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PRIME/41ST PT/FINAL 1

PRIME ACADEMY FINAL - 41st SESSION PROGRESS TEST

FINANCIAL REPORTING No of Pages: 4 Total Marks: 75 Time Allowed: 2 Hrs PART - A

1) M/s Kani has included interest and borrowing cost related to overdraft 45 crores while valuing the

inventories.The CFO argues that it will form part of cost of inventories. As per AS 2 which of the following should be the alternative adopted by the company?

a) Interest on bank o/d will not form part of inventory and therefore not to be included while valuing the inventory

b) The interest cost will be included as a part of inventory c) The interest will be included only in the proportion of inventory amount on the total loan

amount d) All of the above (2 Mark)

2) An unquoted investment is carried in the books at the cost of `2 lakhs. The published accounts of the

unlisted company received in May 1998 showed that the company was incurring cash losses with declining market share and the long term investment may not fetch more than `20,000. Which of the following is more appropriate as per AS 13

a) provision for diminution should be made to reduce the carrying amount of long term investments of `20,000

b) Investment taken only at cost c) Investment are taken at market value basis d) Either b or c whichever is lower (2 Mark)

3) ICICI bank receives a gross of `1500 crores demand deposit from customer and withdrawn `1300 of

demand deposits during the FY 2013-14. How will you classify such receipts and payments in the cash flow statement of ICICI and the manner of such presentation

a) Operating activity on net basis (`200 crores inflow) b) Operating activity on net basis (`200 croresoutflow) c) Financing activity on a total basis (`1300 crores outflow) d) Investing activities on total basis (` 1500 crores inflow) (3 Mark)

4) During the year 2013-14 AD softex India ltd engaged in the following transactions

Salary expenses to key employees who are also principal owners `100000 Sales to affiliated enterprises `250000

Which of the following would be disclosed as related party transactions in AD Softex a) Neither transaction b) `100000 transaction only c) `250000 transaction only d) Both transaction (3 Mark)

PRIME A

CADEMY


5) In a manufacturing process of Vijoy Limited, one by-product BP emerges besides two main products MP1 and MP2 apart from scrap. Detail of cost of production process is here under:

Item Unit Amount (Rs) Output (unit) Closing inventory as on 31.3.2015

Raw material Wages Fixed overhead Variable overhead

15,000 - - -

1,60,000 82,000 58,000 40,000

Mp1-6,250 Mp20-5,000

Bp-1,6000 -

800 200

- -

Average market price of MP1 and MP2 is INR 80 per unit and INR 50 per unit respectively; by-product is sold @ INR 25 per unit. There is a profit INR 5,000 on sale of by-product after incurring separate processing charges of INR 4,000 and packing charges of INR 6,000,INR6,000 was realized from sale of scrap. Calculate the value of closing inventory of MP1 and MP2 as on 31-03-2015. (5 Marks)

6) Bellhop LLC submits the following information pertaining to year 2014-2015. Using the data, you are

required to find the ending cash and bank balances given an opening figure thereof was INR 1.55 million.

`(in millions)

Additional shares issued CAPEX (Capital expenditure) Proceeds from assets sold Dividends declared Gain from disposal of assets Net income Increase in Accounts Receivable Redemption of 4.5% debentures Depreciation & Amortization

6.50 9.90 1.60 0.50

(1.20) 3.30 1.50 2.50 0.75

(5 Marks) 7) While preparing its final accounts for the year ended 31sMarch, 2015, a company made a provision

for bad debts @ 5% of its total trade receivables. In the last week of February 2015, trade receivables for 2 lakhs had suffered heavy loss due to earthquake. The loss was not covered by any insurance policy. In April, 2015, the trade receivable became bankrupt. Can the company provide for full loss arising out of insolvency of trade receivable in the final accounts for year ended 31stMarch, 2015?

(5 Marks) PART – B

1) On 31stMarch, 2009, P Ltd. acquired 1,05,000 shares of Q Ltd. for INR 12,00,000. The Balance Sheet of Q Ltd. on that date was as under:

Liabilities ` Asset `

1,50,000 equity shares of INR 10 each fully paid Pre-incorporation profits Profit and Loss Account Trade payables

15,00,000 30,000 60,000

1,05,000

Fixed assets Current asset

10,50,000 6,45,000

PRIME A

CADEMY


On 31stMarch, 2015 the summarized Balance Sheets of two companies were as follows:

Liabilities P Ltd.(`) Q Ltd.(`) Assets P Ltd.(`) Q Ltd.(`)

Equity shares of INR 10 each fully paid (before bonus issue) Securities Premium Pre-incorporation profits General reserve Profit and Loss A/C Trade payable

45,00,000

9,00,000 -

60,00,000 15,75,000

5,55,000

15,00,000

- 30,000

19,05,000 4,20,000 2,10,000

Fixed Assets 1,05,000equity shares in Q Ltd. at cost Current Assets

79,20,000

12,00,000 44,10,000

23,10,000

- 17,55,000

1,35,30,000 40,65,000 1,35,30,000 40,65,000

Directors of Q Ltd. made bonus issue on 31.3.2015 in the ratio of one equity share of INR 10 each fully paid for every two equity shares held on that date. Calculate as on 31st March, 2015 (i) Cost of Control/Capital Reserve; (ii) Minority Interest; (iii) Consolidated Profit and Loss Account in each of the following cases:

i. Before issue of bonus shares. ii. Immediately after issue of bonus shares. It may be assumed that bonus shares were issued out

of post-acquisition profits by using General Reserve. Prepare a Consolidated Balance Sheet after the bonus issue. (20 Marks)

2) A Ltd. and B Ltd. were amalgamated on and from 1st April, 2014. A new company C Ltd. Was formed

to take over the business of the existing companies. The summarized Balance Sheets of A Ltd. and B Ltd. as on 31st March, 2014 are given below:

Liabilities A Ltd. (`In lakhs)

B Ltd. (` In lakhs)

Assets A Ltd. (` In lakhs)

B Ltd (` In lakhs)

Sharecapital: Equity Shares of INR 100 each 12% Preference shares of INR 100 each Reserves and Surplus: Revaluation Reserve General Reserve Investment Allowance Reserve Profit and Loss Account Secured Loans: 10% Debentures (INR 100 each) Current Liabilities and Provisions: Trade payables

800 300

150 170

50 50

60

420

750 200

100 150

50 30

30

190

Fixed assets: Land and building Plant and machinery Investments Current Assets, Loans and Advances: Inventory Trade receivable Cash at bank

550 350 150

350 300 300

400 250

50

250 350 200

2,000 1,500 2,000 1,500

PRIME A

CADEMY


Additional Information: a) 10% Debenture holders of A Ltd. and B Ltd. are discharged by C Ltd. issuing such number of its

15% Debentures of INR 100 each so as to maintain the same amount of interest. b) Preference shareholders of the two companies are issued equivalent number of 15% preference

shares of C Ltd. at a price of INR 150 per share (face value of INR 100). c) C Ltd. will issue 5 equity shares for each equity share of A Ltd. and 4 equity shares for each equity

share of B Ltd. The shares are to be issued @ INR30 each, having a face value of INR 10 per share. d) Investment allowance reserve is to be maintained for 4 more years

Prepare the Balance Sheet of C Ltd. as on 1stApril, 2014 after the amalgamation has been carried out on the basis of Amalgamation in the nature of purchase. (16 Marks)

3)

a) S. Square Private Limited has taken machinery on lease from S.K. Ltd. The information is as under: Lease term = 4 years Fair value at inception of lease = INR 20,00,000 Lease rent = INR 6,25,000 p.a. at the end of year Guaranteed residual value = INR 1,25,000 Expected residual value = INR 3,75,000 Implicit interest rate = 15% Discounted rates for 1styear, 2ndyear, 3rdyear and 4thyear are 0.8696, 0.7561, 0.6575 and 0.5718 respectively. Calculate the value of the lease liability as per AS19. (6 Marks)

b) P Ltd. has 60% voting right in Q Ltd. Q Ltd. has 20% voting right in R Ltd. Also, P Ltd. directly enjoys

voting right of 14% in R Ltd. R Ltd. is a listed company and regularly supplies goods to P Ltd. The management of R Ltd. has not disclosed its relationship with P Ltd. How would you assess the situation from the viewpoint of AS 18 on Related Party Disclosures? (8 Marks)

PRIME A

CADEMY

PRIME/41st PT/FINAL 1

PRIME ACADEMY 41ST SESSION – FINAL - PROGRESS TEST – FINANCIAL REPORTING

SUGGESTED ANSWERS PART - A 1)

a) In this case, P Ltd. Offers to pay INR.60 per share. The share exchange ratio would be 60/150=0.4 It means, P ltd, would give 0.4 shares for every one share of R Ltd. In other words, P Ltd. Would give 2 shares for 5 shares to be issued by P Ltd. To R Ltd. =5,00,000*0.4=2,00,000 shares (or) 5,00,000*2/5=2,00,000 shares Total no. of shares of P Ltd. After acquisition of R Ltd. =12,00,000+2,00,000=14,00,000 shares. Calculation of E.P.S. of the amalgamated company =Total Net profit after Interest and Tax/Total no. of shares =72,00,000/14,00,000=INR.5.14 per share After amalgamation, the EPS of P Ltd., will improve from INR.5 to INR.5.14 whereas EPS of former shareholders of R Ltd. Would reduce from present 2.40 per share to 5.14*0.4=INR.2.056 per share after merger.

b) AIn this case, P Ltd. Offers INR. 78 per share to the shareholders of R Ltd. The exchange ratio would be 78/150=0.52 shares of P Ltd. For each share of R Ltd. In other words, P Ltd would give 52 shares for per shares of R Ltd. P Ltd. Would issue 5,00,000*0.52=2,60,000 shares to shareholders of R Ltd. E.P.S. of the merged Company=72,00,000/12,00,000+2,60,000=4.93 After merger, there is a dilution in the E.P.S of P Ltd. From 5 to 4.93. After merger E.P.S of former shareholders of R Ltd. =4.93*0.52-=2.56 There is a gain of INR.0.16 in E.P.S of merged company in comparison to E.P.S. of R Ltd.INR.2.40 before merger. Note: Initial increase in and decrease in earnings per share are possible in both cases of merger. Generally, the dilution in E.P.S. will occur wherever the price earning ratio of acquired company calculated on the basis of price paid exceed the P/E ratio of Acquired company and vice-versa. In situation i. The price offered by P Ltd. Per share of R Ltd. Is INR.60 and E.P.S. of R Ltd. Is 2.4, which

would become the earnings of P Ltd. After merger. Price earning(P/E) ratio of P Ltd. After merger 60/240=25. It is lower than the ratio of P Ltd. Before merger i.e.. 30, the E.P.S. of P Ltd. after merger increases to INR.5.14. In situation

ii. The price earnings (p/E)ratio offered for merger is 78/24=32.5 which is higher than P/E ratio of P ltd. Before merger. Hence, the E.P.S. of P Ltd. After merger would get diluted.

2) According toPara10 of AS 25 “Interim Financial Reporting”, If an enterprise prepares and presents a

complete set of financial statements in its interim financial report, the form and content of those statements should conform to the requirements as applicable to annual complete set of financial statements. As on 30.9.2007, Asmitha Ltd., would report the entire `2,00,000 loss on the disposal of its business segment since the loss was incurred during interim period. A cost charged as an expense in an annual period should be allocated to Interim periods on accrual basis. Since `60,000 Property Tax payment relates to entire calendar year 2007, `30,000 would be reported as an expense for six months ended on 30th September, 2007 while remaining `30,000wouldbe reported as prepaid expenses.

PRIME A

CADEMY


3) Cost of Control Particulars ` Cost of investments 1,00,000 Less:Share in Net Assets as on date of acquisition (`1,00,000 × 80% 80,000 Goodwill on Consolidation (Goodwill shown in Balance Sheet) 20,000 Gain/Loss on disposal of investment in Subsidiary Particulars 01.10.09

Sale consideration 2,00,000 Less:Sharein Net Assets as on date of sale (1,80,000 × 80%) (1,44,000) Less:Goodwill on Consolidation (20,000)

Gain on Disposal 36,000 4) (`in ‘000s) Closing equity = 30% of (100–120) = (6)

Pre-acquisition equity = 30% of (100–40) = 18

Calculation of capital reserve/ goodwill (` In 000s)

Investments in B ltd. 15 Less: Pre-acquisition equity 18 Capital Reserve 3 Post-acquisition loss = 30% of (120–40) = 24

Adjustment for equity method

` P&L A/C 18 Balancing figure

To capital reserve 3 To investment in B Ltd. 15 Carrying Amount Note: Loss not recognized = `24–`18 = `6

Consolidated Balance Sheet of A Ltd., group as at 31.3.2008

Liabilities Amount ` Assets Amount `

Share capital (`10) P&L A/C(300-18) Capital reserves Minority interest Sundry liabilities

600 282

3 75

225

Goodwill Sundry Asset

10 1,175

1,185 1,185

PRIME A

CADEMY


PART–B

1) Consolidated Balance sheet of Ram Ltd. & its subsidiaries Shyam Ltd. & Tom Ltd. (As on 31st March 2008)

(As per schedule III of the companies Act,2013) (` In 000’s)

Particulars Noteno. Amount (`)

i)Equity & Liabilities: 1.Shareholders funds a)Share capital b)Reserves & surplus 2.Minority interest(W.N.6) 3.Current liabilities Total ii)Assets: 1.Non-current Asset 2.current Assets Total

1

2

3 4

8,000 3,096

952 4,200

16,248

688 15,560 16,248

Notes to Accounts: ` `

1 2 3 4

Reserve & surplus: a)general reserve b)Profit & Loss A/C(W.N.7) Current liabilities: Ram Ltd. Shyam Ltd. Tom Ltd. Less: Mutual Owing Non Current Assets Goodwill (W.N.5) Current assets: Ram Ltd. Shyam Ltd. Tom Ltd Less: Mutual owing Less: Unrealised profit

1,600 1,496

1,280 3,000 1,210 5,400 1,200

7,240 7,520 2,080

16,840 1,200

15,640 80

3,096

4,200

688

15,560

Working Notes to Accounts; 1) General reserve & P & L A/C of Shyam Ltd.

General reserve A/C of Shyam Ltd.

`(in 000’s) `(in 000’s)

30.03.08 To Bal. c/d 280 1.04.07 By Bal.b/d 280

P&L A/C of Shyam Ltd.

`(in 000’s) `(in 000’s)

31.3.08 To bal c/d 960 01.04.07 By Bal.b/d By profit earned During the year(Bal.fig)

520

440

PRIME A

CADEMY


2) Profit & Loss A/C of Tom Ltd.

`(in 000’s) `(in 000’s)

1.4.05 To Bal. b/d 160 31.3.06 By Bal. c/d 160

160 160

1.4.06 To Bal. b/d To Loss incurred during the year (Bal.fig)

160 320

31.3.07 By Bal. c/d 480

480 480

1.4.07 To Bal. b/d To Lose incurred During the year (Bal.fig)

480 160

31.3.07 By Bal. c/d 640

640 640

3) Analysis of Profit of Tom Ltd.

Capital profit `

Revenue profit (`in 000’s)

i)Shyam Ltd. Debit Bal. in P/L A/C As on 1.4.2005 To 31.3.08(320+160) (Ref.) Share of Shyam Ltd. 75% (Carried forward to W.N.4) ii) Ram Ltd. Debit Bal.in P/L A/C as on 1.4.07 Loss during the year 2007-08 Share of Ram Ltd.-25%

(160)

(160) (120)

-

480 -

(480) (120)

(480) (360)

-

- (160) (160)

(40)

4) Analysis of profits of shyam Ltd.

(from the view point of Ram Ltd.)

Capital profit

Revenue profit (`in 000’s)

General reserve as on 1.4.07 P&L A/c as on 1.4.07 Profit earned during (2007-2008) B/F Shyam Ltd. share of losses of Tom Ltd.(W.N.3(i)) Share of Shyam Ltd.in revenue loss of Tom Ltd. For the period 1.4.05 to 31.8.07(75% of (360-40)) being treated as capital loss from Ram Ltd’s view point. Less: Share of minority interest (20%) Ram Ltd’s share (80%)

280 520

- (120)

(240)

440

88 352

- -

440 (360)

240

320

64 256

PRIME A

CADEMY


5) Cost of control

`( In 000’s)

Investments by Ram Ltd. In Shyam Tom Ltd. Investment by Shyam Ltd. In Tom Ldt. Less: Paid up value of shares of Shyam Ltd. Tom Ltd.(400+1,200) Capital loss of Ram Ltd. In Tom Ltd.(W.N.3 (ii)) Capital profit of Ram Ltd.in Shyam Ltd.(W.N.4) Good will

4,800

200

720

3,200 1,600 4,800

(120)

352

5,720

5,032 688

6) Minority Interest

`(in’ 000)

Paid up value of shares in Shyam Ltd.(20% of 4,000) Share of capital profit (W.N.4) Share of revenue profit (W.N.4)

800 88 64

952

7) Consolidated P&L A/C of Ram Ltd.

`(in’ 000)

P&L A/C Bal Post acquisition share of loss from Tom ltd. Post acquisition share of profit from Shyam Ltd. Less: un realized profit on stock (1/6th of 480)

1,360 (40) 256

1,576 80

1,496

PRIME A

CADEMY


2) Balance Sheet of C Ltd. as at 1st April, 2014

Notes to Accounts:

(` In lakhs) (` In lakhs)

1 2 3 4 5 6 7 8 9

Share Capital Equity share capital (W.N.2) 70,00,000 Equity shares of INR.10 each 5,00,000 Preference shares of INR.100 each (all the above shares are allotted as fully paid-up pursuant to contracts without payment being received in cash) Reserves and surplus Securities Premium Account 1,650 Investment Allowance Reserve Long-term borrowings 15% Debenture Tangible assets Land and Building 950 Plant and Machinery Intangible assets Goodwill [W.N. 2] Non-current Investments Investment Other non-current assets Amalgamation Adjustment Account Trade receivables A Ltd. B Ltd. Trade payables A Ltd. B Ltd.

700 500

1,650 100

950 600

300 350

420 190

1,200

1,750

60

1,550

20

200

100

650

610

Particulars Note. No (` In lakhs)

I. Equity and Liabilities (1) Shareholder's Funds (a) Share Capital (b) Reserves and Surplus (2) Non-Current Liabilities Long-term borrowing (3) Current Liabilities Trade payables Total II. Assets (1) Non-current assets (a) Fixed assets i. Tangible assets ii. Intangible assets (b) Non-current investments (c) Other non-current ass 2) Current assets (a) Inventories (b) Trade receivables (c) Cash and cash equivalents Total

1 2

3

9

4 5 6 7

8

1,200 1,750

60

610

3,620

1,550 20

200 100

600 650 500

3,620

PRIME A

CADEMY


Working Notes:

A Ltd (`) B Ltd (`)

1 2

Computation of Purchase consideration: a)preference shareholders: (3,00,000/100) i.e.3,00,000 shares *150 each (2,00,000/100) i.e. 2,00,000 shares*150 each b) equity shareholders: (8,00,000*5/100) i.e. 40,00,000 shares *30 each (7,50,00,000*4/100) i.e. 30,00,000 share, * 30 each Amount of Purchase Consideration Net Asset Taken over Assets taken over: Land and Building Plant and Machinery Investments Inventory Trade receivables Cash and bank Less: Liabilities taken over: Debentures Trade payable Net assets taken over Purchase consideration Goodwill Capital reserve

450

1,200

1,650

550 350 150 350 300 300

2,000

((40) (420))

460 1,540 1,650

110

300

900 1,200

400 250

50 250 350 200

1,500

((20) (190))

210 1,290 1,200

- 90

3) a) According to para 11 of AS 19 “Leases”, the lessee should recognise 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 of the minimum lease payments from the standpoint of the lessee, the amount recorded as an asset and a liability should be the present value of the minimum lease payments from the standpoint of the lessee. In calculating the present value of the minimum lease payments the discount rate is the interest rate implicit in the lease. Present value of minimum lease payments will be calculated as follows:

Year Minimum lease payment

(`)

Internal rate of return (Discount rate @ 5%)

Present value (`)

1 2 3 4 Total

6,25,000 6,25,000 6,25,000 7,50,000

26,25,000

0.8696 0.7561 0.6575 0.5718

5,43,500 4,72,563 4,10,937 4,28,850

18,55,850

Present value of minimum lease payments INR.18,55,850 is less than fair value at the inception of lease i.e.INR.20,00,000, therefore, the lease liability should be recognized at INR.18,55,850 as per AS 19.

PRIME A

CADEMY


b) P Ltd. has direct economic interest in R Ltd to the extent of 14%, and through Q Ltd. in which it is the majority shareholders, it has further control of 12% in R Ltd. (60% of Q Ltd’s 20%). These two taken together (14% + 12%)make the total control of 26%. Para 10 of AS 18 ‘Related Party Disclosures’, defines related party as one that has at any time during the reporting period, the ability to control the other party or exercise significant influence over the other party in making financial and/or operating decisions. Here, Control is defined as ownership directly or indirectly of more than one-half of the voting power of an enterprise; and Significant Influence is defined as participation in the financial and/or operating policy decisions of an enterprise but not control of those policies. In the present case, control of P Ltd. in R Ltd. directly and through Q Ltd., does not go beyond 26%. However, as per para 12 of AS 18, significant influence may be exercised as an investing party (P Ltd.) holds, directly or indirectly through intermediaries 20% or more of the voting power of the R Ltd. As R Ltd. is a listed company and regularly supplies goods to P Ltd. therefore, related party disclosure, as per AS 18, is required.

c) As per-11 (Revised 2003, ‘The effects of changes in Foreign Exchange Rates’, monetary items

denominated in a foreign currency should be reported using the closing rate at each balance sheet date. The effect of exchange difference should be taken in to profit and loss account. Sundry creditors is a monetary item, hence should be valued at the closing rate i.e. INR 48 at 31st March, 2005 irrespective of the payment for the same subsequently at lower rate in the next F.Y. the difference of INR. 5(48-43) per US dollar should be shown as an exchange loss in the profit and loss account for the year ended 31st march, 2005 and is not to be adjusted against the cost of raw-materials. In the subsequent year, the company would record an exchange gain of Re.1 per US dollar, i.e. the difference between INR. 48 and INR.47 per US dollar. Hence, the accounting treatment adopted by the company is incorrect.

Difference between AS 11 and IAS 21.

AS11 IAS21

Does not make any such exclusions. However forward contract has been removed vide limited revision in AS 30.

Excludes from its scope forward contract

Based on integral and non-integral operation. Based on functional currency approach.

Reporting currency shall always be local currency . Based on presentation currency. Which can be different from local currency.

d) As per AS 5(Revised) “Net profit or Loss for the period, or period items and changes in

Accounting policies “, the term prior period item refers only to income or expenses which arise in the current period as a result of errors or omission in the preparation of the financial statements of one more prior periods. The term does not include other adjustments, necessitated by circumstances, which though related to prior periods are determined in the current period. The full amount of wag arrears paid to workers will be treated as an expenses of current year an it will be charged to profit and loss A/C as current expenses and not as prior [period expenses.

It may be mentioned that additional wages is an expenses arising from the ordinary activities of the company. Although abnormal in amount, such an expenses does not qualify as an extraordinary item However, as per Para 12 of AS 56 (Revised), when items of income and expenses within profit or loss from ordinary activities are of such size, nature or incidence of the enterprise for the period, the nature and amount of such items should be disclosed separately.

PRIME A

CADEMY


PRIME ACADEMY

FINAL - 41ST SESSION PROGRESS TEST STRATEGIC FINANCIAL MANAGEMENT

No. of Pages: 5 Total Marks: 75 Time Allowed: 2Hrs

PART- A Questions 1 -15 carry 1 Mark each and 16-35 carry 3 Marks each

State True or false and give reasons (Question 1 to 10) 1. When calculating sensitivity for each variable, the lower the percentage, the less sensitive is the

NPV to that project variable. 2. MM theory states that managers should adopt as low a dividend policy as possible. 3. Under the certainty equivalent approach and Risk adjusted discount rate method the cash flows

are discounted at the risk free rate of return. 4. Coupon rate and Yield to maturity are the same. 5. Volatility of 3% indicates that an1% increase in YTM would lead to 3% increase in the price of the

bond. 6. 1.52 SGD per USD is a direct quote for Singapore. 7. A quote which is direct for any European country is said to be European terms 8. If INR per AUD rates are: Spot 29.45 and 3 month forward is 29.36, Depreciation percentage of

INR is 1.22% 9. If the US$ rate per £ is 1.4325 – 1.4330, the rate applicable for buying US$ is 1.4330. 10. Under the residual approach, capital expenditure commitments are met out of profits remaining

after payment of dividends.

Choose the correct answer

11. Which of the following would cause the required return on a bond to increase, everything else held equal?

a. Bonds credit rating improves b. The bond is callable c. Bonds is convertible d. All of the above

12. Which of the following causes a lower required return on a bond? a. Bonds credit rating decreases b. The bond is callable c. Bonds is convertible d. All of the above

13. Which of these approaches guarantee a minimum dividend

a. Constant dividend b. Constant pay out c. Residual approach d. None of the above

14. Which of the following models cannot be used to compute market price of the share

a. Walter’s mode; b. Gordon’s model c. Graham & Dodd model d. Lintner’s model

PRIME A

CADEMY


15. Risk in capital budgeting means

a. Possibility of negative npv b. Not knowing the outcomes c. Possibility that the actual outcome differs from the expected outcome d. All of the above

16. Goldilocks Ltd. was started a year back with Equity Capital of `40 Lakhs. The other details are as

under: Earnings of the Company ` 4,00,000 Price Earnings Ratio 12.5 Dividend paid ` 3,20,000 Number of Shares 40,000. What is Ke and r?

Ke = …………… R = ………………..

17. Find the Current Market Price of the Share in Q.16. Use Walter’s Model. a. Cannot be computed b. `100 c. `131.25 d. `96

18. The following information is collected from the Annual Reports of J Ltd.

Profit before Tax ` 2.50 Crores

Number of Outstanding Shares 50,00,000

Tax Rate 40 percent

Equity Capitalization Rate 12 percent

Retention Ratio 40 percent

Rate of Return on Investment 15 percent What is the growth rate?

a. 4.8% b. 6% c. 7.2% d. 9%

19. What is the value of share as per Gordon model in Q.18?

a. `41.67 b. `50 c. ` 53 d. `31.80

Use the following data for Question 20-23

On 31st March 2013, the following information about Bonds is available:

Name of Security Face Value (Rs)

Maturity Date Coupon Rate

Coupon Date(s)

Zero Coupon 10,000 31st March 2013 N.A N.A

T-Bill 1,00,000 20th June 2013 N.A N.A

10.71% GOI 2023 100 31st March 2023 10.71 31st March

10% GOI 2018 100 31st March 2018 10.00 31st March & 01st October

PRIME A

CADEMY


Name of Security Face Value ` Maturity Date Coupon Rate Coupon Date(s) Zero Coupon 10,000 31st March 2023 N.A. N.A. T–Bill 1,00,000 20th June 2013 N.A. N.A. 10.71% GOI 2023 100 31st March 2023 10.71 31st March 10% GOI 2018 100 31st March 2018 10.00 31stMarch & 31st October [PVAF for 10 years: 4% =8.11; 8% = 6.71; 7.5%= 6.864 PVIF for 10th year: 4% = 0.6756; 8% =0.4632 7.5%= .4852]

20. If 10 years yield is 7.5% p.a., what price the Zero Coupon Bond would fetch on 31st March 2013?

a. `6,864 b. `4,852 c. `14,569 d. `20,610

21. What will be the annualized yield if the T –Bill is traded @ `98,500? a. 9.85% b. 15% c. 10.15% d. 6.86%

22. If 10.71% GOI 2023 Bond having YTM is 8%, what Price would it fetch on 1st April 2013 (after Coupon Payment on 31st March)?

a. 118 b. 100 c. 108 d. 134

23. If 10% GOI 2018 Bond having YTM is 8%, what Price would it fetch on 1stApril 2013 (after Coupon Payment on 31st March)?

a. 118 b. 100 c. 108 d. 134

Use the following data for Questions 24 to 27 Buenos Aires Limited has 10 Lakhs Equity Shares Outstanding at the beginning of the year 2013. The Current Market Price per Share is `150. The Company is contemplating a dividend of ` 9 per Share. The rate capitalization, appropriate to its risk class, is 10%. The Company is planning to invest `500 Lakhs assuming a Net Income of `200 Lakhs by the end of the year.Use MM Approach. (II) How many new shares are to issued by the Company, under both the above options, if?

24. Calculate the Market Price of the Share of the Company when Dividend is declared

a. `150 b. `141 c. `174 d. `156

25. Calculate the Market Price of the Share of the Company when Dividend is not declared

a. `150 b. `165 c. `174 d. `159

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26. How many new shares are to issued by the Company if dividend is declared?

a. 3,33,333 b. 2,50,000 c. 1,81,818 d. 2,00,000

27. How many new shares are to issued by the Company if dividend is not declared? a. 3,33,333 b. 2,50,000 c. 1,81,818 d. 2,00,000

28. The probability that the NPV in a project will be `11,500 , if the expected NPV and standard deviation are `73,600 and 46,000 respectively.

a. 8.85% b. 91.15% c. 67.72% d. d.32.28%

29. The standard deviation of a project for years 1 to 3 is 3,674 each year. What is the standard

deviation of the project if discount rate is 7% and the cash flows are uncorrelated? a. 3,674 b. 9,642 c. 5,576 d. 8,457

30. A share of Tension-free Economy Ltd is currently quoted at a price earnings ratio of 7.5 times.

The retained earning being 37.5% is ` 3 per share and return on investment is 12%. The company’s cost of equity.

a. 13.33% b. 13.21% c. 8.33% d. 12.83%

31. Computethe Market price per share, if the company’s cost of capital is 18% and anticipated

growth rate is 15% per annum, assuming other conditions remaining the same as in Q.30. a. a.`191.67 b. b.`100 c. ` 115 d. 166.67

Use the following data for question 32-35 JKL Ltd, an Indian Company, has an export exposure of JPY 100 Lakhs payable August 31, 2014. Japanese Yen (JPY) is not directly quoted against Indian Rupee. The current Spot Rates are: INR/US $ = `62.22 JPY/US $ = JPY 102.34 It is estimated that Japanese Yen will depreciate to 124 level and Indian Rupee to depreciate against US $ to `65. Forward Rates for August 2014 are: INR/US $ = `66.50 JPY/US $ = JPY 110.35.

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32. The value of the receivable `(in Lakhs) at spot rates is: a. 164.47 b. 60.80 c. 63.67 d. 60

33. The cash flow at expected rates is `(in Lakhs):

a. 52.42 b. 190.77 c. 80.60 d. 50

34. The amount receivable `(in Lakhs) if forward cover is taken is:

a. 60.26 b. 165.95 c. 73.38 d. 65

35. Spot rate : Yen/USD is 140 and 3 months forward rate is 138. If interest rate in Japan is 4% and

USA is 7%, What action would follow? a. Invest in USA b. Borrow in Japan c. Invest in Japan d. Both a & b

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PRIME ACADEMY 41st SESSION - FINAL - PROGRESS TEST

STRATEGIC FINANCIAL MANAGEMENT - SUGGESTED ANSWERS

1. FALSE. The lower the sensitivity %, higher is the sensitivity of that project variable. A small change can make NPV negative.

2. FALSE. MM theory states that declaration or non declaration of dividend will not affect the market capitalization of the firm.

3. FALSE. Under the certainty equivalent approach the cash flows are discounted at the risk free rate of return and Risk adjusted discount rate method the cash flows are discounted at the cost of capital.

4. False: Coupon rate is the annual interest payment rate, written on the face of the bond certificate, while Yield to maturity is the return earned by an investor who buys today and holds till its maturity.

5. FALSE: An increase in YTM would lead to decrease in the price of the bond. 6. TRUE. One unit of foreign currency for x units of home currency. 7. FALSE: A quote which is not direct for America is said to be European terms 8. FALSE : appreciation percentage of INR is 1.22% 9. FALSE: Product is £. So buying US$ means selling UKP, So relevant rate is bid rate of 1.4325. 10. FALSE: Under the residual approach, dividends are paid out of profits remaining after capital

expenditure commitments

11. b 12. c 13. a 14. d 15. c 16. Ke = 1/12.5 = 8% R= 4L/40L = 10%

17. C. 8

.08+.

0.10/0.80(10−8)

0.08

18. C. g = b x r (40% x 15)=6%

19. D. 1.8(1.06)

0.12−0.06 EPS=2.50cr(1-40%)/50L = ` 3 and D0 = 3 x 60%=1.8

20. B. 10,000 x PVIF(7.5%, 10) i.e 10,000x 0.4852

21. D. 10,000−98,500

98,500 𝑥

365

81 𝑥 100

22. A. 10.71x PVAF(8%,10) + 100xPVIF(8%,10) = {10.71 x 6.71}+{100x0.4632} 23. C. 5x PVAF(4%,6) + 100xPVIF(4%,6) = {5 x 8.11}+{100x0.6756} 24. D : P0(1 + Ke)-Div = 150(1+0.10) – 9 25. B. same formula as 24. Dividend = 0 26. B.

` In 000s ` In 000s

Income 200 Investment 500

Less: Dividend 90 Less R.E 110

Retained earnings(RE) 110 Fresh issue 390

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27. C.

` In 000s ` In 000s

Income 200 Investment 500

Less: Dividend 0 Less R.E 200

Retained earnings(RE) 200 Fresh issue 300

No: of shares = Fresh issue/ p1 = 3L/165

28. B. Z = 𝑥−‾𝑥

𝜎 = -1.35. area required is area from (-1.35,∞) = 0.4115 + 0.5= 91.15%

29. C. [(3674)2 x 1

(1.07)2 ] +[ (3674)4 x 1

(1.07)4] +[(3674)6 x 1

(1.07)6]

30. B. EPS = Retained earnings/ 0.375 = ` 8, MPS = 8 x 7.5 = ` 60.

g = 0.375 x 12% = 4.5%; D0 = 5 D1 = 5(1+0.045) = 5.225.

Ke = 5.225

60+ 0.045= 13.21%

31. A. P0 = 5(1.05)

0.18−0.15

32. B. 100L yen x 62.22 x (1/102.34) 33. A. 100L yen x 65 x(1/124) 34. A. 100 x 66.50 x (1/110.35)

35. C. Using irpt 1+𝑟ℎ

1+0.0175 =

138

140

Theoretical rh for 3 months = 0.20% or .8% p.a actual rate is 4%, so invest in Japan

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PRIME ACADEMY FINAL - 41st SESSION PROGRESS TEST

ADVANCED AUDITING AND PROFESSIONAL ETHICS No. of page: 1 Total Marks: 75

Time Allowed: 2 Hrs PART - A

1. Match the following

S. No Standard No Standard Name

1 SA 505 Responsibility of joint auditor

2 SA 560 Audit Documentation

3 SA 299 External confirmation

4 SA 230 Analytical procedures

5 SA 520 Subsequent events

(5 Marks) 2. Write short notes on the following

a) Classification of frauds by NBFC b) Core investment companies c) Public Accounts Committee d) Broad objectives of operational audit (4 x 4 = 16 Marks)

3. As a statutory auditor, how will you deal with the following? You notice a misstatement resulting from fraud or suspected fraud during the audit and conclude that it is not possible to continue the performance of audit (4 Marks)

PART - B

1. Give your comments with reference to Chartered Accountants Act, 1949 and Schedules thereto. a) Mr. A, a practicing Chartered Accountant, failed to return the books of account and other

documents of a client despite many reminders from the client. The Client had settled in his entire fees dues also. (4 Marks)

b) Mr. B, a practicing Chartered Accountant As well as a qualified lawyer, was permitted by the bar council to practice as a lawyer also. He Printed his visiting card where he mentioned his designation as Chartered Accountant And Advocate. (4 Marks)

c) Mr. C, a practicing Chartered Accountant, In the course of the audit of a listed company discovered serious violations of the provisions of the Companies Act 1956, informed the Registrar of Companies out of public interest. (4 Marks)

d) Mr. D a practicing Chartered, did not complete his work relating to the audit of the accounts of the company and had not submitted his audit report in due time to enable the company to comply with the statutory requirements. (4 Marks)

2. a) How are Non-Banking Financial companies (NBFCs) classified? (6 Marks) b) State the requirements regarding maintenance of Books of Accounts of a multi- state Co-

operative Society. (4 Marks) 3.

a) What essential qualities should a management/ operational Auditor possess to be effective in his work? (8 Marks)

b) What are the basic differences in the method of auditing followed in case of statuary audit under the companies Act and propriety Audit carried out by the C& AG? (8 Marks)

4. Comprehensive audit involves assessing efficiency and effectiveness of public enterprises. Discuss what is Comprehensive Audit? Enlist some of the areas to be examined therein.

(8 Marks)

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PRIME ACADEMY 41stSESSION - FINAL - PROGRESS TEST

ADVANCED AUDITING AND PROFESSIONAL ETHICS SUGGESTED ANSWERS

PART-A 1) As per SA 560 subsequent events, events occurring between the dates of Balance sheet and audit

report and the facts that become known to the auditor after the date of audit report . Auditor should perform following procedure to obtain sufficient evidence to find out the adjustments or disclosures of those subsequent events

Review the procedure adopted by the management to identify subsequent events

Examine the minutes of the board of directors , executive committees and the general meeting of the shareholders

Collect information from the other sources like budgets, estimates, cash flows, forecasts, interim financials etc

Make enquiries and hold discussion with top management

Details from company’s lawyers for any litigation matter. 2)

a) In order to have uniformity in reporting frauds have been classified as under based mainly on the provisions of the Indian penal code:

i. Misappropriation and criminal breach of trust ii. Fraudulent encashment through forged instruments, manipulation of books of accounts or

through fictitious accounts and conversion of property iii. Unauthorized credit facilities extended for reward or for illegal gratification iv. Negligence and cash shortages v. Cheating or forgery

vi. Irregularity in foreign exchange transactions vii. Any other type of fraudulent not coming under the specific heads

b) SA 260 deals with the communication of audit matters with those charged with governance.

The following are the audit matter of governance interest which are to be communicated i. The general approach and overall scope of audit including expected limitation

ii. The selection of or change in significant accounting policies and practices that have a material effect on the entitys financial statements

iii. The potential effect n the financial statements of any significant and exposures iv. Adjustments to financial statements arising out of audit which have a significant effect on

the financial statement v. Material uncertainties that may cast significant doubt on the entity’s ability to continue as a

going concern vi. Disagreement with management on matters which could have significant impact to the

financial statement vii. Expected modification to the audit report

viii. Other matters like material weakness in internal control

c) As the member of and investment in public sector enterprise grew the parliament decided that a separate committee on public undertakings, should be constituted so their operations could be monitored closely.

The Public Accounts Committee satisfies that: i) The money(shown in the accounts) were disbursed legally on the service or purpose to

which they are applied ii) The expenditure was authorized iii) The re-appropriation of funds were appropriate

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d) Appraisal of control : Evaluation of performance Appraisal of objectives and plan Appraisal of organizational structure.

3) If an auditor concludes that It is not possible to continue the performance of auditing because of misstatement resulting from fraud or suspected fraud he should take action in accordance with the requirement of SA 240 relating to the responsibilities in respect of frauds and errors i. He should consider the professional and legal responsibilities applicable in the circumstances

including whether there is a requirement for the auditor to report the persons who made the audit appointment

ii. He should consider whether he has to report to the regulatory authorities iii. If the auditor withdraws he should discuss with the appropriate level of management and those

who charged with the governance about the reasons for the withdrawal Further as per section 143(12) of the companies act 2013, if an auditor of a company in the course of the performance of his duties as auditor, has reason to believe an offence involving fraud Is being or has been committed against the company against the company by officers or employees of the company, he shall immediately report the matter to the Central government within 60 days of his knowledge and after following the prescribed procedure.

PART B

1) a) A member is liable to disciplinary action under Section 21 of the Chartered Accountants Act, if he

is found guilty of any professional or “Other Misconduct”. As per part IV of the First Schedule to the Chartered Accountants Act, a member of the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he- i. (1)is held guilty by any civil or criminal court for an offence which is punishable with

imprisonment for a term not exceeding six months; ii. (2)in the opinion of the Council, brings disrepute to the profession or the Institute as a result

of his action whether or not related to his professional work. A member may be found guilty of “Other Misconduct”, as per clause 2, under the aforesaid provisions rendering, himself unfit to be member if he retains the books of account and documents of the client and fails to return these to the client on request without a reasonable cause. In the given case, Mr. A failed to return the books of accounts and other documents of his client without any reasonable cause, therefore, he would be guilty of professional misconduct under the aforesaid provisions.

b) Under clause (7) of part 1 of First Schedule, a CA in practice is deemed to be guilty of professional misconduct if he (i) advertises his professional attainments or services or (ii) uses any designation or expressions other than ‘Chartered Accountant” on professional documents, visiting cards, letter heads or sign boards unless it be a degree of a university established by law in India or recognized by the Central Government or a title indicating membership of the ICAI or of any other institution that has been recognized by the Central Government or may be recognized by the council. This clause prohibits advertising of professional attainments or services of a member. It also restrains a member from using any designation or expression other than that of a Chartered Accountant in documents through which the professional attainments of the member would come to the notice of the public. Members of the Institute in practice who are otherwise eligible may practice as advocates subject to the permission of the Bar Council but in such case, they should not use designation ‘chartered accountant in respect of the matters involving the practice as an advocate. In respect of other matters they should use the designation ‘chartered accountant’ but they should not use the designation ‘chartered accountant’ and ‘advocate’ simultaneously.

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Since Mr. B has printed his visiting card where he mentioned his designation as Chartered Accountant and Advocate which is prohibited under the above clause and hence Mr. B is guilty of professional misconduct.

c) Clause (1) of Part I of the Second Schedule to the Chartered Accountants Act, 1949 deals with

the professional misconduct relating to the disclosure of information by a chartered accountant in practice relating to the business of his clients to any person other than his client without the consent of his client or otherwise than as required by any law for the time being in force would amount to breach of confidence. The Code of Ethics further clarifies that such a duty continues even after completion of the assignment. The Chartered Accountant may however, disclose the information in case it is required as a part of performance of his professional duties. In the given case, Mr. C has disclosed serious violations of the provisions of the Companies Act, 1956 to Registrar of Companies without the consent of the client under the impression that it would be in public interest. Instead of disclosing the violations to the Registrar of Companies directly, he should impress on the client that while disclosure may entail only monetary penalties, nondisclosure and subsequent discovery thereof may entail imprisonment and fine, in addition to penalties. He should mention the violations in his report instead of informing the Registrar of Companies. Thus it is a professional misconduct covered by clause (1) of Part I of Second Schedule to the Chartered Accountants Act, 1949.

d) According to clause 7 of Part-I of Second Schedule of Chartered Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional misconduct if he “does not exercise due diligence or is grossly negligent in the conduct of his professional duties”.

2) a) Classification of Non- Banking Financial Companies (NBFCs)

Non - Banking Financial Companies (NBFCs) fall under the following categories: 1) NBFC: the principal business of NBFC is to receive deposits, lending, investments in

securities, Hire purchase finance or equipment Leasing, etc. (sec.45-I(f) of the RBI Act, 1934). They can be categorized as under:

Company Engaged in

Equipment leasing company(EL)

Equipment leasing or financing such activity. Also called as Asset Finance Companies

Hire purchase finance company(HP)

HP Transaction or financing such transaction.

Investment company Acquisition of securities in Group/ Holding/ Subsidiary companies.

Loan company Financing by making loans/ Advances or otherwise, for, any activity other then its own but excludes EL/HP/Housing Finance companies.

Infrastructure finance company

NBFCs who deploy a minimum of 3/4th of their Total Assets in infrastructure loans.

Infrastructure Debt fund (IDF) NBFC

Facilitating the flow of long term debt in to infrastructure projects. (the IDF will be set up either as a trust or as a company- based IDF would normally be a NBFC)

Core investments company NBFCs carrying on the business of acquisition of shares and securities in Group companies and satisfies relevant regulatory framework conditions of RBI.

NBFC-MFI (micro finance institution)

An NBFC-MFC defined as a non-deposit tacking NBFC subject to conditions of RBI.

Residuary non-banking company (does not belong to any of the categories above.)

Receive deposits under any scheme /arrangement of any name, in one lump-sum/ instalments by way of –(a) contribution, (b) subscription ,or (c ) by sale of units/ certificates/ other instruments, or (d) in any other manner.

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2) Mutual Benefit finance company (MBFC)- Nidhi company: Company which is notified by central Government under the companies Act.

3) Mutual benefit company (MBC)- potential Nidhi Company: Company which is working on the lines of a Nidhi company, but-

a) Not yet declared so by the central Government, b) Has minimum net owned funds (NOF) of INR 10 lakhs, c) Has applied to the RBI for certificate of Registration, d) Has applied to department of company Affairs (DCA) for declaration as Nidhi

company, and e) Has not contravened any directions/Regulation of RBI/ DCA.

4) Miscellaneous Non-banking company (MNBC)- Chit fund company; a) These companies manage, conduct or supervise as a promoter, foreman or agent of

any transaction / arrangement. b) They enter into an agreement with a specified number of subscribers that every one

of them shall subscribe a certain sum in installments over a definite period. c) The agreement will provide that every one of the subscribers shall that every one of

the prize amount, determined either –(i) by lot or (ii) by auction, or (iii) by tender, or (iv) in such other prescribed manner.

b) Books of Accounts of MSCS 1) General: As per MSCS Rules,2002, every MSCS shall keep books of accounts with respect to-

a) All sum of money received& expended and the matters in respect of which the receipt and expenditure took place.

b) All sales and purchase of goods. c) The asset and liabilities of the society. d) In the case of a MSCS engaged in production, processing & manufacturing particulars

relating to utilization of materials or labour or other item of cost as may be specified in the Bye Laws of the society.

2) Books of Accounts: Thus, the following books accounts may be maintained:

Item Purpose

Cash book To record particulars regarding cash receipts and expenses under suitable heads, with clear distinction between capital and revenue items of receipts and expenses.

Stock register To record detailed, item-wish and date- wise information of receipts, issues and balances of stock- in-trade. In a producers co-operative society, perpetual inventory records may be maintained based on an appropriate costing method.

Register of asset & investments

To records particulars regarding the various immoveable and moveable asset belonging to the MSCS, by specifying details such as- type of assets, location, date of acquisition, cost, depreciation provided, etc.

Register of Fixed Deposits

In the case of a co-operative credit society, or a co- operative bank, or any other society which is authorized by its bye- Laws to accept deposits from the members / non members, a register of fixed de[posits may be maintained giving details as regards the dates of acceptance, maturity, interest accrual, repayment, etc.

Register of sureties In case of co-operative credit society, loans are given against personal security of members as also surety (Gurantee) provided by two other members. The register of sureties will give particulars about the number of borrows in respect of which a member has stood surety, and show whether it is with the over all limit of surety – ship that may be given by a member as prescribed by the bye-Laws.

Register of loan disbursement and recovery

In the case of co-operative credit society, this register will provide particulars regarding loans sanctioned buy the society, the dates of disbursement and recovery.

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3) a) Qualities of management/ operational Auditor

Qualities Reasons

Mental strength To report facts, and not to change his report under pressure.

Analytical skills To appreciate problems,

To c=visualize whether simpler alternative means are available to do a particular work,

To see whether everything properly fits on the business frame and organizational policy.

Team spirit To get along with organisatinal members generally, and develop a team spirit with people with different background.

HR Skills To be persistent and possess an attitude of skepticism,

To deal consistently with persons at all levels in the organization.

End to End approach

A wholistic approach(ie. End –to- end approach) to view every action in its segmental relevance, as also its relevance to the inter- related operations.

Mindset To imbibe a constructive and purposive approach rather than faultfinding;

To have a broad outlook than narrow protective view point.

Approach participative

An attitude to encourage and appreciate good work, and to extend an helping hand to those found deficient.

Technical background

To identify and analyse the methods of work and identify ways and means for improvement.

Inquiry To ask “who”, “why”, “when”, “what”, “which” and “how” of everything.

Curiosity To know clearly every aspect of the matter under Audit.

b) Under propriety Audit, the Auditor tries to bring out the cases of improper, avoidable and

infructuous expenditure even though the expenditure has been incurred in accordance with the provisions, rules and regulations. Thus, propriety audit goes much beyond the scope of the normal duties under statutory Audit. The major points of distinction between propriety Audit and stator Audit are as under:

SL. No.

Particulars Statutory audit Property Audit

1 Meaning It refers to the examination of the transactions with a view to ascertaining the true and fair view/ character of the financial statements.

It refers to the verification of transactions on the tests of public interest, commonly accepted customs and standards of conduct.

2 Basic purpose

The auditor’s responsibility is to express an opinion,. He is not required to dig up in to the property of affairs except when statutorily required. He is not concerned with the prudence or imprudence, efficiency or the inefficiency of the manner of conduct of business.

The basic requirement is to dig deep into the affairs, to reach the core4 and essence of the transaction. The Auditor is concerned with the prudence and efficiency of the manner of conduct of business. He has to report on whether the enterprise has fulfilled its objectives and targets achieved with proper accounting of expenditure.

3 Approach It is essentially a reporting function and involves the expression of opinion in the form of a report.

This involves deeper inspection of transactions and goes more beyond just expression of opinion, stress being given to economy, efficiency and effectiveness.

4 Vouching The Auditor depends on documents, vouchers & evidence to ascertain the true and fair character of the affairs.

The emphasis to the core of the transaction, i.e. it involves examining the substance of the transaction, not just vouching external evidences.

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5 Guiding principles

Guiding principles for formation of an opinion on the true & fairness include:

a) Application of systematic techniques and procedures.

b) Assessment of internal control. c) Adherence to accepted

accounting principles and compliance with legal and internal rules and regulations.

d) Compliance with professional guidelines, legal provisions and related judicial pronouncements.

Guiding principles in propriety Audit include: a) Verification of propriety of expenditure. b) Exercise of vigilance and prudence on the

part of every person authorized to incur expenditure.

c) Appropriateness of transactions having regard to the factors of prudence, public interest and wasteful expenditure.

d) Adherence of authorities to accepted principles of public spending i.e. prudence in spending.

e) Assurance that no expenditure has been incurred other than those which was essentially required

f) Amounts do not go to the benefit of managerial personnel, employees or others, and also such persons do not abuse their authority to spend.

6 Law The auditor is guided by sec.143 of the Act, which imposes certain specific responsibilities on him.

The Auditor is guided by the provisions of the companies Act, as well as guidelines issued by the C& AG in the manner of conduct of audit.

It is a vital clause which unusually gets attracted whenever it is necessary to judge whether the accountant has honestly and reasonably discharged his duties. The expression negligence covers a wide field and extends from the frontiers of fraud to collateral minor negligence. Where a Chartered Accountant had not completed his work relating to the audit of the accounts a company and had not submitted his audit report in due time to enable the company to comply with the statutory requirement in this regard. He was guilty of professional misconduct under Clause (7). Since Mr. D has not completed his audit work in time and consequently could not submit audit report in due time and consequently, company could not comply with the statutory requirements, therefore, the auditor is guilty of professional misconduct.

4) Comprehensive Audit of Public Enterprises: Areas to be examined: The scope and is determined by the Comptroller and Auditor General of India. Audit of public enterprises in India is not restricted to financial and compliance audit; it extends also to efficiency, economy and effectiveness with which these operate and fulfill their objectives and goals. Another aspect of such audit relates to questions of propriety; this audit is directed towards an examination of management decisions in sales, purchases, contracts, etc. to see whether these have been taken in the best interests of the undertaking and conform to accepted principles of financial propriety. Comprehensive audit involves assessing efficiency and effectiveness of public enterprises in its entirety to be conducted on the basis of certain standards and criterion. Public enterprises have been set-up with socio-objectives. An objective assessment with reference to such objectives’ fulfillment would require comprehensive audit. The starting point of a comprehensive audit of a public enterprise, which covers aspects of economy, efficiency and effectiveness, is the preparation of an audit programme based on the study of decisions relating to the setting up of the enterprise, its objectives, the areas of operation, organization, financial and operational details available in the annual reports and accounts, capital and operational budgets, deliberations of the board of directors, material in the earlier audit inspection reports on the enterprise and other relevant available papers. These audit programmes (or guidelines) identify the areas/aspects which require further detailed audit analysis and criteria,

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the data required for such analysis and the sources of such data, the extent of the audit analysis including the test checks to be applied and the instructions to the audit parties assigned to the work. The areas covered by comprehensive audit are those of investment decisions, project formulation and management, organisation, delegation of powers and management information systems, organisational effectiveness, capacity utilisation, management of equipment, plant and machinery, production performance, use of materials, productivity of labour, idle capacity, costs and prices, development of complementary ancillary small scale industries, materials management, sales and credit control, budgetary and internal control systems, etc. The areas covered in comprehensive audit will naturally vary from enterprise to enterprise depending on the nature of the enterprise, its objectives and operations. Some of the broad areas are listed below:

♦ Comparison of overall capital cost of the project with the approved planned costs.

♦ Production or operational outputs vis-a-vis under - utilisation of the installed `capacity.

♦ Systems of project formulation and implementation.

♦ Cost control measures.

♦ Research and development programmes.

♦ System of repairs and maintenance.

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PRIME/41ST PT/FIANL 1

PRIME ACADEMY FINAL - 41st SESSION - PROGRESS TEST

CORPORATE AND ALLIED LAWS No of Pages: 3 Total Marks: 75 Time Allowed: 2 Hrs PART - A (25 Marks)

I. State whether the given statement is correct/incorrect along with reasons 1. At least one woman director shall be on the board. 2. No independent director shall hold office for more than two consecutive terms. 3. The remuneration payable to directors shall be decided by the Central government 4. The CSR Committee need not consists an independent director 5. An auditor can be removed before the expiry of his term by passing an ordinary resolution.

(5 x 3 = 15 Marks) II. Choose the correct answer from options given below:

1. According to Section 173 of companies act 2013, every company shall hold its first board meeting within ________ of its incorporation

a. 10 days b. 30 days c. 45 days d. 90 days

2. Section 173(2) allows directors to attend board meetings_________ a. In person b. Video conferencing c. Audio visual means d. Any of the above

3. The CSR committee shall be constituted by a company if its___________ a. Net worth is ` 100 crore rupees or more b. Net worth is ` 300 crore rupees or more c. Net worth is ` 500 crore rupees or more d. Net worth is ` 1000 crore rupees or more

4. A One person company shall file copy of financial statements with the registrar within __________ [Section 137(1)]

a. 30 days b. 90 days c. 100 days d. 180 days

5. In case of first auditor, the remuneration shall be fixed by ________ a. Central government b. Member of the company c. Registrar d. Board of directors

6. According to Section 127 of the companies act, 2013 company shall be liable to pay simple interest at the rate of _____ for default in payment and distribution of dividend.

a. 6% b. 10% c. 12% d. 18%

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7. An alternate director shall be appointed during the absence of the original director for a period of not less than ________

a. One month b. Three months c. Two months d. Six months

8. The sitting fees to directors shall not exceed ______[Section 197(5)] a. ` 20000 b. ` 50000 c. One lakh rupees d. Ten lakh rupees

9. According to section 203 of companies act, 2013 every listed company having paid-up share capital of _________ shall have whole-time key managerial personnel

a. ` 1 crore b. ` 10 crore c. ` 50 crore d. ` 1 lakhs

10. Every Public company having a turnover of _________shall conduct secretarial audit a. ` 100 crores b. ` 250 crores c. ` 500 crores d. ` 600 crores (10 x 1= 10 Marks)

PART- B (50 Marks)

1. Board of Director of GHI Limited are to appoint a ‘Stakeholders Relationship Committee’ as required under the provisions of the Companies Act, 2013. The Board decides to constitute the committee with the following directors of the company who are the non-executive directors: Mr. Wise Mr. Intelligent Mr. Green Mr. Blue You are required to:

(i) Draft a resolution appointing the ‘Stakeholders Relationship Committee’. (ii) Which companies are required to constitute the ‘Stakeholders Relationship Committee’ under

the provisions of the Companies Act, 2013? (10 Marks) 2.

a) Mr. Sachin was appointed as an additional Director of Conservative Finance Ltd. w.e.f. 1stOctober, 2013, in a casual vacancy by way of a circular resolution passed by the Board of Directors The next annual general meeting of the company was due on 31st March, 2014, but the same was not held due to delay in the finalisation of the accounts. Some of the shareholders of the company have questioned the validity of the appointment of Mr. Sachin and his continuation as additional director beyond 31st March, 2014. Advise the company on the complaints made by the shareholders (5 Marks)

b) The Annual General Meeting of Bhaskar Electronics Limited declared a dividend at the rate of 30

percent payable on paid up equity share capital of the Company as recommended by Board of Directors on 30th April, 2014. But the Company was unable to post the dividend warrant to Mr. Sanjay, an equity shareholder of the Company, up to30th June, 2014. Mr. Sanjay filed a suit against the Company for the payment of dividend along with interest at the rate of 20 percent per annum for default period. Decide in the light of provisions of the Companies Act, 2013, whether Mr. Sanjay would succeed? Also state the directors' liability in this regard under the Act. (5 Marks)

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3. The Annual General Meeting of Robertson Ltd., for laying the Annual Accounts thereat for the year ended 31st March, 2014 was not held, as the accounts were not ready. In this context:

(i) Advise the company regarding compliance of the provisions of section 137 of the Companies Act, 2013 for filing of copies of financial statements with the Registrar of Companies.

(ii) Will it make any difference in case the Annual Accounts were duly laid before the Annual General Meeting held on 27th September, 2014 but the same were not adopted by the shareholders? (10 Marks)

4.

a) In order to meet the expansion requirement, the Board of Directors of MNR Limited by passing a resolution decides to borrow from the company’s bankers an additional sum of ` 200 crores, as long term loan. The company gives you the following financial information:

`

Equity Share Capital 100 crores

Preference Share Capital 50 crores

General Reserve 25 crores

Debenture Redemption Reserve 25 crores

Provision for Taxation 12 crores

Existing long term loan from company’s bankers is ` 25 crores. Examining the provisions of the Companies Act, 2013, the company seeks your advice about the extent to which the company can borrow from its bankers and also state whether the Board of Directors proposal to borrow ` 200 crores is valid. (5 Marks)

b) Mr. Suresh, a Chartered Accountant, was appointed by the Board of Directors of ABLimited as the

First Auditor. The company in General Meeting removed Mr. Suresh without seeking the approval of the Central Government and appointed Mr. Gupta as Auditor in his place.(5 Marks)

5. a) A meeting of the Board of ‘No Holiday Ltd’ was held on a national holiday. However due to lack of

quorum, the proceedings of the meeting could not be held and therefore the Chairman of the meeting decided with the consent of the majority that the Board meeting be adjourned to next Monday. However, the date fixed for the adjourned meeting happened to be a ‘national holiday’. Advise and draw your analogy with reference to the provisions of the Companies Act,2013, whether the adjourned meeting of the Board can be held on a day which is a public holiday. (5 Marks)

b) In the course of administration of the affairs of a limited company, Chairman of the Board of

directors came across a matter which required the approval by way of a board resolution. In the prevailing circumstances, it is not possible to convene and hold a Board meeting. The chairman approaches you to advise him of the way and the relevant procedure to obtain such approval without holding the Board meeting. Advise the chairman, taking into account the relevant provisions of the Companies Act, 2013 (5 Marks)

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PRIME ACADEMY 41stSESSION – FINAL - PROGRESS TEST- CORPORATE AND ALLIED LAWS

SUGGESTED ANSWERS PART – A

I. 1. True. At least one woman director shall be on the Board of such class or classes of companies

as may be prescribed. [Second proviso to section 149(1)] The Companies (Appointment and Qualification of Directors) Rules, 2014 provides that the following class of companies shall appoint at least one woman director- (1) every listed company; (2) every other public company having - (A) paid–up share capital of one hundred crore rupees or more; or (B) turnover of three hundred crore rupees or more

2. True. Subject to the provisions of section 152, an independent director shall hold office for a term up to five consecutive years on the Board of a company. He shall be eligible for re-appointment on passing of a special resolution by the company and disclosure of such appointment in the Board's report. No independent director shall hold office for more than two consecutive terms. However, such independent director shall be eligible for appointment after the expiration of three years of ceasing to be an independent director. Provided that during the said period of three years, such independent director shall not, be appointed in or be associated with the company in any other capacity, either directly or indirectly.

3. False. Notwithstanding anything contained in any other provision of this Act, but subject to the provisions of sections 197 and 198, an independent director shall not be entitled to any stock option and may receive remuneration by way of(1) fee provided under sub-section (5) of section 197,(2) reimbursement of expenses for participation in the Board and other meetings and(3) profit related commission as may be approved by the members. Under the new Act, an independent director shall not be entitled to any stock option and may receive remuneration by way of sitting fees, reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.

4. False. CSR Committee to have three or more directors. At least one is to be an independent director. Board’s Report shall disclose the constitution of CSR Committee

5. False. The auditor appointed under section 139 may be removed from his office before the expiry of his term only by a special resolution of the company and after obtaining the previous approval of the Central Government by making an application in Form ADT-2 and shall be accompanied with the prescribed fees. The application shall be made to the Central Government within 30 days of the resolution passed by the Board.

II.

1. 30 days 2. Any of the above 3. Net worth is 500 crore rupees or more 4. 180 days 5. Board of directors 6. 18% 7. Three months 8. One lakhs 9. 10 crores 10. 250 crores

PART - B

1. (i) 'Stakeholders Relationship Committee' under the provisions of the Companies Act, 2013 is

appointed by the Board of Directors by passing resolution at its meeting. The resolution is as under: “Resolved that the 'Stakeholders Relationship Committee' be and is hereby constituted as under:

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Mr. Wise Non-Executive Director (Chairperson). Mr. Intelligent Non-Executive Director Mr. Green Non-Executive Director Mr. Blue Non-Executive Director

The Committee further resolves to appoint Mr. Wise as the Committee's Chairman and Mr. Wise be and is hereby appointed as Chairman. The Committee resolves authorising the Company Secretary to take necessary steps to complete the formalities relating to the above resolution.” Dated ________, 2015 Sd/FOR BOARD OF DIRECTORS

(ii) The Board of Directors of a company which consists of more than one thousand shareholders, debenture-holders, deposit-holders and any other security holders at anytime during a financial year shall constitute a Stakeholders Relationship Committee consisting of a Chairperson who shall be a non-executive director and such other members as may be decided by the Board. [Section 178(5) of the Companies Act, 2013] The Committee shall consider and resolve the grievances of security holders of the company [Section 178(6)]. The Chairperson of each of the committee constituted under the provisions of this Act or, in his absence any other member of the committee authorised by him in this behalf shall attend the general meetings of the company. [Section 178(7)]. In case of any contravention of the provisions of Section 177 and this section, the company shall be punishable with fine which shall not be less than ` One lakh but which may extend to ` 5 lakhs and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than ` 25,000 but which may extend to ` One lakh or with both. [Section 178(8)] However, non-consideration of resolution of any grievance by the Stakeholders Relationship Committee in good faith shall not constitute a contravention of this section. [Proviso to section 178(8)]

2. (a) Under section 161(1) of the Companies Act, 2013, the articles of a company may confer on its

Board of Directors the power to appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an additional director at any time who shall hold office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier. Further, section 161(4) states that in the case of a public company, if the office of any director appointed by the company in general meeting is vacated before his term of office expires in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company, be filled by the Board of Directors at a meeting of the Board. In the given case, Mr. Sachin has been appointed as an additional director in order to fill in a casual vacancy. A casual vacancy on the Board can be filled only by means of a board resolution passed at a meeting of the Board and not by circulation. Therefore, the appointment of Mr. Sachin is invalid. However, it is rather strange that in the given case Mr. Sachin has been appointed as an additional director to fill a casual vacancy in the Board. Actually, additional directors are appointed by the Directors (if authorized by the Articles) to increase the number of directors within the legally prescribed limits and not to fill a casual vacancy. In case Mr. Sachin had been appointed as an additional director not to fill a casual vacancy, his appointment could have been made by a resolution by circulation under section 161 (1) and he would have held office till the date of the next AGM or the last date when the next AGM should have been held, whichever is earlier. In the given case, as the AGM was due on 31st March 2014 which is presumably the last date for holding it, his appointment would terminate on 31st March 2014.

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(b) According to Section 127 of the Companies Act, 2013, dividend has to be paid within 30 days from the date of its declaration. The posting of dividend warrant by the company within 30 days will be deemed to be payment irrespective of the fact whether the shareholder has encashed it or not. Failure to pay or post dividend warrant within 30 days constitutes an offence under the Act and the company shall be liable to pay simple interest at the rate of eighteen percent per annum during the period for which such default continues. In the instant case, the Annual General Meeting of Bhaskar Electronics Limited declared a dividend at the rate of 30% payable on paid up equity share capital of the company as recommended by the Board of Directors on 30th April, 2014. But the company was unable to post the dividend warrant to Mr. Sanjay, an equity shareholder of the company, up to 30th June, 2014. I In view of the above provisions, Mr. Sanjay can file a suit against the company for the payment of dividend because failure to pay or post dividend warrant within 30 days constitutes an offence under the Act. Thus, he would succeed but he is entitled for simple interest at the rate of 18% per annum (and not 20% as claimed) during the period for which such default continues. II Every director of the company, if he is knowingly a party to the default, is punishable with simple imprisonment for a term which may extend to two years and also to a fine of one thousand rupees for every day during which such default continues.

3. Under section 137(1) of the Companies Act, 2013, a copy of the financial statements, including

consolidated financial statement, if any, along with all the documents which are required to be or attached to such financial statements under this Act, duly adopted at the annual general meeting of the company, shall be filed with the Registrar within thirty days of the date of annual general meeting in such manner, with such fees or additional fees as may be prescribed within the time specified. Every company shall file the financial statements with the Registrar together with Form AOC-4. Provided that where the financial statements under sub-section (1) are not adopted at annual general meeting or adjourned annual general meeting, such unadopted financial statements along with the required documents under sub-section (1) shall be filed with the Registrar within thirty days of the date of annual general meeting and the Registrar shall take them in his records as provisional till the financial statements are filed with him after their adoption in the adjourned annual general meeting for that purpose. Further under section 137(2) of the Companies Act, 2013 where the annual general meeting of a company for any year has not been held, the financial statements along with the documents required to be attached under sub-section (1), duly signed along with the statement of facts and reasons for not holding the annual general meeting shall be filed with the Registrar within thirty days of the last date before which the annual general meeting should have been held and in such manner, with such fees or additional fees as may be prescribed within the time specified.

4.

(a) Section 180 of the Companies Act, 2013 provides that the Board of directors of a company can exercise certain powers only with the consent of the company accorded by a special resolution passed at the company’s general meeting. Board of directors of the company can borrow money, where the money to be borrowed, together with the money already borrowed by the company will exceed the aggregate of the company’s paid-up share capital and free reserves, apart from temporary loans obtained from the company’s bankers in the ordinary course of business, only with the consent of the company accorded by a special resolution passed at a general meeting. Every such special resolution shall specify the total amount up to which moneys may be borrowed by the Board of Directors. In the given case, the aggregate of paid-up share capital + free reserves is ` 100 crores+ ` 50 crores + ` 25 crores, i.e. ` 175 crores i.e. the maximum amount can be borrowed by the directors. As per resolution, the Board wants to borrow additional sum of ` 200 crores. Company has already borrowed ` 25 crores as existing long term loan. Since the amount of additional

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borrowing i.e. ` 200 crores is in excess of the above limit of ` 175 crores, the Board can borrow only by passing a special resolution passed in the general meeting of the company. The Board of Directors of the company are, therefore, advised to get a special resolution passed in the company’s general meeting and the resolution should also specify the amount that can be borrowed by the Board.

(b) Removal of first auditor: Section 140(1) stipulates that any auditor appointed under section 139

may be removed from office before the expiry of his term by passing special resolution in general meeting, after obtaining the previous approval of the Central Government in that behalf. Provided that before taking any action under subsection (1) of Section 140, the auditor concerned shall be given a reasonable opportunity of being heard. The first auditors appointed by Board of Directors can be removed in accordance with the provision of Section 140(1) of the companies act, 2013. Hence the removal of the first auditor appointed by the Board without seeking approval of the Central Government is invalid. The company contravened the provision of the Act.

5.

(a) The Companies Act 2013 vide section 173(3) merely states that a meeting of the Board shall be called by giving not less than seven days’ notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means. It further provides for the board meeting to be held on shorter notice to transact urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting. Therefore, as far as the holding of a board meeting is concerned, it may be held at any place on any day including a national holiday if agreed by the directors. However, when a board meeting is adjourned due to lack of quorum, then under section 174(4) the adjourned meeting can be held on the same day at the same time and place in the next week or if that day is a national holiday, till the next succeeding day, which is not a national holiday, at the same time and place, unless the Articles provide otherwise. Therefore, the adjourned meeting cannot be held on a national holiday.unless the Articles of the company provide that it can. The meeting will have to be held on the next working day to the national holiday.

(b) Resolutions may be passed in resect of Board approvals in one of the two ways, either at the

board meetings or by circulation. Only those board resolutions may be passed by circulation, that do not relate to such items as are required to be passed only at the meeting of the directors under section 179(3) of the Companies Act, 2013. In order to pass any resolution of the Board by circulation the following steps must be taken and completed as laid down in section 175(1):

(a) The draft of the proposed resolution must be circulated along with all relevant and necessary papers;

(b) The above documents must be delivered to all the directors, members or the committee, as the case may be, at their addresses registered with the company in India;

(c) The documents must be delivered by hand delivery or by post or by courier, or through such electronic means as may be prescribed;

(d) The resolution must be approved by a majority of the directors or members, who are entitled to vote on the resolution.

(e) There must not be any objection from not less than one-third of the total number of directors of the company for the time being, requiring that such resolution under circulation must be decided at a meeting.

Further in terms of section 175(2) of the Companies Act, 2013 a resolution passed by circulation under section 175(1) shall be noted at a subsequent meeting of the Board or the committee thereof, as the case may be, and made part of the minutes of such meeting.

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