ISBN: 978-93-86801-33-3 Scanner · CS Executive Programme Module - II (New Syllabus) (Solution of December - 2017) Paper - 5 : Company Accounts and Auditing Practices Chapter - 1

ISBN: 978-93-86801-33-3

SolvedScanner AppendixCS Executive Programme Module - II

(New Syllabus)(Solution of December - 2017)

Paper - 5 : Company Accounts and Auditing Practices

Chapter - 1 : Share Capital2017 - Dec [1] (d), (e)(d) The shares of many successful companies which offer attractive rates

of dividend on their existing capitals fetch a higher price than their facevalue in the market. When shares are issued at a price higher than theface value, they are said to be issued at a premium. Thus, the excess ofissue price over the face value is the amount of premium. For example,if a share of ` 10 is issued at ` 12, ` (12 – 10) = ` 2 is the premium.The premium on issue of shares must not be treated as revenue profits.On the contrary, it must be regarded as capital receipt. The CompaniesAct requires that when a company issues shares at a premium whetherfor cash or otherwise, a sum equal to the aggregate amount of thepremium collected on shares must be credited to a separate accountcalled “Securities Premium Account”. There are no restrictions in theCompanies Act on the issue of shares at a premium, but there arerestrictions on its disposal. Under Section 52(2) of the Companies Act2013, the Securities Premium Account may be applied by the company:(a) towards the issue of unissued shares of the company to the

members of the company as fully paid bonus shares;(b) in writing off the preliminary expenses of the company;(c) in writing off the expenses of, or the commission paid or discount

allowed on, any issue of shares or debentures of the company;

1

Solved Scanner Appendix CSEP M - II Paper - 5 (New Syllabus) 2

(d) in providing for the premium payable on the redemption of anyredeemable preference shares or of any debentures of thecompany; or

(e) for the purchase of its own shares or other securities under section68.

It is to be noted here that utilization of the amount of Securities PremiumAccount except in any of the modes specified above, will attract theprovisions relating to the reduction of share capital of a company underthe Section 66 of the Companies Act, 2013.The Securities Premium Account must be shown as “Securities premiumreserves” separately in the liabilities side of the balance sheet under thehead “Reserves & Surplus”.The premium is usually payable with the installment due on allotment.However, some companies may charge premium with share applicationmoney or partly with share application money and partly at the time ofallotment of shares. It may be included in call money also.

(e) Issue of Sweat Equity Shares:(1) Notwithstanding anything contained in Section 53, a company may

issue sweat equity shares of a class of shares already issued, if thefollowing conditions are fulfilled, namely:(a) the issue is authorised by a special resolution passed by the

company;(b) the resolution specifies the number of shares, the current

market price, consideration, if any, and the class or classes ofdirectors or employees to whom such equity shares are to beissued;

(c) not less than one year has, at the date of such issue, elapsedsince the date on which the company had commencedbusiness; and

(d) where the equity shares of the company are listed on arecognised stock exchange, the sweat equity shares are issuedin accordance with the regulations made by the Securities andExchange Board in this behalf and if they are not so listed, thesweat equity shares are issued in accordance with such rules asmay be prescribed.


(2) The rights, limitations, restrictions and provisions as are for the timebeing applicable to equity shares shall be applicable to the sweatequity shares issued under this section and the holders of suchshares shall rank pari passu with other equity shareholders.

2017 - Dec [2] (a)Meaning:As per Section 2(37) of the Companies Act, 2013 “employees’ stockoption” means the option given to the directors, officers or employees of acompany or of its holding company or subsidiary company or companies, ifany, which gives such directors, officers or employees, the benefit or right topurchase, or to subscribe for, the shares of the company at a future date ata pre-determined price.ESOP or employee stock option plan refers to a basket of instruments andincentive schemes that find favour with the new upward mobile salary classand which are used to motivate, reward, remunerate and hold on toachievers.Issue of Employee Stock Options:A company, other than a listed company, which is not required to complywith SEBI (Share Based Employee Benefits) Regulations, 2014 shall offershares to its employees under this scheme after complying of followingrequirements:(1) the issue of Employees Stock Option Scheme has been approved by the

shareholders of the company by passing a special resolution.For the purpose of above statement the word “Employee’’ means:(a) a permanent employee of the company who has been working in

India or outside India; or(b) a director of the company, but excluding an independent director; or(c) an employee as defined in 1(a) or (b) above of a subsidiary, in India

or outside India, or of a holding company of the company or of anassociate company,

Excluding:(i) an employee who is a promoter or a person belonging to the

promoter group; or


(ii) a director who either himself or through his relative or through anybody corporate, directly or indirectly, holds more than ten percent ofthe outstanding equity shares of the company.

(2) The company shall make the following disclosures in the explanatorystatement annexed to the notice for passing of the resolution:(a) the total number of stock options to be granted;(b) identification of classes of employees entitled to participate in the

ESOP;(c) the appraisal process for determining the eligibility of employees to

the ESOP;(d) the requirements of vesting and period of vesting;(e) the maximum period within which the options shall be vested;(f) the exercise price or the formula for arriving at the same;(g) the exercise period and process of exercise;(h) the Lock-in period, if any;(i) the maximum number of options to be granted per employee and in

aggregate(j) the method which the company shall use to value its options;(k) the conditions under which option vested in employees may lapse

e.g. in case of termination of employment for misconduct;(l) the specified time period within which the employee shall exercise

the vested options in the event of a proposed termination ofemployment or resignation of employee; and

(m) a statement to the effect that the company shall comply with theapplicable accounting standards.

(3) The companies granting option to its employees pursuant to EmployeesStock Option Scheme will have the freedom to determine the exerciseprice in conformity with the applicable accounting policies, if any.

(4) The approval of shareholders by way of separate resolution shall beobtained by the company in case of:(a) grant of option to employees of subsidiary or holding company; or(b) grant of option to identified employees, during any one year, equal

to or exceeding one percent of the issued capital of the company atthe time of grant of option.


(5) (a) The company may by special resolution, vary the terms of ESOP notyet exercised by the employees.

(b) The notice for passing special resolution for variation of terms ofESOP shall disclose full details of the variation, the rationaletherefor, and the details of the employees who are beneficiaries ofsuch variation.

(6) (a) There shall be a minimum period of one year between the grant ofoptions and vesting of option. However, in a case where options aregranted by a company under its Employees Stock Option Schemein lieu of options held by the same person under an EmployeesStock Option Scheme in another company, which has merged oramalgamated with the first mentioned company, the period duringwhich the options granted by the merging or amalgamating companywere held by him shall be adjusted against the minimum vestingperiod required (i.e; 1 year)

(b) The company shall have the freedom to specify the lock-in period forthe shares issued pursuant to exercise of option.

(c) The Employees shall not have right to receive any dividend or tovote or in any manner enjoy the benefits of a shareholder in respectof option granted to them, till shares are issued on exercise ofoption.

(7) The amount, payable by the employees, at the time of grant of option:(a) may be forfeited by the company if the option is not exercised by the

employees within the exercise period; or(b) the amount may be refunded to the employees if the options are not

vested due to non-fulfillment of conditions relating to vesting ofoption as per the Employees Stock Option Scheme.

(8) (a) The option granted to employees shall not be transferable.(b) The option granted to the employees shall not be pledged,

hypothecated, mortgaged or otherwise encumbered or alienated inany other manner.

(c) Subject to clause (d), no person other than the employees to whomthe option is granted shall be entitled to exercise the option.


(d) In the event of the death of employee while in employment, all theoptions granted to him till such date shall vest in the legal heirs ornominees of the deceased employee.

(e) In case the employee suffers a permanent incapacity while inemployment, all the options granted to him as on the date ofpermanent incapacitation, shall vest in him on that day.

(f) In the event of resignation or termination of employment, all optionsnot vested in the employee as on that day shall expire. However, theemployee can exercise the options granted to him which are vestedwithin the period specified in this behalf, subject to the terms andconditions under the scheme granting such options as approved bythe Board.

(9) The Board of Directors, shall, inter alia, disclose in the Directors’ Reportfor the year, the following details of the Employees Stock OptionScheme:(a) options granted;(b) options vested;(c) options exercised;(d) the total number of shares arising as a result of exercise of option;(e) options lapsed;(f) the exercise price;(g) variation of terms of options;(h) money realized by exercise of options;(i) total number of options in force;(j) employee wise details of options granted to:

(i) key managerial personnel;(ii) any other employee who receives a grant of options in any one

year of option amounting to five percent or more of optionsgranted during that year;

(iii) identified employees who were granted option, during any oneyear, equal to or exceeding one percent of the issued capital(excluding outstanding warrants and conversions) of thecompany at the time of grant.


(10) (a) The company shall maintain a Register of Employee Stock Optionsin Form No. SH.6 and shall forthwith enter therein the particularsof option granted to employees under a scheme of ESOP subjectto above conditions.

(b) The Register of Employee Stock Options shall be maintained at theregistered office of the company or such other place as the Boardmay decide.

(c) The entries in the register shall be authenticated by the companysecretary of the company or by any other person authorized by theBoard for the purpose.

(11) Where the equity shares of the company are listed on a recognizedstock exchange, the Employees Stock Option Scheme shall be issued,in accordance with the regulations made by the Securities andExchange Board of India in this behalf.

2017 - Dec [2] (c)Journal Entries in the books of Vanities Ltd.

Date Particulars Amount(`)

Amount(`)

1. 12% Redeemable preferenceShare Capital A/c Dr.Premium on Redemption of PreferenceShares A/c Dr.

To Preference sharesholders A/c(Being amount payable on redemption of thepreference shares at a premium of 10%)

1,00,000

10,0001,10,000

2. Preference Shareholders A/c Dr.To Bank A/c

(Being amount paid to Preference Shareholderson Redemption of preference shares)

1,10,0001,10,000


3. Securities Premium A/c Dr.To Premium on Redemption of Preference shares A/c

(Being premium on Redemption of preferenceshares written off)

10,000

10,000

4. General Reserve A/c Dr.To Capital Redemption Reserve A/c

(Being amount transferred on Redemption ofpreference shares)

1,00,0001,00,000

Chapter - 2 : Debentures2017 - Dec [2] (d)


Amount(`)

1. Bank A/c Dr.To 12% Debenture app. A/c

(Being application money Recd. for 12,000Debentures @ ` 25 each)

3,00,0003,00,000

2. 12% Debenture app. A/c Dr.To 12% Debentures A/cTo Bank A/c

(Being amount transferred for 10,000debentures @ 25 per debentures and amountrefunded for 2,000 debentures)

3,00,0002,50,000

50,000

3. Debentures allotment A/c Dr.To 12% Debentures A/c

(Being amount due on allotment of 10,000 12%debentures @ ` 25 each)

2,50,0002,50,000

4. Bank A/c Dr.To Debentures allotment A/c

(Being amount Received on allotment ofdebentures)

2,50,0002,50,000


5. Debenture first & final call A/c Dr.To 12% Debentures A/c

(Being amount due on 10,000 12% debentures@ ` 50 each)

5,00,0005,00,000

6. Bank A/c Dr.To Debenture first & final call A/c

(Being first & final call Money Received)

5,00,0005,00,000

Cash BookParticulars Amount

(`)Particulars Amount

(`)To Debenture App. A/c(Being app. Money Recd.for 12,000 debentures @` 25 each)

3,00,000 By Debenture App. A/c(Being amount refundedfor 2,000 Applicants)

50,000

To Debenture allotmentA/c

(Being amount receivedon allotment of 10,00012% deb. @ 25% each)

2,50,000

To Debenture first & finalcall A/c

(Being amount receivedon 10,000 12% deb. @` 50 each)

5,00,000

Chapter - 3 : Final Accounts of Companies2017 - Dec [2] (b)Share Capital:For each class of share capital (different classes of preference sharesto be treated separately):(a) the number and amount of shares authorized;(b) the number of shares issued, subscribed and fully paid, and subscribed

but not fully paid;


(c) par value per share;(d) a reconciliation of the number of shares outstanding at the beginning

and at the end of the period;(e) the rights, preferences and restrictions attaching to that class including

restrictions on the distribution of dividends and the repayment of capital;(f) shares in the company held by its holding company or its ultimate

holding company or by its subsidiaries or associates;(g) shares in the company held by any shareholder holding more than

5 percent shares;(h) shares reserved for issue under options and contracts/commitments for

the sale of shares/disinvestment, including the terms and amounts;(i) Separate particulars for a period of five years following the year in which

the shares have been allotted/ bought back, in respect of:• Aggregate number and class of shares allotted as fully paid up

pursuant to contract(s) without payment being received in cash.• Aggregate number and class of shares allotted as fully paid up by

way of bonus shares (Specify the source from which bonus sharesare issued).

• Aggregate number and class of shares bought back.(j) Terms of any security issued along with the earliest date of conversion

in descending order starting from the farthest such date.

2017 - Dec [2A] (Or) (iii)(i) Non-current investments shall be classified as trade investments and

other investments and further classified as:(a) Investment property;(b) Investments in Equity Instruments;(c) Investments in Preference shares;(d) Investments in Government or trust securities;(e) Investments in units, debentures or bonds;(f) Investments in Mutual Funds;(g) Investments in partnership firm;(h) Other non-current investments (specify nature)

Under each classification, details shall be given of names of thebodies corporate (indicating separately whether such bodies are


(i) subsidiaries, (ii) associates, (iii) joint ventures, or (iv) controlledspecial purpose entities) in whom investments have been madeand the nature and extent of the investment so made in each suchbody corporate (showing separately investments which are partlypaid). In regard to investments in the capital of partnership firms,the names of the firms (with the names of all their partners, totalcapital and the shares of each partner) shall be given.

(ii) Investments carried at other than at cost should be separately statedspecifying the basis for valuation thereof.

(iii) The following shall also be disclosed:(a) Aggregate amount of quoted investments and market value

thereof;(b) Aggregate amount of unquoted investments;(c) Aggregate provision for diminution in value of investments;(d) Aggregate amount of partly paid-up investments;(e) The names of bodies corporate (indicating separately the names

of subsidiaries, associates and other business ventures) in whosesecurities, investments have been made and the nature and extentof the investments so made in each such body corporate.

2017 - Dec [3] (c)Section 197 of the Companies Act, 2013 prescrible the maximumpercentage of profit that can be paid as Managerial remuneration. For thispurpose, profit is to be calculated in the manner as prescribed in Section197 of the Companies Act, 2013.Calculation of Net Profit u/s 197 of the Companies Act, 2013:Net profit before provision for income tax andManagerial remuneration but after depreciationand provision for repair 85,00,000

Less: (i) Depreciat ion allowable underschedule - II of Companies Act, 2013

(ii) Actual Expenditure incurred on repairduring the year

24,00,000

1,50,000 25,50,000

1,10,50,000


Add: (i) Depreciation provided in the Books(ii) Provision for Repair of Machinery

30,00,0002,50,000 32,50,000

Net profit for Managerial Remuneration 78,00,000

Calculation of Managerial Remuneration(a) There’s only one whole time Director:

Managerial Remuneration = 5% of Net Profit= 5% of ` 78,00,000= ` 3,90,000

(b) There are two whole time directors:Managerial Remuneration = 10% of Net Profit

= 10% of ` 78,00,000= ` 7,80,000

(c) There are two whole time directors, one part time director and manager:Managerial Remuneration = 11% of Net Profit

= 11% of ` 78,00,000= ` 8,58,000

2017 - Dec [4] (b)Journal Entries in the books of U Ltd.


Amount(`)

(A) Equity share capital (old) A/c Dr.To Equity share capital (New) A/c

(Being 30,000 equity shares of ` 10 eachconverted into 1,50,000 equity shares of ` 2 each)

3,00,0003,00,000

(B) Equity share capital (New) A/c Dr.To Surrender of shares A/c

(Being equity shareholders surrendered 90% oftheir holding)

2,70,0002,70,000

(C) 8% Cumulative Preference share capital A/c Dr.To 9% cumulative preference share capital A/c

(Being 8% cumulative preference share capitalconverted into 9% cumulative preference of ` 100each)

2,00,0002,00,000


(D) Sundry creditors A/c Dr.To Surrenders of shares A/cTo Capital Reduction A/c

(Being sundry creditors reduce their claims by onefifth in consideration of their getting shares of `35,000)

60,00035,00025,000

(E) Loan from Directors A/c Dr.Directors Remuneration A/c Dr.

To Capital Reduction A/c(Being Directors forego their loan andRemuneration)

50,00020,000

70,000

(F) Capital Reduction A/c Dr.To PlantTo Loose toolsTo DebtorsTo Stock

(Being assets written off)

83,00040,0008,000

15,00020,000

(G) Capital Reduction A/c Dr.To Bank A/c

(Being Reconstruction Exp. written off)

10,00010,000

Surrender of Shares A/c Dr.To Capital Reduction A/c

(Being Balance of Surrender of Share Capital A/ctransferred to Capital Reduction A/c)

2,35,0002,35,000

(H) Capital Reduction A/c Dr.To Profit & Loss A/c

(Being Debit Balance of P & L A/c written off)

2,00,0002,00,000

Securities Premium A/c Dr.To Capital Reduction A/c

(Being Securities Premium A/c transferred toCapital Reduction A/c)

90,00090,000

Capital Reduction A/c Dr.To Goodwill A/cTo Plant A/c

(Being Goodwill and Plant written off)

1,27,00050,00077,000


(I) Bank A/c Dr.To Equity Share Capital (New) A/c

(Being 50,000 new equity shares of ` 10 eachallotted to existing members)

1,00,0001,00,000

Chapter - 4 : Corporate Restructuring2017 - Dec [1] (c)The various objective for undertaking a Corporate Restructuring exercise areas follows:

(i) To focus on core strengths, operational synergy and efficient allocationof managerial capabilities and infrastructure.

(ii) Consolidation and economies of scale by expansion and diversion toexploit extended domestic and global markets.

(iii) Revival and rehabilitation of a sick unit by adjusting losses of the sickunit with profits of a healthy company.

(iv) Acquiring constant supply of raw materials and access to scientificresearch and technological developments.

(v) Capital restructuring by appropriate mix of loan and equity funds toreduce the cost of servicing and improve return on capital employed.

(vi) Improve corporate performance to bring it at par with competitors byadopting the radical changes brought out by information technology.

Restructuring may be of the following kinds:Financial restructuring which deals with the restructuring of capital base andraising finance for new projects. This involves decisions relating toacquisitions, mergers, joint ventures and strategic alliances.Technological restructuring which involves, inter alia, alliances with othercompanies to exploit technological expertise.Market restructuring which involves decisions with respect to the productmarket segments, where the company plans to operate based on its corecompetencies.Organizational restructuring which involves establishing internal structuresand procedures for improving the capability of the personnel in theorganization to respond to changes. This kind of restructuring is required inorder to facilitate and implement the above three kinds of restructuring.These changes need to have the cooperation of all levels of employees toensure that the restructuring is successful.The most commonly applied tools of corporate restructuring are


amalgamation, merger, demerger, slump sale, acquisition, joint venture,disinvestment, strategic alliances and franchises. After a brief overview ofcorporate restructuring now we would confine our discussion to theaccounting for different types of restructuring.

2017 - Dec [3] (b)Calculation of Purchase considerationAssets acquiredLand & Building 50,000Add: Appreciation @ 20% 10,000 60,000Plant & Machinery 40,000Less: Depreciation @ 10% 4,000 36,000Furniture & fixtures 2,000Less: Depreciation @ 15% 300 1,700Sundry Debtors 48,000Less: Provision @ 2.5% 1,200 46,800Bills Receivable 13,000Stock 18,000Cash at Bank 29,000Goodwill 24,000

2,28,500Less: Liabilities

Sundry creditors 30,000Bills Payable 16,000 46,000

Purchase Consideration 1,82,500Mode of Payment

(i) Allotment of 10,000 equity sharesof ` 10 each at ` 12 each 1,20,000

(ii) Allotment of 500, 14% debenturesof ` 100 each at a discount of 10% 45,000

(iii) Cash 17,5001,82,500


Journal Entries in the books of the Company W Ltd.

1. Business acquisition A/c Dr.To M/s A and B

(Being purchase consideration Make due)

1,82,5001,82,500

2. Land & Building A/c Dr.Plant & Machinery A/c Dr.Furniture & Fixtures A/c Dr.Goodwill A/c Dr.Sundry Debtors A/c Dr.Bills Receivable A/c Dr.Stock A/c Dr.Bank A/c Dr.

To Sundry Creditors A/cTo Bills Payable A/cTo Provision for Bad Debtors A/cTo Business acquisition A/c

(Being assets and liabilities takenover and amountmake due)

60,00036,000

1,70024,00048,00013,00018,00029,000

30,00016,000

1,2001,82,500

3. M/s A and B A/c Dr.Discount on issue of debentures A/c Dr.

To Equity share capital A/cTo 14% Debentures A/cTo Securities premium A/cTo Bank A/c

(Being purchase consideration paid)

1,82,5005,000

1,00,00050,00020,00017,500

4. Goodwill A/c Dr.To Bank A/c

(Being expenses on acquisition of Businessdebited to goodwill A/c)

5,0005,000


Chapter - 5 : Consolidation of Accounts2017 - Dec [4] (a)Consolidated profit & loss account of H Ltd. and its subsidiary S Ltd. for theyear ended 31st March, 2017.

Particulars Amount(`)

Amount(`)

Particulars Amount(`)

Amount(`)

To OpeningStock (H Ltd.)

1,00,000 By SalesH Ltd.S Ltd.

8,00,0006,50,000

To PurchasesH Ltd.S Ltd.

5,00,0004,00,000

Less: Inter Co. sales

14,50,000

75,000 13,75,000

Less: Inter Company Purchases

9,00,000

75,000 8,25,000

By Closing stockH Ltd.S Ltd.

1,50,0001,00,000 2,50,000

To Productive WagesH Ltd.S Ltd.

1,50,0001,00,000 2,50,000

To GrossProfit c/d 4,50,000

– 16,25,000 – 16,25,000

To SundryExpensesH. Ltd.S Ltd.

75,0001,00,000 1,75,000

By Gross Profit b/dBy Debenture Interest 3,000

4,50,000

To Debenture Interest 6,000

Less: Inter co. transaction 3,000 Nil

Less: Inter co. transaction 3,000 3,000

To Provision for Taxation

H Ltd.S Ltd.

60,00070,000 1,30,000


To Stock ReserveTo Profit c/d

––

4,6881,37,312

– 4,50,000 – 4,50,000

To Proposed DividendH Ltd.S Ltd.

20,00020,000

By Net Profit b/d – 1,37,312

Less: Dividend of S Ltd. due to H Ltd.

40,000

15,000 25,000

To Preference DividendTo Tax on distributedprofit @15%

H Ltd.S Ltd.

–

3,0003,450

3,000

6,450

To Capital ReserveTo Minority interest

(1/4 of 47550)To Balance c/d

13,228

11,88877,746

1,37,312 1,37,312

Working Note:(1) Calculation of Capital Reserve: Profit of S Ltd. after preference

dividend and Tax on distributed profit:= ` 74,000 - 3,450= ` 70,550Pre acquisition profit i.e profit upto 1st July 2016:

= ` 70,550 × = 17637.50

H Ltd.’s share of pre acquisition profit

= 17637.50 × = 13228.13 or ` 13,228

(2) Stock Reserve has been calculated as under: Total Profit made by SLtd. on goods sold to H Ltd.= ` 75,000 - 50,000 = ` 25,000


1/4th of the goods remained unsold.Hence, profit on 1/4 th Goods= ` 25,000 × 1/4 = ` 6,250H Ltd.’s share of unrealised profits= 3/4 th of ` 6,250= 4687.50 or 4,688

(3) Debenture Interest paid by S Ltd. and Received by H Ltd. amounting` 3,000 has been eliminated from both sides.

(4) Out of the proposed dividend of S Ltd. 3/4th of ` 20,000 i.e. ` 15,000belongs to H Ltd. and as such the same has been eliminated.

Chapter - 6 : Valuation of Shares and Intangible Assets2017 - Dec [2A] (Or) (ii)(a) Valuation of Shares on Dividend basis

Year Dividend Rate Weight Product2014 12 1 122015 15 2 302016 18 3 542017 20 4 80Total 10 176

Weighted Average Rate = = 17.6%

Value of Share = × 10 = 14.67 per share

(b) Valuation of share on Return on capital employed basisYear Return on capital

employed %Weight Product

2014 16 1 16

2015 20 2 40

2016 22 3 66

2017 25 4 100

Total 10 222


Weighted Average Rate = = 22.20%

Value of Share = × 10 = 18.5 per share

2017 - Dec [3] (a)(i) Asset Backing Method

Equity share capital 4,50,0006% Preference share capital 4,50,000Reserve & Surplus 35,000External Liabilities 75,000Gross Assets 10,10,000Less: Fictitious Assets 3,500

External Liabilities 75,000 78,500Net Assets available for all shareholders 9,31,500Less: Preference share capital 4,50,000Net Assets available for equity shareholders 4,81,500No. of equity shares 45,000

Intrinsic Value Per Share =

=

= ` 10.70(ii) Yield Method

Average Profit after Tax 85,050Less: Preference Dividend @ 6% of 4,50,000 27,000Less: Transfer to Reserve 10,000

Profit available for equity shareholders 48,050Expected Rate of Return on equity capital

= × 100

= × 100

= 10.68%Normal Rate of Return given = 9%


Value per share

= × Paid up value per share

= × 10 = 11.86 per share

(iii) Fair value of share

=

=

= 11.28 per share

Chapter - 7 : Liquidation of Company2017 - Dec [2A] (Or) (i)Calculation of Total Remuneration Payable to Liquidator:(i) 2% on assets realised i.e. 25,00,000 × 2% = 50,000

(ii) 3% on amount distributed to preferential creditors i.e.75,000 × 3% = 2,250

(iii) 3% on payment made to unsecured creditors(See Working Note) = 39,255

Total Remuneration 91,505

Working Note:Assets realised 25,00,000

Less: Liquidation Expenses 25,000Preferential Creditors 75,000

Secured Creditors 10,00,000Remuneration to liquidators (exceptremuneration payable on payment madeto unsecured creditors) 52,250 11,52,250Amount available for unsecured creditors 13,47,750


Remuneration payable to Liquidator on unsecured creditors payment:

i.e. 13,47,750 × = ` 39,255

Chapter - 9 : Accounting Standards2017 - Dec [1] (a)Accounting Standards (ASs) are written policy documents issued by expertaccounting body or by government or any other regulatory body. AccountingStandards covers the aspects of recognition, measurements, treatment,presentation and disclosure of accounting transactions in the financialstatements. Thus, accounting standards are guidelines for financialaccounting, as how firms prepare and present its business income andexpense, assets and liabilities.According to Section 2(2) of the Companies Act 2013 “accountingstandards” means the standards of accounting or any addendum thereto forcompanies or class of companies referred to in Section 133.The Central Government may prescribe the standards of accounting or anyaddendum thereto, as recommended by the Institute of CharteredAccountants of India, constituted under section 3 of the CharteredAccountants Act, 1949, in consultation with and after examination of therecommendations made by the National Financial Reporting Authority.Objective of Accounting Standards:• To harmonise different accounting policies and used in a country.• To reduce the accounting alternatives in the preparation of financial

statements• To ensure comparability of financial statements of different enterprises• To call for disclosures beyond that required by the law.

2017 - Dec [1] (b)The following minimum disclosure of notes and explanatory statementsshould be made in the interim financial report:

(i) A statement that the same accounting policies are followed in theinterim financial statements as those followed in the most recentannual financial statements or, if those policies have been changed,a description of the nature and effect of the change.


(ii) Explanatory comments about the seasonality of interim operations.(iii) Unusual factors that affected assets, liabilities, equity, net income and

cash flows.(iv) The effects of changes in estimates.(v) Change in debt and equity through issuance, buy-back and

repayments.(vi) Details of dividend payment.(vii) Segment revenue, segment capital employed and segment result for

business segments or geographical segments, whichever is theprimary basis of segment reporting.

(viii) The effect of changes in the composition of the enterprise during theinterim period, such as amalgamations, acquisition or disposal ofsubsidiaries and long-term investments, restructurings, anddiscontinuing operations.

(ix) Material changes in contingent liabilities since the last annual balancesheet date.

Interim reports should include interim financial statements for thefollowing periods:(a) Balance sheet as of the current interim period and a comparative

balance sheet as of the end of the immediately preceding financial year;(b) Statements of profit and loss for the current interim period and

cumulatively for the current financial year to date, with comparativestatements of profit and loss for the comparable interim periods (currentand year-to-date) of the immediately preceding financial year;

(c) Cash flow statement cumulatively for the current financial year to date,with a comparative statement for the comparable year-to-date period ofthe immediately preceding financial year.

2017 - Dec [2] (e)Rules of Revenue Recognition as per AS - 9This standard deals with the basis for recognition of revenue in the statementof profit and loss of an enterprise. It lays down the conditions to recogniserevenue by sale of goods, rendering of services, resources yielding interest,royalties and dividends. Revenue should be recognised for sale of goods orservices only when the collection is reasonably assured and (i) the property


in goods is transferred from seller to buyer (ii) there is no uncertaintyregarding the amount of consideration that will be realised from sale ofgoods. In the case of services rendered either completed service contractmethod or proportionate service contract method may be adopted forrevenue recognition. In the case of revenue by way of interest, the credit istaken on a time proportion basis taking into account the amount outstandingand the rate applicable. In the case of royalties, revenue is recognised onapproval basis in accordance with the terms of the relevant agreement. Therevenue is recognised for dividend once the right to receive dividend isestablished.

Chapter - 10 : Auditing Concepts2017 - Dec [5] (a)Advantages of An Independent Audit:The fact that audit is compulsory by law, in certain cases by itself shouldshow that there must be some positive utility in it. The chief utility of audit liesin reliable financial statement on the basis of which the state of affairs maybe easy to understand. Apart from this obvious utility, there are otheradvantages of audit. Some or all of these are of considerable value even tothose enterprises and organization where audit is not compulsory, theseadvantages are given below:1. It safeguards the financial interest of persons who are not associated

with the management of the entity, whether they are partners orshareholders.

2. It acts as a moral check on the employees from committing defalcationsor embezzlement.

3. Audited statements of account are helpful in setting liability for taxes,negotiating loans and for determining the purchase consideration for abusiness.

4. This are also use for settling trade disputes or higher wages or bonus aswell as claims in respect of damage suffered by property, by fire or someother calamity.

5. An audit can also help in the detection of wastage and losses to showthe different ways by which these might be checked, especially thosethat occur due to the absence of inadequacy of internal checks orinternal control measures.

6. Audit ascertains whether the necessary books of accounts and allied


records have been properly kept and helps the client in making gooddeficiencies or inadequacies in this respects. As an appraisal function,audit reviews the existence and operations of various controls in theorganizations and reports weakness, inadequacy, etc., in them.

7. Audited accounts are of great help in the settlement of accounts at thetime of admission or death of partner.

8. Government may require audited and certificated statement before itgives assistance or issues a licence for a particular trade.

2017 - Dec [6] (b)

S. No. Heading Description

1. Section 143 ofCompaniesAct, 2013

As per Section 128 of Companies Act, 2013 it isauditor’s duty to state whether, in his opinion andto the best of his information and according to theexplanations given to him, the financial statement(including consolidated financial statement) gives:• The information required by the Act; and• A true and fair view of state of affairs of the

company.

2. Point to beensure byauditor

In order to show a true and fair view the auditorshould ensure that:• The final accounts Financial Statement

(including consolidated financial statement)agree with the books of accounts.

• The closing stock is physically verified andvalued properly.

• Intangible assets like goodwill, patents,preliminary expenses or other deferredrevenue expenses are valued and written ofproperly.

• Expenses/income of capital nature is nottreated as revenue and vice versa.

• Contingent liabilities are not treated as actualliabilities and vice versa.


• Provision is made for all known losses andliabilities.

• Transactions are recorded on accrual basis,i.e. outstanding expenses, prepaid expenses,income accrued and advance income isrecorded properly.

• The exceptional or non-recurring transactionsare disclosed separately in the accounts.

• In case of company, the auditor has to checkwhether the applicable accounting standardsare followed or not and in case of materialdeparture, its impact on profit or loss of thecompany.

Chapter - 11 : Types of Company Audit2017 - Dec [5] (c)

S. No. Heading Description

1. ProhibitedServices[Section 144]

An auditor shall provide to the company only suchother services as are approved by the Board ofDirectors/ the Audit Committee, but which shall notinclude any of the following services (whether suchservices are rendered directly or indirectly to thecompany or its holding company or subsidiarycompany, namely:• accounting and book keeping services;• internal audit;• design and implementation of any financial

information system;• actuarial services;• investment advisory services;• investment banking services;• rendering of outsourced financial services;


management services; and• any other kind of services as may be

prescribed.

2017 - Dec [6] (a)Compliance Audit:A compliance audit is a comprehensive review of an organization’sadherence to regulatory guidelines.What, precisely, is examined in a compliance audit will vary depending uponwhether an organization is a public or private company, what kind of data ithandles and if it transmits or stores sensitive financial data.It is common to us that the business undertakings require some certifiedstatement on various matters and the auditors certify such statements aftercarrying out audit which might be necessary under the particular cases. Allsuch audits are called Compliance Audit. Suppose when a company appliesto a bank for some loan, a certified statement showing the turnover of thecompany for the past two or three years along with the current year might benecessary, and for this purpose the certified statements are to be attachedwith the application, otherwise the application will be rejected. So thesecertified statements showing the turnover of the company fall under thecategory of compliance audit. Internal audit for compliance could be morebroad base to include compliance with documented procedures/policies,compliance with statutory requirements in the relevant areas etc.Objectives of Compliance AuditThe objective of a compliance audit is to determine whether the auditee isfollowing prescribed laws, regulations, policies, or procedures. These auditscan be performed within a business organization for internal purposes or inresponse to requirements by outside groups, particularly government.Benefits of Compliance Audit1. Adherence to the established standards.2. Improvement of internal processes and technologies.3. Maintenance of Certifications.4. Adherence to governmental regulations.5. Cost recovery.


6. Elevate fraud awareness and deter fraudulent activity.7. Manage contract areas of risk.

2017 - Dec [6] (c)Secretarial Audit:The Companies Act, 2013 has introduced a new requirement of SecretarialAudit for bigger companies, which has been prescribed under Section 204of the Act. The provisions regarding secretarial audit of the companyaccording to Section 204 of the Companies Act, 2013 and the Companies(Appointment and Remuneration of Managerial Personnel) Rules, 2014 arediscussed below:Companies required conducting secretarial audit:(1) Every listed company and(2) Company belonging to other class of companies: The other class of

companies are:• every public company having a paid-up share capital of fifty crore

rupees or more; or• every public company having a turnover of two hundred fifty crore

rupees or more.Qualifications for the secretarial auditor: A Secretarial Audit has to beconducted by a Practising Company Secretary in respect of the secretarialand other records of the company.Report of the secretarial audit: A secretarial audit report shall be annexedwith the Board’s report of the company. The Board of Directors, in theirreport made in terms of sub-section (3) of Section 134, shall explain in fullany qualification or observation or other remarks made by the companysecretary in practice in his report under sub-section (1). The format of theSecretarial Audit Report shall be in Form No. MR. 3.Other Provisions:• It shall be the duty of the company to give all assistance and facilities to

the company secretary in practice, for auditing the secretarial andrelated records of the company.

• If a company or any officer of the company or the company secretary inpractise, contravenes the provisions of this section, the company, everyofficer of the company or the company secretary in practice, who is in


default, shall be punishable with fine which shall not be less than onelakh rupees but which may extend to five lakh rupees. As per Section143(14), all provisions regarding rights, duties and obligations ofstatutory auditors shall also apply to Company Secretary in Practiceconducting secretarial audit.

2017 - Dec [6A] (Or) (ii)Meaning of Joint Audit: When two or more auditors are appointed for theexecution of same audit assignment, it is termed as joint audit. Joint auditorsare mainly appointed for audit assignment of public enterprises and bigcompanies.Institute of Chartered Accountants of India (ICAI) has issued SA 299 on“Responsibility of Joint Auditors” w.e.f. April, 1996. Basic principlesgoverning a joint audit are discussed herein given below:Division of Work: Where joint auditors are appointed, they should, bymutual discussion, divide the audit work among themselves in terms of auditof identifiable units or specified areas. If due to the nature of the business ofthe entity under audit, such a division of work may not be possible thedivision of work may be with reference to items of assets or liabilities orincome or expenditure or with reference to periods of time. The division ofwork among joint auditors as well as the areas of work to be covered by allof them should be adequately documented and preferably communicated tothe entity.Reporting Responsibilities : Normally, the joint auditors are able to arriveat an agreed report. However, where the joint auditors are in disagreementwith regard to any matters to be covered by the report, each one of themshould express his own opinion through a separate report. A joint auditor isnot bound by the view of the majority of the joint auditors regarding mattersto be covered in the report and should express his opinion in a separatereport in case of a disagreement. For the purpose of computation of thenumber of company audits held by an auditor pursuant to the ceiling ruleintroduced in the Companies Act, 1956 each joint auditor ship in a companywill be counted as one unit.


2017 - Dec [6A] (Or) (iii)Appointment of first auditor:• According to Section 139(6), the first auditor of a company, other than

a Government Company, shall be appointed by the Board of Directorwithin thirty days from the date of registration of the company.

• In the case of failure of the Board to appoint such auditor, it shall informthe members of the company, who shall within ninety days at anextraordinary general meeting appoint such auditor and such auditorshall hold office till the conclusion of the first annual general meeting.

Chapter - 12 : Internal Audit2017 - Dec [5] (b)Propriety Audit:Kohler has defined propriety as that which meets the test of public interest,commonly accepted customs and standard of conduct and particularly asapplied to professional performance, requirements of Governmentregulations and professional codes. Propriety Audit carry out to check, meanwhether the transactions have been done in conformity with establishedrules, principles and established standard.The Propriety Audit means the verification of following main aspects to findout whether:

(i) Proper recording has been done in appropriate books of accounts.(ii) The assets have not been misused and have been properly

safeguarded.(iii) The business funds have been utilized properly.(iv) The concern is yielding the expected results.

The system of Propriety Audit is applied in respect to Governmentcompanies, Government Department because public money and publicinterest are involved therein. It is an essential function of audit to bring tolight not only cases of clear irregularity but also every matter which in itsjudgement appears to involve improper expenditure or waste of public moneyor stores, even though the accounts themselves may be insufficient to seethat sundry rules or orders of competent authority have been observed. It isof equal importance to ensure that the broad principles of orthodox financeare borne in mind not only by disbursing officers but also by sanctioningauthorities.


Chapter - 13 : Internal Control2017 - Dec [6A] (Or) (i)Review of Personal Polices:In review of personal polices, several functions of Human ResourcesDepartment are reviewed. This review is more than just looking at personnelfiles to make sure they’re complete and consistent with applicable laws andlegislation pertaining to employment practices. In personal policies review itis ascertained whether human resources function is supporting the companyphilosophy, mission and values.A. Review of Employee Relations

The employee relations area of human resources is typically responsiblefor addressing employee concerns, designing and analyzing employeeopinion surveys, assisting HR leadership with monitoring theperformance management system, and representing the company inmatters involving claims pertaining to unemployment compensation andunfair employment practices. An review of these functions includesreviewing the level of employee satisfaction. Employee satisfaction canbe measured by turnover rate; number of employee complaints filed andresolved, the status of action plans from recent employee opinionsurveys, and the effectiveness of performance management system.

B. Review of Safety and Risk ManagementThe goal of HR department’s safety and risk management program is tocreate and maintain a safe work environment. Auditing safety and riskmanagement function goes beyond merely assessing adherence tocompany occupational health safety policy, however it includesassessing employee participation in maintaining a safe workenvironment, measuring the effectiveness of safety training to reduce thenumber of workplace injuries, and providing training related to workplaceviolence, actions of disgruntled employees and civil unrest.

C. Review of Compensation and BenefitsReviewing compensation and benefits begins with an analysis ofcompensation practices - review the employee survey to get sure thatorganisation’s pay practices are appropriate for each job group, ascompetitive as possible for geographic area and the industry, and,importantly, the pay practices must be fair. Reviewing compensation


plans takes time to complete; based on the size of the workforce. Thispart of your person policy review may be more effectively outsourcedthan conducting the analyses in-house.

D. Recruitment and SelectionOrganization’s recruitment and selection process shapes part ofcompany’s reputation. Reviewing human resources employment functioninvolves a review of the way applicants are received. An review shouldreveal how knowledgeable the engaged employment specialists areconcerning organizational structure, positions within each department,and fair employment practices in recruiting and hiring candidates.

Shuchita Prakashan (P) Ltd.25/19, L.I.C. Colony, Tagore Town,

Allahabad - 211002Visit us : www.shuchita.com

Documents

ISBN: 978-93-86801-33-3 Scanner · CS Executive Programme Module - II (New Syllabus) (Solution of December - 2017) Paper - 5 : Company Accounts and Auditing Practices Chapter - 1