CHARTERED ACCOUNTANCY PROFESSIONAL II
(CAP-II)
Revision Test Paper
Group I
December 2020
Education Division
The Institute of Chartered Accountants of Nepal
The Revision Test Papers are prepared by the institute with a view to assist the students in their study.
The suggested answers given here are indicative and not exhaustive. Students are expected to apply their
knowledge and write the answer in the examinations taking the suggested answers as guide. Due care has
been taken to prepare the revision test paper. In case students need any clarification, creative feedbacks or
suggestions for the further improvement on the material, or any error or omission on the material, they
may report to the email educationdepartment@ican.org.np of the Institute.
Paper 1 : Advanced Accounting
Paper 1: Advanced Accounting
© The Institute of Chartered Accountants of Nepal 1
Paper 1 : Advanced Accounting
Revision Questions:
CHAPTER: Accounting Principles, Concepts & Standard
Question No. 1
Explain about the hierarchy of Fair Value.
CHAPTER: Accounting for Special Transactions
Question No. 2
A firm acquired two tractors under hire purchase agreements, details of which were as follows:
Date of Purchase
Cash price
Tractor A 1st April, 20X1(Rs.)
14,000
Tractor B 1st Oct., 20X1 (Rs.)
19,000
Both agreements provided for payment to be made in twenty-four monthly installments (of Rs. 600 each for
Tractor A and Rs. 800 each for Tractor B), commencing on the last day of the month following purchase, all
installments being paid on due dates.
On 30th June, 20X2, Tractor B was completely destroyed by fire. In full settlement, on 10th July, 20X2 an
insurance company paid Rs. 15,000 under a comprehensive policy. Any balance on the hire purchase
company’s account in respect of these transactions was to be written off.
The firm prepared accounts annually to 31st December and provided depreciation on tractors on a straight-line
basis at a rate of 20 per cent per annum rounded off to nearest ten rupees, apportioned as from the date of
purchase and up to the date of disposal.
You are required to record these transactions in the following accounts, carrying down the balances on 31st
December, 20X1 and 31st December, 20X2:
(a) Tractors on hire purchase.
(b) Provision for depreciation of tractors.
(c) Disposal of tractors.
Question No. 3
Bageshwori Enterprises of Nepalgunj has a branch at New Baneshwor to which goods are sent @ 20% above
cost. The branch makes both cash and credit sales. Branch expenses are met partly from H.O. and partly by the
branch. The statement of expenses incurred by the branch every month is sent to head office for recording.
Following further details are given for the year ended 31st Ashadh, 2076:
Particulars
Cost of goods sent to Branch at cost
Goods received by Branch till 31-03-2076 at invoice price
Credit Sales for the year @ invoice price
Cash Sales for the year @ invoice price
Cash Remitted to head office
Expenses paid by H.O.
Bad Debts written off
Amount
2,00,000
2,20,000
1,65,000
59,000
2,22,500
12,000
750
Balances as on
Stock
1-4-2075
25,000
(Cost)
30-4-2075
28,000
(invoice price)
Debtors
32,750
26,000
© The Institute of Chartered Accountants of Nepal 2
Paper 1 : Advanced Accounting
Cash in Hand
5,000
2,500
Show necessary ledger accounts in the books of the head office and determine the Profit and Loss of the
Branch for the year ended 31st Ashadh, 2076.
Question No. 4
A fire occurred in the premises of M/s Kirti & Co. on 15th December, 2018. The working
remained disturbed up to 15th March, 2019 as a result of which sales got adversely affected. The
firm had taken out an insurance policy with an average clause against consequential losses for
2,50,000.
Following details are available from the quarterly sales tax return filed/GST return filed:
Sales
2015-16
2016-17
2017-18
From 1st April to 30th June
From 1st July to 30th September
3,80,000
3,15,000
4,11,900 3,24,000
1,86,000
3,92,000
3,86,000 4,42,000
From 1st October to 31st December
From 1st January to 31st March
3,86,000
4,00,000
4,62,000 3,50,000
2,88,000
3,19,000
3,80,000 2,96,000
Total
12,40,000
2018-19
14,26,000 16,39,900 14,12,000
A period of 3 months (i.e. from 16-12-2018 to 15-3-2019) has been agreed upon as indemnity
period.
Sales from 16-12-2017 to 31-12-2017
68,000
Sales from 16-12-2018 to 31-12-2018
Nil
Sales from 16-03-2018 to 31-03-2018
Sales from 16~03-2019 to 31-03-2019
1,20,000
40,000
Net profit was 2,50,000 and standing charges (all insured) amounted to 77,980 for the year ending
31st March, 2018.
You are required to calculate the loss of profit claim amount.
Question No. 5
Mr. Vijay entered into the following transactions of purchase and sale of equity shares of JP
Power Ltd. The shares have paid up value of 10 per share.
Date
No. of Shares
Terms
Buy @ 20 per share
01.01.2016
600
Buy @ 25 per share
15.03.2016
900
Buy @ 23 per share
20.05.2016
1000
25.07.2016
2500
Bonus Shares received
Sale @ 22 per share
20.12.2016
1500
Sale @ 24 per share
01.02.2017
1000
Addition information:
(1) On 15.09.2016 dividend @ 3 per share was received for the year ended 31.03.2016.
© The Institute of Chartered Accountants of Nepal 3
Paper 1 : Advanced Accounting
(2) On 12.11.2016 company made a right issue of equity shares in the ratio of one share for
five shares held on payment of 20 per share. He subscribed to 60% of the shares and
renounced the remaining shares on receipt of the premium of 3 per share.
(3) Shares are to be valued on weighted average cost basis.
CHAPTER: Analysis and Interpretation of Financial Statements
Question No. 6
From the following particulars extracted from the books of Ashok & Co. Ltd., compute the
following ratios and comment:
(a)
Current ratio, (b) Acid Test Ratio, (c) Stock‐Turnover Ratio, (d) Debtors
Turnover Ratio, (e) Creditors' Turnover Ratio, and Average Debt Collection period.
1‐1‐2019
31‐12‐2019
Rs.
Rs.
Bills Receivable
30,000
60,000
Bills Payable
60,000
30,000
Sundry Debtors
1,20,000
1,50,000
Sundry Creditors
75,000
1,05,000
Stock‐in‐trade
96,000
1,44,000
Additional information:
(a) On 31‐12‐2019, there were assets: Building Rs. 2,00,000, Cash Rs. 1,20,000 and Cash
at Bank Rs. 96,000.
(b) Cash purchases Rs. 1,38,000 and Purchases Returns were Rs. 18,000.
(c) Cash sales Rs. 1,50,000 and Sales returns were Rs. 6,000.
Rate of gross profit 25% on sales and actual gross profit was Rs. 1,50,000.
CHAPTER: Partnership Accounts
Question No. 7
G, S & J were partners sharing profits and losses in the ratio of 4:3:2, no partnership salary or interest on
capital being allowed. Their Balance Sheet as on 31.3.2019 is as follows:
Liabilities
Partners’
fixed capital
accounts:
G
S
J
Partners’ current accounts:
G
S
J
Loan from G
Trade creditors
Amount
24,000
24,000
12,000
600
10,800
(480)
Amount Assets
Fixed assets:
Goodwill
Land
60,000 Plant & Machinery
Motor car
Current assets:
Stock
10,920 Trade debtors
9,600 Less: provision
14,880 Cash at bank
Miscellaneous losses:
© The Institute of Chartered Accountants of Nepal 4
Amount
Amount
48,000
9,600
15,360
840
73,800
4,680
2,400
120
2,280
240
Paper 1 : Advanced Accounting
Profit & loss sale
14,400
95,400
95,400
On 1st April, 2019, the partnership was dissolved. Motor car was taken over by G at a value of 600,
but no cash was given specifically in respect of this transaction. Sale of other assets realized the
following amounts:
Particulars
Goodwill
Nil
Land
8,400
Plant & machinery
6,000
Stock
3,600
Trade debtors
1,920
Trade creditors were paid 14,040 in full settlement of their debts. The cost of dissolution
amounted to 1,800. The loan from G was repaid; G and S both were fully solvent and able to bring
in any cash required but J was forced into bankruptcy and was only able to bring 1/2 of the amount
due.
You are required to prepare:
(i)
Cash & Bank account
(ii)
Realization account, and
(iii) Partners’ Fixed Capital Accounts (after transferring current accounts balances) Apply
Garner Vs. Murray rule.
Question No. 8
X, Y and Z are partners of the firm XYZ & Co., sharing profits and losses in the ratio of 5:3:2. Following is the
Balance sheet of the firm as at 31-3-2019.
Liabilities
Amount
(Rs.)
Partners Capital
X
Y
Z
Investment Fluctuation Reserve
500,000
250,000
200,000
200,000
General Reserve
Long-Term Loan
Bank Overdraft
Sundry Creditors
Total
95,000
1,045,000
360,000
650,000
3,300,000
Assets
Goodwill
Building
Machinery
Furniture
Investments (Market
125,000)
Stock
Sundry Debtors
Profit & Loss A/c
value
Amount
(Rs.)
200,000
950,000
700,000
250,000
Rs. 100,000
550,000
500,000
50,000
3,300,000
It was decided that Y would retire from partnership on 1-4-2019 and M would be admitted as a partner on the
same date. Following adjustments are agreed amongst the partners for the retirement/admission:
i)
Goodwill is to be valued at Rs. 600,000, but the same will not appear as assets in the books of
accounts.
© The Institute of Chartered Accountants of Nepal 5
Paper 1 : Advanced Accounting
ii)
iii)
iv)
v)
vi)
vii)
Building and Machinery are to be revalued at Rs 1,000,000 and Rs. 640,000 respectively.
Investments are to be taken over by Y at market value.
Provision for doubtful debts is to be maintained at 15% of Sundry Debtors.
The capital of the reconstituted firm will be Rs. 1500,000 to be contributed by the partners X, Z and M
in their new profit sharing ratio of 2:2:1.
Surplus funds, if any, will be used to pay bank overdraft.
Amount due to retiring partner Y will be transferred to his loan account.
Required:
1. Revaluation Account
2. Capital Accounts of Partners, and
3. Balance Sheet of the firm after reconstitution
CHAPTER: Preparation and Presentation of Financial Statements of a Company
Question No. 9
The following is the summarised Balance Sheet of Bumbum Limited as at 31st March. 2015:
Sources of funds
Authorized capital
50,000 Equity shares of Rs. 10 each
10,000 Preference shares of Rs. 100 each (8% redeemable)
Total
Issued, subscribed and paid up
30,000 Equity shares of Rs. 10 each
5,000, 8% Redeemable Preference shares of Rs. 100 each
Reserves & Surplus
Securities Premium
General Reserve
Profit & Loss A/c
2,500, 9% Debentures of Rs. 100 each
Trade payables
Application of funds
Fixed Assets (net)
Investments (market value Rs. 5,80,000)
Deferred Tax Assets
Trade receivables
Cash & Bank balance
Amount in Rs.
5,00,000
10,00,000
15,00,000
3,00,000
5,00,000
6,00,000
6,50,000
40,000
2,50,000
1,70,000
25,10,000
7,80,000
4,90,000
3,40,000
6,20,000
2,80,000
25,10,000
In Annual General Meeting held on 20th June, 2015 the company passed the following resolutions:
1.
To split equity share of Rs. 10 each into 5 equity shares of Rs. 2 each from 1st July, 2015.
2.
To redeem 8% preference shares at a premium of 5%.
3.
To redeem 9% Debentures by making offer to debenture holders to convert their holdings into equity shares
at Rs. 10 per share or accept cash on redemption.
4.
To issue fully paid bonus shares in the ratio of one equity share for every 3 shares held on record date
© The Institute of Chartered Accountants of Nepal 6
Paper 1 : Advanced Accounting
On 10th July, 2015 investments were sold for Rs. 5,55,000 and preference shares were redeemed.
40% of Debenture holders exercised their option to accept cash and their claims were settled on 1st August,
2015.
The company fixed 5th September, 2015 as record date and bonus issue was concluded by 12th September,
2015
You are requested to journalize the above transactions including cash transactions and prepare Balance Sheet
as at 30th September, 2015. All working notes should form part of your answer.
Question No. 10
The financial position of two companies Hari Ltd. and Vayu Ltd. as on 31st March, 20X1 was as
under:
Hari Ltd. (Rs. ) Vayu Ltd. (Rs. )
Assets
Goodwill
50,000
25,000
Building
3,00,000
1,00,000
Machinery
5,00,000
1,50,000
Inventory
2,50,000
1,75,000
Trade receivables
2,00,000
1,00,000
Cash at Bank
50,000
20,000
Total
13,50,000
5,70,000
Liabilities
Hari Ltd. (Rs. ) Vayu Ltd. (Rs. )
Share Capital:
Equity Shares of Rs. 10 each
10,00,000
3,00,000
9% Preference Shares of Rs. 100 each
1,00,000
–
10% Preference Shares of Rs. 100 each
–
1,00,000
General Reserve
70,000
70,000
Retirement Gratuity fund
50,000
20,000
Trade payables
1,30,000
80,000
Total
13,50,000
5,70,000
Hari Ltd. absorbs Vayu Ltd. on the following terms:
(a) 10% Preference Shareholders are to be paid at 10% premium by issue of 9% Preference
Shares of Hari Ltd.
(b) Goodwill of Vayu Ltd. is valued at Rs. 50,000, Buildings are valued at Rs. 1,50,000 and the
Machinery at Rs. 1,60,000.
(c) Inventory to be taken over at 10% less value and Provision for Doubtful Debts to be created
@ 7.5%.
(d) Equity Shareholders of Vayu Ltd. will be issued Equity Shares @ 5% premium.
Prepare necessary Ledger Accounts to close the books of Vayu Ltd. and show the acquisition
entries in the books of Hari Ltd. Also draft the Balance Sheet after absorption as at 31st March,
20X1.
Question No. 11
The following data were provided by the accounting records of Ryan Ltd. at year-end, March 31,
© The Institute of Chartered Accountants of Nepal 7
Paper 1 : Advanced Accounting
20X1:
Income Statement
Particulars
Rs.
6,98,000
(5,20,000)
1,78,000
Sales
Cost of Goods Sold
Gross Margin
Operating Expenses
(including Depreciation Expense of Rs. 37,000)
Other Income / (Expenses)
Interest Expense paid
Interest Income received
Gain on Sale of Investments
Loss on Sale of Plant
(1,47,000)
31,000
(23,000)
6,000
12,000
(3,000)
(8,000)
23,000
(7,000)
16,000
Income tax
Comparative Balance Sheets
Particulars
Assets
Plant Assets
Less: Accumulated Depreciation
Investments (Long term)
Current Assets:
Inventory
Accounts receivable
Cash
Prepaid expenses
Liabilities
Share Capital
Reserves and surplus
Bonds
Current liabilities :
Accounts payable
Accrued liabilities
Income taxes payable
Rs.
31st March
20X1
7,15,000
(1,03,000)
6,12,000
1,15,000
5,05,000
(68,000)
4,37,000
1,27,000
1,44,000
47,000
46,000
1,000
9,65,000
1,10,000
55,000
15,000
5,000
7,49,000
4,65,000
1,40,000
2,95,000
3,15,000
1,32,000
2,45,000
50,000
12,000
3,000
9,65,000
43,000
9,000
5,000
7,49,000
Analysis of selected accounts and transactions during 20X0-X1
1.
Purchased investments for Rs. 78,000.
2. Sold investments for Rs. 1,02,000.These investments cost Rs. 90,000.
3. Purchased plant assets for Rs. 1,20,000.
© The Institute of Chartered Accountants of Nepal 8
31st March
20X0
Paper 1 : Advanced Accounting
4.
Sold plant assets that costRs. 10,000 with accumulated depreciation of Rs. 2,000 for
Rs. 5,000.
5.
Issued Rs. 1,00,000 of bonds at face value in an exchange for plant assets on 31st March,
20X1.
6. Repaid Rs. 50,000 of bonds at face value at maturity.
7. Issued 15,000 shares of Rs. 10 each.
8. Paid cash dividends Rs. 8,000.
Prepare Cash Flow Statement using indirect method.
Question No. 12
The promotors of Shiva Ltd. took over on behalf of the company a running business with effect
from 1st April 2017. The company got incorporated on 1st August 2017. The annual accounts
were made up to 31st March, 2018 which revealed that the sales for the whole year totalled ` 2400
lakhs out of which sales till 31st July, 2017 were for 600 lakhs. Gross profit ratio was 20%.
The expenses from 1st April 2017, till 31st March, 2018 were as follows:
Particulars
Salaries
Rent, Rates and Insurance
Sundry Office Expenses
Traveller's Commission
Discount allowed
Bad Debts
Directors' Fee
Tax Audit Fee
Depreciation on Tangible Assets
Debenture Interest
in lakhs
75
30
72
20
16
8
30
16
15
14
Prepare a statement showing the calculation of profits for the pre-incorporation and Post
incorporation periods.
Question No. 13
The Balance Sheet of Hilltop Limited as on 32nd Ashadh, 2075 was as follows:
Liabilities
Amount Assets
(Rs.)
5,00,000 Equity Shares of Rs. 10 each
50,00,000 Goodwill
fully paid
Patent
9% 20,000 Preference shares of Rs.
Land and Building
100 each fully paid
20,00,000 Plant and Machinery
10% First debentures
6,00,000 Furniture and Fixtures
10% Second debentures
10,00,000 Computers
Debentures interest outstanding
1,60,000 Trade Investment
Trade creditors
5,00,000 Debtors
Directors’ loan
1,00,000 Stock
Bank overdraft
1,00,000 Discount on issue of debentures
Outstanding liabilities
40,000
© The Institute of Chartered Accountants of Nepal 9
Amount
(Rs.)
10,00,000
5,00,000
30,00,000
10,00,000
2,00,000
3,00,000
5,00,000
5,00,000
10,00,000
1,00,000
Paper 1 : Advanced Accounting
Provision for Tax
1,00,000 Profit and Loss Account(Loss)
96,00,000
15,00,000
96,00,000
Note: Preference dividend is in arrears for last three years.
A holds 10% first debentures for Rs. 4,00,000 and 10% second debentures for Rs. 6,00,000. He is
also creditors for Rs. 1,00,000. B holds 10% first debentures for Rs. 2,00,000 and 10% second
debentures for Rs. 4,00,000 and is also creditors for Rs. 50,000.
The following scheme of reconstruction has been agreed upon and duly approved by the court.
(i)
All the equity shares be converted into fully paid equity shares of Rs. 5 each.
(ii)
The preference shares be reduced to Rs. 50 each and the preference shareholders agree
to forego their arrears of preference dividends in consideration of which 9% preference
shares are to be converted into 10% preference shares.
(iii)
Mr. ‘A’ is to cancel Rs. 6,00,000 of his total debt including interest on debentures and
to pay Rs. 1 lakh to the company and to receive new 12% debentures for the Balance
amount.
(iv)
Mr. ‘B’ is to cancel Rs. 3,00,000 of his total debt including interest on debentures and to
accept new 12% debentures for the balance amount.
(v)
Trade creditors (other than A and B) agreed to forego 50% of their claim.
(vi)
Directors to accept settlement of their loans as to 60% thereof by allotment of equity
shares and balance being waived.
(vii)
There were capital commitments totalling Rs. 3,00,000. These contracts are to be
cancelled on payment of 5% of the contract price as a penalty.
(viii) The Directors refund Rs. 1,10,000 of the fees previously received by them.
(ix)
Reconstruction expenses paid Rs. 10,000.
(x)
The taxation liability of the company is settled at Rs. 80,000 and the same is paid
immediately.
(xi)
The assets are revalued as under:
Rs.
Land and Building
28,00,000
Plant and Machinery
4,00,000
Stock
7,00,000
Debtors
3,00,000
Computers
1,80,000
Furniture and Fixtures
1,00,000
Trade Investment
4,00,000
Pass Journal entries for all the above-mentioned transactions including amounts to be written off
Goodwill, Patents, Loss in Profit & Loss Account and Discount on issue of debentures.
© The Institute of Chartered Accountants of Nepal 10
Paper 1 : Advanced Accounting
Question No. 14
A company issued 1,50,000 shares of Rs. 10 each at a premium of Rs. 10. The entire issue
was underwritten as follows:
X-90,000 shares (firm underwriting 12,000 shares) Y- 37,500 shares (firm underwriting
4,500 shares) Z- 22,500 shares (firm underwriting 15,000 shares)
Total subscriptions received by the company (excluding firm underwriting and marked
applications) were 22,500 shares.
The marked applications (excluding firm underwriting) were as follows:
X-15,000 shares Y- 30,000 shares
Z- 7,500 shares
Commission payable to underwriters is at 5% of the issue price. The underwriting contract
provides that credit for unmarked applications be given to the underwriters in proportion to
the shares underwritten and benefit of firm underwriting is to be given to individual
underwriters.
Required:
i) Determine the liability of each underwriter (number of shares)
ii) Compute the amounts payable or due from underwrites; and
iii) Pass Journal Entries in the books of the company relating to underwriting.
Question No. 15
What are the complete set of financial statements as per NAS 1?
CHAPTER: Government Accounting
Question No. 16
What is NPSAS and What is the implementation status of NPSAS in Nepal?
CHAPTER: Accounting from Incomplete Records
Question No. 17
From the following information in respect of Mr. Preet, prepare Trading and Profit and
Loss Account for the year ended 31st March, 2018 and a Balance Sheet as at that date:
(1)
Liabilities and Assets
31-03-2017
31-03-2018
Stock in trade
1,60,000
1,40,000
Debtors for sales
Bills receivable
Creditors for purchases
Furniture at written down value
Expenses outstanding
Prepaid expenses
Cash on hand
Bank Balance
3,20,000
2,20,000
1,20,000
40,000
12,000
4,000
20,000
?
?
3,00,000
1,27,000
36,000
14,000
3,000
1,500
© The Institute of Chartered Accountants of Nepal 11
Paper 1 : Advanced Accounting
(2)
Receipts and Payments during 2017-2018:
Collections from Debtors
(after allowing 2-1/2% discount)
Payments to Creditors
(after receiving 2% discount)
Proceeds of Bills receivable discounted at 2%)
Proprietor’s drawings
11,70,000
7,84,000
1,22,500
1,40,000
Purchase of furniture on 30.09.2017
12% Government securities purchased on 1-10-2017
20,000
2,00,000
Expenses
Miscellaneous Income
3,50,000
10,000
(3)
Sales are effected so as to realize a gross profit of 50% on the cost.
(4)
Capital introduced during the year by the proprietor by cheques was omitted to be recorded
in the Cash Book, though the bank balance on 31st March, 2018 (as shown above), is after
taking the same into account.
Purchases and Sales are made only on credit.
During the year, Bills Receivable of 2,00,000 were drawn on debtors. out of these, Bills
amount to 40,000 were endorsed in favour of creditors. Out of this latter amount, a Bill for
8,000 was dishonoured by the debtor.
(5)
(6)
CHAPTER: Accounting for Not for Profit Organization
Question No. 18
What are the components of Financial Statements of NPO?
CHAPTER: Preparation of Financial Statements of Special Organizations
Question No. 19
Following information as at third quarter ending FY 2076/77 were drawn from the records
of M/s Kankai Bank Limited as under:
Loan outstanding for
Upto 1 month
More than 1 month but not more than 3 months
More than 3 months but not more than 6 months
More than 6 months but not more than 12 months
More than 12 months
Total
Amount Rs.
1,673,000
100,000
13,612
782
2,198
1,789,592
The bank has not restructured or rescheduled any of its credit.
Following additional information relating to previous quarter ending were extracted from
the records of the bank:
Particulars
Amount Rs.
Paid up Equity Share Capital
171,010
General Reserve
155,432
© The Institute of Chartered Accountants of Nepal 12
Paper 1 : Advanced Accounting
Retained Earnings
87,886
General Loan Loss Provision
16,983
Exchange Equalization Reserve
22,313
Un-audited current year profit
31,991
Deferred Revenue expenses
2,884
The bank is in the process of preparing the documents for quarterly reporting. The bank has
also provided a term loan of Rs.125,000 to a single party during the period under review. As
a reporting and compliance officer of the bank you are required to calculate movement in
loan loss provision amount.
CHAPTER: Miscellaneous Theory
Question No. 20
Write short notes on:
a) Non Banking Assets
b)
c)
d)
e)
Unexpired Risk Reserve
Receipt and Expenditure Account
Debt Service Coverage Ratio
Watch List in Loan loss provisioning
© The Institute of Chartered Accountants of Nepal 13
Paper 1 : Advanced Accounting
Answers/Hints:
CHAPTER: Accounting Principles, Concepts & Standard
Question No. 1
Answer
Generally ‘Fair Value’ represents the cash or cash equivalents received or receivable by the
seller. Fair Value is the price that would be received to sell an asset or paid to transfer a
liability (exit price) in an orderly transaction (not a forced transaction) between market
participants (market based view) at the measurement date (current price).
Entity’s intention to hold an asset or to settle or otherwise fulfill a liability is not relevant
when measuring Fair Value. It is market based measurement not an entity-specific
measurement.
NFRS 13 introduces a fair value hierarchy that categorizes inputs to valuation techniques
into 3 levels. The highest priority is given to Level 1 inputs and the lowest priority to Level 3
inputs.
Level 1 inputs
Level 1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities that the entity can access at the measurement date.
Level 2 inputs
Level 2 inputs are inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly or indirectly.
(Example: Quoted price for similar item in active markets, quoted price for
similar/identical in inactive markets, other observable inputs, market
substantiated inputs etc.)
Level 3 inputs
Inputs are unobservable inputs for the asset or liability.
(Example: Financial forecasts, historical volatility etc.)
CHAPTER: Accounting for Special Transactions
Question No. 2
Answer
Solution:
Hire Purchase accounts in the buyer’s books
(a) Tractors on Hire Purchase Account
Date
1/4/2001
Particulars
Amt
(Rs.)
To HP Co. -Cash 14,000
price Tractor A
Date
Particulars
31/12/2001 By Balance c/d
Tractor
14,000
Tractor
19,000
1/10/2001 To HP Co. - Cash 19,000
price Tractor B
Total
33,000
© The Institute of Chartered Accountants of Nepal 14
Total
Amt
(Rs.)
33,000
A
B
33,000
Paper 1 : Advanced Accounting
1/1/2002
1/1/2003
By Balance c/d
Tractor A 14,000
Tractor B 19,000
33,000
Total
To Balance b/d
33,000
14,000
30/6/2002
By
Disposal
Tractor
A/c
Transfer
By Balance c/d
Total
of 19,000
14,000
33,000
(b) Provision for Depreciation of Tractors Account
Date
31/12/2001
30/6/2002
31/12/2002
Particulars
To Balance c/d
Amt (Rs.)
3,050
Total
3,050
To Disposal of 2,850
Tractor account
Transfer
(950 + 1,900)
To Balance c/d
4,900
Total
7,750
Date
Particulars
31/12/2001 By P & L A/c:
Tractor
2,100*
Tractor
950**
Total
1/1/2002
By Balance b/d
Amt (Rs.)
3,050
A
B
30/6/2002
3,050
3,050
By P & L A/c
(Depn. for Tractor
B)
(19,000 x 20% x
6/12)
31/12/2002 By P & L A/c
(Depn. for Tractor
A)
(14,000 x 20%)
Total
1/1/2003
By Balance b/d
1,900
Date
30/6/2002
Amt (Rs.)
2,850
2,800
7,750
4,900
* 14,000 x 20% x 9/12 = 2,100
** 19,000 x 20% x 3/12 = 950
(c) Disposal of Tractor Account
Date
30/6/2002
Particulars
Amt (Rs.)
To Tractors on 19,000
hire
purchase
Tractor B
Total
19,000
Particulars
By Provision for
Depn. of Tractors
A/c
10/7/2002 By Cash : Insurance
31/12/2002 By P & L A/c : Loss
(b.f.)
Total
15,000
1,150
19,000
Question No. 3
Answer
Books of Bageshwori Enterprises
Branch Stock Account
Particulars
To Balance b/d
Amt (Rs.)
30,000
Particulars
By Branch Debtors
© The Institute of Chartered Accountants of Nepal 15
Amt (Rs.)
1,65,000
Paper 1 : Advanced Accounting
To Goods Sent to Branch A/c
2,40,000
To Branch Adjustment A/c 2,000
(Excess of sale over invoice
price)
Total
2,72,000
By Branch Bank
By Balance c/d
59,000
Goods in Transit
(Rs. 2,40,000 –Rs. 2,20,000)
Stock at Branch
Total
20,000
28,000
2,72,000
Branch Debtor A/c
Particulars
To Balance b/d
To Branch Stock
Amt (Rs.)
32,750
1,65,000
Particulars
By Bad debts written off
By Branch Cash-collection
(bal.fig.)
By Balance c/d
1,97,750
Amt (Rs.)
750
1,71,000
26,000
1,97,750
Branch Cash Account
Particulars
To Balance b/d
To Branch Stock
Amt (Rs.)
5,000
59,000
To Bank (as per contra)
12,000
To Branch Debtors
Total
1,71,000
2,47,000
Particulars
By Bank Remit to H.O.
By Branch profit & loss A/c
(exp. paid by H.O.)
By Branch profit & loss A/c
[Bal. fig. (exp. paid by
Branch)]
By Balance c/d
Total
Amt (Rs.)
2,22,500
12,000
10,000
2,500
2,47,000
Branch Cash Account
Particulars
Amt (Rs.)
To Stock Reserve (on closing 8,000
stock (48,000 × 1/6)
To Gross Profit c/d
39,000
Total
47,000
Particulars
By Stock Reserve opening
(25000 × 20%)
By Goods sent to Branch A/c
By Branch Stock A/c
Total
Amt (Rs.)
5,000
40,000
2,000
47,000
Branch Profit & Loss A/c
Particulars
To Branch Expenses
(paid by HO: Rs. 12,000 and
paid by Branch Rs. 10,000)
To Branch Debtors-Bad
debts
To Net Profit
Total
Amt (Rs.)
22,000
Particulars
By Gross Profit b/d
Amt (Rs.)
39,000
Total
39,000
750
16,250
39,000
Goods Sent to Branch Account
Particulars
To Branch Adjustment A/c
Amt (Rs.)
40,000
Particulars
By Branch to Stock A/c
© The Institute of Chartered Accountants of Nepal 16
Amt (Rs.)
2,40,000
Paper 1 : Advanced Accounting
To Purchase A/c - Transfer
Total
2,00,000
2,40,000
Total
2,40,000
Question No. 4
Answer
(a) Gross profit ratio
Net profit for the year 2017-18
2,50,000
Add: Insured standing charges
77,980
Ratio of Gross profit = 3,27,980 / 16,39,900 = 20%
3,27,980
X
Calculation of Short sales
Indemnity period: 16.12.2018 to 15.3.19
Standard sales to be calculated on basis of corresponding period of year 2017-18
Sales for period 16.12.2017 to 31.12.17
68,000
Sales for period 1.1.2018 to 15.3.2018 (Note 1)
2,60,000
Sales for period 16.12.2017 to 15.3.2018
3,28,000
Add: upward trend in sales (15%) (Note 2)
Standard Sales (adjusted)
49,200
3,77,200
Actual sales of disorganized period
Calculation of sales from 16.12.18 to 15.3.19
Sales for period 16.12.18 to 31.12.18
Sales for 1.1.19 to 15.3.19 ( 2,96,000 – 40,000)
Nil
2,56,000
Actual Sales
Short Sales ( 3,77,200 - 2,56,000)
2,56,000
1,21,200
Loss of gross profit
Short sales x gross profit ratio = 1,21,200 x 20%
24,240
Application of average clause
Working Notes:
1.
Sales for period 1.1.18 to 15.3.18
Sales for 1 Jan. to 31 March (2017-18) (given)
Less: Sales for 16.3.18 to 31.3.18 (given)
© The Institute of Chartered Accountants of Nepal 17
3,80,000
(1,20,000)
Paper 1 : Advanced Accounting
Sales for period 1.1.18 to 15.3.18
2.
2,60,000
Calculation of upward trend in sales
Total sales in year 2015-16
=
12,40,000
Increase in sales in year 2016-17 as compared to 2015-16
=
1,86,000
Thus annual percentage increase trend is of 15%
3.
Gross profit on annual turnover
Sales from 16.12.17 to 30.12.17 (adjusted) (68,000 x 1.15)
78,200
1.1.18 to 31.3.18 (adjusted) (3,80,000 x1.15)
4,37,000
1.4.18 to 30.6.18
3,24,000
1.7.18 to 30.9.18
4,42,000
1.10.18 to 15.12.18 (3,50,000 – Nil)
3,50,000
Sales for 12 months just before date of fire*
Gross profit on adjusted annual sales @ 20%
16,31,200
3,26,240
NOTE*: Alternatively, the annual adjusted turnover may be computed as 17,98,000 (
15,64,000 X 1.15) considering the annual % increase trend for the entire period of last 12
months preceding to the date of fire. In that case, the gross profit on adjusted annual sales
@ 20% will be computed as 3,59,720 and net claim will be computed accordingly.
Question No. 5
Answer
Investment in Equity shares of JP Power Ltd.
(a)
Date
1.1.16
Particulars
To Bank A/c
No. Dividend
600
15.3.16
To
Bank A/c
900
To Balance b/d
34,500
34,500 15.9.16 By Bank dividend
1,500
1.4.16
1,500
1,500
20.5.16
To
1,000
23,000 20.12.16 By Bank
1,500
33,000
25.7.16
To Bonus shares 2,500
1,000
24,000
12.11.16
To
12,000 31.3.17 By Balance c/d 3,100
36,812.50*
20.12.16
To P& L A/c
(profit on sale)
Bank A/c
Bank A/c
600
Amount Date
Particulars
No. Dividend
12,000 31.3.16 By Balance c/d 1,500
22,500
_ 1.2.17
15,187.50*
© The Institute of Chartered Accountants of Nepal 18
____
By Bank
Amount
34,500
______
4,500
34,500
3,000
Paper 1 : Advanced Accounting
1.2.17
To P& L A/c
(profit on sale)
31.3.17
To P & L A/c
(dividend)
12,125
4,500
5,600
4,500
96,812.50
5,600
4,500
96,812.50
Working Notes:
1.
Calculation of Weighted average cost of equity shares
600 shares purchased at 12,000
900 shares purchased at 22,500
1,000 shares purchased at 23,000 2,500 shares at nil cost
600 right shares purchased at 12,000
Total cost of 5,600 shares is 66,500 [ 69,500 less 3,000 (pre-acquisition dividend received
on 1,000 shares purchased on 20.5.17].
Hence, weighted average cost per share will be considered as 11.875 per share
(66,500/5,600).
2.
It has been considered that no dividend was received on bonus shares as the dividend
pertains to the year ended 31st March, 2016.
3.
Calculation of right shares subscribed by Vijay
Right Shares (considering that right shares have been granted on Bonus shares also) =
5,000/5 x 1= 1,000 shares
Shares subscribed = 1,000 x 60%= 600 shares
Value of right shares subscribed = 600 shares @ 20 per share = 12,000 Calculation of sale
of right renouncement
No. of right shares sold = 1,000 x 40% = 400 shares
Sale value of right = 400 shares x 3 per share = 1,200
Note: As per para 13 of AS 13, sale proceeds of rights is to be credited to P & L A/c.
4.
Profit on sale of equity shares
As on 20.12.16
Sales price (1,500 shares at 22)
Less: Cost of shares sold (1,500 x 11.875)
Profit on sale
33,000.00
(17,812.50)
15,187.50
As on 1. 2.17
Sales price (1,000 shares at 24)
© The Institute of Chartered Accountants of Nepal 19
24,000
Paper 1 : Advanced Accounting
Less: Cost of shares sold (1,000 x 11.875)
Profit on sale
(11,875)
12,125
Balance of 3,100 shares as on 31.3.17 will be valued at 36,812.50 (at rate of 11.875 per
share)
CHAPTER: Analysis and Interpretation of Financial Statements
Question No. 6
Answer:
Trading Account
Particular
Amount
Rs.
96,000
To Opening Stock
To Purchase: Cash:
1,38,000
Credit:
3,78,000
Amount
Rs.
By Sales: Cash:
1,50,000
Credit :
4,56,000
6,06,000
5,16,000
Less: S/R
18,000
4,98,000
To Gross Profit
1,50,000
Less: P/R
Particular
6,000
6,00,000
By Closing Stock
1,44,000
7,44,000
1.
7,44,000
Gross profit Sales
Gross Profit Margin =
25% =
1,50,000
X 100
X 100
Sales
Sales = 1,50,000
25
X 100
Sales = 6,00,000
2. Current Ratio
Current Assets Current
=
liabilities
Current Assets = Stock + debtors + Bills receivable + Cash + Bank
Balance
Current Liabilities = Creditors + Bills payable
CA = 1,44,000 + 1,50,000 + 60,000 + 1,20,000 + 96,000
= 5,70,000
CL = 1,05,000 + 30,000
= 1,35,000
= 5,70,000
1,35,000
© The Institute of Chartered Accountants of Nepal 20
Paper 1 : Advanced Accounting
= 4.22 : 1
3. Acid Test Ratio
Cash & Cash Equivalent Assets
Liquid Liabilities
=
Cash & Cash equivalent Assets = Cash + Bank + Short term
Investments
(Liquid) Quick Liabilities = Current Liabilities – BOD
= 1,20,000 + 96,000
= 2,16,000
QL = 1,05,000 + 30,000
= 1,35,000
= 2,16,000
1,35,000
= 1.6 : 1
4.
Cost of goods sold
Stock Turnover Ratio =
Avg. Stock
Avg. stock = Opening Stock + Closing Stock
2
COGS = Sales – GP
96,000 + 1,44,000
2
AS = 1,20,000
COGS = 6,00,000 – 1,50,000
4,50,000
= 4,50,000
1,20,000
= 3.75 times
5. Debtors Ratio
(Avg. debt collection period)
=
Debtors + Bills receivable
Credit sales
= 1,50,000 + 60,000
4,56,000
© The Institute of Chartered Accountants of Nepal 21
X 365 / 360 days
X 365 days
Paper 1 : Advanced Accounting
= 0.461
X 365 days
= 168 days
6. Creditors Ratio
Creditors + Bills payable
=
X 365 / 360 days
Credit Purchase
= 1,05,000 + 30,000
X 365 days
3,78,000
= 0.357
X 365 days
= 130 days
CHAPTER: Partnership Accounts
Question No. 7
Answer:
(a)
Cash & Bank Account
Particulars
Particulars
Amount
240 By Realisation A/c-Creditors
By Realisation A/c-Expenses
8,400 By G’s Loan A/c
6,000 By G’s Capital A/c
3,600 By S’s Capital A/c
1,920
To Balance b/d
To Realisation A/cLand
Plant and Machinery
Stock
Trade Debtors
Amount
14,040
1,800
9,600
16,280
28,680
To Capital Accounts:
G
27,200
S
J
20,400
2,640
50,240
70,400
70,400
Realisation Account
Particulars
Amount Particulars
To Goodwill
To Land
48,000 By Trade Creditors
9,600 By Provision for Bad Debts
To Plant and Machinery
15,360 By Bank:
To Motor Car
840
To Stock
4,680
To Sundry Debtors
2,400
To Bank (Creditors)
14,040
© The Institute of Chartered Accountants of Nepal 22
Land
Plant and Machinery
Amount
14,880
120
8,400
6,000
Stock
3,600
Debtors
1,920
19,920
Paper 1 : Advanced Accounting
To Bank (Expenses)
1,800 By G (Car)
600
By Capital Accounts:
(Loss)
G
27,200
S
20,400
J
13,600
61,200
96,720
96,720
Partners’ Fixed Capital Accounts
Particulars
To
To
To
To
To
Current
(Transfer)
Realisation
(Loss)
Realisation
(Car)
J's Capital
(Deficiency)
Bank*
A/c
A/c
A/c
A/c
J Particulars
3,680 By Balance b/d
G
24,000
27,200 20,400 13,600 By Current A/c
(Transfer)
600
— By Bank
—
6,000
—
—
—
2,640
27,200
20,400
—
—
—
2,640
G
5,800
1,320
S
—
1,320
By Bank*
(realisation loss)
16,280 28,680
— By G & S
(Deficiency)
51,200 50,400 17,280
51,200
S
J
24,000 12,000
50,400 17,280
Note:
1.
G, S and J will bring cash to make good their share of the loss on realization.
2.
As per Garner Vs. Murray rule, solvent partners- G and S have to bear the loss due to
insolvency of a partner J in their fixed capital ratio.
*Alternatively, posting may be done for the net amount being received from /paid to G and S
respectively.
Working Note:
Current account balances of partners have been arrived after adjusting profit and loss account debit
balance as follows:
Particulars
Current account balance
600
10,800
(480)
G
S
J
(b)
Profit & loss
(6,400)
(4,800)
(3,200)
5,800
6,000
3,680
Dr.
Cr.
Dr.
Statement of Distribution of Cash
Particulars
Realization
Balances due (1)
(i) Sale of Patent
1,400
(ii) Sale of furniture
(iii) Sale of machinery
2,800
1,680
© The Institute of Chartered Accountants of Nepal 23
Partners’ Capitals
Trade Loans from
Creditor partners
2,800
(1,400)
1,400
(1,400)
1,400
1,400
(1,400)
G
13,440
(15,960)
S
8,400
(9,576)
J
Total
11,760 33,600
(6,384) (31,920)
Paper 1 : Advanced Accounting
Maximum possible loss (total of capitals
33,600 less cash available
1,680) allocated to partners in the profit
sharing ratio i.e. 5 : 3 : 2
Amounts at credit
Deficiency of G and S written off against J
Amount paid (2)
Balances in capital accounts (1 – 2) = (3)
(iv) Sale of stock
Maximum possible loss
( 31,920 – 5,600)
allocated
to partners in the ratio 5 : 3 : 2
Amounts at credit and cash paid (4)
Balances in capital accounts left unpaid—
Loss (3 – 4) = (5)
31,920
(2,520)
2,520
–
13,440
(1,176)
1,176
–
8,400
5,376
(3,696)
1,680
10,080
1,680
1,680
31,920
(13,160)
280
13,160
(7,896)
504
7,896
(5,264) (26,320)
4,816
5,600
5,264 26,320
5,600
26,320
Question No. 8
Answer:
Revaluation Account
Particulars
Debit (Rs.)
To Provision for doubtful debts 75,000
(15% of 500,000)
To Machinery
60,000
Particulars
Credit (Rs.)
By Building
50,000
By Investments
25,000
By Partners’ Capital
Total
135,000
X
30,000
Y
18,000
Z
12,000
Total
60,000
13,5000
Partners’ Capital Account
Particulars X
Y
Z
To
Revaluation
30,000
18,000
To Goodwill
100,000
60,000
To
Investment
To Profit &
Loss A/c
To X
M
Particulars
X
Y
Z
12,000
By
b/d
Balance
500,000
250,000
200,000
40,000
By Investment
Fluctuation
Reserve
100,000
60,000
40,000
By
General
Reserve
47,500
28,500
19,000
By Z
30,000
90,000
125,000
25,000
15,000
10,000
30,000
30,000
© The Institute of Chartered Accountants of Nepal 24
M
Paper 1 : Advanced Accounting
To Y
90,000
To Y’s Loan
To
c/d
90,000
300,500
Balance
Total
600,000
-
600,000
300,000
755,000
518,500
782,000
420,000
By M
30,000
90,000
By Bank
47,500
-
523,000
420,000
Total
755,000
518,500
782,000
420,000
Balance Sheet of Firm as on 31.03.2019 (after reconstitution)
Rs
Partners’ Capital
Buildings
Rs
1000,000
X
600,000
M
300,000
Z
600,000
Y’ Loan
Machinery
640,000
Furniture
250,000
1,500,000
Stock
550,000
300,500
Sundry Debtors (net of provision) 425,000
Long-Term Loan
1,045,000
Bank
630,500
Sundry Creditors
650,000
Total
3,495,500
Total
3,495,500
Working Notes:
1. Profit sharing ratio- gain for the other partners including new partner
Old Ratio
X
Y
5
3
5/10
3/10
Z
2
New Ratio
X
Z
2
2
M
1
2/10
2/5
1/5
2/5
Gain/Loss
X
5 2
−
10 5
1
=
10
Loss
Z
2 2
−
5 10
1
=
5
M
1
5
Z and M gain in 1:1 but X loses by 1/10.
Adjustment of goodwill has been made accordingly in partners’ capital accounts by crediting X by
1/10th and Y by 3/10th value of goodwill and debiting Z and M in their equal gaining ratio
correspondingly.
Goodwill already shown in balance sheet of Rs. 200,000 is firstly written off and then an adjustment
entry is passed for revalued goodwill of Rs. 600,000 in sacrificing and gaining ratio of partners.
2. Bank Account
Particulars
To Partners’ Capital
Debit (Rs.)
Particulars
By balance b/d (overdraft)
© The Institute of Chartered Accountants of Nepal 25
Credit
(Rs.)
360,000
Paper 1 : Advanced Accounting
X
Z
M
Total
47,500 By Balance c/d
523,000
420,000
990,500 Total
630,500
990,500
3. Capitals of X, Z and M as per new ratio
X’s share (1500,000 X 2/5)
600,000
Z’s share (1500,000 X 2/5)
600,000
M’s share (1500,000 X 1/5)
300,000
Total
1500,000
CHAPTER: Preparation and Presentation of Financial Statements of a Company
Question No. 9
Answer:
2015
Particulars
Dr. (Rs)
July 1
Equity Share Capital A/c (Rs. 10 each).................Dr.
To Equity share capital A/c (Rs. 2 each)
(Being equity share of Rs. 10 each splitted into 5 equity shares of Rs. 2
each) {1,50,000 X 2}
3,00,000
Cash & Bank balance A/c
Dr
To Investment
A/c
To
Profit & Loss A/c
(Being investment sold out and profit on sale credited
to Profit & Loss A/c)
8% Redeemable preference share capital A/c Dr.
Premium on redemption of preference share A/c
Dr.
To Preference shareholders A/c
(Being amount payable to preference share holders on
redemption)
5,55,000
Preference shareholders A/c Dr.
To Cash & bank A/c
(Being amount paid to preference shareholders)
5,25,000
General reserve A/c............................................................Dr.
To Capital redemption reserve A/c
(Being amount equal to nominal value of preference shares transferred to
Capital
Redemption Reserve A/c on its redemption as per the law)
5,00,000
9% Debentures A/c
Dr.
Interest on debentures A/c
Dr.
To Debenture holders A/c
(Being amount payable to debenture holders along with interest payable)
2,50,000
7,500
July 10
July 10
July 10
July 10
Aug 1
© The Institute of Chartered Accountants of Nepal 26
Cr. (Rs)
3,00,000
4,90,000
65,000
5,00,000
25,000
5,25,000
5,25,000
5,00,000
2,57,500
Paper 1 : Advanced Accounting
Aug. 1
Sept. 5
Sept.
12
Sept. 30
Sept. 30
Debenture holders A/c Dr.
To Cash & bank A/c (1,00,000 +
7,500)
To Equity share capital
A/c{15,000 X 2}
To Securities premium A/c
(Being claims of debenture holders satisfied)
Capital Redemption Reserve A/c
Dr.
To Bonus to shareholders A/c
(Being balance in capital redemption reserve capitalized to issue bonus
shares)
2,57,500
Bonus to shareholders A/c
Dr.
To
Equity share capital A/c
1,10,000
1,07,500
30,000
1,20,000
1,10,000
1,10,000
1,10,000
(Being 55,000 fully paid equity shares of Rs. 2 each issued as bonus in ratio
of 1 share for every 3 shares held)
Securities Premium A/c
Dr.
25,000
To Premium on redemption of preference shares A/c
(Being premium on preference shares adjusted from securities premium
account)
Profit & Loss A/c
7,500
Dr.
To Interest on
debentures A/c
(Being interest on debentures transferred to Profit and Loss Account)
25,000
7,500
Balance Sheet as at 30th September, 2015
Particulars
Notes
Equity and Liabilities
1. Shareholders' funds
a. Share capital
b. Reserves and Surplus
Rs.
1
2
4,40,000
13,32,500
2. Current liabilities
a. Trade Payables
1,70,000
Total
19,42,500
Assets
1 Non-current assets
a.
Fixed assets
Tangible assets
b.
Deferred tax asset
2. Current assets
Trade receivables
Cash and cash equivalents
7,80,000
3,40,000
6,20,000
2,02,500
Total
19,42,500
Notes to accounts
1
Share Capital
© The Institute of Chartered Accountants of Nepal 27
Rs.
Rs.
Paper 1 : Advanced Accounting
Authorized share capital
2,50,000 Equity shares of Rs. 2 each
5,00,000
10,00,000
10,000 Preference shares of Rs. 100 each
15,00,000
Issued, subscribed and paid up
4,40,000
2,20,000 Equity shares of Rs. 2 each [(30,000 x 5) + 15,000+55000]
Reserves and Surplus
Securities Premium A/c
Balance as per balance sheet
Add: Premium on equity shares issued on conversion of
debentures (15,000 x 8)
6,00,000
1,20,000
7,20,000
Less: Adjustment for premium on preference Shares
Balance
Capital Redemption Reserve (5,00,000-1,10,000)
General Reserve (6,50,000 - 5,00,000- 25,000)
Profit & Loss A/c
Add: Profit on sale of investment
Less: Interest on debentures
Total
Working Notes:
Particulars
1.
2.
3.
Redemption of preference share:
5,000 Preference shares of Rs. 100 each
Premium on redemption @ 5%
Amount Payable
Redemption of Debentures
2,500 Debentures of Rs. 100 each
Less: Cash option exercised by 40% holders
Conversion option exercised by remaining 60%
1,50,000
Equity shares issued on conversion =
= 15,000 shares
10
(25,000)
40,000
65,000
(7,500)
6,95,000
3,90,000
1,25,000
97,500
13,32,500
Rs.
5,00,000
25,000
5,25,000
2,50,000
Issue of Bonus Shares
Existing equity shares after split (30,000 x 5)
Equity shares issued on conversion
Equity shares entitled for bonus
Bonus shares (1 share for every 3 shares held) to be issued
4.
Cash and Bank Balance
Balance as per balance sheet
© The Institute of Chartered Accountants of Nepal 28
1,50,000 shares
15,000 shares
1,65,000 shares
55,000 shares
2,80,000
5,55,000
Paper 1 : Advanced Accounting
Add: Realization on sale of investment
5.
8,35,000
(5,25,000)
Less: Paid to preference share holders
Paid to Debenture holders (7,500 + 1,00,000)
Balance
Interest of Rs. 7,500 paid to debenture holders have been debited to Profit
& Loss Account.
Question No. 10
Answer
In the Books of Vayu Ltd.
Realisation Account
Rs.
To Sundry Assets
5,70,000 By
To Preference Shareholders
(Premium
Redemption)
To
Rs.
10,000
By
By
Retirement
Fund
Gratuity
Trade payables Hari
Ltd. (Purchase
20,000
80,000
on
Consideration)
Equity Shareholders
50,000
(Profit on Realisation)
5,30,000
_______
6,30,000
6,30,000
Equity Shareholders Account
Rs.
To
Equity Shares of Hari Ltd.
4,20,000
_______
Rs.
By Share Capital
3,00,000
By General Reserve
70,000
By Realisation Account
(Profit
on
Realisation)
50,000
4,20,000
4,20,000
Preference Shareholders Account
To
9% Preference Shares of Hari
Ltd.
Rs.
1,10,000
© The Institute of Chartered Accountants of Nepal 29
By Preference Share
Capital
Rs.
1,00,000
Paper 1 : Advanced Accounting
By Realisation Account
(Premium
on
Redemption
of
Preference Shares)
10,000
1,10,000
1,10,000
Hari Ltd. Account
To
Realisation Account
Rs.
5,30,000
_______
5,30,000
By 9%
Preference
Shares
By Equity Shares
Rs.
1,10,000
4,20,000
5,30,000
In the Books of Hari Ltd.
Journal Entries
Business Purchase A/c
To Liquidators of Vayu Ltd. Account
( Being business of Vayu Ltd. taken over)
Goodwill Account
Building Account
Machinery Account
Inventory Account
Trade receivables Account
Bank Account
To Retirement Gratuity Fund Account
To Trade payables Account
To Provision for Doubtful Debts Account
To Business Purchase A/c
(Being Assets and Liabilities taken over as per agreed
valuation).
Liquidators of Vayu Ltd. A/c
To 9% Preference Share Capital A/c
To Equity Share Capital A/c
To Securities Premium A/c
(Being Purchase Consideration satisfied as above).
© The Institute of Chartered Accountants of Nepal 30
Dr.
Dr.
Rs.
5,30,000
Cr.
Rs.
5,30,000
Dr.
Dr.
Dr.
Dr.
Dr.
Dr.
50,000
1,50,000
1,60,000
1,57,500
1,00,000
20,000
20,000
80,000
7,500
5,30,000
Dr.
5,30,000
1,10,000
4,00,000
20,000
Paper 1 : Advanced Accounting
Balance Sheet of Hari Ltd. (after absorption) as
at 31st March, 20X1
Particulars
Notes
Equity and Liabilities
Shareholders' funds
A
Share capital
1
B
Reserves and Surplus
2
2
Non-current liabilities
A
Long-term provisions
3
3
Current liabilities
A
Trade Payables
B
Short term provision
Total
Assets
1
Non-current assets
A
Fixed assets
Tangible assets
4
Intangible assets
5
2
Current assets
A
Inventories
B
Trade receivables
6
C
Cash and cash equivalents
Total
1
Rs.
16,10,000
90,000
70,000
2,10,000
7,500
19,87,500
11,10,000
1,00,000
4,07,500
3,00,000
70,000
19,87,500
Notes to accounts
Rs.
1
Share Capital
Equity share capital
1,40,000 Equity Shares of Rs. 10 each fully paid(Out of
above 40,000 Equity Shares were issued in consideration
other than for cash)
Preference share capital
2,100 9% Preference Shares of Rs. 100 each (Out of above
1,100 Preference Shares were issued in consideration other
than for cash)
Total
2
Reserves and Surplus
Securities Premium
General Reserve
Total
3. Long-term provisions
Gratuity fund
Total
© The Institute of Chartered Accountants of Nepal 31
14,00,000
2,10,000
16,10,000
20,000
70,000
90,000
70,000
70,000
Paper 1 : Advanced Accounting
4. Short term Provisions
Provision for Doubtful Debts
5. Tangible assets
Buildings
Machinery
Total
6. Intangible assets
Goodwill
Total
7. Trade receivables
7,500
4,50,000
6,60,000
11,10,000
1,00,000
1,00,000
3,00,000
Working Notes:
Purchase Consideration:
Goodwill
Building
Machinery
Inventory
Trade receivables
Cash at Bank
Rs.
50,000
1,50,000
1,60,000
1,57,500
92,500
20,000
6,30,000
Less: Liabilities:
Retirement Gratuity
Trade payables
Net Assets/ Purchase Consideration
To be satisfied as under:
10% Preference Shareholders of Vayu Ltd.
Add: 10% Premium
1,100 9% Preference Shares of Hari Ltd.
Equity Shareholders of Vayu Ltd. to be satisfied by issue of 40,000
Equity Shares of Hari Ltd. at 5% Premium
Total
© The Institute of Chartered Accountants of Nepal 32
(20,000)
(80,000)
5,30,000
1,00,000
10,000
1,10,000
4,20,000
5,30,000
Paper 1 : Advanced Accounting
Question No. 11
Answer
Ryan Ltd.
Cash Flow Statement for the year ending 31st March, 20X1
Particulars
Rs.
Cash flows from operating activities Net
profit before taxation Adjustments for:
23,000
Depreciation
Gain on sale of investments Loss
37,000
on sale of plant assets Interest
(12,000)
expense
3,000
Interest income
23,000
Operating profit before working capital changes Decrease in
(6,000)
accounts receivable
68,000
Increase in inventory Decrease in
8,000
prepaid expenses Increase in
(34,000)
accounts payable Increase in
4,000
accrued liabilities
7,000
Cash generated from operations
3,000
Income taxes paid*
56,000
Net cash generated from operating activities Cash
(9,000)
flows from investing activities Purchase of plant
Sale of plant
Purchase of investments Sale of
investments Interest received
Net cash used in investing activities Cash
flows from financing activities Proceeds from
issuance of share capital Repayment of bonds
Interest paid
Dividends paid
Net cash from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the period Cash and
cash equivalents at the end of the period
Rs.
47,000
(1,20,000)
5,000
(78,000)
1,02,000
6,000
(85,000)
1,50,000
(50,000)
(23,000)
(8,000)
69,000
31,000
15,000
46,000
* Working Note:
Rs.
Income taxes paid:
Income tax expense for the year
Add: Income tax liability at the beginning of the year
Less: Income tax liability at the end of the year
© The Institute of Chartered Accountants of Nepal 33
7,000
5,000
12,000
(3,000)
9,000
Paper 1 : Advanced Accounting
Question No. 12
Answer
Statement showing the calculation of Profits for the pre-incorporation and postincorporation periods
Particulars
Total
Basis of
Amount Allocation
( in lakhs)
480
Gross Profit (20% of ` 2,400)
Less: Salaries
75
Rent, rates and Insurance
30
Sundry office expenses
72
Travellers’ commission
20
Discount allowed
16
Bad debts
8
Directors’ fee
30
Tax Audit Fees*
16
Depreciation on tangible assets
15
Debenture interest
14
Net profit
184
* Tax Audit Fees allocated in the ratio of sales.
Sales
Time
Time
Time
Sales
Sales
Sales
Post
Sales
Time
Post
PrePostincorporation incorporation
(in lakhs)
120
25
10
24
5
4
2
4
5
41
(in lakhs)
360
50
20
48
15
12
6
30
12
10
14
143
Thus, pre-incorporation profits is ` 41 lakhs and post- incorporation profit is ` 143 akhs.
Working Notes:
1.
Sales ratio
Particulars
Sales for the whole year
Sales up to 31st July, 2017
Therefore, sales for the period from 1st August, 2017 to 31st March,
2018
Thus, sale ratio
= 600:1800 = 1:3
2.
( in lakh)
2400
600
1,800
Time ratio
1st April, 2017 to 31st July, 2017 : 1st August, 2017 to 31st March, 2018
= 4 months: 8 months = 1:2, Thus, time ratio is 1:2.
Question No. 13
Answer:
Journal Entries in the Books of Hilltop Ltd.
(i)
Equity Share Capital (Rs. 10 each) A/c
To Equity Share Capital (Rs. 5 each) A/c
To Reconstruction A/c
(Being conversion of 5,00,000 equity
© The Institute of Chartered Accountants of Nepal 34
Dr. 50,00,000
25,00,000
25,00,000
Paper 1 : Advanced Accounting
(ii)
shares of Rs. 10 each fully paid into same
number of fully paid equity shares of Rs. 5
each as per scheme of reconstruction.)
9% Preference Share Capital (Rs.100 each) A/c
Dr. 20,00,000
To 10% Preference Share Capital (Rs.50 each) A/c
10,00,000
To Reconstruction A/c
10,00,000
(Being conversion of 9% preference share
of Rs. 100 each into same number of 10%
preference share of Rs. 50 each and
claims of preference dividends settled as
(iii)
per scheme of reconstruction.)
10% First Debentures A/c
4,00,000 10% Second Debentures A/c
6,00,000
Dr.
Dr.
Trade Creditors A/c
Dr. 1,00,000
Interest on Debentures Outstanding A/c
Dr. 1,00,000
Bank A/c
Dr. 1,00,000
To 12% New Debentures A/c
To Reconstruction A/c
7,00,000
6,00,000
(Being Rs. 6,00,000 due to A (including creditors) cancelled and
12% new debentures allotted for balance amount as per scheme
of reconstruction.)
(iv)
10% First Debentures A/c
Dr. 2,00,000
10% Second Debentures A/c
Dr. 4,00,000
Trade Creditors A/c
Dr. 50,000
Interest on Debentures Outstanding A/c
Dr. 60,000
To 12% New Debentures A/c
4,10,000
To Reconstruction A/c
3,00,000
(Being Rs. 3,00,000 due to B (including creditors) cancelled and
12% new debentures allotted for balance amount as per scheme
of reconstruction.)
(v)
Trade Creditors A/c
Dr. 1,75,000
To Reconstruction A/c
1,75,000
(Being remaining creditors sacrificed 50% of their claim.)
(vi)
(vii)
Directors' Loan A/c
Dr. 1,00,000
To Equity Share Capital (Rs. 5) A/c
60,000
To Reconstruction A/c
40,000
(Being Directors' loan claim settled by issuing 12,000 equity
shares of Rs. 5 each as per scheme of reconstruction.)
Reconstruction A/c
To Bank A/c
© The Institute of Chartered Accountants of Nepal 35
Dr. 15,000
15,000
Paper 1 : Advanced Accounting
(Being payment made for cancellation of capital
commitments.)
Bank A/c
(viii)
Dr. 1,10,000
To Reconstruction A/c
1,10,000
(Being refund of fees by directors credited to reconstruction
A/c.)
Reconstruction A/c
(ix)
Dr. 10,000
To Bank A/c
10,000
(Being payment of reconstruction expenses.)
(x)
(xi)
Provision for Tax A/c
Dr. 1,00,000
To Bank A/c
80,000
To Reconstruction A/c
20,000
(Being payment of tax for 80% of liability in full settlement.)
Reconstruction A/c
Dr. 47,20,000
To Goodwill A/c
To Patent A/c
10,00,000
5,00,000
To Profit and Loss A/c
To Discount on issue of Debentures A/c
To Land and Building A/c
15,00,000
1,00,000
2,00,000
To Plant and Machinery A/c
6,00,000
To Furniture & Fixture A/c
To Computers A/c
1,00,000
1,20,000
To Trade Investment A/c
1,00,000
To Stock A/c
To Debtors A/c
3,00,000
2,00,000
(Being writing from losses and reduction in the value of
Question No. 14
Answer:
(i)
Computation of total liability of underwriters in shares
Particulars
(in shares)
Gross liability
Less:
Marked
applications
(excluding firm underwriting )
Less: Unmarked applications
in the ratio of gross liabilities
of 12:5:3
(excluding
underwriting )
Less: Firm underwriting
Less: Surplus of Y and Z
X
90,000
Y
37,500
Z
22,500
Total
1,50,000
(15,000)
75,000
(30,000)
7,500
(7,500)
15,000
(52,500)
97,5000
(13,500)
61,500
(12,000)
49,500
(5,625)
1,875
(4,500)
(2,625)
(3,375)
11,625
(15,000)
(3,375)
(22,500)
75,000
(31,500)
43,500
firm
© The Institute of Chartered Accountants of Nepal 36
Paper 1 : Advanced Accounting
adjusted
in X's
(2,625+3,375)
Net liability
Add: Firm underwriting
Total liability
(ii)
balance
(6,000)
43,500
12,000
55,500
2,625
4,500
4,500
3,375
15,000
15,000
00
43,500
31,500
75,000
Calculation of amount payable to or due from underwriters
Particulars
Total Liability in shares
X
55,500
Amount receivable @ Rs 20 from
11,10,000
Underwriter (in Rs)
Less:
Underwriting
Commission Payable @ 5% of Rs (90,000)
20 (in Rs)
10,20,000
Net amount receivable (in Rs)
Y
Z
4,500
15,000
Total
75,000
90,000
3,00,000
15,00,000
(37,500)
(22,500)
(1,50,000)
52,500
2,77,500
13,50,000
Question No. 15
Solution:
Complete set of financial statements includes:
A Statement of financial position as at the end of the period
A Statement of profit or loss and other comprehensive income for the period
A Statement of changes in equity for the period
A Statement of cash flows for the period
Notes, comprising a summary of significant accounting policies and other explanatory
information
A balance sheet as at the beginning of the of the earliest comparative period when an entity
applies
•
An accounting policy retrospectively or
Change in Accounting Policy has retrospective effect except if exempted by new NFRS, effect
is immaterial, retrospective application is impracticable, new NFRS requires prospective
application etc.:NAS-8 Accounting policies, changes in accounting estimates and Errors
•
Makes a retrospective restatements of items in its financial statements or
Material prior period errors should be corrected retrospectively as soon as discovered.:NAS8 Accounting policies, changes in accounting estimates and Errors
•
When it reclassifies items in its financial statements
Re-classification is moving an amount from one account to another. Example: reclassification
of long term loans due in less than one year is treated as current liabilities.
© The Institute of Chartered Accountants of Nepal 37
Paper 1 : Advanced Accounting
CHAPTER: Government Accounting
Question No. 16
Answer:
The Accounting Standards Board has developed Nepal Public Sector Accounting Standards
(NPSASs) for public sector entities in Nepal. This standard provides for accounting and
reporting of financial information in general purpose financial statements to be issued by the
government entities based on cash basis of accounting.
The ASB has developed this standard for adoption by the Government of Nepal and
recognizes that the Government of Nepal has the right to adopt this standard and establish
necessary policy and guidelines for adoption. Adoption of this standard by the Government of
Nepal (GoN) improves both the quality and comparability of financial information reported
by public sector entities in Nepal.
There is general consensus among policy makers, accounting professionals, and international
organizations on the need for Nepal to adopt the cash basis IPSAS. Nepal has developed
Nepal public sector accounting standards by referring to the cash basis IPSAS in a close
collaboration between the professional accountants and government officials. Attempts are
being made to change the accounting regulations in order to incorporate the mandatory use of
IPSAS. Nepal has successfully completed piloting of two ministries for fiscal year 2067/68 &
2068/69 of Ministry of Physical Infrastructure and Transport & Ministry of Women, Children
and Social Welfare, followed by live implementation for fiscal year 2069/70 of these two
ministries. Certificate of conformance was also provided to these two ministries by ICFGM
for respective years. Implementation was further extended for 31 economic entities
(ministries & constitutional bodies) for fiscal year 2070/71 & 2071/72 which has also been
completed by the end of Ashadh 2072. Nepal has completely implemented NPSAS to all 43
economic entities (As-a-whole-of-government) in 2073/74. OAG format (federal, province
and local government) has been approved by office of auditor general in Poush 2075.
Implementation to provincial government is being exercised in 2075/76.
CHAPTER: Accounting From Incomplete Records
Question No. 17
Answer:
Trading and Profit and Loss Account of Mr. Preet for the year ended 31st
March, 2018
Amount
Amount
To
Opening stock
1,60,000 By Sales
To
Purchases (W.N.5)
9,12,000 By Closing stock
1,40,000
To
Gross profit c/d (Bal.fig.)
4,66,000
_______
15,38,000
15,38,000
To
Expenses (W.N.7)
To
Discount
(W.N.9)
allowed
13,98,000
3,44,000 By Gross profit b/d
32,500 By Discount
(W.N.10)
© The Institute of Chartered Accountants of Nepal 38
received
4,66,000
16,000
Paper 1 : Advanced Accounting
To
Depreciation
on
furniture (W.N.1)
To
Net profit
13,000 By Interest on Govt.
Securities (W.N.8)
12,000
1,14,500 By Miscellaneous income
10,000
5,04,000
5,04,000
Balance Sheet of Mr. Preet as on 31st March, 2018
Amount
Liabilities
Assets
Amount
Capital (W.N.6)
3,76,000
Furniture
1,27,000
Add: Additional capital
(W.N.2)
1,72,000
12%
Government
Securities
Accrued interest on
Govt.
2,00,000
Add: Profit during the year
1,14,500
Less: Drawings
6,62,500
(1,40,000)
Creditors
Outstanding expenses
securities (W.N.8)
Debtors (W.N.3)
5,22,500 Bills
Receivable
(W.N.4)
3,00,000 Stock
36,000 Prepaid expenses
Cash on hand
Bank balance
8,58,500
12,000
3,26,000
35,000
1,40,000
14,000
3,000
1,500
8,58,500
Working Notes:
1.
Furniture account
Particulars
To
Balance b/d
To
Bank
Particulars
Amount
1,20,000 By Depreciation (bal.fig.)
20,000 By Balance c/d
1,40,000
2.
Amount
13,000
1,27,000
1,40,000
Cash and Bank account
Particulars
To
Amount Particulars
Balance b/d
Amount
By Creditors
7,84,000
Cash
4,000 By Drawings
1,40,000
Bank
20,000 By Furniture
20,000
To
Debtors
To
Bill Receivable
To
Miscellaneous
income
To
Additional Capital
(bal.fig.)
11,70,000 By 12% Govt. securities
1,22,500 By Expenses
2,00,000
3,50,000
10,000 By Balance c/d
1,72,000
Cash
3,000
_______
Bank
1,500
© The Institute of Chartered Accountants of Nepal 39
Paper 1 : Advanced Accounting
14,98,500
3.
14,98,500
Debtors account
Particulars
Amount Particulars
To
To
Balance b/d
Creditors
(Bills
receivable
dishonoured)
To
Sales (W.N.11)
3,20,000 By
8,000 By
13,98,000 By
By
17,26,000
Cash and Bank
Discount
11,70,000
30,000
Bills Receivable
Balance c/d (bal.fig.)
2,00,000
3,26,000
17,26,000
4.
Bills Receivable account
Particulars
Amount Particulars
To
Debtors
2,00,000
By
By
By
By
Amount
Amount
Bank
Discount
Creditors
Balance c/d (bal. fig.)
2,00,000
5.
1,22,500
2,500
40,000
35,000
2,00,000
Creditors account
Particulars
Amount Particulars
Amount
To
Bank
7,84,000 By Balance b/d
2,20,000
To
Discount
16,000 By Debtors (Bills receivable
dishonoured)
To
Bills receivable
40,000 By Purchases (bal. fig.)
To
Balance c/d
9,12,000
3,00,000
11,40,000
6.
8,000
11,40,000
Balance Sheet as on 1st April, 2017
Amount
Liabilities
Creditors
Outstanding expenses
Capital (balancing figure)
Amount
Assets
2,20,000 Furniture
1,20,000
40,000 Debtors
3,20,000
3,76,000 Stock
1,60,000
Prepaid expenses
12,000
Cash
4,000
_______ Bank balance
20,000
6,36,000
7.
6,36,000
Expenses incurred during the year
Particulars
Expenses paid during the year
Add: Outstanding expenses as on 31.3.2018
Prepaid expenses as on 31.3.2017
© The Institute of Chartered Accountants of Nepal 40
Amount
Amount
3,50,000
36,000
12,000
48,000
Paper 1 : Advanced Accounting
3,98,000
Less: Outstanding expenses as on 31.3.2017
Prepaid expenses as on 31.3.2018
Expenses incurred during the year
8.
40,000
14,000
(54,000)
3,44,000
Interest on Government securities
2,00,000 x 12% x 6/12= 12,000
Interest on Government securities receivables for 6 months =12,000
9.
Discount allowed
10.
Discount received
11.
Credit sales
Cost of Goods sold = Opening stock + Net purchases – Closing stock
=1,60,000 +9,12,000 –1,40,000
=9,32,000
Sale price =9,32,000 + 50% of 9,32,000 =13,98,000
CHAPTER: Accounting for Not for Profit Organization
Question No. 18
Answer
The financial statements include to each of the following documents:
a. Statement of financial position
b. Statement of income and expenditure
c. Statement of change in reserve
d. Cash flow statement and
e. Statement of accounting policies and notes to financial statements.
As part of the explanatory notes to the financial statements, NPOs may also include
supplementary schedules and information based on or derived from, and expected to be read
with, such documents. Financial statements would not, however, normally include such items
of reports by the governing body/management, statements by the chairman, discussions and
analysis by management and similar items that may be included in a financial or annual
report of a corporate entity, unless required by the relevant Donor Agreements.
© The Institute of Chartered Accountants of Nepal 41
Paper 1 : Advanced Accounting
NPOs shall prepare the following two statements externally funded projects as Project Level
Reporting as required by the Agreement where the above mentioned first five statements may
or may not be relevant:
f. Fund Accountability Statement
g. Statement of Budget Variance (Budgeted vs Actual Expenditure Report)
CHAPTER: Preparation of Financial Statements of Special Organizations
Question No. 19
Answer:
As per the provision of the NRB Directives, a bank can provide credit up to 25% of its core
capital to a single party. This limit is called the single obligor limit (SOL). While calculating
the SOL, core capital of previous quarter shall be taken as base. In case any excess credit than
SOL, additional 100% provision shall be made for such excess credit amount.
Before calculating the provision amount, SOL of the bank shall be tested upon.
Computation of SOL and credit amount more than SOL
Particulars
Core Capital
Paid up Equity Share Capital
General reserve
Retained earnings
Un-audited current year cumulative profit
Less: Deferred Revenue expenses
Total Core capital
Single obligor limit ( 25% of the core capital)
Loan to single party
Loan more than SOL
Computation of Loan Loss Provision amount
Particulars
Categories
Not due or <=3 months
Pass
>1 months <= 3 months
Watch list
>3 months <= 6 months
Sub-standard
>6 months <= 12 months
Doubtful
>12 months
Loss
Total
Amount
171,010
155,432
87,886
31,991
(2,884)
443,435
110,859
125,000
14,141
Loan Amt
Provision
Provision
Rate
Amount
1,673,000
1%
16,730
100,000
5%
5,000
13,612
25%
3,403
782
50%
391
2,198
100%
2,198
1,689,592
27,722
Additional provision for loan in excess of SOL
14,141
Total Provision amount
41,863
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Kankai Bank Ltd
Movement in Provision Amount
For Third Quarter of Fiscal Year 2076/77
Amount in NPR
Particulars
Opening Provision amount
Closing Provision amount
Movement in provision amount (addition during the quarter)
Amount
16,983
41,863
24,880
CHAPTER: Miscellaneous Theory
Question No. 20
Answer
a) NonBanking
Assets
Bank can sale the property which has taken as collateral security, against loan and advances given to
the borrower in case of default, to recover outstanding principal and interest amount. If such
properties couldn’t be sold through auction then the bank can assume the properties in its own name.
Such assumed property is called ‘Non-Banking Asset (NBA)’. Recognition of the NBA should be
done at lower of total outstanding amount (principal plus accrued interest thereon as on the date of
assume) and prevailing market value of the properties. The difference between the two should be
recorded as an expense in the year of assume. As per the requirement of the Unified Directives of
Nepal Rastra Bank (NRB), 100% provision should be provided to total value of NBA from the year of
assume. It means institution shouldn’t hold NBA.
b) Unexpired Risk Reserve
As per rule 15 of the Insurance Regulation 2049, every Insurer operating Non-Life Insurance Business
shall transfer an amount not less than fifty percent of the Net Insurance Premium show in Revenue
Account to the Unexpired Risk Reserve" account. Such amount shall be allocated for every
category of Insurance the Insurer operating. e.g. An insurer operating Non-Life Insurance Business
and accepting risk for Fire Insurance, Marine Insurance, Motor Insurance and Aviation Insurance,
then the insurer shall maintain the Unexpired Risk Reserve For each of the fire, marine motor and
aviation insurance.
Such Unexpired Risk Reserve shall be recognized as income in next year except the Unexpired Risk
Reserve maintained for Maine Insurance. In case of Marine Insurance, Unexpired Risk Reserve
maintained for it shall not be recognized as income for at least three years.
c) Receipt and Expenditure Account
Receipt and Expenditure Account also can be taken as part of Financial Statements. Some non-profit
making organization like professional firms, educational institutes etc. prefers to prepare Receipts and
Expenditure account instead of Income and Expenditure account as part of Financial Statements. Such
an account includes all expenses on accrual basis but incomes are recorded on cash basis. In other
words, to find out the result, all outstanding expenses are taken into account but the incomes that are
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outstanding are not considered. The main reason behind this kind of practice is that professionals
consider it imprudent and risky to recognize the outstanding incomes.
d) Debt Service Coverage Ratio
The ratio is a key financial ratio for the lenders.
Debt servicing means timely payment of principal amount of instalments plus interest. Borrower
should be able to service the debt out of the profits. Profit means the profit available for debt
servicing.
This ratio is calculated as:
Profit available for Debt Servicing
Loan instalments +Interest
This ratio normally should be 1.33 but a higher coverage is of advantage to the business as it improves
its strength to service the debts promptly
This ratio normally should be 1.33 but a higher coverage is of advantage to the business as it improves
its strength to service the debts promptly
e) Watch List in Loan loss provisioning
Nepal Rastra Bank (NRB) has formulated a new category of loan for provisioning
purposes. As per the NRB’s Rule, all loans are required to be classified into 5 different
categories including Watch List whereby 5% of the total loan is required to be kept as
provisioning though the provision can be reversed when the loan becomes performing
later. Provision made for watch list loans is a general loan loss provision. As per the
circular issued by NRB, the loans having the following characteristics are to be
classified as Watch List loans:
1.
If interest and principal repayments are overdue for more than a month.
2.
Short term/Working Capital Loans that are not renewed on time and are renewed
on temporary basis.
3.
Loan and advances to customers/ group of customers who have been categorized
as non performing by other banks and financial institutions.
4.
Firms/Companies/Organizations having negative net worth or net loss though
interest and principal are served on regular basis.
5.
Loan and advances having multiple banking exposure more than Rs. 1 billion and
have not entered into consortium agreement.
6.
Specifically specified by NRB after due inspection.
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Revision Questions
GENERAL CONCEPTS- AUDITING AND ASSURANCE
Question No. 1
A professional accountant should be updated with the recent technical and professional
developments whether serving clients or employing organization. Explain in reference to
fundamental principle of professional competence and due care?
ETHICS
Question No. 2
RTS and Associates, an existing firm of chartered accountants has recently opened offices in
all provinces. The firm also made announcement of opening its new offices via local radio
stations of all provinces. Give your opinion about the validity of act done.
REGULATORY COMPLIANCE
Question No. 3
Mr. X was the auditor of Miracle Finance Company for the FY 2075/76 and had signed the
audit report on 2076.08.30. The profit of the company showed growth of 25% in that year
compared to previous year. The general meeting of the company held on 2076.10.10
appointed another audit firm as the auditor for FY 2076/77. Mr. X purchased 500 shares of
that company from secondary market in 2077.01.10 in his name and in the name of his wife.
Give your view regarding the validity of transaction.
PLANNING AN AUDIT ENGAGEMENT
Question No. 4
The auditor shall obtain an understanding of internal control relevant to the audit. Although
most controls relevant to the audit are likely to relate to financial reporting, not all controls
that relate to financial reporting are relevant to the audit. It is a matter of the auditor’s
professional judgment whether a control, individually or in combination with others, is
relevant to the audit. Explain the factors relevant to this judgment with reference to NSA 315.
Question No. 5
Do you agree that while developing an audit plan the auditor shall also plan the nature, timing
and extent of direction and supervision of engagement team members and the review of their
work? Discuss.
Question No. 6
Auditors may need to revise materiality as the audit progresses. Discuss with reference to
NSA 320.
Question No. 7
What are the considerations to be taken by the auditor while designing and performing
substantive analytical procedures?
Question No. 8
Why is timely preparation of Audit Documentation necessary? Explain.
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Question No. 9
Mr. Prasad, a Chartered Accountant has been appointed as the auditor of M/S Doordarshan
Ltd. He has developed the audit plan and wants to start the detailed audit procedures. The
management of the company requests him to discuss the audit plan first but he thinks that he
can communicate only about the significant findings of the audit. Guide him whether he
needs to discuss the audit plan with the management or those charged with governance and
what are the matters to be communicated?
Question No. 10
Mr. Shamba is external auditor of Comfortable Hotel Pvt. Ltd. for FY 2076/77. The
Management of the company has considered the consequences of COVID-19 and other
events and conditions, and it has determined that they do not create a material uncertainty that
casts significant doubt upon the entity’s ability to continue as a going concern. The impact of
COVID-19 on future performance and therefore on the measurement of some assets and
liabilities or on liquidity might be significant and might therefore require disclosure in the
financial statements, but management has determined that they do not create a material
uncertainty that casts significant doubt upon the entity’s ability to continue as a going
concern and therefore did not disclose the matters. What is the responsibility of auditor
regarding this?
GATHERING AUDIT EVIDENCE DURING AN AUDIT ENGAGEMENT
Question No. 11
a) Write short note on Monetary Unit Sampling.
b) Write short note on reliability of audit evidence.
Question No. 12
Differentiate between
a) Inspection and Observation
b) Continuous audit and final audit
Question No. 13
How will you vouch/verify the following?
a) Sales return
b) Receipt of capital subsidy
c) Work in progress
d) Asset abroad
Question No. 14
Mr. Bhattarai, the auditor of PQR Company while performing audit procedures in the current
period obtains evidence that the opening balance of inventory contains misstatements that
could materially affect the current period’s financial statements. It is the initial engagement of
Mr. Bhattarai and the financial statements for the prior period were audited by another
auditor. Suggest him the necessary action to be taken further.
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USING THE WORK OF OTHERS
Question No. 15
Mr. Gyan Bahadur, a practicing Chartered Accountant has used the expert’s work on the
audit of Rich Bank Ltd. regarding valuation of assets. The auditor in his audit report has
mentioned that he has used the work of expert and is not liable for the work of expert,
without the permission of expert. Does using expert's work relief the auditor from its
responsibility?
INTERNAL AUDIT AND CORPORATE GOVERNANCE
Question No. 16
Discuss the role of audit committee in corporate governance.
AUDIT CONCLUSIONS AND REPORTING
Question No. 17
a) The auditor shall perform inquiring of management and, where appropriate, those charged
with governance as to whether any subsequent events have occurred which might affect
the financial statements. Explain with examples.
b) What is the objective of an agreed upon procedures engagement? What are the matters to
be included in the terms of engagements to perform agreed-upon procedures regarding
financial information?
Question No. 18
As an auditor, comment and give your views with explanations on following cases:
a) M/s Big Company Ltd. changed its accounting policy from cost model to revaluation
model to measure its entire class of property, plant and equipments in subsequent years.
Since the fair value of property, plant and equipments was higher than its cost price, there
was revaluation profit of Rs.1 crore and the company transferred that profit directly into
general reserves. The company also wants to distribute bonus share out of this profit.
b) You are auditor of M/S Smart Company Ltd. for the FY 2075/76. The company had
contractual obligation to deliver the order of one thousand units of products amounting
Rs. 30 million within 25th Asadh of 2076 to one of its clients. If the order is not delivered
on time, the company will be charged penalty of 5% of the contract amount. The
company delivered the order only on 15th Shrawan 2076 and raised the invoice for the full
value on that day. However, the client made the payment deducting the penal charge of
Rs. 1.5 million. Both the revenue and penalty was booked in FY 2076/77.
GOVERNMENT AUDIT
Question No. 19
Discuss about compliance auditing in reference of public sector audits?
AUDIT OF SPECIAL ORGANIZATIONS
Question No. 20
Mention the specific features of audit of cooperatives.
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Answers/Hints
GENERAL CONCEPTS- AUDITING AND ASSURANCE
Answer No. 1
One of the fundamental principles of professional accountant is professional competence and due
care. A professional accountant shall comply with the principle of professional competence and
due care, which requires an accountant to:
i.
Attain and maintain professional knowledge and skill at the level required to ensure that a
client or employing organization receives competent professional service, based on current
technical and professional standards and relevant legislation; and
ii.
Act diligently and in accordance with applicable technical and professional standards.
Serving clients and employing organizations with professional competence requires the exercise
of sound judgment in applying professional knowledge and skill when undertaking professional
activities. Maintaining professional competence requires a continuing awareness and an
understanding of relevant technical, professional and business developments. Continuing
professional development enables a professional accountant to develop and maintain the
capabilities to perform competently within the professional environment.
Diligence encompasses the responsibility to act in accordance with the requirements of an
assignment, carefully, thoroughly and on a timely basis. In complying with the principle of
professional competence and due care, a professional accountant shall take reasonable steps to
ensure that those working in a professional capacity under the accountants authority have
appropriate training and supervision. Where appropriate, a professional accountant shall make
clients, the employing organization, or other users of the accountant’s professional services or
activities, aware of the limitations inherent in the services or activities.
ETHICS
Answer No. 2
As per Rule 63 of ICAN Rules, any member wishing to open branch of the audit firm in another
place can do so with the approval of ICAN after by making application in prescribed format and
paying prescribed fees. Such branch office shall be managed by at least one member of
equivalent category. Thus, the opening of offices in all provinces by RTS and Associates, firm of
Chartered Accountants is valid if it has duly obtained the approval of ICAN. Similarly, in
accordance to ICAN’s guidance on marketing professional services, paid announcements when
opening a new office, changes in the membership of a firm and changes in the name or address is
permissible. Hence, making announcement by RTS and Associates of opening of new office in
provinces through respective local radio stations is valid.
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REGULATORY COMPLIANCE
Answer No. 3
As per section 12 of BAFIA 2073, the Director, Chief Executive, Auditor, Company Secretary
of the bank or financial institution or the person directly involved in management and account of
a bank or financial institution shall not buy or sell, mortgage or cause to be mortgaged, transfer
or transact or give or accept as donation the securities of the concerned bank or financial
institution or of its subsidiary company in his/her name or in name of member of his/her family
or a firm, company or institution under the control of such person or to any other person until
he/she is in such position or until one year from the date of retirement from such position.
In the given case, Mr. X was auditor of Miracle Finance Company for FY 2075/76 and signed
the audit report on 2076.08.30. When he purchased the shares of the company on 2077.01.10,
one year has not passed from the date of retirement from his position as the auditor. Thus, he
cannot purchase the shares of that company in his name or in the name of his family member.
Hence, he has acted against the law.
PLANNING AN AUDIT ENGAGEMENT
Answer No. 4
As per NSA 315, “Identifying And Assessing The Risks Of Material Misstatement Through
Understanding The Entity And Its Environment” the auditor shall identify and assess the risks of
material misstatement, whether due to fraud or error, at the financial statement and assertion
levels, through understanding the entity and its environment, including the entity’s internal
control. The auditor shall obtain an understanding of internal control relevant to the audit.
There is a direct relationship between an entity’s objectives and the controls it implements to
provide reasonable assurance about their achievement. The entity’s objectives, and therefore
controls, relate to financial reporting, operations and compliance; however, not all of these
objectives and controls are relevant to the auditor’s risk assessment. Factors relevant to the
auditor’s judgment about whether a control, individually or in combination with others, is
relevant to the audit may include such matters as the following:
▪ Materiality.
▪ The significance of the related risk.
▪ The size of the entity.
▪ The nature of the entity’s business, including its organization and ownership characteristics.
▪ The diversity and complexity of the entity’s operations.
▪ Applicable legal and regulatory requirements.
▪ The circumstances and the applicable component of internal control.
▪ The nature and complexity of the systems that are part of the entity’s internal control,
including the use of service organizations.
▪ Whether, and how, a specific control, individually or in combination with others, prevents, or
detects and corrects, material misstatement
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Controls over the completeness and accuracy of information produced by the entity may be
relevant to the audit if the auditor intends to make use of the information in designing and
performing further procedures. Controls relating to operations and compliance objectives may
also be relevant to an audit if they relate to data the auditor evaluates or uses in applying audit
procedures. Internal control over safeguarding of assets against unauthorized acquisition, use, or
disposition may include controls relating to both financial reporting and operations objectives.
The auditor’s consideration of such controls is generally limited to those relevant to the
reliability of financial reporting.
An entity generally has controls relating to objectives that are not relevant to an audit and
therefore need not be considered. For example, an entity may rely on a sophisticated system of
automated controls to provide efficient and effective operations (such as an airline’s system of
automated controls to maintain flight schedules), but these controls ordinarily would not be
relevant to the audit. Further, although internal control applies to the entire entity or to any of its
operating units or business processes, an understanding of internal control relating to each of the
entity’s operating units and business processes may not be relevant to the audit.
Answer No. 5
The auditor shall plan the nature, timing and extent of direction and supervision of engagement
team members and the review of their work. The nature, timing and extent of the direction and
supervision of engagement team members and review of their work vary depending on many
factors, including:
• The size and complexity of the entity.
• The area of the audit.
• The assessed risks of material misstatement. For example, an increase in the assessed risk of
material misstatement for a given area of the audit ordinarily requires a corresponding
increase in the extent and timeliness of direction and supervision of engagement team
members, and a more detailed review of their work).
• The capabilities and competence of the individual team members performing the audit work.
However, in case of smaller entities, where an audit is carried out entirely by the engagement
partner, questions of direction and supervision of engagement team members and review of their
work do not arise. In such cases, the engagement partner, having personally conducted all
aspects of the work, will be aware of all material issues.
Answer No. 6
According to NSA 320, “Materiality in Planning and Performing an Audit”, the concept of
materiality is applied by the auditor both in planning and performing the audit, and in evaluating
the effect of identified misstatements on the audit and of uncorrected misstatements, if any, on
the financial statements and in forming the opinion in the auditor’s report. Auditors may need to
revise materiality as the audit progresses.
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The auditor shall revise materiality for the financial statements as a whole (and, if applicable, the
materiality level or levels for particular classes of transactions, account balances or disclosures)
in the event of becoming aware of information during the audit that would have caused the
auditor to have determined a different amount (or amounts) initially. Materiality for the financial
statements as a whole (and, if applicable, the materiality level or levels for particular classes of
transactions, account balances or disclosures) may need to be revised as a result of a change in
circumstances that occurred during the audit (for example, a decision to dispose of a major part
of the entity’s business), new information, or a change in the auditor’s understanding of the
entity and its operations as a result of performing further audit procedures. For example, if
during the audit it appears as though actual financial results are likely to be substantially
different from the anticipated period-end financial results that were used initially to determine
materiality for the financial statements as a whole, the auditor revises that materiality.
If the auditor concludes that a lower materiality for the financial statements as a whole (and, if
applicable, materiality level or levels for particular classes of transactions, account balances or
disclosures) than that initially determined is appropriate, the auditor shall determine whether it is
necessary to revise performance materiality, and whether the nature, timing and extent of the
further audit procedures remain appropriate. Where materiality is revised during the audit, details
of the revision are also recorded in the audit file.
Answer No. 7
The auditor’s substantive procedures at the assertion level may be tests of details, substantive
analytical procedures, or a combination of both. The decision about which audit procedures to
perform, including whether to use substantive analytical procedures, is based on the auditor’s
judgment about the expected effectiveness and efficiency of the available audit procedures to
reduce audit risk at the assertion level to an acceptably low level. The auditor may inquire of
management as to the availability and reliability of information needed to apply substantive
analytical procedures, and the results of any such analytical procedures performed by the entity.
When designing and performing substantive analytical procedures, either alone or in
combination with tests of details, as substantive procedures the auditor shall:
(a) Determine the suitability of particular substantive analytical procedures for given
assertions, taking account of the assessed risks of material misstatement and tests of details,
if any, for these assertions. Substantive analytical procedures are generally more applicable
to large volumes of transactions that tend to be predictable over time.
(b) Evaluate the reliability of data from which the auditor’s expectation of recorded amounts or
ratios is developed, taking account of source, comparability, and nature and relevance of
information available, and controls over preparation;
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(c) Develop an expectation of recorded amounts or ratios and evaluate whether the expectation
is sufficiently precise to identify a misstatement that, individually or when aggregated with
other misstatements, may cause the financial statements to be materially misstated; and
(d) Determine the amount of any difference of recorded amounts from expected values that is
acceptable without further investigation.
Answer No. 8
Audit documentation refers to the record of audit procedures performed, relevant audit evidence
obtained, and conclusions the auditor reached. Audit documentation provides the evidence of the
auditor’s basis for a conclusion about the achievement of the overall objectives of the auditor and
evidence that the audit was planned and performed in accordance with NSAs and applicable
legal and regulatory requirements.
It is necessary that the auditor shall prepare audit documentation on a timely basis. Preparing
sufficient and appropriate audit documentation on a timely basis helps to enhance the quality of
the audit and facilitates the effective review and evaluation of the audit evidence obtained and
conclusions reached before the auditor’s report is finalized. Documentation prepared after the
audit work has been performed is likely to be less accurate than documentation prepared at the
time such work is performed.
The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit file on a timely basis after the date of the
auditor’s report. An appropriate time limit within which to complete the assembly of the final
audit file is ordinarily not more than 60 days after the date of the auditor’s report.
Answer No. 9
As per NSA 300, “Planning an audit of financial statements”, the auditor may decide to discuss
elements of planning with the entity’s management to facilitate the conduct and management of
the audit engagement (for example, to coordinate some of the planned audit procedures with the
work of the entity’s personnel). Although these discussions often occur, the overall audit strategy
and the audit plan remain the auditor’s responsibility. When discussing matters included in the
overall audit strategy or audit plan, care is required in order not to compromise the effectiveness
of the audit. For example, discussing the nature and timing of detailed audit procedures with
management may compromise the effectiveness of the audit by making the audit procedures too
predictable.
Communication regarding the planned scope and timing of the audit may:
(a) Assist those charged with governance to understand better the consequences of the auditor’s
work, to discuss issues of risk and the concept of materiality with the auditor, and to identify any
areas in which they may request the auditor to undertake additional procedures; and
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(b) Assist the auditor to understand better the entity and its environment.
According to NSA 260, matters communicated may include:
• How the auditor plans to address the significant risks of material misstatement, whether due
to fraud or error.
• How the auditor plans to address areas of higher assessed risks of material misstatement.
• The auditor’s approach to internal control relevant to the audit.
• The application of the concept of materiality in the context of an audit.
• The nature and extent of specialized skill or knowledge needed to perform the planned audit
procedures or evaluate the audit results, including the use of an auditor’s expert.
• When NSA 701 applies, the auditor’s preliminary views about matters that may be areas of
significant auditor attention in the audit and therefore may be key audit matters
Other planning matters that it may be appropriate to discuss with those charged with governance
include:
• Where the entity has an internal audit function, how the external auditor and internal
auditors can work together in a constructive and complementary manner, including any
planned use of the work of the internal audit function, and the nature and extent of any
planned use of internal auditors to provide direct assistance.
• The views of those charged with governance of:
o The appropriate person(s) in the entity’s governance structure with whom to
communicate.
o The allocation of responsibilities between those charged with governance and
management.
o The entity’s objectives and strategies, and the related business risks that may result in
material misstatements.
o Matters those charged with governance consider warrant particular attention during the
audit, and any areas where they request additional procedures to be undertaken.
o Significant communications with regulators.
o Other matters those charged with governance consider may influence the audit of the
financial statements.
Answer No. 10
The auditor’s responsibilities are to obtain sufficient appropriate audit evidence regarding, and
conclude on, the appropriateness of management’s use of the going concern basis of accounting
in the preparation of the financial statements, and to conclude, based on the audit evidence
obtained, whether a material uncertainty exists about the entity’s ability to continue as a going
concern.
Where, the management has already performed assessment of the entity’s ability to continue as a
going concern, the auditor shall evaluate management’s assessment of the entity’s ability to
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continue as a going concern. The auditor shall discuss the assessment with management and
determine whether management has identified events or conditions that, individually or
collectively, may cast significant doubt on the entity’s ability to continue as a going concern. In
evaluating management’s assessment, the auditor shall consider whether management’s
assessment includes all relevant information of which the auditor is aware as a result of the audit.
If events or conditions have been identified that may cast significant doubt on the entity’s ability
to continue as a going concern, the auditor is suggested to obtain sufficient appropriate audit
evidence to determine whether or not a material uncertainty exists that may cast significant doubt
on the entity’s ability to continue as a going concern. If the auditor concludes that a material
uncertainty exists, the auditor is required to determine whether the financial statements
adequately disclose the events or conditions that may cast significant doubt and management’s
plans to deal with them, and discloses clearly that there is a material uncertainty.
If the auditor concludes that no material uncertainty exists, the auditor is still required to evaluate
whether the financial statements provide adequate disclosures about these events or conditions.
In these circumstances, the auditor may consider that the disclosures of these events or
conditions are fundamental to users’ understanding of the financial statements and that it is
necessary to draw their attention to such disclosures by including an Emphasis of Matter
paragraph in the auditor’s report that refers to the disclosures. The disclosures may include
disclosures about principal events or conditions; management’s evaluation of the significance of
those events or conditions in relation to the entity’s ability to meet its obligations; management’s
plans that mitigate the effect of these events or conditions; or significant judgments made by
management as part of its assessment of the entity’s ability to continue as a going concern.
GATHERING AUDIT EVIDENCE DURING AN AUDIT ENGAGEMENT
Answer No. 11
a) Monetary Unit Sampling (MUS) is a type of value-weighted selection in which sample size,
selection and evaluation results in a conclusion in monetary amounts. MUS is a statistical
sampling method that is used to determine if the account balances or monetary amounts in a
population contain any misstatements. The objective of MUS is to determine the accuracy of
financial accounts. The steps involved in monetary unit sampling are to:
• determine a sample size
• select the sample
• perform the audit procedures
• evaluate the results and arriving at a conclusion about the population.
When performing tests of details it may be efficient to identify the sampling unit as the
individual monetary units that make up the population. Having selected specific monetary
units from within the population, for example, the accounts receivable balance, the auditor
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may then examine the particular items, for example, individual balances, that contain those
monetary units. One benefit of this approach to defining the sampling unit is that audit effort
is directed to the larger value items because they have a greater chance of selection, and can
result in smaller sample sizes. This approach may be used in conjunction with the systematic
method of sample selection and is most efficient when selecting items using random
selection. Each individual monetary unit in the population is considered a sampling unit, so
that account balances or amounts in the population with a higher value have a proportionally
higher chance of being selected. Once the testing of a sample has been completed, a
conclusion is reached in monetary amounts, rather than the rate of occurrence of
misstatements. MUS methods are relatively simple to use, and so can be an efficient tool for
audit testing. MUS advantages include the following:
• It is easier to apply than classical variables sampling.
• There is no need to consider the characteristics of the population when determining
sample sizes, such as the standard deviation of dollar amounts within the population.
• The stratification of a population is not needed, since samples are automatically selected
in proportion to their monetary amounts.
• If no misstatement is expected, the sample size is quite efficient.
MUS methods are especially applicable when making selections for accounts receivable
confirmations, loan receivable confirmations, inventory price tests, and fixed asset addition
tests.
b) When designing and performing audit procedures, the auditor shall consider the relevance
and reliability of the information to be used as audit evidence. The reliability of information
to be used as audit evidence, and therefore of the audit evidence itself, is influenced by its
source and its nature, and the circumstances under which it is obtained, including the controls
over its preparation and maintenance where relevant. Therefore, generalizations about the
reliability of various kinds of audit evidence are subject to important exceptions. Even when
information to be used as audit evidence is obtained from sources external to the entity,
circumstances may exist that could affect its reliability. For example, information obtained
from an independent external source may not be reliable if the source is not knowledgeable,
or a management’s expert may lack objectivity.
While recognizing that exceptions may exist, the following generalizations about the
reliability of audit evidence may be useful:
• The reliability of audit evidence is increased when it is obtained from independent
sources outside the entity.
• The reliability of audit evidence that is generated internally is increased when the related
controls, including those over its preparation and maintenance, imposed by the entity are
effective.
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•
Audit evidence obtained directly by the auditor (for example, observation of the
application of a control) is more reliable than audit evidence obtained indirectly or by
inference (for example, inquiry about the application of a control).
• Audit evidence in documentary form, whether paper, electronic, or other medium, is
more reliable than evidence obtained orally (for example, a contemporaneously written
record of a meeting is more reliable than a subsequent oral representation of the matters
discussed).
• Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies or facsimiles, or documents that have been filmed, digitized or
otherwise transformed into electronic form, the reliability of which may depend on the
controls over their preparation and maintenance.
If the auditor has doubts over the reliability of information to be used as audit evidence, the
auditor shall determine what modifications or additions to audit procedures are necessary to
resolve the matter, and shall consider the effect of the matter, if any, on other aspects of the
audit.
Answer No. 12
a) Inspection and Observation
Basis
Inspection
Meaning
Inspection involves examining records
or documents, whether internal or
external, in paper form, electronic
form, or other media, or a physical
examination of an asset.
Audit
It provides audit evidence with respect
evidence
to existence of an asset or evidence of
authorization of transactions.
Limitation Inspection of documents and assets
may not necessarily provide audit
evidence about ownership or value.
Example
Observation
Observation consists of looking at a
process or procedure being performed
by others.
Observation provides audit evidence
about the performance of a process or
procedure.
It is limited to the point in time at
which the observation takes place, and
by the fact that the act of being
observed may affect how the process or
procedure is performed
For example, inspection of documents For example, the auditor’s observation
and assets.
of inventory counting by the entity’s
personnel, or of the performance of
control activities.
b) Continuous audit and final audit
Basis
Continuous Audit
Final Audit
Period
Continuous audit remains continue Final audit is done at the end of the
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Scope
Chances of
fraud
or
error
Time
of
conduct
Cost
involved in
audit
for whole year.
year.
In case of continuous audit accounts In case of final audit detailed checking
are checked in detail.
is not made as compared to continuous
audit. Generally audit is conducted on
sampling basis.
In continuous audit chances of errors In case of final accounts chances of
and frauds are reduced. Errors can be fraud and errors are high.
corrected on time.
Continuous audit is conducted Final audit is conducted only after the
throughout the year when entries and close of fiscal year after completion of
records are being prepared.
entries and record.
It is more costly because of increased It is less costly because of less no. of
no. of visits.
visits.
Answer No. 13
a) Sales return
i. Examine the accounting basis for such transactions with reference to corresponding Debit
Note to Debit Note. The relevant correspondence from the parties may also be examined.
ii. Verify the goods returned by customer by reference to relevant corresponding record in
good inward book or the stores records. Further, the figures in these documentary
evidences should be compared with the original invoices for rates and other charges and
calculation should also be checked. Store records should be reviewed to check if the
goods returned are not recorded twice i.e. once on receivable of Debit Note and next on
receivable of actual quantity returned from the customers.
iii. Examine in depth to eliminate the possibility of fictitious sales returns for covering bogus
sales recorded earlier when such returns outwards are in substantial figure either at the
start or end of the accounting year.
iv.
Cross-check with reference to original invoices any rebates in price or allowances if any
given by buyers on strength of their Debit Notes.
b) Receipt of capital subsidy
i. Refer to application made for the claim of subsidy to ascertain the purpose and the
scheme under which the subsidy has been made available.
ii. Examine documents for the grant of subsidy and note the conditions attached with the
same relating to its use, etc.
iii. See that conditions to be fulfilled and other terms especially whether the same is for a
specific asset or is for setting up a factory at a specific location.
iv.
Check relevant entries for receipt of subsidy.
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v.
Check compliance with requirements of NAS 20 on “Accounting for Government Grants
and Disclosure of Government Assistance” i.e. whether it relates to specific amount or in
the form of promoters’ contribution and accordingly accounted for as also compliance
with the disclosure requirements.
c) Work in progress
i.
Involve a technical expert in verification and valuation of WIP, if necessary.
ii.
Ensure that cost sheets are duly attested by the works manager.
iii.
Test the correctness of the cost sheet by verifying quantities, cost of material wages
and other charges with reference to the record.
iv.
Verify stage of completion with component of cost involved with underlying records.
v.
Compare the unit cost as shown by the cost sheet with standard cost for any large
variations.
vi.
Ensure the allocation of overhead expenses has been made on reasonable basis and is
same as used in earlier period.
vii.
Compare the cost sheet with that of the previous year and if there is any large
variation, investigate with the reasons thereof.
d) Assets abroad
i.
Examine the title deeds of immovable properties abroad.
ii.
Ensure the immovable properties abroad have been properly classified and disclosed.
iii.
Review the internal control to confirm the accountability of each asset has been
established by maintaining appropriate records and has been accounted and
depreciated properly.
iv.
Where documents of title relating to assets held abroad are not available for
inspection, a certificate should be obtained from the agent or any other party holding
the document. Ascertain that such certificate has been obtained disclosing
unequivocally that they were free from any charge or encumbrance.
v.
Obtain sufficient evidence to satisfy that the assts are physically verified and exists at
the specified location.
vi.
Obtain third party confirmation for any assets that are in possession of other parties
like bank balance, debtors etc.
Answer No. 14
According to NSA 510 ‘Initial audit engagements - opening balances’, in case of initial
engagements, the auditor shall obtain sufficient appropriate audit evidence about whether the
opening balances contain misstatements that materially affect the current period’s financial
statements by determining whether the prior period’s closing balances have been correctly
brought forward to the current period or, when appropriate, have been restated, by determining
whether the opening balances reflect the application of appropriate accounting policies; and by
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reviewing the predecessor auditor’s working papers to obtain evidence regarding the opening
balances; evaluating whether audit procedures performed in the current period provide evidence
relevant to the opening balances; or performing specific audit procedures to obtain evidence
regarding the opening balances.
If the auditor obtains audit evidence that the opening balances contain misstatements that could
materially affect the current period’s financial statements, the auditor shall perform such
additional audit procedures as are appropriate in the circumstances to determine the effect on the
current period’s financial statements. The additional audit procedures may include observing a
current physical inventory count and reconciling it to the opening inventory quantities,
performing audit procedures on the valuation of the opening inventory items and performing
audit procedures on gross profit and cut-off.
The auditor shall also communicate the misstatements with the appropriate level of management
and those charged with governance. If the auditor concludes that the opening balances contain a
misstatement that materially affects the current period’s financial statements, and the effect of
the misstatement is not appropriately accounted for or not adequately presented or disclosed, the
auditor shall express a qualified opinion or an adverse opinion, as appropriate.
USING THE WORK OF OTHERS
Answer No. 15
According per NSA 620, “Using the Work of an Auditor's Expert”, the auditor has sole
responsibility for the audit opinion expressed, and that responsibility is not reduced by the
auditor’s use of the work of an auditor’s expert. An auditor’s external expert is not a member of
the engagement team and is not subject to quality control policies and procedures as well.
Nonetheless, if the auditor using the work of an auditor’s expert, having followed this NSA,
concludes that the work of that expert is adequate for the auditor’s purposes, the auditor may
accept that expert’s findings or conclusions in the expert’s field as appropriate audit evidence.
Moreover, the auditor shall not refer to the work of an auditor’s expert in an auditor’s report
containing an unmodified opinion unless required by law or regulation to do so.
If such reference is required by law or regulation or the auditor makes reference to the work of
an auditor’s expert in the auditor’s report because such reference is relevant to an understanding
of a modification to the auditor’s opinion, the auditor shall indicate in the auditor’s report that
such reference does not reduce the auditor’s responsibility for that opinion. In such
circumstances, the auditor may need the permission of the auditor’s expert before making such a
reference. If permission is refused and the auditor believes a reference is necessary, the auditors
may need to seek legal advices
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INTERNAL AUDIT AND CORPORATE GOVERNANCE
Answer No. 16
Corporate governance broadly refers to the mechanisms, processes and relations by which
corporations are controlled and directed. A governance structure identifies the distribution of
rights and responsibilities among different participants in the corporation (such as the board of
directors, managers, shareholders, creditors, auditors, regulators, and other stakeholders) and
includes the rules and procedures for making decisions in corporate affairs. Corporate
governance includes the processes through which corporations' objectives are set and pursued in
the context of the social, regulatory and market environment. Governance mechanisms include
monitoring the actions, policies and decisions of corporations and their agents.
The audit committee plays a major role in corporate governance regarding the organization’s
direction, control, and accountability. As a representative of the board of directors and main part
of the corporate governance mechanism, the audit committee is involved in the organization’s
both internal and external audits, internal control, accounting and financial reporting, regulatory
compliance, and risk management. Audit committees are identified as effective means for
corporate governance that reduce the potential for fraudulent financial reporting. It is the
function of audit committee to review the accounts and financial statements of the company and
ascertain the truth of the facts mentioned in such statements and to review the internal financial
control system and the risk management system of the company and to prepare the accounts
related policy of the company and enforce, or cause to be enforced, the same. Audit committees
oversee the organization’s management, internal and external auditors to protect and preserve the
shareholders’ equity and interests.
The audit committee in companies is empowered by Company Act 2063, for inquiring into any
matter, notify the managing director of the company, chief executive or the company or other
director, auditor, internal auditor and accounts chief involved in the day-to-day operations of the
company to attend its meeting; and it shall be their duty to be present in the meeting of that
committee if they are so notified. The board of directors has to implement the suggestions given
by the audit committee in respect of the accounts and financial management the company; and
where any suggestion cannot be implemented, the board of directors shall also mention the
reasons for the same in its report
Thus most of the audit committee activities and responsibilities are related directly or indirectly
to the audit committee roles in corporate governance. The audit committee’s composition,
competence, independence, and expertise are strongly correlated with the organization’s
corporate governance.
AUDIT CONCLUSIONS AND REPORTING
Answer No. 17
a) The auditor shall perform audit procedures designed to obtain sufficient appropriate audit
evidence that all events occurring between the date of the financial statements and the date of
the auditor’s report that require adjustment of, or disclosure in, the financial statements have
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been identified. One of the audit procedures is inquiring of management and, where
appropriate, those charged with governance, as to whether any subsequent events have
occurred that might affect the financial statements. The auditor may inquire as to the current
status of items that were accounted for on the basis of preliminary or inconclusive data and
may make specific inquiries about the following matters:
• Whether new commitments, borrowings or guarantees have been entered into.
• Whether sales or acquisitions of assets have occurred or are planned.
• Whether there have been increases in capital or issuance of debt instruments, such as the
issue of new shares or debentures, or an agreement to merge or liquidate has been made
or is planned.
• Whether any assets have been appropriated by government or destroyed, for example, by
fire or flood.
• Whether there have been any developments regarding contingencies.
• Whether any unusual accounting adjustments have been made or are contemplated.
• Whether any events have occurred or are likely to occur that will bring into question the
appropriateness of accounting policies used in the financial statements, as would be the
case, for example, if such events call into question the validity of the going concern
assumption.
• Whether any events have occurred that are relevant to the measurement of estimates or
provisions made in the financial statements.
• Whether any events have occurred that are relevant to the recoverability of assets.
b) According to the NSRS 4400, “Engagement Agreed upon Procedures Regarding Financial
Information”, the objective of an agreed-upon procedures engagement is for the auditor to
carry out procedures of an audit nature to which the auditor and the entity and any
appropriate third parties have agreed and to report on factual findings. As the auditor simply
provides a report of the factual findings of agreed-upon procedures, no assurance is
expressed. Instead, users of the report assess for themselves the procedures and findings
reported by the auditor and draw their own conclusions from the auditor’s work. The report is
restricted to those parties that have agreed to the procedures to be performed since others,
unaware of the reasons for the procedures, may misinterpret the results.
The auditor should conduct an agreed-upon procedure engagement in accordance with this
NSRS and the terms of the engagement. The auditor should ensure with representatives of
the entity and, ordinarily, other specified parties who will receive copies of the report of
factual findings, that there is a clear understanding regarding the agreed procedures and the
conditions of the agreement.
Matters to be agreed include the following:
• Nature of the engagement including the fact that the procedures performed will not
constitute an audit or a review and that accordingly no assurance will be expressed.
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•
•
•
•
•
Stated purpose for the engagement.
Identification of the financial information to which the agreed-upon procedures will be
applied.
Nature, timing and extent of the specific procedures to be applied.
Anticipated form of the report of factual findings.
Limitations on distribution of the report of factual findings. When such limitation would
be in conflict with the legal requirements, if any, the auditor would not accept the
engagement.
In certain circumstances, for example, when the procedures have been agreed to between the
regulator, industry representatives and representatives of the accounting profession, the
auditor may not be able to discuss the procedures with all the parties who will receive the
report. In such cases, the auditor may consider, for example, discussing the procedures to be
applied with appropriate representatives of the parties involved, reviewing relevant
correspondence from such parties or sending them a draft of the type of report that will be
issued.
Matters that would be included in the engagement letter include the following:
• A listing of the procedures to be performed as agreed upon between the parties.
• A statement that the distribution of the report of factual findings would be restricted to
the specified parties who have agreed to the procedures to be performed.
Answer No. 18
a) According to NAS 16 ‘Property Plant and Equipment’, if an asset’s carrying amount is
increased as a result of a revaluation, the increase shall be recognised in other comprehensive
income and accumulated in equity under the heading of revaluation surplus. The revaluation
surplus included in equity in respect of an item of property, plant and equipment may be
transferred directly to retained earnings when the asset is derecognised. This may involve
transferring the whole of the surplus when the asset is retired or disposed of. However, some
of the surplus may be transferred as the asset is used by an entity. In such a case, the amount
of the surplus transferred would be the difference between depreciation based on the revalued
carrying amount of the asset and depreciation based on the asset’s original cost. Transfers
from revaluation surplus to retained earnings are not made through profit or loss.
Similarly, revaluation reserves created out of revaluation of assets are not distributable profit.
According to Section 56(10) of Companies Act, 2063, no share capital shall be increased or
bonus share issued by revaluating the assets of a company other than from profits made by
the company or funds created out of profits.
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Hence, in the given case, the revaluation profit shall be accumulated in equity under the
heading of revaluation surplus and not directly under the general reserves. Also, the company
cannot issue the bonus share by using the revaluation reserve.
b) As per NAS 10 “Events after the reporting period”, adjustments to assets and liabilities are
required for events after the reporting date that provide additional information materially
affecting the determination of the amounts relating to conditions existing at the reporting
date. Similarly, as per NAS 37 "Provisions, Contingent liabilities and Contingent Assets",
future events that may affect the amount required to settle an obligation should be reflected
in the amount of a provision where there is sufficient objective evidence that will occur.
The amount of Rs 1.5 million is a material amount and it is the result of an event, which has
occurred after the reporting date. The facts have become known to the auditor before the date
of issue of the Audit Report and Financial Statements. The auditor has to perform the
procedure to obtain sufficient, appropriate evidence about the events occurring from the date
of the financial statements i.e. Ashad end 2076 to the date of audit report. It is observed that
as a result of violating the terms of contract by not delivering the order on time, penalty of
Rs. 1.5 million was incurred but it was not included in the financial statements of FY
2075/76. It is quite clear that the obligation requires provision for outstanding expenses in
FY 2075/76. So, the auditor should request the management to adjust the sum of Rs. 1.5
million by making provision for expenses. If the management does not accept the request the
auditor should qualify the audit report.
GOVERNMENT AUDIT
Answer No. 19
Compliance auditing is the independent assessment of whether a given subject matter is in
compliance with applicable authorities identified as criteria. Compliance audits are carried out by
assessing whether activities, financial transactions and information comply, in all material
respects, with the authorities that govern the audited entity. These authorities may include rules,
laws and regulations, budgetary resolutions, policy, established codes, agreed terms or the
general principles governing sound public-sector financial management and the conduct of
public officials.
The subject matter in the compliance audit is defined by the scope of the audit. It may be
activities, financial transactions or information. For attestation engagements on compliance it is
more relevant to focus on the subject matter information that may be a statement of compliance
in accordance with an established and standardized reporting framework.
Compliance auditing is often an integral part of an SAI’s (Supreme Audit Institutions) mandate
for the audit of public-sector entities. This is because legislation and other authorities are the
primary means by which legislatures exercise control of income and expenditure, management
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and the rights of citizens to due process in their relations with the public sector. Public-sector
entities are entrusted with the sound management of public funds. It is the responsibility of
public-sector bodies and their appointed officials to be transparent about their actions and
accountable to citizens for the funds with which they are entrusted, and to exercise good
governance over those funds.
Compliance auditing promotes transparency by providing reliable reports as to whether funds
have been administered, management exercised and citizens’ rights to due process honoured as
required by the applicable authorities. It promotes accountability by reporting deviations from
and violations of authorities, so that corrective action may be taken and those accountable may
be held responsible for their actions. It promotes good governance both by identifying
weaknesses and deviations from laws and regulations and by assessing propriety where there are
insufficient or inadequate laws and regulations. Fraud and corruption are, by their very nature,
elements which counteract transparency, accountability and good stewardship. Compliance
auditing therefore promotes good governance in the public sector by considering the risk of fraud
in relation to compliance.
Compliance audit can be part of a combined audit that may also include other aspects.
Compliance audit is generally conducted either in relation with financial audit or in combination
with performance audit. When compliance auditing is part of a performance audit, compliance is
seen as one of the aspects of economy, efficiency and effectiveness. Non-compliance may be the
cause of, an explanation for, or a consequence of, the state of the activities that are the subject of
the performance audit.
Compliance audit may also be planned performed and reported on separately from the audit of
financial statements and from performance audits. Compliance audits may be conducted
separately on a regular or an ad hoc basis, as distinct and clearly-defined audits each related to a
specific subject matter.
AUDIT OF SPECIAL ORGANIZATIONS
Answer No. 20
There are certain special features of co-operative audit to be borne in mind other than general
process of audit involved in audit work (such as checking of posting, ascertainment of
arithmetical accuracy, vouching, verification of assets and liabilities and final scrutiny of
financial statements). Some of the special features are:
a) Examination of overdue debts, whether classified properly as loan not overdue, loan
overdue within 12 months and loan overdue for more than 12 months and whether proper
provision for doubtful debts has been made.
b) Ensure whether overdue interest has not been capitalized in outstanding loan.
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c) Regarding valuation of assets and liabilities, there are no specific provisions or instructions
under the Act and Rules and thus general principles of accounting and auditing standards
shall be adopted.
d) Adherence to cooperative principles shall be ascertained by the auditor in general, how far
the objects, for which co-operative organization is established, have been achieved. The
assessment should not necessarily be in terms of profit but in terms of bestowing benefits to
the members.
e) Observations of provisions of acts and rules and point out the infringement with provisions
therein. The financial implications of such infringements should be properly assessed and
reported by the auditor.
f) Verification of member’s register and examination of pass books.
g) Creation of statutory and voluntary reserves or fund and operation of such reserves or funds
h) Verification of implementation and compliance with directives of Anti-money laundering
for co-operative society and procedures prepared by the co-operative there under and
reporting.
© The Institute of Chartered Accountants of Nepal 22
Paper 3 : Corporate and Other Laws
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© The Institute of Chartered Accountants of Nepal 1
Paper 3 : Corporate and Other Laws
Revision Questions
NEPAL CHARTERED ACCOUNTANT ACT, 2053 AND RULES 2061
Question No. 1
Who shall appoint the Executive Director of ICAN? What are the function, duties and powers of the
Executive Director?
COMPANIES ACT, 2063
Question No. 2
Jupiter Capital Ltd. has passed a special resolution in an extraordinary general meeting (EGM), whereby
all the preference shares issued by Jupiter Capital Ltd. are to be converted into ordinary shares. Some of
the preference shareholders are not satisfied with the said conversion and seek your advice with respect to
the remedy available to the preference shareholders after the said conversion. Explain
Question No. 3
Vishwakarma Electronics Limited with paid up capital of 1 crore has appointed an individual firm, Suresh
Associates, Chartered Accountants, as Auditor of the company at the Annual General Meeting held on
30th Poush, 2076. Mrs. Kamala, wife of Mr. Suresh, invested in the equity shares having face value of
NRs.1 lakh of Vishwakarma Electronics Limited. However, Suresh & Associates continuous to function
as statutory auditors of the company. Advice.
Question No. 4
What are the terms to be abided by any company incorporated under the companies Act, 2063 in addition
to those set forth in the Companies Act, 2063, Memorandum of Association or Articles of Association?
SECURITIES ACT, 2063
Question No. 5
The Board of Directors of Reliance Energy Ltd. proposes to issue the prospectus inviting offers from the
public for subscribing the shares of the company. State the matters to be contained in the prospectus to be
issued by the company in accordance with Securities Act 2063.
Question No. 6
What are the function, duties and powers of the chairperson of the securities board?
BANKS AND FINANCIAL INSTITUTIONS ACT, 2073
Question No. 7
The board of directors of Manaslu Bank Ltd., a commercial bank, decided to transfer 15% of net profits to
its general reserve fund for the financial year ended 31st Ashad 2077. Certain shareholders of the
company objects to the above act of the board of directors on the ground that it violates the provisions, of
the Banks and Financial Institutions Act, 2073. Examine the provision of Banks and Financial Institutions
Act, 2073 and decide:
i)
Whether the contention of the shareholders is tenable.
ii)
Would your answer be still the same in case the board of directors transfers 30% of the banks
net profit to the general reserve fund?
© The Institute of Chartered Accountants of Nepal 2
Paper 3 : Corporate and Other Laws
Question No. 8
What are the objectives of Banks and Financial Institutions Act, 2073?
NEPAL RASTRA BANK ACT, 2058
Question No. 9
Nepal Rastra Bank shall mobilize foreign exchange reserve in Nepal. What are the assets to be included in
the foreign exchange reserve of Nepal Rastra Bank?
INSURANCE ACT, 2049
Question No. 10
Insurance Board has cancelled the license of Narayani Insurance Ltd. for not starting the insurance
business within 9 months of issuing the certificate to start the business. Mr. Jayanti Bhandari, the CEO of
the Narayani Insurance Ltd. claims that the board does not provide opportunity of being heard before
cancelling the license. She approached you to know the condition and procedure of cancelling the license
of the insurance company as per Insurance Act 2049. Advice.
INDUSTRIAL ENTERPRISES ACT, 2073
Question No. 11
What are the provisions relating to land and land ceiling as per industrial enterprises act, 2076?
Question No. 12
Rehersal Hotel Pvt. Ltd. is in operation since last 10 years with 100 rooms. However, due to poor location
choice the hotel is in continuous loss since four years with room occupancy and capacity utilization of
20% in the same period. Due, to heavy loss, the company closed its operation from shrawan 2077 which
was further affected by Covid-19 pandemic which hardly hit tourism sector. Rajan Sharma, CEO of the
hotel wants to know whether Rehearsal Hotel Pvt. Ltd. fulfills the conditions to be categorized as sick
industries and obtain the various facilities, concession and benefits to sick industries. Explain.
LABOUR ACT, 2074
Question No. 13
Mr. Ramesh Dahal is a plumber by profession and has provided the plumbing services to Reliance Textile
Pvt. Ltd. for 5 days during Bhadra 2077. The company asks the plumber to work fixing the remuneration
of fifteen thousand verbally and does not prepare and enter into written employment contract citing it is a
casual employment. The managing director of the company is confused whether the company has
complied with the provision of labour act, 2074 regarding the validity of the contract. Suggest.
Question No. 14
Write short notes on termination of employment on medical grounds as per labour act 2074.
BONUS ACT, 2030
Question No. 15
Sindu Hydropower Ltd., a government owned establishment has earned profit during the financial year
2076-77 and wants to distribute the bonus to employees. Mr. Ramesh the managing director of the
company wants to know the amount to be distributed as bonus and conditions to be followed. As a
© The Institute of Chartered Accountants of Nepal 3
Paper 3 : Corporate and Other Laws
consultant of the company, explain the provision stated in bonus act to be followed by the government
owned establishment for the distribution of bonus.
NEGOTIABLE INSTRUMENT ACT, 2034
Question No. 16
A draws and B accepts the bill payable to C or order, C endorses the bill to D and D to E, who is a holderin-due course. From whom E can recover the amount? Examining the right of E, state the privileges of the
holder-in-due course provided under the Negotiable Instruments Act, 2034.
Question No. 17
Referring to the provisions of the Negotiable Instruments Act, 2034, examine the validity of the
following:
i) A Bill of Exchange originally drawn by M for a sum of NRs.10,000, but accepted by R only for
NRs.7,000.
ii) A cheque marked ‘Not Negotiable’ is not transferable.
SOCIAL WELFARE ACT, 2049
Question No. 18
What are the function, duties and rights of social welfare council?
WTO AND NEPAL LAWS
Question No. 19
What are the challenges to Nepal from the world trade organization membership?
MULUKI DEWANI SAMHITA AIN, 2074
Question No. 20
What are the conditions in which surety shall be discharged from the liability as per Muluki Dewani
(Samhita) Ain 2074?
© The Institute of Chartered Accountants of Nepal 4
Paper 3 : Corporate and Other Laws
Answers/Hints
NEPAL CHARTERED ACCOUNTANT ACT, 2053 AND RULES 2061
Answer No. 1
As per section 38 of Nepal Chartered Accountants Act, 2053, the Council shall appoint any person who
has experience in accounting profession to the post of executive director in order to carry out
administrative activities of the Institute. The executive director shall act under supervision and control of
the Council.
The term of office of the Executive Director shall be 4 years, and the Council may, if it so wishes, reappoint him or her. The Council may designate any officer employee of the Institute to perform the
functions of the Executive Director during the absence of the latter.
The functions, duties and authorities of the Executive Director shall be as follows:a) To act as chief executive of the Institute being accountable to the Council,
b) To carry out day-to-day administrative business of the Institute,
c) To submit annual budget of the Institute to the Council,
d) To maintain and cause to be maintained the books of accounts of the Institute,
e) To keep in custody of the Members' Register and Register of the Members holding Certificate of
Practice and keep it up-to-date.
COMPANIES ACT, 2063
Answer No. 2
According to section 30 of companies act 2063, general meeting of a particular class shareholders shall
adopt special resolution for alteration in the rights of the shareholders of any particular class. However,
except as otherwise provided in the AOA of a company, approval of the shareholders of any particular
class shall be required to make any alteration in the rights of those shareholders of that class.
Provided, however, that no alteration may be made in the rights of the shareholders of any particular class
in a manner to adversely affect the rights of the shareholders of any other class.
In the given case, Jupiter Capital Ltd. decides in extraordinary general meeting passed the special
resolution of converting the preference shares into ordinary shares. It seems that the special resolution has
been passed by equity shareholders and not by preference shareholders. Further, some of the preference
shareholders are dissatisfied with the decision of the extra-ordinary general meeting.
Hence, if the preference shareholders representing at least 10% shares who are not satisfied with a
decision to make alteration in the rights attached to the shares of that class, file a petition in the court to
have the decision to make such alteration void. The decision made to make alteration in the rights of the
shareholders of such class shall not be enforced unless and until otherwise decided or ordered by the
court.
If it appears that alteration in the rights conferred to the shareholders of the class concerned is prejudicial
to the rights of the petitioner shareholders, the court may quash the decision made on the alteration in the
rights of the shareholders of that class.
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Answer No. 3
According to section 112(1)(e) of companies act 2063, a substantial shareholder of the company or a
shareholder holding 1% or more of the paid-up capital of the company or his close relative shall be
disqualified for being appointed as an auditor of the company.
In this case, Mr. Suresh, Chartered Accountant, did not hold any shares in the company. But, Mrs.
Kamala, his wife held equity shares of Vishwokarma Electrics Limited of face value of 1 lakh which is
1% of paid up capital of the company is not within the specified limited of 1%.
Further, section 112(2) provides that the auditor shall, prior to his appointment, give information in
writing to the company that he is not disqualified for being appointed as an auditor of the company.
Where any auditor becomes disqualified to audit the accounts of a company or there arises a situation
where he becomes disqualified for appointment or can no longer continue to act as an auditor of the
company, he shall immediately stop performing audit which is required to be performed or is being
performed by him and give information thereof to the company in writing. The audit performed by an
auditor who has been appointed in contravention of this Section shall be invalid.
Hence, Suresh & Associates cannot continue to function as auditor of the company with the investment
made by his wife in the equity shares of Vishwakarma Electronics Limited which is 1% or more of the
paid up capital of the company.
Answer No. 4
As per section 10 of companies act, 2063, in addition to the provision of act, memorandum and articles of
association, following are the terms to be followed by the company:a) To carry out all transaction and activities in its name.
b) Private company shall add the word “private limited” to its name as last word and a Public company
shall add the word “limited” to its name as last word. Provided this provision shall not be applicable
to company not distributing profit.
c) Private company shall not sell its share and debenture publicly.
d) Private company shall not pledge or otherwise transfer title of its securities to any person other than
its shareholder without fulfilling the conditions laid down on MOA, AOA or Consensus agreement.
e) A company shall not open proprietorship firm or partnership firm. Eg. Annapurna Construction Pvt.
Ltd. cannot open partnership firm with Hari and Shyam.
f) A company not distributing profit shall not distribute dividends or pay any amount directly or
indirectly to its members or their relatives.
SECURITIES ACT, 2063
Answer No. 5
As per section 32 of Securities Act, 2063, every prospectus of the company shall contain following
matters:
a) General information of the company,
b) Capital and other information of the company,
c) Main functions to be done by the company,
d) Matters relating to legal proceedings,
e) Matters relating to financial condition and financial status,
f) Matters relating to general administration,
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g) Matters relating to management of the company,
h) Details of expert preparing prospectus; and
i) Such other matters relating to prospectus as prescribed.
Answer No. 6
In accordance with section 8 of securities act 2063, following are the functions, duties and powers of
securities board:
(a) To perform such functions as may be necessary for the protection of the interests of investors in
securities for the development of capital market,
(b) To regulate and monitor stock exchanges and transactions of securities business persons in order to
make transactions in securities strengthened, effective and reliable,
(c) To act as the executive chief of the Board,
(d) To submit such long-term and short-term plans and policies as be necessary to be adopted by the
Board for the management of stock exchanges and development of capital market to the Board for
its approval,
(e) To call or cause to be called the meeting of the Board and preside over the same,
(f)
To prepare annual programs and budget of the Board and submit the same to the Board for its
approval,
(g) To implement the decisions made by the Board,
(h) To inspect and supervise day-to-day business of the Board and perform the functions in accordance
with the objectives of the Board,
(i)
To appoint the advisers and employees required for the Board as prescribed,
(j)
To perform such other functions as may be entrusted to him or her by the Board.
BANKS AND FINANCIAL INSTITUTIONS ACT, 2073
Answer No. 7
As per section 44 of Banks and Financial Institutions Act, 2073, a bank or financial institution must
maintain a general reserve fund. The BFI’s must credit at least 20% of the net profits of each fiscal year to
such fund until the amount of such fund doubles the paid-up capital; and after such fund doubles the
paid-up capital at least 10% of the net profits shall be credited to such fund in the later fiscal years.
Further, the amount credited to the general reserve fund may not be invested or transferred to any other
head without the prior approval of the Rastra Bank.
i)
In the given case Manaslu Bank Ltd. has transferred 15% of net profit to the general reserve
fund instead of transferring at least 20% of the net profits of each fiscal year to the fund until
the amount of such fund doubles the paid up capital. The question is not clear whether the
amount of general reserve fund amounts more than double of paid up capital of the company.
Hence, applying the above provision, the contention of the shareholders shall be tenable since
the percentage of transfer of net profits to the general reserve fund is lower than the statutory
limits as prescribed by the act.
ii)
In the second case, the contention of the shareholders shall not be tenable, since 30% of net
profit is more than the statutory limits of 20% of net profits as prescribed by the act.
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Answer No. 8
The objectives of Banks and Financial Institutions act are as follows:
a) To amend and consolidate the prevailing legislation relating to banks and financial institutions
and make it timely, in order to promote the trust of the general public in the overall banking and
financial system of the country;
b) To protect and promote the rights and interests of depositors;
c) To provide quality and reliable banking and financial intermediary services to the general public
through healthy competition among banks and financial institutions;
d) To minimize risks relating to the banking and financial sector;
e) To boost and consolidate the economy of the state of Nepal by liberalizing the banking and
financial sectors;
f) To make necessary legal provisions relating to the establishment, operation, management and
regulation of banks and financial institutions;
NEPAL RASTRA BANK ACT, 2058
Answer No. 9
As per section 66(1) of Nepal Rastra Bank act 2058, following are the assets to be included in foreign
exchange reserve of Nepal Rastra Bank:
a) Gold and other precious metals held by or for the account of the Bank;
b) Foreign currencies held by or for the account of the Bank;
c) Foreign currencies held in the accounts of the Bank on the books of a foreign central bank or
other foreign banks;
d) Special drawing rights (SDR) held by the Bank at the International Monetary Fund;
e) Bill of exchange, promissory note, certificate of deposit, bonds, and other debt instrument
payable in convertible foreign currencies issued by any debtor or liability holder and held by the
Bank;
f) Any forward purchase or repurchase agreements of the Bank concluded with or guaranteed by
foreign central banks or public international financial institutions, and any futures and option
contracts of the Bank providing for payment in freely convertible foreign currency.
INSURANCE ACT, 2049
Answer No. 10
As per section 13 of Insurance Act, 2049, the insurance board may cancel the registration of an Insurer by
providing a written notice with stating the date in the following circumstances:
(a) If the Insurance Business is not started within 6 months from the date of obtaining the certificate,
(b) If it is felt that the liability of the Insurer exceeds its assets within Nepal,
(c) If the Insurer could not fulfill the liability pursuant to the decision within 3 months from the date of
final decision of the court for the case filed under the Insurance Policy issued within Nepal,
(d) If the head office of the Insurance Business of any foreign Insurer is situated outside Nepal and it is
felt that Nepalese Insurer has not obtained equal facilities there which are enjoyed by the foreign
Insurer pursuant to the prevailing law of such country,
(e) If the Insurer does not open its office inside Nepal,
(f) If the Insurer does not perform the functions to be performed or has performed any functions which
is not to be performed pursuant to this Act or the Rules made under this Act.
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Further, the insurance board shall provide a reasonable time-limit to submit clarification before canceling
the registration to the concerned Insurer stating the reasons for cancellation of its registration. The Board
shall cancel the registration of such Insurer, if the concerned Insurer does not submit its clarification
within the reasonable time period or clarification submitted by it is not satisfactory.
In the given case, the insurance board cancels the license of Narayani Insurance Ltd. without providing
opportunity to submit clarification which should be provided to the company. Although, Narayani
Insurance Ltd. has not started its business within 6 months from the date of obtaining the certificate, the
company should be provided with opportunity to submit clarification.
Hence, the decision to cancel the license of insurance board to cancel the license of Narayani insurance
Ltd. is not valid in accordance with insurance act, 2049. The insurance board should have provided
reasonable time limit to submit clarification for not starting business within 6 months to the insurance
company.
INDUSTRIAL ENTERPRISES ACT, 2073
Answer No. 11
As per section 30 of Industrial Enterprises Act, 2076, the land required for the industry should be
purchased by the industrialist itself. However, if land required for the industry could not be purchased
then in such a case, industry registering authority shall provide necessary facilitation.
Further, as per section 32 of Industrial Enterprises Act, 2076, the industry which requires a land area more
than the land ceiling prescribed as per the prevailing laws of Nepal shall submit an application to the
industry registering authority for the exemption on land.
Industry Registering Authority shall submit a report with their views to ministry after having required
inspection of submitted documents for exemption on land. The industry should use the exempted land as
obtained only for the purpose for which the land is taken. Industry registering authority may inspect to
identify whether the exempted land has been used in accordance with approved objectives and provide
necessary directions. Exempted land shall be returned to the Nepal Government in accordance with
prevailing law, if the direction given by the body registering the industry is not followed.
Industrial Enterprises Act, 2076, explicitly restricts exempted land from being sold, transferred or used as
collateral in consideration of obtaining loan from the banks or financial institutions.
Answer No. 12
As per section 39 of Industrial Enterprises Act, 2076, Government of Nepal making prescribed rules may
categorize the industries fulfilling following conditions as sick industries:
a) Industry is in operation for at least 5 years from the date of its commercial production or transaction;
b) Not closed due to intention or mis-management but from event beyond its control;
c) Capacity utilization of 30% or less for last 3 consecutive years;
d) Operating in continuous loss since last 3 consecutive years
In the given case, Rehearsal Hotel Pvt. Ltd. was in operation since last 5 years and was closed due to low
number of occupancy and revenue. The hotel was not closed intentionally or due to mismanagement and
the hotel is in loss since last 3 years with capacity utilization of less than 30%.
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Government of Nepal may revive and restructure the hotel, if the revival of sick industries is possible by
providing facilities to such industries on the basis of job creation, import substitution, export promotion
and helping to earn foreign currency.
Further, the hotel will be eligible to claim full or partial exemption on duty, fee and tax on the machinery,
tools & equipment’s imported by the hotel on becoming a sick industry for the extension, restructuring
and diversification of such industry.
Hence, Rehersal Hotel Pvt. Ltd. fulfills the condition to be categorized as sick industries since it has
fulfilled all the condition to become sick industries. Once the hotel is categorized as sick industry, it can
obtain the benefit provided by government of Nepal to the sick industries by prescribing the rules.
LABOUR ACT, 2074
Answer No. 13
As per section 10 of labour act, 2074, casual employment means the employment for seven days or less
than seven days within a period of one month for providing any work or services. Further, as per section
11 of labour act 2074, no employer can put any person on work without making written employment
agreement. Such employment contract shall include the salary, facilities, employment conditions and
other prescribed particulars. However, written agreement is not required in case of Casual Employment.
In the given case, the plumber has been employed in the nature of casual employment since the plumber
has worked for less than seven days during the Bhadra month. Further, written employment contract is
not necessary for casual employment. Reliance Textiles Pvt. Ltd. can employ Mr. Rajaram Dahal by
making verbal agreement for remuneration and other employment terms and conditions. Written
employment contact is necessary for regular employment, work based employment, time bound
employment and part time employment.
Hence, the verbal employment contract made by the Reliance Textiles Pvt. Ltd. is valid as per labour act,
2074. The company has complied with the provisions of the labour act, 2074.
Answer No. 14
As per section 143 of labour act, 2074, the employer may, on the basis of a recommendation of a doctor,
terminate the employment of workers on following grounds:
a) where any worker becomes incapable of working as a result of physical or mental disablement or
injury; or
b) probability of causing an adverse effect on the business of the employer because of long term
medical treatment of the worker.
The employer shall not terminate the employment of any worker while undergoing medical treatment in
the hospital or within one year from the date of commencement of treatment at home. The treatment shall
be carried because of an accident or occupational disease caused while performing the work. The
employer shall give full pay (100%) during the period of such treatment.
Provided that the employer shall not be required to pay such remuneration, if the worker is entitled to
receive the remuneration for the treatment period from the Social Security Fund.
The employer shall not have right to terminate the employment of any worker for a period of 6 months, in
case such worker is not able to attend to the work in the enterprise on the ground of medical treatment
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because of an non-occupational disease or accident. Provided that, termination of the employment can be
made within the period of 6 months, if there is a clear recommendation from the doctor about the inability
of the worker to join the work again.
The employer may also engage the worker who is physically incapacitated or injured or disabled to any
work suitable to the condition of his/her health wherever possible.
BONUS ACT, 2030
Answer No. 15
As per section 5(1) of Bonus Act, 2030, each profit making enterprise shall have to allocate an amount
equivalent to 10% of its net income of one fiscal year for bonus to the employees. However, the
percentage of bonus and other matter relating to bonus which is to be distributed by the Government
owned enterprises shall be determined as prescribed. Further, non-profit making entity owned by
Government of Nepal cannot distribute bonus to its employees.
Entity owned by government of Nepal may distribute bonus only by fulfilling following conditions:
a) Expenses booked on accrual basis in earlier financial year have been paid in next financial year;
b) The amount of contingent liabilities has been determined in each financial year and separate fund has
been established for such determined amount;
c) Loan taken from Nepal government or on the guarantee of Nepal government as mentioned in loan
deed has been paid in accordance with repayment schedule.
Any other matters relating to distribution of bonus other than mentioned in the bonus act, 2030 and bonus
rules, 2039 shall be as decided by Nepal Government.
NEGOTIABLE INSTRUMENT ACT, 2034
Answer No. 16
Negotiable Instruments Act, 2034 describes the liabilities of prior parties to the holder in due course. This
section says that a holder in due course has privilege to hold every prior party to a negotiable instrument
liable on it until the instrument is duly satisfied. Here the holder in due course can hold all the prior
parties liable jointly and severally. Prior parties include the maker or drawer, the acceptor and endorsers.
Accordingly in the given question, E, a holder in due course can recover the amount from all the prior
parties i.e., D & C (the endorsers), B (an acceptor) and A (the drawer).
Following are the privileges of a “Holder in Due Course” as per Negotiable Instrument Act, 2034:
a) Every prior party to a negotiable instrument is liable to a Holder in due course.
b) Each prior party shall be liable as a principal debtor (primary responsibility) in respect of each
subsequent party.
c) A holder who derives title from Holder in due course has the same rights as that of a Holder in
due course.
d) No prior party can set up a defence that the negotiable instrument was drawn, made or endorsed
by him without any consideration. i.e. if a holder has obtained the instrument with consideration
then the prior parties shall be liable on the negotiable instrument.
e) Holder in due course gets a valid title to the negotiable instrument even though the title of the
transferor was defective.
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Answer No. 17
i) As per the provisions of the Negotiable Instruments Act 2034, acceptance may be either general or
qualified. It is qualified when the drawee does not accept the bill according to the apparent tenor of
the bill but attaches some condition or qualification which have the effect of either reducing his
(acceptor’s) liability or acceptance of this liability is subject to certain condition.
The holder of the bill is entitled to require an absolute and unconditional acceptance, otherwise he
will treat it as dishonoured however, he may agree to qualified acceptance but he does so at his own
risk, since he discharges all parties prior to himself, unless he has obtained their consent.
Thus, in the given case if the Drawer (M) agrees to acceptance, the drawee (R) is responsible for a
sum of NRs.7,000 only.
ii) It is wrong statement. A cheque marked “not negotiable” is a transferable instrument. The inclusion
of the words ‘not negotiable’ however makes a significant difference in the transferability of the
cheques. The holder of such a cheque cannot acquire title better than that of the transferor.
Anyone who takes a cheque marked ‘Not Negotiable’ takes it at his own risk. If the title of the
transferor becomes defective, the title of the transferee is also affected by such defect and the
transferee cannot claim the right of a holder in due course. i.e. the title of transferee of such cheque
cannot be better than that of its transferor.
SOCIAL WELFARE ACT, 2049
Answer No. 18
The functions, Duties and Rights of the Council as per section 9 of social welfare act shall be as follows:
a) To run the social welfare activities smoothly and effectively, to extend help to the social
organizations and institutions and to develop co-ordinations among them and to super vise, follow-up
and carry out evaluations of their activities.
b) To extend help and support to establish social organizations and institutions, their development,
strengthening and extensions.
c) To work as co-ordinator between Government of Nepal and social organizations and institutions.
d) To provide consultancies to Government of Nepal in order to formulate policies and programs
directly related to social welfare activities and other social services.
e) To establish and conduct a fund, for the social welfare activities.
f) To work as a center for dissemination of information's and documentation's to the affiliated service
oriented organizations and institutions with Council.
g) To conduct training, studies and research programme in the areas related with social welfare.
h) To carry out the physical supervisions of the properties of those social institutions and organizations
affiliated with the Council.
i) To carry out the necessary functions to implement the objectives of this Act.
j) To make contract or agreement with the local, foreign or international organizations and foreign
countries.
k) To collect grant from the national and international agency and to manage to received grant.
WTO AND NEPAL LAWS
Answer No. 19
Following are some of the challenges to Nepal from WTO membership:
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a) Employment: At present, 14 percent of the Nepalese workforce is believed to be unemployed
and 47 percent underemployed. To achieve a higher level of production, in terms of both quality
and quantity, sophisticated machineries and better technology have to raise production efficiency.
It is machinery rather than labour that allows achieving the target of meeting the market demand
on schedule. Therefore it is very likely that the workforce is replaced instantly by machineries
like in developed economies.
b) Negotiation for more benefits: The task of negotiation for accession with the objective of
gaining more and loosing less is challenging for Nepal primarily due to lack of knowledgeable
and skillful human resources with the government as well as private sector.
c) Strengthening institutions: Given the financial constraint of the government and the lack of
proper policy intervention to cope with the responsibility and obligations posed by the WTO
membership, the task of strengthening institutions seems difficult to achieve.
d) Specialization in some products and services: This is a challenging task of Nepal, when there is
lack of proper physical and institutional infrastructure, capital and resources for industrialization.
e) Making industries cost effective: The old industries of Nepal need urgent restructuring and
modernization in order to make them capable of producing quality goods at a competitive price. It
is not possible to make industries cost effective without investment.
f) Income distribution and Poverty: Since rules, laws, practices and norms of economic and social
nature are shaped as per the requirements of the global village, the economy and society are put
under the powerful influence of outside forces, such as INGOs and MNCs. Local monopolies are
also replaced by international monopolist whose interest is not to co-operate with local
government in resolving any social crisis but to reap economic benefits. The process aggravates
the problems of income and wealth inequality, the rural-urban gap, poverty, unemployment and
social and economic dualism. The country is thus forced to remain in a low equilibrium poverty
trap.
g) Monopoly of MNCs in patent: Due to the intervention of MNCs in local initiatives, due to huge
research capacities and technological advancement, MNCs are able to patent other countries
resources especially LDCs like Nepal. Basmati rice which is originated in South Asia, was
patented by one of the U.S. MNC’S under the name of “Taxomati”. Similarly, “turmeric” and
“neem” was also being patented in the U.S. recently a patent has been granted to a U.S. firm on
Karela (bitter gourd), Jamun (Sygimium cumini) and brinzal for anti-diabetic properties despite
their use being mentioned in several Indian texts.
MULUKI DEWANI SAMHITA AIN, 2074
Answer No. 20
As per section 565 of Muluki Dewani (Samhita) Ain 2074, except otherwise provided for in the contract,
the surety shall be discharged from liability to the following extent as mentioned in any of the following
circumstances:
a) In case the person who has to repay a loan or fulfill a liability changes the terms and conditions of the
contract extending substantial impact on the contract without having approval of the surety, in respect to
the transaction to be carried out after such changes.
(b) In case a contract is concluded to release from liability to the person who has to fulfill the concerning
matter in respect to which the guarantee has been provided.
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(c) In case the person who has to repay a loan or fulfill a liability is released from liability, or in case the
loan is waived, by the action of the creditor.
(d) In case the creditor agrees to release the debtor from the liability by collecting a sum less than what is
due, or to provide additional time limit for repaying the loan, or not to initiate a litigation.
(e) In case any action of the creditor causes an adverse impact to the surety's right to have legal remedy
against the person who is under obligation to repay the loan or fulfill the liability.
(f) In case the creditor loses, damages or returns any security obtained by him from the debtor, to the
extent of the value of that security.
(g) To the extent to which the person who is under obligation to repay a loan or fulfill a liability has
repaid the loan or fulfilled the liability according to the contract.
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