SUGGESTED ANSWERS TO
THE QUESTIONS SET AT
CHARTERED ACCOUNTANCY PROFESSIONAL (CAP)-III LEVEL
JUNE 2023 EXAMINATIONS
Group-I
The Institute of Chartered Accountants of Nepal (ICAN)
ICAN Marg, Satdobato, Lalitpur
Suggested Answers June 2023 Examination (CAP III - Group I)
© The Institute of Chartered Accountants of Nepal
All exam questions and solutions are the copyright of ICAN and can be used only by students in
preparation for their CA exams. They cannot be published in any form (paper or soft copy), or sold
for profit in any way, without first gaining the express permission of ICAN. Nor can they be used
as examinations, in whole or in part, by other institutions or awarding bodies.
Year and month of Publication: 2023 September
Disclaimer:
The suggested answers published herein do not constitute the basis for evaluation of the students'
answers in the examination. The answers are prepared by the concerned resource persons and
compiled by the Technical Directorate of the Institute with a view to assist the students in their
education. While due care has been taken in the compilation of answers, if any errors or omissions
are noted, the same may be brought to the attention of the Technical Directorate. The Council or
the Board of Studies of the Institute is not any way responsible for the correctness or otherwise
of the answers published herewith.
The Institute of Chartered Accountants of Nepal
1
Suggested Answers June 2023 Examination (CAP III - Group I)
Contents
Paper 1 – Advanced Financial Reporting ................................................................................. 3
Paper 2 – Advanced Financial Management .......................................................................... 21
Paper 3 – Advanced Audit and Assurance ............................................................................. 34
Paper 4 – Corporate Laws ....................................................................................................... 52
Examiner’s Commentary on Students' Performance in June 2023 Examinations............. 64
The Institute of Chartered Accountants of Nepal
2
Suggested Answers June 2023 Examination (CAP III - Group I)
Paper 1 – Advanced Financial Reporting
Attempt all questions. Working notes should form part of the answers.
1. L Ltd. has business relationship with two companies, P Ltd. and J Ltd. The draft statements of
financial position of these three companies as at Ashad end 2079 are provided below:
Assets:
Non-current assets:
Property, plant and equipment
Investment in subsidiaries
P Ltd.
J Ltd.
Investment in PY Ltd.
Intangible assets
Current assets
Total assets
Equity and liabilities:
Share capital Rs. 100
Other components of equity
Retained earnings
Total equity
Non-current liabilities
Current liabilities
Total liabilities
Total equity and liabilities
L Ltd.
Rs. million
P Ltd.
Rs. million
J Ltd.
Rs. million
920
300
310
730
320
48
198
1,896
895
2,791
30
650
480
1,130
35
345
250
595
920
73
895
1,888
495
408
903
2,791
400
37
442
879
123
128
251
1,130
200
25
139
364
93
138
231
595
Additional relevant information:
i) On 1 Shrawan 2078, L Ltd. acquired 60% of the equity interests of P Ltd. The cost of investment
comprised cash of Rs. 730 million. At acquisition, the fair value of the non- controlling interest in
P Ltd. was estimated at Rs. 292 million. On acquisition date, the fair value of the identifiable net
assets acquired totaled Rs. 835 million and the retained earnings of P Ltd. were estimated to be Rs.
319 million whilst other components of equity were Rs. 27 million. The excess in fair value is
resulting from a non-depreciable land.
ii) It is the group’s policy to measure the non-controlling interest at fair value at the date of
acquisition.
iii) On 1 Shrawan 2078, P Ltd. acquired 70% of the equity interests of J Ltd. for a cash consideration
of Rs. 320 million. The fair value of a 30% holding of the non-controlling interests was estimated at
Rs. 72 million, and a 58% holding was Rs. 161 million. At the date of acquisition, the identifiable
net assets of J Ltd. had a fair value of Rs. 362 million, retained earnings were Rs. 106 million and
other components of equity were Rs. 20 million. The excess in fair value is due to non-depreciable
land.
iv) On 1 Shrawan 2078, L Ltd. acquired a 14% interest in PY Ltd., for a cash considerationof Rs. 18
million. The investment was accounted for under NFRS 9: Financial Instruments and was
designated as at fair value through other comprehensive income. On 1 Magh 2078, L Ltd. acquired
an additional 16% interest in PY Ltd. for a cash consideration of Rs. 27 million and achieved
significant influence. The value of the original 14% investment on 1 Magh 2078 was Rs. 21 million.
PY Ltd. made profits after tax of Rs. 10 million and Rs. 30 million for the years to Ashad end 2078
and Ashad end 2079 respectively. On Ashad end 2079, L Ltd. received a dividend from PY Ltd.
The Institute of Chartered Accountants of Nepal
3
Suggested Answers June 2023 Examination (CAP III - Group I)
amounting to Rs. 2 million, which has been credited to other components of equity.
L Ltd. purchased patents amounting to Rs. 10 million to use in a project to develop new products
on 1 Shrawan 2078. L Ltd. has completed the investigative phase of the project, incurring an
additional cost of Rs. 7 million and has now determined that the product can be developed
profitably. An effective and working prototype was created at a cost of Rs. 4 million and in order
to put the product into a condition for sale, a further Rs. 3 million was spent. Finally, marketing
costs of Rs. 2 million were incurred. All of the above costs are included in the intangible assets of
L Ltd.
vi) Impairment tests were conducted for both P Ltd. and J Ltd. on Ashad end 2079. The recoverable
amounts of both cash generating units as stated in the individual financial statements as at Ashad
end 2079 were P Ltd., Rs. 1,425 million, and J Ltd., Rs. 604 million, respectively. The Directors
of L Ltd. felt that any impairment of assets was due to the poor performance of the intangible assets
and it was deemed that other assets were already held at recoverable amount. The recoverable
amounts have been determined without consideration of liabilities which all relate to the financing
of operations.
Required:
20
Prepare the consolidated statement of financial position for the L Ltd. Group as at Ashad end 2079:
v)
Answer
1)
Assets:
L Ltd. Group
Consolidated statement of financial position as at Ashad End 2079
Rs. million
Non-current assets
Property, plant and equipment (920 + 300 + 310 +89 + 36)
1,655
Goodwill (W3)
187
Intangible assets (198 + 30 + 35 – 9 -27)
227
Investment in PY Ltd (W7)
50.5
Current assets (895 + 480 + 250)
Total assets
1,625
3,744.5
Equity and liabilities
Equity attributable to owners of parent
Share capital
Retained earnings (W5)
Other components of equity (W5)
920
978.82
76.1
1,974.92
Non-controlling interest (W4)
384.58
2,359.5
Total non-current liabilities (495 + 123 + 93)
711
Current liabilities (408 + 128 + 138)
674
Total liabilities
Total equity and liabilities
The Institute of Chartered Accountants of Nepal
1,385
3,744.5
4
Suggested Answers June 2023 Examination (CAP III - Group I)
Working Notes:
W1) Group Structure
L Ltd.
PY Ltd.
- 60% on P Ltd. - 14 % until 1 Magh, 2078
- 30% from 1 Magh, 2078
P Ltd.
- 70% on J Ltd.
The group effective interest in J Ltd is 42% (60% x 70%). The NCI holding is therefore 58%
(100% - 42%).
P Ltd.
L Ltd (Group) interests:
Non-controlling interest:
Direct
Indirect
Direct
Indirect
60%
40%
100%
J Ltd.
60% X 70% =
42%
100% - 70% =
40% X 70% =
30%
28%
100%
W2) Net Assets – P Ltd
Acquisition date
Rs. million
Share capital
Other components of equity
Retained earnings
Fair value adjustment – land
Reporting date
Change
400
Rs. million
400
Rs. million
27
37
10.0
319
442
123
89
89
-
835
968
133
-
Net Assets - J Ltd
Share capital
Acquisition date Reporting date
Rs. million
Rs. million
200
200
Other components of equity
Retained earnings
Fair value adjustment- land
Change
Rs. million
-
20
25
5
106
139
33
36
36
-
362
400
38
W3) Goodwill
P Ltd
Rs. million
Fair value of consideration
730
Fair value of non-controlling interest
292
Fair value of identifiable net assets acquired (W2)
Goodwill at acquisition
J Ltd
Fair value of consideration
The Institute of Chartered Accountants of Nepal
(835)
187
Rs. million
320
5
Suggested Answers June 2023 Examination (CAP III - Group I)
Indirect holding adjustment (40% x Rs. 320)
FV of NCI at acquisition (58% holdings)
Less fair value of identifiable net assets (W2)
Negative Goodwill at acquisition
(128)
161
(362)
(9)
Goodwill charged to Profit or Loss account
9
Goodwill at reporting date
-
W4) Non–controlling Interest
Rs. million
NCI in P Ltd at acquisition
292
NCI % of post-acquisition profit (40% x (Rs. 968 – Rs. 835) (W2))
53.2
Indirect holding adjustment (40% x Rs. 320)
NCI in J Ltd at acquisition
NCI% of post-acquisition profit (58% x (Rs. 400 – Rs.362) (W2))
Impairment (58% x Rs. 27 (W6))
(128)
161
22.04
(15.66)
384.58
W5) Reserves
Retained earnings
L Ltd
P Ltd: 60% x (Rs. 442 – Rs. 319 (W2))
J Ltd: 42% (139 – Rs. 106) (W2))
Impairment (42% x Rs. 27 (W6))
PY Ltd gain from OCE (W7)
PY Ltd dividend (W7)
Share of PY’s post-acquisition retained earnings (W7)
Capital surplus (Negative goodwill of J Ltd)
Intangible assets (W8)
Rs. million
895
73.8
13.86
(11.34)
3
2
2.5
9
(9)
978.82
Other components of equity
L Ltd
P Ltd: 60% x (Rs. 37 – Rs. 27) (W2)
Rs. million
73
6
J Ltd: 42% (Rs. 25 – Rs. 20) (W7))
2.1
PY Ltd gain to retained earnings (W7)
(3)
PY Ltd dividend (W7)
(2)
76.1
W6) Impairment
Note (vi) states that the recoverable amount of each subsidiary has been determined ‘without
consideration of liabilities’. Therefore carrying value of assets should be compared to calculate
impairment.
The Institute of Chartered Accountants of Nepal
6
Suggested Answers June 2023 Examination (CAP III - Group I)
P Ltd (Rs. million)
Goodwill (W3)
Assets (per SFP)
Fair value adjustment (W2)
Total assets value
Recoverable amount
J Ltd (Rs. million)
187
-
1,130
595
89
36
1,406
631
(1,425)
(604)
Impairment
N/A
27
Group reserves will be debited with Rs. 11.34 (42% of 27 ) million and NCI with Rs. 15.66 (58%
of 27) million, being the loss in value of the assets split according to the effective interests.
W7) PY Ltd
L Ltd has significant influence over PY. PY is therefore an associate and must be accounted for
using the equity method. The gain of Rs. 3 million (Rs. 21 million – Rs. 18 million) recorded with
OCE up to Magh 1, 2078 would not be transferred to profit or loss for the year but can be
transferred within equity and hence to retained earnings under NFRS 9 Financial instruments.
Dr
OCE
Rs. 3 million
Cr
Retained earnings
Rs. 3 million
The dividend should have been credited to L’s profit or loss and not to OCE.
Dr
OCE
Rs. 2 million
Cr
Retained earnings
Rs. 2 million
The amount included in the consolidated statement of financial position would be:
Rs. million
Cost (Rs. 21 million + Rs. 27 million)
48
Share of post-acquisition profits (Rs. 30 million x 6/12 x 30%)
4.5
Less dividend received
(2.0)
50.5
There is no impairment as the carrying amount of the investment in the separate financial
statements does not exceed the carrying amount in the consolidated financial statements nor does
the dividend exceed the total comprehensive income of the associate in the period in which the
dividend is declared.
The group’s share of the post-acquisition retained earnings movement is Rs. 2.5 m (Rs. 4.5 m –
Rs. 2.0 m). This will be held within group earnings (W5).
W8) Development
There are strict criteria in NAS 38 governing the items that can be included in the cost of an intangible
assets. L should recognize the Rs. 10 million as an intangible asset plus the cost of the prototype of
Rs. 4 million and the Rs. 3 million to get it into condition for sale. The remainder of the costs should
be expensed including the marketing costs. This totals Rs. 9 million, which should be taken out of
intangibles and expensed.
Dr
Retained earnings
Rs. 9 million
Cr
Intangible assets
Rs. 9 million
The Institute of Chartered Accountants of Nepal
7
Suggested Answers June 2023 Examination (CAP III - Group I)
2.
a) The following trial balance and other information relate to Nyatapola Co. Ltd. at 32nd Ashad, 2079:
Note
i)
ii)
iii)
iv)
v)
(Rs. in
million)
(Rs. in million)
Revenue
i
213.50
Cost of Sales
136.80
Distribution Costs
12.50
Administrative Expenses
ii
19.00
Interest on Debenture and dividend paid
ii and iii
20.70
Investment Income
0.40
Equity Shares
60.00
6% Debenture
ii
25.00
Retained earnings on 1.4.2078
18.50
Land and buildings at cost (land element
iv
50.00
Rs. 10 million)
Plant and equipment at cost
iv
83.70
Accumulated depreciation at 1.4.2078:
Building
8.00
Plant and Equipment
33.70
Equity Financial Asset Investments
v
17.00
Inventory at 32.3.2079
24.80
Trade Receivable
28.50
Bank Balance
2.90
Current Tax
vi
1.10
Deferred Tax
vi
1.20
Trade Payables
36.70
Total
397.00
397.00
Notes:
On 1.4.2078, Nyatapola Co. Ltd. sold one of its products for Rs. 10 million (included in revenue
in the trial balance). As part of the sale agreement, Nyatapola is committed to the ongoing servicing
of this product until 31.3.2081 (i.e. three years from the date of sale). The value of this service has
been included in the selling price of Rs. 10 million. The estimated cost to Nyatapola of the
servicing is Rs. 600,000 p.a. and Nyatapola’s normal gross profit margin on this type of servicing
is 25%. Ignore discounting.
Nyatapola issued a Rs. 25 million 6% Debenture on 1.4.2078. Issue costs were Rs. 1 million and
these have been charged to administrative expenses. The loan will be redeemed on 31.3.2081 at a
premium which gives an effective interest rate of 8%.
Nyatapola paid and equity dividend of 32% per share during the year ended 32.3.2079.
Non-current assets:
Nyatapola had been carrying land and buildings at depreciated cost, but due to a recent rise in
property prices, it decided to reveal its property on 1.4.2078 to market value. An independent
valuer confirmed the value of the property at Rs. 60 million (land element Rs. 12 million) as at
that date and the directors accepted this valuation. The property had a remaining life of 16 years
at the date of its revaluation. Nyatapola will make a transfer from the revaluation reserve to
retained earnings in respect of the realization of the revaluation reserve. Ignore deferred tax on the
revaluation.
Plant and equipment is depreciated at 15% p.a. using the reducing balance method.
No depreciation has yet been charged on any non-current asset for the year ended 32.3.2079. All
depreciation is charged to cost of sales.
The investments had a fair value of Rs. 15.7 million as at 32.3.2079. There were no acquisition or
disposals of these investments during the year ended 32.3.2079.
The Institute of Chartered Accountants of Nepal
8
Suggested Answers June 2023 Examination (CAP III - Group I)
vi) The balance on current tax represents the under/over provision of the tax liability for the year
ended 31.3.2078. A provision for income tax for the year ended 32.3.2079 of Rs. 7.4 million is
required. At 32.3.2079, Nyatapola had taxable temporary differences of Rs. 5 million, requiring a
provision for deferred tax. Any deferred tax adjustment should be reported in the income
statement. The corporate tax rate of Nyatapola is 20%.
Required:
(8+2=10)
i) Prepare the statement of comprehensive income for Nyatapola Co. Ltd. for the year ended 32nd
Ashadh 2079.
ii) Prepare the statement of changes in equity for Nyatapola Co. Ltd. for the year ended 32nd Ashadh
2079.
b) Given below is Lal’s accounts for deferred taxation in accordance with NAS 12 on Income Taxes.
A taxation rate of 20% was applicable to the year ended Ashad 2078 and as a result of recent
legislation, the taxation rate for the year ended Ashad 2079 has been increased to 30%.
Year ended 31
Year ended 32
Particulars
Ashad 2078
Ashad 2079
Accounting Profit
21,450
27,600
Add: Depreciation for accounting purpose
3,000
To be calculated
Donation
500
300
Amortization of software costs
1,200
To be calculated
26,150
Less: Depreciation for tax purpose
(3,750)
To be calculated
22,400
Tax expenses @20%
4,480
To be calculated
i)
ii)
iii)
iv)
i)
ii)
Summary of non-current assets
Plant
Software
Cost b/f on 1.4.2078
16,000
4,500
Additions year ended Ashad 2079
4,000
Nil
Accumulated Depreciation
b/f on 1.4.2078
9,600
2,700
Charge for year ended Ashad 2079
To be calculated
To be calculated
Accumulated Depreciation –Tax purpose
b/f on 1.4.2078
9,250
See (ii)below
Tax depreciation year to Ashad end 2079
To be calculated
To be calculated
Additional Information
Plant is depreciated at 20% p.a. on straight line for accounting purpose and 25% p.a. on a reducing
balance method for tax purpose.
The software development started in FY 2073/74 and was completed on Ashad end 2076. During
the development period these costs were capitalized. Amortization commenced on 1.4.2076 and
was based on the sum of digits method over five year life. Software costs are allowed in full for
tax purpose as they are incurred.
Donation are not an allowable expense for tax purpose.
Lal’s forecast indicated that future profits will arise that will attract tax liabilities.
Required:
(4+6=10)
Calculate the current tax expenses for the year to Ashad end 2079.
Calculate the liability or asset for deferred tax in the statement of financial position at Ashad end
2078 and 2079 arising in relation to the plant and software of Lal.
The Institute of Chartered Accountants of Nepal
9
Suggested Answers June 2023 Examination (CAP III - Group I)
Answers
2 a) (i) Statement of comprehensive income for the year ended 32nd Ashadh 2079
(Rs. in million)
211.90
(147.30)
64.60
(12.50)
(18.00)
(1.30)
0.40
(1.92)
31.28
(8.30)
22.98
18.00
40.98
Revenue (213.50 – 1.60) (W.N. 1)
Cost of Sales (W.N. 2)
Gross profit
Distribution costs
Administrative expenses (19.00-1.00) (W.N. 4)
Loss on fair value of equity investments (17.00 – 15.70)
Investment income
Finance costs (W.N. 4)
Profit before tax
Income tax expense (7.40+1.10-0.20) (W.N. 5)
Profit for the year
Other comprehensive income
Gain on revaluation of Land and building (W.N. 3)
Total comprehensive Income
(ii) Statement of changes in equity for the year ended 32nd Ashadh 2079
Balance as on 1.4.2078
Total comprehensive income
Transfer to retained earnings
Dividend paid (60.00X32%)
Balance as on 32.3.2079
Share
capital
60.00
60.00
Revaluatio
n Reserve
18.00
(1.00)
17.00
(Rs. in million)
Retained
Total
earnings
Equity
18.50
78.50
22.98
40.98
1.00
(19.20)
(19.20)
23.28
100.28
Working Notes:
W.N. 1 –
Sales made which include revenue for ongoing serving work must have part of the revenue
deferred. The deferred revenue must include the normal profit margin (25%) for the deferred work.
At 32.3.2079, there are two more years of servicing work, thus Rs. 1.6 million
((600,000x2)x100/75) must be treated as deferred revenue, split equally between current and noncurrent liabilities.
W.N. 2 Cost of sales
As per trial balance
Depreciation of building (W.N. 3)
Depreciation of plant (W.N. 3)
W.N. 3 Non current assets
Land and buildings:
The gain on revaluation and carrying amount of the land and building is:
Land
Carrying amount as at 1.4.2078
10.00
136.80
3.00
7.50
147.30
Building
32.00
(40.00 – 8.00)
Revalued amount as at this date
(12.00)
(48.00)
(60.00-12.00)
Gain on revaluation
2.00
16.00
Building depreciation year to 32.3.2079 (48.00/16 years)
3.00
The transfer from the revaluation reserve to retained earnings in respect of ‘excess’ depreciation
(as the revaluation is realized) is Rs. 1 million i.e. (48.00-32.00)/16 years.
The Institute of Chartered Accountants of Nepal
10
Suggested Answers June 2023 Examination (CAP III - Group I)
The carrying amount at 32.3.2079 is Rs. 57 million (60.00 – 3.00)
Plant and equipment:
Carrying amount as at 1.4.2078 (83.70 – 33.70)
50.00
Depreciation at 15% p.a.
(7.50)
Carrying amount as at 32.3.2079
42.50
W.N. 4 Debenture
The finance cost of the debenture is charged at the effective rate of 8% applied to the carrying
amount of the debenture. The issue costs of the loan (Rs. 1 million) should be deducted from the
proceeds of the loan (Rs. 25 million) and not treated as an administrative expense. This gives an
initial carrying amount of Rs. 24 million and a finance cost of Rs. 1.92 million (24 x 8%). The
interest actually paid is Rs. 1.5 million (25 x 6%) and the difference between these amounts of Rs.
420,000 (1.92 – 1.50) is accrued and added to the carrying amount of the debenture.
W.N. 5 Deferred Tax
Provision required as at 32.3.2079 (5 x 20%)
Less: deferred tax b/d
Credit to Income statement
1.00
(1.20)
0.20
2 b) (i) Current tax expenses
Particulars
Accounting profit
Add: Depreciation for accounting purpose (20% of 20,000)
Donation
Amortization of software costs( W.N-1)
Rs.
27,600
4,000
300
900
32,800
(2,688)
30,112
9,034
Less: tax depreciation ( W.N-2)
Tax expenses @ 30%
(ii) Deferred tax Asset/ Liability
As at 31.3.2078
Cost
Depreciation
Net Book Value as on 31.3.2078 (A)
Tax cost
Tax Depreciation
Tax base 31.3.2078 (B)
Temporary difference (A)-(B)
Plant
Rs.
16,000
(9,600)
6,400
Software
Rs.
4,500
(2,700)
1,800
Total
Rs.
20,500
(12,500)
8,200
16,000
(9,250)
6,750
(350)
4,500
(4,500)
Nil
1,800
20,500
(13,750)
6,750
1,450
Therefore, deferred tax liability for the year ended 31.3.2078 is Rs.1, 450@ 20% =Rs.290
Plant
Software
Total
As at 32.3.2079
Rs.
Rs.
Rs.
Cost
20,000
4,500
24,500
Accumulated Depreciation – Accounting
(13,600)
(3,600)
(17,200)
purpose
(9,600+4,000)
(2,700+900)
Net Book Value as on 32.3.2079 (A)
6,400
900
7,300
Tax cost
The Institute of Chartered Accountants of Nepal
20,000
4,500
24,500
11
Suggested Answers June 2023 Examination (CAP III - Group I)
Accumulated Depreciation- Tax purpose
Tax base 32.3.2079 (B)
(11,938)
(9,250+2,688)
8,062
(4,500)
(16,438)
Nil
8,062
(1,662)
900
(762)
Temporary difference (A)-(B)
Therefore, deferred tax asset for the year ended 32.3.2079 = Rs.762 @ 30%= Rs.228.60. This
should be recognized because a future tax liability is expected to arise, against which it can be
offset.
Working Notes
a) Amortization of development cost of software
Sum of digits= (5+4+3+2+1)=15
Cost= 4,500
Amortization for year ended 32.3.2079 (3rd Year)=4,500*3/15= Rs.900
b) Tax depreciation on Plant for the year ended 32.3.2079
Particulars
On original asset 25%* (16,000-9,250)
On addition : 25% * 4,000
Total
Rs.
1,688
1,000
2,688
3.
a) During FY 2078/79, Ratoma Limited discovered that some products that had been sold during FY
2077/78 were incorrectly included in the inventory at Rs. 6,500.
Ratoma Limited’s accounting records for FY 2078/79 show sales of Rs. 104,000, cost of goods
sold of Rs. 86,500 (including Rs. 6,500 for the error in opening inventory), and income taxes of
Rs. 5,250.
In FY 2077/78, Ratoma Limited reported:
Sales
Cost of goods sold
Profit before income taxes
Income taxes
Profit
Basic and diluted EPS
Rs.
73,500
(53,500)
20,000
(6,000)
14,000
2.8
In FY 2077/78 opening retained earnings was Rs. 20,000 and closing retained earnings was Rs.
34,000. Ratoma Limited’s income tax rate was 30% for FY 2078/79 and FY 2077/78. It had no
other income or expenses.
Ratoma Limited had Rs. 50,000 (5,000 shares of Rs. 10 each) share capital throughout, and no
other components of equity except for retained earnings.
Required: (3.5+3.5+3=10)
Show how the above will be treated /accounted in Ratoma Limited’s
(i) Statement of Profit and Loss,
(ii) Statement of Changes in Equity and
(iii) Notes to accounts, wherever required for current period and earlier period(s) as per relevant
Accounting Standard.
The Institute of Chartered Accountants of Nepal
12
Suggested Answers June 2023 Examination (CAP III - Group I)
b) The Directors of M company seek advice on how they must account for the following transactions
in preparing financial statements for the year to Ashad end 2079:
i) On 1 Shrawan 2077, M had issued 2 million 10% Rs. 25 convertible loan note at a premium of
2%. Issue costs amounted to Rs. 250,000. Loan note holders are entitled to convert each note into
5 Rs. 2.5 equity shares at any time starting from Ashad end 2079. Any note remaining unconverted
will be redeemed at par on Ashad end 2081. The loan notes give periodic interest payments on
Ashad end each year over their term to maturity. The original effective interest rate on the liability
component of the loan notes has been correctlycomputed as 11.67%. M was in a position to issue
similar notes but without conversion rights at a market interest rate of 11.5%.
ii) On 1 Magh 2078, M made another investment by buying 3 million Rs. 2.5 equity sharesin S
company at a price (fair value) of Rs. 11.25 per share. Transaction costs paid by M on 1 Magh
2078 amounted to Rs. 200,000. Each equity share of S was trading at a priceof Rs. 11 on Ashad
end 2079. M received a dividend of Rs. 0.5 per share from these shares in Ashad 2079. M has not
made any election with regard to accounting for these shares.
Required:
(6+4=10)
Explain, with necessary calculation, to the Directors of M company how the above transactions
must be accounted in the financial statements of M for the year to Ashad end 2079.
Answer
3 a) (i) Extract from the Statement of Profit and Loss of Ratoma Ltd.
Particulars
FY 2078/79
Rs.
104,000
(80,000)
24,000
(7,200)
16,800
3.36
Sales
Cost of goods sold
Profit before income taxes
Income tax @ 30%
Profit after tax
Basic and diluted EPS
(Restated)
FY 2077/78
Rs.
73,500
(60,000)
13,500
(4,050)
9,450
1.89
3 a) (ii) Statement of Changes in Equity of Ratoma Ltd.
Balance at 31st Asadh, 2077
Profit for the year ended 31st Asadh, 2078 as
restated
Balance at 31st Asadh, 2078
Profit for the year ended 32nd Asadh, 2079
Balance at 32nd Asadh, 2079
Share capital Retained Earnings
50,000
20,000
Total
70,000
9,450
9,450
29,450
16,800
46,250
79,450
16,800
96,250
50,000
50,000
3 a) (iii) Extract from the Notes to accounts of Ratoma Ltd.
Some products that had been sold in FY 2077/78 were incorrectly included in inventory at 31st
Asadh, 2078 at Rs. 6,500. The financial statements of 2077/78 have been restated to correct this
error. The effect of the restatement on those financial statements is summarized below:
Effect on FY 2077/78
(Increase) in cost of goods sold
(6,500)
Decrease in income tax expenses (6,000 – 4,050)
1,950
(Decrease) in profit (14,000 – 9,450)
(4,550)
The Institute of Chartered Accountants of Nepal
13
Suggested Answers June 2023 Examination (CAP III - Group I)
(Decrease) in basic and diluted EPS (2.8 – 1.89)
(0.91)
(Decrease) in inventory
(6,500)
Decrease in income tax payable
1,950
(Decrease) in equity
(4,550)
There is no effect on the balance sheet at the beginning of the preceding period i.e. 1st Srawan,
2077.
3 b) i) M must split the loan notes into the liability component and the equity component at initial
recognition (1.04.2077) as follows (NAS 32):
Particulars
Gross issue proceeds ( 2 million X Rs. 25 X 1.02)
Less: Liability component (PV of loan note cash flows to Maturity at market
rate of non-convertible debt):
Principal (2X25X1.115^-4)
Interest (1.1^-1+1.115^-2+1.115^-3+1.115^-4) = 3.070X10%XRs. 25X2
million
Rs. Million
51
32.35
15.35
(47.70)
Equity Component Share Options
Net Issue proceeds (51 - 0.25)
Net liability component (47.7/51 X 50.75)
Net Equity Component (3.3/51 X 50.75)
50.75
47.47
3.28
Subsequently, measure the liability component at amortised cost as follows (NFRS 9):
Particulars
Initial amount at 1.04.2077
Finance cost y/e Ashad 2078 (47.47X11.67%)
Interest paid at Ashad end 2078 (Rs. 25X10%X2 million)
Rs. Million
47.47
5.54
(5)
Carrying amount at Ashad end 2079
Finance cost to report in SPL for y/e Ashad 2079 (48.01X11.67%)
Interest paid at Ashad end 2079 Rs. (25X10%X2 million)
48.01
5.60
(5)
Carrying amount to report in SFP at Ashad end 2079 (as non-current liability)
48.61
3 b) ii) The financial asset (investment) is an equity instrument asset for which there is irrevocable election
to designate as an FVTOCI item. The default classification of FVTPL will therefore apply. The asset
will initially be measured at FV without including transaction costs. Transaction costs will be
expensed in P/L for the period the contract is entered (in this case y/e Ashad 2079). Subsequently,
the asset must be remeasured to FV each reporting date with gains/losses reported in P/L. dividends
received will also be reported in P/L. The following amounts are applicable for the y/e Ashad 2079:
Particulars
Initial carrying amount at Magh 1, 2078 (FV) (11.25X3 million)
Remeasurement loss to report in P/L for the y/e Ashad 2079 bal. fig.)
Carrying amount to report in SFP at Ashad end 2079 (FV) (11X3 million)
Net investment income to report in P/L for y/e Ashad 2079:
Transaction costs
Dividend income (0.5X3 million)
Remeasurement loss
The Institute of Chartered Accountants of Nepal
Rs. Million
33.75
(0.75)
33.00
(0.2)
1.5
(0.75)
0.55
14
Suggested Answers June 2023 Examination (CAP III - Group I)
4.
a)
b)
c)
d)
e)
Write short note/ answer on the following:
‘Close out’ in securities trading
Plain vanilla swap
Explain opportunity cost in the context of human resource accounting.
Capital expenditure may not be represented by assets. Explain.
Embedded derivative as per NFRS
(5×3=15)
Answer
4 a) ‘Close out’ in securities trading
In case of purchases on behalf of clients, member brokers shall be a at liberty to close out the
transactions by selling the securities, in case the client fails to make the full payment to the member
broker for the execution of the contract within two days of contract note having been delivered for
cash and seven days for specified shares or before pay in day (as fixed by stock exchange for the
concerned settlement period), whichever is earlier; unless the client already has an equivalent
credit with the member. The loss incurred in this regard, if any, will be met from the margin money
of that client. In case of sales on behalf of clients, member broker shall be at liberty to close out
the contract by effecting purchases if the client fails to deliver the securities sold with valid transfer
documents within two days of the contract note having been delivered or before delivery day (as
fixed by Nepal Stock Exchange for the concerned settlement period from time to time), whichever
is earlier. Loss on the transaction, if any, will be deductible from the margin money of that client.
4 b) Plain vanilla swap
A plain vanilla swap is one of the simplest financial instruments contracted in the over-the-counter
market between two private parties, both of which are usually firms or financial institutions. There
are several types of plain vanilla swaps, including an interest rate swap, commodity swap, and a
foreign currency swap. The term plain vanilla swap is most commonly used to describe an interest
rate swap in which a floating interest rate is exchanged for a fixed rate or vice versa.
A plain vanilla interest rate swap is often done to hedge a floating rate exposure, although it can
also be done to take advantage of a declining rate environment by moving from a fixed to a floating
rate. Both legs of the swap are denominated in the same currency, and interest payments are netted.
The notional principal does not change during the life of the swap, and there are no embedded
options.
In a plain vanilla interest rate swap, Company A and Company B choose a maturity, principal
amount, currency, fixed interest rate, floating interest rate index, and rate reset and payment dates.
On the specified payment dates for the life of the swap, Company A pays Company B an amount
of interest calculated by applying the fixed rate to the principal amount, and Company B pays
Company A the amount derived from applying the floating interest rate to the principal amount.
Only the netted difference between the interest payments changes hands.
4 c) It is one of the Economic value models used for measurement and valuation of Human assets. As
per this model, opportunity cost is the value of an employee in his alternative use. This opportunity
cost is used as a basis for estimating the value of Human resources. Opportunity cost value may
be established by competitive bidding within the firm so that in effect, Managers must bid for any
scarce employee. A Human asset will have a value only if it is a scarce resource, that is, when its
employment in one division denies it to another division. This method excludes employees of the
type of which can be readily hired from outside the firm. Also, it is in very rare cases that managers
would like to bid for an employee.
4 d) Capital expenditures (CapEx) are investments made by a company in long-term assets, such as
property, plant, and equipment, with the expectation of generating future benefits. While capital
expenditures are typically represented by assets on a company's balance sheet, it is possible for
some capital expenditures to not be represented by assets.
The Institute of Chartered Accountants of Nepal
15
Suggested Answers June 2023 Examination (CAP III - Group I)
This can happen when a company makes an expenditure that does not meet the criteria for
capitalization as an asset under accounting standards. For example, if a company spends money
on research and development, the costs associated with this expenditure may not be capitalized as
an asset because the future benefits of the research and development are uncertain.
In addition, some capital expenditures may be expensed immediately rather than being capitalized
as an asset. For example, if a company spends money on repairs and maintenance to an existing
asset, the cost of these expenditures may be expensed immediately rather than being capitalized as
an improvement to the asset.
Furthermore, there may be situations where a company invests in a long-term asset that generates
future benefits, but these benefits are not expected to be sufficient to recover the full cost of the
asset. In such cases, the asset may be impaired and its carrying value reduced, resulting in a loss
on the company's income statement.
In summary, while capital expenditures are typically represented by assets on a company's balance
sheet, there are situations where capital expenditures may not be represented by assets, such as
when the expenditures do not meet the criteria for capitalization, are expensed immediately, or
result in an impairment loss.
4 e) Embedded Derivative as per NFRS
An embedded derivative is a component of a hybrid contract that also includes a non-derivative
host with the effect that some of the cash flows of the combined instrument vary in a way similar
to a stand alone derivative. An embedded derivative causes some or all of the cash flows that
otherwise would be required by the contact to be modified according to a specified interest rate,
financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit
rating or credit index, or other variable, provided in the case of a non financial variable that the
variable is not specified to a party to the contract. A derivative that is attached to a financial
instrument but is contractually transferable independently of that instrument, or has a different
counterparty, is not an embedded derivative, but a separate financial instrument.
5.
a) Paragraph 1.3.32 of Part 1 of Nepal Public Sector Accounting Standards requires that the financial
statements provide information that meets a number of qualitative characteristics. Appendix 4 of
the standard summarizes the qualitative characteristics of financial reporting. Explain the four
principal qualitative characteristics of financial reporting.
8
b) Following data relate to Galaxy Ltd.:
Particulars
Current Assets:
Inventory
Trade receivables
Cash & cash equivalents
Current Liabilities:
Trade payables
Provision for tax
Summary of Statement of Profit and Loss
Sales
Less: Cost of sales
Other Income
Interest income
Fire insurance claim received
Depreciation
The Institute of Chartered Accountants of Nepal
32.3.2079 (Rs.)
31.3.2078 (Rs.)
120,000
205,000
35,000
165,000
188,000
20,500
195,000
48,000
215,000
65,000
Rs.
8,550,000
(5,600,000)
20,000
110,000
Rs.
2,950,000
130,000
3,080,000
(24,000)
16
Suggested Answers June 2023 Examination (CAP III - Group I)
Administrative and selling expenses
(1,540,000)
Interest expenses
(36,000)
Foreign exchange loss
(18,000)
(1,618,000)
Net Profit before tax and extraordinary income
1,462,000
Income Tax
(95,000)
Net Profit
1,367,000
Additional information:
i) Trade receivables and Trade payables include amounts relating to credit sale and credit purchase
only.
ii) Foreign exchange loss represents increment in liability of a long-term borrowing due to exchange
rate fluctuation between acquisition date and balance sheet date.
Required:
7
Prepare statement of cash flows showing cash generated from Operating Activities using direct
method as per NFRS.
Answer:
5 a) The four principal qualitative characteristics are understandability, relevance, reliability and
comparability.
i) Understandability
Information is understandable when users might reasonably be expected to comprehend its
meaning. For this purpose, users are assumed to have a reasonable knowledge of the entity's
activities and the environment in which it operates, and to be willing to study the information.
Information about complex matters should not be excluded from the financial statements
merely on the grounds that it may be too difficult for certain users to understand.
ii) Relevance
Information is relevant to users if it can be used to assist in evaluating past, present or future
events or in confirming, or correcting, past evaluations. In order to be relevant, information
must also be timely.
Materiality
The relevance of information is affected by its nature and materiality. Information is material if its
omission or misstatement could influence the decisions of users or assessments made on the
basis of the financial statement. Materiality depends o n the nature or size of t he item or
error judged in t he part icular circumstances of its omission or misstatement. Thus, materiality
provides a threshold or cut-off po int rather than being a primary qualitative characteristic
which information must have if it is to be useful.
iii) Reliability
Reliable information is free from material error and bias, and can be depended on by users to
represent faithfully that which it purports to represent or could reasonably be expected to
represent.
Faithful Representation
For information to represent faithfully transactions and other events, it should be presented in
accordance with the substance of the transactions and other events, and not merely their legal
form.
Substance Over Form
If information is to represent faithfully the transactions and other events that it purports to
represent, it is necessary that they are accounted for and presented in accordance with their
substance and economic reality and not merely their legal form. The substance of
transactions or other events is not always consistent with their legal form.
The Institute of Chartered Accountants of Nepal
17
Suggested Answers June 2023 Examination (CAP III - Group I)
Neutrality
Information is neutral if it is free from bias. Financial statements are not neutral if the
information they contain has been selected or presented in a manner designed to influence the
making of a decision or judgment in order to achieve a predetermined result or outcome.
Prudence
Prudence is the inclusion of a degree of caution in the exercise of the judgments needed in making
the estimates required under conditions of uncertainty, such that assets or revenue are not
overstated and liabilities or expenses are not understated.
Completeness
The information in financial statements should be complete within the bounds of materiality
and cost.
iv) Comparability
Information in financial statements is comparable when users are able to identify similarities
and differences between that information and information in other reports.
Comparability applies to the:
•
•
comparison of financial statements of different entities; and
comparison of the financial statements of the same entity over periods of time.
An important implication of the characteristic of comparability is that users need to be
informed of the policies employed in the preparation of financial statements, changes to those
policies and the effects of those changes.
Because users wish to compare the performance of an entity over time, it is important
that the financial statements show corresponding informatio n for preceding periods.
5 b) Statement Cash Flows from operating activities of Galaxy Ltd. for the year ended 32
Ashad 2079 (Direct Method)
Particulars
Rs.
Rs.
Operating Activities:
Cash received from Trade receivables (W.N. 3)
8,533,000
Less: Cash paid to Suppliers (W.N.2)
5,575,000
Payment for Administration and Selling expenses
1,540,000
Payment for Income Tax (W.N.4)
112,000 (7,227,000)
1,306,000
Adjustment for exceptional items (fire insurance claim)
110,000
Net cash generated from operating activities
1,416,000
Working Notes:
1. Calculation of total purchases
Cost of Sales = Opening stock + Purchases – Closing Stock
Rs. 5,600,000 = Rs. 165,000 + Purchases – Rs.120,000
Purchases = Rs.5,555,000
2. Calculation of cash paid to Suppliers
Particulars
To Bank A/c (balancing
figure)
To Balance c/d
Trade Payables
Rs.
Particulars
5,575,000 By Balance b/d
195,000
5,770,000
The Institute of Chartered Accountants of Nepal
By Purchases (W.N. 1)
Rs.
215,000
5,555,000
5,770,000
18
Suggested Answers June 2023 Examination (CAP III - Group I)
3. Calculation of cash received from Customers
Trade Receivables
Particulars
Rs.
Particulars
To Balance b/d
188,000 By Bank A/c (balancing
figure)
To Sales
8,550,000 By Balance c/d
8,738,000
4. Calculation of tax paid during the year in cash
Provision for tax
Particulars
Rs.
Particulars
To Bank A/c (balancing
112,000 By Balance c/d
figure)
To Balance c/d
48,000 By Profit & Loss
Account
160,000
6.
a)
Rs.
8,533,000
205,000
8,738,000
Rs.
65,000
95,000
160,000
An entity enters into a contract for the sale of Product A for Rs. 10,000. As part of the contract,
the entity gives the customer a 40% discount voucher for any future purchases up to Rs. 8,000 in
the next 30 days. The entity intends to offer a 10% discount on all sales during the next 30 days
as a part of seasonal promotion. The 10% discount cannot be used in addition to the 40% discount
voucher.
The entity believes that there is 75% likelihood that a customer will redeem the voucher and, on
an average, a customer will purchase Rs. 5,000 of additional products.
Required:
5
Determine, for each performance obligations of the entity, the stand-alone selling price and
allocated transaction price. State when the revenue is recognized.
b) Z Ltd. operates a defined benefit scheme which at Ashad end 2078 was in deficit by Rs. 240
million. Details for the year ended Ashad 2079 are as follows:
Rs. in million
Current service cost
110
Cash contribution to the scheme
200
Benefits paid in the year
160
Net loss on curtailment
22
Gain on remeasurement of liability at Ashad end 2079
18
The rate of interest applicable to corporate bonds was 5% and 8% at Ashad end 2078 and Ashad
end 2079 respectively. The cash contributions for the scheme have been correctly accounted for in
the financial statements for the year ended Ashad end 2079. This is the only adjustment that has
been made in respect of the scheme.
Required:
5
Recommend the correct accounting treatment of the above transactions in the financial statements
of Z Ltd. for the year ended Ashad end 2079, and show the financial statements extracts in
accordance with NAS 19: Employee Benefits.
Answer
6 a) Since all customers will receive a 10% discount on purchases during the next 30 days, the only
additional discount that provides the customer with a material right is the incremental discount of
30% on the products purchased. The entity accounts for the promise to provide the incremental
discount as a separate performance obligation in the contract for the sale of Product A.
The Institute of Chartered Accountants of Nepal
19
Suggested Answers June 2023 Examination (CAP III - Group I)
The entity believes there is 75% likelihood that a customer will redeem the voucher and on an
average a customer will purchase Rs. 5,000 of additional products. Consequently, the entity’s
estimated stand-alone selling price of the discount voucher is Rs. 1,125 (Rs. 5,000 average
purchase price of additional products x 30% incremental discount x 75% likelihood of exercising
the option). The stand-alone selling prices of Product A and the discount voucher and the resulting
allocation of Rs. 10,000 transaction price are as follows:
Performance obligations
Product A
Discount voucher
Total
Stand-alone selling price (Rs.)
10,000
1,125
11,125
Performance obligations
Product A
Discount voucher
[(Rs. 10,000 ÷ Rs. 11,125) ×
Rs. 10,000]
[(Rs. 1,125 ÷ Rs. 11,125) ×
Rs. 10,000]
Allocated transaction
price (nearest Rs.)
8,989
Total
1,011
10,000
The entity allocates Rs. 8,989 to Product A and recognizes revenue for Product A when control is
transferred. The entity allocates Rs. 1,011 to the discount voucher and recognizes revenue for the
voucher when the customer redeems it for goods or services or when it expires.
6 b) Pension scheme
The defined benefit scheme for the year should have been recorded as follows:
Particulars
Net obligation at Ashad end 2078
Cash contribution into the scheme
Net finance cost for the year (Rs. 240 million x 5%)
Current service cost
Loss on curtailment
Gain on remeasurement
Net liability at Ashad end 2079
Rs. million
240
(200)
12
110
22
(18)
166
The benefits paid do not affect the net liability for the year. Since only the cash contributions have
been recorded for the year, the net obligation should be increased byRs. 126 million (Rs. 166
million – Rs. 40 million (240 -200). Rs. 144 million should be expensed to profit or loss being the
service cost component (current and curtailment) plus the interest charge. Rs. 18 million should
be credited to other components of equity being the gain on remeasurement.
Statement of profit or loss extract for the year ended (Extract)
Rs. Million
Defined benefit scheme (Rs. 110 + Rs. 12 + Rs. 22)
(144)
Statement of financial position extract
Rs. Million
Equity and liability:
OCI – remeasurement component
18
Non-current liabilities:
Increased in defined benefit obligation
126
The Institute of Chartered Accountants of Nepal
20
Suggested Answers June 2023 Examination (CAP III - Group I)
Paper 2 – Advanced Financial Management
Attempt all questions. Working notes should form part of the answers. Make assumptions
wherever necessary.
1. ABC Ltd . has been offered a contract to manufacture three special communication systems
machine for a Kathmandu Municipality for Rs. 35,00,000. Manufacture is to take a total of three
years at the rate of one machine per year. Payment will be made as follows:
At the start of manufacture
At the end of first year
Upon completion
Rs. 20,00,000
Rs. 6,00,000
Rs. 9,00,000
A special equipment is required to do the job. The equipment costs Rs. 7,00,000. It is to be installed
and paid for immediately. Upon completion of the work, it can be sold for Rs. 1,75,000.
The management accounting department of ABC Ltd. has prepared the following estimates of
other resource requirements:
a) Materials
Quantity
Available in
Original
Current purchase
Type
(tons)
stock now (tons)
cost/ton (Rs.)
price per ton (Rs.)
120
60
2,800
6,000
MM-1
60
20
2,000
5,000
MM-2
MM-1 is regularly used by the company in its different contracts. MM-2 is a special type of
materials. If the stock is not used in the contract under consideration, it will have to be disposed
of immediately at a cost of Rs. 500 per ton. Materials for the contract are to be purchased and paid
for annually in advance. Material prices are expected to increase at an annual compound rate of
10% owing to inflation and other factors.
b) Labour
Estimated labour requirements:
Skilled
21,000 hours
Unskilled
27,000 hours
Current wage rates are Rs. 50 per hour for skilled labour and Rs. 20 per hour for unskilled labour.
Wages are expected to increase at an annual compound rate of 8%.
c) Overheads
The company allocates overheads to contracts at a rate of Rs. 65 per skilled labour hour, computed
as follows:
Fixed overhead (including depreciation of Rs. 20) Rs. 50
Variable overhead
Rs. 15
Rs. 65
Both fixed and variable overhead expenses are expected to increase at an annual compound rate
of 7%.
The current price is likely to hold for next 12 months. All cash flows (other than those mentioned
above) arise on the last date of the year to which they relate.
The company needs a minimum return of 15% on its contracts.
Calculate the project’s net present value and state whether ABC Ltd should undertake manufacture
of the special communication system machines. Show all supporting calculations. Ignore taxation.
20
The Institute of Chartered Accountants of Nepal
21
Suggested Answers June 2023 Examination (CAP III - Group I)
Answer
1)
Materials Utilization
MM-1
Year-1
40*Rs 6,000
Year-2
40*Rs 6,000(1.1)
Year-3
40*Rs 6,000(1.1)^2
Rs.
240,000
264,000
290,400
*
**
MM-2
Year-1
Year-2
20*Rs 500
20*Rs 50,00(1.1)
-10,000
110,000
Year-3
20*Rs 5,000(1.1)^2
121,000
*40 tons used from existing stock at current replacement costs
** Utilization of 20 tons of stock less saving of disposal costs.
Labour cost
Year-1
Skilled
Unskilled
Year-2
Skilled
Unskilled
Year-3
Skilled
Unskilled
Rs.
7,000*Rs 50
9,000*Rs 20
350,000
180,000
7,000*Rs 50*1.08)
9,000*Rs 20*(1.08)
378,000
194,400
7,000*Rs 50*1.08)^2
9,000*Rs
205*(1.08)^2
408,240
209,952
Variable Overheads
Year-1
7,000*Rs 15
105,000
Year-2
7,000*Rs 15*1.07
112,350
7,000*Rs
Year-3
120,215
15*1.07^2
Calculation of Net Present Value of the Project
Year
0
1
2
Cash Inflow
Project Revenues
2,000,000
600,000
Cash Outflow
Special Equipment
700,000
Materials
MM-1
240,000
264,000
290,400
MM-2
-10,000
110,000
121,000
Labour
Skilled
350,000
378,000
Unskilled
180,000
194,400
Variable Overhead
105,000
112,350
Total
930,000
1,009,000
1,096,150
Net Cash Inflow
1,070,000
-409,000 -1,096,150
PV Factor at 15%
1
0.869
0.756
PV of Cashflow
1,070,000
-355,421
-828,689
Net present value (Rs.)
107,032
Suggestion: Since the NPV of the project is positive, it is suggested to take
up the project.
The Institute of Chartered Accountants of Nepal
3
900,000
-175,000
408,240
209,952
120,214.5
563,406.5
336,593.5
0.657
221,142
22
Suggested Answers June 2023 Examination (CAP III - Group I)
Note
Fixed OH: Since allocated OH are irrelevant, it is ignored while calculating the cost.
Depreciation: Since tax rate should be ignored, depreciation not taken into consideration.
2.
a) The following information is provided relating to the acquiring company Parrot Ltd. and the target
Company Hen Ltd.
Parrot Ltd.
Hen Ltd.
No. of shares (F.V. Rs. 10 each)
10.00 Lakhs
7.5 Lakhs
Market capitalization
500.00 Lakhs 750.00 Lakhs
P/E ratio (times)
10.00
5.00
Reserves and Surplus
300.00 Lakhs 165.00 Lakhs
Promoter's Holding (No. of shares) 4.75 Lakhs
5.00 Lakhs
Board of Directors of both the Companies have decided to give a fair deal to the shareholders and
accordingly for swap ratio the weights are decided as 40%, 25% and 35% respectively for Earning.
Book Value and Market Price of share of each company.
10
i) Calculate the swap ratio and also calculate Promoter's holding % after acquisition.
ii) What is the EPS of Parrot Ltd. after acquisition of Hen Ltd.?
iii) What is the expected market price per share and market capitalization of Parrot Ltd. after
acquisition, assuming P/E ratio of Firm Parrot Ltd. remains unchanged.
iv) Calculate free float market capitalization of the merged firm.
b) Ram has Rs. 300,000 to invest in the capital market. He considers stock of Shivam Cements Ltd.
to be a safe bet. Shivam is currently traded at Rs. 200. Industry analysts opine that Shivam will
either remain at Rs. 200 or go upto Rs. 250 in 6 months time, considering the performance of the
industry. Ram views this as an opportunity and has decided to invest Rs. 300,000 to buy shares of
Shivam and earn a maximum of upto 25% which is more than the risk free rate.
His friend, Hari, also has Rs. 300,000 to invest. However, he considers Ram’s proposition to be
bit risky. Having some knowledge on options, Hari intends to buy calls and invest at risk free rate
of 12%. 6 months option carries an exercise price of Rs. 220.
10
What should be the price of the call, for Hari’s proposition to yield the same result 6 months later
(i.e. a minimum net worth of Rs. 300,000)? What How many calls should Hari buy?
Who would be better off at the end of 6 months, if the actual spot price is Rs. 180, Rs. 250 and Rs.
300?
(𝑒 0.06 = 1.0618)
Answer
2 a) Swap Ratio
Market capitalization
No. of shares
Market Price per share
P/E ratio
EPS
Profit
Share capital
Reserves and surplus
Total
Book Value per share
Parrot Ltd.
500 lakhs
10 lakhs
Rs. 50
10
Rs. 5
Rs. 50 lakh
Rs. 100 lakh
Rs. 300 lakh
Rs. 400 lakh
Rs. 40
Hen Ltd.
750 lakhs
7.5 lakhs
Rs. 100
5
Rs. 20
Rs. 150 lakh
Rs. 75 lakh
165 lakh
Rs. 240 lakh
Rs. 32
The Institute of Chartered Accountants of Nepal
23
Suggested Answers June 2023 Examination (CAP III - Group I)
(i) Calculation of Swap Ratio
EPS
Book Value
Market price
1:4 i.e.
1:0.8 i.e.
1:2 i.e.
4.0 × 40%
1.6
0.8 × 25%
0.2
2.0 × 35%
0.7
Total
2.5
Swap ratio is for every one share of Hen Ltd. is issue 2.5 shares of Parrot Ltd. Hence, total no. of
shares to be issued 7.5 lakh × 2.5 = 18.75 lakh shares
Promoter's holding = 4.75 lakh shares + (5× 2.5 = 12.5 lakh shares) = 17.25 lakh i.e.
Promoter's holding % is (17.25 lakh/28.75 lakh) × 100 = 60%
Calculation of EPS, Market price, Market capitalization and free float market capitalization.
(ii) Total No. of Shares
Total capital
EPS
10 lakh + 18.75 lakh = 28.75 lakh
100 lakh + 187.5 lakh = Rs. 287.5 lakh
Total Profit
No.of Share
=
50 Lakh+150 Lakh
28.75 Lakh
=
200
28.75
= Rs. 6.956
(iii) Expected market price
= EPS (6.956) × P/E (10) = Rs. 69.56
= Rs. 69.56 per share × 28.75 lakh shares
= Rs. 1,999.85 lakh
(iv) Free float of market capitalization
= Rs. 69.56 per share × (28.75 lakh × 40%)
= Rs. 799.94 lakh
2 b)
Current stock price (SP0)
Rs. 200
Expected future stock price (SP1)
Rs. 200
Expected future stock price (SP2)
Rs. 250
Exercise price (EP)
Rs. 220
Calculation of Option Delta
Particulars
𝐒𝐏𝟏
Future Spot Price
200
Position on expiry date (in comparison with EP of
Out of money
Rs. 220)
Action on expiry date
Lapse
Value of Option on expiry (Future spot price less
Rs. 0
EP)
Option Delta = Change in value of Option/ Change in future spot price
= (30 – 0) / (250 – 200) = 30/ 50 = 0.60
𝐒𝐏𝟐
250
In the money
Exercise
Rs. 30 (250-220)
Calculation of amount to be invested at risk free rate
i.e. Present value of lower band of future spot price (SP1) = Rs. 200 × 𝑒 −𝑟𝑡 = 200/ 𝑒 −0.12∗0.5
= 200/ 𝑒 0.06 = 200/ 1.0618 = Rs. 188.36
Value (price) of call = Option Delta × (Current stock price – Amount to be invested at risk free
rate)
= 0.60 × (200 – 188.36) = 0.60 × 11.64 = Rs. 6.98
The Institute of Chartered Accountants of Nepal
24
Suggested Answers June 2023 Examination (CAP III - Group I)
Number of calls to be bought by Hari
= (1/ Options Delta) per share of Shivam
= 1/ 0.60 or 1.667 per share of Shivam
= 5 calls for every 3 shares of Shivam
Calculation of number of calls and investment in risk free rate by Hari
Particulars
Outflow towards purchase of calls
5 calls × Rs. 6.98 per call
Outflow towards investment
3 shares of Shivam × Rs. 188.36
Total amount per set of 5 calls and risk free investment
Total number of sets invested
300,000/600
Total number of calls to be purchased 500 sets × 5 calls per set
Total amount invested in risk free rate 500 sets × Rs. 565.10
Now,
Evaluation of position of Ram at the end of 6 months
Number of shares bought by Rs. 300,000 = 300,000/ 200 = 1,500 shares
Particulars
Case A
Case B
Closing
net Rs. 270,000 (1500 Rs. 375,000 (1500
worth
shares × Rs. 180)
shares × Rs. 250)
Opening
net Rs. 300,000
Rs. 300,000
worth
Change
in Rs.30,000 decrease
Rs. 75,000 increase
amount
Change in %
10%
25%
Inference
Erosion in wealth
Increase in wealth
Value
Rs. 34.90
Rs. 565.10
Rs. 600
500 sets
2500 calls
Rs. 282,550
Case C
Rs. 450,000 (1500
shares × Rs. 300)
Rs. 300,000
Rs. 150,000 increase
50%
Increase in wealth
Evaluation of position of Hari at the end of 6 months
Particulars
Case A
Case B
Actual closing price per share Rs. 180
Rs. 250
Exercise price of Option
Rs. 220
Rs. 220
Position
Out of money
In the money
Action
Lapse
Exercise
Value of call before expiry
Rs. 0
Rs. 30 (250-220)
No of calls
2500
2500
Total value of calls at the end Rs. 0
Rs. 75,000
(A)
(2500×30)
Maturity value of investment
Rs. 300,000
Rs. 300,000
𝑟𝑡
0.06
(282,550
(Investment × 𝑒 or × 𝑒 ) (282,550
×1.0618)
×1.0618)
(B)
Closing net worth (A+B)
Rs. 300,000
Rs. 375,000
Opening net worth
Rs. 300,000
Rs. 300,000
Change in amount
Rs.0
Rs.
75,000
increase
Change in %
0%
25%
Inference
No change in Increase in wealth
wealth
Case C
Rs. 300
Rs. 220
In the money
Exercise
Rs. 80 (300-220)
2500
Rs. 200,000
(2500×80)
Rs. 300,000
(282,550
×1.0618)
Rs. 500,000
Rs. 300,000
Rs.
200,000
increase
66.67%
Increase in wealth
Therefore, Hari will be better off when actual market price of Shivam is either Rs. 180 or Rs. 300
and is on equal position to Ram when actual market price is Rs. 250. And risk is neutralized in
case of Hari by use of Options.
The Institute of Chartered Accountants of Nepal
25
Suggested Answers June 2023 Examination (CAP III - Group I)
3.
a) The following information was extracted from the books of Ms Mahakali Ltd:
Face Value of Bond
Rs. 1000
Coupon Interest Rate
9.50%
Time Period of Maturity Remaining 4 years
Interest Payment
Annual , at the end of the year
Principal Repayment
At the end of the Bond maturity
Conversion Ratio
28
(Number of shares per Bond)
Current Market Price per Share
60
Market Price of Convertible Bond
1775
It can issue plain bonds without conversion option at an interest rate of 11.5%
Year
T1
T2
T3
T4
PVIF @ 11.5% 0.897 0.804 0.721 0.647
Based on the above data, you are requested to calculate:
i)
ii)
iii)
iv)
v)
10
Straight value of bonds
Conversion Value of Bond
Conversion Premium
Percentage of Down Turn Risk
Conversion Parity Price
b) Mr. John recently attended an investor's meet in Kathmandu wherein he came across some brokers
who advised him to measure the systematic risk of shares using beta before finally investing money
in the same. Mr. Don picked the old financial newspapers and prepared the following table
containing the data of equity share prices of Lalpa Microfinance, Shrestha Hydropower and Nepal
Stock Exchange (NEPSE), Collected on the last trading day of English Month for the last thirteen
months.
Share Price of
Share Price of
Date
NEPSE
Lalpa Microfinance (Rs.) Shrestha Hydropower (Rs.)
Feb 28
115
28
976
March 29
125
26
985
April 30
140
21
991
May 31
167
20
1035
June 28
189
20
1049
July 31
177
15
989
Aug 30
142
19
977
Sep 30
121
21
965
Oct 31
102
32
956
Nov 29
94
29
951
Dec 31
102
31
957
Jan 31
126
28
962
Feb 28
149
39
975
Calculate Beta for Lalpa Microfinance and Shrestha Hydropower. Use NEPSE Data as a proxy for
market portfolio and comment.
10
The Institute of Chartered Accountants of Nepal
26
Suggested Answers June 2023 Examination (CAP III - Group I)
Answer
3 a)
i)
Straight Value of Bond=
=
Rs 95*.897+Rs 95*.804+Rs95*0.721+Rs1095*0.647
=
Rs 85.22+Rs 76.38+Rs68.50+708.47
=
Rs 938.56
ii)
Conversion rate is 28 shares per bond. Market price of share Rs 60
Conversion Value 28*Rs 60=Rs 1680
iii)
Conversion Premium
=
(Market Price-Conversion Value/Conversion Value)*100
=
(1775-1680)/1680*100
=
5.65%
Alternatively , it can also be computed on Per Share/Bond basis as follows:
(1775-1680)/28=Rs 3.39 per share
or
1775-60*28
=
95
iv)
Percentage of Down Turn Risk
(1775-938.56)/938.56*100
=
89.12%
or
1775-938.56/1775*100=
=
47.12%
This ratio gives the percentage price decline experienced by the bond if the
stock becomes worthless
v)
Conversion Parity Price
Bond Price/No of Shares on Conversion
=
1775/28
=
Rs. 63.39
3 b) BETA = [NSXY – (SX)(SY)]/[NSX2-(SX)2]
Y = Return on Security
X=Return on Market Portfolio (index)
N=Total number of Observations
X= [(Market Index level on last trading day of 't' month – Market Index level on last trading day
of 't-1' month)]  100
Y = (Price of share on last trading day of 't' month – Price of share on last trading day of 't-1'
month)/Price of Share on last trading day of 't-1' month
Determination of Beta in Respect of Equity Shares of Lalpa Microfinance
Date
Share Price of
Lalpa
Microfinance
(Rs)
NEPSE
Return on
Lalpa
Microfinance
'Y'
115
976
Feb 28
125
985
March 29
140
991
April 30
The Institute of Chartered Accountants of Nepal
8.7
12
X
0.92
0.61
Return on
NEPSE
Index
X´Y
8.00
7.32
X2
0.85
0.37
27
Suggested Answers June 2023 Examination (CAP III - Group I)
167
1035
19.29
May 31
189
1049
13.17
June 28
177
989
-6.35
July 31
142
977
-19.77
Aug 30
121
965
-14.79
Sep 30
102
956
-15.7
Oct 31
94
951
-7.84
Nov 29
102
957
8.51
Dec 31
126
962
23.53
Jan 31
149
975
18.25
Feb 28
39.00
Sum
3.25
Average
Observations (N)
12
BETA = 12´ 258.1 - (0.21´ 39)/12´62.06 - (0.21´ 0.21) =
4.44
1.35
-5.72
-1.21
-1.23
-0.93
-0.52
0.63
0.52
1.35
0.21
0.02
85.65
17.78
36.32
23.92
18.19
14.60
4.08
5.36
12.24
24.64
258.1
19.71
1.82
32.72
1.46
1.51
0.86
0.27
0.4
0.27
1.82
62.06
4.15
Determination of Beta in Respect of Equity Shares of Shrestha Hydropower
Date
Share Price
of Shrestha
(Rs)
NEPSE
Return on
Shrestha
Hydropower
'Y'
28
976
Feb 28
26
985
-7.14
March 29
21
991
-19.23
April 30
20
1035
-4.76
May 31
20
1049
0
June 28
15
989
-25
July 31
19
977
26.67
Aug 30
21
965
10.53
Sep 30
32
956
52.38
Oct 31
29
951
-9.38
Nov 29
31
957
6.9
Dec 31
28
962
-9.68
Jan 31
39
975
39.29
Feb 28
60.58
Sum
5.05
Average
Observations (N)
12
BETA = 12´ 66.86 - (0.21´ 60.57)/12´62.06 - (0.21´ 0.21) =
X
0.92
0.61
4.44
1.35
-5.72
-1.21
-1.23
-0.93
-0.52
0.63
0.52
1.35
0.21
0.02
Return on
NEPSE
Index
X´Y
-6.57
-11.73
-21.13
0.00
143.00
-32.27
-12.95
-48.71
4.88
4.35
-5.03
53.04
66.86
X2
0.85
0.37
19.71
1.82
32.72
1.46
1.51
0.86
0.27
0.4
0.27
1.82
62.06
1.06
Comment: Since the beta of Lalpa Microfinance is substantially higher (4.15) than that of Shrestha
Hydropower (1.06), the equity shares of Lalpa Microfinance are evidently more risky compared
to those of Shrestha Hydropower.
4.
a)
b)
c)
d)
e)
Write short note on the following:
Warrants
Merits & Demerits of Shares Buyback
Insider trading
Difference between Cash market & Derivative market
What is Net interest position risk and Price risk?
The Institute of Chartered Accountants of Nepal
(5×3=15)
28
Suggested Answers June 2023 Examination (CAP III - Group I)
Answer
4 a) Warrant is an instrument that gives its holder the right to purchase a certain number of shares at a
specified price over a certain period of time. A warrant entitles its holders to subscribe to the equity
capital of a company during a specified period at a stated/particular/certain price. The holder
acquires only the right (option) but s/he has no obligation to acquire the equity shares. Warrants
are generally issued in conjunction with/tied to other instruments. Warrants can be detachable and
non-detachable. A detachable warrant can be sold separately in the sense that the holder can
continue to retain the instrument to which the warrant was tied and at the same time sell it to take
advantage of price increases. Separate sale independent of the instrument is not possible in case of
non-detachable warrants. The detachable warrants are listed independently for stock exchange
trading but non-detachable warrants are not.
4 b) Merits and demerits of Shares Buyback: Companies generally buyback shares to consolidate
ownership, increase their share price on the market, increase demand for their stock, or serve a
support level for stock prices if the market takes a downward turn.
The theory behind share buybacks is that they reduce the number of shares available in the market,
all else equal , increase earnings per share (EPS) on the remaining shares, benefitting shareholders.
For companies flush with cash, the prospect of bumping up EPS can be tempting. In addition ,
companies that buyback their shares often believe, the stock is undervalued and a good buy at the
current market Billionaire investor Warren Buffett utilizes stock buybacks when he feels that
shares of his own company are trading at too low a level. A buyback will create a level of support
i..e during a recessionary period or market correction, buybacks are thought to create a lower price
levels that cannot be broken through. As a result, open-market buybacks automatically lift its stock
price, even if only temporarily and can enable the company to hit quarterly earnings per share
(EPS) targets. All that said, buybacks can be done for legitimate and constructive reasons.
Buybacks can also be a way for a company to protect itself from a hostile takeover or signal that
it plans to go private.
There are some downsides to buybacks. One of the most important metrics for judging a
company’s financial position is its EPS. EPS divides a company’s total earnings by the number of
outstanding shares; a higher number indicates a stronger financial position. By repurchasing its
stock, a company decreases the number of outstanding shares. A stock buyback thus enables a
company to increase this metric without actually increasing its earnings or doing anything to
support the idea that it is becoming financially stronger. The impact on earnings per share can
given an artificial lift to the stock and mask financial problems revealed by a closer look at the
company’s ratios. Companies can use buybacks as a way to allow executives to take advantage of
stock option programs while not diluting EPS. However, there isn’t much evidence supporting the
widespread belief that this happens. Buybacks can create short-term bump in the stock price that
some say allow insiders to profit while suckering other investors. This price increase may look
good at first, but the positive effect is usually temporary, with equilibrium regaining when the
market realizes that the company has done nothing to increase its actual value. Those who buy in
after the bump can then lose money.
4 c) Insider trading is an activity of buying or selling or dealing in securities of a listed company by
Director, Member of Management, an Employee or any other person such as auditor, advisor etc.
who have knowledge of material, 'inside' information not available to general public. Dealing in
securities by an insider is illegal when it is predicated upon utilization of inside information to
profit at the expense of other investors who do not have access to such investment information.
Insider trading is an unethical practice resorted by those in power, causing huge losses to common
investors thus driving them away from capital market. Further insider trading gives rise to potential
conflict of interest in which the company's best interest may wrongfully take second place to the
insider's self interest. Accordingly, insider trading is banned globally and Securities Act, 2063 has
made it punishable in Nepal. Further, listed companies are required to use their websites for giving
all investors direct access to significant background information and for replies to questions of
The Institute of Chartered Accountants of Nepal
29
Suggested Answers June 2023 Examination (CAP III - Group I)
analysts and investors. They are required to submit price sensitive and other periodic information
to stock exchange in addition to publication of financial and other information quarterly, annually
etc.
4 d)
i) In cash market tangible assets are traded whereas in derivative market contracts based on tangible
or intangibles assets like index or rates are traded.
ii) In cash market, we can purchase even one share whereas in Futures and Options minimum lots are
fixed.
iii) Cash market is riskier than Futures and Options segment because in "Futures and Options" risk is
limited up to 20%.
iv) Cash assets may be meant for consumption or investment. Derivate contracts are for hedging,
arbitrage or speculation.
v) The value of derivative contract is always based on and linked to the underlying security. However,
this linkage may not be on point-to-point basis.
vi) In the cash market, a customer must open securities trading account with a securities depository
whereas to trade futures a customer must open a future trading account with a derivative broker.
vii) Buying securities in cash market involves putting up all the money upfront whereas buying futures
simply involves putting up the margin money.
viii) With the purchase of shares of the company in cash market, the holder becomes part owner of the
company. While in future it does not happen.
4 e) Net Interest Position Risk: The size of non-paying liabilities is one of the significant factors
contributing towards profitability of banks. Where banks have more earning assets than paying
liabilities, interest rate risk arises when the market interest rates adjust downwards. Thus, banks
with positive net interest positions will experience a reduction in NII as the market interest rate
declines and increases when interest rate rises. Thus, large float is a natural hedge against the
variations in interest rates.
Price Risk: Price risk occurs when assets are sold before their stated maturities. In the financial
market, bond prices and yields are inversely related. The price risk is closely associated with the
trading book, which is created for making profit out of short-term movements in interest rates.
Banks which have an active trading book should, therefore, formulate policies to limit the portfolio
size, holding period, duration, defeasance period, stop loss limits, marking to market, etc. Banks
which have an active trading book should, therefore, formulate policies to limit the portfolio size,
holding period, duration, defeasance period, stop loss limits, marking to market, etc.
5.
a) One year ago mutual fund made an issue of 10,00,000 units of Rs. 10 each. No entry load was
charged. It made the following investment:
Particulars
Rs.
50,000 Equity shares of Rs. 100 each @ Rs. 160 80,00,000
7% Government Securities
8,00,000
9% Debentures (Unlisted)
5,00,000
10% Debentures (Listed)
5,00,000
98,00,000
During the year, dividends of Rs. 12,00,000 were received on equity shares. Interest on all types
of debt securities was received as and when due. At the end of the year equity shares and 10%
debentures are quoted at 175% and 90% respectively. Other investments are at par.
Find out the Net Asset Value (NAV) per unit given that operating expenses paid during the year
amounted to Rs. 5,00,000. Also find out the NAV, if the Mutual fund had distributed a dividend
of Rs. 0.80 per unit during the year to the unit holders.
8
The Institute of Chartered Accountants of Nepal
30
Suggested Answers June 2023 Examination (CAP III - Group I)
b) On April 3, 2022, a Bank quotes the following:
Spot exchange Rate (US $ 1) Rs. 66.2525 Rs. 67.5945
2 months’ swap points
70
90
3 months’ swap points
160
186
In a spot transaction, delivery is made after two days.
Assume spot date as April 5, 2022.
Assume 1 swap point = 0.0001
You are required to:
i) Ascertain swap points for 2 months and 15 days. (For June 20, 2022),
ii) Determine foreign exchange rate for June 20, 2022, and
iii) Compute the annual rate of premium/discount of US$ on Rupee, on an average rate.
7
Answer
5 a) In order to find out the NAV, the cash balance at the end of the year is calculated as follows:
Particulars
Cash balance in the beginning
(Rs. 100 lakhs - Rs. 98 lakhs)
Dividend Received
Interest on 7% Govt. Securities
Interest on 9% Debentures
Interest on 10% Debentures
(-) Operating expenses
Net cash balance at the end
Calculation of NAV
Cash Balance
7% Govt. Securities (at par)
50,000 equity shares @ Rs. 175 each
9% Debentures (Unlisted) at cost
10% Debentures @ 90%
Total Assets
No. of Units
NAV per Unit
Rs.
2,00,000
12,00,000
56,000
45,000
50,000
15,51,000
5,00,000
10,51,000
Rs.
10,51,000
8,00,000
87,50,000
5,00,000
4,50,000
1,15,51,000
10,00,000
Rs. 11.55
Calculation of NAV, if dividend of Rs. 0.80 is paid Net Assets (Rs. 1,15,51,000 - Rs. 8,00,000)
No. of Units
NAV per unit
Rs. 1,07,51,000
10,00,000
Rs. 10.75
5 b) (i) Swap Points for 2 months and 15 days
Swap Points for 2 months (a)
Swap Points for 3 months (b)
Swap Points for 30 days (c) = (b) – (a)
Swap Points for 15 days (d) = (c)/2
Swap Points for 2 months & 15 days (e) = (a) + (d)
The Institute of Chartered Accountants of Nepal
Bid
70
160
90
45
115
Ask
90
186
96
48
138
31
Suggested Answers June 2023 Examination (CAP III - Group I)
(ii) Foreign Exchange Rates for 20th June 2022
Spot Rate (a)
Swap Points for 2 months & 15 days (b)
Bid
Ask
66.2525
0.0115
66.2640
67.5945
0.138
67.6083
(iii) Annual Rate of Premium
Spot Rate (a)
Bid
66.2525
Ask
67.5945
Foreign Exchange Rates
for 20th June 2022 (b)
66.2640
67.6083
Premium (c)
0.0115
0.0138
132.5165
135.2028
66.2583
(0.0115/66.2583)×(12/25)×100
=0.0833%
67.6014
(0.0138/67.6014)×(12/25)×100
=0.0980%
Total (d) = (a) + (b)
Average (d) / 2
Premium
6.
a) The equity shares of ABC Ltd are currently being traded at Rs 48 per share in the market. ABC
Ltd has total 20,00,000 equity shares outstanding in number; and promoter’s equity holding in the
company is 50%. Panda Ltd wishes to acquire ABC Ltd because of likely synergies. The estimated
present value of these synergies is Rs 90,00,000.
Further Panda Ltd feels that management of ABC Ltd has been overpaid. With better motivation,
lower salaries and fewer perks for the top management, will lead to savings of Rs 5,00,000 p.a.
Top management with their families are promoters of ABC Ltd. Present value of these savings
would add Rs 37,50,000 in value to the acquisition.
Following additional information is available regarding Panda Ltd.:
Earnings per share
: Rs 5
Total Number of equity shares outstanding
: 15,00,000
Market price of equity share
: Rs 80
Required:
5
i) What is the maximum price per equity share which Panda Ltd , can offer to pay for ABC Ltd.?
ii) What is the minimum price per equity share at which the management of ABC Ltd. will be willing
to offer their controlling interest?
b) Once each year, C Ltd., buys a quantity of perishable commodity. It processes and packages
commodity immediately and holds the cartons for sale a year later. Purchases have to be made in
units of 100 kgs. The current buying price is Rs. 60 per 100 kgs yield sufficient output for a batch
of 100 cartons and the processing and packaging of each batch costs Rs. 140. Storage costs,
excluding interest amount to Rs. 50 per 100 cartoons per annum, payable at the end of the year. C
Ltd, incurs fixed operating costs- namely costs which arise independently of the output level of
Rs. 140,000 each year – payable at the end of the year. Interest cost on capital invested in
inventories is 25% p.a.
Market Conditions are such that C Ltd, takes its selling price as fixed by competitive
considerations. Sales are made in cases of 100 cartoons. The selling price, next year, for current
The Institute of Chartered Accountants of Nepal
32
Suggested Answers June 2023 Examination (CAP III - Group I)
output is estimated at Rs. 400 per 100 cartons. The probability of different volumes of sales has
been estimated as under:
Cases of 100 cartoon
2,000
2,500
3,000
Probability
0.2
0.5
0.3
The Directors are considering what quantity of the commodity should now be purchased and
processed for sale next year. You are to assume that the quantity to be purchased will be 200,000
kgs, 250,000 kgs or 300,000 kgs. Any output that is not sold next year will have to be scrapped
and will have no scrap value.
You are required to calculate: Calculate the quantity which should be purchased in order to
maximize the expected value of cash flows from the year's operations. Ignore
taxation. 5
Answer
6 a)
Calculation of maximum price per share at which Panda Ltd can offer to pay for ABC
Ltd.'s share
96,000,000
Market Value (20,00,000*48)=
Rs.
9,000,000
Synergy Gain
Rs.
3,750,000
Saving of Overpayment
Rs.
108,750,000
Total Benefits
Rs.
54.38
Maximum Price (Rs 10,87,50,000/20,00,000)
Rs.
b) Calculation of minimum price per share at which the management of ABC Ltd.'s will be
willing to offer their controlling interest.
48,000,000
Value of ABC Ltd's Mgmt Holding (50% of 2,000,000*48) = Rs.
3,750,000
Add: PV of loss of remuneration to top management Rs.
51,750,000
Total
1,000,000
No of share (2,000,000*50%) =
51.75
Minimum Price (Rs. 51,750,000/1,000,000) =
Rs.
6 b)
Sales associated with purchases in kgs.
Cases
Demanded
Probability
200,000
250,000
300,000
2000
0.2
800,000
800,000
800,000
2500
0.5
800,000
1,000,000
1,000,000
3000
0.3
800,000
1,000,000
1,200,000
Expected Sales
(i)
Purchase and Processing as Rs. 200 per case (i.e Rs 60+ Rs 140)
Storage Cost (Rs. 50 per case)
Fixed Operating Cost
Interest on Capital (25% on Purchase and Processing Cost)
Total Cost
(ii)
Anticipated Surplus
(i)-(ii)
Sales  Probability'
200,000 250,000
Rs.
160,000
400,000
240,000
800,000
400,000
100,000
140,000
100,000
740,000
60,000
300,000
Rs.
Rs.
160,000 160,000
500,000 500,000
300,000 360,000
960,000 1,020,000
500,000 600,000
125,000 150,000
140,000 140,000
125,000 150,000
890,000 1,040,000
70,000
-20,000
Thus, the policy which maximizes cash flows is the purchase of 250,000 cases.
The Institute of Chartered Accountants of Nepal
33
Suggested Answers June 2023 Examination (CAP III - Group I)
Paper 3 – Advanced Audit and Assurance
Attempt all questions.
1. Comment and give your views with reasons on each of the following cases, giving consideration
to respective Standards, Laws and Code of Ethics:
(a) You are an audit supervisor of AB & Co., Chartered Accountants and are planning the audit of
your client, Easy Wash Company which manufactures cleaning products. Its financial year ends
on 32nd Ashadh 2079. The company’s draft financial shows the profit before tax as Rs. 33·6 crores.
You are supervising a large audit team for the first time and will have specific responsibility for
supervising and reviewing the work of the audit assistants in your team.
Easy Wash Company purchases most of its raw materials from suppliers in Africa and these goods
are shipped directly to the company’s warehouse and the goods are usually in transit for up to three
weeks. The company has incurred Rs. 1·3 crore of expenditure on developing a new range of
cleaning products which are due to be launched into the market place in Ashadh 2080. In Asoj
2078, the Company also invested Rs. 90 lakhs in a complex piece of plant and machinery as part
of the development process. The full amount has been capitalized and this cost includes the
purchase price, installation costs and training costs.
This year, the bonus scheme for senior management and directors has been changed so that rather
than focusing on profits, it is instead based on the value of year-end total assets. In previous years,
an allowance for receivables, made up of specific balances, which equaled almost 1% of trade
receivables was maintained. However, the finance director feels that this is excessive and
unnecessary and has therefore not included it for the year 2078/79 and has credited the opening
balance to the profit or loss account.
A new general ledger system was introduced in Chaitra 2078; the finance director has stated that
the data was transferred and the old and new systems were run in parallel until the end of Bhadra
2079. As a result of the additional workload on the finance team, a number of control account
reconciliations were not completed as at 32nd Ashadh 2079, including the bank reconciliation. The
finance director is comfortable with this as these reconciliations were completed successfully in
Shrawan 2079. In addition, the year-end close down of the purchase ledger was undertaken on 8th
Shrawan 2079.
In the given case, describe the significant audit risks, and explain the auditor’s response to each
risk, in planning the audit of Easy Wash Company.
(10 marks)
Answer:
As per NSA 315, auditors are required to identify and assess the risks of material misstatements
and accordingly, as per NSA 330, apply appropriate audit procedures (responses) to those
significant risks assessed. So, based on information available in the given case, significant audit
risks and auditor’s responses are explained as below:
Easy Wash Company has incurred expenditure
of Rs. 1·3 crore in developing a new range of
cleaning products. NAS 38 Intangible Assets
requires research costs to be expensed to profit
Auditor’s Response
The audit team should undertake detailed
cut-off testing of purchases of goods at the
year end and the sample of GRNs from
before and after the yearend relating to goods
from suppliers in Africa should be increased
to ensure that cut-off is complete and
accurate.
Obtain a breakdown of the expenditure and
verify that it relates to the development of the
new products. Undertake testing to
determine whether the costs relate to the
The Institute of Chartered Accountants of Nepal
34
Significant Audit Risks
Easy Wash Company purchases their goods
from suppliers in Africa and the goods are in
transit for up to three weeks. At the year end,
there is a risk that the cut-off of inventory,
purchases and payables may not be accurate and
may be under/overstated.
Suggested Answers June 2023 Examination (CAP III - Group I)
or loss and development costs to be capitalised
as an intangible asset.
If the company has incorrectly classified
research costs as development expenditure,
there is a risk the intangible asset could be
overstated and expenses understated.
In addition, as the senior management’s bonus
is based on year-end asset values, this increases
this risk further as management may have a
reason to overstate assets at the year end.
In Asoj 2078, the company invested Rs. 90
lakhs in a complex piece of plant and
machinery. The costs include purchase price,
installation and training costs. As per NAS 16
Property, Plant and Equipment, the cost of an
asset incudes its purchase price and directly
attributable costs only.
Training costs are not, generally, permitted
under NAS 16 to be capitalised as part of the
cost and therefore plant and machinery and
profits are overstated.
The bonus scheme for senior management and
directors of Easy Wash Company has been
changed; it is now based on the value of yearend total assets.
There is a risk that management might be
motivated to overstate the value of assets
through the judgements taken or through the use
of releasing provisions or capitalization policy.
research or development stage. Discuss the
accounting treatment with the finance
director and ensure it is in accordance with
NAS 38.
Obtain a breakdown of the Rs. 90 lakhs
expenditure and undertake testing to confirm
the level of training costs which have been
included within non-current assets. Discuss
the accounting treatment with the finance
director and the level of any necessary
adjustment to ensure treatment is in
accordance with NAS 16.
The finance director of the Company believes
that an allowance for receivables is excessive
and unnecessary and therefore has not provided
for it at the year end and has credited the
opening balance to profit or loss.
There is a risk that receivables will be
overvalued; some balances
may be
irrecoverable and so will be overstated if not
provided for.
In addition, releasing the allowance for
receivables will increase asset values and hence
the senior management bonus which increases
the risk further.
A new general ledger system was introduced in
Chaitra 2078 and the old and new systems were
run in parallel for sometimes.
There is a risk of the balances being misstated
and loss of data if they have not been transferred
from the old system completely and accurately.
If this is not done, this could result in the auditor
not identifying a significant control risk.
Throughout the audit, the team will need to
be alert to this risk and maintain professional
skepticism.
Detailed review and testing on judgemental
decisions, including treatment of provisions,
and compare treatment against prior years.
Any manual journal adjustments affecting
assets should be tested in detail.
In addition, a written representation should
be obtained from management confirming
the basis of any significant judgements.
Review and test the controls surrounding
how the Company identifies receivables
balances which may require a provision to
ensure that they are operating effectively in
the current year.
Discuss with the finance director the
rationale for not maintaining an allowance
for receivables and releasing the opening
provision.
Extended post year-end cash receipts testing
and a review of the aged receivables ledger
to be performed to assess valuation and the
need for an allowance for receivables.
The auditor should undertake detailed testing
to confirm that all of the balances at the
transfer date have been correctly recorded in
the new general ledger system.
The auditor should document and test the
new system. They should review any
management reports run comparing the old
and new system during the parallel run to
The Institute of Chartered Accountants of Nepal
35
Suggested Answers June 2023 Examination (CAP III - Group I)
In addition, the new general ledger system will
require documenting and the controls over this
will need to be tested.
A number of reconciliations, including the bank
reconciliation, were not performed at the year
end, however, they were undertaken in
subsequent months.
Control account reconciliations provide
comfort that accounting records are being
maintained completely and accurately. At the
year end, it is important to confirm that balances
including bank balances are not under or
overstated. This is an example of a control
procedure being overridden by management
and raises concerns over the overall emphasis
placed on internal control.
The purchase ledger of the Company was
closed down on 8th Srawan, rather than at the
yearend 32nd Ashadh.
There is a risk that the cut-off may be incorrect
with purchases and payables over or
understated.
(b)
identify any issues with the processing of
accounting information.
Discuss this issue with the finance director
and request that the year-end (i.e., Ashadh
end) control account reconciliations are
undertaken. All reconciling items should be
tested in detail and agreed to supporting
documentation.
The audit team should undertake testing of
transactions posted to the purchase ledger
between 1 and 8 Srawan to identify whether
any transactions relating to the 2079/80 have
been included this year or any 2078/79
balances were removed.
Konnect Bank Ltd, a licensed financial institution in Nepal, has extended agricultural loans to
customers through its network of 150 branches across Nepal. The portfolio of agricultural loans is
approximately 40% in Madhesh Pradesh out of total agricultural loans. The Bank offers
agricultural loans to farmers and agribusinesses. As an auditor, you are assigned to perform the
year-end audit of Agricultural loans of Konnect Bank financial statements by assessing the
agricultural loan portfolio and gathering appropriate audit evidence in accordance with NSA 500Audit Evidence.
(10 Marks)
Answer
NSA 500 provides guidance to auditors on obtaining and evaluating audit evidence to form an
opinion on the financial statements of an entity. When gathering audit evidence for agricultural
loans, auditors typically follow specific procedures to assess the existence, valuation, and
presentation of these loans. Further, the requirement of NRB Circular, Directive and guidelines
should be followed carefully. Below are some key considerations and audit procedures related to
agricultural loans:
1. Understanding the Agricultural Loan Portfolio:
o Obtain an understanding of the entity's policies and procedures for granting, monitoring, and
collecting agricultural loans.
o Identify the relevant laws specifically NRB, regulations, and industry-specific standards governing
agricultural lending activities.
o Gain knowledge of the characteristics of agricultural loans, such as the types of collateral,
repayment terms, interest rates, and risk factors.
2. Examination of Loan Agreements and Supporting Documentation:
o Review loan agreements and related documentation, such as promissory notes, mortgage deeds,
security agreements, and insurance policies.
o Verify the existence and accuracy of loan terms, including loan amount, interest rates, repayment
schedules, and collateral requirements.
o Assess compliance with internal policies and external regulations governing agricultural loans.
The Institute of Chartered Accountants of Nepal
36
Suggested Answers June 2023 Examination (CAP III - Group I)
3. Confirmation of Loan Balances and Collateral:
o Send confirmations to borrowers to verify the outstanding balances of agricultural loans.
o Confirm the existence and valuation of collateral securing the loans, such as land titles, livestock,
crops, or other agricultural assets.
o Consider the use of alternative procedures when confirmations are not feasible, such as inspecting
collateral or obtaining third-party appraisals.
4. Evaluation of Impairment and Provisioning:
o Assess the entity's procedures for recognizing and measuring impairments in agricultural loans.
o Review the adequacy of loan loss provisions and allowances for doubtful accounts.
o Evaluate the reasonableness of assumptions and methodologies used for estimating impairments,
such as expected cash flows, collateral values, and market conditions.
5. Testing Loan Disbursements and Repayments:
o Trace loan disbursements to supporting documentation, such as bank statements and loan
application forms.
o Verify the appropriateness and authorization of loan disbursements based on borrower eligibility
and compliance with loan agreements.
o Perform reconciliations and analytical procedures to validate loan repayment schedules and assess
the accuracy of interest income recognition.
6. Assessing Valuation and Presentation Disclosures:
o Evaluate the entity's compliance with accounting standards regarding the valuation and
presentation of agricultural loans.
o Review the adequacy of disclosures in the financial statements, including details of loan terms,
collateral, impairment, and risk management practices.
o Assess the consistency and comparability of loan disclosures with industry norms and regulatory
requirements.
Specific procedures may vary based on the policy of bank itself and nature and complexity of the
agricultural loan portfolio. It's essential for auditors to exercise professional judgment, consider
materiality, and tailor their procedures to address specific risks associated with agricultural lending
activities. Since portfolio is huge in Madhesh Province, focus should be made accordingly.
2.
(a) CB & Associates., Chartered Accountants are the auditors of Newborn Ltd. You are an Audit
Manager and reviewing the audit working files of Newborn Limited for the financial year ended
on Ashadh 32, 2079. The Newborn Limited is a producer of canned pickle, canned tomatoes and
pepper, selling its products to wholesalers and supermarkets. From your review of the audit
working papers, you have noted that:
(i) The level of materiality was determined to be Rs. 34 crores at the planning stage, and this
materiality threshold has been used throughout the audit. There was no evidence in the audit file
that this threshold has been reviewed during the audit.
(ii) From your review of the audit planning, you noted that a building was acquired in Chaitra 2078
by Newborn at a cost of Rs. 41 crores and was recognised in the draft statement of financial
position at a carrying amount of Rs. 42 crores as of Ashadh 32, 2079. The building is in Hetauda
and was acquired for the purpose of staff dormitory working for the company’s factory in Hetauda.
The building has not been physically verified by any member of the audit team. Based on the audit
working papers, it was concluded that audit team had obtained the purchase agreement in relation
to the building, and therefore can conclude that the asset is appropriately valued and that it exists.
In addition, the Factory Manager has confirmed in writing that the building is located within their
premises, and it is in good condition. No further work is required in respect of this item.
The Institute of Chartered Accountants of Nepal
37
Suggested Answers June 2023 Examination (CAP III - Group I)
(iii) Inventory was recognised at Rs.58 crores in the draft statement of financial position. You have
reviewed the results of audit procedures performed at the inventory count, where the test counts
carried out by the audit team indicated that the count of some items performed by the company’s
staff was not correctly done, but the team did not consider the discrepancies to be material.
(iv) The audit senior spoke to you yesterday about his concern regarding the review of the audit
working papers. Apparently, the audit manager’s review and the partner’s review occurred
concurrently. The partner only asked the audit senior if there were any residual issues on the audit,
scanned through the audit documentation and signed off in the working papers.
Comment on the audit procedures performed by the audit team highlighting the audit quality
control issues arisen therein.
(4x2.5=10 marks)
Answer:
Comments on the audit procedures performed and the related audit quality control issues in the
given case are discussed below:
(i) Materiality - NSA 320 requires the auditor to apply the concept of materiality when planning an
audit. Auditors must consider materiality at the planning stage of the audit because it helps them
to determine which items to test and provides good basis in determining sample size. As the audit
progresses, NSA 320 requires the auditor to review the materiality level determined at planning
stage. This means that materiality level determined by the audit team at planning stage; i.e., Rs. 34
crores may not be appropriate to use throughout the audit. For example, the building cost of Rs.
41 crores was recognised as Rs. 42 crores resulting in a difference of Rs. 1 crore. The auditor may
regard this as not material and not carry out test to confirm the difference. There is the possibility
of low audit quality if the auditor fails to carry out test on the carrying amount of Rs. 42 crores as
of Ashadh 32, 2079. The same principle is applied to inventory counts. The fact that proper
counting was not carried out by management staff indicates the possibility of material
misstatement in the inventory balance as at the end of Ashadh 2079. Materiality at the final stage
of the audit helps the auditor in determining the reasonableness of the audit carried out and at what
level the audit report will be modified. Therefore, failure to review materiality as the audit
progresses may result to a low audit quality and this may also result to high audit risk. If the auditor
had used a lower materiality level than the Rs. 34 cores set, the auditor would be able to carry out
many tests on inventory, thereby reducing the risk of detection and invariably overall audit risk.
(ii) Building - The building acquired during the year should be categorised as non-current asset and
as such the following detail substantive tests need to be carried out by the firm to confirm financial
statements assertions as relate to cost, authorisation, valuation, existence, beneficial ownership and
its presentation in the statement of financial position. Absence of evidence of all these assertions
in the current audit working papers of the firm would be regarded as poor audit work on
verification of building. The audit firm should confirm the following:
• Cost - The building was acquired during the year. Relevant documents such as registration at
Malpot, sales invoice and original receipt obtained from the vendor should be examined by the
audit team and a copy should be kept in the current audit working papers file.
• Authorisation - Evidence of the authority to purchase the building by the company should be
obtained and reviewed in the minutes of meetings of the board of directors. Also, the payment
voucher in respect of this newly acquired building should also be reviewed and a copy should be
kept in the audit file.
• Valuation- The initial cost of the building was Rs. 41 crores but was recognised in the draft
statement of financial position at a carrying amount of Rs. 42 crores. The reason for this may be
that the building must have been revalued and based on this; the audit firm should have ascertained
the following:
o Whether or not the valuation was carried out by the company or by an external valuer.
The Institute of Chartered Accountants of Nepal
38
Suggested Answers June 2023 Examination (CAP III - Group I)
o If the valuation was carried out by the company, the firm should have ascertained the basis of
valuation; and if the valuation was carried out by an external valuer, the firm should ascertain the
reputation, experience and independence of the external valuer.
• Existence- The audit team did not carry out physical confirmation of where the building is located.
They only relied on purchase agreement and confirmation in writing from the Factory Manager in
respect of the building. To confirm the existence of this building, physical confirmation needs to
be carried out.
• Beneficial ownership- the audit firm needs to confirm whether or not the acquired building is
being used for the purpose and benefits of the company. This can be done by checking relevant
documents relating to its usage, such as checking expenses in respect of repairs and maintenance
of the building.
• Presentation- The statement of the financial position should be reviewed to confirm whether or
not the building has been properly classified and presented in accordance with relevant accounting
standard.
It is obvious from the review of the current audit working papers file that all the above assertions
were not carried out and as such, the quality of the audit was poor.
(iii) Inventory- Inventory of Rs. 58 crores was recognised in the draft statement of financial position.
This amount is a material figure and since the audit team has indicated that the count of some items
by the company’s staff was not correctly done, there is need for the firm to do the following:
• Request for a recount of the inventory items while representative of the audit firm will be in
attendance to observe the procedures;
• The valuation method used should be confirmed whether or not it is in line with relevant
accounting standard;
• The condition and obsoleteness of the inventory items should be considered;
• The cut-off procedures in relation to the inventory should be reviewed;
• Relevant documents such as purchase invoices and receipts should be checked so as to confirm
the ownership of the inventory; and
• The firm should review the available internal control put in place by the management of the
company on the existence and movement of the inventory.
(iv) Review by the audit manager and engagement partner
As discussed above, before the audit report is issued, the engagement partner needs to be satisfied
that sufficient appropriate audit evidence have been obtained to support the conclusions reached
and for the audit report to be issued, he should therefore review the audit documentation; and hold
discussion with the audit team. This process is usually referred to as the partner’s review. It should
be scheduled into the audit plan towards the completion of the audit.
Before the partner’s review, the audit senior should ensure that every file is complete and crossreferenced to cut down the number of points that might be raised by the partner’ review. The
partner’s review will usually be preceded by a manager’s review, in the hope that the audit manager
will identify some matters that can be resolved before they come to the attention of the engagement
partner, but in electronic environment, it is possible to do it concurrently.
(b) M/s PWC & Associates, a renowned audit firm in the field of audit and assurance practice for past
two decades. The firm was appointed to conduct statutory audit of Libra Ltd. An unlisted company,
which is engaged in the business of paper manufacturing. It decided to commence the audit for the
recently concluded financial year. Once after making significant progress in the audit, the auditors
made the following observations:
The Institute of Chartered Accountants of Nepal
39
Suggested Answers June 2023 Examination (CAP III - Group I)
Observation 1: The management has disclosed in the financials that, during the year, one of the
warehouses of the company was affected due to the major flood. As a result of the same, the
Company had incurred some losses. But the management was of the view that it was not material.
Observation 2: Due to flood, few records maintained by the company with respect to a particular
transaction was completely destroyed and there was no duplicate record maintained by the
Company. However, those records were not pervasive, but material.
You are required to advice, whether M/s PWC & Associates should report Observation 1 and 2 in
its audit report? If so, under which heading should it be reported?
(10 Marks)
Answer:
Observation 1: The management has disclosed in the financials that, during the year, one of the
warehouses of the company was affected due to the major flood. As a result of the same, the
Company had incurred some losses. But the management was of the view that it was not material.
In this regard, the auditor should consider the materiality of the relevant items at the warehouse.
The concept of materiality shall be 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
(NSA 320).
As per NSA 706, “Emphasis of Matter Paragraph & Other Matter Paragraph in the Independent
Auditor’s Report”, an emphasis of Matter Paragraph refers to matter appropriately disclosed in the
financials, that in the auditor’s judgement is of such importance that it is fundamental to users
understanding of the financials. Hence, in this case, the auditor shall report about the consequences
of the flood which effected the Company’s warehouse under Emphasis of Matter Paragraph.
Finally, when the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the
auditor shall: (a) include it immediately after the Opinion paragraph in the auditor’s report; (b) use
the heading “Emphasis of Matter,” or other appropriate heading; (c) include in the paragraph a
clear reference to the matter being emphasized and to where relevant disclosures that fully describe
the matter can be found in the financial statements; and (d) indicate that the auditor’s opinion is
not modified in respect of the matter emphasized.
Observation 2: Due to flood, few records maintained by the company with respect to a particular
transaction was completely destroyed and there was no duplicate record maintained by the
Company. However, those records were not pervasive, but material. As per NSA 705,
“Modification of opinion in the Independent Auditor’s Report”, where the auditor is unable to
obtain sufficient and appropriate audit evidence and where such matter is material but not
pervasive, the auditor shall issue a qualified opinion.
Thus, in the given situation, on account of flood few records pertaining to particular transactions
was completely destroyed and in absence of duplicate records, the auditor was unable to obtain
sufficient and appropriate audit evidence and those details were material but not pervasive.
Therefore, in accordance with NSA 705, the auditor is required to issue qualified opinion.
3. Comment and give your views with reasons on each of the following cases, giving consideration
to Nepal Standards on Auditing:
a) TUV Ltd. is a company engaged in the business of manufacture of spare parts. M/s Sajal Associates
are the statutory auditors of the company for the FY 2078-79. During the course of audit, CA Sajal
noticed that the company had a major customer, namely, Ukraine Mart from Ukraine. Owing to
an outbreak of war and subsequent destruction leading to government ban on import and export in
The Institute of Chartered Accountants of Nepal
40
Suggested Answers June 2023 Examination (CAP III - Group I)
Ukraine, the demand from Ukraine Mart for the products of TUV Ltd. ended for an unforeseeable
time period. When discussed with the management, CA Sajal was told that the company is in the
process of identifying new customers for their products. CA Sajal understands that though the use
of going concern assumption is appropriate but a material uncertainty exists with respect to the
identification of new customers. This fact is duly reflected in the financial statements of TUV Ltd.
for the FY 2078-79. How should CA Sajal deal with this matter in the auditor’s report for the FY
2078-79?
(8 Marks)
•
o
o
o
o
o
Answer:
Evaluating appropriateness of going concern assumption:
NSA 570 “Going Concern” requires that the auditor shall consider whether there are events or
conditions that may cast significant doubt on the entity’s ability to continue as a going concern.
For instances;
Loss of a major market or key customer is one of the operating indicators that may cast significant
doubt on the company’s ability to continue as a going concern.
Where management has not yet performed an assessment of the entity’s ability to continue as a
going concern, requesting management to make its assessment.
Evaluating management’s plans for future actions in relation to its going concern assessment,
whether the outcome of these plans is likely to improve the situation and whether management’s
plans are feasible in the circumstances.
Where the entity has prepared a cash flow forecast, and analysis of the forecast is a significant
factor in considering the future outcome of events or conditions in the evaluation of management’s
plans for future action; (i) evaluating the reliability of the underlying data generated to prepare the
forecast; and (ii) determining whether there is adequate support for the assumptions underlying the
forecast.
Requesting written representations from management and, where appropriate, those charged with
governance, regarding their plans for future action and the feasibility of these plans.
• In the present case, TUV Ltd. has a key customer in Ukraine from which the demand for its
products ended on account of outbreak of war, subsequent destruction and government ban on
import or export in Ukraine. Further, the company has not yet identified new customers and is in
the process of doing the same. As such, the identification of new customer is a material uncertainty
that cast a significant doubt on the company’s ability to continue as a going concern. However,
this matter is duly disclosed by the management of TUV Ltd. in the financial statements for the
year ended 32nd Ashadh, 2079.
Conclusion:
Considering that the going concern assumption is appropriate but a material uncertainty exists with
respect to identification of new customer, CA Sajal should:
i. Express an unmodified opinion and
ii. Include in his audit report, a separate section under the heading “Material Uncertainty related to
Going Concern” to:
- Draw attention to the note in the financial statements that discloses the matters and
- State that these events or conditions indicate that a material uncertainty exists that may cast
significant doubt on the entity’s ability to continue as a going concern and that the auditor’s opinion
is not modified in respect of the matter.
b) Complex Party Ltd is a manufacturing company that has multiple subsidiaries and huge
intercompany transactions. As the auditor, you are required to assess the company's compliance
with NSA 550, "Related Parties," and evaluate the impact of related party transactions on the
financial statements for FY 2078-79.
(7 Marks)
The Institute of Chartered Accountants of Nepal
41
Suggested Answers June 2023 Examination (CAP III - Group I)
Answer
NSA 550 Related Parties states related parties as individuals or entities that have the ability to
control or exercise significant influence over the audited entity, or are under the control or
significant influence of the audited entity. This includes key management personnel, close family
members, entities controlled by key management personnel, and entities that have significant
influence over the audited entity.
The auditor is required to obtain an understanding of the audited entity's transactions and
relationships with related parties. This includes obtaining information from management,
reviewing relevant documents, and conducting inquiries with appropriate individuals within and
outside the entity.
The auditor must evaluate the risks associated with transactions and relationships with related
parties and assess the potential impact on the financial statements. This involves considering the
nature of the transactions, the financial significance, the potential for conflicts of interest, and the
existence of related party transactions not conducted at arm's length.
The auditor is required to obtain sufficient and appropriate audit evidence regarding related party
transactions and relationships. This may include obtaining confirmations from related parties,
reviewing contracts or agreements, examining supporting documentation, and performing
analytical procedures.
Given in the case, the entity has huge related party transactions so following procedure would be
suggested to follow:
1. Understanding the Company and Identifying Related Parties:
o Obtain a thorough understanding of the company's organizational structure, including its
subsidiaries, associates, and joint ventures.
o Review the company's policies and procedures for identifying and disclosing related party
transactions.
o Obtain a list of key management personnel and their relationships with other entities.
2. Assessing the Materiality of Related Party Transactions:
o Evaluate the significance of related party transactions based on their size, nature, and the potential
influence on the financial statements.
o Consider any potential risks associated with related party transactions, such as the possibility of
inappropriate transactions or conflicts of interest.
3. Performing Audit Procedures:
o Review the company's financial statements, notes to the financial statements, and any relevant
agreements or contracts.
o Verify the accuracy and completeness of related party disclosures in the financial statements.
o Obtain and review any supporting documentation for related party transactions, such as invoices,
contracts, or correspondence.
o Assess the appropriateness of the accounting treatment for related party transactions and evaluate
whether they have been properly disclosed.
4. Testing the Adequacy of Controls:
o Evaluate the company's internal controls over related party transactions, including the approval
process and monitoring mechanisms.
o Perform tests of controls to determine if the company's procedures for identifying, recording, and
disclosing related party transactions are effective.
o Consider the potential risk of management override of controls and design additional substantive
procedures if necessary.
The Institute of Chartered Accountants of Nepal
42
Suggested Answers June 2023 Examination (CAP III - Group I)
5. Communicating with Management and Those Charged with Governance:
o Discuss any significant related party transactions or control deficiencies with management and
those charged with governance.
o Seek additional information or explanations for any identified issues or concerns.
o Document all communication and responses received from management and those charged with
governance.
6. Reporting:
o Evaluate the impact of related party transactions on the financial statements and the overall fairness
of the presentation.
o Provide appropriate disclosures in the audit report regarding related party transactions, including
any identified significant risks or concerns.
4.
a) The Coordinator of Audit Committee of H Bank Limited instructed the CEO and Executive
Management team to lay off additional employees emerged due to recent takeover of Ichhya Bank
Limited. The employee union of Bank protesting against this move. In the context of good
governance and responsibility of audit committee outlined in NRB Directives, analyse the move
of audit committee in this case.
(8 Marks)
Answer
Good governance is the framework of practices and processes that organizations use to ensure
accountability, transparency, integrity, and effective decision-making. An important component
of good governance is the establishment of an Audit Committee, which plays a critical role in
overseeing the financial reporting process and ensuring the integrity of financial statements. The
Audit Committee is typically a subcommittee of the organization's board of directors and is
responsible for providing independent and objective oversight of the organization's financial
reporting, internal controls, risk management, and audit processes.
The key responsibilities of an Audit Committee in promoting good governance include:
1. Financial Reporting and Disclosure:
o Reviewing and monitoring the organization's financial reporting process, ensuring the accuracy
and integrity of financial statements, and reviewing the adequacy of disclosures.
2. Internal Controls and Risk Management:
o
Overseeing the effectiveness of the organization's internal control systems, including financial,
operational, and compliance controls.
o Evaluating the organization's risk management processes, including identifying and assessing
significant risks and reviewing risk mitigation strategies.
3. External Audit:
o
o
Recommending the appointment, independence, and remuneration of the external auditors.
Reviewing the scope of the external audit and ensuring the auditors have access to the necessary
information to perform their duties effectively.
o Assessing the performance and independence of the external auditors and overseeing the resolution
of any disagreements between management and the auditors.
The Institute of Chartered Accountants of Nepal
43
Suggested Answers June 2023 Examination (CAP III - Group I)
4. Compliance and Ethics:
o
o
Monitoring compliance with applicable laws, regulations, and ethical standards.
Establishing and overseeing mechanisms for reporting and addressing concerns regarding
unethical behavior, fraud, or irregularities.
5. Internal Audit:
o
o
o
Reviewing and approving the internal audit charter, scope, and annual plans.
Monitoring the performance and effectiveness of the internal audit function.
Reviewing and following up on internal audit reports and recommendations.
6. Stakeholder Communication and Engagement:
o
Engaging with stakeholders, including management, external auditors, and regulators, to address
concerns and promote transparency and accountability.
o Communicating with shareholders and other stakeholders on matters related to financial reporting,
audit, and risk management.
The composition of the Audit Committee typically includes independent directors with relevant
financial expertise and experience. These members should have the necessary knowledge and
skills to understand financial statements, internal controls, risk management, and audit processes.
By having a well-structured and effective Audit Committee, organizations can enhance
transparency, strengthen accountability, mitigate risks, and build stakeholder confidence in the
financial reporting and governance practices of the organization.
The Audit Committee plays a critical role in promoting good governance and overseeing the
financial reporting and audit processes of an organization.
Nepal Rastra Bank has mandated to establish an Audit Committee under a non-executive Director.
This committee shall review the institution's financial condition, its internal controls, audit
program, and upon detailed discussion on the findings of the internal audit, shall issue necessary
guidelines to the management of the institution. The external as well as internal auditors shall have
direct access to this Committee. The Board of Directors of the licensed institution shall discuss in
detail the reports of the auditors and the Committee. The Chief Executive shall not be included as
the member of the Audit Committee formed by the licensed institution. However, this shall not
prohibit from including him/her as an invitee, whenever necessary.
Major Responsibilities of the Committee as per NRB
(a) To review the licensed institution's financial condition, internal controls, audit program, and
findings of the internal audit team and to recommend to the Board of Directors about the actions
to be taken;
(b) To review the matters contained in the audit report of the external (statutory) auditors and initiate
for necessary corrective actions;
(c) To help ensure annual report to be accurate and real;
(d) To ensure the Board of Directors that accounts are accurate and fair, along with frequent reviews
of the adequacy of provisioning against contingencies and classified loan;
(e) To review the compliance of the regulations issued by this Bank to the licensed institutions and
include the same in its report;
(f) To review the activities of licensed institution in respect of its regularity, economical, logical,
effectiveness, and give necessary suggestions to the Board of Directors.
The Institute of Chartered Accountants of Nepal
44
Suggested Answers June 2023 Examination (CAP III - Group I)
Having explained above, audit committee and board are not expected to engage as below:
1. Engage in Management Functions:
o Avoid involvement in day-to-day management activities or decision-making.
o Maintain an oversight role and avoid conflicts of interest.
2. Override or Undermine Internal Controls:
o Do not interfere with the design, implementation, or operation of internal controls.
o Ensure that internal controls are robust and effective in mitigating risks and ensuring the integrity
of financial reporting.
3. Compromise Independence and Objectivity:
o Avoid personal or professional relationships that compromise independence or create conflicts of
interest.
o Exercise independent judgment and resist undue influence from management or external parties.
4. Neglect Regulatory Compliance and Ethical Standards:
o Ensure compliance with applicable laws, regulations, and ethical standards.
o Maintain a strong commitment to ethical conduct, integrity, and professional skepticism.
5. Fail to Stay Informed and Educated:
o Stay abreast of changes in accounting standards, regulatory requirements, and emerging trends in
corporate governance.
o Regularly engage in continuing education and professional development to enhance knowledge
and skills.
Thus, from good governance perspective, involvement of audit committee to lay off additional
employees emerged due to recent takeover of Ichhya Bank Limited is not justifiable.
b) The professional accountants/ or accounting firms in public practice may provide different nonassurance services to an audit client. Such non-assurance services may include accounting and
bookkeeping, valuation, tax audit, internal audit, and recruitment services etc. Explain, in brief,
the requirements that the professional accountants are expected to comply with to accept nonassurance services to an audit client.
(7 marks)
Answer:
Handbook of the Code of Ethics for Professional Accountants, 2018 issued by the ICAN sets out
the requirements in Section 600 for professional accounting firms and accountants for providing
non-assurance services to an audit client. As per Section 600, specific requirements are discussed
as below:
o Firms are required to comply with the fundamental principles, be independent, and apply the
conceptual framework set out in Section 120 to identify, evaluate and address threats to
independence.
o Before accepting an engagement to provide a non-assurance service to an audit client, the firm
shall determine whether providing such a service might create a threat to independence.
o The firm should consider factors that are relevant in evaluating the level of threats created by
providing a non-assurance service to an audit client which include:
• The nature, scope and purpose of the service.
• The degree of reliance that will be placed on the outcome of the service as part of the audit.
• The legal and regulatory environment in which the service is provided.
• Whether the outcome of the service will affect matters reflected in the financial statements on
which the firm will express an opinion,
The Institute of Chartered Accountants of Nepal
45
Suggested Answers June 2023 Examination (CAP III - Group I)
• The level of expertise of the client’s management and employees with respect to the type of
service provided.
• The extent of the client’s involvement in determining significant matters of judgment.
• The nature and extent of the impact of the service, if any, on the systems that generate information
that forms a significant part of the client’s:
o Accounting records or financial statements on which the firm will express an opinion.
o Internal controls over financial reporting.
• Whether the client is a public interest entity. For example, providing a non-assurance service to
an audit client that is a public interest entity might be perceived to result in a higher level of a
threat.
o A firm or network firm might provide multiple non-assurance services to an audit client. In these
circumstances the consideration of the combined effect of threats created by providing those
services is relevant to the firm’s evaluation of threats.
o A firm or a network firm shall not assume a management responsibility for an audit client.
Management responsibilities involve controlling, leading and directing an entity, including making
decisions regarding the acquisition, deployment and control of human, financial, technological,
physical and intangible resources.
o A non-assurance service provided, either currently or previously, by a firm or a network firm to
an audit client compromises the firm’s independence when the client becomes a public interest
entity unless:
• The previous non-assurance service complies with the provisions of this section that relate to
audit clients that are not public interest entities;
• Non-assurance services currently in progress that are not permitted under this section for audit
clients that are public interest entities are ended before, or as soon as practicable after, the client
becomes a public interest entity.
• The firm should address threats that are created and not at an acceptable level before accepting
any non-assurance engagements of the audit client.
5. Answer the following:
a) Technological advancement has taken place at faster pace as it was never before. Everything going
digital affecting everyday human life. Accounting profession is also not left unaffected by
technological changes taking place in this field. In this context, discuss about the matters that you
will consider while obtaining understanding of the IT environment of your audit client.
8
Answer:
NSA 315 (Revised) Identifying and Assessing he Risk of Material Misstatement though
understanding the Entity and its environment deals with auditors responsibility to identify and
assess the risk of material misstatement in the financial statements, through understanding the
entity and its environment , including the entity’s internal control. In obtaining an understanding
of the IT environment relevant to the flows of transactions and information processing in the
information system, the auditor gathers information about the nature and characteristics of the IT
applications used, as well as the supporting IT infrastructure and IT processes. The following
points are examples of matters that the auditor may consider in obtaining the understanding of the
IT environment and includes examples of typical characteristics of IT environments based on the
complexity of IT applications used in the entity’s information system. However, such
characteristics are directional and may differ depending on the nature of the specific IT
applications in use by an entity.76
The Institute of Chartered Accountants of Nepal
46
Suggested Answers June 2023 Examination (CAP III - Group I)
Matters related to extent of automation and use of data:
• The extent of automated procedures for processing, and the complexity of those procedures,
including, whether there is highly automated, paperless processing.
• The extent of the entity’s reliance on system generated reports in the processing of information.
• How data is input (i.e., manual input, customer or vendor input, or file load).
• How IT facilitates communication between applications, databases or other aspects of the IT
environment, internally and externally, as appropriate, through system interfaces.
• The volume and complexity of data in digital form being processed by the information system,
• including whether accounting records or other information are stored in digital form and the
location of stored data.
Matters related to the IT applications and IT infrastructure:
• The type of application (e.g., a commercial application with little or no customization, or a highlycustomized or highly-integrated application that may have been purchased and customized, or
developed in-house).
• The complexity of the nature of the IT applications and the underlying IT infrastructure.
• Whether there is third-party hosting or outsourcing of IT.
• Whether the entity is using emerging technologies that affect its financial reporting.
Matters related to IT processes:
• The personnel involved in maintaining the IT environment (the number and skill level of the IT
support resources that manage security and changes to the IT environment).
• The complexity of processes to manage access rights.
• The complexity of the security over the IT environment, including vulnerability of the IT
applications,
• databases, and other aspects of the IT environment to cyber risks, particularly when there are webbased transactions or transactions involving external interfaces.
• Whether program changes have been made to the manner in which information is processed, and
the extent of such changes during the period.
• The extent of change within the IT environment (e.g., new aspects of the IT environment or
significant changes in the IT applications or the underlying IT infrastructure).
• Whether there was a major data conversion during the period and, if so, the nature and significance
of the changes made, and how the conversion was undertaken.
b) Himal Private Ltd. (HPL) is in dispute with its buyers Terai Private Limited (TPL) over a
receivable of Rs. 20 million; due to quality issues with the product sold to TPL. The management
has informed you that negotiations with TPL have concluded and TPL has agreed to pay Rs. 14
million whereas the rest of the amount would be written off. HPL’s management has provided a
written representation to the auditor with respect to the said receivable. However, they want to
preclude the auditor from sending a confirmation to HPL.
The Institute of Chartered Accountants of Nepal
47
Suggested Answers June 2023 Examination (CAP III - Group I)
In this context, evaluate the appropriateness of written representation as audit evidence and
determine the course of action available to the auditor in the above situation.
7 Marks
Answer:
Written representations are necessary information that the auditor requires in connection with the
entity’s financial statements. Although written representations provide audit evidence, they do not
provide sufficient appropriate audit evidence on their own about any of the matters with which
they deal. The fact that the management has provided reliable written representations do not affect
the nature or extent of other audit evidence that the auditor should obtain. Hence, considering the
scenario, the auditor should take the following steps to obtain the required evidence as per NSA
580:
- Inquire management about reasons for refusal to send confirmation.
- Seek audit evidence as to their validity and reasonableness.
- In case a valid reason is not provided by the management, evaluate the implications of
management’s refusal on the auditor’s assessment of the relevant risks of material misstatement,
including the risk of fraud and on the nature, timing and extent of other audit procedures;
- Perform alternative audit procedures to obtain relevant and reliable audit evidence, such as:
o Obtain correspondence with the supplier.
o Check subsequent receipt from the supplier.
- Communicate with those charged with governance, if:
o The auditor concludes that management’s refusal to allow the auditor to send a
confirmation request is unreasonable.
o The auditor is unable to obtain relevant and reliable audit evidence from alternative audit
procedures.
- The auditor shall determine the implications for the audit and the auditor’s opinion in accordance
with NSA 705 given such a limitation on scope.
6. Write short notes on the following:
(5×3=15 Marks)
a) Independence of Auditors
Answer:
Independence means the state of free will where the judgement of the person is not affected by any
factors such as interest or influence. Auditor independence refers to the independence of the
external auditors. It is characterized by integrity and an objective approach to the audit process.
The concept requires the auditor to carry out his or her work freely and in an objective manner.
Simply, an auditor is required to report on the status of financial statements prepared by the
management of the entity and his report is trusted by the users of financial statements. Therefore,
the auditor should report in an unbiased manner i.e. independently without any interest or
influence.
As per section 290.6 of the Code of Ethics 2015, independence comprises:
a. Independence of mind
b. Independence of Appearance
The International Federation of accountants (IFAC) provides a framework of principles that
members of assurance teams, firms and network firms should use identity threats to independence,
evaluate the significance of those threats, and, if the threats are other than clarly insignificant,
The Institute of Chartered Accountants of Nepal
48
Suggested Answers June 2023 Examination (CAP III - Group I)
identify and apply safeguards to eliminate the threats or reduce them to an acceptable level, such
that independence of mind and independence in appearance are not compromised. In situations
when no safeguards are available to reduce the threat to an acceptable level, the only possible
actions are to eliminate the activities or interest creating the threat, or to refuse to accept or continue
the assurance engagement.
a.
b.
c.
d.
e.
Threats to Independence:
Self-interest threat
Self-review threat
Advocacy threat
Familiarity threat
Intimidation threat
b) Responsibility of Auditor when interim financial statement is departed from the Applicable
Financial Reporting Framework.
Answer
The auditor should express a qualified or adverse conclusion when a matter has come to the
auditor’s attention that causes the auditor to believe that a material adjustment should be made to
the interim financial information for it to be prepared, in all material respects, in accordance with
the applicable financial reporting framework.
If matters have come to the auditor’s attention that cause the auditor to believe that the interim
financial information is or may be materially affected by a departure from the applicable financial
reporting framework, and management does not correct the interim financial information, the
auditor modifies the review report. The modification describes the nature of the departure and, if
practicable, states the effects on the interim financial information. If the information that the
auditor believes is necessary for adequate disclosure is not included in the interim financial
information, the auditor modifies the review report and, if practicable, includes the necessary
information in the review report. The modification to the review report is ordinarily accomplished
by adding an explanatory paragraph to the review report, and qualifying the conclusion in line with
format prescribed in NSRE 2410.
c) Confidentiality, Integrity and Availability (CIA) triad in Information Systems Security
Audit
Answer
Information Systems Security Audit is an independent review and examination of system records,
activities and related documents to determine the adequacy of system controls, ensure compliance
with established security policy and approved operational procedures, detect breaches in security
so as to verify whether data integrity is maintained, assets are safeguarded, organizational goals
are achieved effectively and resources are used efficiently. Security audit is a systematic,
measurable technical assessment of how security policies are built into the information systems.
Professionalism and credibility play a very important role in the auditor’s performance of
Information Systems Security Audit. He should have full knowledge of the organization and its
various functions, at times with considerable inside information.
The three fundamental features of an Information System that gets tested in course of security
audit are assessment of confidentiality, availability and integrity of the information systems assets.
The principle screening variables are various conceivable physical and logical security threats.
The Institute of Chartered Accountants of Nepal
49
Suggested Answers June 2023 Examination (CAP III - Group I)
The purpose of any audit will be essentially to examine three basic compliances in terms of
Confidentiality, Integrity and Availability (CIA) –
• Confidentiality concerns the protection of sensitive information from unauthorized disclosure.
Keeping in view the level of sensitivity of the data the stringency of controls over its access should
be determined.
• Integrity refers to ‘the accuracy and completeness of the information as well as to its validity in
accordance with business values and expectations. It is an important audit objective as it provides
assurance to the management as well as the users that the information can be relied and trusted
upon. It also includes reliability, which refers to degree of consistency of the system to function.
• Availability relates to information and information systems being available and operational when
they are needed. It also concerns safeguarding of necessary resources and associated capabilities.
This implies that the organization has measures in place to ensure business continuity and timely
recovery can be made in case of disasters.
d) Sampling Risk
Answer
“Sampling risk” arises from the possibility that the auditor’s conclusion, based on a sample may
be different from the conclusion reached if the entire population were subjected to the same audit
procedure. There are two types of sampling risk:
The risk the auditor will conclude, in the case of a test of controls, that controls are more effective
than they actually are, or in the case of a test of details, that a material error does not exist when in
fact it does. This type of risk affects audit effectiveness and is more likely to lead to an
inappropriate audit opinion; and
The risk the auditor will conclude, in the case of a test of controls, that controls are less effective
than they actually are, or in the case of a test of details, that a material error exists when in fact it
does not. This type of risk affects audit efficiency as it would usually lead to additional work to
establish that initial conclusions were incorrect.
e) Written Representations
Answer:
A written statement by management provided to the auditor to confirm certain matters or to support
other audit evidence. Written representations in this context do not include financial statements,
the assertions therein, or supporting books and records. Audit evidence is all the information used
by the auditor in arriving at the conclusions on which the audit opinion is based. Thus written
representations are necessary information that the auditor requires in connection with the audit of
the entity’s financial statements. Accordingly, similar to responses to inquiries, written
representations are audit evidence. Although written representations provide necessary audit
evidence, they do not provide sufficient appropriate audit evidence on their own about any of the
matters with which they deal. Furthermore, the fact that management has provided reliable written
representations does not affect the nature or extent of other audit evidence that the auditor obtains
about the fulfillment of management’s responsibilities, or about specific assertions. The auditor
shall request management to provide a written representation that it has fulfilled its responsibility
for the preparation of the financial statements in accordance with the applicable financial reporting
framework, including where relevant their fair presentation, as set out in the terms of the audit
engagement. Other NSAs require the auditor to request written representations. If, in addition to
such required representations, the auditor determines that it is necessary to obtain one or more
written representations to support other audit evidence relevant to the financial statements or one
or more specific assertions in the financial statements, the auditor shall request such other written
representations.
The Institute of Chartered Accountants of Nepal
50
Suggested Answers June 2023 Examination (CAP III - Group I)
Extent of Reliance:
NSA 580, “Written Representations”, states that If the auditor has concerns about the competence,
integrity, ethical values or diligence of management, or about its commitment to or enforcement
of these, the auditor shall determine the effect that such concerns may have on the reliability of
representations (oral or written) and audit evidence in general. In particular, if written
representations are inconsistent with other audit evidence, the auditor shall perform audit
procedures to attempt to resolve the matter. If the matter remains unresolved, the auditor shall
reconsider the assessment of the competence, integrity, ethical values or diligence of management,
or of its commitment to or enforcement of these, and shall determine the effect that this may have
on the reliability of representations (oral or written) and audit evidence in general. If the auditor
concludes that the written representations are not reliable, the auditor shall take appropriate
actions, including determining the possible effect on the opinion in the auditor’s report.
The Institute of Chartered Accountants of Nepal
51
Suggested Answers June 2023 Examination (CAP III - Group I)
Paper 4 – Corporate Laws
Attempt all questions
1. Answer the following questions:
a) Mr A is one of the shareholders of a company XYZ. Mr A wants to sell and pledge his shares and
debentures. He doesn't know the process and legal provision regarding selling, pledging and
transmitting of title of shares and debentures. He, then, consults you on this matter. Could you
please advise him on the following issues as per Companies Act, 2063:
(5+5=10)
i) How shares and debentures of a company can be sold or pledged on the basis of Companies Act,
2063?
ii) How title of shares and debentures are transferred to new buyer of shares or
debentures?
b) The Reliance group of companies and its shareholders with external investors want to operate an
insurance company. The main motto is to promote insurance business and risk minimization by
indemnifying the aggrieved parties. Profit maximization is also one of the important factors for
the investors. In such situation they approached you to suggest regarding the following issues. In
this regard, how would you suggest them as per newly promulgated Insurance Act,
2079?
(2+5+3=10)
i) What is Insurance contract? Mention the types of Insurance business.
2
ii) Explain the provisions for incorporation of an insurance company as per Insurance Act, 2079. 5
iii) Discuss the Non-Insurability of any property or liability of any businesses or organizations by the
insurance company.
3
Answer
1 a) i) Pursuant to clause (d) of section 10 of companies Act, 2063, a private company shall not pledge
or otherwise transfer title to its securities to any person other than its shareholder without
fulfilling the procedures contained in the memorandum of association, articles of association and
consensus agreement. Provision regarding selling or pledging shares or debentures as mentioned
in section 42 of Companies Act, 2063 are as follows:
• The share or debenture of a company may be sold or pledged as movable property, subject to this
Act, the memorandum of association and articles of association.
• Notwithstanding anything contained in Sub-section (1), the promoter of a company other than a
private company which has not borrowed loan from any other company, shall not be entitled to
sell or pledge any share held by him/her until the first general meeting of that company is held and
a call on the share issued in his/her name is fully paid up.
• If a share or debenture is pledged pursuant to Sub-section (1), the pledgee shall make an application
in such format and along with such fees as may be prescribed, to the registered office of the
company to have the matter recorded in the register. The applicant shall also submit the deed on
pledge as well as the share or debenture certificate along with the application to be so made.
• If an application is made pursuant to sub-section (3), the company shall record in the register the
execution (implementation) of such pledge& on receipt of information on the redemption (release)
of share or debenture so pledged, the records of such pledge shall be crossed off the register.
ii) Transferring of title of shares or debentures to new buyer is mentioned in section 43 of the
Companies Act which is as follows:
• If any share or debenture is sold, subject to Sub-sections (1) and (2) of Section 42, the buyer thereof
shall make an application to the registered office of the company, in such format and along with
such fees as may be prescribed, to have such debenture or share transferred to his/her name. The
The Institute of Chartered Accountants of Nepal
52
Suggested Answers June 2023 Examination (CAP III - Group I)
•
•
•
•
applicant shall also submit along with such application, a copy of the deed relating to the sale and
purchase of share and share or debenture certificate.
If an application is made under Sub-section (1), the company shall cross off the name of transferor
shareholder or debenture holder and enter the name of the transferee shareholder or debenture
holder in the register within 15 days after the making of such application.
Notwithstanding anything contained in Sub-section (1), if the prevailing law on securities
transactions provides that no deed of transfer is required to transfer the title to the share or
debenture of a company such deed shall not be required to be produced along with an application
to be so made.
If a person who transfers any securities makes an application, also accompanied by a deed of
transfer of share, signed by the purchaser to get the transfer of any share or debenture recorded,
the company shall register the name of share or debenture transferee in the shareholder register or
debenture holder register as if such application was made by the transferee him/herself.
If any person acquires the title to any share or debenture by operation of any other provision
contained in the prevailing law the provision contained in Sub-section (1), shall not be deemed to
prevent the company from registering such person as a shareholder or debenture-holder.
1 b) i) “Insurance Contract" means a written contract made between the Insurer and the Insured on the
condition of bearing risk according to the contract by paying a fixed insurance premium.
The major types of insurance business are: (a) Life insurance business, (b) non-life insurance
business, (c) Re- insurance business and (d) micro-insurance business.
ii) The provisions for incorporation of Insurer as provided in Section 25 of Insurance Act, 2079 are
as follows:
• A person desirous to operate insurance business under this Act shall incorporate insurance
company by getting such company registered as a public limited company in accordance with the
prevailing law.
• Notwithstanding anything contained in sub-section (1), an insurance company that has been
established before the commencement of this Act and obtained a license to conduct insurance
business, shall not require to incorporate a company again for the same purpose.
• Any person or member of his/ her family or any company or corporate body where they are
substantial shareholders shall not invest more than 15 % of the paid up capital of the insurance
company incorporated under this Section. Provided that, this provision shall not be applicable in
relation to the shares subscribed by Nepal Government, Provincial Government or foreign
investors.
• Individuals or corporate body subscribing shares exceeding the limit mentioned in sub-section (3)
at the time of commencement of this Act, shall maintain the share investment limit of the same
sub-section within 2 years of commencement of this Act.
• Any person or member of his family, firm, company or corporate body pursuant to sub-section (3)
shall not invest shares exceeding 1 % or more of the paid up capital of other insurance company
carrying same type of insurance business.
iii)
1) Pursuant to Sub-section (1), of Section 66 of the Act, notwithstanding anything contained
elsewhere in this Act, an Insurer shall not insure any assets or liabilities of any of the following
persons or organizations:
• Liability to be borne by the insurer itself,
• Insurer’s own substantial shareholders, directors, consultants, auditors, employees or members of
his/her joint family,
• Substantial shareholders or members of his/her joint family,
• Firm, company or organization having the authority to nominate or appoint its Director,
• Any firm, company or organization in which director of the Insurer has financial interest,
managing agent or shareholder or director there or basic shareholders or members of his/her joint
The Institute of Chartered Accountants of Nepal
53
Suggested Answers June 2023 Examination (CAP III - Group I)
family of the same. Provided that, the Insurer engaging in life insurance business, under the
conditions & limitation of insurance amount, shall not be prohibited to insure the individuals
mentioned in this Sub-section.
2) Notwithstanding anything contained elsewhere in this section, the provisions mentioned in Subsection (1) shall not be applied in relation to insuring the assets or liabilities under the ownership
of the Government of Nepal.
2. Answer the following questions:
a) Presently Cooperatives and Micro-Finance has indeed in financial, managerial and other risk. The
debtors of the concerned institution have in strike against the Government and concerned
institutions to overcome the problem. Nepal Rastra Bank (NRB) has crucial and central role in the
issuance of license and financial sector management of those institutions. In the management of
the situation, what objectives of the NRB have? Have the functions, duties and powers of Nepal
Rastra Bank provided in the Nepal Rastra Bank Act, 2058 to overcome the situation? Explain. 7
b) A person not having required qualification elected as the Council Member of the ICAN, what
would be the position of the member so elected? State the status of any act and action done by
such Council Member according to the Nepal Chartered Accountants Act, 2053.
7
c) Discuss the process of examination of bid by the Public Entity as per the Public Procurement Act
2063 where the goods are purchased through the bidding process?
6
Answer
2 a) Section 4 have attributed the objectives of the Nepal Rastra Bank (the Bank).
1) The objectives of the Bank are:
a) To formulate necessary monetary and foreign exchange policies in order to maintain the stability
of price and balance of payment for economic stability and sustainable development of economy,
and manage it;
b) To increase the access of the financial service and increase the public confidence towards the
banking and financial system by maintaining stability of the banking and financial sectors,
c) To develop a secure, healthy and efficient system of payment.
2) The Bank shall, without any prejudice to the objectives referred to in Sub-section (1), extend cooperation in the implementation of the economic policies of Government of Nepal.
Likewise, Section 5 has prescribed the Functions, Duties and Powers of the Bank in order to
achieve the objectives referred to in Section 4, shall be as follows:
a) To issue bank notes and coins;
b) To formulate necessary monetary policies in order to maintain price stability and to implement or
cause to implement them;
c) To formulate foreign exchange policies and to implement or cause to implement them;
d) To determine the system of foreign exchange rate;
e) To manage and operate foreign exchange reserve;
f) To issue license to commercial banks and financial institutions to carry on banking and financial
business and to regulate, inspect, supervise and monitor such transactions;
g) To act as a banker, advisor and financial agent of Government of Nepal;
h) To act as the banker of commercial banks and financial institutions and to function as the lender
of the last resort;
i) To establish and promote the system of payment, clearing and settlement and to regulate these
activities;
j) To operate open market transaction through necessary instruments for liquidity management,
The Institute of Chartered Accountants of Nepal
54
Suggested Answers June 2023 Examination (CAP III - Group I)
k) To implement or cause to implement any other necessary functions which the Bank has to carry
out in order to achieve the objectives of the Bank under this Act;
While exercising the powers conferred by this Act or any other prevailing law, the Bank shall have
power to carry out other functions and take actions, which are incidental thereto. No one shall
violate powers conferred on the Bank under this Act.
2 b) As per section 7(3) of the Nepal Chartered Accountants Act 2053, the Council shall consist of the
following Councilors:
a) 10 person elected by and amongst Chartered Accountant members - Member
b) 4 persons elected by and amongst Registered Auditors members- Member
c) 3 persons nominated by Government of Nepal upon the recommendation of the Auditor General
from amongst the persons having experience on accountancy. - Member
Hence, in order to be elected as a council member, the candidate should have eligibility as a
Chartered Accountant member or Registered Auditor member of the institute.
(a)
(b)
(c)
(d)
(e)
(f)
In addition, as per Rule 89 of Nepal Chartered Accountants Rules 2061, the candidate should not
have the following disqualifications:
Not attained a period of 10 years after obtaining the membership of the institute,
Not elapsed a period of 6 years from the expiry date of the imprisonment punishment sentenced
by the election special court constituted under prevailing law in an offence pertaining to election,
Not elapsed a period of 6 months from the expiry date of the sentence convicted in a criminal
offense involving moral turpitude with imprisonment punishment for a period of 2 year or more.
Non-Nepali citizen,
Registered his/her name in the chartered accountancy education conducted by the institute,
Not elapsed a period of 2 years after the expiry of disciplinary action charged by the Council.
In this way, a person is presumed to be qualified for candidacy of councilor only if he possesses
the qualification under section 7 of the Act and does not possess the disqualification prescribed
under Rule 89 of the Regulation. However, as per section 12 of the Act, any action undertaken
according to decision of the Council, where a person, without possessing qualifications required
to be a Councilor, has been elected or nominated as the Councilor, shall not be invalid merely on
the ground thereof.
Hence, the position of the Councilor who has been elected without being qualified shall remain
vacant. However, the act and action done by such councilor before proving his/her disqualification
shall not be invalid.
2 c) On receipts of the bid documents, the Public Entity shall have to open bids as prescribed at the
time and place specified in the bidding documents on the same day immediately after expiry of the
deadline for the submission of bids as per Section 22 of the Public Procurement Act, 2063.
According to Section 23, the bid opened pursuant to Section 22 shall be submitted to the evaluation
committee by the Public Entity. Under Section 23(2) the committee shall, prior to evaluating the
bids submitted pursuant to Sub-section (1), examine the bids in order to ascertain the following
matters:
(a) Whether documents establishing that the bidder is qualified under law to submit the bid are
submitted or not,
(b) Whether the bid is complete in accordance with the instructions to bidders set forth in the bidding
documents or not and whether it is signed by the bidder or by the bidder’s authorized agent or not,
(c) Where a bid security is required to be submitted along with the bid, whether a bid security of such
type, period and amount as set forth in the bidding documents is accompanied with the bid or not,
The Institute of Chartered Accountants of Nepal
55
Suggested Answers June 2023 Examination (CAP III - Group I)
(d) Whether the bid is substantially responsive to the technical specifications set forth in the bidding
documents and the terms and conditions of procurement contract attached with the bidding
documents or not.
Under sub-section (3) in examining the completeness of bids pursuant to clause (b) of Sub-section
(2), the following matters shall be examined:
(a) Whether a power of attorney for the authorized agent or local agent of the bidder is submitted or
not,
(b) Where a joint venture agreement is necessary, whether such agreement is submitted or not,
(c) Whether documents establishing the eligibility of the bidder and of goods mentioned by the bidder
are submitted or not,
(d) Whether necessary document relating to the qualifications of the bidder is submitted or not,
(e) Where the bidding documents require the submission of a rate analysis, whether such rate analysis
is submitted or not,
(f) Other matters as prescribed.
(4) The Public Entity may ask bidders for necessary information.
(5) The concerned bidder should have to provide the information sought by the Public Entity without
allowing any change or alteration in the bid price or other substance of the bid.
(6) In examining bids bidder shall be made to ascertain whether or not it conforms to the
prequalification or not.
(7) While examining the qualification pursuant to Sub-section (6), if the qualification of a bidder is
found to be substantially lower than what was at the prequalification stage, the bid of such a bidder
shall be rejected.
(8) If any arithmetical error is found in a bid in examining bids the Public Entity may correct such an
error, and where, in making such correction, there exists a discrepancy between unit rate and total
amount, the unit rate shall prevail, and the total amount shall be corrected as per the same rate.
(9) Where there is a discrepancy between figures and words in a bid submitted by a bidder, the amount
in words shall prevail.
(10) Where any error is corrected pursuant to Sub-section (8) or (9), information of such correction
shall be communicated to the concerned bidder.
3. Answer the following questions:
a) Explain the Function, Responsibilities and Powers of the Financial Intelligence Unit under the
Assets (Money) Laundering Prevention Act, 2064.
7
b) International Financial Transaction plays vital role in the modern economy. State the functions,
duties and powers of the 'Implementation Committee' in this respect as prescribed by the
International Financial Transactions Act, 2054.
7
c) Mr. Forgussion, a foreigner, and Rabin Dahal have established a joint venture company in Smart
Cell which provides telephone service with mobile networks throughoutin Nepal. Nepali investor
has owned 60 percent investment in the company and rest is foreign investor. Both of them
approached you to draw a solution on the matter of distributing profits. How you suggest to them
for the settlement of the disputes rose between them? Discuss with provision of Foreign Investment
and Technology Transfer Act, 2075.
6
Answer
3 a) In pursuance to section 9 of the Assets (Money) Laundering Prevention Act, 2064, the Financial
Intelligence Unit ( FIU) shall be established as a Department in Rastra Bank with functional
independence and autonomy to receive suspicious transaction reports and other information related
to money laundering , terrorist financing and predicate offences and analyze suspicious
The Institute of Chartered Accountants of Nepal
56
Suggested Answers June 2023 Examination (CAP III - Group I)
transactions and other information and to disseminate the results of such analysis to the
Department.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
(l)
Pursuant to Section 10 (1) of this Act, the various functions, responsibilities and powers in addition
of others of the Financial Intelligence Unit can be listed as under:
To receive threshold transaction reports as per this Act,
To receive suspicious transaction reports as per this Act,
To receive the report of currency and bearer negotiable instrument as per this Act,
To receive other relevant information in accordance with the provision of this Act,
To analyze suspicious transaction report, including other reports and information received
pursuant to this Act,
To disseminate the conclusion/findings of the analysis to the concerned investigation officer or
authority on the request of investigation officer himself/herself or other concerned authority if any
suspicion (doubt) arises regarding to the offences relating to money laundering, financing on
terrorist activities or other offence in its analysis pursuant to clause (e),
To provide necessary training to its own staffs, regulator, reporting entity and relevant government
agencies,
To provide feedback and guidance in relation to identification of suspicious transaction, suspicious
transaction report or information to the Reporting Entity or concerned agency,
To submit annual report regarding its own activities and strategic analysis report to the
Government of Nepal through Rastra Bank incorporating the statements of types of offences,
techniques or methods of committing offences and trends of offences related with money
laundering and financing on terrorist activities,
To assist the Regulator in supervision of Reporting Entity as per necessity so as to know whether
RE has developed mechanism to identify and evaluate suspicious transaction and its reporting or
provide feedbacks on supervision report,
To conclude memorandum of understanding with foreign counterparts in order to exchange
information upon reciprocity,
To carry out other functions as prescribed.
FIU may request any relevant information or cooperation needed to carry out its duties with a
foreign counterpart that performs similar functions, or it may spontaneously or upon request, share
its information or otherwise cooperate with such foreign counterpart.
Financial Intelligence Unit, on the basis of gravity, may fine up to Rs. 10 million to a Reporting
Entity or officials or staffs of that entity that does not submit suspicious transaction report or does
not comply the orders issued and conditions prescribed pursuant to this Act or does not submit the
documents or information ordered to submit or does not provide information of transactions
pertaining to Section 10A, violates the confidentiality of the notices/information regarding to it or
does not submit notices or information within prescribed time. It shall provide a reasonable
opportunity to the Reporting Entity for its clarification while imposing such fine.
3 b) Section 12 of the International Financial Transaction Act, 2054 provides various functions, duties
and powers of the Implementation Committee formed under section 11 of the Act which are as
follows:
(a) To monitor and supervise as to whether or not licensed institutions are conducting international
financial transactions in accordance with this Act and the rules framed hereunder or other current
laws relating to international financial transactions.
(b) To offer suggestions to The Promotion Board in connection with facilities to be provided to
international financial institutions in order to establish Nepal as an attractive international financial
transactions center.
The Institute of Chartered Accountants of Nepal
57
Suggested Answers June 2023 Examination (CAP III - Group I)
(c) To offer suggestions to The Promotion Board in connection with reforms to be introduced in
current laws relating to international financial transactions in order to conduct international
financial transactions in an effective and systematic manner.
(d) To conduct investigations as to whether or not licensed institutions have fulfilled the conditions as
required by this Act, and require it to fulfill them if they are found not to have been fulfilled.
(e) To issue necessary instructions to licensed institutions on matters concerting international financial
transactions.
(f) To acquire the services of local or foreign experts and specialist agencies for the promotion and
development of international financial transactions.
(g) To comply with the instructions issued by The Promotion Board from time to time.
(h) To suspend or cancel, according to the situation, the license obtained by a licensed institution in
case it violates this Act or the rules framed hereunder, or other current laws relating to international
financial transactions. Provided that, the concerned institution shall be provided with an
opportunity to submit its explanations before canceling its license in that manner.
(i) To perform such other Acts as are prescribed in order to make international financial transactions
effective.
Besides the above, 'Implementation Committee' also has the following functions, duties and
powers as provided under the various sections of the Act.
(a) Under Section 11(2) The Implementation Committee may invite any local or foreign expert or
advisor engaged in international financial transactions to attend its meeting in the capacity of an
observer.
(b) Under Section14: License to be issued: The Implementation Committee shall, if it deems it
appropriate to issue a license to conduct international financial transactions following necessary
investigations into an application filled for a license to conduct financial transactions under section
13, issue a license in the prescribed form by prescribing necessary conditions also on payment of
the
prescribed license fee. In case a license cannot be issued the concerned applicant must be
notified accordingly. The Implementation Committee shall have the power to demand information
particulars or documents pursuant to the license application - Section 15.
(c) Under Section 17: Secrecy to be maintained
1) The Implementation Committee must keep secret all documents and information relating to
licensed institutions that are under its' custody or control.
2) The Implementation Committee shall not be compelled to submit the documents and information
mentioned in sub- section (1) to any Court, Inquiry Commission or Committee or the Commission
for Investigation into Abuse of Authority, or to violate the secrecy of such documents or
information in any way.
(d) Under Section 18: Money to be deposited in The Consolidated Fund: Fees and other amounts
received by the Implementation Committee under this Act shall be deposited in The Consolidated
Fund.
(e) Under Section 19: Power to form Sub-Committee: The Promotion Board or the Implementation
Committee may form Sub Committees according to need in order to discharge their functions. The
functions, duties, jurisdiction and working procedures of a Sub- Committee
formed under
sub-section (1) shall be as prescribed by The Promotion Board or the Implementation Committee,
which has formed it.
(f) Under Section 20: Cooperation to be provided: All government agencies must extend necessary
cooperation to The Promotion Board and the Implementation Committee in discharging their
functions.
(g) Under Section 21: Delegation of powers: The Implementation Committee may delegate all or any
of the powers vested in it under this Act or the rules or by- rules framed hereunder to any of its
member, Sub-Committee or office-employee according to need. Provided that the Implementation
Committee may not delegate the power to issue licenses to conduct international financial
transactions as well as the power to cancel or suspend such license.
The Institute of Chartered Accountants of Nepal
58
Suggested Answers June 2023 Examination (CAP III - Group I)
3 c) The disputes prevailing between the Nepali investor and foreign investor can be settled through
the legal provision of the Foreign Investment and Technology Transfer Act, 2075. I suggest them
to follow the process through the section 40 of the Act. That dispute shall be settled as follows:
1) If there arises any dispute between a Nepali investor and a foreign investor in relation to foreign
investment, the Department may make it necessary facilitation in order that such a dispute is settled
by the concerned parties through mutual discussions or negotiations.
2) If the dispute cannot be settled through the process referred to in sub-section (1) within a period of
forty-five days after the dispute has arisen, and a joint investment or dispute settlement agreement
exists between the parties to the dispute for the resolution of such a dispute, the dispute shall be
settled in accordance with such an agreement.
3) The parties shall give information about the settlement of the dispute in accordance with sub-section
(2) to the Foreign Investment Approving body not later than fifteen days of its settlement.
Provided, that the parties shall not be bound to give information about on what terms and
conditions such a settlement has been made.
4) If the agreement concluded between the parties in accordance with sub-section (2) has no provision
about the settlement of disputes, such a dispute shall be settled by arbitration in accordance with
the arbitration law of Nepal.
5) Any dispute arising in connection with any foreign investment shall be settled by arbitration in
accordance with the prevailing Rules or Procedures of the United Nations Commission on
International Trade Law (UNCITRAL), unless otherwise agreed upon by the parties to the dispute.
6) Arbitration to be conducted in accordance with this Section shall be held in Nepal, and substantive
law of Nepal relating to arbitration shall apply. Provided that, with respect to the case referred to
in sub- section (2), the provision contained in that sub-section shall apply.
7) If no agreement was made between the parties on the settlement of dispute prior to the arising of
the dispute or if they realize that the agreement, if any made, is inadequate, the concerned parties
may make an agreement for the settlement of a dispute even after the dispute has arisen.
Information of the agreement so made shall be given to body registering the industry.
8) Any dispute with respect to the agreement made in accordance with sub-section (7) may also be
settled in accordance with this Section.
4. Answer the following questions:
a) Modern Commercial bank appoints Mr. Pradhan as an auditor to compliance with the prevailing
legal provisions. After the appointment of Mr. Pradhan, another auditor complained to the bank
stating that Pradhan is ineligible to be appointed as an auditor. Answer the following questions on
the above factual background considering by the bank referring the provisions of Banks and
Financial Institutions Act, (BAFIA) 2073.
(1.5+4+2.5=8)
i) What is “Financial interests” in banking?
ii) Who is ineligible to be appointed as an auditor of a bank or financial institution and what would
happen if any person appointed as an auditor has Ineligibility?
iii) Which type of action is taken if an auditor does not perform his/her duties as per BAFIA, 2073?
b) Mr. Ramesh Adhikari would like to invest some money in securities business but he is even
unknown about the basic knowledge regarding securities. So, he asks you to make clear about the
following securities related questions.
(2.5+4.5=7)
i) Define the term securities.
ii) Mention the different types of securities business as per Securities Act, 2063.
Answer
4 a) i) “Financial interests” means a situation where any Director, shareholder subscribing one percent or
more shares or Chief Executive or family member of such person or the person, company, or
corporate body having authority to appoint a Director subscribes ten percent or more shares of a
firm, company or corporate body separately or jointly, such person or persons are deemed to have
financial interests in the institution having ten percent or more shares, and the term also include
The Institute of Chartered Accountants of Nepal
59
Suggested Answers June 2023 Examination (CAP III - Group I)
the interests which the Rastra Bank specifies as having financial interests depending upon the
nature and circumstance of financial transaction.
ii) Ineligibility for Appointment as Auditor: According to section 64(1) of the Act, any of the
following persons or any firm, company, or institution in which such person is a promoter or
partner shall not be eligible to be appointed as an auditor of a bank or financial institution: (a) A promoter, Director, Chief Executive of a bank or financial institution or his\her family member,
(b) An official, employee or internal auditor of the bank or financial institution,
(c) A person working as a partner of any promoter, Director or employee of the bank or financial
institution,
(d) A borrower of the bank or financial institution, a person with significant ownership or relevant
person or person having financial interests,
(e) A person who has been declared bankrupt in Nepal or abroad,
(f) A person, firm, company, or institution having subscribed one percent or more shares of the bank
or financial institution,
(g) A person, who has been punished in any criminal offense by the court and a period of five years
has not been lapsed after he\she has served the punishment,
(h) A person who is disqualified to become an auditor according to prevailing laws.
(2) If any person appointed as auditor of a bank or financial institution is found to be ineligible
pursuant to Sub-Section (1), his/her appointment shall be deemed to have been ipso facto invalid.
iii) Recommendation for taking actions against Auditor as per section 67 of BAFIA, 2073:
(1) The Rastra Bank shall write to the concerned regulating authority to remove name of an auditor,
who does not perform his/her duties as per this Act, from the panel of the auditors subject to
prohibit him/her to carry out audit of any bank or financial institution for one year to three years.
(2) In case of recommendation pursuant to sub-section (1), the concerned regulating agency shall have
to take actions against such auditor as per the prevailing laws.
4 b) i) "Securities" means any shares, stocks, bonds, debentures, debenture stocks or collective investment
scheme certificate issued by a body corporate or treasury bonds, saving bonds or bonds issued by
the Government of Nepal or by a body corporate against the guarantee of the of the Government of
Nepal, and this term also includes such other securities as may be specified by the Board to be
transacted or transferable through the stock exchange or the instrument to purchase, sell or exchange
such securities.
ii) Types of securities business as per Securities Act, 2063
(1) For the purposes of this Act, the securities business shall be divided into the following types:
(a) Securities brokerage,
(b) Securities trade,
(c) Issue and sales management,
(d) Investment management,
(e) Investment consultancy service,
(f) Collective investment fund management,
(g) Securities registration or securities central deposit service or custodial service,
(h) Service relating to the settlement of the account of securities transactions,
(i) Market maker,
(j) Such other business as may be specified by the Board to be a securities business.
(2) The scope and other provisions of the securities business referred to in Sub-section (1) shall be as
prescribed.
The Institute of Chartered Accountants of Nepal
60
Suggested Answers June 2023 Examination (CAP III - Group I)
5. Answer the following questions:
(3×5=15)
a) Mr A is a director of ABC cooperatives. He was convicted of a negligently driving a car and met
an accident where he was fined 10 thousand rupees. A journalist questions his eligibility to become
a director of a cooperative. He asked you about the legal provision on how and when a director of
a cooperative organization can be removed? Answer on the basis of Cooperative Act, 2074.
b) State the concept of “Sick Industry” as prescribed by the Industrial Enterprises Act, 2076. When
and what basis an industry is declared as sick industry?
c) The Foreign Investment and Technology Transfer Act, 2075 been enacted to attract foreign
investment and technology. Answer the following questions pertaining to it:
i) The term "Foreign Investor" and "Foreign Investment".
ii) The procedure of obtaining approval to foreign investment in Nepal.
Answer
5 a) Section 45 of Cooperative Act, 2074 provide the criteria of removing director from his/her office
as follows:
(1) General Meeting may by a resolution adopted by its majority remove a director from the office of
a director in any of the following circumstances:a) In case he/she incurs loss or damage to the concerned Cooperative Organization by committing
fiscal embezzlement;
b) In case he/she discloses confidentiality of transaction of the concerned cooperative Organization
in an unauthorized manner;
c) In case he/she involves in the same nature of business or transaction with the concerned cooperative
organization in a competitive manner;
d) In case he/she commits any act against the interests of the concerned cooperative Organization;
e) In case he/she is physically or mentally incapable to work;
f) In case any director does not have qualifications referred to in this Act, Rules or Byelaws framed
under this Act.
(2) Before adopting a resolution to remove any director is removed from the office, such a director
shall be provided with reasonable opportunity to defend him-self or herself at the General Meeting.
(3) In case any director fails to submit his or her defense within the period referred to in sub-Section
(2), or in case his or her defense is not satisfactory, the General Meeting may remove him or her
from the office thereafter.
(4) The member removed from the director pursuant to sub-Section (3) shall not be eligible to become
a candidate for a period of two terms of the office.
(5) In case any director is removed from the office pursuant to sub-Section (3), the General Meeting
may elect another person as the director for the remaining term of the office.
On the basis of above mentioned provision, Mr A cannot be removed from the post of director.
5 b) Section 39 of the Act provides that if any Industry is being operated for a minimum period of five
years after commencement of its commercial production or transaction and its production level is
thirty percent or less than thirty percent of the total production capacity in the last 3 consecutive
years owing to the circumstances beyond control without any default or weakness on the part of
the management and operating in loss for a consecutive period of such 3 years, Government of
Nepal may, on the basis of prescribed criteria and following the prescribed procedures declare it
as a sick industry.
On the basis of identification of the sick industry, it may be classified as fully sick industry, sick
industry and sick oriented industry on the prescribed grounds for its appropriate management.
The Institute of Chartered Accountants of Nepal
61
Suggested Answers June 2023 Examination (CAP III - Group I)
If the industry which is in the state of closure owing to sick, seems from the schemes or project
proposal submitted by the industry or study conducted by the Ministry, that it can be re-operated
by providing certain exemptions, facilities or concessions, Government of Nepal may provide
facilities, exemptions and concessions as prescribed for the resurgence, reconstruction and
management of such industries for certain period.
If any Cooperative society along with the participation of investors submits proposal for the
operation of the sick industry, the industry may, based on the capacity and feasibility of the
Cooperative society, be operated by such Cooperatives society within the prescribed conditions.
Notwithstanding anything mentioned in the prevailing laws, Government of Nepal may provide
full or partial rebate on duty, fees or taxes levied on machineries, tools or equipment imported for
expansion, restructuring or diversification of sick industry.
5 c) i) Pursuant to section 2(k) of this Act, "Foreign Investor" means any foreign individual, firm,
company, Non-resident Nepali or foreign government or international agency or other corporate
body of similar nature that makes foreign investment, and also includes, in the case of a foreign
investor that is an institutional foreign investor, the ultimate beneficiary of such an institution.
Pursuant to section 2(j) of this Act, "Foreign investment" means the following investment made
by a foreign investor in an industry or company:
(1) Share investment in foreign currency,
(2) Re-investment in an industry of dividends derived from foreign currency or shares,
(3) Lease finance made in accordance with Section 6 of this Act,
(4) Investment made in venture capital fund in accordance with Section 9 of this Act,
(5) Investment made in listed securities through secondary securities market in accordance with
Section 10 of this Act,
(6) Investment made by purchasing shares or assets of a company incorporated in Nepal,
(7) Investment received through the banking channel after issuing securities in a foreign capital market
by an industry or company incorporated in Nepal in accordance with Section 11 of this Act,
(8) Investment made through technology transfer, or
(9) Investment maintained by establishing and expanding an industry in Nepal.
ii) Section 15 of this Act provides application to be made for approval to make foreign investment by
a foreign investor (including a Chinese Investor) as under:
(1) A foreign investor wishing to make foreign investment shall make an application, setting out the
details, accompanied by a time schedule for bringing foreign investment into Nepal and action
plan on investment in the industry, to the Foreign Investment Approving Body for approval, to
make foreign investment, in such a form and setting out such details as prescribed.
(2) If, in examining an application received pursuant to sub-section (1) above, it appears that such
documents as prescribed have been completed, the Foreign Investment Approving Body shall give
approval for foreign investment in such form as prescribed within period of seven days of the date
of receipt of the application subject to section 17 of this Act.
(3) An industry which has obtained approval pursuant to sub-section (2) wishes to make investment
from the eared profits in the same industry or in any industry other than that referred to the
Schedule of this Act, it is not necessary for it to re-obtain approval on foreign investment.
Provided that, the matter requiring license or permission under the prevailing law for the purpose
of registration of an industry or company or tax or any other business, or any requirements
afterwards of approval shall be governed accordingly.
For the purpose of section 17 of this Act, Foreign Investment Approving Body is identified as:
(1) The Department of Industries which shall approve the foreign investment not exceeding six billion
Rupees.
The Institute of Chartered Accountants of Nepal
62
Suggested Answers June 2023 Examination (CAP III - Group I)
(2) The Investment Board under the Investment Board Act, 2068 which shall approve the foreign
investment exceeding six billion Rupees.
6. Write short notes on the followings:
a) Mention the situation when a punishment can be waived under the Banking Offence and
Punishment Act, 2064.
4
b) Power of the Arbitrator (any SIX) as per the Arbitration Act, 2055
3
c) Explain the provision on reward to be provided to the informant under Foreign Exchange
Regulation Act, 2019.
3
Answer
6 a) Section 26 of the banking offence and punishment Act, 2064 mentions the situation where a
punishment can be waived. It states that: The investigation and inquiry officer may provide waiver
in the claim of punishment, in full or part, to a person extending cooperation in regard to the
investigation and inquiry proceedings initiated under the Act presenting such person as his/her
witness.
Provided, notwithstanding anything contained in this Act or in prevailing laws a lawsuit may be
reregistered against such person if his/her cooperation could not be established from other
proof/evidence or if he/she made statement before the adjudicating officer against the cooperation
extended by him/her to the investigation and inquiry officer.
6 b) Section 21 of the Arbitration Act, 2055 prescribes the power of the Arbitrator as follows:
The powers of the arbitrator shall be as follows, except when otherwise provided for in the
agreement:
(a) To direct the concerned parties to appear before him/her to submit documents, and record their
statements as required.
(b) To record statements of the witness.
(c) To appoint expert and seek their opinion or cause examination on any specific issue.
(d) In case party is a foreign national so that the decision pronounced by the arbitrator is not likely to
be implemented for that reason, to obtain a bank guarantee or any other appropriate guarantee as
determined by the arbitrator.
(e) To inspect the concerned place, object, product, structure, production process or any other related
matter which are connected with the dispute on the request of the parties or on his/her own
initiative if he/she so deems appropriate, and in case there is any material or object which is likely
to be destroyed or damaged, to sell them in consultation with the parties, and keep the sale proceeds
as a deposit.
(f) To exercise any specific power conferred by the parties.
(g) To issue preliminary orders or interim or inter locating orders in respect to any matter connected
with the dispute on the request of any party, or take a conditional decision.
(h) To issue certified copy of document.
(i) To exercise the other power conferred by this Act.
6 c) Section 20 of the foreign exchange regulations Act, 2019 has mentioned the provision on reward
to the informant. According to this provision if any person provides Nepal Government or the
authority authorized by the Government of Nepal information that any person has done any act in
contravention of this Act or Rules, Bye-laws, orders notices or directions or license framed or
issued under this Act and the foreign exchange is seized and the offence proved on the basis of the
information so given, twenty percent of the amount in question set by converting such seized
foreign exchange into the Nepalese currency shall be given as a reward to such informant.
The amount of reward to be given shall be given from the amount to be set by converting such
seized foreign exchange into the Nepalese currency after the final settlement of the case.
The Institute of Chartered Accountants of Nepal
63
Suggested Answers June 2023 Examination (CAP III - Group I)
Examiner’s Commentary on Students' Performance in June
2023 Examinations
Paper 1 – Advanced Financial Reporting
List of Questions Specific Comments on the Performance of the Students
Question no. 1
Most of the students tried but could not answer properly. Students have
no clear understanding of holding company.
Question no. 2
a. Most of the students are not able to solve.
b. Well attempted.
Question no. 3
Change in equity Statement format is not clear for the student.
Question no. 4
Poor performance in conceptual knowledge of accounting terms.
Question no. 5
a. Lack of preparation.
b. Most students did not have knowledge of direct and indirect cash
flows.
Question no. 6
Revenue recognition and its calculation is not proper.
Paper 2 – Advanced Financial Management
List of Questions Specific Comments on the Performance of the Students
Question no. 1
Most of the students answer the question but notable to solve completely.
Question no. 2
a. Good performance from student.
b. Most of the students could not attempt.
Question no. 3
a. Good performance.
b. Most of the students calculated on the basis of market price rather on
return basis. Weak performance.
Question no. 4
Theory part is satisfactory. However Price risk and interest risk is not
covered by most of the students.
Question no. 5
a. Most of the students answer correctly.
b. Annual rate of premium is calculated on average basis.
Question no. 6
a. Answer correctly.
b. Most of the students failed to answer.
Paper 3 – Advanced Audit and Assurance
List of Questions Specific Comments on the Performance of the Students
Question no. 1
a. Students are giving specific answers for the issues.
b. General type answer.
Question no. 2
a. Most of the students give specific answer with relevant provisions of
NSA/NFRS..
b. Provisions of NSA 320, 705 & 706 not well written.
Question no. 3
a. Most of the students do not explain the Going Concern issue correctly.
b. Assessment of Company’s compliance with related party not
discussed.
Question no. 4
a. Conclusion whether it is justifiable or not has not been written in
majority of cases.
b. Factors evaluating the level of threats created has not been written in
majority of the cases.
Question no. 5
a. Fairly written answers.
b. Students give correct answer with NSA provisions and correct
conclusion.
Question no. 6
Students write short notes correctly.
The Institute of Chartered Accountants of Nepal
64
Suggested Answers June 2023 Examination (CAP III - Group I)
Paper 4 – Corporate Laws
List of Questions Specific Comments on the Performance of the Students
Question no. 1
Instead of writing specific answer of Companies Act, 2063, majority of
students have written their practical experience of secondary market.
They could not differentiate between jurisdiction of Companies Act and
Securities Act.
Question no. 2
Most of the students are confused about the concern of the question and
have written the general answer heard in the market instead of specific
answer pursuant to NRB Act, 2058.
Question no. 3
a. Regarding dispute settlement under FITTA 2075, a few students are
confused in relation to Arbitration Act 2055 and have written answers
pursuant to the latter Act.
b. Other questions are solved satisfactorily.
Question no. 4
a. Most of the students lack amount of financial interest pursuant to
BAFIA and has given audit subjects definition.
b. Punishment under BAFIA for auditor could not be given by majority
of students.
Question no. 5
Satisfactory performance.
Question no. 6
a. Waive of punishment under BOPA 2064 could not be answered by
most of the students.
b. Satisfactory performance.
The Institute of Chartered Accountants of Nepal
65