PAPER – 10 : CORPORATE ACCOUNTING AND AUDITING

SUGGESTED ANSWERS
SECTION-A
1.
(i) (C)
(ii) (D)
(iii) (B)
(iv) (D)
(v) (D)
(vi) (A)
(vii) (C)
(viii) (B)
(ix) (C)
(x) (D)
(xi) (C)
(xii) (D)
(xiii) (D)
(xiv) (C)
(xv) (D)
SECTION-B
2. (a)
In the books of P Ltd.
Journal
Date Particulars L.F Debit (₹) Credit (₹)
1st Equity Share Capital A/c …… Dr. 3,000
Securities Premium A/c Dr. 200
To Equity Share Allotment A/c 500
To Equity Share Call A/c 1,200
To Forfeited Share A/c 1,500
Alternatively,
Equity Share Capital A/c ….. Dr. 3,000
Securities Premium A/c Dr. 200
To Calls-in-arrear A/c 1,700
To Forfeited Share A/c 1,500
2nd Bank A/c………………………………… Dr. 2,000
Forfeited Share A/c……………………… Dr. 500
To Equity Share Capital A/c 2,500
3rd Forfeited Shares A/c …………………………Dr. 700
To Capital Reserve A/c 700
Note: Entries to be supported by Narration.

Calculation of Amount to be transferred to Capital Reserve

Amount forfeited per share of M ₹3
Less: Loss on re-issue per share ₹2
Surplus ₹1
Amount forfeited per share of N ₹6
Less: Loss on re-issue per share ₹2
Surplus ₹4
Transferred to Capital Reserve: M’s share (100 x ₹ 1) = ₹100;
N’s share (150 x ₹ 4) = ₹ 600.
Total = ₹100 + ₹ 600 = ₹700.
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2. (b)
(i) Number of shares issued:
Debenture holders opted for conversion (40,000 /100) = 400
Option for conversion = 20%
Number of debentures to be converted (20% of 400) = 80
Redemp. value of 80 debentures at a premium of 5% [80 x (100+5)] = ₹ 8,400
Equity shares of ₹ 10 each issued on conversion [₹ 8,400/ ₹.20] = 420 shares

(ii) Cash to be paid:

Number of debentures - number of debentures to be converted into equity shares= 400- 80 =320 Debentures
Redemption value of 320 debentures (320 × ₹ 105) = ₹ 33,600

(iii) Journal of Akash Limited:

Date Particulars L.F. Dr.( ₹.) Cr.( ₹)
1 Debentures A/c Dr. 40,000
Premium on redemption A/c Dr. 2,000
To Debenture holders A/c 42,000
2 Debenture holders A/c Dr. 42,000
To Equity Share capital A/c 4,200
To Securities premium A/c 4,200
To Bank A/c 33,600
Note: Entries to be supported by Narration.
3.
Alpha Ltd.
Statement of Profit and Loss for the year ended 31st March, 2024
Particulars Amount(₹)
I. Revenue from operations 57,00,000
II. Other income (Income from Govt. Securities) 24,000
III. Total Revenue [I + II] 57,24,000
IV. Expenses:
Cost of purchase 32,00,000
Changes in inventories (50000)
Employee Benefits Expense 7,72,000
Finance Costs 30,000
Depreciation and Amortization Expenses 5,00,000
Other Expenses 4,45,750
Total Expenses 48,97,750
V. Profit before Tax (III-IV) 8,26,250
VI. Provision for Tax 1,50,000
VII. Profit for the period 6,76,250

Balance Sheet as on 31.03.2024

Note No. Amount(₹)
I EQUITY AND LIABILITIES
(1) Shareholders' Funds
Share Capital 1 30,00,000
Reserves and Surplus 2 11,76,250
(2) Non-Current Liabilities
Long-term Borrowings (10% debentures) 3,00,000
(3) Current Liabilities
Trade Payable 2,00,000
Other Current Liabilities 3 7,500
Short-Term Provisions (Provision for tax) 4 1,50,000
Total 48,33,750
II ASSETS
(1) Non-Current Assets
(a)PPE 5 31,00,000
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 (b)Non-current Investments (12%L T Govt. Securities) 2,00,000
(2) Current Assets
Inventories 3,50,000
Trade Receivables 7 9,61,750
Cash and bank balances 2,22,000
Total 48,33,750
Note: Contingent Liability for Proposed Dividend (3000000 x 10%) = ₹ 3,00,000.

Notes to Accounts:
Particulars Amount(₹)
1. Share Capital
Subscribed and Paid-up Capital
300000 Equity Shares of Rs. 10 each 30,00,000
2. Reserve and Surplus
General Reserve 3,00,000
Balance of Statement of Profit & Loss A/c
Opening Balance 3,00,000
Add: Profit for the period 6,76,250
9,76,250
Appropriations
Transfer to General Reserve (1,00,000)
8,76,250
11,76,250
3. Other Current Liabilities
Interest accrued on Debentures 7,500
4. Short Term Provision
Provision for Tax 1,50,000
5. PPE
Buildings 1200000
Less: Depreciation 60000 1140000

Machinery 2000000
Less: Depreciation 400000 1600000

Motor van 400000

Less: Depreciation 40000 360000
31,00,000
6. Total depreciation 5,00,000
7. Trade Receivables
Sundry Debtors 10,00,000
Less: Provision for Doubtful Debts 38,250
9,61,750
8. Employee Benefit Expenses
Salaries 6,72,000
Contribution to P.F. and Gratuity Funds 1,00,000
7,72,000
9. Finance Cost
Interest on Debenture 22,500
Outstanding Interest on Debenture 7,500
30,000
10. Other Expenses
Discount Allowed 7,500
Carriage Outward 1,50,000
Rent and Rates 50,000
Advertisement 1,50,000
Bad Debt 20,000
Misc. Expenditure 30,000
Provision for Doubtful Debts 38,250 4,45,750

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4. (a)
Secured and unsecured portion of loan
Date Particulars Amount(₹)
31.03.2024 Balance of Loan (Principal) 15,00,000
Add: Outstanding Interest 1,97,112
Total Claim 16,97,112
Less: Value of security at that date 14,70,000

2,27,112
Classification: Secured portion of loan. 14,70,000
Unsecured portion of loan 2,27,112

Outstanding interest
Quarter ending Interest (₹) Closing balance
with Principal (₹)

31.03.2023 37,500 15,37,500

30.06.2023 38,438 15,75,938
30.09.2023 39,398 16,15,336
31.12.2023 40,383 16,55,719
31.03.2024 41,393 16,97,112
1,97,112

4. (b)
Statement showing Life Assurance Fund
Particulars Amount(₹) Amount(₹) Amount(₹)
Balance of Fund as on 31st March, 2023 30,00,000
Add:
Interest on securities 4,100
Premium outstanding 2,700
6,800
Less: 30,06,800
Claims outstanding 13,250
(-) Covered under re-insurance 6,000 7,250
Bonus in reduction of premium 2,250
9,500
Balance of Life Assurance Fund 29,97,300

5. (a)
Bonus payable for current year = ₹..300000 + 6% of ₹.300000 = ₹ 3,18,000
No. of employees in payroll = 450 – 8% of 450 = 414
Provision for bonus = ₹.318000 x 414 = ₹ 13,16,52,000
Note: Here, the company has a constructive obligation and not a legal obligation to increase the bonus.

This will be falling under the category of Short Term Employee Benefit.

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5. (b)
Y Ltd.
Cash Flow Statement for the year ended on 31.03.2023
Particulars Amount(₹)
Cash Flows from Operating Activities
Net Profit before Taxation 10,00,000
Add back:
Depreciation on Fixed Assets 2,95,000
Discount on Issue of Debentures 15,000
Interest Expenses (Debentures) 1,75,000
14,85,000
Less: Profit on Sale of Investment (10,000)
Less: Interest Income from Long-term Investments (30,000)
Cash Generated from Operations Before WC Changes 14,45,000
Less: Increase in non-cash working capital(639000-586000)
Cash Generated from Operations (53,000)
Less: Income-tax Paid 13,92,000
Net Cash from Operating Activities (5,25,000)
8,67,000

6. (a)
Following are the essential characteristics or principles of a good internal check system:
(i). Division of work:
The entire task should be divided among the staff in such a way that no single person is allowed to complete the
work solely by himself from the beginning to the end.
(ii). Provision of check:
There must be clear instruction that the work performed by any staff must be checked by the next staff.
(iii). Responsibility:
Responsibility of each individual must be properly defined and fixed.
(iv). Use of technology:
As far as possible, various technology enabled devices should be used to minimise human error.
(v). Rotation of employees:
A system of transfer or rotation of employees from one responsibility to another must be followed by the
business.
(vi). Control over employees:
Generally, chances of frauds are high in case there is direct contact between staff and the customers. So, a
manager can keep eyes in those areas to make internal check system more effective.
(vii). Supervision:
A strict supervision should be exercised to ensure that the prescribed internal checks and procedures are fully
operative.
(viii). Periodical review:
The system of internal check is reviewed from time to time to introduce improvements.

6. (b)
Applicability and Conduct of Secretarial Audit:
(a) The Companies Act 2013: As per the provision of Section 204(1) of the Companies Act, 2013 read with Rule 9 of
the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014:
1. Every listed company;
2. Every public company having a paid-up share capital of 50 crore rupees or more; or
3. Every public company having a turnover of 250 crore rupees or more; or
4. Every company having outstanding loans or borrowings from banks or public financial institutions of 100crore
rupees or more.
- is required to annex with its Board’s Report made in terms of Section 134(3) of the Companies Act, 2013, a
Secretarial Audit Report, given by a Company Secretary in practice, in Form No. MR-3.
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 As per Section 204(2), it shall be the duty of the company to give all assistance and facilities to the company
secretary in practice, for auditing the secretarial and related records of the company.

Moreover, Section 204(4) further provides that if a company or any officer of the company or the company
secretary in practice, contravenes the provisions of this section, the company, every officer of the company or the
company secretary in practice, who is in default, shall be liable to a penalty of two lakh rupees.

(b) SEBI Regulations: As per Regulation 24A of the SEBI(LODR) Regulations, 2015, every listed entity and its
material unlisted subsidiaries incorporated in India shall undertake secretarial audit and shall annex a secretarial
audit report given by a company secretary in practice, in such form as specified, with the annual report of the
listed entity.

In addition to the above, every listed entity shall submit a secretarial compliance report in such form as specified,
to stock exchanges, within sixty days from end of each financial year.(Amended by the SEBI (Listing Obligations
and Disclosure Requirements)(Second Amendment) Regulations, 2021 w.e.f. 5.5.2021).

7. (a)
Difference Between Audit Report and Audit Certificate:
Points Auditor’s Report Auditor’s Certificate
It is an expression of opinion It is a confirmation of correctness
Nature about the financial statements. and accuracy about some matters.

Basis of The report is based on facts, The certificate is based on actual

audit assumptions and estimations figures and facts.
The scope of audit report is Its scope is limited
Scope
large.
In audit report, there is a scope No scope of constructive advice
Advice of giving constructive advice to exists in the case of the certificate.
the company.
Audit report is an opinion by the Audit certificate is a formal
auditor and does not guarantee statement by the auditors which
Guarantee
the accuracy of the financial guarantee the accuracy of the facts
statements stated therein
The report is submitted to the Certificates are issued as and when
Time of
appointing authority only after required.
issue
the audit is complete.
As a report is merely an opinion, In case of the wrong certificate, the
if it is not correct, the auditor auditor will be held responsible.
Liability
may not be held responsible,
of
unless he is found to be
auditor
negligent to his duty.

7. (b)
Role Of NFRA: The NFRA's role, it is a statutory body established by the Companies Act of 2013. Its major
responsibility is ensuring that Auditing and Accounting Standards for Public Interest Entities are followed.

 The NFRA oversees the Quality Review Board. Its primary function will be quality audits of public, listed and
private firms. This will allow the NFRA to contribute to the development of legislation governing accounting and
auditing.
 The NFRA has the authority to investigate professional misconduct, levy fines, and potentially prevent a
Practicing Professional from practising for 10 years.
 The NFRA, in addition to supervising the auditing profession, advises the Central Government on accounting
standards and auditing rules.
 The National Financial Reporting Authority can also investigate misbehaviour, chequebooks, papers, and oaths.
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  The NFRA will be tasked with ensuring the quality of its members' services and defining criteria for auditors and
auditing companies.
 The NFRA may also organize research groups, advisory committees, and task teams. These organizations are in
charge of developing people's awareness of auditing standards, as well as auditor obligations and quality.
 If the auditors commit fraud, the regulator may suspend them for ten years or more. A fine of up to five times the
auditor's fees can also be levied.
 The NFRA may also become a member of worldwide or regional groups of independent audit regulators. In
addition to these core responsibilities, the NFRA may be in charge of specific financial companies.
 Its role has expanded to encompass the creation of standards that are applicable to all enterprises and professions.
The NFRA can also undertake industry studies and enlist the assistance of other specialists.
 The NFRA may also ask additional experts to assist in the creation of accounting principles and other relevant
functions. Previously, the Central Government mandated accounting standards based on ICAI recommendations.
This body, however, has been superseded by the NFRA.

Alternative:
Role of NFRA:
A. Recommending Auditing Standards
As mentioned earlier, NFRA recommends auditing policies and standards to be adopted by companies for approval
by the Central Government. For this purpose, the Authority –

 shall receive recommendations from the Institute of Chartered Accountants of India on proposals for new
accounting standards or auditing standards or for amendments to existing accounting standards or auditing
standards;

 may seek additional information from the Institute of Chartered Accountants of India on the recommendations
received under clause (a), if required.

Further, the Authority shall consider the recommendations and additional information in such manner as it deems fit
before making recommendations to the Central Government.

B. Monitoring and Enforcing Compliance with Auditing Standards

(1) For the purpose of monitoring and enforcing compliance with auditing standards under the Act by a company or a
body corporate governed under Rule 3, the Authority may:

(a) review working papers (including audit plan and other audit documents) and communications related to the audit;
(b) evaluate the sufficiency of the quality control system of the auditor and the manner of documentation of the system
by the auditor; and
(c) perform such other testing of the audit, supervisory, and quality control procedures of the auditor as may be
considered necessary or appropriate.

(2) The Authority may require an auditor to report on its governance practices and internal processes designed to
promote audit quality, protect its reputation and reduce risks including risk of failure of the auditor and may take
such action on the report as may be necessary.

(3) The Authority may seek additional information or may require the personal presence of the auditor for seeking
additional information or explanation in connection with the conduct of an audit.

(4) The Authority shall perform its monitoring and enforcement activities through its officers or experts with
sufficient experience in audit of the relevant industry.

(5) The Authority shall publish its findings relating to non-compliances on its website and in such other manner as it
considers fit, unless it has reasons not to do so in the public interest and it records the reasons in writing.

(6) The Authority shall not publish proprietary or confidential information, unless it has reasons to do so in the public
interest and it records the reasons in writing.

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 (7) The Authority may send a separate report containing proprietary or confidential information to the Central
Government for its information.

(8) Where the Authority finds or has reason to believe that any law or professional or other standard has or may have
been violated by an auditor, it may decide on the further course of investigation or enforcement action through its
concerned Division.

C. Power to Investigate
In addition to the above, the Authority also enjoys power to -
(i) investigate any matter of professional or other misconduct under sub-section (4) of section 132 of the Act;
(ii) undertake investigation into any matter on the basis of its compliance or oversight activities; or
(iii) undertake suo-motu investigation into any matter of professional or other misconduct, after recording reasons in
writing for this purpose.

If, during the investigation, the Authority has evidence to believe that any company or body corporate has not
complied with the requirements under the Act or rules which involves or may involve fraud amounting to rupees
one crore or more, it shall report its findings to the Central Government.

On the commencement of these rules-

(a) the action in respect of cases of professional or other misconduct against auditors of companies referred to in rule 3
shall be initiated by Authority and no other institute or body shall initiate any such proceedings against such
auditors:

Provided that no other institute or body shall initiate or continue any proceedings in such matters of misconduct
where the Authority has initiated an investigation under this rule;

(b) the action in respect of cases of professional or other misconduct against auditors of companies or bodies
corporate other than those referred to in rule 3 shall continue to be proceeded with by the Institute of Chartered
Accountants of India as per provisions of the Chartered Accountants Act, 1949 and the regulations made
thereunder.

8. (a)
The following are the steps to be taken by an auditor of a co-operative society:
(i) General Points:
In general, while conducting audit of Co-operative society,the auditor needs to lookinto the following: -
 The auditor should carefully go through the bye-laws of the society and see that they are being observed both in
letter and spirit.
 He should examine the Register of Members of the society and individual shareholdings.
 He should test-check the internal check and control system operated by the society and model his audit
examination based on its strengths and weaknesses.

(ii) Audit of income:

He should carefully vouch the receipt of cash. Cash receipts on account of share capital should be vouched with
the Register of Members. Cash received against sales should be vouched with the cash memos and invoices
issued to customers as also Sales Account. Receipt of cash in respect of payment of interest and repayment of
loans advanced by the society should be vouched with the loan agreements. Cash received from members towards
construction of houses or their maintenance, should be vouched with the Register of Members, demands made by
the society from time to time, and money receipts.

(iii) Audit of Expenditure:

 He should vouch all expenditure with reference to authorisation from the Managing Committee, particularly in
the case of large capital expenditure, as also the bills received from individual parties, the money receipts
obtained from them, and entries in the Bank Pass Book along with counter-foils of cheques.

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  He should vouch the payment of loans from the loan agreements entered into with borrower members.

 He should vouch establishment expenses with reference to the resolutions of the Managing Committee,
agreements with the persons concerned, and money receipts obtained from them.

(iv) Other points:

 He should appropriately classify overdue debts for a period from six months to five years and more, and report
them to the members, with a note regarding the effects these might have on the financial position of the society.
He should also put a note regarding the probability of recovery of such debts.
 Similarly, he should make a special reference to the overdue amount of interest from members. Generally, interest
on overdue debts should not be credited to Interest Account but to the Overdue Interest Reserve Account.
 Writing off of bad debts should be after prior authorisation from the Managing Committee of the society.
According to the Maharashtra Co-operative Societies Rules, a bad debt can be written off only when it is certified
to be irrecoverable by the auditor. This casts a special obligation on the auditor to ascertain whether the debt in
question was created within the Rules of the society, and whether it has now really become bad and irrecoverable.

8. (b)
Provisions Relating to Appointment of First Auditor
(I) In case of a company other than a Government Company [Section 139(6)]
 The first auditor of a company, other than a Government company, shall be appointed by the Board of Directors
within thirty days from the date of registration of the company.

 In the case of failure of the Board to appoint such auditor, it shall inform the members of the company, who shall
appoint such auditor within ninety days at an extraordinary general meeting.

 The auditor, so appointed, shall hold office till the conclusion of the first annual general meeting.

(II) In case of a Government Company [Section 139(7)]

 In the case of a Government company or any other company owned or controlled, directly or indirectly, by the
Central Government, or by any State Government, or Governments, or partly by the Central Government and
partly by one or more State Governments, the first auditor shall be appointed by the Comptroller and Auditor-
General of India within sixty days from the date of registration of the company.
 In case the Comptroller and Auditor-General of India does not appoint such auditor within the aforesaid period,
the Board of Directors of the company shall appoint such auditor within the next thirty days.
 Further, in the case of failure of the Board to appoint such auditor within the next thirty days, it shall inform the
members of the company who shall appoint such auditor within sixty days at an extraordinary general meeting.
 The auditor, so appointed, shall hold office till the conclusion of the first annual general meeting.

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