RTP June 2018 Ans
RTP June 2018 Ans
RTP June 2018 Ans
Rs.
Department Blue 36,000
Department Black 27,000
Department Pink 18,000
Stocks lying at different departments at the end of the year are as under:
Dept. Blue Dept. Black Dept. Pink
Rs. Rs. Rs.
Transfer from Department Blue — 15,000 11,000
Transfer from Department Black 14,000 — 12,000
Transfer from Department Pink 6,000 5,000 —
Required: Correct departmental Profits after charging Managers‘ commission.
f. A company capitalizes interest cost of holding investments and adds to cost of investment
every year, thereby understating interest cost in profit and loss account. Comment on the
accounting treatment done by the company in context of the relevant NAS.
Write Short Notes
22. (a). Contingent Assets
(b). Watch List in Loan loss provisioning
(c). Leases
(d). Government Accounting System in Nepal
(e). Debt Service Coverage Ratio
(f). Advantages of Customized Accounting Packages
(g). Non Banking Assets
(h). Re-Insurance
SUGGESTED ANSWERS
28,800 28,800
39,000 39,000
Insurance Claim
Answer No 2:
Working Notes
(1) Abnormal items: Rs.
Original cost of slow moving items 5,000
cost of slow moving item sold 2,500
Balance of slow moving items in stock 2,500
Original cost of slow moving items sold 2,500
Loss incurred on such sale 500
Sale proceeds of slow moving items 2,000
Contract Accounting
Answer No 4:
In the books of M/s Santi Constriction
Contract Account
For the period ended 31.3.2074
Date Particulars Amount Date Particulars Amount
To Materials sent to site 160,000 By Unused materials at site 21,620
To Wages 101,200 By Machines A/c (WDV as on 140,600
Add: Outstanding 37,520 138,720 31stAshad 2074)
To Machines (Cost) 148,000 By Work in Progress:
To Direct Charges 7,500 Certified 350,000
Add: Outstanding 600 8,100 Uncertified 18,000 368,000
To Establishment charges 6,400
To Profit and Loss A/c (Transfer 36,800
of Profit)
To Balance c/d 32,200
530,220 530,220
To Materials at site 21,620
To Machines 140,600
(Refer Working Note No.1)
By Work in Progress:
Certified 350,000
Uncertified 18,000
368,000
Less: Balance b/d 32,200 335,800
Working Note
1. Calculation of Written Down Value of Machines on 31stAshad 2074
Cost of Machine on 1stBaisakh 2074 148,000
Less: Depreciation on Rs.148,000 for 3 months @ 20% per annum
=148,000X20/100X3/12 7,400
Net Written Down Value of Machine 140,600
2. Calculation of amount to be transferred from Contract A/c to Profit and Loss A/c
Total surplus in Contract Account as on 31stAshad 2074:
=Rs.21,620+Rs.140,600+Rs.368,000-Rs.160,000-Rs.138,720-Rs.148,000-Rs.8,100-
Rs.6,400
=Rs.69,000
Thus Profit to be credited to Profit and Loss Account:
=Rs. 69,000X2/3X280,000/350,000
=Rs.36,800
(ii) Book value of the plant left with the hire vendor:
Price of one plant Rs. 100,000 X 1 = 100,000
Less: Depreciation for the first year @20% - 20,000
80,000
Less: Depreciation for second year @ 20% on Rs. 80,000 - 16,000
Agreed value of the plant taken back by the hire vendor 64,000
Answer No 6:
Journal Entries
In the books of Kitkit Ltd.
NRs. NRs.
Date Particulars Dr. Cr.
Answer No 7:
Books of M/s Yeti Ltd.
Journal Entries
S.N. Particulars Debit Credit
1. Bank Account Dr. 12,000,000
To Share Application A/c 12,000,000
(Being Share application money received for 800,000
share at Rs. 15 per Share))
Working Note;
a. Calculation of Calls in Arrears of Amit Rs.
Amount paid at the time of application = 800×15 = 12,000
Amount utilized in application = 400×15 = 6,000
Excess amount = 12,000 – 6,000 = 6,000
Calls in arrear at the time of Allotment = 400×25 – 6,000 = 4,000
Calls in arrear at the time of First & Final Call = 400×15 = 6,000
Incomplete Records
Answer No 9:
Projected Balance Sheet
as on 31st Ashadh, 2073
Liabilities Rs. Assets Rs.
Capital 1,000,000 Fixed Assets 400,000
Profit & Loss Account as on Additions 100,000
st
1 Shrawan, 2072 60,000 500,000
Add: Profit for the year 374,000 434,000 Less: Depreciation (50,000) 450,000
Creditors (Trade) 110,000 Stock in trade 336,000
Sundry Debtors 200,000
Cash & Bank Balances 558,000
1,544,000 1,544,000
Working Notes:
Projected Trading and Profit and Loss Account
for the year ended 31st Ashadh, 2073
Rs. Rs.
To Opening Stock 300,000 By Sales 2,120,000
To Purchases 1,520,000 By Closing Stock (balancing figure) 336,000
To Gross Profit (30% on sales) 636,000
2,456,000 2,456,000
To Sundry Expenses (10% on sales) 212,000 By Gross Profit b/d 636,000
To Depreciation 50,000
To Net Profit 374,000
636,000 636,000
Cash and Bank Account for the period
1st Shrawan, 2072 to 31st Ashadh, 2073
Rs. Rs.
To Balance b/d 350,000 By Sundry Creditors 1,550,000
To Sundry Debtors 2,070,000 (Rs. 140,000 + Rs. 1,410,000)
(Rs. 150,000 + Rs. 1,920,000) By Expenses 212,000
By Fixed Assets 100,000
By Balance c/d 558,000
2,420,000 2,420,000
Note: It is assumed that the entire sales and purchases are on credit basis.
Ratio Analysis
Answer No 10:
Balance Sheet of Nyatapola Enterprises
Business Combination
Answer No 11:
Books of Blue Star Limited
Realization Account
Rs. Rs.
To Building 3,40,000 By Creditors 3,20,000
To Machinery 6,40,000 By B Ltd. 12,10,000
To Stock 2,20,000 By Equity Shareholders A/c (Loss) 60,000
To Debtors 2,60,000
To Goodwill 1,30,000
1,590,000 1,590,000
Bank Account
To Balance b/d 136,000 By 10% debentures 400,000
To Big Star Ltd. 600,000 By Loan from A 160,000
By Equity shareholders A/c 176,000
736,000 736,000
Working Notes:
1. Valuation of Goodwill Rs.
Average profit 124,400
Less: 8% of Rs. 880,000 70,400
Super profit 54,000
Value of Goodwill = 54,000 x 4 216,000
Out of this Rs. 600,000 is to be paid in cash and remaining i.e., (1,210,000–600,000) Rs.
610,000 in shares of Rs. 125/-. Thus, the number of shares to be allotted 610,000/125 = 4,880
shares.
3. Unrealized Profit on Stock Rs.
The stock of Blue Star Ltd. includes goods worth Rs. 100,000 which was sold
by Big Star Ltd. on profit. Unrealized profit on this stock will be
40,000 25,000
1,00,000
1,60,000
As Big Star Ltd. purchased assets of Blue Star Ltd. at a price 10% less than (10,000)
the book value, 10% need to be adjusted from the stock i.e., 10% of
Rs.100,000.
Amount of unrealized profit 15,000
4. Liquidation expenses borne by the Big Star Ltd. so that should be debited to Goodwill Account.
Answer No 12
Books of Hill Ltd.
Realisation Account
Workings:
Adjusted Balance Sheet of Hill Ltd.
Capital & Liabilities Amount Rs Assets Amount Rs.
Share Capital 10,00,000 Fixed assets 3,00,000
General Reserve 5,00,000 Goodwill 1,00,000
Current Liabilities 2,00,000 Current assets 13,00,000*
17,00,000 17,00,000
Hill Ltd retains Rs. 100,000 in cash for dividend (10%) ( 1,400,000-100,000)
1. Total Purchase consideration (based on net worth of Hill Ltd.) is Rs. 1,450,000.
2. Himal Ltd. holds 2,500 shares in Hill Ltd. The percentage of holding is 25%
3. The net purchase consideration to pay Rs. 1,450,000 * ¾ = 1,087,500
4. Calculation of Current Assets
Current assets of Himal Ltd. 3,250,000
Add Dividend 25,000
3,275,000
Less: intercompany amount 15,000
3,260,000
Current Assets of Hill Ltd. 1,300,000
Less unrealized profit 12,500
(Rs. 50,000-37,500) 1,287,500
Total Current Assets 4,547,500
Internal Reconstruction
Answer No 13
Journal Entries
in the books of Pokhara Light Ltd.
Rs.
Rs.
(i) Equity Share Capital (Rs.100) A/c 1,00,00,000
Dr.
To Equity Share Capital (Rs.40) A/c 40,00,000
To Reconstruction A/c 60,00,000
(Being conversion of equity share capital of Rs.100 each into
Rs.40 each as per reconstruction scheme)
(ii) 12% Cumulative Preference Share capital (Rs.100) A/c Dr. 50,00,000
To 12% Cumulative Preference Share Capital (Rs.60) A/c 30,00,000
To Reconstruction A/c 20,00,000
(Being conversion of 12% cumulative preference share capital of
Rs.100 each into Rs.60 each as per reconstruction scheme)
(iii) 10% Debentures A/c Dr. 40,00,000
To 12% Debentures A/c 28,00,000
To Reconstruction A/c 12,00,000
(Being 12% debentures issued to 10% debenture-holders for
70% of their claims. The balance transferred to capital reduction
account as per reconstruction scheme)
(iv) Sundry Creditors A/c Dr. 20,00,000
To Equity Share Capital A/c 12,00,000
To Reconstruction A/c 8,00,000
(Being a creditor of Rs.20,00,000 agreed to surrender his claim
by 40% and was allotted 30,000 equity shares of Rs.40 each in
full settlement of his dues as per reconstruction scheme)
(v) Provision for Taxation A/c Dr. 1,00,000
Reconstruction A/c Dr. 50,000
To Current Assets (Bank A/c) 1,50,000
(Being conversion of the provision for taxation into liability for
taxation for settlement of the amount due)
(vi) Reconstruction A/c Dr. 99,50,000
To P & L A/c 4,00,000
To Preliminary Expenses A/c 2,00,000
To Fixed Assets A/c 37,50,000
To Current Assets A/c 55,00,000
To Investments A/c 50,000
To Capital Reserve A/c 50,000
(Being amount of Reconstruction utilized in writing off P & L
A/c (Dr.) Balance, Preliminary Expenses, Fixed Assets, Current
Assets, Investments and the Balance transferred to Capital
Reserve)
Working Note:
Reconstruction Account
Rs. Rs.
To Liability for taxation A/c 50,000 By Equity share capital 60,00,000
To P & L A/c 4,00,000 By 12% Cum. preference share 20,00,000
To Preliminary expenses 2,00,000 By 10% Debentures 12,00,000
To Fixed assets 37,50,000 By Sundry creditors 8,00,000
To Current assets 55,00,000
To Investment 50,000
To Capital Reserve 50,000
(balancing figure) _________ _________
1,00,00,000 1,00,00,000
55,000 55,000
297,000 297,000
73,800 73,800
362,000 362,000
19. Answer:
a. Calculation of Total Risk Weighted Assets = 213,546 + 4,235 + 1,618 = 219,399
c. Supplementary Capital
Particular Amount
General Loan Loss Provision 1,215
Investment Adjustment Reserve 22
Total Supplementary Capital 1,237
21. Answers:
a) According to NAS - 18 on Revenue, revenue from the sale of goods shall be recognized
when
the seller of goods has transferred to the buyer the significant risks and rewards of
ownership of the goods;
the seller retains neither continuing managerial involvement to the degree usually
associated with ownership nor effective control over the goods sold;
the amount of revenue can be measured reliably.
It is probable that the economic benefits associated with the transaction will flow to the
entity; and
The costs incurred or to be incurred in respect of the transaction can be measured
reliably.
Since the transport bills were sent through the bank for collection, it may be said that the
seller entity has retained effective control over the ownership of goods. Further since the
documents were not cleared by the customer even after the expiry of the normal period of
collection, there is an uncertainty in the realization of sale proceeds. Hence, revenue should
not be recognized in this case.
(b). The borrowing costs incurred by an entity to finance prepayments on a qualifying asset are
capitalised on the same basis as the borrowing costs incurred on assets constructed by the
entity.
The capitalisation starts when all three conditions are met: expenditures are incurred,
borrowing costs are incurred, and the activities necessary to prepare the asset for its
intended use or sale are in progress.
Expenditures on the asset are incurred when the prepayments are made (payments of the
instalments). Borrowing costs are incurred when borrowing is obtained. The last condition
– the activities necessary to prepare the asset for its intended use or sale are in progress –
can vary depending on facts and circumstances. When the construction process by the third
party does not start at the prepayment date, management assesses whether it is appropriate
to start capitalisation from this date or whether it should be deferred to a later date.
(c). As per NAS 37 ‗Provisions, contingent liabilities and contingent assets‘ a provision should
be recognised when;
(a) an enterprise has a present obligation as a result of a past event.
(b) it is probable that an outflow of resources embodying economic benefits will be
required to settle the obligation; and
(c) a reliable estimate can be made of the amount of the obligation. If these conditions are
not met, no provision should be recognised.
In the given situation the directors of the company are of the opinion that the claim can be
successfully resisted by the company, therefore there will be no out flow of the resources.
The company will disclose the same as contingent liability by way of the following notes:
‗Ligation is in process against the company relating to a dispute with a competitor who
alleges that the company has infringed patents and is seeking damages of Rs. 20 millions.
However, the directors are of the opinion that the claim can be successfully resisted by the
company.‘
(d). Nepal Accounting Standard (NAS) 10 ‗Events after the reporting period‘, states that
adjustments to assets and liabilities are not appropriate for events occurring after the
balance sheet date, if such events do not relate to conditions existing at the balance sheet
date. The destruction of warehouse due to earthquake did not exist on the balance sheet
date i.e. 31.3.2072. Therefore, loss occurred due to earthquake is not to be recognized in
the financial year 2071-72.
However, unusual changes affecting the existence or substratum of the enterprise after the
balance sheet date may indicate a need to consider the use of fundamental accounting
assumption of going concern in the preparation of the financial statements. As per the
information given in the question, the earthquake has caused major destruction; therefore
fundamental accounting assumption of going concern is called upon.
Hence, the fact of earthquake together with an estimated loss of Rs. 25 lakhs should be
disclosed in the report of the directors for the financial year 2071-72.
(e). ‗Other Comprehensive Income’s per NAS
Other comprehensive income comprises items of income and expenses (including
reclassification adjustments) that are not recognized in profit and loss as required or
permitted by other NFRSs.
The components of other comprehensive income include;
1. changes in revaluation surplus
2. re-measurements of defined benefit plans
3. gains and losses arising from translating the financial statements of a foreign operation
4. gains and losses from investments in equity instruments measured at fair value through
other comprehensive income in accordance NFRS related with financial instruments
5. the effective portion of gains and losses on hedging instruments in a cash flow hedge
6. for particular liabilities designed as at fair value through profit or loss, the amount of
the change in the fair value that is attributable to changes in the liability‘s credit risk.
(f). The investments other than investment in properties are not qualifying assets as per NAS-
23 Borrowing Costs. Therefore, interest cost of holding such investments cannot be
capitalized. Further, even interest in respect of investment properties can only be
capitalized if such properties meet the definition of qualifying asset, namely, that it
necessarily takes a substantial period of time to get ready for its intended use or sale. Also,
where the investment properties meet the definition of ‗qualifying asset‘, for the
capitalization of borrowing costs, the other requirements of the standard such as that
borrowing costs should be directly attributable to the acquisition or construction of the
investment property and suspension of capitalization as per NAS-23 have to be complied
with.
(h). Re-insurance
In general insurance there are risks which, because of their magnitude or nature, one
insurance company cannot afford to cover, e.g., aviation insurance. Generally, in such
cases, an insurance company insures the whole risk itself and lays off the amount it has
accepted to other insurance of reinsurance companies, retaining only that much risk which
it can absorb.
A reinsurance transaction may thus be defined as an agreement between a 'ceding company'
and a 're-insurer' whereby the former agrees to 'cede' and the later agrees to accept a certain
specified share of risk or liability upon terms as set out in the agreement.
Paper 2: Audit and Assurance
Questions
Question No 1:
Explain audit risk and the components of audit risk.
Question No 2
Define a ‗test of control‘ and provide an example of a test of control in relation to the audit
of wages and salaries;
Question No 3
Define a ‗substantive procedure‘ and provide an example of a substantive procedure in
relation to the audit of wages and salaries.
Question No 4
NSA 500 Audit Evidence requires auditors to obtain sufficient and appropriate audit
evidence. Appropriateness is a measure of the quality of audit evidence; that is, its relevance
and its reliability. Identify and explain the factors which influence the reliability of audit
evidence
Question No 5
Auditors are required to perform an overall review of the financial statements before they
provide their audit opinion. Explain the procedures an auditor should perform in conducting
their overall review of the financial statements
Question No 6
You are a member of the recently formed internal audit department of Nepal Food
Company Ltd The company manufactures tinned fruit and vegetables which are supplied to
large and small food retailers. Management and those charged with governance of Nepal
Food Company Ltd have concerns about the effectiveness of their sales and dispatch system
and have asked internal audit to document and review the system. In the Sales and dispatch
system , Sales orders are mainly placed through company‘s website but some are made via
telephone. Online orders are automatically checked against inventory records for
availability; telephone orders, however, are checked manually by order clerks after the call.
A follow-up call is usually made to customers if there is insufficient inventory. When taking
telephone orders, clerks note down the details on plain paper and afterwards they complete a
three part pre-printed order form. These order forms are not sequentially numbered and are
sent manually to both dispatch and the accounts department. As the company is expanding,
customers are able to place online orders which will exceed their agreed credit limit by
10%. Online orders are automatically forwarded to the dispatch and accounts department. A
daily pick list is printed by the dispatch department and this is used by the warehouse team
to dispatch goods. The goods are accompanied by a dispatch note and all customers are
required to sign a copy of this. On return, the signed dispatch notes are given to the
warehouse team to file. The sales quantities are entered from the dispatch notes and the
authorized sales prices are generated by the invoicing system. If a discount has been given,
this has to be manually entered by the sales clerk onto the invoice. Due to the expansion of
the company, and as there is a large number of sale invoices, extra accounts staff have been
asked to help out temporarily with producing the sales invoices. Normally it is only two
sales clerks who produce the sales invoices.
Identify and explain the deficiencies in Nepal Food Company Ltd Co‘s sales and dispatch
system and provide a recommendation to address each of these deficiencies.
Question No 7
Explain the relationship between the planning, executing, and reporting stages of an audit.
Why is risk identification in the first stage?
Question No 8
When gaining an understanding of a client, an auditor will be interested in an entity‘s
relationships with both its suppliers and customers. What aspects of these relationships will
the auditor be interested in and how would they affect the assessment of audit risk?
Question No 9
What does it mean a business is a ―going concern‖ or, alternatively, has ―going concern
issues‖? Why must an auditor specifically consider evidence about the going concern
assessment for each client? What are mitigating factors in the context of the going concern
assessment? Give some examples of mitigating factors for a loss-making client.
Question No 10
Why does an auditor need to understand a client‘s IT system? Explain how IT affects the
financial statements
Question No 11
Give an example of a client closing procedure. Using your example, explain the accounts
that would be affected if the closing procedure is performed inadequately.
Question no 12
Forming an Opinion and Reporting on Financial Statements requires auditors to produce an
audit report. This report should contain a number of consistent elements so that users are
able to understand what the audit report means. Required: Describe the elements of an
unmodified auditor‘s report and for each explain why they are included.
Question No 13
ILife Insurance Co (ILife) has been trading for 15 years selling insurance and has recently
become a listed company. In accordance with corporate governance principles ILife
maintains a internal audit department of two staff. The directors feel that the internal audit
department needs to increase in size and specialist skills are required, but they are unsure
whether to recruit more internal auditors, or to outsource the whole function to the JRH &
associates(CA).
Required: (a) Explain the advantages and disadvantages for each of ILife Enterprises Co
AND JRN & associate of outsourcing the internal audit department.
Question No 14
For the audit of the inventory cycle and year-end inventory balance of Nepal Glass Co Ltd:
(i) Describe the audit procedures that could be carried out using computer-assisted audit
techniques (CAATS);
(ii) Explain the potential advantages of using CAATs; and
(iii) Explain the potential disadvantages of using CAATs.
Question No 15
Explain the purpose of, and procedures for, obtaining written representations
Question No 16
List the sources of information that would be of use in gaining an understanding of Client
business, and for each source describe what you would expect to obtain.
Question No 17
Explain the audit assertion used by the auditor in obtaining the audit evidence?
Question No 18
Describe substantive procedures the auditor should perform to obtain sufficient and
appropriate evidence in relation to purchases and other expenses.
Question No 19
Describe substantive procedures the auditor should perform to verify each of the following
assertions in relation to receivables:
(i) Accuracy, valuation and allocation;
(ii) Completeness; and
(iii) Rights and obligations.
Question No 20
Describe substantive procedures the auditor should perform to confirm the redundancy
provision at the year end.
Question No 21
Non statistical sampling is an audit sampling technique in which the risk of sampling error
is estimated by the auditors using professional judgment rather than by the laws of
probability. Statistical sampling involves the quantification of the risk of sampling error
through the use of mathematics and laws of probability. Explain Statistical sampling and
methods of Statistical sampling
Question No 23
How do you vouch the Patents right obtained by the company?
Question No 24
How do you vouch refund of General Insurance Premium paid?
Question No 25
Nepal Brick Manufacture Pvt. Ltd. has submitted the financial statements for the year
ended 31.03.2073 for audit. The audit assistant observes and brings to your notice that
the company's records show following dues:
Demand for Environment Hazard relating to financial Year 2070-71 R s 36 lacs -
Appeal is pending before District Court since 30-9-72.
As an auditor, how would you bring this fact to the members?
Question No 26
Director of Mega Trend Ltd. draws an advance of Rs 280 per day in connection with the
foreign trip undertaken on behalf of the company. On his return ,he submit the hotel bill
of Rs170 and for remaining amount he files a declaration stating that amount was spend
on local market and local travelling for which no bill was provided. Mega Trend Ltd.
books the balance expenses on the basis of such declaration. As the auditor of Mega
Trend Ltd. how do you deal with this?