CAP_II_Group_I__RTP_Dec2024

Revision Test Paper (RTP), December 2024 CAP II – Group I
CHARTERED ACCOUNTANCY PROFESSIONAL II

(CAP-II)
Revision Test Paper

Group I
December 2024
The Institute of Chartered Accountants of Nepal
The Revision Test Papers are prepared by the institute with a view to assist the students in their study.
The suggested answers given here are indicative and not exhaustive. Students are expected to apply their
knowledge and write the answer in the examinations taking the suggested answers as guide. Due care
has been taken to prepare the revision test paper. In case students need any clarification, creative
feedback, or suggestions for the further improvement of the material, or any error or omission on the
material, they may report to the email of the Institute.
The Institute of Chartered Accountants of Nepal 1

Contents
Paper 1 Advanced Accounting ..........................................................................................................3
Paper 2 Audit & Assurance ............................................................................................................. 43
Paper 3 Corporate and Other Laws ................................................................................................ 59

Paper 1
Advanced Accounting

Section 1: Questions
Chapter: Department Accounting
Question No. 1:
M/s. Kapada Garment, a retail store, has two departments, Department X and Department Y, for
each of which stock account and memorandum mark-up account are kept. All the goods supplied
to each department are debited to the stock account at cost plus a mark-up, which together make
up the selling price of the goods and in the account the sale proceeds of the goods are credited.
The amount of mark-up is credited to the Departmental Mark-up Account. If the selling price of
any goods is reduced below its normal selling price, the reduction is adjusted both in the Stock
Account and the Departmental Markup Account. The rate of Markup for X Department is 33-1/3%
of the cost and for Y Department it is 50% of the cost.
The following figures have been taken from the books for the year ended March, 2016:
Particulars Department X Department Y

Opening Stock 63,000 111,600
Purchases 455,400 560,400
Sales 573,600 750,000
The stock of Department X on April 1, 2015 included goods the selling price of which had been
marked down by Rs. 7,560. These goods were sold during the year at the reduced prices.
Certain stock of the value of Rs. 41,400 purchased from the Department X was later in the year
transferred to the Department Y and sold for Rs. 62,100. As a result, though cost of the goods is
included in the Department X, the sale proceeds have been credited to the Department Y.
During the year 2015-16 to promote the goods, they were marked down as follows:
Particulars Cost Mark Down

Department X 33,600 2,160
Department Y 60,000 12,000
All the goods marked-down were sold, except of Department Y of the value of Rs. 30,000 marked
down by Rs. 6,000.
At the time of stock taking on 31st March,2016 it was discovered that cloth of Department X of
the cost of Rs. 2,340 was missing and it was decided that the amount be written off.
You are required to prepare for both the departments for the year ended 31st March, 2016:
(a) The Memorandum Stock Account; and
(b) The Memorandum Mark-up Account.

Chapter: Accounting for Branch

Question No. 2:
M/s. Birat Ltd., Kathmandu, have a branch in Hong Kong. At the end of 31st March, 2023, the
following ledger balances have been extracted from the books of the Kathmandu Office and the
Hong Kong Office:
Kathmandu Hong Kong
Particulars (Rs. in thousands) (Dollars in thousands)
Debit Credit Debit Credit
Share Capital 2,000
Reserves and Surplus 1,000
Land 500
Buildings (Cost) 1,000
Buildings Acc. Depreciation 200
Plant & Machinery (Cost) 2,500 200
Plant & Machinery Acc.
Depreciation 600 130
Debtors and Creditors 280 200 60 30
Stock (1.4.2022) 100 20
Branch Stock Reserve 4
Cash & Bank Balances 10 10
Purchase and Sales 240 520 20 123
Goods Sent to Branch 100 5
Managing Director's Salary 30
Wages & Salaries 75 45
Rent 12
Office Expenses 25 18
Commission Receipts 256 100
Branch / H.O. Current Account 120 7
Total 4,880 4,880 390 390
The following information is also available:
a) Closing Stock: Kathmandu Rs. 150,000, Hong Kong $ 3,125
b) Head office always sent goods to the branch at cost plus 25%
c) Provision is to be made for doubtful debts at 5%
d) Depreciation is to be provided on Building at 10%, Plant at 20% on written down values
e) Managing director is entitled to 2% commission on net profits before provision of doubtful debts
f) Income- tax is to provide at 47.5%.
You are required:

- To convert the branch trial balance into rupees. Use the following rates of exchange:
Opening rate 1 $ = Rs. 20 Closing rate 1 $ = Rs. 24 Average rate 1 $ = Rs. 22 For fixed
assets 1 $ = Rs. 18.

- To prepare Profit or Loss Account for the year ended 31st March, 2023 showing to the
extent possible head office result and branch results separately.
Chapter: Accounting for Hire Purchase Transactions

Question No. 3:
M/s. Rihan Traders purchased a Machine on hire purchase from M/s. Khadka Suppliers on 1st Jan,
2022. The hire purchase price was 48,000. Down payment was 12,000 and the balance is payable
in 3 annual instalments of 12,000 each payable at the end of each financial year. Interest is payable
@ 8% p.a. and is included in the annual payment of 12,000.
Depreciation at 10% p.a. is to be written off using the straight-line method.
You are required to:

(i) Calculate the cash price of the Machine and the interest paid on each instalment.
(ii) Pass relevant journal entries in the books of M/s. Rihan Traders from 1st Jan, 2022 to 31st
Dec, 2022 following the interest suspense method.
Chapter: Computation of Insurance Claim
Question No. 4:
M/s Agni Traders had obtained a fire insurance policy against its trading stock. Unfortunately, fire
broke out on 12.04.2024. Goods costing Rs. 40,600 lying at the corner of store remained unaffected
by fire. Whereas, some of the stocks were recovered in a damaged condition and were valued at
Rs. 39,400.
Following records were extracted from the books of account of M/s Agni Traders:
Particulars Amount (Rs.)

Closing Stock as on 31.03.2024 314,400
Purchase up to 12th April, 2024 742,000
th
Sales up to 12 April, 2024 10,52,000
Goods are normally sold at Gross Margin of 30% on sales
It was discovered that the company had obtained insurance policy of Rs. 200,000 for its trading
stock for the year ending 31st March, 2025.
You are required to compute the amount of claim of loss to be filed before Insurance Company.
Chapter: Accounting from Incomplete Records
Question No. 5:
From the following information obtained from Mr. X, a trader, who does not keep proper accounts,
prepare a Trading and Profit and Loss Account for the year ended 31st March, 2022 and the Balance
Sheet as on that date:

a) Withdrawals as per pass book
Rent, Rates and Taxes 6,000 Advertisement 1,000

Printing Charges 1,000 X's Drawings 10,000
Postage and Telegram 1,000 Salaries 8,000
Paid to Creditors 50,000 Wages 8,000
Insurance 6,000 Furniture Purchase (1.4.2021) 2,000
b) Balance at Bank on 31.3.2022 was Rs. 3,000.

c) Stock on 1.4.2021 was Rs. 24,000 and Stock on 31st March, 2022 was Rs. 4,000 less than of
stock on 1.4.2021. Out of stock on 1.4.2021, spoiled stocks were sold for Rs. 2,000 which
were not deposited into Bank Account.
d) Payment for purchases included Rs. 4,000 for last year’s purchases. Rs. 1,000 of previous
year’s purchases is still unpaid on 31.3.2022. Current year’s list of unpaid invoices not ticked
off in purchase register amounted to Rs. 5,000.
e) Collections for sale were Rs. 1,00,000 which includes Rs. 12,000 in respect of previous year’s
sale. Balance of un-ticked bills of last year’s sale still amounted to Rs. 8,000 on 31st March,
2022. Un-ticked bills of the current year totaled up to Rs. 20,000.
f) Salaries Rs. 500 and wages Rs. 500 were outstanding on 31st March, 2022.
g) Furniture on 31.3.2021 amounts to Rs. 6,000 and Machinery on the same date were Rs.
50,000.
h) Prepaid Insurance on 31.3.2022 amounted to Rs. 400.
i) Depreciation at 10% p.a. shall be provided on Furniture and at 25% p.a. on Machinery.
He maintained purchases and sales registers and items are ticked off on collection or payments.
All collections are deposited and payments are all in cheques. Petty expenses Rs. 1,000 were
paid out of his drawings. All purchases and sales were made on credit basis.
Chapter: Accounting for NPOs
Question No. 6:
The following is the receipts and payments account of Jivan Charitable Hospital for the year ended
31st March 2023.
Receipts Amount Payments Amount
To Balance b/d (Cash & Bank) 28,000 By Payment for Medicines 120,000
To Subscriptions Collected 200,000 By Honorarium to doctor 40,000
To Donations 58,000 By Salary 110,000
To Interest on Investments 28,000 By Sundry Expenses 2,000
(@7% p.a for the year) By Equipment 60,000
To Charity Show Collections 40,000 By Charity show expenses 4,000
By Balance c/d (Cash & Bank) 18,000
Total 354,000 Total 354,000
Following additional information are available:

31.03.2022 31.03.2023
Subscription Due 2,000 4,000
Subscription received in advance 4,000 2,000
Stock of medicines 40,000 60,000
Creditors for medicines 32,000 48,000
Cheque issued to creditors but not presented for payment 2,500 3,500
Equipments 84,000 120,000
Buildings 160,000 152,000
st
You are required to prepare Income and Expenditure account for the year ended 31 March 2023
and Balance sheet as on that date.
Chapter: Partnership Accounting
Question No. 7:
Asal, Bimal and Kamal are in partnership sharing profit and loss in the ratio of 2:3:5. The following
is the Balance sheet of the firm as on 31.12.2023:
Liabilities Amount Assets Amount
Capital Accounts Plant and Machinery 100,000
- Asal 5,000 Sundry Debtors 25,000
- Bimal 20,000 Cash 5,000
- Kamal 25,000
Trade Creditors 60,000 P/L A/c 40,000
Bank Loan 60,000
(Secured against Assets of Firm)
Total 170,000 Total 170,000
The assets of the firm realized 100,000. Asal’s private estate has a surplus of Rs. 5,000, Bimal is
insolvent whereas Kamal could bring only 50 paisa in a rupee from his estate.
Show the realization account and the accounts of the partners assuming that all entries relating to
dissolution are passed through realization account.
Question No. 8:
Rajesh and Nikhil are Partners in a firm with equal share in profit and loss. Financial Position as
on 31.12.2022 stood as follows:
Liability Amount Assets Amount

Capital Accounts Building 180,000
Rajesh 360,000 Equipment 84,000
Nikhil 420,000 Stock 444,000
Sundry Debtors 144,000
Sundry Creditors 180,000 Bank 108,000
Total 960,000 Total 960,000

From 1st January of 2023, Shiva is admitted as Partner on the following terms:
- The new Profit-sharing shall be equal among all the partners.
- Shiva would bring Rs. 360,000 towards capital. Building to be valued at 95% and stock at Rs.
420,000.
- After completion of 1 trading year, Goodwill is to be valued at 3 times of; net profit of the
year in excess of Rs. 180,600. Such goodwill shall be given credit to old partners in their
sacrificing ratio towards new partner.
Following Transactions took place for the year ended 31.12.2023:
Sales 3,600,000
Purchase 3,180,000
Salary 240,000
Rent 120,000
Office Expenses 108,000
Drawings - Rajesh 30,000
Drawings - Nikhil 24,000
Drawings - Shiva 18,000
Payment for Purchase 2,881,200
(represents 98% in full settlement)
Collection from Debtors 2,028,000
(After Cash discount of Rs. 12,000)
Value of stock as on 31.12.2023 stood at Rs. 7,20,000, Equipment is to be depreciated by Rs. 5,400
and after all such above adjustments including goodwill adjustment, Shiva contributed necessary
cash to make his capital proportionate to his profit-sharing ratio.
Required:
- Balance Sheet of the firm after admission on 1.1.2023.
- Balance Sheet of the firm after 1st trading year showing all the necessary working notes.
Chapter: Business Combination

Question No. 9:
Given below is the statement of Financial Position of Sun Limited and Moon Ltd. as at 31.03.2022:
Particulars Note No. Sun Ltd. Moon Ltd.
(A) Equity and Liabilities
1. Shareholders’ Funds
(a) Share Capital (of Rs. 10 each) 400,000 160,000
(b) Reserves and Surplus 1 454,000 165,200
2. Non -Current Liabilities 2 - 60,000
3. Current Liabilities 3 56,000 72,800
Total 910,000 458,000
(B) Assets

1. Non -Current Assets

(a) Property, Plant &Equipment 630,000 272,000
(b) Investments 75,000 40,000
2. Current Assets 4 205,000 146,000
Total 910,000 458,000
Note No. Particulars Sun Ltd. Moon Ltd.

1 Reserves & Surplus
General Reserve 202,000 92,000
Profit & Loss A/c 178,000 63,200
Export Profit Reserve 74,000 10,000
Total 454,000 165,200
2 Non- Current Liabilities
14% Debentures - 60,000
3 Current Liabilities
Trade Payables 36,000 56,800
Other Current Liabilities 20,000 16,000
Total 56,000 72,800
4 Current Assets
Inventory 86,000 34,000
Trade Receivables 81,000 70,000
Cash and Cash equivalents 38,000 42,000
Total 205,000 146,000
Moon Limited is to be amalgamated with Sun Limited from 1.04.2022 and the amalgamation is to
be carried out in the nature of purchase.
Sun Limited would issue 12% debentures to discharge the claim of the debenture holders of Moon
Limited so as to maintain their present annual interest income.
Non-trade investment, which constitute 80% of their respective total investments yielded income
of 20% to Sun Limited and 15% to Moon Limited.
Profit before tax of both the companies during the last 3 years were as follows:
Year Sun Ltd. Moon Ltd.

2019-2020 328,000 102,000
2020-2021 298,000 86,000
2021-2022 241,600 85,600
Goodwill is to be calculated on the basis of simple average of three years profit by using
capitalization method taking 18% as normal rate of return (Ignore taxation).
Purchase consideration is to be discharged by Sun Limited on the basis of intrinsic value per share.
Prepare Balance Sheet of Sun Limited after the amalgamation.

Chapter: Ratio Analysis

Question No. 10:
The following information is extracted from the annual report of Atul Pvt. Ltd. company for the
year end 31 December, 2022:
Particulars Amount/ Ratio
Issued and paid up equity shares of Rs. 100 each 12,00,000
Net working capital 6,06,000
Current ratio 1.75:1
Quick ratio 1.25:1
Net Non-current (fixed) assets to shareholders' equity 60%
Gross profit margin 20% on Sales
Net profit to Share Capital 16%
Sales to Stock Ratio 6.575 times
Average age of outstanding debtors 2 months
Make appropriate assumptions and prepare an Income Statement and Statement of Financial
Position for the aforesaid company.
Chapter: Internal Reconstruction

Question No. 11:
Given below is the Statement of Financial Position of Green Planet Ltd. As on 31.03.2022.
Particulars Amount
Equity & Liability
Equity Shares of 100 Each 500,000
12% Preference shares of 100 each 250,000
11% Debentures of 100 each 200,000
Sundry Creditors 250,000
Provision for Tax 5,000
Total 1,205,000
Assets
Fixed Assets 625,000
Investments 50,000
Current Assets 500,000
P&L A/c 30,000
Total 1,205,000

- All the existing equity and preference shares of the company are reduced to Rs. 40 and Rs. 60
each.
- Debenture holders surrender their existing debentures of Rs.100 each in lieu of fresh
debentures of Rs. 70 each for every debenture held by them. However, debenture holders
demand for increase in interest rate to 12%.
- Fixed assets are to be written down by 30%. Current assets are to be revalued at Rs. 225,000.
- Investments to be brought to their market value of Rs. 47,500.
- Tax liability of the company were settled for Rs. 7,500.
- XY & Co., one of the suppliers, to whom the company owed Rs. 100,000 decided to forgo
40% of its claim. 1,500 equity shares of Rs. 40 each were allotted in full satisfaction of its
claim.
Prepare Reconstruction A/c and show the Balance sheet of the company after giving effect to the
above.
Chapter: Cash Flow Statement

Question No. 12:
Given below is the Income Statement for the Year ended and Statement of Financial Position of
Bikash Ltd. as on date:
Income statement for the Year ended 31.03.2022

Particulars Amount
Sale of Goods 5,040,000
Less:
Cost of goods sold 3,960,000
Depreciation 120,000
Salary & Wages 480,000
Other Expenses 160,000
Provision for Tax 176,000 (4,896,000)
Net Operating Profit 144,000
Add: Gain on sale of Equipment 24,000
168,000
Opening Balance of Retained Earnings 303,600
471,600
Dividend Declared and Paid during the Year 144,000
Retained earning Closing Balance 327,600
Statement of Financial Position as on 31.03.2022

Equity & Liabilities 31.03.2021 31.03.2022 Assets 31.03.2021 31.03.2022
Share Capital 720,000 888,000 Machine & Equipment 720,000 1,152,000
Retained Earnings 303,600 327,600 Investment 96,000 192,000
Creditors 480,000 468,000 Debtors 336,000 372,000

Expenses Payable 48,000 96,000 Stock 528,000 192,000

Tax Payable 24,000 26,400 Prepaid expenses 15,600 18,000
Accumulated Depreciation 240,000 264,000 Cash 120,000 144,000
Total 1,815,600 2,070,000 Total 1,815,600 2,070,000
One of the equipment originally costing Rs. 144,000 was sold during the Year.
Prepare cash flow statement of the concern using indirect method from the given information.
Chapter: Banks and Financial Institutions

Question No. 13:
XYZ Bank Limited, licensed as “A” class financial institution by NRB, provides you the following
information regarding Outstanding Loans as on 31st Ashadh, 2080:
Category Amount
1. Good 5,000,000
2. Rescheduled /Restructured 210,000
3. Substandard 500,000
4. Doubtful 300,000
5. Bad 500,000
During financial year 2080-81 additional loans amounting to Rs. 3,000,000 were disbursed. The
Bad loans amounting to Rs. 200,000 was written off during the year. Loans amounting to Rs.
150,000 were shifted from Doubtful category to Bad category. Similarly, Loans amounting to
Rs. 500,000 shifted from Good category to Substandard category and Substandard Loans
amounting to Rs. 200,000 were rescheduled during the year.
From the above information, you are required to calculate the loan loss provision as per the
directive issued by Nepal Rastra Bank. Students are required to apply the most recent directives to
all relevant reporting periods, regardless of any previously applicable directives during those
periods.
Question No. 14:

Following particulars are extracted from books of XYZ Bank Ltd. As an officer of Reporting and
Compliance Department of the bank, you are requested to find out the Capital Adequacy Ratio
(CAR) for quarterly reporting in a format as prescribed by NRB.
Particulars Rs.
Paid Up Equity Share Capital 2,409,097
Gross Income of Previous Year 6,067,000
Net Interest Income of Previous Year 4,550,250
Share Premium 11,849
Exchange Equalization Reserve 37,191
Proposed Bonus Equity Shares 602,274
Statutory General Reserves 1,324,498
Investment in equity arising out of Underwriting Commitment 58,700

Subordinated Term Debt 1,050,000

Retained Earnings Up to Previous Year 255,533
Unaudited current year cumulative profit 294,817
Discount value to 5 YTM Bond / Debenture - 337,500
General Loan Loss Provision 421,020
Investment Adjustment Reserve 38,919
Debenture Redemption Reserve 480,363
Investment in equity of institutions having financial interest 78,000
Cumulative and Redeemable preference shares 256,300
Irredeemable Non-Cumulative Preference shares 263,630
Deferred Revenue Expenditure 16,500
Other Reserves 31,500
RWE for Credit Risk 54,416,415
RWE for Operational Risk 3,860,762
RWE for Market Risk 368,056
Supervisory Response:
While doing on site examinations or inspections and after discussing with management of the bank,
NRB has not satisfied with the quality of bank’s risk management and control procedures and
advised the bank’s management to adjust the RWE as follows:
a) Asset Liability Management policies and practices to effectively manage the market risks of
the bank is not satisfactory and an additional risk weight of 1% of Net Interest Income of
Previous Year shall be added to the risk weight for market risk.
b) Banks do not adopt sound practices for the management of operational risk; an additional
capital charge of 2% of Gross Income of Previous Year shall be levied for operational risks.
c) Bank has not achieved the desired level of disclosure requirements; the total risk weighted
exposures before other supervisory adjustments of the bank shall be increased up to 3%.
Chapter: Underwriting of Shares & Debentures
Question No. 15:

A Company came up with public issue of 60,00,000 equity shares of Rs. 10 each at Rs. 15 per
share. A, B and C took underwriting of the issue in 3: 2: 1 ratio. Applications were received for
54,00,000 shares. The marked applications were received as under:
A 16,00,000 Shares
B 14,00,000 Share
C 12,00,000 Shares
Commission payable to underwriters is at 5% on the face value of shares.

(a) Compute the liability of each underwriter as regards the number of shares to be taken up.
(b) Pass journal entries in the books of company to record the transactions relating to underwriters.
(Narrations not necessary)

Chapter: Financial Reporting Standard (NFRS 15)

Question No. 16:
On 31st Asadh 2080, RR Enterprises sold a machine to a customer for Rs 36,000. The sales contract
include an assurance type warranty for the first 90 days and an optional ‘extended coverage’ plan
under which it will repair or replace any defective part for three years from the expiration of the
assurance-type warranty.
Since the optional ‘extended coverage’ plan is sold separately, the entity determines that the three
years of extended coverage represent a separate performance obligation (i.e. a service-type
warranty). The entity determines that the stand-alone selling prices of the machinery and the
extended warranty are Rs 40,000 and Rs 5,000, respectively.
Apply the 5 stages of revenue recognition, per NFRS 15, to determine how much revenue RR
Enterprises should recognize in the year ended 31st Asadh, 2080.
Chapter: Financial Reporting Standard (NAS 16)

Question No. 17:
When reading the accounting policies note in the financial statements, the shareholder notices that
the company measures all of its freehold land using a Revaluation model but that it measures its
plant and equipment using a cost model. He further notices that both of these asset types are shown
in the ‘property, plant and equipment’ figure, which is a single line item of non-current assets in
the consolidated statement of financial position. A shareholder argues that it makes no sense to
him that assets, which are shown as property, plant and equipment, are measured inconsistently.
If it is OK to measure different items of property, plant and equipment using two different
measurement models, why not the company use the Revaluation model for the more readily
accessible properties and use the cost model for the properties in remote locations to save on time
and cost?

Question No. 18:
RST Pvt Ltd. is planning to undergo a major restructuring to streamline its operations. As part of
this plan, the company intends to transfer one of its manufacturing plants situated in Pokhara to
Kathmandu. The board of directors approved the restructuring plan on Asadh 1, 2081, and publicly
announced the main details to employees and other stakeholders on Asadh 15, 2081. The
restructuring plan includes:
- Termination of 50 employees of Pokhara Branch, with severance payments of 20 lakh.
- Closure costs of Rs 500,000 for shutting down the plant, including contract termination
penalties.
- Marketing expenses of Rs 200,000 for rebranding due to relocation.

- Relocation costs of Rs 300,000 for moving continuing employees from Pokhara to

Kathmandu.
The company wants to create provision for all the above expenses. Is the accounting treatment
justified?
Question No. 19:
Sagarmatha Pvt Ltd is a private limited company with its registered office in Nepal. On 1 Bhadra
20X1, it purchased a plot of land in Belgium for USD 10,000. At 31 Asadh 20X2, the fair value of
the land was USD 12,000. The company has adopted revaluation policy for its Property Plant and
Equipment in accordance with NAS 16. Discuss the initial and subsequent recognition of Land.
Relevant exchange rates:
a. 1 Bhadra 20X1: Rs 100 per USD
b. 31st Asadh, 20X2: Rs 102 per USD
Chapter: Miscellaneous
Question No. 20:
Write Short Notes on:
a) Other Comprehensive Income

b) Biological assets
c) Going Concern
d) Accounting Estimates
e) Re-insurance

Section 2: Answers
Chapter: Departmental Accounting
Answer to Question No. 1:
Memorandum Stock A/c
Particulars X Y Particulars X Y
To opening stock 84,000 167,400 By Sales 573,600 750,000
To Purchase 552,000 902,700 By Mark down (op. stock) 7,560 -
By Mark down (on purchase) 2,160 12,000
By Abnormal Loss (shortage) 3,120 -
By Closing Stock 49,560 308,100
Total 636,000 1,070,100 Total 636,000 1,070,100
Memorandum Mark-up
Particulars X Y Particulars X Y
To Mark Down 7,560 - By opening stock Reserve 21,000 55,800
To Mark Down 2,160 12,000 By Memo. Stock (margin) 138,000 300,900
To Memo stock 780 -
To Closing Stock Reserve [WN-1] 12,390 98,700
To Gross Profit 136,110 246,000
Total 159,000 356,700 Total 159,000 356,700
Working Note -1: Closing Stock Reserve (for Y Department)

Closing Stock (Total) 308,100
Particulars Invoice Price Stock Reserve
a) Value of Marked down goods
Cost 30,000
Normal Invoice Price 45,000
Mark down 6,000
Revised Invoice Price 39,000 39,000 9,000
b) Value of Normal Goods 89,700

[308,100-39,000] 269,100 (269,100*50/150)
Total 308,100 98,700
Stock reserve for X department: 49,560*33.33/133.33 = 12,390

Chapter: Accounting for Branch

Statement showing conversion of Foreign Trial Balance in Nepalese Currency. [‘000]
Hong Kong
Particulars Dollar Ex Rate Nepalese Rupee
Dr. Cr. Dr. Cr.
Plant & Machine (Cost) 200 - 24 4,800 -
Accumulated Depreciation (130+14) - 144 24 - 3,456
Depreciation (200-130)*10% 14 - 22 308 -
Debtors 60 - 24 1,440 -
Provision for Doubtful Debts (60*5%) - 3 24 - 72
Provision Expense (charged to PL) 3 - 22 66 -
Creditors - 30 24 - 720
Opening Stock 20 - 20 400 -
Cash 10 - 24 240 -
Sales - 123 22 - 2,706
Purchase 20 - 22 440 -
Goods Sent to Branch 5 - Actual 100 -
Wages & Salary 45 - 22 990 -
Rent 12 - 22 264 -
Office Expenses 18 - 22 396 -
Commission Receipt - 100 22 - 2,200
Head Office - 7 24 - 168
Foreign Exchange - - - - 122
Translation Reserve (Gain) (b/f)
Total 407 407 9,444 9,444
Trading and Profit/ Loss A/c

For the year ended 31.03.2023
Particulars H.O. Branch Total Particulars H.O. Branch Total

To Opening Stock 100 400 500 By Sales 520 2,706 3,226
To Purchase 240 440 680 By Goods Sent 100 - 100
To Goods Received - 100 100 By Closing Stock 150 75 225
To Wages 75 990 1,065
To Gross Profit 355 851 1,206
Total 770 2,781 3,551 Total 770 2,781 3,551
To Depreciation - Building 80 - 80 By Gross Profit 355 851 1,206
To Depreciation - P&M 380 308 688 By Commission Receipt 256 2,200 2,456
To Director Salary 30 - 30 By Stock Reserve 4 - 4
To Rent - 264 264 (opening)
To Office Expense 25 396 421
To Provision expenses 14 66 80

To Stock Reserve (Closing) 15 - 15

To Net Profit 71 2,017 2,088
(before adjustment of
Managers Commission)
Total 615 3,051 3,666 Total 615 3,051 3,666
Closing Stock Reserve = [3,125*24]*25/125 = 15
General P/L
Particulars Amount Particulars Amount

To Manager Commission [WN-1] 43.36 By PL A/c
- Head office 71.00
- Branch 2017.00
To Income Tax Exp. (47.5%) 971.20
(2088-43.36) * 47.5%
To Net Profit after Tax 1,073.44
Total 2,088.00 Total 2,088.00
Working Note – 1 Calculation of Managers Commission

Net Profit before Adjustment 2,088
Add: Provision Expenses (14+66) 80
Net profit for purpose of Manager Commission 2,168
Manager Commission (2%*2,168) 43.36
Statement of other comprehensive income (Extract)
Net Profit form Income Statement 1,073.44

Foreign Exchange Tr. Gain 122.00
Total Income 1,195.44
Note:
As per the requirements of NAS 21, foreign operation has been translated as follows: -
- Items of P/L translated on average rate (except closing stock which is translated on closing
rate) and items of Statement Financial Position is translated on closing rate.
- Equity has been translated using closing rate, As NAS 21 does not clearly state requirement
of translation of equity, translation at closing rate is the best alternative as all assets/liabilities
represented by equity are translated at closing rate.
- Translation gain has been recognized directly in equity under Translation Reserve. The
transfer should be made through Statement of Other Comprehensive Income.
- Translation gain is not recognized in statement of profit or loss but shown separately in
statement of other comprehensive income.

Chapter: Accounting for Hire Purchase Transactions

Statement showing Cash Price of Machine and Interest on each Instalment
Instalment Interest Principal
Particulars Interest Calculation
Amount Amount Amount
3rd Instalment 30,000 = 30,000*8/108 2,222 27,778
2nd Instalment 30,000 = (30,000+27,778)*8/108 4,280 25,720
1st Instalment 30,000 = (30,000+25,720+27,778)*8/108 6,185 23,815
Down Payment 30,000 - - 30,000
Total 120,000 12,687 107,313
Alternatively, cash price can be calculated as follows:

Cash Price of Machine = Down Payment + Present Value of all future payments
= 30,000 + [30,000*PVIFA (8%, 3Years)]
= 30,000 + (30,000 * 2.5771)
= 107,313
Journal Entries in the books of M/s Rihan Traders:
Date Particulars L.F. Amount Amount
1.1.2022 Machine A/c Dr. 107,313
Interest Suspense A/c Dr. 12,687
To Khadka Suppliers 120,000
(Being Machine Purchased and Interest Suspense Booked)
1.1.2022 Khadka Suppliers A/c Dr. 30,000
To Bank 30,000
(Being Down Payment Made)
31.12.2022 Interest Expense A/c Dr. 6,185
To Interest Suspense A/c 6,185
(Being Interest expense for the period booked)
31.12.2022 Khadka Suppliers A/c Dr. 30,000
To Bank 30,000
(Being 1st Instalment paid)
31.12.2022 Depreciation A/c Dr. 10,731
To Machine A/c 10,731
(Being depreciation on Machine provided for the year)
31.12.2022 P/L A/c Dr. 16,916
To Interest Expense 6,185
To Depreciation A/c 10,731
(Being Interest & depreciation charge transferred to P/L A/c)

Interest Suspense A/c

Date Particulars J.F Amount Date Particulars J.F Amount
1.1.2022 To Khadka Suppliers 12,687 31.12.2022 By Interest Expense 6,185
31.12.2022 By Balance C/d 6,502
Total 12,687 Total 12,687
Chapter: Computation of Insurance Claim

Statement showing value of stock lost due to fire as on 12th April, 2024
Particulars Amount
Value of stock as on 12 April, 2024 [WN-1] 320,000
Less: Stock unaffected by fire (40,600)
Less: Salvaged value of goods recovered (39,400)
Stock damaged by fire 240,000
Applying Average Clause,

Amount of Claim = Policy Amount * Loss of Stock
Stock Value on date of fire
= (200,000*240,000)/320,000
= 150,000
Working Note – 1: Stock Value as on date of Fire

Memorandum Trading
From 1 April 2024 to 12 April, 2024
To opening Stock 314,400 By Sales 1,052,000
To Purchase 742,000 By Closing Stock 320,000
To Gross Profit 315,600
Total 1,372,000 Total 1,372,000
Gross Profit = 1,052,000*30%

= 315,600

Chapter: Accounting from Incomplete Records

Trading & Profit Loss A/c
For the Year Ended 31.03.2022
To Opening Stock 24,000 By Sales 108,000
Less: Damaged goods (2,000) 22,000
To Purchase 51,000 By Closing Stock 20,000
To Wages 8,500
(8000+500)
Total 128,000 Total 128,000
To Rent, Rates & Tax 6,000 By Gross Profit 46,500
To Printing 1,000
To Postage 1,000
To Insurance 5,600
(6000-400)
To Advertisement 1,000
To Salary 8,500
(800+500)
To Depreciation - Furniture 800

To Depreciation - Machine 12,500
To Petty Expenses 1,000
To Net Profit 9,100
Balance Sheet of Mr. X

As on 31.03. 2022
Capital 91,000 Furniture 7,200
Add: Net Profit 9,100 [(6000+2000)-800]
Less: Drawings (11,000) 89,100 Machinery 37,500
(10,000 + 2000 - 1000) (50000-12500)
Stock 20,000
Creditors 6,000 Debtors 28,000
Wages Payable 500 Prepaid Insurance 400
Salary Payable 500 Bank 3,000

Debtors A/c
To Balance b/d 20,000 By Bank 100,000
(12000+8000)
To Sales 108,000 By Balance c/d 28,000
(bal fig.) (20000+8000)
128,000 128,000
Creditors A/c
To Bank 50,000 By Balance b/d 5,000
(4000+1000)
To Balance c/d 6,000 By Purchase 51,000
(5000+1000) (Bal. fig)
56,000 56,000
Bank A/c
By Balance b/d
(overdraft) 4,000
(Bal. Fig)
By Rent, Rates 6,000
By Printing 1,000
To Debtors 100,000 By Postage 1,000
By Creditors 50,000
By Insurance 6,000
By Advertisement 1,000
By Drawings 10,000
By Salary 8,000
By Wages 8,000
By Furniture 2,000
By Balance c/d 3,000
100,000 100,000
Balance Sheet of Mr.X

As on 01.04.2021 (Opening Balance Sheet)
Capital 91,000 Furniture 6,000
(Bal. fig.) Machinery 50,000
Stock 24,000
Bank Overdraft 4,000 Debtors 20,000
Creditors 5,000 Bank -
Total 100,000 Total 100,000

Chapter: Accounting for NPOs

Jivan Charitable Hospital
Income & Expenditure A/c
For the Year ended 31.03.2023
Expenditure Amount Income Amount

To Medicine Consumed 116,000 By Subscription Income 204,000
To Honorarium 40,000 By Donation Income 58,000
To Salary 110,000 By Interest on Investment 28,000
To Sundry Expenses 2,000 By Charity Show (Net) 36,000
To Depreciation: (40000-4000)
- Equipment 24,000
- Buildings(160,000-
152,000) 8,000
To Surplus (b/f) 26,000
Total 326,000 Total 326,000
Balance Sheet
As on 31.03.2023
Capital Fund 678,000 Buildings 152,000
Add: Surplus 26,000 704,000 Equipment 120,000
Investment 400,000
Creditors for Medicine 48,000 Subscription Receivable 4,000
Advance Subscription 2,000 Stock of Medicine 60,000
Cash & Bank 18,000
Total 754,000 Total 754,000
Subscription A/c

To Opening Receivable 2,000 By opening advance 4,000
To Income & Exp.(b/f) 204,000 By Bank 200,000
To Closing Advance 2,000 By closing Receivable 4,000
Total 208,000 Total 208,000
Creditors A/c
To Bank 120,000 By Balance b/d 32,000
To Balance c/d 48,000 By Purchase (b/f) 136,000
Total 168,000 Total 168,000

Stock A/c

By Income & Exp.
To Balance b/d 40,000 (b/f) 116,000
To Purchase 136,000 By balance c/d 60,000
Total 176,000 Total 176,000
Equipment A/c

To Balance b/d 84,000 By Depreciation (b/f) 24,000
To Bank 60,000 By Balance c/d 120,000
Total 144,000 Total 144,000
Balance Sheet (opening Balance Sheet)

As on 1.04.2022
Capital Fund 678,000 Buildings 160,000
(Bal fig.) Equipment 84,000
Investment (28,000/7%) 400,000
Creditors for Medicine 32,000 Subscription Receivable 2,000
Advance Subscription 4,000 Stock of Medicine 40,000
Cash & Bank 28,000
Total 714,000 Total 714,000
Note: cheques have no impact in preparing financials of this organization as it is not an error in
the books of this organization, and is just the reconciliation item arising from timing difference,
which will be eventually settled.

Bank A/c
To Balance b/d 5,000 By Realization A/c 60,000
To Realization A/c 100,000 By Realization A/c 51,667
To Asal's Capital 5,000 [Creditors – WN-1]
To Kamal's Capital [WN-3] 1,667
Total 111,667 Total 111,667

Realization A/c
To Plant & Machinery 100,000 By Creditors 60,000
To Sundry Debtors 25,000 By Bank Loan 60,000
To Bank 60,000 By Bank 100,000
To Bank [WN-1] 51,667 By Asal's Capital 3,333
By Bimal's Capital 5,000
By Kamal's Capital 8,334
Total 236,667 Total 236,667
Partner’s Capital A/c

Particulars Asal Bimal Kamal Particulars Asal Bimal Kamal
To P/L A/c 8,000 12,000 20,000 By Balance b/d 5,000 20,000 25,000
To Realization A/c 3,333 5,000 8,334 By Bank 5,000 - 1,667
To Deficiency - 3,000 - By Deficiency 1,333 - 1,667
Total 11,333 20,000 28,334 Total 11,333 20,000 28,334
Let amount brought by Kamal be X.

Amount to be brought by Kamal is 2X
Deficiency of Kamal's part is X.
WN-1: Payment to Creditor (from extract of Cash A/c)

= 5,000 + 100,000 + 5000 + X - 60000
= 50,000 + X
WN-2: Realization Loss (from extract of Realization A/c)

= 100,000+25,000+60,000+50,000+X-60,000-60,000-100,000
= 15,000 + X
Realization Loss to be borne by Kamal

= 50% of (15,000 + X)
= 7500 + 0.5X
WN-3: For Kamal's Capital: (from extract of Partners Capital A/c)

Dr. side [20,000+7500+0.5X] = Cr. Side [25000+X+X]
or, 27,500+0.5X = 2X+25,000
or, 1.5X = 2,500
or, X = 1,667


Revaluation A/c
To Building By Rajesh's
(5%*180,000) 9,000 Capital(1/2*33,000) 16,500
To Stock By Nikhil's Capital
(444,000-420,000) 24,000 (1/2*33,000) 16,500
Balance Sheet of the Firm

As on 1.1.2023
Capital Accounts Building (95%) 171,000
Rajesh [WN-1] 343,500 Equipment 84,000
Nikhil [WN-1] 403,500 Stock 420,000
Shiva [WN-1] 360,000 Sundry Debtors 144,000
Sundry Creditors 180,000 Bank 468,000
Total 1,287,000 Total 1,287,000
Trading & Profit/Loss A/c

For the Year ended 31.12.2023
To Opening Stock 420,000 By Sales 3,600,000
To Purchase 3,180,000 By Closing Stock 720,000
Total 4,320,000 Total 4,320,000
To Salary 240,000 By Gross Profit 720,000
To Rent 120,000 By Discount Received 58,800
To Office Expenses 108,000 [2,881,200*2/98]
To Discount Allowed 12,000
To Depreciation 5,400
To Net Profit
(b/f)(1:1:1)
- Rajesh Capital 97,800
- Nikhil Capital 97,800
- Shiva Capital 97,800
Total 778,800 Total 778,800
Value of Goodwill after completion of 1st Trading Year = 3* [Profit of the year - 180,600]
= 3*[293,400-180,600]
= 338,400

Adjustment of Goodwill
Partners Rajesh Nikhil Shiva
Old Cr. 169,200 169,200 -
New Dr. 112,800 112,800 112,800
Net 56,400 Cr. 56,400 Cr. 112,800 Dr.
Balance Sheet of the Firm

As on 31.12.2023
Capital Accounts Building 171,000
Rajesh [WN-1] 467,700 Equipment 78,600
Nikhil [WN-1] 533,700 Stock 720,000
Shiva [WN-1] 500,700 Sundry Debtors 1,704,000
Bank Overdraft [WN-3] 751,500 [WN-2]
Sundry Creditors [WN-2] 420,000
Total 2,673,600 Total 2,673,600
Working Note: 1
Partner’s Capital A/c
Date Particulars Rajesh Nikhil Shiva Date Particulars Rajesh Nikhil Shiva
1.1.23 To Revaluation 16,500 16,500 - 1.1.23 By Balance b/d 360,000 420,000 -
1.1.23 To Balance c/d 343,500 403,500 360,000 1.1.23 By Bank - - 360,000
Total 360,000 420,000 360,000 Total 360,000 420,000 360,000
Date Particulars Rajesh Nikhil Shiva Date Particulars Rajesh Nikhil Shiva
To By Balance
31.12.23 Drawings 30,000 24,000 18,000 31.12.23 b/d 343,500 403,500 360,000
To Rajesh
31.12.23 Capital - - 56,400 31.12.23 By P/L A/c 97,800 97,800 97,800
To Nikhil By Shiva
31.12.23 Capital - - 56,400 31.12.23 Capital 56,400 56,400 -
To Balance By Bank (bal
31.12.23 c/d * 467,700 533,700 500,700 31.12.23 fig.) - - 173,700
Total 497,700 557,700 631,500 Total 497,700 557,700 631,500
*Total Capital of Rajesh and Shiva (2/3) 1,001,400

Total Capital of the Firm (Whole) 1,502,100
Proportionate Capital of Shiva (1/3) 500,700

Working Note: 2
Debtors A/c

To Balance b/d 144,000 By Cash & Bank 2,028,000
To Sales 3,600,000 By Discount 12,000
By Balance c/d 1,704,000
Total 3,744,000 Total 3,744,000
Working Note: 3
Creditors A/c
To Cash & Bank 2,881,200 By Balance b/d 180,000
To Discount received 58,800 By Purchase 3,180,000
To Balance c/d 420,000
Total 3,360,000 Total 3,360,000
Working Note: 4
Bank A/c
To Balance b/d 468,000 By Creditors 2,881,200
To Debtors 2,028,000 By Salary 240,000
To Shiva Capital 173,700 By Rent 120,000
To Balance c/d 751,500 By Office Expenses 108,000
(overdraft) By Drawings 72,000
Total 3,421,200 Total 3,421,200
Chapter: Business Combination

Financials of Sun Limited
As on 01.04.2022 (After Amalgamation)
Particulars Note. No. Amount

I. Equity and liabilities
(1) Shareholder's funds
(a) Share capital 1 525,500
(b) Reserves and surplus 2 840,500
(2) Non-current liabilities
12% Debentures 70,000

(3) Current liabilities

(a) Trade payables 92,800
(b) Other current liabilities 36,000
Total 1,564,800
II. Assets
(1) Non-current assets
(a) Property, plant and equipment 902,000
(b) Intangible assets (Goodwill) [WN 1] 186,800
(c) Non-current investments 115,000
(2) Current assets
(a) Inventories 120,000
(b) Trade receivables 151,000
(c) Cash & cash equivalents 80,000
(3) Miscellaneous
Amalgamation Adjustment Account* 10,000
Total 1,564,800
*Amalgamation Adjustment Account has been created against Export Profit Reserve (Assuming
it to be a Statutory Reserve) of Moon Ltd.
Notes to Financials
Particulars Amount
1. Share Capital
Equity Shares (40,000+12,550) shares of 10 each [WN-2] 525,500
2. Reserve & Surplus

General Reserve 202,000
Profit and Loss A/c 178,000
Securities Premium [12,550 x 30] [WN-2] 376,500
Export profit reserve 74,000
Add: Balance of Moon Ltd. 10,000 84,000
Total 840,500
Working Note -1 Valuation of Goodwill
a) Capital Employed
Particulars Sun Ltd. Moon Ltd.
Total Assets 910,000 458,000
Less: Non-Trade Investment (80% of
Total Investments) (60,000) (32,000)
850,000 426,000
Less: Liabilities
14% Debentures - (60,000)
Trade payables (36,000) (56,800)
Other current liabilities (20,000) (16,000)
Capital Employed 794,000 293,200

b) Adjusted Average Profit

Simple Average profit of 3 Years 289,200 91,200
Less: Non-Trading Income on
Investment (12,000) (4,800)
(60,000*20%) (32,000*15%)
Adjusted Profit (Future Maintainable
Profit-FMP) 277,200 86,400
c) Goodwill Value
Capitalized value of average profit
(FMP/Capitalization rate) 1,540,000 480,000
Less: Capital Employed (From
Above) (794,000) (293,200)
Goodwill 746,000 186,800
Working Note -2 Intrinsic value and purchase consideration

a) Intrinsic Value per Share
Goodwill (WN 1) 746,000 186,800
Property, Plant & Equipment 630,000 272,000
Investments 75,000 40,000
Current Assets 205,000 146,000
Less: Liabilities
12% Debentures
[(14%*60,000)/12%] - (70,000)
Trade payables (36,000) (56,800)
Other Current Liability (20,000) (16,000)
Net Assets 1,600,000 502,000
No. of Shares 40,000 16,000
Intrinsic value per share 40.000 31.375
[Net Assets / No. of Shares]
b) Purchase Consideration & Payment
Payment In No. of Shares Amount

Equity Shares 12,550 502,000
[16,000*31.375/40]
Equity Share Capital @
Rs.10 12,550 125,500
Securities
Premium(remaining @
Rs. 30) 12,550 376,500

Chapter: Ratio Analysis

Income Statement of Atul Pvt. Ltd.
For the Year Ended 31.12.2022
Particulars Amount
Sales Revenue [WN-3] 26,56,300
Less: Cost of goods sold (80% of Sales) 21,25,040
Gross Profit (20% of Sales) 531,260
Less: Other Expenses (b/f) 339,260
Net Profit [WN-3] 192,000
Balance Sheet of Atul Pvt. Ltd.

As on 31.12. 2022
Particulars Amount
Equity & Liability
Issued & Paid up Capital 12,00,000
Reserve & Surplus [WN-4] 315,000
Current Liability [WN-1] 808,000
Total 23,23,000
Assets
Fixed Assets [WN-4] 909,000
Current Assets
- Stock [WN-2] 404,000
- Debtors [WN-3] 442,717
- Cash & Bank (balancing fig.) 567,283 14,14,000
Total 23,23,000
Working Note 1: Calculation of Current Assets and Current Liability

Current Ratio = 1.75:1
or, Current Assets = 1.75
Current Liability 1
or, Current Assets = 1.75 * Current Liability
Net Working Capital = Current Assets - Current Liability
or, 606,000 = Current Assets - Current Liability
or, 606,000 = 1.75 Current Liability - Current Liability

or, 0.75 Current Liability = 606,000

Current Liability = 808,000
Current Assets = 1.75*808,000
= 14,14,000
Working Note 2: Calculation of Stock

Quick Ratio = 1.25:1
or, Quick Assets = 1.25
Current Liability 1
or, Quick Assets = 1.25 * Current Liability
= 1,010,000
Quick Assets = Current Assets - Stock - Prepaid Expenses
or, Stock = 14,14,000 - 10,10,000 (assuming there is no prepaid expenses)
or, Stock = 404,000
Working Note 3: Calculation of Sales/ Turnover,Debtors and Net Profit

Sales to Stock Ratio = 6.575 times
Turnover (Sales) = 404,000*6.575 = 26,56,300
Average age of Debtors = 2 months
Closing Debtors = Sales * 2/12 = 442,717 (Assuming all sales are made in credit uniformly
throughout the year and recovery is made uniformly as well)
Net Profit to Share Capital = 16%
Net Profit = 12,00,000*16% = 192,000
Working Note 4: Calculation of Shareholders’ Equity, Fixed Assets and Reserve & Surplus
Net Fixed Assets to Shareholders Equity = 60%
Fixed Assets = 0.6
Equity 1
Fixed Assets = 0.6 Equity
Shareholders Equity + Long term Loan + Current Liability = Fixed Assets + Current Assets
or, Shareholders Equity + 0 = 0.6 Equity + Current Assets - Current Liability

or, 0.4 Shareholders Equity = Net Working Capital

or, Shareholders Equity = 606,000/ 0.4 = 15,15,000
Fixed Assets = Shareholders Equity * 60% = 909,000
Reserve & Surplus = Shareholders Equity - Share Capital
= 315,000
Note: We have assumed long term loan to be 0.
Chapter: Internal Reconstruction
Reconstruction A/c
To Fixed Assets (5) 187,500 By Equity Share Capital (1) 300,000
To Current Assets (6) 275,000 By 12% Preference Share (2) 100,000
To Investment (7) 2,500 By 10% Debentures (3) 60,000
To Liability for taxation A/c (8) 2,500 By Sundry Creditors (4) 40,000
To P & L A/c 30,000
To Capital Reserve (Bal fig.) 2,500
Total 500,000 Total 500,000
(1) (500,000/100)*(100-40)
(2) (250,000/100)*(100-60)
(3) (200,000/100)*(100-70)
(4) 100,000*40%
(5) 625,000*30%
(6) 500,000-225,000
(7) 50,000-47,500
(8) 7,500-5000
Statement of Financial Position of Green Planet Ltd. (and reduced)

As on 31.03.2022
Particulars Amount
Equity & Liability
Issued, subscribed and paid up capital:
6,500 equity shares of Rs.40 each* 260,000
12% Preference Shares:
2,500 Pref. shares of Rs.60 each 150,000
Reserves & Surplus
Capital Reserve 2,500

12% Debentures:
2,000 Debentures of Rs. 70 each 140,000
Current Liabilities and Provisions
Sundry Creditors (250,000-100,000) 150,000
Total 702,500
Assets
Fixed Assets 437,500
[625,000-30%]
Investments 47,500
Current Assets 217,500
[225,000-7,500] (Cash paid for settlement of
Tax liability)
Total 702,500
(A) * 5,000 shares of Rs. 40 each to existing shareholders and 1,500 shares of Rs. 40 each
in settlement of claim of XY & Co.
Chapter: Cash Flow Statement

Statement of Cash Flow
For the year ended 31.03.2022
Particulars Amount
A. Cash Flow from Operating Activities
Net Profit during the year before Tax [168,000+176,000] 344,000
Add: Depreciation on Equipment 120,000
Less: Gain on Sales of Equipment (24,000)
Cash Flow before adjustment for changes in working capital 440,000
Adjustments in working capital
Decrease in Stock (528,000-192,000) 336,000
Increase in Expenses Payable (96,000-48,000) 48,000
Increase in Debtors (336,000-372,000) (36,000)
Increase in Prepaid expenses (15,600-18,000) (2,400)
Decrease in Creditor (480,000-468,000) (12,000) 333,600
Tax Paid [WN-1] (173,600)
Net Cash Flow From Operating Activities 600,000
B. Cash Flow from Investing Activities
Sales of Equipment [WN-4] 72,000
Purchase of Equipment [WN-2] (576,000)
Purchase of Investment (96,000-192,000) (96,000)
Net Cash Flow From Investing Activities (600,000)

C. Cash Flow from Financing Activities

Issue of Share Capital (888,000-720,000) 168,000
Dividend Paid (144,000)
Net Cash Flow From Financing Activities 24,000
Net Changes in Cash Position (A+B+C) 24,000
Add: Opening Cash & Cash Equivalents 120,000
Closing Cash & Cash Equivalents 144,000
WN-1 - Tax Payable A/c

To Bank (Payment) (b/f) 173,600 By Balance b/d 24,000
To Balance C/d 26,400 By Tax expense 176,000
200,000 200,000
WN-2 -Machine & Equipment A/c (Cost)

By Equipment
To Balance b/d 720,000 Disposal A/c 144,000
To Bank (Purchase) (b/f) 576,000 By Balance C/d 1,152,000
Total 1,296,000 Total 1,296,000
WN-3 -Accumulated Depreciation A/c

To Equipment Disposal A/c (b/f) 96,000 By Balance b/d 240,000
To Balance C/d 264,000 By Depreciation 120,000
Total 360,000 Total 360,000
WN-4 -Equipment Disposal A/c

To Equipment A/c 144,000 By Acc. Depreciation 96,000
To Profit on Sale 24,000 By Bank (Bal Fig.) 72,000
168,000 168,000


Statement showing computation of Loan Loss Provision:
Rescheduled/
Category Good Doubtful Bad Total
Restructured Substandard
Loan Amount 31st Ashad, 2080 5,000,000 210,000 500,000 300,000 500,000 6,510,000
Rate of Provision 1.1% 12.5% 25% 50% 100%
Provision as on 31st Ashad, 2080 55,000 26,250 125,000 150,000 500,000 856,250
Adjustments -
(+) Additional Loan 3,000,000 - - - - 3,000,000
(-) Bad Loan Written off - - - - (200,000) (200,000)
Shifted from doubtful to Bad - - - (150,000) 150,000 -
Shifted from Good to Sub-standard (500,000) - 500,000 - - -
Substandard Loan Rescheduled - 200,000 (200,000) - - -
12.5% for
210,000 &
25% for
Rate of Provision 1.1% Rescheduled 25% 50% 100%
Substandard
loan of Rs.
200,000
Closing Provision 82,500 76,250 200,000 75,000 450,000 883,750
Movement of Provision 27,500 50,000 75,000 (75,000) (50,000) 27,500
Note:
1. Based on Circular 1/081/082 for amendment on Unified NRB Directive 2080, rate for loan loss
provision is as follows:
Category Rate of Provision
Good 1.1%
Watchlist 5%
Sub-Standard 25%
Doubtful 50%
Bad 100%

Rescheduled/Restructured • 12.5% for first time rescheduling/restructuring with equal

(General requirements) installments but not exceeding grace period of 1 year, in the
case of performing loans
• Rate as per previous classification if rescheduled from
Sub-standard, Doubtful and Loss Category
2.

Statement showing computation of Capital Adequacy Table
Particulars Amount
Core Capital
Paid Up Equity Share Capital 2,409,097
Share Premium 11,849
Irredeemable Non-Cumulative Preference shares 263,630
Proposed Bonus Equity Shares 602,274
Statutory General Reserves 1,324,498
Retained Earnings Up to Previous Year 255,533
Unaudited current year cumulative profit 294,817
Debenture Redemption Reserve 480,363
Less:
Investment in equity arising out of Underwriting Commitment 58,700
Investment in equity of institutions having financial interest 78,000
Deferred Revenue Expenditure 16,500
Total Core Capital 5,488,861
Supplementary Capital
Exchange Equalization Reserve 37,191
Subordinated Term Debt 1,050,000
Discount value to 5 YTM Bond / Debenture -337,500
General Loan Loss Provision 421,020
Investment Adjustment Reserve 38,919
Cumulative and Redeemable preference shares 256,300
Other Reserves 31,500
Total Supplementary Capital 1,497,430
Total Capital Fund (Core + Supplementary) 6,986,291
Risk Weighted Exposure
RWE for Credit Risk 54,416,415
RWE for Operational Risk 3,860,762
RWE for Market Risk 368,056
Total Risk Weighted Exposure before Supervisory Adjustment 58,645,233
Add: 3% of total RWE due to non-compliance of disclosures
1,759,357
(58,645,233*3%)
2% Capital Charge for Operational Risk (2% of 6,067,000) 121,340

1% Capital Charge for Net Interest Income (1% of 4,550,250) 45,503

Total Risk Weighted Exposure (RWE) 60,571,433
Core Capital to Total RWE (Core Capital/Total RWE)*100% 9.06%

Capital Fund to Total RWE (Total Capital Fund/Total RWE)*100% 11.53%
Chapter: Underwriting of Shares & Debentures
Computation of liability of underwriters in respect of shares
Particulars A B C
Gross liability in agreed ratio of 3: 2: 1 30,00,000 20,00,000 10,00,000
Less: Unmarked applications (Subscribed (6,00,000) (4,00,000) (2,00,000)
Shares - marked shares) [54,00,000 - 42,00,000] in 3: 2: 1
Less: Marked applications (16,00,000) (14,00,000) (12,00,000)
Shortfall / (surplus) in marked shares 8,00,000 2,00,000 (4,00,000)
Surplus of C distributed to A & B in 3:2 ratio (2,40,000) (1,60,000) 4,00,000
Net liability for underwriting shares 5,60,000 40,000 Nil
Journal Entries
Particulars Rs Rs
A's Account [5,60,000 X 15] Dr 84,00,000
B's Account [40,000 X 15] Dr 6,00,000
To Share Capital Account [6,00,000 X 10] 60,00,000
To Securities Premium Account [6,00,000 X 5] 30,00,000
Commission Expense A/c Dr. Dr. 30,00,000
To A's Account [30,00,000*10*5%] 15,00,000
To B's Account [20,00,000*10*5%] 10,00,000
To C's Account [10,00,000*10*5%] 5,00,000
Securities Premium A/c Dr. Dr. 30,00,000

To Commission Expense 30,00,000
Bank Account Dr. 69,00,000
To A's Account 69,00,000
B's Account Dr. 4,00,000
To Bank Account 4,00,000
C's Account Dr. 5,00,000
To Bank Account 5,00,000

Chapter: Financial Reporting Standard (Revenue Recognition)

Step 1 – Identify the contract
There is a valid sales agreement between RR Enterprises and its customer
Step 2 – Identify the separate performance obligations within a contract
There are two performance obligations (promises) within the contract:
a) The supply of a machine (including assurance type warranty)
b) The supply of service type warranty
Step 3 – Determine the transaction price
The total transaction price is Rs 36,000.
Step 4 – Allocate the transaction price to the performance obligations in the contract.
Performance Obligation Standalone Sales Prices Allocated Transaction Price
Supply of Machine 40,000 [(40,000/45,000)*36,000]32,000
Service Type Warranty 5,000 [(5,000/45,000)*36,000]4,000
Total 45,000 36,000
Step 5 – Recognize revenue when (or as) a performance obligation is satisfied
a) Control over the machine has been passed to the customer so the full revenue of Rs 32,000
allocated to the supply of the machine should be recognised on 31st Asadh 2081.
b) The performance of service type warranty will begin only after the expiration of Assurance
type warranty.(i.e 90 days from date of sale). Therefore, since performance has not even
begun, Revenue of Rs 4,000 cannot be recognised on 31st Asadh 2081.
Conclusion: Revenue of Rs 32,000 should be recognized by RR Enterprises for the financial year
ending Asadh 31, 2081.
Chapter: Financial Reporting Standard (PPE)
As per Para 29 of NAS 16 “Property, Plant and Equipment”, An entity shall choose either the cost
model or the revaluation model as its accounting policy and shall apply that policy to an entire
class of property, plant and equipment (PPE). Also, as per Para 36, if an item of PPE is revalued,
the entire class of PPE to which that asset belongs shall be revalued. A class of PPE is a grouping
of assets of a similar nature and use in an entity’s operations.
In the given case, Land is one distinct class of PPE and plant and equipment is another class of
PPE. Therefore, it is perfectly consistent with NAS 16 for property to be measured under the
revaluation model and plant and equipment to be measured under the cost model.

However, it would be inappropriate to apply different accounting policies for the same class of
PPE based simply on its geographical location. Therefore, the contention of the shareholder to
use a fair value model for more readily accessible properties and use a cost model for the
properties in remote locations to save time and cost is not correct.
As per Para 72 of NAS 37 “Provisions, Contingent Liabilities and Contingent Assets”, a provision
for restructuring costs is recognized only when the entity has a constructive obligation arising from
having a detailed formal plan for the restructuring and has raised a valid expectation in those
affected that it will carry out the restructuring by starting to implement that plan or announcing its
main features to those affected by it.
As per Para 80, provision for restructuring should include only the direct expenditures that are
both necessarily entailed by the restructuring and are not associated with the entity's ongoing
activities. Ongoing costs such as the costs of relocating continuing staff and marketing costs
should be excluded from the provision and should instead be expensed as they are incurred.
In the given case, the cost of restructuring is recognized as follows:
Severance Payments of 20 lakh:

These costs should be recognized as a provision because they are directly related to the termination
of employees as a result of the restructuring. There is a present obligation resulting from a
constructive obligation as the company has communicated its plan to terminate employees.
Closure Costs of Rs 500,000:

These costs should be recognized as a provision. They are directly associated with the closure of
the manufacturing plant and represent an obligation that has arisen due to the decision to
restructure.
Marketing Expenses of Rs 200,000:

These costs are related to rebranding efforts, which are ongoing activities and are not directly
attributable to the restructuring. Hence, they should not be included in the provision.
Relocation Costs of Rs 300,000:

These costs are related to the ongoing activities of the entity (relocating continuing employees)
and are not directly attributable to the restructuring itself. Therefore, they should not be included
in the restructuring provision.
Conclusion: Provision should be made for Rs 25 lakhs (Severance Payments 20 lakhs and Closure
cost of Rs 5 lakh). Hence the accounting treatment of the company to create provision for all the
given expenses is not justified as per NAS 37.


As per NAS 21, “The Effects of Changes in Foreign Exchange Rates”, A Foreign currency
transaction should be initially recorded by converting them into functional currency using
exchange rate at the date of transaction.
At each subsequent balance sheet date:
• foreign currency monetary amounts should be reported using the closing rate.
• non-monetary items carried at historical cost should be reported using the exchange rate at
the date of the transaction.
• non-monetary items carried at fair value should be reported at the rate that existed when
the fair values were determined.
In the given case, the land is initially recognized at cost, which is translated into the functional
currency using the exchange rate on the purchase date. The land is therefore initially recorded at
NPR 10,00,000 (USD 10,000 * 100).
Land is not a monetary item so its cost is not retranslated using closing rate at year end. However,
in accordance with the revaluation model in NAS 16, a fair value has been determined. This
valuation is in USD and so must be translated into the functional currency using the exchange rate
in place when the fair value was determined. This means that the land must be revalued to Rs
12,24,000 (USD 12,000 * 102). The increase in the carrying value of the land of 224,000 (Rs
12,24,000 – Rs 10,00,000) will be reported as a revaluation gain in other comprehensive income
for the year and accumulated separately in equity.
Chapter: Miscellaneous
a) Other Comprehensive Income
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 NFRS.
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.

b) Biological assets
Biological assets are living animals and plants. They include sheep, pigs, beef cattle, poultry, fish,
dairy cows, trees in a forest, plants for harvest (for example, wheat and vegetables), trees, plants
and bushes from which agricultural produce is harvested (for example, fruit trees, vines and tea
bushes)
Biological assets within the scope of NAS 41 are measured on initial recognition and subsequent
reporting dates at fair value less costs to sell, unless fair value cannot be measured reliably.
c) Going Concern
Going concern concept is an underlying assumption in the preparation of financials of an
enterprise. The financial statements are normally prepared on the assumption that an enterprise is
a going concern and will continue in operation for the foreseeable future. Hence, it is assumed that
the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of
its operations. If such an intention or need exists, the financial statements may have to be prepared
on a different basis and, if so, the basis used is disclosed.
If the management believes that an entity may no longer be a going concern, then this brings up
the issue of whether its assets are impaired, which may call for the write-down of their carrying
amount to their liquidation value/ realization value.
d) Accounting Estimates
Exposure Draft of NFRS 2024 for NAS 8 , Accounting Policies, Changes in Accounting Estimates
and Errors, has defined accounting estimates as “monetary amounts in financial statements that
are subject to measurement uncertainty”. As a result of the uncertainties in business activities,
many financial statement items cannot be measured with precision but can only be estimates. These
are accounting estimates. Some examples include:
a) Estimation of useful life of depreciable assets.
b) Estimation of residual value of depreciable assets.
Therefore, the management makes various estimates and assumptions of assets, liabilities, incomes
and expenses as on the date of preparation of financial statements. This process of estimation
involves judgments based on the latest information available.
e) Re-insurance
If an insurer does not wish to bear the whole risk of policy written by him, he may reinsure a part
of the risk with some other insurer. For example: In general insurance there are risks of such
magnitude or nature which one insurance company cannot afford to cover, e.g., aviation insurance.
Generally, in such cases, an insurance company insures the whole risk itself but lays off certain
portion to other reinsurance companies, retaining only that much risk which it can absorb.
It may however be emphasized that the original insured does not acquire any right under a
reinsurance contract against the reinsurer. In the event of loss, therefore, the insured’s claim for
full amount is against the original insurer.

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.

Section 3: Exam Tips to Students

1. Practice, Practice, Practice: The best way to prepare for accounting exams is to practice as many
problems as possible. Work through past exam papers, sample questions, and exercises from your
textbook. This will not only help you become familiar with the format of questions but also
improve your problem-solving skills.
2. Master Time Management: During your exam, managing your time effectively is crucial.
Practice solving questions under timed conditions to ensure you can complete the exam within the
allotted time.
3. Read Instructions Carefully: During the exam, read all instructions and questions carefully
before starting. Make sure you understand what is being asked before you begin answering.
Misinterpreting a question can lead to unnecessary mistakes and wastage of time.
4. Review Your Answers: If time permits, review your answers at the end of the exam. Check for
any mistakes or missed questions. A second look can help you catch errors and improve your
overall score.
5. Take Care of Your Health: Ensure you get enough sleep, eat nutritious meals, and stay hydrated.
Physical well-being has a significant impact on cognitive function and concentration. Avoid last-
minute cramming and aim for a balanced study routine.

Paper 2
Audit & Assurance

Section 1: Questions:
Chapter: REGULATORY AND ETHICAL ISSUES
Question No. 1:
Ram professional accountant in practice made exaggerated claims about his qualifications and
guaranteed unrealistic outcomes in his promotional materials, along with unsubstantiated
comparisons to other firms. What specific ethical issues do these actions raise? How do they
potentially violate the principles of honesty, truthfulness, and professional conduct? What
consequences could Ram face if these issues aren't addressed, and what steps should he take to
rectify the situation and ensure compliance with ethical standards?
Question No. 2:
Shyam & Co received Rs 300,000 from Nebico Ltd, a listed company, during the current year, the
firm's total income is Rs 1,600,000. The previous year, Shyam & Co received Rs 250,000 from
Nebico Ltd, & firm’s total income was Rs 1,450,000. Comment
Question No. 3:
Dangi Associates provide audit services to XYZ Pvt Ltd and also provide the book keeping
services and prepares financials as well. Comment
Chapter: COMPLETING AND REPORTING ON AN ASSURANCE ENGAGEMENT

Question No. 4:
CA Guru is in the process of preparing the final audit report of JPA Private Limited and would like
to disclaim his opinion on the financial statements due to an inability to obtain sufficient
appropriate audit evidence. How shall CA Guru amend the description of the auditor's
responsibilities as required by NSA 700?
Question No. 5:
CA Omkar is the statutory auditor of Sabhyata Ltd. for the FY 2020-21. The company is engaged
in the business of manufacture of floor tiles. During the course of audit, CA Omkar obtained certain
audit evidences which were not consistent with the affirmations made in the financial statements.
Discuss as to how CA Omkar should deal with the situation in the auditor's report.
Chapter: NEPAL STANDARDS ON AUDITING (NSA)

Question No. 6:
In the course of audit of PB Ltd., You observe that there is a likelihood of misstatement in the
account balances and disclosures in the financial statements. What should be your considerations
as an auditor for “Assessing the Risk of Material Misstatements

Question No. 7:
What are the factors that may assist the auditor in determining whether external confirmation
procedures are to be performed as substantive audit procedures while responding the assessed
risks?
Question No. 8:
While auditing Galaxy Limited, Mr. GN, the statutory auditor of the company, came to know that
some of the trade payables are outstanding as it is from previous year in the Balance sheet of the
current year. Mr. GN, therefore, requested written confirmation of balances from trade payables.
In the list of confirmations request sent, one of the trade payables, having outstanding balance of
Rs 12 lakh, sent his confirmation through an electronic mail. You are required to explain what the
further procedures are required to rely on such responses received electronically.
Question No. 9:
CA K audited the books of accounts of E Ltd. for the financial year 2020-2021. The auditor used
an audit procedure according to which all the documents and records maintained by the company
were checked in detail to obtain audit evidence. Explain the audit procedure used by the auditor
and its reliability.
Question No. 10:
Discuss the key areas an auditor should inquire about with management concerning subsequent
events that may impact the financial statements. Provide examples of specific inquiries that the
auditor might make in relation to these areas.
Question No. 11:

Discuss the key matters an auditor should consider when assessing the integrity of a client during
the acceptance and continuance of a client relationship or specific engagement.
Question No. 12:

M/s TP & Co., a firm of Chartered Accountants, is auditor of KSR Ltd. for many years. KSR Ltd.
has diversified their business into newer areas during the last year. The senior member of the audit
team handed over the standard audit programme of earlier years to the audit assistants and
instructed them to follow the same. The assistants are conducting the audit accordingly. Whether
the attitude of the audit assistants is justified or they are required to keep an open mind? Guide
them.
Question No. 13:

Auditor of Sunshine Ltd. is of the view that due to greater management intervention to specify
accounting treatment, the risk of material misstatement is greater for non-routine transactions. Is
the view of the auditor, correct? Specify the other matters due to which the risk of material
misstatement is greater for significant non-routine transactions.

Question No. 14:

P Ltd. is a company from a business group "ABCD" and is engaged in trading of garments. The
promoters of the company are promoters and directors of some other group companies also. You
have been appointed as an auditor of P Ltd. P Ltd has entered into various intercompany
transactions (within group companies) during the year which are outside its normal course of
business. What will be your duties as an auditor in relation to those transactions?
Question No. 15:

The approach to audit and extent of checking are undergoing a progressive change in favour of
more attention towards the questions of principle and controls with a curtailment of non-
consequential routine checking. Discuss the given statement.
Question No. 16:

Discuss the matters relevant to the auditor’s evaluation of whether, the expectation can be
developed sufficiently and precisely to identify a misstatement that, when aggregated with other
misstatements, may cause the financial statements to be materially misstated.
Question No. 17:

Give some Examples of work of the internal audit function that can be used by the external auditor.
Question No. 18:

In case of certain subject matters, limitations on the auditor's ability to detect material
misstatements are particularly significant. Explain such assertions or subject matters.
Question No. 19: Short Notes

a) Flow Chart
b) Snapshot Technique
c) Limitation of Internal Audit
d) Window Dressing
Question No. 20: Difference Between
a) Control Risk & Detection Risk
b) Audit Plan and Audit Programme
c) Audit and Review Engagement

Section 2: Answers:
Ram's exaggerated claims about his qualifications and guaranteed outcomes, along with
unsubstantiated comparisons to other firms, violate the principles of Professional behavior as
outlined in the HANDBOOK OF THE CODE OF ETHICS FOR PROFESSIONAL
ACCOUNTANTS (2023).
As per Sec 115 of Code of Ethics Professional accountant shall comply with relevant laws and
regulations and avoid any conduct that might discredit the profession. A professional accountant
shall be honest and truthful and shall not make:
▪ Exaggerated claims for the services offered by, or the qualifications or experience of, the
accountant; or
▪ Disparaging references or unsubstantiated comparisons to the work of others.
These actions can mislead clients and discredit the profession, potentially leading to disciplinary
actions, legal issues, and reputational damage.
To rectify the situation, Ram should withdraw or correct the misleading promotional materials,
ensure future marketing is accurate and truthful, and issue a public clarification if necessary.
Marketing efforts should focus on factual, verifiable information and uphold professional integrity
by avoiding exaggerated or unsubstantiated claims.
According to Section 410 of the Handbook of the Code of Ethics for Professional Accountants
(2023), when an audit client is a public interest entity and the fees from the client and its related
entities exceed 15% of the firm's total fees for two consecutive years, the firm must:
1. Disclose to those in charge at Nebico Ltd that these fees represent more than 15% of the
firm’s total income.
2. Safeguards: The firm should consider and apply one of the following safeguards:
o Pre-Issuance Review: Have an independent professional accountant or a
professional body review the audit before issuing the opinion on the current year's
financial statements.
o Post-Issuance Review: Have an independent professional accountant or a
professional body review the audit of the previous year’s financial statements
after issuing the opinion and before issuing the opinion for the following year’s
For Shyam & Co, this means they need to disclose the high percentage of fees to Nebico Ltd and
decide whether a pre-issuance or post-issuance review is necessary to address any independence
concerns.


According to Section 601 of the Handbook of the Code of Ethics for Professional Accountants
(2023), providing accounting and bookkeeping services to an audit client can create a self-review
threat. In the case of Dangi Associates, which provides both audit services and handles
bookkeeping tasks and financial statement preparation for XYZ Pvt Ltd, this creates a potential
self-review threat. This threat arises because the firm might have to audit its own work, which
could compromise objectivity and independence.
To address this threat, Dangi Associates should take the following safeguards:
1. Use of Independent Professionals: Ensure that the bookkeeping and financial statement
preparation services are performed by professionals who are not part of the audit team.
This separation helps mitigate the self-review threat by ensuring that those preparing the
financial statements are not involved in auditing their own work.
2. Independent Review: Implement a review process where an appropriate reviewer, who
was not involved in providing the bookkeeping and financial services, reviews both the
audit work and the services performed. This review should ensure that the audit remains
objective and is not influenced by the firm’s prior work.
Additionally, Dangi Associates must confirm that the bookkeeping and financial statement
preparation services provided are of a routine or mechanical nature, meaning they require minimal
professional judgment. For example, this includes posting client-approved entries to the trial
balance, calculating depreciation based on client-determined policies, preparing payroll
calculations from client data, and preparing financial statements from client-approved records.
By adhering to these safeguards, Dangi Associates can maintain the integrity of the audit process
and ensure that their review practices are impartial and compliant with professional standards.

Since the auditor, CA Guru, disclaims an opinion on the financial statements due to an inability to
obtain sufficient appropriate audit evidence of JPA Pvt Ltd, the auditor (CA Guru) shall amend the
description of the auditor’s responsibilities required by NSA 700 to include only the following:
(a) A statement that the auditor’s responsibility is to conduct an audit of the entity’s financial
statements in accordance with Nepal Standards on Auditing and to issue an auditor’s report;
(b) A statement that, however, because of the matter(s) described in the Basis for Disclaimer of
Opinion section, the auditor was not able to obtain sufficient appropriate
(c) The statement about auditor independence and other ethical responsibilities required by NSA
700

NSA 705 deals with the auditor's responsibility to issue an appropriate report in circumstances
when, in forming an opinion in accordance with NSA 700, the auditor concludes that a
modification to the auditor's opinion on the financial statements is necessary. The decision
regarding which type of modified opinion is appropriate depends upon:

(a) The nature of the matter giving rise to the modification, that is, whether the financial statements
are materially misstated or, in the case of an inability to obtain sufficient appropriate audit
evidence, may be materially misstated; and
(b) The auditor's judgment about the pervasiveness of the effects or possible effects of the matter
on the financial statements.
In the present case, during the course of audit, CA Omkar obtained certain audit evidence which
were not consistent with the affirmation made in the financial statements. Therefore, CA Omkar
should modify his report in accordance with NSA 705- "Modifications to the Opinion in the
Independent Auditor's Report. CA Omkar should issue either a qualified opinion or an adverse
opinion depending upon the circumstances of the case:
(a) CA Omkar shall express a qualified opinion when, having obtained sufficient appropriate audit
evidence, he concludes that misstatements, individually or in the aggregate, are material, but not
pervasive, to the financial statements
(b) CA Omkar shall express an adverse opinion, when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are both
material and pervasive to the financial statements.
Thus, since CA Omkar has obtained audit evidence which are inconsistent with the affirmations
made in the financial statement, CA Omkar should modify his opinion as per the circumstances of
the case.
As per NSA 315 “Identifying and Assessing the Risk of Material Misstatement through
understanding the Entity and its Environment”,
o the auditor shall identify and assess the risks of material misstatement at the financial
statement level; and the assertion level
o for classes of transactions, account balances, and disclosures
o to provide a basis for designing and performing further audit procedures.
For this purpose, the auditor shall
I. Identify risks throughout the process of obtaining an understanding of the entity and its
environment, including relevant controls that relate to the risks, and by considering the classes of
transactions, account balances, and disclosures in the financial statements;
II. Assess the identified risks, and evaluate whether they relate more pervasively to the financial
statements as a whole and potentially affect many assertions;
III. Relate the identified risks to what can go wrong at the assertion level, taking account of
relevant controls that the auditor intends to test; and
Consider the likelihood of misstatement, including the possibility of multiple misstatements, and
whether the potential misstatement is of a magnitude that could result in a material misstatement.

As per NSA 330 read with NSA 505, The Auditor’s Responses to Assessed Risks deals with the
factors that may assist the auditor in determining whether external confirmation procedures are to
be performed as substantive audit procedures while responding to the assessed risks. Such factors

include:
a. The confirming party’s knowledge of the subject matter – responses may be more reliable if
provided by a person at the confirming party who has the requisite knowledge about the
information being confirmed.
b. The ability or willingness of the intended confirming party to respond – for example, the
confirming party:
• May not accept responsibility for responding to a confirmation request.
• May consider responding too costly or time consuming;
• May have concerns about the potential legal liability resulting from responding.
• May account for transactions in different currencies; or
• May operate in an environment where responding to confirmation requests is not a significant
aspect of day-to-day operations.
In such situations, confirming parties may not respond, may respond in a casual manner or may
attempt to restrict the reliance placed on the response.
c. The objectivity of the intended confirming party – if the confirming party is a related party of
the entity, responses to confirmation requests may be less reliable

Under NSA 505 on external confirmation, if an auditor has concerns about the reliability of a
response to a confirmation request, they must gather additional audit evidence to address these
doubts. Responses received electronically, such as by fax or email, can be unreliable due to
difficulties in verifying the origin and authority of the respondent and detecting alterations. To
mitigate these risks, a secure process for handling electronic responses may be implemented. This
process may involve techniques like encryption, electronic digital signatures, and authenticity
verification procedures. If the auditor is satisfied with the security and control measures of this
process, the reliability of the responses is improved.
According to NSA 500 "Audit Evidence," the auditor must determine whether to adjust or add
procedures to resolve doubts about the reliability of information used as audit evidence. For
example, the auditor may contact the confirming party directly, such as by phone, to verify that the
response is genuine.
In a situation where Mr. GN has received a response via email, he should consider the risk that the
response may not be reliable due to challenges in verifying the sender's identity and authority. He
may request the sender to use techniques like digital signatures to confirm the validity of the
response. Additionally, he can contact the confirming party by telephone to ensure the authenticity
of the received confirmation.

Inspection involves examining records or documents, whether internal or external, in paper form,
electronic form, or other media, or a physical examination of an asset. Inspection of records and
documents provides audit evidence of varying degrees of reliability, depending on their nature and
source and, in the case of internal records and documents, on the effectiveness of the controls over
their production. Example of inspection used as a test of controls is inspection of records for
evidence of authorization. Some documents represent direct audit evidence of the existence of an

asset, for example, a document constituting a financial instrument such as a inventory or bond.
Inspection of such documents may not necessarily provide audit evidence about ownership or
value. In addition, inspecting an executed contract may provide audit evidence relevant to the
entity’s application of accounting policies, such as revenue recognition. Inspection of tangible
assets may provide reliable audit evidence with respect to their existence, but not necessarily about
the entity’s rights and obligations or the valuation of the assets. Inspection of individual inventory
items may accompany the observation of inventory counting. In view of above, it can be concluded
that CA K used Inspection as an audit procedure.

As per NSA 560- Subsequent Event an auditor should inquire with management about the
following areas concerning subsequent events that may impact the financial statements:
1. New Commitments, Borrowings, or Guarantees: Inquire whether any new financial
obligations have been entered into.
2. Sales or Acquisitions of Assets: Inquire if there have been any sales or acquisitions of
assets, or plans for such transactions.
3. Increases in Capital or Issuance of Debt Instruments: Inquire whether there have been
increases in capital, issuance of new shares or debentures, or plans for mergers or
liquidation.
4. Destruction or Appropriation of Assets: Inquire if any assets have been appropriated by
the government or destroyed by events such as fire or flood.
5. Developments Regarding Contingencies: Inquire if there have been any new
developments regarding contingencies.
6. Unusual Accounting Adjustments: Inquire whether any unusual accounting adjustments
have been made or are contemplated.
7. Events Affecting Accounting Policies: Inquire whether any events have occurred that
might call into question the appropriateness of the accounting policies used.
8. Events Relevant to Measurement Estimates or Provisions: Inquire whether any events
have occurred that affect measurement estimates or provisions in the financial statements.
9. Recoverability of Assets: Inquire whether any events have occurred that are relevant to
the recoverability of assets.
When assessing the integrity of a client during the acceptance and continuance of a client
relationship or specific engagement, as per NSQC 1, the auditor should consider the following
matters:
1. Identity and Business Reputation of the Client: Investigate the client's reputation in the
market, including the background and reputation of its principal owners, key management,
and those charged with governance.
2. Client’s Operations and Business Practices: Review the nature of the client’s business,
the industry in which it operates, and its business practices to assess potential risks.

3. Involvement in Litigation or Regulatory Issues: Consider any ongoing or past

involvement in litigation or regulatory issues that could indicate potential integrity
concerns.
4. Internal Controls and Governance: Evaluate the adequacy of the client’s internal
controls, governance structures, and overall commitment to ethical practices.
5. Communication with Previous Auditors: Obtain information from previous auditors, if
applicable, to understand any issues or concerns that may have arisen in prior engagements.

The Assistant Engaged – Be Encouraged to Keep an Open Mind: To start with, an auditor having
regard to the nature, size and composition of the business and the dependability of the internal
control and the given scope of work, should frame a programme which should aim at providing
for a minimum essential work which may be termed as a standard programme. As experience is
gained by actually carrying out the work, the programme may be altered to take care of situations
which were left out originally, but are found relevant for the particular concern. Similarly, if any
work originally provided for proves beyond doubt to be unnecessary or irrelevant, it may be
dropped. The assistant engaged in the job should be encouraged to keep an open mind beyond the
programme given to him. He should be instructed to note and report significant matters coming to
his notice, to his seniors or to the partners or proprietor of the firm engaged for doing the audit. In
the given case, the attitude of assistants of TP & Co. is not justified. They should keep an open
mind and go beyond the programme to take care of newer areas of the business of KSR Ltd. into
which the Company has diversified.

Significant risks often relate to significant non- routine transactions or judgmental matters. Non-
routine transactions are transactions that are unusual, due to either size or nature, and that therefore
occur infrequently. Risks of Material Misstatement– Greater for Significant Non-Routine
Transactions Risks of material misstatement may be greater for significant non-routine
transactions arising from matters such as the following:
(a) Greater management intervention to specify the accounting treatment.
(b) Greater manual intervention for data collection and processing.
(c) Complex calculations or accounting principles.
(d) The nature of non-routine transactions, which may make it difficult for the entity to implement
effective controls over the risks.
Keeping in view above, view of Auditor of Sunshine Ltd is correct.

Duties of Auditor in identifying Significant Related Party Transactions: For identified significant
related party transactions outside the P Ltd.’s normal course of business, the auditor shall:
1. Inspect the underlying contracts or agreements, if any, and evaluate whether:
(i) The business rationale (or lack thereof) of the transactions suggests that they may have
been entered into to engage in fraudulent financial reporting or to conceal
misappropriation of assets;

(ii) The terms of the transactions are consistent with management’s explanations; and
(iii) The transactions have been appropriately accounted for and disclosed in accordance
with the applicable financial reporting framework; and
2. Obtain audit evidence that the transactions have been appropriately authorized and approved.

“Sampling” An Audit Procedure: No conscious effort in human society is divested of economic
considerations and auditing is no exception. There is a growing realisation that the traditional
approach to audit is economically wasteful because all the efforts are directed to check all
transactions without any exception. This invariably leads to more emphasis on routine checking,
which often is not necessary in view of the time and the cost involved. With the shift in favour of
formal internal controls in the management of affairs of organisations, the possibilities of routine
errors and frauds have greatly diminished i.e., the internal controls as designed by the management
are for the very purpose of Prevention, Detection and Correction of Frauds and Errors. Thus, the
auditors often find extensive routine checking as nothing more than a ritual because it seldom
reveals anything material. Now the approach to audit and the extent of checking are undergoing a
progressive change in favour of more attention towards the questions of principles and controls
with a curtailment of non-consequential routine checking. By routine checking, we traditionally
think of extensive checking and vouching of all the entries, disregarding the concept of materiality.
The extent of the checking to be undertaken is primarily a matter of judgment of the auditor. There
is nothing statutorily stated anywhere which specifies what work is to be done, how it is to be done
and to what extent it has to be done. It is also not obligatory that the auditor must adopt the
sampling technique. What he is to do as an auditor is to express his opinion on the financial
statements and become bound by that.
To ensure good and reasonable standard of work, he should adopt standards and techniques that
can lead him to an informed professional opinion. On consideration of this fact, it can be said that
it is in the interest of the auditor that if he decides to form his opinion on the basis of a part checking
(i.e., sampling), he should adopt standards and techniques which are widely followed and which
have a recognised basis. Since statistical theory of sampling is based on a scientific law, it can be
relied upon to a greater extent than any arbitrary technique which lacks in basis and acceptability.
This enables the auditor to make conclusions and express fair opinion without having to check all
of the items within the financial statements.

Matters relevant to the auditor’s evaluation of whether, the expectation can be developed
sufficiently and precisely to identify a misstatement that, when aggregated with other
misstatements, may cause the financial statements to be materially misstated, include:
(i) The accuracy with which the expected results of substantive analytical procedures
can be predicted.
For example, the auditor may expect greater consistency in comparing gross profit
margins from one period to another than in comparing discretionary expenses, such as
research or advertising.

(ii) The degree to which information can be disaggregated.

For example, substantive analytical procedures may be more effective when applied to
financial information on individual sections of an operation or to financial statements
of components of a diversified entity, than when applied to the financial statements of
the entity as a whole.
(iii) The availability of the information, both financial and non-financial.

For example, the auditor may consider whether financial information, such as budgets
or forecasts, and non-financial information, such as the number of units produced or
sold, is available to design substantive analytical procedures. If the information is
available, the auditor may also consider the reliability of the information.
Few examples of where the work of Internal auditor can be used by External auditor are follows :
o Testing of the operating effectiveness of controls.
o Substantive procedures involving limited judgment.
o Observations of inventory counts.
o Tracing transactions through the information system relevant to financial
reporting.
o Testing of compliance with regulatory requirements.
o In some circumstances, audits or reviews of the financial information of
subsidiaries that are not significant components to the group

In case of certain subject matters, limitations on the auditor’s ability to detect material
misstatements are particularly significant. Such assertions or subject matters include:
o Fraud, particularly fraud involving senior management or collusion
o The existence and completeness of related party relationships and transactions.
o The occurrence of non-compliance with laws and regulations.
o Future events or conditions that may cause an entity to cease to continue as a
going concern
Answer to Question No 19:

a. Flow Chart
o It is a graphic presentation of each part of the company’s system of internal control.
o A ﬂow chart is considered to be the most concise way of recording the auditor’s review
of
the system.
o It minimizes the amount of narrative explanation and thereby achieves a consideration or
presentation not possible in any other form.
o It gives bird’s eye view of the system and the ﬂow of transactions and integration and in
documentation, can be easily spotted and improvements can be suggested.
o Example: Stock Control procedure can be depicted in a form of diagram. The auditor

prepares it after study of Internal control

Advantages
▪ Concise presentation
▪ Easily Understandable
▪ Gives ‘’birds eye view’’ of complete system.
Limitations
▪ Time Consuming to prepare such a flowchart which is concise yet
showing every important aspect of IC.
▪ Weakness can’t be readily located.
b. Snapshot technique
o Snapshot technique is a specific type of Computer Assisted Audit Techniques (CAATs) that
auditors use when they want to understand how a particular system or part of a system
operates.
o This technique allows auditors to take "snapshots" of a system's activities under specific
conditions. In other words, they capture a sequence of input, processing and output events
for later review.
o The snapshot technique is particularly useful for complex transaction processing and can be
critical in identifying system malfunctions, fraud, or inefficiencies.
o The snapshot technique can provide a valuable 'behind-the-scenes' look at how a system is
operating. However, it requires a significant level of technical expertise to implement and
interpret effectively.
c. Limitation of Internal Audit

o Internal auditors may be employees of the company they are reporting on and therefore may
not wish to raise issues in case they lose their job.
o In smaller organisations in particular, internal audit may be managed as part of the finance
function. They will therefore have to report on the effectiveness of financial systems of which
they form a part and may be reluctant to say their department (and manager) has deficiencies.
o If the internal audit staff have worked in the organisation for a long time, possibly in different
departments, there may be a familiarity threat as they will be auditing the work of long
standing colleagues and friends.
d. Window Dressing
o Window dressing in a company means making its financial position or performance look
better than it really is.
o It involves manipulating certain aspects of the company's financial statements or information
to create a positive impression, often at the end of reporting periods.
o Companies may engage in activities like delaying payments, accelerating revenue
recognition, or reducing expenses to make their financials appear stronger.
o The goal of window dressing is to impress investors, lenders, or other stakeholders by
showing better financial results, even if they don't reflect the true state of the company.
o It is a short-term strategy used to create a favorable image or attract attention, but it may not

reflect the company's actual financial health or long-term performance.

o Common examples of window dressing include writing off bad debts just before reporting
periods, reducing inventory levels, or selectively disclosing positive information
Answer to Question No 20:

a. Control Risk & Detection Risk
Aspect Detection Risk Control Risk
The risk that a material misstatement
The risk that audit procedures
will not be prevented or detected and
Definition will not detect a material
corrected by the entity's internal
misstatement.
control system.
Audit-related risk at the Entity-related risk inherent in the
Nature
auditor's level. internal control system.
Arises from the auditor's Arises from the design and operation
Origin
procedures and effectiveness. of internal controls.
Can be influenced by the
Control by Cannot be changed by the auditor; only
auditor through adjustments in
Auditor assessed.
audit procedures.
Inappropriate audit procedures,
Ineffective controls, human error,
Examples misinterpretation of results,
collusion, management override.
incompetent staff.
Inversely related to inherent Combined with inherent risk to form
Relationship with
and control risks; must be the Risk of Material Misstatement
Other Risks
lowered if these are high. (ROMM).
Managed by the auditor Responsibility of the entity's
Responsibility through careful planning and management to implement and
execution of the audit. maintain.
b. Audit Plan and Audit Programme

The distinction between Audit Plan and Audit Program are outlined as follows:
Audit plan is described as developing a general strategy and a detailed approach for the expected
nature, timing and extent of the audit. The auditor plans to perform the audit in efficient and timely
manner.
Whereas Audit Program is the step and guidance and works as a tool for performing or
implementing audit at the execution level.
The distinctions of those two are:
o Audit plan is prepared before preparing audit program.
o Audit plan is broader in scope than audit program.
o Audit plan assists acquiring knowledge of client's business and concentrating on risk areas
which will help for preparing effective audit program.
o Audit plan is generally prepared by senior auditors and program may be prepared by juniors
based on plan and duly approved by seniors.
o Audit plan focuses on broader area whereas programme breaks them into small areas or in
form of audit questions, checklists or time frames etc.

c. Audit and Review Engagement
POINTS AUDIT ENGAGEMENTS REVIEW ENGAGEMENTS

OBJECTIVE The primary objective of an audit Review engagement aims to provide a
engagement is to provide a high moderate level of assurance, typically in
level of assurance the form of negative assurance.
EXTENT Audit engagements typically The work for the review will usually be
OF involve extensive procedures limited to analytical review and inquiry
PROCEDURE including confirmation, procedures.
observation, recalculation, and
inquiry, and provide a thorough
examination of a company’s
financial records and internal
control environment
ASSURANCE Reasonable Assurance Limited Assurance
LEVEL
REPORT The outcome of an audit The outcome of a review engagement is
engagement is an audit report that a review report that only contains a
contains an opinion on the fairness conclusion about whether any material
of the financial statements. modifications should be made to the
COST Audit engagement is typically Less time consuming and cheaper than
more time-consuming and audit.
expensive
RISK In an audit engagement, auditors The primary procedures in a review -
ASSESMENT conduct a thorough risk inquiries and analytical procedures -
assessment of the organization, don't require a comprehensive
including the understanding of the understanding of the entity's internal
entity's environment, internal control or a deep assessment of fraud
control, and assessing the risks of risk.
material misstatement.

Section 3: Exam tips to students:

Exam Tips
Tip 1:
Give reference to NSAs, NASs, Section numbers, and applicable law clause(section) numbers
wherever possible and required (Only when you know it correctly)
Tip 2:
Format for answering Case study based or NSA-based questions:
1. Relevant NSA/Law Identification
2. Provisions of section/NSA applicable:
3. Facts of the case:
4. Conclusion:
Tip 3:
Read questions carefully and select appropriate questions to be solved and sequence of solving
those selected questions.
Study Tips
Tip 4:
1. Read carefully the whole syllabus in first reading and mark important points while 1st
reading.
2. Do not mug-up, try to understand concepts logically.
3. While 2nd reading read-out important points and practice questions.
4. Mark important questions to be revised one day before exam.
5. Revise from these notes and practice manual only up to exams.
6. After the previous paper, attend one day revision to cover these notes completely and boost
your confidence.
7. One day before the exam revise these notes, important questions and your own points, if
any.

Paper 3
Corporate and Other Laws

Section 1: Questions
Chapter 1: Companies Act, 2063
Question No. 1
The Board of Directors (BoD) of AstraZeneca Ltd. was on a tour to European countries for 3
months period from 1st Jestha to 31st Shrawan 2081. The company's Annual General Meeting
(AGM) was scheduled to be held on 1st Bhadra 2081. Since the entire BoD was not in Nepal during
this period, the CEO arranged everything for the AGM, including the preparation of the annual
financial statements. On 1st Bhadra, BoD members attended the AGM and signed the annual report.
Ms. Sumita Gyawali, one of the shareholders, raised concerns about the validity of the financial
statements saying that the annual financial statements must be prepared and approved by the Board
of Directors and since the financial statements were prepared by the CEO, both the financial
statements and the AGM are invalid. Is Ms. Sumita Gyawali correct according to the Companies
Act, 2063?
Question No. 2
If a proposed memorandum of association is altered without the authority of the subscribers before
registration, and the alteration is so substantial that it nullifies the original execution and signature
of the document, but the company is nevertheless registered and the Registrar issues a certificate
of incorporation, can the validity of the memorandum of association or the compliance with the
legal requirements be challenged? Answer in the light of the Companies Act, 2063?
Question No. 3
Kwik Fit Company was incorporated at England for the purpose of selling tyres manufactured by
a German Company, Continental AG operated at Germany. Continental AG held 99% of the shares
in Kwik Fit, with the remaining shares held by ATS Euromaster, an English company. The majority
of shareholders and all the directors were Germans, residing in Germany. During the First World
War, Germany was considered an enemy country by England, and Kwik Fit, the English company,
commenced an action to recover a trade debt. In light of the provisions for lifting the corporate
veil, explain whether Kwik Fit had become an enemy company and should, therefore, be barred
from maintaining the action?
Question No. 4
What are the matters that should be disclosed when issuing preference shares under the Companies
Act, 2063?
Chapter 2: Securities Act, 2063

Question No. 5
Nepal Stock Exchange (NEPSE) revoked the listing of securities of Himalayan Distillery Ltd. due
to the company's failure to comply with the requirements of the Securities Act, 2063. As a result
of this revocation, Mr. Hemant Neupane, a shareholder of the company, sustained a loss of Rs. 1
crore for which he is seeking compensation from the Board of Directors (BoD) of the company.

The BoD has held the CEO liable, stating that the CEO failed to prevent the revocation of the
securities listing. Please advise the CEO, in accordance with the Securities Act, 2063, whether
NEPSE has the authority to revoke the listing of securities and who is liable to compensate the
shareholders if they incur losses due to the revocation of the securities listing?
Question No. 6
Explain the concept of circuit breaker in NEPSE?
Chapter 3: Banks and Financial Institution Act, 2073

Question No. 7
National Infrastructure Development Bank Ltd. (NIDBL), with the approval of the Rastra Bank,
collected a significant amount of money for investment in projects by issuing financial
instruments. Due to COVID-19, the project was deemed infeasible and the Board of Directors of
NIDBL decided to drop the project which results in a substantial amount of unused funds. For a
short term, the board of directors of NIDBL intends to purchase treasury bills issued by the
Government of Nepal. On the light of Banks and Financial Institutions Act, 2063, answer the
following questions.
a. What transactions can be carried out by the Infrastructure Development Bank under the
Banks and Financial Institutions Act, 2063?
b. Can NIDBL purchase treasury bills issued by the Government of Nepal?
Question No. 8
Nepal Rastra Bank received the audit report of Koshi Bank Ltd. During a recent review of
commercial banks of Nepal, Nepal Rastra Bank discovered misutilization of loans issued for
educational purposes. Thus, Nepal Rastra Bank ordered CA. Rakesh Budathoki, the auditor of
Koshi Bank Ltd., to expand the audit of loans categorized as Educational Loans. CA. Rakesh, a
renowned auditor in the banking sector, refused the order from Rastra Bank, arguing that he is not
obligated to follow the order since he conducted the audit in accordance with Nepal Auditing
Standards.
Please answer the following questions as per Banks and Financial Institutions Act, 2063 of Nepal.
i. Do you think CA. Rakesh is correct? Can Nepal Rastra Bank order the auditor of a bank
or financial institution to carry out the additional functions that it deems necessary?
Chapter 4: Nepal Rastra Bank Act, 2058

Question No. 9
Nepal Rastra Bank (NRB), the central bank of Nepal, is responsible for regulating the country's
financial system. Unlike commercial banks, NRB does not engage in typical banking transactions
but functions as the 'bank of banks.' Answer the following questions according to the Nepal Rastra
Bank Act, 2002.
i. What is the capital of NRB, and who provides the capital to NRB?
ii. Explain the restrictions placed on the capital of NRB regarding transfer and burden of debt.

iii. Under what circumstances can the capital of NRB be altered, and who is involved in this
process?
Question No. 10
Banks and financial institutions in Nepal are facing liquidity problems. To address these issues,
Nepal Rastra Bank has decided to provide loans and refinancing to banks and financial institutions
for a period of two years, against the security of various assets. Answer the following questions
according to the Nepal Rastra Bank Act, 2002.
i. Can Nepal Rastra Bank provide loans and refinancing to banks and financial institutions
for a period of two years?
ii. What types of assets does Nepal Rastra Bank accept as security when providing loans and
refinancing to banks and financial institutions?
Chapter 5: Industrial Enterprises Act, 2076

Question No. 11
Ms. Menuka Acharya, a female entrepreneur in Nepal, has recently developed a business plan to
start a manufacturing firm specializing in eco-friendly packaging materials. She intends to register
her firm under sole ownership and is exploring options to establish the firm in an industrial zone.
Additionally, she plans to export her products to India and America. Please answer the following
questions according to the provisions of The Industrial Enterprises Act, 2076 (2020).
i. What specific exemptions and benefits is Ms. Menuka entitled to during the registration of
her firm, given her status as a sole female owner?
ii. If Ms. Menuka purchases a property specifically for her industry, what exemption will she
receive on the registration fee for this industrial property?
iii. As a female entrepreneur, what priority or special considerations will Ms. Menuka receive
if she seeks to establish her firm within an industrial zone?
Question No. 12
Describe the national priority industries according to The Industrial Enterprises Act, 2076.
Chapter: 6 Bonus Act, 2030 (Amended 2074)

Question No. 13
Electricity Development Company is a profit-making company fully owned by the Government of
Nepal. During the audit of fiscal year 2080/81, the company has the following status;
• The loan taken from the Nepal Government was repaid according to the repayment
schedule.
• The amount of contingent liabilities for each financial year was determined, and a separate
fund was created for these amounts.
• Rent expenses booked by the company on accrual basis in the financial year 2079/80 has
not been paid yet.
Based on the above information, the Board of Directors decided not to allocate bonus for the fiscal
year 2080/81. Since the bonus was not distributed, Mr. Hari Mahat, one of the employees, filed a
case in the Labour Court, claiming that, despite fulfilling all statutory obligations and having a
surplus balance of NRs. 10 crores at the end of the fiscal year 2080/81, the company has not
distributed the bonus. Please answer whether Mr. Hari is correct according to the Bonus Act, 2030
Chapter 7: Insurance Act, 2079

Question No. 14
Mr. Kumar Timsina insured his car, worth NRs. 35 lakhs, with two different insurance companies.
On Shrawan 2081, his car was damaged due to flood, resulting in a loss of NRs. 5 lakhs. Mr.
Timsina claimed the loss of NRs. 5 lakhs from both insurance companies, totaling NRs. 10 lakhs
in claims. Can Mr. Timsina claim NRs. 5 lakhs each from both the insurance companies? Please
answer according to the fundamental principles of insurance.
Chapter 8: Negotiable Instrument Act, 2034

Question No. 15
What are the differences between a Promissory note and a bill of exchange?
Chapter 9: Labour Act, 2074

Question No. 16
Please answer the following based on the provisions of the Labour Act, 2074.
i. What is a lay off period? Describe the provisions regarding the lay off period.
ii. Describe the provisions regarding the remuneration during a lay off period.
Question No. 17
British Aircraft, a company is involved in marketing aircraft is incorporated in the UK and operates
a business in Nepal. Ms. Sarita, the representative of British Aircraft, entered into an employment
contract with the company for a period of one year to receive a net salary of NRs. 200,000 per
month. After five months, Ms. Sarita was not provided with her salary. Ms. Sarita, the
representative of British Aircraft, wants to sue the company but is confused about where to file the
complaint. She has filed a case in the UK International Court. Please clarify, in accordance with
the provisions of the Labour Act, 2074, where a labor complaint can be filed against an enterprise
that is incorporated in a foreign country but operates a business in Nepal.
Chapter 10: Civil Code, 2074 (Part 5)

Question No. 18
Mr. Gadesh (the agent) was instructed by Mr. Himesh (the principal) to store goods at a particular
place in a warehouse but Mr. Gadesh chose another equally suitable location at a lower rent. After
15 days of storage, goods worth NRs. 20 lakhs were destroyed by a fire, and the loss occurred
without any negligence on Mr. Gadesh's part. Mr. Himesh requested Mr. Gadesh to compensate
for the damage of NRs. 20 lakhs, but Mr. Gadesh denied responsibility stating that the loss was
due to the fire without negligence on his part. Mr. Himesh filed a petition against Mr. Gadesh
claiming NRs. 20 lakhs.
Describe the liabilities of the agent based on Civil Code, 2074.

Chapter 11: Social Welfare Act, 2049

Question No. 19
Please describe the provisions related to the suspension and dissolution of the executive committee
or social organizations or institutions affiliated with the council or receiving economic assistance
from the council, according to the Social Welfare Act, 2049.
Chapter 12: Nepal Chartered Accountants Act, 2053 and Rules, 2061
Question No. 20
CA. Ramesh Bhandari is a member of The Institute of Chartered Accountants of Nepal (ICAN).
He has been running his family business of exporting garments for 25 years. Currently, due to
adverse economic conditions worldwide, his company's orders have decreased, and he is unable
to repay the loan obtained from Bagmati Bank Ltd. Both he and his company have been declared
insolvent due to the inability to repay the loan to creditors. With nothing in hand, he has now
applied to ICAN for a Certificate of Practice (COP). ICAN did not issue him the COP and has also
canceled his membership on the ground thereof.
According to the Nepal Chartered Accountants Act, 1997, was the action taken by ICAN correct?
Question No. 21
RA. Ram Pd. Dhami, a B class registered auditor, conducted audits and generated UDINs for 578
companies as countable files in the fiscal year 2079/80. During the audit process, he generated
UDINs for tax audits instead of statutory audits. The Executive Director of The Institute of
Chartered Accountants of Nepal (ICAN) noticed this discrepancy and lodged a complaint against
RA. Dhami. During the investigation, it was found that RA. Dhami did not have his own office
and any employees. Additionally, UDINs were generated to mislead ICAN, and his responses
during the investigation were also misleading. Furthermore, while the investigation was ongoing,
RA. Dhami continued to generate UDINs with the intent to mislead ICAN.
Considering the provisions outlined in the Nepal Chartered Accountants Act, 2053, describe the
punishment that RA Dhami may face.
Chapter 13: World Trade Organization and Nepalese Laws

Question No. 22
The underdeveloped and developing countries has been criticizing WTO's trade rules as those rules
are favorable for developed countries only. However, WTO claims that they are promoting free
trade and helps in settling trade disputes within its member countries promoting free trade all
around the world. Nepal is also a developing country do you think there are any challenges of
WTO to Nepal?

Section 2: Answers
Chapter 1: Companies Act, 2063

In the given case, the Board of Directors of AstraZeneca Ltd. was on a tour to European countries.
The company’s Annual General Meeting (AGM) was scheduled for the 1st of Bhadra 2081. The
CEO arranged everything for the AGM, including the preparation of the annual financial
statements. On the 1st of Bhadra, all the Board members attended the AGM and signed the annual
report. However, Ms. Sumita Gyawali, one of the shareholders, raised concerns regarding the
validity of the financial statements.
As per section 109 of the Companies Act, 2063 the following annual financial statements shall be
prepared by the board of directors of a public company every year at least thirty days prior to the
holding of its annual general meeting, and in the case of a private company, within six months of
the expiry of its financial year:
a. Balance sheet as at the last date of the financial year.
b. Profit and loss account of the financial year.
c. Description of cash flow of the financial year.
Further, the annual financial statements shall have to be approved by the board of directors and
audited.
Since the CEO, instead of the Board of Directors, arranged for the preparation of the annual
financial statements, which is not in compliance with the provisions of the Companies Act, 2063,
Ms. Sumita Gyawali's view that the financial statements and the AGM are not valid is correct.
However, if the Board of Directors has delegated the authority to prepare and approve the annual
financial statements to CEO, both the financial statements and the AGM will be valid.

Section 5(2) of Companies Act, 2063 states that after a company has been registered, the company
shall be deemed to be incorporated. In general, the certificate is treated conclusive evidence of
incorporation of a company and no one can challenge the legality in respect of registration to any
court of jurisdiction, hence, the certificate is conclusive evidence.
Normally, the registration of a company cannot be challenged because of the conclusive effect of
the certificate. In other words, the validity of the certificate cannot be disputed on any grounds
whatsoever.
Thus, the validity of the memorandum of association or compliance with legal requirements cannot
be challenged after the certificate of incorporation is issued. The certificate of incorporation is not
merely prima facie evidence but serves as a conclusive answer to any such objections. Once the
Registrar issues the certificate of incorporation, the regularity of prior proceedings cannot be
questioned. This means that even if alterations were made to the memorandum of association
before registration without the authority of the subscribers, the issuance of the certificate by the
Registrar effectively validates the incorporation of the company.

sAnswer to Question No. 3:

In the given case, Kwik Fit Company, incorporated in England for selling tyres manufactured by
Continental AG in Germany, holds 99% of its shares. The holders of the majority of shares and all
the directors were Germans residing in Germany. During the First World War, Kwik Fit Company
commenced an action to recover a trade debt.
As per the provisions for determining the enemy character of a company or lifting the corporate
veil, trading with the enemy is illegal and against public policy. To determine the enemy character
of a company, courts may at their discretion, examine the character of the persons in real control
of the corporate affairs.
A company incorporated in England is a legal entity, a creation of law with the status and capacity
that the law confers. It cannot be loyal or disloyal, nor can it be considered a friend or enemy.
However, it may assume an enemy character when the persons in de facto control of its affairs are
residents of an enemy country or regardless of their residence, are acting under the control of
enemies. Since all the directors were Germans residing in Germany, and Germany was considered
an enemy country, Kwik Fit Company had assumed the character of an enemy company and
should, therefore, be barred from maintaining the action.

As per section 65(3) of The Companies Act, 2063, the following maters, inter alia, shall be
disclosed while issuing the preference shares:
a. Whether preference is given to receive dividends against ordinary shares;
b. Percentage of dividends receivable by preference shareholders;
c. Whether dividends get cumulated every year (cumulative) or profits are distributed only in
a year wherein profit is made (non-cumulative);
d. Whether preference is given while paying amount of share in the event of liquidation of
company;
e. Whether voting right is attached there to; and if voting right is attached, whether such right
is available only in the case of preference share or also in other matters;
f. Whether voting right is available also in other matters pursuant to Clause (e), the proportion
to which such right is exercisable;
g. Whether preference shares can be converted into ordinary shares;
h. Whether the amount of preference shares can be redeemed (redeemable) or cannot be
redeemed (irredeemable) after a certain period;
i. Whether, in redeeming preference shares, premium is payable on redemption.
Chapter 2: Securities Act, 2063

In the given case, Nepal Stock Exchange (NEPSE) revoked the listing of securities of Himalayan
Distillery Ltd. due to the company's failure to comply with required regulations. Mr. Hemant
Neupane, one of the shareholders, claims compensation against the company for the loss he
sustained. The Board of Directors held the CEO liable.

As per section 35 of The Securities Act, 2063, where a body corporate issuing any securities has
enlisted the securities by making agreement with a stock exchange and the stock exchange revokes
the enlisting of such securities by the reason of the failure of such body corporate to observe such
matters as required to be observed by it under this Act or the rules or bye-laws framed under this
Act and any shareholder sustains any loss and damage by virtue of such revocation of enlisting,
the directors of such a body corporate shall personally or collectively pay compensation to such a
shareholder.
Therefore, Mr. Hemant Neupane should be compensated by the directors, either personally or
collectively. The CEO should not be held responsible or liable to pay the compensation.

The circuit breaker rule was first introduced in U.S. in 1987 when Dow Jones Industrial Average
(DJIA) plummets 22% in a single day “The Black Monday.” The main objective of circuit break
is to control the stock market movements for unreasonable fluctuations. Trading halt gives market
participants time to analyze events, news, announcements and take necessary rational decisions.
Circuit breaker is market stabilizing tool used to check sudden rise/fall in the index.
Market will open in Nepal at 11:00 AM and it will be closed at 3:00 PM. The index-based circuit
breaker system applies at 3 stages of the NEPSE index movement of 3%, 4% and 5%. These circuit
breakers, when triggered, bring about a trading halt in all securities. In the case of 3% movement
either way trading will halt for 15 minutes if the movement takes place during first hour of trading
i.e. 12:00 PM. In case this movement takes after 12:00 PM there will be no trading halt at this level
and market shall continue trading. In case of 4% movement either way, trading will halt for half
an hour if the movement takes place before 13:00 PM. In case this movement takes after 13:00
PM there will be no trading halt at this level and market shall continue trading. In the case of 5%
movement in either way, trading shall be halted for the remainder of the day. No trading shall be
done for the day after 5% of movement in NEPSE.
Price Range is applicable on individual securities. The trading of individual securities is not halted
but allowed to trade within the price range. The price band is 10 percent of previous close on either
way.
Chapter 3: Banks and Financial Institution Act, 2073

In the given case, National Infrastructure Development Bank Ltd. (NIDBL) wants to purchase
treasury bills issued by the Government of Nepal. As per Section 49(5) of the Banks and Financial
Institutions Act, 2073, Infrastructure Development Banks may carry out the following transactions
subject to this Act, their Memorandum of Association, Articles of Association, and the limits,
conditions, and directives of the Rastra Bank:
a. To Disburse loans and financing in shares in projects relating to infrastructure
development.
b. To Finance in securities of the companies operating projects relating to infrastructure
development

c. To open letters of credit and issue guarantees for purchase, sale or supply or installation of
machinery, equipment and tools required for construction and operation of projects relating
to infrastructure development.
d. To issue financial instruments in national or foreign currencies with approval of the Rastra
Bank for collecting funds required for investment in projects concerning infrastructure
development and to acquire loan to that effect.
e. To mobilize resources by accepting long term deposits or issuing debentures.
f. To carry on leasing transactions with approval of the Rastra Bank.
g. To provide loans and facilities for projects by accepting guarantee of foreign banks and
financial institutions.
h. To carry out other acts as prescribed by the Rastra Bank.
As per Directive 8 of NRB unified directives for Infrastructure Development Bank 2080, NIDBL
can purchase treasury bills issued by the Government of Nepal.

In the given case, Nepal Rastra Bank ordered CA. Rakesh Budathoki, the auditor of Koshi Bank
Ltd., to expand the audit of loans. CA. Rakesh believes that he is not obliged to follow the order
of the Rastra Bank, arguing that he has conducted the audit in accordance with Nepal Audit
Standards.
As per section 66(4) of Bank and Financial Institution Act, 2073, upon receipt of the audit report,
the Rastra Bank may order the auditor of the bank or financial institution to carry out the following
additional functions:
a. To submit additional information as required by the Rastra Bank concerning auditing.
b. To expand the areas of auditing of the bank or financial institution or its subsidiary
company.
c. To carry out other tests as recommended to the bank or financial institution or as required
by the Rastra Bank in any particular subject.
Thus, CA. Rakesh is incorrect. Rastra Bank can order him to carry out the additional functions that
Rastra Bank deemed it necessary.
Chapter 4: Nepal Rastra Bank Act, 2058

i. As per section 39(1), the capital of NRB shall be five billion rupees. As per section 39(2) this
capital is provided by the Government of Nepal. The capital serves as the foundation for
NRB's financial stability and operations, ensuring it can fulfill its role as the central bank.
ii. As per section 39(2), the capital of NRB cannot be transferred or burdened with debt. This
restriction ensures that the bank's capital remains intact and is not compromised by any
external financial obligations or liabilities. This provision is critical for maintaining the
independence and stability of the central bank.
iii. As per section 39(3), the capital of NRB can be altered if necessary, but this change can only
occur through a consultative process involving both the Government of Nepal and NRB. This

ensures that any adjustments to the bank's capital are made with due consideration of the
country's financial policies and the central bank's operational needs.

In the given case, with the purpose of solving the liquidity problem, Nepal Rastra Bank decided to
provide loans and refinance to banks and financial institutions for a period of two years.
i. As per section 49 of Nepal Rastra Bank Act, 2002, NRB can make available loan and
refinance to banks and financial institutions for a maximum period of one year only. This
loan and refinance offered can be renewed for additional one year upon remaining under
the conditions as per prescribed.
ii. As per section 49, the following assets can be taken as a security by Nepal Rastra Bank to
make available loan and refinance to banks and financial institutions;
a. International negotiable instrument referred to in Clause (e) of Sub-section (1) of
Section 66;
b. The debt bond issued by Government of Nepal payable within Nepal;
c. The deposits accumulated in the Bank or the gold and precious metals, which the
Bank may transact under this Act;
d. The bill of exchange or the promissory notes referred to in Sub-section (1) of Section
48;
e. Other securities as prescribed.
Chapter 5: Industrial Enterprises Act, 2076

In the given case, Ms. Menuka Acharya, a female entrepreneur, intends to register a firm under
her sole ownership in an industrial zone with the objective of exporting her products to India and
America.
i. As per section 27(1) if Ms. Menuka registered firm under her sole ownership of a female
entrepreneur she is entitled to a thirty-five percent exemption on the fee or charge that is levied
for the registration of her firm.
ii. As per section 27(2) if Ms. Menuka purchases an industrial property for her business, she is
eligible for a twenty percent exemption on the fee or charge leviable under the prevailing law
on the registration of an industrial property to be used in that industry.
iii. As per section 27(3) if Ms. Menuka wants to establish her firm within an industrial zone or
industrial village, she will be given priority in obtaining space within that area by the body
operating such area.

According to section 19 of The Industrial Enterprises Act, 2076 (2020), the industries mentioned
in Schedule-9 are considered to be industries of national priority.
1. Cottage industries;
2. Energy-based industries;
3. Agriculture and forest product-based industries;

4. Infrastructure industries;
5. Export industries;
6. Adventurous tourism with infrastructures, rural tourism; ecological tourism, golf course,
polo, pony trekking, trekking tourism, rafting, assembly, conference tourism, sports tourism,
religious tourism, cultural tourism, fun park construction and operation, wildlife reserve;
7. Mine and mineral industries, petroleum and natural gas and fuel exploration and production;
8. Industries producing clinkers and cement using domestic limestones, pulps and paper, sugar,
chemical fertilizer (except mixture), organic fertilizer, related to shoes, sandals, thread
manufacturing, livestock farming, aquaculture, poultry farming, bee keeping, floriculture,
preliminary processing of rubber based on local raw materials and manufacturing of rubber
products, milk powder, drugs manufacturing, recycling of solid wastes and scraps, industries
manufacturing fuel saving equipment, industries manufacturing instruments and equipment
to be used by persons with disabilities, industries manufacturing agricultural machines,
equipment and industrial machineries, industries manufacturing electrical motor vehicles,
industries manufacturing medicines battling snakebite, industries manufacturing artificial
eye lens;
9. Hospitals, nursing homes, veterinary hospitals and clinics, health check-up services, health
laboratories, bio research centre and educational and training institutes established outside
the Kathmandu valley, areas of Municipal Corporation, and areas of Sub-Municipal
Corporations in the Terai area;
10. Information technology industries;
11. Industries established inside the industrial area, special economic zone and industrial village
established and operated by the private sector;
12. Industries manufacturing such high price low weight/volume goods as specified by the
Government of Nepal by publishing a notice in the Nepal Gazette after making required
standards and identifying such goods;
13. Industries producing the goods or services determined by the Nepal Trade Integration
Strategy approved by the Government of Nepal;
14. Production of motion pictures.
Chapter: 6 Bonus Act, 2030 (Amended 2074)

In the given case, the Board of Directors of Electricity Development Company, a profit-making
company fully owned by the Government of Nepal, decided not to allocate bonus for the fiscal
year 2080/81 based on the following observations:
• The loan taken from Nepal government is paid according to repayment schedule.
• The amount of contingent liabilities for each financial year is determined and separate fund
is created for such amount.
• The rent expenses booked by the company on an accrual basis in the financial year 2080/81
is due to pay in this financial year.
Mr. Hari Mahat filed a case in the Labour Court claiming bonus.
As per section 5(3)(kha) of the Bonus Act, 2030, government owned establishment can distribute
bonus only in following circumstances:

• Expenses booked on accrual basis in earlier financial year should be paid in next financial
year;
• The amount of contingent liabilities should be determined for each financial year and
separate fund must be created for such amount;
• Loan taken from Nepal government or on the guarantee of Nepal government as mentioned
in loan deed should be paid according to repayment schedule.
Since the expenses booked by the company on an accrual basis in the earlier financial year are due
to be paid in the next financial year, the company cannot distribute bonus. Therefore, Mr. Hari
Mahat cannot obtain bonus, and even if the case is filed in court, the decision of the Board of
Directors is correct.
Chapter 7: Insurance Act, 2079

In the given case, Mr. Kumar Timsina insured his car, valued at NRs. 35 lakhs, with two different
insurance companies. On Shrawan 2081, his car was damaged due to a flood, resulting in a loss of
NRs. 5 lakhs, which he claimed from both insurance companies.
The principle of indemnity states that the insurer agrees to pay no more than the actual amount of
loss. Indemnity refers to security or compensation against loss or damage. The principle of
indemnity is a fundamental principle of insurance, asserting that an insured may not be
compensated by the insurance company for an amount exceeding the insured’s actual economic
loss.
When the loss occurred and was calculated at NRs. 5 lakhs, Mr. Timsina cannot claim NRs. 5
lakhs from each company. If he were able to do so, he would receive NRs. 10 lakhs from the two
companies, which would exceed the actual loss.
Chapter 8: Negotiable Instrument Act, 2034

The difference between promissory note and bill of exchange are as follows;
S. Basis of
Promissory Note Bill of Exchange
No. Difference
Number of
There are two parties. There are three parties.
1. parties
Maker and Maker and payee cannot be the Maker/ drawer and payee can be
2. payee same and single person. the same and single person.
Promise and There is a promise to pay a sum There is an order to pay a sum
3. order of money. of money.
Acceptance is not required as it is Acceptance is necessary by the
Acceptance signed by the person liable to pay drawee before it can be
4. it. presented for payment.
Nature of Liability of the maker of a Liability of the maker of a bill is
5. liability promissory note is primary. secondary.

It can be drawn payable to

Payable to It cannot be drawn payable to
bearer but not payable to bearer
bearer bearer.
6. on demand.
Notice of No notice is to be provided to the Notice of dishonor must be
7. dishonor maker. given to all prior parties.
Maker is in immediate relation Drawer is not in immediate
Maker's position
8. with the payee. relation with the payee.
9. Instrument in set It cannot be drawn in set. It can be drawn in set.
Foreign bills must be protested
No protest is required in the case
Proof of protest for dishonor when such protest
of a promissory note.
10. is required by law.
Chapter 9: Labour Act, 2074

i. Lay off period means holding the labour in reserve when the work is suspended. During the
operation of an industry, under section 15 of the Act, the employer may stop the work and lay off
workers in case any special situation occurs because of shortage of electricity, water, raw material
or lack of fund or inability to reach the workplace or work or operate the workplace because of
any situation beyond control.
As per Sub-section (2) of section 15 the employment relationship between the employer and
workers shall continue during the lay off period. Any employer employing ten or more than ten
workers may lay off workers for a period maximum of fifteen days. In case there is a need to lay
off the workers for more than fifteen days, the employer shall be required to consult the authorised
trade union or labour Management Committee.
ii. As per section 39 of the Labour Act, 2074, the workers who are laid off pursuant to this Act shall
be paid half of their remuneration which they are entitled to until the work is resumed by the
employer. Provided that such workers shall not be required to give attendance in the workplace
during the layoff period unless the requirement of attendance is mentioned in the notice issued
relating to the layoff.

In the given case, Ms. Sarita, the representative of British Aircraft entered an employment contact
with British Aircraft to obtain salary net of tax of NRs. 200,000 per month for one year to act as a
representative of the company. But after five months Ms. Sarita was not provided with her salary.
And accordingly, has filed a case in the UK International Court.
As per section 90 of The Labour Act, 2074, any foreign enterprise involved in the promotion of
any business or sale of any goods or any other activity in Nepal violates the employment contract
entered into with its representative or labour in Nepal, such a representative or labour may file a
complaint to the Office or Labour Court in accordance with this Act.
Thus, Ms. Sarita may file a complaint with the Office of the Labour Court according to the
provisions of the Labour Act, 2074.

Chapter 10: Civil Code, 2074 (Part 5)

In the given case, Mr. Gadesh (the agent) was instructed by Mr. Himesh (the principal) to place
the goods in a specific location at a warehouse. However, Mr. Gadesh chose another equally
suitable location at a lower rent. Subsequently, goods worth NRs. 20 lakhs were destroyed by fire.
Mr. Himesh filed a petition against Mr. Gadesh claiming NRs. 20 lakhs. Mr. Gadesh contends that
the loss was due to the fire and not due to any negligence on his part.
As per section 594 of the Civil Code, 2074, the duties to be followed by an agent are as follows:
• Duty to follow the instructions given by the principal.
• Duty to exercise care skill and diligence.
• Duty to keep and render proper accounts to his principal.
• Duty to follow custom.
• Duty to communicate with the principal in case of difficulty.
• Duty to pay sums received to the principal.
• Duty not to deal on his own account.
• Duty not to make secret profit from the business of agency
• Duty not to use information obtained in the course of agency against the principal.
• Duty to protect and preserve the interest of the principal in case of his death or insolvency.
• Duty not to delegate authority
Thus, as per "Duty to follow the instructions given by the principal", it is the first and for most
duty that during the business of agency, the agent is bound to follow all the lawful instructions
given by the principal. In the absence of any such directions, must act according to the custom
which prevails in doing business of the same kind at the place where he conducts such business.
When he acts otherwise, if any loss is sustained, he is liable to compensate his principal though he
may act bona fide. Since Mr. Gadesh (the agent) did not follow the instructions of Mr. Himesh
(the principal), Mr. Gadesh is liable to cover the loss of NRs. 20 lakhs.
Chapter 11: Social Welfare Act, 2049

Section 20 of the Social Welfare Act, 2049 has authorized the Government of Nepal on the
recommendations of the council to suspend or dissolve the executive committee or those social
organizations or institutions affiliated with the council or, receiving economic assistance from the
Council, if they do their business against, prevailing laws or their own constitutions. While doing
so, a reasonable opportunity to give their clarification shall be given to the executive committees
before their suspension or dissolution.
Similarly, under Sub-section (2) of Section 20 of the Act, the Government of Nepal may constitute
a Ad hoc committee from the general members of that organization and institution to carry out the
business of that organization and institution until the suspension of that organization and institution
lifted, when suspended and until the constitution of new executive committee, when dissolved.
Further, Sub-section (3) provides that the Ad hoc committee formed pursuant to Sub-section (2)
in the condition of dissolution of any social organization and institution, shall constitute new

executive committee within the period of three months of its formation, in accordance with the
constitution of those organization and institution.
Chapter 12: Nepal Chartered Accountants Act, 2053 and Rules, 2061
In the given case, CA. Ramesh Bhandari is unable to repay the loan he obtained for the business
of exporting garments from Bagmati Bank Ltd. and has been declared insolvent due to his inability
to repay his creditors. He applied to ICAN for a Certificate of Practice, but ICAN denied his
application and has also canceled his membership.
Section 18 of the ICAN Act has stated following grounds on which persons shall not be deemed
to be eligible to be a member of the Institute:-
a. One who has not acquired qualifications as referred to in sub-sections (2) and (3) of Section
16.
b. One who has not attained the age of twenty-one years.
c. One who is insolvent and is unable to settle up the debts.
d. One who is convicted by the court in a criminal offense involving moral turpitude
e. One who is insane
Thus, as per section 18, CA. Ramesh Bhandari is not eligible to be a member. Therefore, ICAN's
decision to not issue him a Certificate of Practice and to cancel his membership is correct.

In the given case, RA. Ram Pd. Dhami, a B-class Registered Auditor, generated Tax Audit UDINs
instead of Statutory Audit UDINs for 578 countable files. During the investigation, it was found
that RA. Dhami does not have his own office and employees. It was discovered that UDINs were
generated to mislead ICAN, and his responses during the investigation were also misleading.
Additionally, while the investigation was ongoing, he continued to generate UDINs with the intent
to mislead ICAN.
As per Nepal Chartered Accountants Act, 2053 section 34(1), The member and member having
obtained professional certificate shall fully observe this Act or the Rules framed under this Act.
As per section 34(9), A member having obtained the professional certificate shall carefully
perform the duties required to be performed in the course of practicing his or her profession and
shall draw attention of all the concerned towards any material things which are not or have not
been done in consonance with the laws in force and the recognized principles on auditing. And as
per section 34(15) other matters relating to conduct to be observed by the member and the member
having obtained the professional certificate shall be as prescribed. As per Nepal Chartered
Accountants Rule, 2061 Rule 64(kha) a member having obtained the professional certificate shall
abide the professional behavior and code of conduct issued by the council. Thus RA. Dhami is
negligent on fulfilling the provisions of Nepal Chartered Accountants Act and have violated the
code of conduct.
Since, RA. Dhami is negligent on fulfilling fundamental principles of audit and have violated the
code of conduct, The council may impose any of the following penalties to RA. Dhami as per
section 14(5)(ga) of Nepal Chartered Accountants Act, 2053.
(a) Reprimanding;
(b) Removing from the membership for a period not exceeding Five years;

(c) Prohibiting from carrying on the accountancy for any specific period;
(d) Canceling the professional certificate or membership.
However, before imposing penalty, the Council shall provide a reasonable opportunity to RA.
Dhami to defend himself.
Further, as per section 41(4) RA. Dhami may be suspended for a period not exceeding Five years
and be punished with a fine not exceeding Two Thousand Rupees or with imprisonment for a term
not exceeding Three months or with both.
Chapter 13: World Trade Organization and Nepalese Laws

Yes, Nepal also possesses challenges of World Trade Organization (WTO).
The major challenges of WTO to Nepal are as under.
• Revenue collection is adversely affected due to reduction of Tariff
• Nepal is facing difficult in meeting international standard of quality
• Elimination of duty free and quota free system
• National indigenous expertise may decline
• Domestic investment may suffer because of Foreign Direct Investment
• Domestic industries may be adversely affected
• WTO has implemented strong defense of ‘Trade Related Intellectual Property’ rights.
These allow firms to implement patents and copyrights. In areas, such as life-saving
drugs, it has raised the price and made it less affordable for countries like Nepal.
• WTO has rules which favor multinationals. For example, 'most favored nation' principle
means countries should trade without discrimination. Nepal cannot give preference to
local contractors but may have to choose foreign multinationals - whatever their history
in repatriation of profit, investment in area.

Section 3: Exam tips to students:
Tip 1: Familiarize yourself with the syllabus and exam format. Understand the weightage of each
topic and the distribution of marks across different sections. This will help you allocate
your study time effectively.
Tip 2: Practice solving questions under timed conditions to improve your time management skills.
Allocate an appropriate amount of time to each question based on its marks and complexity.
Tip 3: Create visual aids like mind maps and flowcharts to summarize complex legal concepts and
interrelationships between different sections. These visuals can make revision easier.
Tip 4: Ensure sufficient sleep, a balanced diet, and regular exercise during exam preparation.
Tip 5: Clearly mention the question number at the top of your answer sheet and begin answering
questions or sub-questions on a new and fresh page.
Tip 6: Always begin answering easy questions so that you can be confident during the exam and
attempt exam effectively.
Tip 7: During the exam, read each question carefully to understand the requirements. Pay attention
to keywords that indicate the scope of your answer, such as 'discuss,' 'explain,' 'analyze,'
etc.
Tip 8: Divide your time based on the marks allocated to each question. If a question carries more
marks, spend proportionally more time on it, but don't get stuck on a single question.
Tip 9: Avoid using abbreviations or shortcuts unless explicitly permitted in the subject or context.
Tip 10: If time permits, review your answers before submitting the paper. Check for any errors,
missing points, or areas where you could provide more clarity.

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Revision Test Paper (RTP), December 2024 CAP II – Group I

CHARTERED ACCOUNTANCY PROFESSIONAL II

Revision Test Paper

The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal 1

The Institute of Chartered Accountants of Nepal 2

The Institute of Chartered Accountants of Nepal 3

Particulars Department X Department Y

Particulars Cost Mark Down

The Institute of Chartered Accountants of Nepal 1

Chapter: Accounting for Branch

You are required:

The Institute of Chartered Accountants of Nepal 2

Chapter: Accounting for Hire Purchase Transactions

You are required to:

Particulars Amount (Rs.)

The Institute of Chartered Accountants of Nepal 3

a) Withdrawals as per pass book

Rent, Rates and Taxes 6,000 Advertisement 1,000

b) Balance at Bank on 31.3.2022 was Rs. 3,000.

Following additional information are available:

The Institute of Chartered Accountants of Nepal 4

Liability Amount Assets Amount

The Institute of Chartered Accountants of Nepal 5

Chapter: Business Combination

The Institute of Chartered Accountants of Nepal 6

1. Non -Current Assets

Note No. Particulars Sun Ltd. Moon Ltd.

Year Sun Ltd. Moon Ltd.

Prepare Balance Sheet of Sun Limited after the amalgamation.

The Institute of Chartered Accountants of Nepal 7

Chapter: Ratio Analysis

Chapter: Internal Reconstruction

The Institute of Chartered Accountants of Nepal 8

Chapter: Cash Flow Statement

Income statement for the Year ended 31.03.2022

Statement of Financial Position as on 31.03.2022

The Institute of Chartered Accountants of Nepal 9

Expenses Payable 48,000 96,000 Stock 528,000 192,000

Chapter: Banks and Financial Institutions

Question No. 14:

The Institute of Chartered Accountants of Nepal 10

Subordinated Term Debt 1,050,000

Chapter: Underwriting of Shares & Debentures

Question No. 15:

Commission payable to underwriters is at 5% on the face value of shares.

The Institute of Chartered Accountants of Nepal 11

Chapter: Financial Reporting Standard (NFRS 15)

Chapter: Financial Reporting Standard (NAS 16)

Chapter: Financial Reporting Standard (NAS 37)

The Institute of Chartered Accountants of Nepal 12

- Relocation costs of Rs 300,000 for moving continuing employees from Pokhara to

a) Other Comprehensive Income

The Institute of Chartered Accountants of Nepal 13

Working Note -1: Closing Stock Reserve (for Y Department)

b) Value of Normal Goods 89,700

Stock reserve for X department: 49,560*33.33/133.33 = 12,390

The Institute of Chartered Accountants of Nepal 14

Chapter: Accounting for Branch

Trading and Profit/ Loss A/c