Question 1

P and Q are partners sharing profits equally of P & Co. Trial Balance Sheet as on 31st March, 2021:

Equity and Liabilities: Capital - P: ₹1,00,000, Q: ₹50,000; Current Account: ₹1,00,000; Reserves: ₹20,000; P's current account: ₹15,000; Q's current account: ₹15,000; Total: ₹2,00,000

Assets: Bank: ₹30,000; Debtors: ₹25,000; Stock: ₹40,000; Furniture: ₹15,000; Machinery: ₹15,000; P's current account: ₹15,000; Total: ₹2,00,000

The firm was dissolved on the above date. P took over 50% of the stock at 10% less on its book value, and the remaining stock was sold at a gain of 15%. Furniture and Machinery realised for ₹40,000 and ₹50,000 respectively. Bad debts of ₹1,000 were written off and further bad debts of ₹500 realised. Record the dissolution of the firm including transfer of current acc…

Accepted Answer

**DISSOLUTION OF PARTNERSHIP FIRM - JOURNAL ENTRIES**

The dissolution of P & Co. requires transferring all assets to Realization Account, recognizing gains/losses, and distributing final amounts to partners including capital, reserves, and current account balances.

**JOURNAL ENTRIES:**

**1. Transfer of Reserves to Capital Accounts (in profits ratio 1:1)**
- Reserves A/c Dr. ₹20,000
  - To P's Capital A/c Cr. ₹10,000
  - To Q's Capital A/c Cr. ₹10,000

**2. Transfer of Assets to Realization Account**
- Realization A/c Dr. ₹1,40,000
  - To Bank A/c Cr. ₹30,000
  - To Debtors A/c Cr. ₹25,000
  - To Stock A/c Cr. ₹40,000
  - To Furniture A/c Cr. ₹15,000
  - To Machinery A/c Cr. ₹15,000

**3. P takes 50% of Stock at 10% less on book value**
- Bank A/c Dr. ₹18,000
  - To Realization A/c Cr. ₹18,000
[50% of stock = ₹20,000; Less 10% = ₹20,000 × 0.90 = ₹18,000]

**4. Remaining 50% of Stock sold at 15% gain**
- Bank A/c Dr. ₹23,000
  - To Realization A/c Cr. ₹23,000
[50% of stock = ₹20,000; Plus 15% gain = ₹20,000 × 1.15 = ₹23,000]

**5. Furniture Realized**
- Bank A/c Dr. ₹40,000
  - To Realization A/c Cr. ₹40,000

**6. Machinery Realized**
- Bank A/c Dr. ₹50,000
  - To Realization A/c Cr. ₹50,000

**7. Bad Debts Written Off**
- Realization A/c Dr. ₹1,000
  - To Debtors A/c Cr. ₹1,000

**8. Further Bad Debts Realized (Irrecoverable)**
- Realization A/c Dr. ₹500
  - To Debtors A/c Cr. ₹500

**9. Collection of Remaining Debtors**
- Bank A/c Dr. ₹23,500
  - To Realization A/c Cr. ₹23…

Question 2

How much fine may be punishable with under section 140(3) for non-compliance of section 140(2) of the Companies Act, 2013?

Accepted Answer

**Section 140(2) of the Companies Act, 2013** requires that when an auditor resigns from a company, he must file a **statement in Form ADT-3** indicating the reasons and other relevant facts concerning his resignation. This statement must be filed with the **company** as well as with the **Registrar of Companies** within **30 days** from the date of resignation. In the case of certain specified companies (e.g., those prescribed under the Act), a copy must also be filed with the **Comptroller and Auditor General of India (C&AG)**.

In the given case, the auditor resigned but failed to properly file the statement of reasons as mandated under Section 140(2).

**Penalty under Section 140(3) of the Companies Act, 2013:**

Any auditor who does not comply with the provisions of Section 140(2) shall be punishable with a **fine of not less than ₹50,000 but which may extend to ₹5,00,000**.

Therefore, the auditor in the given case is liable to a fine ranging from a **minimum of ₹50,000 to a maximum of ₹5,00,000** for failing to file the required statement upon resignation.

Question 3

A firm of Chartered Accountants holding partnership appointment, 'Mr. A', 'Mr. B' and 'Mr. C' are holding partnership in 'ABC & Associates', 'Mr. X', 'Mr. Y' and 'Mr. Z' are holding partnership in 'XYZ & Associates'. 'Mr. X' and 'Mr. C' are holding partnership appointment as sole proprietors in M and N Companies respectively. They allocate the 20 audits between themselves in three ways.

Accepted Answer

**Section 141(3) of the Companies Act, 2013** sets a ceiling that **no person shall be appointed as an auditor of a company if he holds the position of an auditor of more than twenty companies**. This ceiling applies to both firms and individuals.

**Key Points for Analysis:**
- ABC & Associates (firm) has three partners: Mr. A, Mr. B, and Mr. C
- XYZ & Associates (firm) has three partners: Mr. X, Mr. Y, and Mr. Z
- Mr. C already holds 1 audit appointment as sole proprietor (Company N)
- Mr. X already holds 1 audit appointment as sole proprietor (Company M)
- When a partner holds audits through a firm, those audits count towards BOTH the firm's and the individual partner's ceiling

**(i) Maximum Audits in ABC & Associates:**
The firm's own ceiling is **20 audits**. However, when allocating audits to the firm, we must ensure each partner's total (firm audits + sole proprietor audits) does not exceed 20. Mr. C currently has 1 sole proprietor audit, leaving him capacity for 19 firm audits. By distributing firm audits appropriately among Mr. A, Mr. B, and Mr. C (with Mr. A and Mr. B taking larger shares, and Mr. C up to 19), **ABC & Associates can hold maximum 20 audits**.

**(ii) Maximum Audits for Individual Partners:**
Each partner's individual limit is 20 audits (firm audits + sole proprietor audits combined):
- **Mr. A: 20 audits** (no existing sole proprietor appointments)
- **Mr. B: 20 audits** (no existing sole proprietor appointments)
- **Mr. C: 19 audits** (already hold…

Question 4

Whether Raiyyer & Co can accept the audit of Britannia Inc. & Co Ltd?

Accepted Answer

Whether Raiyyer & Co can accept the audit depends on satisfying both **eligibility criteria** and **independence requirements** under the Companies Act 2013 and Indian Auditing Standards.

**Eligibility Requirements:**
Under Section 139 of the Companies Act 2013, an auditor must be a **Chartered Accountant (CA)** as defined in the Chartered Accountants Act 1949, and must hold a valid **Practising Certificate** from the Institute of Chartered Accountants of India (ICAI). Raiyyer & Co must first meet these basic qualification requirements.

**Disqualifications - Section 141:**
Raiyyer & Co cannot accept the audit if subject to any disqualifications, including: (i) lack of professional qualifications; (ii) conviction for certain offences; (iii) removal from ICAI register or subject to disciplinary action for professional misconduct; (iv) lack of independence from the company; (v) being an officer or employee of the company; or (vi) having direct/indirect financial interest in the company.

**Independence Requirement - Core Criterion:**
Raiyyer & Co must be **completely independent** as mandated by SA 260 (Communication with Those Charged with Governance) and SA 240 (The Auditor's Responsibilities Relating to Fraud). Independence is compromised if: (a) Raiyyer & Co or its partners have a material financial interest in Britannia Inc. & Co Ltd; (b) Any partner is a director, officer, or employee of the company; (c) There are family relationships with key management personnel; (d) T…

Question 5

As suggested by Mr. Smith, the revised access control mechanisms like Password and...

Accepted Answer

**Answer: (B)**

The principle of **Least Privilege** is the correct access control mechanism to accompany password-based authentication. After experiencing unauthorized data disclosure and loss, MPEL must implement a revised access control framework combining **Authentication** (passwords) with **Authorization** based on the Principle of Least Privilege.

The Principle of Least Privilege (PoLP) is a foundational security control that mandates users be granted only the minimum level of access rights necessary to perform their job functions. This reduces the risk of unauthorized data access, minimizes the impact of compromised credentials, and limits the scope of potential internal threats.

In the context of MPEL's remediation:
- **Passwords** provide authentication (verifying user identity)
- **Least Privilege** provides authorization (determining permitted actions)

Together, these ensure that even if a password is compromised, the attacker's actions are restricted to only what that user legitimately requires. The other options are incorrect: Asset Protection is a broad term unrelated to access mechanisms; Moderate and Most Privilege violate fundamental security principles and would expose the organization to greater risk of unauthorized disclosure.

Question 6

O'Farm, an organic farm products brand has been operating in India since 2014. It has built a dedicated history of business with revenue of ₹ 20 crores in the previous year and it became one of the top 10 NGOs for organic farming. While the company operated on 'Kisan Kalyan', a farmer-friendly agro since its inception, the tough times ahead seem to call for changes. The recent amendments in Agriculture laws, though recently related to organic farming, have posed immense threat to the small agriculture farmer segment. It expects that these amendments will harm the local farming practice.

Accepted Answer

**Sub-part (i): O'Farm's New Strategy Implementation Due to Agriculture Law Amendments**

O'Farm's new strategy implementation, triggered by the recent amendments in Agriculture laws, best describes a **Reactive Strategy** (also called an **Adaptive Strategy**).

The company is responding to an **external environmental change** — specifically a **Political/Legal factor** under the **PESTEL framework** — rather than proactively initiating change. The Agriculture law amendments created a direct threat to the small farmer segment that O'Farm's 'Kisan Kalyan' model was built upon. As a result, O'Farm is compelled to restructure its **supply chain** (shifting from international sourcing from Afghanistan, Nigeria, and Turkey to potentially domestic alternatives) and re-examine its farmer partnerships. This response is **reactive in nature** — the strategy is shaped by external forces, not internal choice, making it a classic example of an **emergent strategy** arising from an unplanned external trigger.

Key strategic implication: O'Farm must now evaluate a **Strategic Realignment** — balancing its original mission ('Kisan Kalyan') with the new regulatory reality, ensuring the revised supply chain and go-to-market approach retain **strategic fit** with the brand's purpose.

**Sub-part (ii): Diagnosis of O'Farm's Current Strategic Challenges**

O'Farm is currently experiencing **Strategic Drift** — a situation where the organisation's strategy gradually moves away from its core purp…

Question 7

The shift of Q-Form into "Rasav Kalyan" is "Upshala Seera" is a change in?

Accepted Answer

**Answer: (D)**

When Q-Form shifts into 'Rasav Kalyan' through 'Upshala Seera', it represents a **Product** change. This shift indicates the company is entering/launching into a new product line or service offering, thereby expanding its product portfolio. The organization is changing what it manufactures or offers to its customers, which is a product-level strategic change rather than a fundamental change in the organization's core purpose (mission) or long-term aspirational direction (vision).

Question 8

Which of the following was the first and major advantage for Q-Form that helped them strengthen their Leadership in the market?

Accepted Answer

This question requires specific knowledge of the Q-Form case study from the CA Intermediate curriculum materials. Without access to the detailed case scenario provided in your exam paper or study material, I cannot confidently identify which was the 'first and major advantage' for Q-Form. To answer this accurately, you would need to refer to the Q-Form case study section in your paper/textbook where the company's history and competitive advantages are outlined.

Question 9

The brand has achieved cost leadership through multiple strategies, but it would be a sustained challenge to sustain this leadership because of which of the following factors?

Accepted Answer

**Answer: (A)**

The sustainability of cost leadership is fundamentally challenged by **competitor imitation**. When a company achieves cost leadership through identifiable strategies—whether operational efficiencies, supply chain innovations, or niche positioning—competitors can observe, analyze, and replicate these approaches. This erosion of competitive isolation is the primary threat to sustaining any competitive advantage under Porter's generic strategies framework. Once the 'recipe' for cost leadership becomes visible and replicable in the market, the advantage loses its defensibility, forcing the cost leader into continuous innovation to maintain relative cost position.

Question 10

Differentiate on ordinary partnership firm with an LLP (Limited Liability Partnership) in respect of the following:

Accepted Answer

**Ordinary Partnership Firm vs. Limited Liability Partnership (LLP):**

**1. Perpetual Succession**

An **ordinary partnership firm does not have perpetual succession**. Under the Indian Partnership Act, 1932, the partnership is dissolved on the death, insolvency, retirement, or expulsion of any partner, unless the partnership deed provides otherwise. Even with such a clause, the firm requires reconstitution with a new deed, and the old firm technically ceases to exist. The firm's legal existence is dependent on the continued participation of its partners.

Conversely, an **LLP has perpetual succession**. As per the Limited Liability Partnership Act, 2008, an LLP is a separate legal entity with continuous existence. Changes in membership (entry or exit of members) do not affect the LLP's legal existence, structure, or continuity. The LLP continues indefinitely until formally dissolved in accordance with law.

**2. Ownership of Assets**

In an **ordinary partnership, assets are held in the joint names of partners**. The firm does not have a separate legal entity, so technically the partners are joint owners. The partnership is merely an association of persons. Ownership vests with the partners collectively, not with an independent entity.

In an **LLP, assets are owned by the LLP as a separate legal entity**. Since an LLP is a legal entity distinct from its members, all assets purchased in the LLP's name belong to the LLP. Members do not have personal ownership rights over LLP…

Question 11

Advise company regarding the current action Aakshan Ltd will have to follow for the court case for financial statements prepared for year ending 31st March 2021

Accepted Answer

**Answer: (D)**

For a court case where the outcome is uncertain and not explicitly stated as probable, the appropriate accounting treatment under **Ind AS 37 Provisions, Contingent Liabilities and Contingent Assets** (or AS 29 under the older standards applicable during 2020-2021) is to **disclose the matter as a contingent liability in the notes to financial statements**.

A **provision** is recognized in the balance sheet only when: (1) there is a present obligation from a past event, (2) an outflow of resources is **probable** (more likely than not), and (3) a reliable estimate can be made. Since the court case outcome is uncertain and the probability of loss is not established as probable, the conditions for recognition as a provision are not satisfied.

Instead, the court case must be disclosed as a **contingent liability** because: (1) it represents a possible obligation arising from past events, (2) the ultimate outcome depends on future court judgment, and (3) disclosure provides relevant information to users of financial statements about potential liabilities.

**Revenue reserve** and **capital reserve** are inappropriate—these are created from profits or capital gains respectively, not for litigation matters. The disclosure of contingent liabilities is a mandatory requirement under paragraph 86-89 of Ind AS 37, ensuring proper transparency in financial reporting.

Question 12

Mr. H and his team members carefully watched the whole process of counting of finished wooden doors by employees of Balson Limited. This is an example of which audit procedure?

Accepted Answer

**Answer: (b)**

The scenario describes Mr. H and his team members watching the counting process of finished wooden doors performed by employees of Balson Limited. This is a classic example of the audit procedure known as **Observation**. Observation, as defined in SA 500 (Audit Evidence), involves the auditor watching the performance of a process or procedure being carried out by others, typically client personnel. In this case, the auditors are observing the inventory counting process firsthand, which allows them to assess the adequacy of the counting procedures, monitor compliance with the company's policies, and gather direct evidence about the accuracy and completeness of the inventory. This is distinct from inspection (which involves examining physical assets or documents directly by the auditor themselves), external confirmation (which involves written responses from third parties), and inquiry (which involves questioning management or staff).

Question 13

Mr. Smith's suggestion of solution to the problem of MPEL, refers to a strategy well depicted in the DIAGRAM 1. What do you think this strategy refers to?

Accepted Answer

**Answer: (B)**

Without access to DIAGRAM 1 referenced in this question, a definitive answer cannot be provided. However, based on CA Intermediate Management Cycles curriculum, **PDCA Cycle (Plan-Do-Check-Act)** is the most commonly depicted strategy for addressing organizational problems through continuous improvement. The PDCA cycle follows an iterative approach: Planning the solution, Doing/implementing it, Checking/reviewing results, and Acting on learnings. This cycle is fundamental to quality management and process improvement.

**Note**: The specific answer depends entirely on DIAGRAM 1's visual representation. If the diagram shows:
- Four iterative phases with continuous loops → PDCA Cycle
- Statistical/data-driven methodology → Six Sigma
- Radical process redesign steps → BPR Cycle
- System implementation/integration phases → ERP Cycle

Without the diagram, PDCA is the most statistically likely answer in CA exams on this topic.

Question 14

On 1st April, 2020, XYZ Ltd. offered 100 shares to each of its 750 employees at a concessional rate. The employees were given a choice to apply for shares within 30 days of the offer. 600 employees accepted the offer and paid ₹50 per share purchased. Face value of each share is ₹10. You are required to record the issue of shares in the books of the company.

Accepted Answer

**Part (a): Journal Entries in the Books of XYZ Ltd.**

The company offered 100 shares to each of 750 employees. Only **600 employees** accepted the offer and paid ₹50 per share. Total shares to be issued = 600 × 100 = **60,000 shares**.

Since the **face value** is ₹10 and the **issue price** is ₹50, there is a **Securities Premium** of ₹40 per share.

**Journal Entries:**

**(1) On receipt of application money from employees:**

Bank A/c &emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp; Dr. &emsp; ₹30,00,000
&emsp; To Share Application A/c &emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp; ₹30,00,000
*(Being application money received from 600 employees for 60,000 shares @ ₹50 each)*

**(2) On allotment of shares:**

Share Application A/c &emsp;&emsp;&emsp;&emsp;&emsp; Dr. &emsp; ₹30,00,000
&emsp; To Share Capital A/c &emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp; ₹6,00,000
&emsp; To Securities Premium A/c &emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp;&emsp; ₹24,00,000
*(Being 60,000 shares of ₹10 each allotted at a concessional price of ₹50 per share, including securities premium of ₹40 per share)*

Note: The remaining 150 employees who did not accept the offer within 30 days — no entry is required for them as they did not participate.

---

**Part (b): Definitions of Key Terms under ESOP**

**(i) Vesting Period** *(Note: The question likely refers to 'Vesting Period'; 'Voting Period' does not appear as a standard ESOP term under the ICAI Gui…

Question 15

What is the action which Aakshan Ltd is supposed to take with regard to treatment of dividend declared while preparing and finalizing financial statements for year ending 31st

Accepted Answer

**Answer: (C) both a and b**

When a dividend is declared by a company during the financial year (or by board/shareholder resolution before financial statements are finalized), the entity must recognize it as a **liability** in the statement of financial position because a present legal or constructive obligation exists to transfer economic benefits to shareholders. The liability must be **recorded at the amount of the declared dividend**. Both actions (A) and (B) are required and complementary under IND AS accounting standards. Failure to recognize the declared dividend as a liability would understate liabilities and misstate the company's financial position at the reporting date.

Question 16

In addition to audit of Harish Kedia Ltd., which of the services can be performed by Raiyyer & Co?

Accepted Answer

**Answer: (D)**

Under Section 144 of the Companies Act 2013, an auditor is prohibited from rendering certain services during the period of their appointment, as they may impair professional independence and objectivity.

The prohibited services include: (1) accounting and bookkeeping services; (2) internal audit services; (3) design and implementation of financial information systems; (4) actuarial services; (5) management consulting services; (6) investment advisory services; (7) any service involving a contingent fee; and (8) any other service not compatible with professional independence.

Analyzing the options: Option (A) – design and implementation of financial information system is explicitly prohibited under Section 144(1)(iii). Option (B) – actuarial services for valuation of gratuity are prohibited under Section 144(1)(iv) as these create threats to independence. Option (C) – conducting internal audit is explicitly prohibited under Section 144(1)(ii). Therefore, none of the services listed in options (A), (B), or (C) can be performed by the auditor Raiyyer & Co during their tenure.

Question 17

MPEL provides business intelligence solution to its clients that may require to store complex data such as images, audio and video etc. Identify the type of database that suits best for this scenario:

Accepted Answer

**Answer: (A)**

Object Oriented Database is the best choice for MPEL's requirement. An Object Oriented Database (OODB) is specifically designed to store complex data types including multimedia objects such as images, audio, and video as unified objects with their attributes and methods. Unlike Relational Databases (which are optimized for structured tabular data with fixed schemas), OODBs provide seamless storage and retrieval of non-traditional, unstructured data formats that business intelligence solutions often require. Hierarchical and Network Databases are legacy models unsuitable for modern multimedia content management.

Question 18

ABC is a marketing consultancy business. ABC's most recent corporate analysis has identified that three new businesses have recently entered its market and started providing similar services. ABC is evaluating whether investing in any of the new businesses would be a

Accepted Answer

**Answer: (A)**

Investing in any of the new businesses would be an **Opportunity** in SWOT analysis. While the entry of three new competitors providing similar services represents a **Threat** to ABC's existing market position, the strategic option to invest in these new businesses represents an external positive development that ABC can exploit. By investing in the new ventures, ABC can diversify its portfolio, gain equity stakes in emerging market players, leverage its consultancy expertise to add value to these businesses, and potentially neutralize competitive threats through strategic acquisition or partnership. Opportunities in SWOT analysis refer to external factors that a business can capitalize on for growth and competitive advantage, which fits this scenario of ABC evaluating investment options in new market entrants.

Question 19

The following is the balance sheet information as at 31.03.2021: Share Capital (Equity Share Capital: ₹50,00,000 at ₹10 each fully paid up: ₹10,00,000; 10% Preference Shares of ₹100 each fully: ₹60,00,000); Reserves & Surplus; Capital Reserve: ₹1,00,000; Security Premium: ₹12,00,000; General Reserve: ₹5,00,000; Retained Earnings: ₹43,50,000; 12% Debentures: ₹12,50,000; Current Liabilities and Provisions: ₹5,00,000; Tangible Assets: ₹10,75,000; Current Assets: ₹3,00,000; Inventory: ₹2,00,000; Cash and Bank: ₹14,15,000

Accepted Answer

**Buy-Back of Equity Shares — Maximum Permissible Limit under Section 68 of the Companies Act 2013**

**Given Data (from Balance Sheet as at 31.03.2021):**
Paid-up Equity Share Capital = ₹10,00,000 (1,00,000 shares of ₹10 each fully paid). 10% Preference Share Capital = ₹60,00,000. **Free Reserves** = Securities Premium (₹12,00,000) + General Reserve (₹5,00,000) + Retained Earnings (₹43,50,000) = ₹60,50,000. Note: **Capital Reserve (₹1,00,000) is excluded** — it is not a free reserve for buy-back purposes under Section 68. 12% Debentures (Debt) = ₹12,50,000. Cash and Bank = ₹14,15,000.

**Condition 1 — Section 68(2)(b): Buy-back ≤ 25% of (Total Paid-up Capital + Free Reserves)**
Total paid-up capital = ₹10,00,000 + ₹60,00,000 = ₹70,00,000. Total of paid-up capital and free reserves = ₹70,00,000 + ₹60,50,000 = ₹1,30,50,000. 25% of ₹1,30,50,000 = **₹32,62,500**.

**Condition 2 — Section 68(2)(c): Buy-back of equity shares ≤ 25% of Paid-up Equity Capital**
25% of ₹10,00,000 = **₹2,50,000** (i.e., maximum 25,000 equity shares).

**Maximum Permissible Buy-back = Lower of Condition 1 and Condition 2 = ₹2,50,000 (25,000 equity shares at ₹10 each)**

**Condition 3 — Post Buy-back Debt-Equity Ratio [Rule 17 of Companies (Share Capital and Debentures) Rules 2014]:**
Post buy-back, the ratio of aggregate secured and unsecured debts to paid-up capital and free reserves must not exceed 2:1. Post buy-back debt = ₹12,50,000. Post buy-back equity and reserves = ₹7,50,000 (equity SC) + ₹60,00…

Question 20

State the disclosures Aakshan Ltd is required to make with respect to the long-term loan taken from Suburban Bank

Accepted Answer

**Answer: Cannot be determined** — The question references disclosure statements I, II, III, and IV regarding Aakshan Ltd's long-term loan from Suburban Bank, but these specific statements are not provided in the question text. Without visibility of the four statements being evaluated, it is impossible to identify which combination represents the required disclosures. However, under **Ind AS 109 (Financial Instruments: Recognition and Measurement)** and **Ind AS 7 (Statement of Cash Flows)**, standard disclosures for long-term loans typically include: (1) nature, terms, and conditions of debt; (2) interest rate (fixed/floating) and maturity date; (3) scheduled repayment obligations; (4) security/collateral details; (5) any covenants or restrictions; (6) fair value information; and (7) related party nature if applicable. Additionally, **Schedule III of the Companies Act 2013** specifies the format and content requirements for loan disclosures in the Balance Sheet notes. To correctly solve this question, the candidate requires access to the four specific statements presented as options I, II, III, and IV in the original exam paper.

Question 21

Which of the following option is correct in Law regarding appointment of first auditor of Jameshar Ltd?

Accepted Answer

**Answer: (D)**

The first auditor of a company is appointed by the **Board of Directors** within 30 days of registration of the company, as per Section 139(1) of the Companies Act, 2013. This is a statutory requirement and the fundamental procedural rule governing first auditor appointment. No individual, regardless of their status, has the authority to appoint the first auditor; this power vests exclusively with the Board of Directors. While options (B) and (C) identify specific disqualifications (managing director or subscriber status), they are secondary consequences of the primary rule established in option (D)—that appointment authority belongs to the Board alone.

Question 22

Auditor Compares Gross Profit Ratio with that of Previous year and it is discovered that there has been a fall in the ratio. This is an example of...

Accepted Answer

**Answer: (a)**

The auditor's comparison of the gross profit ratio with the previous year to identify a fall is an example of an **Analytical Procedure**. Analytical procedures involve evaluating financial information through the analysis of plausible relationships among financial and non-financial data. Comparing key ratios (like gross profit ratio) across periods and investigating unusual variations or fluctuations is a direct application of analytical procedures as defined under SA 520. The fall in the ratio represents an unusual relationship that triggers the need for further investigation. This procedure helps the auditor identify potential misstatements and areas requiring additional scrutiny. It is not a test of controls (which evaluate the effectiveness of internal controls), not audit sampling (which applies procedures to a portion of items), and while analytical procedures can be substantive in nature, the specific classification of this activity is an analytical procedure.

Question 23

Trekking Plus is a small company based in the Himalayan ranges in India. It is known in the region for its hill walking sticks. Trekking Plus set specialist walking equipment in their small shop at the foot of the mountains. They do not have a website yet are able to sell their products at premium prices. Which of the following one of Porter's generic competitive strategies is most likely being employed by Trekking Plus?

Accepted Answer

**Answer: (D)**

Trekking Plus is employing **focused differentiation** strategy. The company operates in a geographically limited market (Himalayan region) serving a specific customer segment (trekkers requiring specialist hill walking equipment). The key indicators are: (1) **small company** with limited geographic presence (one shop, no website), indicating a **focused approach** rather than broad market coverage; (2) **premium pricing**, ruling out cost leadership; (3) **specialist walking equipment and regional reputation**, indicating differentiation based on unique product features and quality, not price competition. Focused differentiation combines a narrow target market (niche focus) with competing through unique product features and brand positioning, which perfectly matches Trekking Plus's business model.

Question 24

JRTI Limited (Bond Company) recently made a public issue in respect of which the following information is available:

The shareholders adopted the following resolution on 31st March, 2021:
(1) Buy back 25% of the paid-up capital and it was decided to offer a price of 20% over market value of company within 5 to 10 years.

(2) To finance the buy-back of shares, company:
(i) Issues 3,000, 14% debentures of ₹ 100 each.
(ii) Issues 2,500, 10% preference shares of ₹ 100 each.

(3) Underwriting Commission: 2%

(4) Number of debentures applied for: 75,000

Conversion portion for debentures: 40%, date of conversion to equity if 6 months from the date of closing of issue is 31st October 2020.

You are required to pass the necessary journal entries to record the above transactions.

Accepted Answer

**Journal Entries in the Books of JRTI Limited**

**Assumptions:**
(a) Debentures and preference shares are issued at par (₹100 each).
(b) Date of conversion is taken as 31st October **2021** (the reference to 2020 appears to be a data error in the question since the resolution itself is dated 31st March 2021).
(c) Equity shares issued on conversion are assumed at ₹100 face value (face value not stated in the question).
(d) Underwriting commission is calculated on the nominal value of securities actually issued.
(e) Preference shares were fully subscribed (no oversubscription/undersubscription data given).

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**Journal Entries:**

**1. On receipt of debenture application money (75,000 debentures applied at ₹100)**
Bank A/c Dr. ₹75,00,000
  To Debenture Application A/c ₹75,00,000
*(Application money received for 75,000 debentures × ₹100)*

**2. On allotment of 3,000 debentures and refund of excess**
Debenture Application A/c Dr. ₹75,00,000
  To 14% Debentures A/c ₹3,00,000
  To Bank A/c (Refund) ₹72,00,000
*(3,000 debentures allotted; excess application money for 72,000 debentures refunded)*

**3. On receipt of preference share application money**
Bank A/c Dr. ₹2,50,000
  To 10% Preference Share Application & Allotment A/c ₹2,50,000
*(2,500 shares × ₹100; assumed fully subscribed)*

**4. On allotment of preference shares**
10% Preference Share Application & Allotment A/c Dr. ₹2,50,000
  To 10% Preference Share Capital A/c ₹2,50,000
*(Allotment of 2,500, 10% preference share…

Question 25

State which of the following statement is true with respect to recording an intangible in the books

Accepted Answer

**Answer: (A)**

Intangible assets can be correctly recorded in the books when they meet the recognition criteria specified in **AS 26 (Intangible Assets)**. An intangible asset is recognized as an asset when: (1) it is identifiable and separable from the entity; (2) the entity has control over it through ownership or contractual rights; (3) there is probable inflow of future economic benefits; and (4) the cost can be reliably measured. Both **auditing standards (SA)** and the **Companies Act, 2013** permit the recognition and recording of intangible assets if these conditions are satisfied. Therefore, intangibles are not prohibited from being booked—they are a standard component of asset recognition in financial statements. The key distinction lies in whether the specific intangible meets the recognition criteria, not whether intangibles as a category can be recorded.

Question 26

Regarding Jameshar Ltd., about the amount of remuneration and who can fix the fees?

Accepted Answer

**Answer: (C)**

Under Section 139 of the Companies Act 2013, the Board of Directors appoints the first auditor of a company. The Board of Directors has the authority to fix the remuneration of the first auditor at the meeting in which the auditor is appointed. There is no statutory limit or cap on the amount of remuneration that can be fixed by the Board for the first auditor, though it should be reasonable and prudent.

Option (A) is incorrect because only authorized bodies (Board or general meeting) can fix auditor remuneration, not just anyone.

Option (B) is incorrect regarding the first auditor—the general meeting does not fix remuneration for the first auditor appointed by the Board. The general meeting fixes remuneration only for auditors appointed by shareholders in subsequent general meetings.

Options (C) and (D) correctly state that the Board of Directors may fix the remuneration of the first auditor appointed by it with no statutory limit on the amount.

Question 27

The persona with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity are:

Accepted Answer

**Answer: (b)**

Those **charged with governance** are the personas with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity. As defined in SA 260 (Communication with Those Charged with Governance), these are persons entrusted with the supervision, control, and direction of an entity. They ensure the entity operates in accordance with its objectives and functions, provide accountability to stakeholders, and oversee management's implementation of strategies and policies. While the audit committee is part of those charged with governance, and management executes operations, the broader category of those charged with governance encompasses the board and other parties responsible for accountability and strategic oversight.

Question 28

Reliability of Audit Evidence: As per SA 500 on 'Audit Evidence', the reliability of the information to be used as audit evidence and therefore of the audit evidence itself is affected by its source and its nature and the circumstances under which it is obtained. Explain the following guide principles about the reliability of various kinds of audit evidence: (i) The reliability of audit evidence is increased when it obtains from independent sources outside the entity; (ii) The reliability of audit evidence that is generated internally is increased when the related controls, including those over its preparation and maintenance, imposed by the entity are effective; (iii) Audit evidence obtained directly by the auditor (for example, observation of the application of a control) is more reliabl…

Accepted Answer

**Principle 1: Reliability Increased from Independent External Sources**

Audit evidence obtained from independent sources outside the entity is more reliable than evidence obtained from within the entity. External sources such as banks, customers, government authorities, and suppliers have no direct relationship with the entity and therefore no incentive to provide misleading information. The independence of the external source reduces the risk of bias or manipulation by management. For example, direct confirmations received from customers or banks regarding balances are considered highly reliable evidence. This principle reflects the auditor's reliance on third parties who operate independently and have their own reputation and interests to protect.

**Principle 2: Reliability Increased When Internal Controls are Effective**

When audit evidence is generated internally by the entity, its reliability depends significantly on the effectiveness of controls surrounding its preparation, processing, and maintenance. Internally generated evidence (such as internally prepared schedules, reconciliations, or ledger accounts) becomes more reliable when the entity has implemented effective controls including proper authorization procedures, segregation of duties, regular review and reconciliation processes, and system-generated controls. The auditor must assess the control environment and understand the control procedures before relying on internally generated evidence. Without strong …

Question 29

Mr. Sharma's network by ML Smith has high cost of installation and maintenance. The company decides to create a STAR network. Which linkages need to be removed from DIAGRAM 2?

Accepted Answer

**Answer: (B)**

A **STAR network topology** requires all nodes to connect exclusively through a central hub, with no direct peer-to-peer connections between peripheral nodes. To convert from the original topology in DIAGRAM 2 to a STAR network, all circular/ring linkages must be removed, leaving only the hub as the connection point. Option (B) removes the ring configuration C1-C2, C2-C3, C3-C4, C4-C1, which creates the required STAR topology where each node connects only to the central hub, eliminating the high maintenance and installation costs of maintaining multiple direct interconnections.

Question 30

A Ltd has recently decided to install a new IT tool to improve the efficiency of its payroll function. A ltd. believes this will reduce the cost of running the payroll system by 20%, although it is unclear whether this will be achieved. The installation will cost ₹50,00,000. What level of authority should be required to approve this investment in the new IT tool?

Accepted Answer

**Answer: (D)**

A ₹50,00,000 capital investment for an IT tool requires **Strategic level** approval. While the investment is functional in nature (payroll), the substantial amount, capital-intensive nature of IT implementation, and potential long-term operational implications elevate it beyond routine functional authority. Functional level approval typically handles operational decisions within delegated limits (usually ₹10-25 lakhs). Business level deals with unit-specific decisions but ₹50 lakhs is material enough to require strategic review. Corporate level is reserved for larger enterprise-wide investments. Strategic level authority—comprising senior management and strategic decision-makers—is appropriate here as it permits proper evaluation of uncertain benefits (20% cost reduction claim), capital efficiency, and long-term IT investments affecting operational infrastructure.

Particulars	P (₹)	Q (₹)
Original Capital	1,00,000	50,000
Share of Reserves	10,000	10,000
Current Account (transferred)	15,000	15,000
Share of Gain on Realization	29,750	29,750
Total Payable	1,54,750	1,04,750

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Particulars	₹	Particulars	₹
Stock	40,000	Bank (from P)	18,000
Furniture	15,000	Bank (stock sale)	23,000
Machinery	15,000	Bank (furniture)	40,000
Debtors	25,000	Bank (machinery)	50,000
Bad Debts written off	1,000	Bank (debtors)	23,500
Bad Debts (further)	500	P's Capital A/c (gain share)	29,750
		Q's Capital A/c (gain share)	29,750
Total	96,500	Total	214,000