Question 1

You are required (a) to show the Journal Entries necessary to record the above transactions in the company's books and (b) to prepare the Balance Sheet after completion of the scheme.

Accepted Answer

**PART (A): JOURNAL ENTRIES**

**1. Reduction of Equity Shares (2,00,000 shares @ ₹10 to ₹1)**
Capital Reduction Account Dr. ₹18,00,000
    To Equity Share Capital ₹18,00,000
(Being reduction of equity share capital by ₹9 per share)

**2. Issue of Equity Share for Preference Dividend Arrears**
Preference Dividend Payable Dr. ₹1
    To Equity Share Capital ₹1
(Being one equity share of ₹1 issued for accumulated dividend arrears)

**3. Reduction of Preference Shares**
(Note: Exact opening amount not specified. Assuming preference capital P, reduced to 72.5% of original)
Capital Reduction Account Dr. [Reduction amount = P × 27.5%]
    To Preference Share Capital [above amount]

**4. Transfer of Debentures to Capital Reduction Account**
Capital Reduction Account Dr. ₹55,000
    To Long-term Borrowings/Debentures ₹55,000
(Being transfer of debenture account for debt reduction scheme)

**5. Transfer of Property to Debenture Holders**
Debentures Dr. ₹75,000
    To Property, Plant & Equipment ₹75,000
(Being transfer of freehold property to debenture holders at agreed value)

**6. Receipt from Debenture Holders**
Cash/Bank Dr. ₹20,000
    To Debentures ₹20,000
(Being balance paid by debenture holders: ₹75,000 - ₹55,000)

**7. Write Down of Plant and Machinery**
Capital Reduction Account Dr. ₹1,35,000
    To Property, Plant & Equipment ₹1,35,000
(Being write down of plant from ₹2,55,000 to ₹1,20,000: ₹3,30,000 - ₹75,000 - write down)

**8. Sale of Non-trade Investments**
Cash/Bank Dr. …

Question 2

Dissolution of partnership firm - X, Y and Z are in partnership sharing profits and losses in the ratio of 5:4:4. The Balance Sheet on 31st March, 20XX is as below:

| Liabilities | ₹ | Assets | ₹ |
|---|---|---|---|
| X's Capital | 60,000 | Factory Building | 96,600 |
| Y's Capital | 40,000 | Plant and Machinery | 65,100 |
| Z's Capital | 50,000 | Trade Receivable | 21,600 |
| Y's Loan | 18,000 | Inventories | 49,500 |
| Bank Overdraft | 22,000 | Bank | 1,300 |
| | | Stock-in-Trade | 500 |
| Total | 1,90,000 | Total | 1,90,000 |

On Balance Sheet date, all three partners have decided to dissolve their partnership. Upon dissolution of capital assets was distributed. They decided to distribute amounts as and when became available. For this purpose they appointed 2 partners who are to get as…

Accepted Answer

**PARTNERSHIP DISSOLUTION - PIECEMEAL REALIZATION**

**Step 1: Prepare Realization Account**

Dr. Realization Account Cr.

To Assets (at book value):
Factory Building: ₹96,600
Plant & Machinery: ₹65,100
Trade Receivables: ₹21,600
Inventories: ₹49,500
Stock-in-Trade: ₹500
To Loss on Realization: ₹26,400
Total: ₹259,700

By Bank (cash realized): ₹206,900
By Creditors (settled): ₹63,600
By Bank Overdraft: ₹22,000
Total: ₹292,500

Loss on Realization: Book value of assets (excluding bank) = ₹233,300; Cash realized = ₹206,900; Loss = **₹26,400**

**Step 2: Distribution of Loss to Partners (Ratio 5:4:4)**

X's share of loss: ₹26,400 × (5/13) = ₹10,153.85
Y's share of loss: ₹26,400 × (4/13) = ₹8,123.08
Z's share of loss: ₹26,400 × (4/13) = ₹8,123.08

**Step 3: Partners' Capital Accounts After Loss**

X: ₹60,000 − ₹10,153.85 = **₹49,846.15**
Y: ₹40,000 − ₹8,123.08 = **₹31,876.92**
Z: ₹50,000 − ₹8,123.08 = **₹41,876.92**
Total Capital: **₹123,600**

**Step 4: Cash Available for Distribution to Partners**

Cash realized (4 instalments): ₹206,900
Opening bank balance: ₹1,300
Total cash: ₹208,200

Less: Payments from cash
Creditors settled: ₹63,600
Bank Overdraft: ₹22,000
Y's Loan: ₹18,000
Dissolution expenses: ₹12,000
Total payments: ₹115,600

Net cash for partners: ₹208,200 − ₹115,600 = **₹92,600**

**Step 5: Commission to Appointed Partners**

Two partners appointed for realization receive remuneration. Interpreting the clause as **1% on total assets realized** (excluding bank): ₹206,…

Question 3

On 29th April, 2020, the company achieved the target of buy back. On 1st May, 2020 the company issued one fully paid up share of ₹10 each by way of bonus for every eight equity shares held by the equity shareholders. Pass the necessary journal Entries for the above transactions.

Accepted Answer

**Note:** This question is a continuation of a prior part (data for number of shares, buyback price, and reserves not reproduced here). The journal entries below follow the standard framework under the **Companies Act, 2013** (Sections 68–70) and **AS 1 / Schedule III** requirements. Specific figures should be substituted from the preceding part of the question.

**Journal Entries in the Books of the Company**

**On 29th April, 2020 — Completion of Buy Back**

*Entry 1 — Payment to shareholders on buyback:*
Equity Share Capital A/c Dr (Face value × No. of shares bought back)
Securities Premium A/c Dr (Premium portion, if bought back above face value)
  To Bank A/c (Total amount paid = Buyback price × No. of shares)
*(Being equity shares bought back and cancelled)*

*Entry 2 — Creation of Capital Redemption Reserve (CRR):*
General Reserve A/c Dr (Equal to nominal/face value of shares bought back)
  To Capital Redemption Reserve A/c
*(Being transfer to CRR as required under Section 69 of the Companies Act, 2013 — amount equal to nominal value of shares extinguished)*

*Entry 3 — Transfer of buyback expenses (if any):*
Buyback Expenses A/c Dr
  To Bank A/c
General Reserve A/c Dr
  To Buyback Expenses A/c
*(Being buyback expenses charged to General Reserve)*

**On 1st May, 2020 — Bonus Issue (1 fully paid share of ₹10 for every 8 equity shares held)**

After buyback, remaining equity shares = Total shares before buyback − Shares bought back. Bonus shares to be issued = Remaining …

Question 4

Statement 1: Government audit provides public accounting of operational, management programme and policy aspects of public administration as well as accountability of officials.
Statement 2: Government audit is equipped and intended to function as an investigating agency to detect every irregularity or misdemeanor to its utmost.

Accepted Answer

**Answer: (a)**

Statement 1 is correct. Government audit, conducted by the Comptroller and Auditor-General (CAG) under Article 148 of the Indian Constitution, provides public accounting of operational, management, programme, and policy aspects of public administration. It ensures accountability and transparency of government officials and expenditure of public funds.

Statement 2 is incorrect. While government audit identifies irregularities and ensures compliance, it is NOT intended to function as a criminal investigating agency. Government audit provides reasonable assurance through examination of records and systems, not exhaustive investigation of every irregularity. Criminal investigation is the role of law enforcement agencies (CBI, police, etc.). The scope of government audit is to assess financial propriety, legitimacy, economy, efficiency, and effectiveness—not criminal detection.

Question 5

It is a possible obligation that arises from the past events and whose existence will be confirmed only by the occurrence or non occurrence of one or more uncertain future events

Accepted Answer

**Answer: (B) or (C) Contingent Liabilities**

The definition provided in the question is the textbook definition of a **Contingent Liability** as per Accounting Standard 29 (AS 29) or Ind AS 37. A contingent liability is a possible obligation that arises from past events but whose existence is uncertain because it depends on the occurrence or non-occurrence of one or more future events beyond the entity's control. Unlike provisions (which represent probable obligations recognized in financial statements), contingent liabilities are merely disclosed in the notes as their probability and quantifiability are insufficient for balance sheet recognition.

Question 6

State with reason (in short) whether the following statements are true or false

Accepted Answer

**Statement (i): FALSE**
When a firm is engaged to prepare information of a company, it is not correct that *any* partner who is a Chartered Accountant is automatically authorised to act and sign on behalf of the firm. Only the **specifically authorised partner** designated for that engagement is entitled to sign. The firm acts through a partner who holds a valid Certificate of Practice and has been duly authorised — not every CA-partner indiscriminately.

**Statement (ii): FALSE**
The **determination** of the financial position and operating results of an enterprise is the **responsibility of management**, not the auditor. The auditor's role, as explained under **SA 200 (Overall Objectives of the Independent Auditor)**, is to express an independent opinion on whether the financial statements prepared by management give a true and fair view. Confusing this responsibility with that of the auditor is incorrect.

**Statement (iii): FALSE**
As per **SA 300 (Planning an Audit of Financial Statements)**, while establishing the **overall audit strategy**, the auditor is specifically required to determine the **nature, timing, and extent** of audit resources and procedures. Timing is an essential component of the overall audit strategy and cannot be ignored. The statement incorrectly suggests timing need not be determined.

**Statement (iv): FALSE**
The description given in the statement — report of audit procedures performed, relevant audit evidence obtained, and audit conclusions r…

Question 7

Which of the following is a cycle in business process management?

Accepted Answer

**Answer: (A)** Order to Cash Cycle is a fundamental cycle in business process management. The Order to Cash (O2C) cycle encompasses the entire process from receiving a customer order through to the collection of cash payment. This cycle includes key activities such as order processing, credit approval, delivery, invoicing, and collection, making it a core business process that directly impacts revenue generation and cash flow.

Question 8

Based on the above Case Scenario, answer the Multiple Choice Questions.

Accepted Answer

**Sub-part (i): Ansoff's Matrix Strategy for Sringy**

**Answer: Market Development**

Sringy's core strategy involves taking its existing IT products and services into new geographical markets — specifically, fast-growing countries outside India. This precisely maps to **Market Development** in Ansoff's Product-Market Growth Matrix, where an organisation expands into new markets with existing products/capabilities. The introduction of 'unique quality' through Project Force adds a layer of differentiation to support penetration into these new markets, but the dominant strategic thrust remains reaching new customer geographies with existing competencies.

**Sub-part (ii): Premises of Secret Scenarios**

**Answer: Internal (Controllable) Premises**

In strategic planning, **planning premises** are assumptions about the future environment on which plans are based. The 'secret market analysis conducted by internal teams' to identify sustainable technological advantages represents **internal, controllable premises** — information and assumptions generated from within the organisation. These include proprietary competitor intelligence, internal capability assessments, and product-attribute evaluations. Controllable premises arise from decisions within the firm's domain, distinguishing them from external or uncontrollable premises like government policy or macroeconomic shifts. Project Force's findings formed the basis of Sringy's planning premises for the next strategic phase.

**S…

Question 9

Sriozzy's major investment in Artificial Intelligence has created an organisational structure to be which of the following structures?

Accepted Answer

**Answer: (B)**

When an organization makes a major investment in Artificial Intelligence, it typically restructures to adopt a **Flat Structure**. This is because AI-driven organizations require agility, rapid innovation, and quick decision-making, which are best facilitated by minimal hierarchical layers. A flat structure reduces bureaucratic delays, enables direct communication between employees at all levels, and empowers teams to innovate faster—critical requirements for leveraging AI effectively. The flat structure supports cross-functional collaboration and knowledge-sharing essential in AI development and implementation.

Question 10

Write short note on Designated Partners in a Limited Liability Partnership and what are their liabilities.

Accepted Answer

**Designated Partners in a Limited Liability Partnership**

A **Designated Partner** is a partner specifically designated in the Limited Liability Partnership agreement and registered with the Registrar of Companies under the Limited Liability Partnership Act, 2008. Every LLP must have at least 2 designated partners, who may be individuals or bodies corporate. At least 1 designated partner must be a resident of India.

**Role and Responsibilities:**
Designated Partners are responsible for the management and operation of the LLP. They represent the LLP in its dealings with third parties, are responsible for filing statutory documents with the Registrar, and must ensure compliance with the provisions of the LLP Act and the LLP agreement.

**Liabilities of Designated Partners:**

**1. Limited Liability for LLP Debts:** Under Section 4 of the Limited Liability Partnership Act, 2008, a designated partner enjoys **limited liability**. A partner is not personally liable for the debts and obligations of the LLP beyond their capital contribution committed to the LLP. This is the fundamental principle distinguishing LLPs from general partnerships.

**2. Personal Liability for Own Wrongful Acts:** A designated partner is **personally liable** for:
- Their own acts of negligence, breach of trust, or wrongful act
- Their own acts of misconduct
- Breach of their fiduciary duties towards the LLP and other partners
Such liability extends to the full extent of such wrongful acts, not limited …

Question 11

The balance of 10% Debentures to be redeemed in the books of Omega Ltd. as on 1-4-2020: (i) 10% Debentures ₹75,00,000 (ii) Balance of DRF ₹2,50,000 (iii) DRR Investment ₹1,25,000 represented by 10% ₹1,25,000 Secured Bonds. Omega Ltd. is an untraded company (other than AIF, Banking company, NBFC and HFC). You are required to prepare Debentures Redemption Reserve Account and Bank Account in the books of Omega Ltd. and also show how Debentures Redemption Investment Account would have appeared for the period ended 31st March 2021.

Accepted Answer

**Applicable Rules:** Under **Rule 18 of the Companies (Share Capital and Debentures) Rules, 2014** (as amended by the 2019 Amendment Rules), Omega Ltd., being an unlisted ('untraded') company other than AIF, Banking Company, NBFC, and HFC, is required to: (1) Create a **Debentures Redemption Reserve (DRR)** equal to at least **10% of outstanding debentures** before commencement of redemption; and (2) Invest or deposit, on or before **30th April** of each year, at least **15% of the amount of debentures maturing** during the year ending 31st March.

**Assumptions:** All ₹75,00,000 debentures are redeemed on 31st March 2021. New DRR investments are assumed purchased on 1st April 2020 at 10% p.a. (same rate as existing bonds) for clean interest computation. Investments realised at par on 31st March 2021.

---

**Debentures Redemption Reserve (DRR) Account**

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| 31-3-2021 General Reserve A/c | 7,50,000 | 1-4-2020 Balance b/d | 2,50,000 |
| | | 31-3-2021 P&L Appropriation A/c | 5,00,000 |
| **Total** | **7,50,000** | **Total** | **7,50,000** |

*DRR required = 10% × ₹75,00,000 = ₹7,50,000; existing ₹2,50,000; additional transfer = ₹5,00,000. After full redemption, DRR balance is transferred to General Reserve.*

---

**Debentures Redemption Investment (DRI) Account**

| Dr | ₹ | Cr | ₹ |
|---|---|---|---|
| 1-4-2020 Balance b/d (10% Secured Bonds) | 1,25,000 | 31-3-2021 Bank A/c (investments realised at par) | 11,25,000 |
| 1-4-2020 Bank A/c (…

Question 12

Limited Liability Partnerships ("LLP") as per the provisions of section 3 of the Limited Liability Partnership Act, 2008, Limited Liability Partnership shall have at least 2 designated Partners who are individuals. Provided that in case of Limited Liability Partnership in which all the partners are bodies corporate or in which one or more partners are individuals and other corporate, at least one of the designated Partner shall be an individual. Accordingly, the bodies corporate shall act as designated partners. Liability of designated partners: As per section 8 of LLP Act, unless expressly provided otherwise in this Act, a designated partner shall be liable to all penalties imposed on the limited liability partnership for any contravention of those provisions.

Accepted Answer

**Designated Partners in Limited Liability Partnerships - Requirements and Liability**

**Concept of Designated Partners**: As per Section 3 of the Limited Liability Partnership Act, 2008, an LLP must have a minimum of **two designated partners**. Designated partners are those members specifically identified to manage and represent the LLP and to carry out the regulatory functions and obligations of the partnership.

**Requirements for Designation**: The Act mandates that at least two designated partners must be **individuals**. However, the Act provides flexibility for hybrid structures: (1) If all partners are bodies corporate (companies), at least one designated partner must still be an individual. (2) If the LLP has a mix of individual and corporate partners, at least one designated partner must be an individual. This requirement ensures that every LLP has at least one natural person with direct accountability and responsibility.

**Role of Corporate Bodies as Designated Partners**: While bodies corporate (companies, firms registered under Companies Act 2013) may be designated partners, they must designate an **individual as an authorized representative** to act on their behalf. The designated individual must have the legal capacity to carry out the duties and responsibilities. If a corporate body fails to designate a proper individual representative or that individual is incapacitated, the corporate body cannot effectively discharge its duties as a designated partner.

*…

Question 13

The inclusion of dummy workman in the specimen list by the management of MNO Ltd. as noticed by CA Ramesh amounts to

Accepted Answer

**Answer: (C) Inflating cash payment**

Inclusion of a dummy (fictitious) workman in the specimen list results in fraudulent wage payments being made to a non-existent employee. This directly inflates cash payments as salaries are disbursed for work never performed. While this fraudulent act does constitute misappropriation of company funds, the specific mechanism and classification relates to **inflating cash payments** through fictitious payroll entries. This is a common payroll fraud scheme identified during audit procedures.

Question 14

Internal quality engagement, procedures designed to provide evidence of compliance by engagement teams with the firm's quality control policies and procedures

Accepted Answer

**Answer: (B)**

Inspection is the quality control procedure specifically designed to examine selected engagement files and assess whether engagement teams have complied with the firm's quality control policies and procedures. As per SA 220 (Quality Control for an Audit of Financial Statements), inspection involves selecting a sample of completed engagements and reviewing them to provide evidence of compliance with professional standards and internal policies. While monitoring is a broader quality control element encompassing various ongoing processes, inspection is the specific procedure that directly provides evidence of engagement team compliance through examination of engagement work and documentation.

Question 15

The primary responsibility for the prevention and detection of fraud rests with both those charged with governance of the entity and management. Explain. If there remains a deep-seated fraud in the accounts, which in the normal course of audit may not come to light, it will not be considered as failure of audit. Explain.

Accepted Answer

**Part (a): Primary Responsibility for Prevention and Detection of Fraud**

As per **SA 240 – The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements**, the primary responsibility for the prevention and detection of fraud rests with **those charged with governance** and **management** of the entity.

**Role of Management:** Management is responsible for creating a culture of honesty and ethical behaviour. This is achieved by implementing and maintaining an effective **internal control system** designed to prevent and detect fraud. Management must set the tone at the top, establish clear policies regarding ethical conduct, and ensure adequate supervision of employees. They are also responsible for implementing anti-fraud programs, policies, and procedures.

**Role of Those Charged with Governance:** Those charged with governance (such as the Board of Directors or Audit Committee) have oversight responsibility over management. They must ensure that management has put in place appropriate systems and processes to prevent and detect fraud. Their oversight role includes monitoring the effectiveness of internal controls, reviewing financial reporting processes, and ensuring that management is held accountable.

**Why this responsibility rests with them:** These parties have direct authority over the entity's operations, employees, and financial reporting systems. They are in the best position to design, implement, and monitor controls. The auditor, on t…

Question 16

In a study, Databasis collects data from specific originating stations. Data for specific destinations are carried by Databasis in Mumbai Local Train and then delivered to destinations. Based on the above case, where segregation of data is done based on destination station as specified in the source code mentioned at the top of the database, for what method is the best fit to the method adopted by Databasis?

Accepted Answer

**Answer: (A) Batch Processing System**

The scenario describes a **Batch Processing System**. The key indicators are: (1) data is collected from originating stations and accumulated; (2) data is segregated/grouped by destination station; (3) the segregated data is transported together in the Mumbai Local Train (metaphor for batch transmission); and (4) delivery occurs after the entire batch is ready and transported. This is characteristic of batch processing, where data is accumulated over a period, processed as a complete group based on specific criteria (destination), and results are delivered in a delayed manner rather than immediately. Real-time processing would process data instantaneously as it arrives, and online processing typically involves interactive user transactions. The train analogy perfectly illustrates batch processing: just as trains collect multiple passengers from various origins, group them by destination, and deliver them at scheduled times (not immediately), batch processing systems collect, group, and process data in consolidated batches at scheduled intervals.

Question 17

In future, to fight out uncertainties like geo-political influences, which of the following is used by Sriozzy?

Accepted Answer

**Answer: (B)**

Scenario Analysis is the appropriate strategic management tool for fighting out uncertainties like geo-political influences. Scenario Analysis is a forward-looking strategic tool that involves developing multiple plausible future scenarios and preparing contingency strategies for each. It specifically addresses external uncertainties including geo-political tensions, regulatory changes, and market volatility by allowing organizations to:

1) Anticipate diverse future possibilities rather than relying on a single forecast
2) Develop strategies for different contingencies
3) Build organizational resilience against unforeseen external shocks

While SWOT Analysis identifies threats including geo-political ones, it is a static analytical tool. Strategic Audit evaluates current organizational health. ADL Matrix is a portfolio analysis tool. Only Scenario Analysis is specifically designed as a forward-looking uncertainty management tool.

Question 18

While conducting audit against provision of funds, the statutory auditors, M/s Suresh Rana & Associates must check -

Accepted Answer

**Answer: (b)**

When conducting audit against provision of funds, the statutory auditors must verify that expenditure has been incurred strictly for the purpose for which the grant and appropriation was authorized, and that the amount spent does not breach the sanctioned limit. This is the core mandate of provision of funds audit—to ensure that public money granted for specific purposes is used only for those purposes and within authorized amounts. While options (a), (c), and (d) relate to general audit requirements (authorization, constitutional compliance, and regulatory compliance respectively), option (b) directly and comprehensively addresses the specific audit objective against provision of funds: matching expenditure to authorized purpose and amount.

Question 19

With respect to the fraud which has already been reported by The Cost accountant of the company, Mr. Suresh, what is the responsibility of Ms. R.S Associates in this regard?

Accepted Answer

**Answer: (C)**

Even though the cost accountant has detected and reported the fraud to the Central Government, the statutory auditor (Ms. R.S. Associates) has independent responsibilities that cannot be delegated or waived. Under **SA 240 (The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements)**, the auditor must independently respond to identified or suspected fraud regardless of whether others have already reported it.

Option (C) correctly states that Ms. R.S. Associates must: (1) report the fraud in her own capacity, (2) if unsatisfied with management's response, request management to take appropriate remedial actions, and (3) evaluate whether the resulting misstatement is material to the financial statements.

Options (A) and (B) incorrectly suggest the auditor has no responsibility or should not interfere—this violates the principle of auditor independence. Option (D) mentions the wrong person's name and only addresses written representations, which is insufficient.

The statutory auditor cannot rely solely on the cost accountant's report; they must perform independent procedures to assess fraud risk, evaluate its impact on financial statements, and determine appropriate reporting and communication requirements under **Section 143(12) of the Companies Act, 2013**.

Question 20

The approach of Professional Skepticism disallowed by the auditor:

Accepted Answer

**Answer: (D)**

Professional Skepticism is NOT disallowed in any of the mentioned areas. According to SA 200 (Standard on Auditing 200 - Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing), the auditor is required to maintain professional skepticism throughout the planning and performance of the audit. This skepticism must also be applied when evaluating the effect of identified misstatements. Professional skepticism—defined as an attitude including a questioning mind, alertness to conditions indicating possible misstatement, and critical assessment of audit evidence—is mandatory, not optional, at all stages of the audit engagement.

Question 21

The Chartered Accountant has a responsibility to remain independent by taking into consideration as per the practice. The threats to independence and the safeguards available to eliminate the threats. Explain the guiding principles in this connection.

Accepted Answer

**Independence of a Chartered Accountant — Guiding Principles, Threats and Safeguards**

The **Code of Ethics issued by ICAI** (based on the IESBA Code) requires a Chartered Accountant in practice to maintain independence both in **fact** and in **appearance**. This is fundamental to the credibility of an audit or assurance engagement.

**Concept of Independence:**

**Independence of Mind** refers to the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, allowing an individual to act with integrity and exercise objectivity and professional skepticism.

**Independence in Appearance** refers to the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firm's or an audit team member's integrity, objectivity or professional skepticism had been compromised.

**Threats to Independence:**

The ICAI Code of Ethics identifies the following principal threats:

1. **Self-Interest Threat** — A financial or other interest of a member will inappropriately influence his judgment or behaviour. Example: holding shares in the client company, dependency on fees from a single client.

2. **Self-Review Threat** — A member will not appropriately evaluate the results of a previous judgment or service performed by him, which will be relied upon when forming a judgment as part of the current engagement. Example: auditing financial stat…

Question 22

PNP use of mobile phones for its application is representative of the way technology is changing the way we do work. Mobile phones are characterized by creating a certain type of transmission mode. Identify the same.

Accepted Answer

**Answer: (A) Half Duplex** (or equivalently (B), as both options are identical).

Mobile phones are characterized by **Half Duplex** transmission mode. In half duplex communication, data transmission occurs in both directions, but not simultaneously—when one party transmits, the other receives, and they alternate roles. This is distinctly different from full duplex (simultaneous two-way communication) or simplex (one-way only). In a mobile phone conversation, when you speak, your voice is transmitted and the other party receives it; when they speak, the roles reverse. This alternating transmission pattern, despite modern cellular networks' technical capacity for simultaneous transmission via different frequencies, is the characteristic transmission mode representative of mobile phone communication as taught in telecommunications fundamentals.

Question 23

Not all customers can be satisfied, and Sriozzy addressed the same by connecting with the right customers. Arrange the following in the order that Sriozzy followed while pursuing their customer reach out: (I) Market Segmentation (II) Market Target (III) Market Positioning

Accepted Answer

**Answer: (A)**

The correct order for marketing strategy execution is Market Segmentation → Market Targeting → Market Positioning. Sriozzy followed the standard **STP model** to identify and reach the right customers:

(I) **Market Segmentation** comes first: The company divides the total market into distinct, homogeneous groups based on demographics, psychographics, behavior, or other criteria. This identifies different customer clusters with varying needs.

(II) **Market Targeting** follows: From the segments identified, the company selects specific segments that align with its strengths and objectives. Targeting the 'right customers' means choosing segments where the company can compete effectively and create value.

(III) **Market Positioning** is the final step: Within the chosen target segments, the company creates a unique and favorable perception of its offerings in customers' minds, differentiating itself from competitors.

This sequence is logical because you must first understand market diversity (segmentation), then choose which groups to serve (targeting), and finally determine how to appeal to them distinctly (positioning). Attempting to position without knowing your target, or targeting without understanding segments, would be strategically ineffective.

Question 24

When information to be used as audit evidence has been acquired using the work of a management's expert and having regard to the significance of expert's work for the auditor's purposes, explain the considerations guiding the auditor whether or not to rely on the auditor's expert.

Accepted Answer

When information to be used as audit evidence has been acquired from a management's expert, the auditor must evaluate the appropriateness of the expert's work as audit evidence. The considerations guiding whether to rely on the expert's work are outlined in SA 620 - Using the Work of an Auditor's Expert.

**Competence of the Expert**: The auditor must evaluate whether the expert possesses appropriate professional qualifications, specialized knowledge, and relevant experience in the subject matter. The auditor should consider membership in relevant professional bodies, standing in the profession, and adherence to professional standards applicable to the expert's field of practice.

**Objectivity of the Expert**: A critical consideration is the objectivity and independence of the expert. The auditor must identify and evaluate any potential biases, financial interests, or conflicts of interest that might impair the expert's judgment. This includes assessing whether the expert has any direct or indirect financial interest in the entity being audited or in the audit outcome itself.

**Nature, Scope and Objectives of Expert's Work**: The auditor should understand the nature and scope of the expert's engagement, terms of reference, and objectives. The expert's work should be sufficiently detailed and relevant to the auditor's purposes. The auditor must determine whether the scope of the expert's work directly addresses the matters the auditor needs evaluated and whether the expert's…

Question 25

Buy Back of Securities - Mrs. Vikash Infra Ltd. (a limited company) provide the following information as on 31.3.2020:

| Particulars | ₹ |
|---|---|
| Land and Building | ₹ 21,50,000 |
| Plant and Machinery | ₹ 15,00,000 |
| Furniture and Fixtures | ₹ 2,00,000 |
| Trade Receivables | ₹ 5,50,000 |
| Inventories | ₹ 1,80,000 |
| Cash and Cash Equivalents | ₹ 40,000 |
| Share capital: 10,000 Equity Shares of ₹ 10 each fully paid up | ₹ 1,00,000 |
| General Reserve | ₹ 2,50,000 |
| P&L Account (Surplus) | ₹ 1,50,000 |
| 10% Debentures (Secured by floating charge on all assets) | ₹ 20,00,000 |
| Unsecured Loans | ₹ 8,00,000 |
| Trade Payables | ₹ 1,20,000 |

On 31st April, 2020 the Company announced the buy back of 15,000 of its equity shares @ ₹ 10 per share. For this purpose, it sold as an i…

Accepted Answer

**Buy-Back of Securities — Mrs. Vikash Infra Ltd.**

**Note on Question Data:** The question contains apparent inconsistencies — (i) the balance sheet does not balance as given (assets ₹46,20,000 vs. liabilities ₹34,20,000, with an unaccounted investment of ₹12,00,000 implied); (ii) 31st April does not exist; (iii) 15,000 shares cannot be bought back when only 10,000 shares exist. The answer below applies the correct legal framework and provides journal entries on a corrected/illustrative basis.

**Step 1: Check Legal Conditions under Section 68 of the Companies Act, 2013**

**Condition 1 — Maximum 25% of Paid-up Capital and Free Reserves:**
Paid-up Share Capital: ₹1,00,000; General Reserve: ₹2,50,000; P&L Surplus: ₹1,50,000; Total = ₹5,00,000. Maximum permissible buy-back = 25% × ₹5,00,000 = **₹1,25,000**. Proposed buy-back = 15,000 × ₹10 = **₹1,50,000**. Since ₹1,50,000 > ₹1,25,000, **this condition is NOT satisfied**.

**Condition 2 — Post Buy-back Debt-Equity Ratio (≤ 2:1):**
Total Debt (10% Debentures + Unsecured Loans) = ₹20,00,000 + ₹8,00,000 = ₹28,00,000. Post buy-back equity = ₹5,00,000 − ₹1,50,000 = ₹3,50,000. D/E ratio = ₹28,00,000 ÷ ₹3,50,000 = **8:1**, far exceeding the 2:1 ceiling. Notably, even before buy-back the ratio is 5.6:1, making any buy-back impossible on this ground.

**Condition 3 — Shares Outstanding:**
The company has only **10,000 equity shares** in issue. It cannot buy back 15,000 shares. This renders the proposal fundamentally invalid.

**Conclus…

Question 26

Which part of government audit covers the scrutiny of the expenditure incurred on the maintenance of assets acquired by the company which is considered as infectious and available by SA Suresh Rana -

Accepted Answer

**Answer: (a)**

Proprierty Audit covers the scrutiny of expenditure incurred on maintenance of assets to examine whether such expenditure is proper, necessary, legal, and in accordance with established practices and the spirit of law. Propriety Audit ensures that transactions are honest, faithful, and consistent with rules, procedures, and agreements applicable to the organization. The examination of maintenance expenditure on company assets to verify its propriety, reasonableness, and compliance with authorized norms falls within the scope of Propriety Audit.

Performance Audit (option d) focuses on the 3 Es—economy, efficiency, and effectiveness—rather than propriety per se. Audit against Provision of Funds (option b) concerns the availability of budgetary provisions, while Audit of sanctions (option c) verifies authorization limits. Propriety Audit is the appropriate classification for scrutinizing whether expenditure on asset maintenance is proper and justified.

Question 27

_________________ refers to events or conditions that create an incentive or pressure to commit fraud or provide an opportunity to commit fraud

Accepted Answer

**Answer: (C)**

The blank refers to **Incentives/Pressures**. These are events or conditions that create the motivation and pressure for individuals to commit fraud or provide the opportunity to do so. This concept is central to the fraud triangle used in auditing, which identifies three essential elements for fraud: (1) Incentives/Pressures—the reasons or circumstances motivating fraudulent conduct; (2) Opportunities—conditions allowing fraud to occur; and (3) Attitudes/Rationalization—the mindset justifying the wrongdoing. Incentives and pressures include financial difficulties, personal vices, external pressures (creditors, loans), and competitive or performance pressures. These conditions create the environment where fraud becomes possible and attractive to potential perpetrators.

Question 28

in which the auditor selects the sample without following a structured Technique

Accepted Answer

**Answer: (C)**

Haphazard selection is a non-statistical sampling method where the auditor selects items without following any structured or systematic technique. The auditor picks items in an apparently random manner based on intuition rather than a predetermined method. Unlike statistical sampling methods (such as Monetary Unit Sampling) or systematic selection approaches, haphazard selection involves no specific pattern, stratification, or structured framework in the selection process.

Question 29

The auditor's determination of materiality is a matter of professional judgment, and is affected by the auditor's perception of the financial information needs of users of the financial statements.

Accepted Answer

**Part (a): Auditor's Assumptions About Users of Financial Statements**

When determining materiality, the auditor operates on the following key assumptions about users of financial statements:

**Reasonable Knowledge**: Users are assumed to have a reasonable understanding of accounting, financial matters, and business activities relevant to the entity. However, they are not assumed to be experts in all technical accounting areas.

**Holistic Reading**: Users will read the financial statements as a whole, including all notes, disclosures, and supplementary information. The auditor does not assume users will focus on isolated figures without considering the complete context.

**Economic Decision-Making**: Users rely on financial statements primarily to make economic decisions—such as investment, lending, or dividend decisions. The information provided is expected to be relevant and useful for these purposes.

**Professional Judgment Recognition**: Users understand that the preparation of financial statements involves the application of accounting policies, estimates, and professional judgments by management. They recognize the inherent limitations in financial reporting.

**Varied Information Needs**: While users have differing specific information requirements, they share a common need for information about the entity's financial position, performance, and cash flows.

These assumptions guide the auditor in setting an appropriate level of materiality and determining the natur…

Question 30

The coding scheme created by Mumbai Databasis is a good example of _______.

Accepted Answer

**Answer: (D)**

A coding scheme created by an organization like Mumbai Databasis is a clear example of **Organizational Knowledge**. Organizational knowledge refers to knowledge assets and information systems that exist within and are owned by the organization, used to accomplish its objectives and operations. A coding scheme is a documented, standardized system developed and maintained by the organization for systematic classification, data management, or operational purposes. Unlike tacit knowledge (which is personal, experiential, and difficult to articulate), a coding scheme is explicit and documented. It is organizational because it is created by the organization, belongs to the organization, and is utilized across the organization's functions.

CA Inter Corp Laws

Drill 5 questions from this paper — instant grading

Worked Solution

Write it like this

1The skeleton

2Examiner-rewarded phrases

3Common trap