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Past papers/ Audit & Ethics/ November 2014
Paper 16 Qs
Suggested Answers · November 2014

CA Inter Audit & Ethics

This page contains all 16 questions from the CA Inter Auditing & Ethics Suggested Answers for the November 2014 attempt cycle, sourced from VSI Jaipur.

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Q.1(a) 05 marks medium Finance lease classification and unearned finance income com ⚡ Try this Q →
A machine having expected useful life of 6 years, is leased for 4 years. Both the cost and the fair value of the machinery are ₹7,00,000. The amount will be paid in 4 equal instalments and at the termination of lease, lessor will get back the machinery. The unguaranteed residual value at the end of the 4th year is ₹70,000. The IRR of the investment is 10%. The present value of annuity factor of ₹1 due at the end of 4th year at 10% IRR is 3.169. The present value of ₹1 due at the end of 4th year at 10% rate of interest is 0.683. State with reasons whether the lease constitutes finance lease and also compute the unearned finance income.
CTTP

Worked Solution

✓ Verified

Classification of Lease:

Under AS 19 – Leases, a lease is classified as a finance lease if it transfers substantially all the risks and rewards incidental to ownership of an asset. The following indicators confirm finance lease classification in this case:

1. Lease period as a proportion of useful life: The lease term is 4 years out of a total useful life of 6 years, i.e., 4/6 = 66.67%. Since this exceeds 50%, the lease covers the major part of the economic life of the asset — a primary indicator of a finance lease under AS 19.

2. Present value of MLP test: The present value of minimum lease payments (MLP) at the inception of the lease equals the fair value of the asset (₹7,00,000), confirming that substantially all risks and rewards are transferred to the lessee.

Conclusion: The lease constitutes a Finance Lease as per AS 19.

---

Computation of Annual Lease Instalment:

Since the unguaranteed residual value (URV) of ₹70,000 is not included in MLP, the fair value equation is:

Fair Value = MLP × PV Annuity Factor + URV × PV Factor

₹7,00,000 = R × 3.169 + ₹70,000 × 0.683

₹7,00,000 = R × 3.169 + ₹47,810

R × 3.169 = ₹6,52,190

Annual Instalment (R) = ₹6,52,190 ÷ 3.169 = ₹2,05,803 (approx.)

---

Computation of Unearned Finance Income:

Under AS 19, the lessor records the lease as a receivable equal to the net investment in the lease. The unearned finance income is the difference between the gross investment and the net investment.

Particulars₹
Total MLP (₹2,05,803 × 4)8,23,212
Add: Unguaranteed Residual Value70,000
Gross Investment in the Lease8,93,212
Less: Net Investment (Fair Value of Asset)(7,00,000)
Unearned Finance Income₹1,93,212

The unearned finance income to be recognised over the lease term is ₹1,93,212. This income is allocated across the 4 years using the actuarial method (constant periodic rate of return on the net investment outstanding).

AS 19 – Leases (Accounting Standard issued by ICAI)
PLAN

Write it like this

Time target 9 min

1The skeleton

- Lead with the AS 19 classification heading first — examiners are scanning for 'Finance Lease / Operating Lease' in your opening line; burying it after calculations kills your presentation marks.
- State BOTH indicators explicitly — lease period % (4/6 = 66.67%) AND PV of MLP = fair value; one indicator alone looks incomplete even if sufficient, examiners reward exhaustive listing.
- Show the instalment formula before plugging numbers — write Fair Value = R × PVF(annuity) + URV × PV(single) first, then substitute; this signals you know WHY URV is excluded from MLP, which is the conceptual crux.
- Use a table for Gross vs Net Investment — never write unearned finance income as a running sentence calculation; the tabular format (Gross Investment → Less Net Investment → Unearned Finance Income) is exactly how ICAI model answers present it and earns full format marks.
- End with one closing sentence naming the allocation method — 'allocated using the actuarial method at a constant periodic rate of return on net investment outstanding' signals you know what happens AFTER computation, which separates 4/5 answers from 5/5.

2Examiner-rewarded phrases

“transfers substantially all the risks and rewards incidental to ownership”“gross investment in the lease being the aggregate of minimum lease payments and unguaranteed residual value”“unearned finance income is the difference between the gross investment and the net investment in the lease”

3Common trap

Don't fall for this

Heads up — most students include the unguaranteed residual value (₹70,000) inside MLP when computing the instalment, which inflates R and blows the entire calculation. URV is NOT part of MLP by definition under AS 19; it goes separately as URV × PV factor on the fair value side of the equation.

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Q.1(b) 05 marks medium Intangible asset amortization under AS 26 ⚡ Try this Q →
A company is showing an intangible asset at ₹88 lakhs as on 01.04.2013. This asset was acquired for ₹120 lakhs on 01.04.2009 and the same was available for use from that date. The company has been following the policy of amortization of the intangible assets over a period of 15 years on straight line basis. Comment on the accounting treatment of the above with reference to the relevant Accounting Standard.
CTTP

Worked Solution

✓ Verified

Relevant Standard: AS 26 – Intangible Assets

Verification of Carrying Amount as on 01.04.2013:
The company acquired the intangible asset for ₹120 lakhs on 01.04.2009 and has been amortizing it over 15 years on straight-line basis. Annual amortization = ₹120/15 = ₹8 lakhs. Over 4 years (01.04.2009 to 01.04.2013), accumulated amortization = ₹32 lakhs. Hence, the carrying amount of ₹88 lakhs (₹120 – ₹32) is arithmetically correct under the company's stated policy.

Issue: Conflict with AS 26 Presumption on Useful Life:
As per paragraph 63 of AS 26, there is a rebuttable presumption that the useful life of an intangible asset will not exceed 10 years from the date the asset is available for use. The company's policy of amortizing over 15 years rebutts this presumption. Such a rebuttal is permissible only if the enterprise has reliable evidence that the useful life exceeds 10 years and it makes appropriate disclosures explaining the factors that determined the longer useful life.

Consequences if Presumption Cannot be Rebutted:
If the company cannot provide reliable evidence to justify a 15-year useful life, the asset must be amortized over 10 years. In that case:
- Correct annual amortization = ₹120/10 = ₹12 lakhs
- Accumulated amortization over 4 years = ₹48 lakhs
- Correct carrying amount as on 01.04.2013 = ₹120 – ₹48 = ₹72 lakhs

The intangible asset is currently overstated by ₹16 lakhs (₹88 – ₹72), and an additional charge of ₹16 lakhs needs to be recognized in the Statement of Profit and Loss.

Conclusion:
The accounting treatment followed by the company is not in accordance with AS 26 unless it can rebut the 10-year presumption with reliable evidence and makes adequate disclosures as required. If the presumption stands unrebutted, the useful life must be restricted to 10 years, the carrying amount restated to ₹72 lakhs, and the deficit of ₹16 lakhs charged to the Profit and Loss Account immediately. The auditor should also qualify the report if this adjustment is not made.

Paragraph 63 of AS 26 – Intangible Assets (ICAI)Paragraph 65 of AS 26 – Intangible Assets (disclosure requirements when useful life exceeds 10 years)
PLAN

Write it like this

Time target 9 min

1The skeleton

- Start with the Standard citation — write 'AS 26 – Intangible Assets, Para 63' in your very first line so the examiner ticks the reference box before reading anything else.
- Verify the carrying amount first — show the arithmetic (₹120 ÷ 15 × 4 = ₹32 lakh accumulated, so ₹88 lakh is correct under company policy) because this signals you read the question carefully and sets up the conflict cleanly.
- Name the rebuttable presumption explicitly — use the exact phrase 'rebuttable presumption that useful life does not exceed 10 years' and flag that 15 years breaches it; this single phrase is worth 1–2 marks on its own.
- Split into two scenarios — first 'if rebuttal is valid: disclose factors + evidence'; second 'if rebuttal fails: restate to 10 years' — examiners love a conditional structure because it shows you know the rule isn't black-and-white.
- Show the restatement numbers explicitly — ₹120 ÷ 10 × 4 = ₹48 lakh, carrying amount = ₹72 lakh, overstatement = ₹16 lakh, charged to P&L — your conclusion must have a rupee figure or it feels incomplete.
- End with the audit/disclosure consequence — one line: 'auditor should qualify if adjustment not made' — this is a 5-mark question, that extra line is what separates a 4 from a 5.

2Examiner-rewarded phrases

“there is a rebuttable presumption that the useful life of an intangible asset will not exceed 10 years from the date the asset is available for use”“the enterprise should disclose the factors that played a significant role in determining the useful life of the intangible asset”“the carrying amount of the intangible asset is overstated and the excess should be charged to the Statement of Profit and Loss”

3Common trap

Don't fall for this

Heads up — most students write 'the company is wrong to use 15 years' as a flat statement and forget that AS 26 allows it IF reliable evidence exists; if you don't mention the conditional rebuttal angle, you lose the nuance marks even if your numbers are perfect.

🎯 Practice more Intangible asset amortization under AS 26 questions →
Q.1(c) 05 marks medium Forward contract profit/loss recognition on foreign currency ⚡ Try this Q →
Stem Ltd. purchased a Plant for US$ 30,000 on 30th November, 2013 payable after 6 months. The company entered into a forward contract for 6 months @ ₹62.15 per dollar. On 30th November, 2013, the exchange rate was ₹60.75 per dollar. How will you recognise the profit or loss on forward contract in the books of Stem Ltd. for the year ended 31st March, 2014?
CTTP

Worked Solution

✓ Verified

Applicable Standard: AS 11 – The Effects of Changes in Foreign Exchange Rates

When a forward exchange contract is entered into to hedge a recognised foreign currency liability, the accounting treatment under AS 11 requires the following:

Step 1 – Recording the underlying transaction (30th November, 2013)
The Plant is recorded at the spot rate on the date of purchase: US$ 30,000 × ₹60.75 = ₹18,22,500. A corresponding creditor for US$ 30,000 is also created at the same rate.

Step 2 – Identifying the Premium/Discount on the Forward Contract
The difference between the forward rate and the spot rate at the inception of the contract is the forward premium or discount.

Forward Rate: ₹62.15 per USD
Spot Rate on 30th November, 2013: ₹60.75 per USD

Since forward rate > spot rate, the dollar is at a premium.

Total Premium = (₹62.15 – ₹60.75) × US$ 30,000 = ₹1.40 × 30,000 = ₹42,000

This premium represents an additional cost of hedging and is not capitalised to the asset; it is treated as a revenue expense amortised over the life of the forward contract.

Step 3 – Amortisation of Premium for the year ended 31st March, 2014
Contract period: 30th November, 2013 to 31st May, 2014 = 6 months
Period falling in current year: 1st December, 2013 to 31st March, 2014 = 4 months

Premium to be recognised as expense in the year ended 31st March, 2014:
= ₹42,000 × (4/6) = ₹28,000 (Loss / Expense)

The remaining ₹14,000 (= ₹42,000 × 2/6) is carried as a Prepaid Expense / Deferred Forward Premium in the Balance Sheet as at 31st March, 2014, to be charged in the next accounting year.

Conclusion: Stem Ltd. shall recognise a loss (expense) of ₹28,000 on account of forward contract premium in its Profit & Loss Account for the year ended 31st March, 2014, and defer ₹14,000 to the subsequent period.

AS 11 – The Effects of Changes in Foreign Exchange Rates (issued by ICAI)
PLAN

Write it like this

Time target 9 min

1The skeleton

- Name AS 11 upfront — write 'As per AS 11 – The Effects of Changes in Foreign Exchange Rates' in your very first line, because examiners are trained to tick the standard before reading anything else.
- Record the asset at spot rate and state the figure explicitly — write '30,000 × ₹60.75 = ₹18,22,500' so the examiner sees you know the base; this also anchors your premium calculation that follows.
- Calculate total premium in one clean line — '(Forward Rate – Spot Rate) × Units = (₹62.15 – ₹60.75) × 30,000 = ₹42,000' and label it 'premium' not 'difference', because ICAI's vocabulary is specific here and examiners match words.
- Apportion using a fraction with dates written out — show '4/6 months (Dec 2013 – Mar 2014)' explicitly; a bare fraction like '4/6' without dates looks like guesswork and risks partial credit.
- Split the ₹42,000 into two destinations with account names — '₹28,000 → P&L as expense' and '₹14,000 → Prepaid Expense / Deferred Forward Premium in Balance Sheet'; naming both accounts is where the last mark usually sits.

2Examiner-rewarded phrases

“the premium or discount on a forward exchange contract shall be amortised as income or expense over the life of the contract”“the difference between the forward rate and the spot rate at the date of the transaction is recognised as income or expense over the period of the contract”“the exchange difference on the forward contract is not capitalised to the asset but treated as revenue expense”

3Common trap

Don't fall for this

Most students calculate ₹42,000 correctly but then charge the full amount to P&L — forgetting to split 4 months vs 2 months because the year-end falls mid-contract. That single oversight costs 2 marks, and there's no partial credit if you don't show the deferred ₹14,000 separately.

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Q.1(d) 05 marks medium Contingent liability — patent infringement dispute under AS ⚡ Try this Q →
WZW Ltd. is in dispute involving allegation of infringement of patents by a competitor company who is seeking damages of a huge sum of ₹1000 Lakhs. The directors are of the opinion that the claim can be successfully resisted by the company. How would you deal the same in the Annual Accounts of the company?
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Q.2 16 marks very hard Partnership dissolution — sale of business to company ⚡ Try this Q →
P and Q were carrying on business sharing profits and losses equally. The firm's Balance Sheet as at 31.12.2013 was: Liabilities: Capital Accounts — P ₹1,50,000; Q ₹1,30,000 (Total ₹2,80,000); Sundry Creditors ₹80,000; Bank Overdraft ₹45,000; Profit & Loss A/c ₹30,000; Drawings Account — P ₹9,000; Q ₹7,000 (Total ₹16,000). Total ₹4,05,000. Assets: Plant ₹1,60,000; Building ₹48,000; Debtors ₹75,000; Stock ₹70,000; Joint Life Policy ₹6,000. Total ₹4,05,000. The operations of the business were carried on till 30.06.2014. P & Q both withdrew in equal amount half the amount of profit made during the current period of six months after charging depreciation at 10% per annum on plant and after writing off 5% on building. During the current period of six months, creditors were reduced by ₹20,000 and bank overdraft by ₹5,000. The joint life policy was surrendered for ₹6,000 before 30th June 2014. Stock was valued at ₹84,000 and debtors at ₹68,000 on 30th June 2014. The other items remained the same as at 31.12.2013. On 30.06.2014, the firm sold its business to PQ Ltd. The value of goodwill was estimated at ₹1,30,000 and the remaining assets were valued on the basis of the balance sheet as on 30.06.2014. PQ Ltd. paid the purchase consideration in equity shares of ₹10 each. You are required to prepare:
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Q.3(a) 00 marks easy Employee stock options — journal entries under ESOP ⚡ Try this Q →
X Ltd. granted 500 stock options to its employees on 1.4.2011 at ₹50 per share. The vesting period is 2½ years and the maximum exercise period is one year. Market price on that date is ₹140 per share. All the options were exercised on 30.06.2014. Pass journal entries giving suitable narrations, if the face value of equity share is ₹10 per share.
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Q.3(b) 00 marks easy Partly convertible debentures — journal entries ⚡ Try this Q →
Venus Limited recently made a public issue in respect of which the following information is available: (i) No. of partly convertible debentures issued 4,00,000; face value and issue price of ₹100 per debenture. (ii) Convertible portion per debenture — 80%, date of conversion — on expiry of 7 months from the date of closing of issue. (iii) Date of closure of subscription list — 01.06.2013, date of allotment — 01.07.2013. Rate of interest on debentures 10% p.a. payable from the date of allotment. Value of equity share for the purpose of conversion — ₹40 (Face value ₹10). (iv) Underwriting commission — 3%. (v) No. of debentures applied for 3,00,000. (vi) Interest payable on debentures — half yearly on 30th September and 31st March. Write relevant journal entries for all transactions arising out of the above during the year ended on 31st March, 2014 (including cash and bank entries).
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Q.4 16 marks very hard Capital reduction and reorganisation — journal entries ⚡ Try this Q →
The Balance Sheet of X Ltd. as at 31st March, 2014 was as follows: Equity and Liabilities: Shareholder's Fund — Share Capital: (a) 40,000 equity shares of ₹100 each fully paid ₹40,00,000; (b) 20,000, 10% preference shares ₹100 each fully paid ₹20,00,000. Reserve & Surplus: (a) Securities Premium Account ₹1,50,000; (b) Profit & Loss Account (₹23,00,000). Non-Current Liabilities — 7% Debentures of ₹100 each ₹4,00,000. Current Liabilities — Creditors ₹10,00,000; Loan from Director ₹2,00,000. Total ₹54,50,000. Assets: Non-Current Assets — Fixed Assets: Land & Building ₹20,00,000; Plant & Machinery ₹12,00,000 (Total ₹32,00,000). Intangible Assets — Goodwill ₹4,00,000. Current Assets — Debtors ₹12,00,000; Stock ₹5,00,000; Cash at Bank ₹18,50,000. Total Assets ₹54,50,000. No Dividend on Preference Shares has been paid for last 5 years. The following scheme of reorganisation was duly approved by the Court: (i) Each equity share to be reduced to ₹25. (ii) Each existing Preference Share to be reduced to ₹75 and then exchanged for one new 13% Preference Share of ₹50 each and one Equity Share of ₹25 each. (iii) Preference Shareholders have forgone their right for dividend for four years. One year's dividend at the old rate is however, payable to them in fully paid equity shares of ₹25. (iv) The Debenture Holders be given the option to either accept 90% of their claims in cash or to convert their claims in full into new 13% Preference Shares of ₹50 each issued at par. One-fourth (in value) of the Debenture Holders accepted Preference Shares for their claims. The rest were paid in cash. (v) Contingent Liability of ₹2,00,000 is payable which has been created by wrong action of one Director. He has agreed to compensate this loss out of the loan given by the Director to the Company. (vi) Goodwill does not have any value in the present. Decrease the value of Plant & Machinery, Stock and Debtors by ₹3,00,000; ₹1,00,000 and ₹2,00,000 respectively. Increase the value of Land & Building to ₹25,00,000. (vii) 50,000 new Equity Shares of ₹25 each are to be issued at par payable in full on application. The issue was underwritten for a commission of 4%. Shares were fully taken up. (viii) Total expenses incurred by the Company in connection with the Scheme excluding Underwriting Commission amounted to ₹20,000. Pass necessary Journal Entries to record the above transactions.
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Q.5(a) 08 marks hard Insurance company revenue account preparation ⚡ Try this Q →
Metro General Insurance earned the following data for the year ended 31st March, 2014: Direct Business Reinsurance Premium received ₹75,25,000 ₹8,25,000 Premium paid — ₹4,90,000 Claims paid during year ₹49,70,000 ₹5,10,000 Claims payable: 1st April 2013 ₹6,85,000 ₹95,000 31st March 2014 ₹7,38,000 ₹70,000 Claims received — ₹3,95,000 Claims receivable: 1st April 2013 ₹75,000 31st March 2014 ₹1,25,000 Expenses of Management ₹2,90,000 Commission: On insurance accepted ₹1,60,000 ₹15,000 On insurance ceded ₹18,000 Additional information: (1) Expenses of Management include ₹45,000 Surveyor's fees and ₹55,000 Legal expenses for settlement of claims. (2) Reserve for unexpired risk is to be maintained @ 40%. The balance of Reserve for unexpired risk as on 01.04.2013 was ₹28,40,000. You are required to make the Revenue Account for the year ended 31st March, 2014.
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Q.5(b) 08 marks hard Bank capital adequacy — Tier I, Tier II, risk weighted asset ⚡ Try this Q →
A commercial bank has the following capital funds and assets. Segregate the capital funds into Tier I and Tier II capitals. Find out the risk adjusted asset and risk weighted asset ratio. State your observation on the risk weighted asset ratio. Particulars (₹ in crores): Equity Share Capital: 400.00 Statutory Reserve: 250.00 Capital Reserve (of which ₹18 crores were due to revaluation of assets and the balance due to sale of capital assets): 86.00 Assets: Cash Balance with RBI: 12.00 Balance with other Banks: 20.00 Other Investments: 40.00 Loans & Advances: (i) Guaranteed by Government: 14.50 (ii) Others: 5,465.00 Premises Furniture & Fixtures: 74.00 Off Balance Sheet Items: (i) Guarantees and other obligations: 700.00 (ii) Acceptances, endorsements and letter of credit: 4,900.00
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Q.6(a) 08 marks hard Branch accounting — goods invoiced at invoice price, debtors ⚡ Try this Q →
LMN is having a branch at Mumbai. Goods are invoiced to the branch at 25% profit on sale. Branch has been instructed to send all cash daily to head office. All expenses are paid by head office except petty expenses, which are met by the Branch. From the following particulars, prepare branch account in the books of head office: Particulars / Amount: Stock as on 1st April, 2013 (Invoice Price): ₹40,000 Sundry Debtors as on 1st April, 2013: ₹25,000 Cash in hand as on 1st April, 2013: ₹1,000 Office furniture as on 1st April, 2013: ₹4,000 Goods invoiced from head office (invoice price): ₹1,80,000 Goods return to head office: ₹6,000 Goods return by debtors (at invoice price): ₹1,250 Cash received from Debtors: ₹65,000 Cash sales: ₹1,20,000 Credit sales: ₹70,000 Discount allowed to debtors: ₹300 Expenses paid by head office: Salary, Staff Welfare, Telephone Expenses (amounts given in original) Other Misc. Expenses paid by branch: ₹700 Stock as on 31st March, 2014: ₹35,000 Depreciation to be provided on branch furniture: 10% p.a.
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Q.6(b) 08 marks hard Departmental accounts with inter-departmental transfers at c ⚡ Try this Q →
Mega Ltd. has two departments, A and B. From the following particulars, prepare departmental Trading A/c and General Profit & Loss Account for the year ended 31st March, 2014: Particulars Dept A Dept B Opening stock as on 01.04.2013 (at cost) ₹70,000 ₹54,000 Purchases ₹3,92,000 ₹2,98,000 Carriage Inward ₹6,000 ₹9,000 Wages ₹54,000 ₹36,000 Sales ₹5,72,000 ₹4,60,000 Purchased Goods Transferred: By Department B to A ₹50,000 — By Department A to B — Finished Goods Transferred: By Department B to A ₹1,50,000 By Department A to B ₹1,75,000 Closing Stock — Purchased Goods: ₹24,000; Finished Goods: ₹1,02,000 Purchased goods have been transferred mutually at their respective departmental purchase cost and finished goods at departmental market price, and 30% of the closing finished stock with each department represents finished goods received from the other department.
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Q.7(b) 04 marks medium Non-Integral Foreign Operation indicators under AS 11 ⚡ Try this Q →
What are the indicators of Non-Integral Foreign Operation (NIFO)?
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Q.7(c) 04 marks medium Weighted average number of shares — date of inclusion; Poten ⚡ Try this Q →
In the following list of shares issued for the purpose of calculation of weighted average number of shares, from which date is the weight to be considered: (i) Equity Shares issued in exchange of cash, (ii) Equity Shares issued as a result of conversion of a debt instrument, (iii) Equity Shares issued in exchange for the settlement of a liability of the enterprise, (iv) Equity Shares issued for rendering of services to the enterprise, (v) Equity Shares issued in lieu of interest and/or principal of another financial instrument, (vi) Equity Shares issued as consideration for the acquisition of an asset other than in cash. Also define Potential Equity Share.
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Q.7(d) 04 marks medium Bank income recognition on performing assets and NPAs ⚡ Try this Q →
Find out the income to be recognised by ABC Bank Ltd. for the year ended 31st March, 2014 in respect of interest on advances (₹ in lakhs) as detailed below: Performing Asset NPA Interest Interest Interest Interest earned received earned received Term loan 280 180 170 20 Cash credits and overdrafts 1700 1630 310 48 Bills purchased/discounted 400 400 180 70
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Q.7(e) 04 marks medium Electricity company — accounting for consumer contributions ⚡ Try this Q →
State any four alternative accounting treatments of the fund received by an Electricity Company from consumer towards capital expenditure/service line contributions.
Keep reading free — every worked solution + bare-Act citation for Electricity company — accounting for consumer contributions towards capital expenditure
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