Cap II Group I RTP June 2024

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

(CAP-II)
Revision Test Paper

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

Contents
Paper 1 - Advanced Accounting ....................................................................................... 3
Paper 2 - Audit & Assurance .......................................................................................... 41
Paper 3 - Corporate and Other Laws ............................................................................ 59

Paper 1
Advanced Accounting

Section 1: Questions
Chapter: Departmental Accounting
Question No. 1:
Dugar Ltd. has three departments-Spinning, Sewing and Selling. From the following information
provided, prepare Departmental Trading, Profit and Loss Account for the year ending 31.03.2080.
Particulars Selling Sewing Spinning
Stock (1.4.2079) 190,000 80,000 50,000
Direct Materials - 200,000 160,000
Direct Labor - 100,000 90,000
Stock (31.3.2080) 50,000 200,000 50,000
Turnover 800,000 - -
Floor Space (sq. mtr.) 200 300 500
Staffs employed 25 50 75
Spinning Department transfers goods to Sewing Department at 20% above the cost. Similarly,
Sewing Department transfers goods to Selling Department by adding margin of 20% on sales.
Miscellaneous income and space sublet income of Spinning Department amounts to Rs. 150,000
and other commonly consumed expenses of all departments amount to : Salary of Rs. 180,000 and
Rent of Rs. 60,000. Opening stock reserve on stocks lying with Sewing and Selling Departments
are 20,000 and 30,000 respectively.
Chapter: Branch Accounting

Question No. 2:
CG Ltd. opened a Branch at Dang on 1st April, 2022. The goods were sent to the Branch Office at
125% cost price of the head office. Following particulars is available with respect to Dang Branch.
Particulars Amount
Goods Sent to Dang Branch (H.O Cost) 700,000
Cash Sales 312,500
Credit Sales 437,500
Cash collected from Debtors 390,000
Discounts allowed 10,000
Returns from Debtors 12,500
Cash sent to branch for:
Wages 7,500
Freight 27,500
Other Expenses 15,000 50,000
Spoiled cloth in bales written off at invoice price 1,250
Closing Stock (Invoice Price) 138,750

Requirements:
i) Dang Branch Stock A/c
ii) Dang Branch Debtors A/c
iii) Dang Branch Adjustment A/c
iv) Dang Branch P/L A/c
v) Dang Branch Cash A/c
Question No. 3:
M/s Dilip & Co. commenced business on 1.4.2022 with Head Office at Kathmandu and a Branch
at Pokhara. Head Office makes exclusive purchase and sends goods to Pokhara Branch after
processing. Goods were sent to Pokhara branch by adding margin of 10% over the processed cost.
Both the Head office and Branch makes gross profit of 25% over their respective cost incurred.
Trial Balance as on 31.03.2023 stood as follows:
Head Office Branch

Particulars
Debit Credit Debit Credit
Capital - 155,000 - -
Drawings 27,500 - - -
Purchases 984,750 - - -
Processing Cost 25,250 - - -
Sales - 640,000 - 410,000
Goods sent to Branch - 462,000 - -
Admin expenses 69,500 - 7,500 -
Selling expenses 25,000 - 3,100 -
Debtors 154,800 - 56,800 -
Branch A/c 194,900 - - -
Creditors - 300,700 - 5,400
Bank Balance 76,000 - 38,750 -
Head Office account - - - 130,750
Goods received from H.O. - - 440,000 -
Total 1,557,700 1,557,700 546,150 546,150
Adjustments:
a) Pokhara Branch had remitted Rs. 42,150 to Head office, but the same was not received by H.O.
till the end of reporting date.
b) There was a shortage of stock at Branch amounting to Rs. 10,000 (selling price of Branch).
c) Closing stock of unprocessed goods at H.O. amounted to Rs. 50,000.
d) Difference in Goods sent by Head office and goods received represents goods remaining in
transit.
Requirement
Trading and Profit/Loss account of Head office and Branch in columnar form for the year ended
31.3.2023. [round up the figures (in decimal) in nearest rupee]

Chapter: Hire Purchase Transaction

Question No. 4:
M/s Akbar bought 6 TV sets from AB electronics @ Rs. 57,500 each. M/s Akbar recorded assets
in its book and charged depreciation @ 20% p.a. on written down basis. Interest rate is charged @
10% p.a. The terms of payment under hire purchase were as follows:
Down Payment 150,000
1st Instalment at the end of Year 1 79,500
2nd Instalment at the end of Year 2 73,500
3rd Instalment at the end of Year 3 82,500
M/s Akbar failed to pay the 3rd instalment due to which vendor repossessed 2 TV sets leaving 4
other sets with Akbar and adjusted the value of repossessed goods with outstanding balance.
Repossessed goods were mutually agreed to be taken over on the basis of 30% depreciation per
annum on written down basis. Hire vendor incurred repairing expenses of Rs. 7,500 and sold them
at Rs. 52,500.
Requirement:
i) Hire Assets A/c and Hire Vendor A/c in the books of Hire Purchaser
ii) Goods Repossessed A/c in the books of Hire Vendor
Chapter: Accounting for Lease
Question No. 5:
Hari Charan ltd. leased Machine (having useful life of 5 Years) to Ram Charan, under the
following terms of lease payment:
Initial Payment at the time of lease agreement 200,000
Lease Rent at the end of Year 1 220,000
Applicable Rate of Interest is 10% p.a.
Find
i) Value of leased assets to be initially recognized in the books of Ram Charan
ii) Finance Charges to be transferred to Income Statement each year.

Chapter: Insurance Claim

Question No. 6:
A fire occurred in the premises of Bad Luck Co. on 30th Poush 2079. From the following particulars,
you are required to ascertain the amount of claim to be filed with the insurance company for the
loss of stock.
Stock as per Balance Sheet as at 32nd Ashadh 2079 99,000

Purchases (including purchase of furniture Costing Rs. 40,000) 180,000
Carriage inwards up to date of fire 47,000
Sales (including goods sold on approval basis amounting Rs 49,500). No
confirmation had been received in respect of two-thirds of such Goods sold on 275,000
approval basis.
Sales value of goods drawn by proprietor 15,000
Cost of goods sent to consignee on 15th Poush 2079 lying unsold with them 16,500
Sales value of goods distributed as free samples 1,500
Stock as on 31st Ashad 2078 100,000
Purchases during financial year -2078-79 100,000
Sales during financial year – 2078-79 125,000
The selling price had been increased by 20% with effect from 1st Shrawan 2079. For
valuing the stocks for the Balance Sheet as at 32nd Ashadh 2079, Rs. 1,000 had been written
off in respect of a slow moving item, the cost of which was Rs. 5,000. Before Poush end of
FY 79-80, a portion of those goods were sold at a loss of Rs. 500 on the original cost of Rs.
2,500. The remainder of the stock was now estimated to be worth the original cost.
Subject to the above exceptions, the gross profit had remained at a uniform rate throughout.
The value of goods salvaged was estimated at Rs. 20,000. The enterprise had taken an
insurance policy for Rs. 70,000 which was subject to the average clause.
Chapter: Investment Accounting

Question No. 7:
On 1st Bhadra 2076, Crystal Ltd. Purchased 13.5% Convertible Debentures in Clear Ltd. of
face value of Rs. 10,00,000 @ 105 ex-interest. Additional expenses incurred for purchase is
Rs 10,000. Interest on debentures is payable each year on 31st Ashad and 30th Poush. The
accounting year adopted by Crystal Ltd. is calendar year. The following other transactions
were entered into in 2076 by Crystal Ltd. in regard to these debentures:
1st Mangsir Purchased Rs. 5,00,000 Debentures @ 107 cum interest.
1st Magh Sale of Rs. 4,00,000 Debentures @ 103 cum interest.
31st Chaitra Receipt of 20,000 Equity Shares in Clear Ltd. of Rs. 10 each in
conversion of 20% of the Debentures held.
The market value of the Debentures and Equity Shares in Clear Ltd. at the end of 2076 was
106 and Rs. 15 respectively. Face value of each debenture is Rs 100.

Prepare the Debenture Investment Account in the books of Crystal Ltd. on Average Cost
basis.
Chapter: Underwriting of Shares and Debentures

Question No. 8:
Sagar Limited comes out with a public issue of 32,00,000 equity shares of Rs 10 each at a premium
of 5%. Rs. 5 is payable on application and Rs. 2 on allotment including premium. This issue was
underwritten by two underwriters namely Dhurmus and Suntali, equally. Underwriters were given
maximum permissible commission as per law. Each of the underwriters underwrites 60,000 shares
firm. Subscriptions including firm underwriting came for 28,80,000 shares, the distribution of
forms being Dhurmus: 15,60,000; Suntali; 10,80,000 and Unmarked 2,40,000. One of the applicant
holding 6000 shares failed to pay the allotment money.
You are required to prepare each underwriter’s liability (in shares) assuming that benefit of firm
underwriting is given to individual underwriter and to prepare necessary journal entries to record
the above transactions.
Chapter: Accounting of Share Capital

Question No. 9:
The Financial Position of Everest Limited as on 31st Ashadh 2080 is given below:
Equity & Liabilities Amount Assets Amount
Issued and paid up capital Freehold Property 200,000
20,000 equity shares of Rs.10 each 200,000 Stock in trade 120,000
General Reserve 280,000 Sundry debtors 100,000
% Debentures 120,000 Cash and bank balances 280,000
Sundry Creditors 100,000
700,000 700,000
It was resolved at the annual general meeting:
a) To pay dividend of 20%
b) To issue one bonus share for every 5 shares held.
c) To give the existing shareholders the option to buy two of Rs.10 share @ Rs.14 for every four
shares held prior to bonus distribution. The option was taken by all the shareholders.
d) To repay the debentures at the premium of 5% in cash or by conversion into equity shares of
Rs 10 at Rs 14. 40% Debenture holders opted for conversion into shares.
You are required to pass necessary journal entries to give effect to the above transactions.

Chapter: Business Combination

Question No. 10:
Better Ltd. gives you the following information as on 31st Ashad 2080:
Particulars Amount
Share capital:
Equity shares of Rs 10 each 6,00,000
12,000, 9% cumulative preference shares of Rs 10 each 1,20,000
Profit and Loss Account (Dr. balance) 3,40,000
10% Debentures of Rs 100 each 4,00,000
Interest payable on Debentures 40,000
Trade Payables 3,00,000
Property, Plant and Equipment 6,80,000
Goodwill 20,000
Inventory 1,60,000
Trade Receivables 2,20,000
Bank Balance 40,000
A new company Best Ltd. is formed with authorized share capital of Rs 8,00,000 divided into
80,000 Equity Shares of Rs 10 each. The new company will acquire the assets and liabilities of
Better Ltd. on the following terms:
1. Better Ltd.'s debentures are paid by similar debentures in new company and for outstanding
accrued interest on debentures, equity shares of equal amount are issued at par.
2. The trade payables are paid by issue of 24,000 equity shares at par in full and final settlement
of their claims.
3. Preference shareholders are to get equal number of equity shares issued at par. Dividend on
preference shares is in arrears for three years. Preference shareholders to forgo dividend for
two years. For balance dividend, equity shares of equal amount are issued at par.
4. Equity shareholders are issued one share at par for every three shares held in Better Ltd.
5. Current Assets are to be taken at book value (except inventory, which is to be reduced by 10%).
Goodwill is to be eliminated. The Property, plant and equipment is taken over at Rs 6, 16,800.
6. Remaining equity shares of the new company are issued to public at par fully paid up.
7. Expenses of Rs 10,000 to be met from bank balance of Better Ltd. This is to be adjusted from
the bank balance of Better Ltd. before acquisition by Best Ltd.
Requirement:
a) Realization account and Equity Shareholders' account in the books of Better Ltd.
b) Bank Account and Balance Sheet with notes to accounts in the books of Best Ltd.

Chapter: Internal Reconstruction

Question No. 11:
The Balance Sheet of Reconstruction Ltd as on 31st Ashad 2080 is as follows-
Particulars Notes Amount
Equity and Liabilities
Shareholders’ Fund
Share capital 1 7,00,000
Reserves and surplus 2 (1,40,000)
Non-current liabilities
Long-term borrowings 3 1,10,000
Current liabilities
Trade Payables 1,60,000
Short term Borrowings – Bank overdraft 1,80,000
10,10,000
Assets
Non-current assets
Property, Plant Equipment 4 6,70,000
Intangible assets 5 1,00,000
Non-current investments 6 80,000
Current assets
Inventories 60,000
Trade receivables 1,00,000
10,10,000
Notes to accounts:
1 Share Capital Amount
Equity share capital:
40,000 Equity Shares of Rs 10 each 4,00,000
Preference share capital:
30,000 8% Cumulative Preference Shares of Rs 10 each
(preference dividend has been in arrears for 4 years) 3,00,000
7,00,000
2 Reserves and surplus
Securities premium 20,000
Profit and loss account (debit balance) (1,60,000)
(1,40,000)
3 Long-term borrowings
Secured
9% Debentures (secured on the freehold property 100,000
Accrued interest on 9% debentures 10,000
1,10,000
4 Property, Plant and Equipment

Freehold property 2,40,000

Leasehold property 1,70,000
Plant and machinery 2,60,000
6,70,000
5 Intangible assets
Goodwill 1,00,000
6 Non-current investments
Non-Trade investments at cost 80,000
The Company went into reconstruction after the approval of the scheme by the court. Following
steps were taken:
a) The preference shares were reduced to Rs 2.5 per share, and the equity shares to Rs 1 per share.
b) One new equity share of Rs 1 was issued for the arrears of preferred dividend for past 4 years.
c) The debenture holders took over the freehold property at an agreed figure of Rs 1, 50,000 and
paid the balance to the company after deducting the amount due to them.
d) Plant and Machinery was written down to Rs 2, 00,000.
e) Non-trade Investments were sold for Rs 64,000.
f) Goodwill & obsolete stock (included in value of inventories) of Rs. 20,000 were written off.
g) A contingent liability of which no provision had been made was settled at Rs 14,000 and of
this amount, Rs 12,600 was recovered from the insurance.
You are required to show the Journal Entries, necessary to record the above transactions in the
company’s books.
Chapter: Winding up of Company
Question No. 12:
From the given below Trial Balance of Antim Ltd., on 1st Baisakh, 2079, prepare liquidator’s
final statement of account:
Particulars Debit Credit
9% Preference Share Capital (5,000 Shares at Rs 100 each, fully paid) - 500,000
Equity Share Capital: 8,000 Equity Shares at Rs 100 each, fully paid - 800,000
8,000 Equity Shares at Rs 100 each, Rs 50 paid up - 400,000
Plant 1,200,000 -
Stock-in-Trade 1,440,000 -
Sundry Debtors 340,000 -
Sundry Creditors - 884,000
Bank Balance 480,000 -
Preliminary Expenses 24,000 -
6% Mortgage Loan - 920,000
Outstanding Liabilities for Expenses - 100,000
Profit and Loss A/c (Trading Loss for the previous accounting year) 120,000 -
Total 3,604,000 3,604,000
Following points need to be considered:

a) On 21st Baisakh, 2079, the Liquidator sold plant for Rs 11, 80,000 and stock-in-trade at 10%
less than the Book Value. He realized 80% of Sundry Debtors, and incurred cost of collection
of Rs 7,400 (remaining Debtors are to be treated as bad).
b) The Loan Mortgage was discharged as on 31st Baisakh, 2079, along with interest for 6 months.
Creditors were discharged subject to 5% discount. Outstanding Expenses paid at 20% less.
c) Preference Share Dividend is due for one year and paid with final payment.
d) Liquidation Expenses incurred are Rs 7,200, and Liquidator’s Remuneration is settled at 4% on
disbursement to shareholders (preference and equity) excluding preference dividend, subject to
minimum of Rs 40,000. Liquidator’s Remuneration to be rounded off to the multiple of Rs 10.
Chapter: Partnership Accounting

Question No. 13:
Rajesh, Krishna and Dilip were partners of the firm ‘Ratna Emporium’ sharing profits and losses
in the ratio of 3:2:1 respectively. On 31st Ashad, 2080 their Balance Sheet stood as follows:
Liabilities Rs Assets Rs
Rajesh's Capital A/c 16,80,000 Land and Buildings 14,00,000
Krishna's Capital A/c 11,60,000 Machinery 11,00,000
Dilip's Capital A/c 6,70,000 Furniture 6,10,000
General Reserve 6,30,000 Stock 8,40,000
Creditors 6,00,000 Debtors 6,00,000
Cash at Bank 1,90,000
47,40,000 47,40,000
On the above-mentioned date, the partners decided to convert their firm into a private limited
company and named it ‘Ratna Emporium (Private) Ltd.'. The company took over all the assets
including cash at bank and all the creditors for Rs 42, 00,000 payable in the form of fully paid
equity shares of Rs 10 each. It recorded in its books, land and buildings at Rs 16,40,000, machinery
at Rs 9,90,000 and created a provision for bad debts @ 5% on debtors. The expenses of the take-
over came to Rs 23,000 which were paid and borne by the company.
The expenses of getting the company incorporated were Rs 57,000.
The partners distributed the company's shares amongst themselves in their profit sharing ratio.
They settled their accounts by paying or receiving cash.
Prepare Realization Account and all the partners' capital accounts in the firm's ledger and pass
journal entries in the books of the company for all of its transactions mentioned above.
Chapter: Pre & Post Incorporation Profit

Question No. 14:
OMKAR Limited was incorporated on 01.08.2078 to take-over the business of a partnership firm
w.e.f. 01.04.2078. The following is the extract of Profit and Loss Account for the year ended
31.03.2079.
Particulars Amount (Rs) Particulars Amount (Rs)
To Salaries & Allowances 240,000 By Gross Profit 1,200,000

To Rent 160,000
To Commission on Sales 42,000
To Depreciation 50,000
To Interest on loan 64,000
To Director Fees 24,000
To Advertisement 72,000
To Net Profit for the Year 548,000
Total 1,200,000 Total 1,200,000
a) Due to advertising on post incorporation period, OMKAR Limited monthly average sales
increased by 25%.
b) The Gross profit ratio post incorporation increased to 30% from 25%.
c) Interest on Loan related to borrowings made in post-incorporation period.
You are required to apportion the profit for the year between pre-incorporation and post-
incorporation.
Chapter: Cash Flow Statement

Question No. 15:
From the following information of XYZ Ltd., prepare statement of Cash Flow for the Year 2023.
Particulars 2022 2023
Equity & Liability
Share Capital 1,000,000 1,400,000
Retained Earnings 200,000 340,000
Share Premium 100,000 140,000
11% Debentures 200,000 100,000
Trade Payables 300,000 360,000
Provision for Tax 200,000 260,000
Total 2,000,000 2,600,000
Assets
Land 600,000 600,000
Plant & Machine 720,000 1,260,000
Investment 80,000 -
Inventory 300,000 300,000
Trade Receivables 200,000 300,000
Cash & Cash Equivalents 100,000 140,000
Total 2,000,000 2,600,000
Additional Information:
a) Depreciation of Rs. 140,000 was charged on Plant and Machine during the Year.
b) The Company had paid Tax of Rs. 200,000.

c) Investment was sold for Rs. 160,000.

d) Debentures were redeemed at premium of 10%.
Chapter: Accounting from Incomplete Records

Question No. 16:
Respected Aman Prakash
I am thankful for you as you have agreed to assist me in preparing financials of my second-hand
business. I started my business on 1.1.2022. Such records as I have kept are, unfortunately, to be
found on now rather scruffy scraps of paper stored in a large cardboard box. Doubtless, you will
want to examine these records for yourself, but I thought it might assist you if I were to summarize
my business dealings up to 31.12.2022 as I recall them.
In December 2021, I was lucky enough to win Rs. 5,000 on football pools, and this, together with
Rs. 1,000 loaned to me by a friend – I agreed, incidentally, to pay him 10% p.a. interest – started
my business. I put Rs. 5,500 into the bank immediately, in a separate business account. I needed a
lorry to enable me to collect and deliver the second-hand goods, a dealer was asking Rs. 1,300 for
a second-hand lorry, but I convinced him for Rs. 840. I’ve only paid by cheque Rs. 200 of this so
far, but as I will finish paying the full Rs. 840 in three years, it will be mine before it falls to pieces
in another five years from now. I rented some business premises, for Rs. 350 a year. I have paid
by cheque this year’s rent & also Rs. 50 in respect of next year.
My first bit of business was to buy a job lot of 2,000 pairs of jeans for Rs. 6,000 but I have paid a
cheque for Rs. 4,000 so far. To date, I have sold 1,500 pairs and received Rs. 5,800 but I reckon I
am still owned Rs. 500, most of which I should be able to collect (10% remain doubtful). I
promptly banked the Rs. 5,800 as it was all in cheques.
I brought 800 T-shirt for Rs. 1,200 out of my Bank Account. I have sold 700 of these for cash –
Rs. 1,500 in all – but as the remainder have got damaged, I will be lucky if I get Rs. 50 for them.
I managed to get some pocket calculator cheaply. 50 of them only cost me Rs. 200 but found that
that it would require repair before sale. I reckon, I can repair them for Re. 1 each and sell them at
Rs. 8 each. I haven’t paid my cash into the bank at all, as the cash I got for the T-shirts and my
initial float enabled me to pay for my petrol Rs. 400 and odd expenses Rs. 250. Also, it enabled
me to draw Rs. 20 per week for myself.
As I had done so well, I went on holiday; it made a bit of a hole in my Bank Account but it was
worth all Rs. 600 of it. Perhaps, all these information would help you in preparing the financials.
Yours sincerely,
Baman Pandey
Required: From the data provided by Mr. Baman, prepare Statement of Profit or Loss for the
period ended 31st December 2022 and a Financial Position as on that date.

Chapter: Banks and Financial Institutions

Question No. 17:
From the following foreign currency assets and liabilities balances of ABC Bank Ltd, along with
their respective exchange rates, calculate Risk Weighted Exposure for Market Risk.
S.N. Currency Exchange Rate Assets Liabilities
1 USD(U.S. Dollar) 132 15,000 17,500
2 EUR(Euro) 141 6,500 4,200
3 GBP (UK Pound Sterling) 158 450 80
4 CHF(Swiss Franc) 140 520 0
5 AUD(Australian Dollar) 89 120 0
6 CAD(Canadian Dollar) 95 50 20
7 SGD(Singapore Dollar) 92 100 40
Total 22,740 21,840
Chapter: Accounts of Insurance Companies

Question No. 18:
Following particulars are extracted from the records of Bharosa Ltd, a Non-Life Insurance
Company.
Particulars Amount in "000"
Income on Government Securities & Securities guaranteed by Government 43,852.00
Income on fixed deposit of commercial bank 8,852.00
Income on Fixed Deposit of Development Bank 11,036.00
Dividend on equity shares of public company 5,850.00
Income from Bonds 486.00
Net Profit on sale of investments 1,888.00
Profit on sale of fixed assets – loss on sale of fixed assets 1,108.00
Opening net worth of the company 322,000.00
Following information are available for each category of the insurance business which the
company is operating:
Particulars Fire Marine Motor Engineering Misc.
Opening Unexpired Risk Reserve 18,426 5,624 128,304 4,404 16,000
Opening provision for
8,362 2,040 88,672 5,524 9,026
Outstanding Claim
Net insurance premium 14,780 10,682 429,986 5,262 47,784
Reinsurance Commission income 42,588 14,280 14,950 18,272 35,306
Agent commission 14,138 3,846 52,362 11,346 15,276
Reinsurance commission expense 1262 114 690 0 808
Claim Paid 5,304 2,330 171,076 3,064 25,546
From the above information, distribute the income on investments, loans and others to profit &
loss account and various revenue accounts.
Chapter: Accounting for NPOs

Question No. 19:

Following is the Receipts and payments Account of Helping Club for the year ended Dec 31, 2018.
Receipts Amount Payments Amount

Cash in Hand 1,000 Groundsman's Fees 7,500
Bank balance: Mowing Machine 15,000
Deposit Account 22,300 Rent of Ground 2,500
Current Account 6,000 Cost of Teas 2,500
Bank Interest 300 Printing & office Exp. 2,800
Subscription 26,000 Repairs to equipment 4,000
Receipts From Teas 3,000 O/s Honoraria to Secretary 4,000
Contribution to Fares 1,000 Bank balance:
Sale of Equipment 800 Deposit Account 30,900
Proceeds from events 7,800 Current Account 1,500
Donation for upcoming tournament 10,000 Cash in Hand 3,500
Travelling Expense 4,000
Total 78,200 Total 78,200
You are given the following additional information:

Jan 1 Dec 31
Rs. Rs.
Subscriptions due 1,500 1,000
Amount due for printings etc. 1,000 800
Cheques unpresented being payment for repairs 3,000 2,600
Interest receivable (yet to be booked) 200
Bonus to groundsman 3,000
Machinery & Equipment 8000 17,500
For the year ended Dec 31, 2018, the honoraria to the secretary are to be increased by a total of
Rs. 2,000.
Prepare the Income & Expenditure Account for 2018 and the relevant Statement of Financial
Position as on that date
Chapter: Provisions, Contingent Liability and Contingent Assets

Question No. 20:
Differentiate between Provision and Contingent Liability with examples in tabular form.

Section 2: Answers
Chapter: Departmental Accounting
Answer to Question No. 1:
Departmental Trading and P/L A/c
For the year ending 31.03.2080
Particulars Spinning Sewing Selling Particulars Spinning Sewing Selling
To Opening Stock 50,000 80,000 190,000 By Sales - - 800,000
To Materials 160,000 200,000 - By Transfer (N1) 300,000 600,000 -
To Direct Wages 90,000 100,000 - By Closing Stock 50,000 200,000 50,000
To Transfer - 300,000 600,000
To Gross Profit 50,000 120,000 60,000
Total 350,000 800,000 850,000 Total 350,000 800,000 850,000
To Salary 90,000 60,000 30,000 By Gross Profit 50,000 120,000 60,000
To Rent 30,000 18,000 12,000 By Misc. Income 150,000 - -
To Net Profit 80,000 42,000 18,000
Total 200,000 120,000 60,000 Total 200,000 120,000 60,000
General PL A/c (Combined PL)

To Stock Reserve 30,000 By Stock Reserve 50,000
(Closing) (N2) (Opening) [20,000+30,000]
To Net Profit 160,000 By Departmental Profit 140,000
Total 190,000 Total 190,000
Note 1: Value of goods Transferred

Transfer value of goods from Spinning to Sewing = (50,000+160,000+90,000-50000)*120%
= 300,000
Trf. value of goods from Sewing to Selling = (80000+200000+100000+300000-200000)*100/80
= 600,000
Note 2 : Stock Reserve on Closing Stock

Stock Reserve on stock lying with Sewing Department = 200,000*(300,000/600,000)*20/120
= 16,667
Stock Reserve on stock lying with Selling Department
- Margin added by Sewing Department = 50,000*100%*20%
= 10,000
- Margin added by Spinning Department = (50,000-10,000)*(300,000/600,000)*20/120
= 3,333
Total Closing Stock Reserve = 16,667 + 10,000 + 3,333 = 30,000
Basis of Allocation of Expenses

Expenses Head Basis of Allocation

Salary Staffs Employed (75:50:25)

Rent Floor Space (500:300:200)

Dang Branch Stock A/c [at Invoice Price]

To Goods sent 875,000 By Branch Cash 312,500
To Branch Debtors (Return) 12,500 By Branch Debtors 437,500
To Branch Adjustment (b/f) 2,500 By Branch Adjustment (Margin) 250
"Apparent Surplus" By Branch P/L (Cost) 1,000
By Balance c/d 138,750
890,000 890,000
Dang Branch Debtors A/c

To Branch Stock 437,500 By Branch Cash 390,000
By Branch PL (Discount) 10,000
By Branch Stock (Return) 12,500
By Balance c/d (b/f) 25,000
437,500 437,500
Dang Branch Adjustment A/c

By Goods Sent (Margin)
To Branch Cash (Wages) 7,500 (700,000*25%) 175,000
To Branch Cash (Freight) 27,500 By Branch Stock (Surplus) 2,500
To Branch Stock (Margin) 250
To Closing stock Reserve
(138,750/125*25) 27,750
To GP trf to Branch PL (b/f) 114,500
177,500 177,500
Dang Branch P/L A/c

To Branch Debtors 10,000 By Branch Adjustment A/c 114,500
To Branch Cash (Other Exp.) 15,000
To Branch Stock (Cost) 1,000
To Net profit of Branch
(b/f) 88,500
114,500 114,500
Dang Branch Cash A/c

To Branch Stock 312,500 By Branch adjustment 35,000
To Branch Debtors 390,000 (7,500+27,500)

To Cash (Sent by HO) 50,000 By Branch PL 15,000

By Cash (Remit to HO) (b/f) 702,500
752,500 752,500

Trading and Profit/ Loss A/c
For the Year ended 31.03.2023
Head Head
Particulars Branch Particulars Branch
Office Office
To Purchase 984,750 - By Sales 640,000 410,000
To Processing Cost 25,250 - By Goods Sent to Branch 462,000 -
To Goods Received - 462,000 By Abnormal Loss [N2] - 8,000
By Closing Stock
- Processed Goods (In
To Gross Profit [N1] 170,000 82,000 Hand) (balancing Fig.) 28,000 104,000
- Unprocessed Goods 50,000 -
- Goods in Transit - 22,000
Total 1180,000 544,000 Total 1180,000 544,000
To Admin Expenses 69,500 7,500 By Gross Profit 170,000 82,000
To Selling Expenses 25,000 3,100
To Abnormal Loss - 8,000
To Stock
Reserve[N3] 11,455 -
To Net Profit(b/f) 64,045 63,400
Total 170,000 82,000 Total 170,000 82,000
Note 1: Calculation of Gross Profit

Gross Profit of Head Office = (640,000*25/125)+(462,000*10/110)
=170,000
Gross Profit of Branch = (410,000*25/125)
= 82,000
Note 2: Calculation of Abnormal stock at Branch

Loss of Stock at Selling Price of Branch = 10,000
Loss of Stock at Cost Price of Branch [10,000*100/125] = 8,000
Note 3: Calculation of Closing Stock Reserve

Closing Stock (In Hand) of Branch = 104,000
Closing Stock (In Transit) = 22,000
Total Closing Stock = 126,000
Closing Stock Reserve [126,000*10/110] = 11,455

Chapter: Hire Purchase Transaction

In the Books of M/s Akbar [Hire Purchaser]
TV Sets A/c
By
To AB Electronics A/c 345,000 Depreciation(345,000*20%) 69,000
Total 345,000 Total 345,000
By Depreciation
To Balance b/d 276,000 (276,000*20%) 55,200
Total 276,000 Total 276,000
By
To Balance b/d 220,800 Depreciation(220,800*20%) 44,160
By AB Electronics [N1] 39,445
By P/L A/c (Loss) [N1] 19,435
Total 220,800 Total 220,800
AB Electronics A/c
To Bank [Down payment] 150,000 By TV Sets A/c 345,000
To Bank [1st instalment] 79,500 By Interest Expense 19,500
To Balance c/d 135,000 (345,000-150,000)*10%
Total 364,500 Total 364,500
To Bank [2nd instalment] 73,500 By Balance b/d 135,000
By Interest
To Balance c/d 75,000 Expense(135,000*10%) 13,500
Total 148,500 Total 148,500
To TV Sets A/c 39,445 By Balance b/d 75,000
By Interest
To Balance c/d 43,055 Expense(75,000*10%) 7,500
In the Books of AB Electronics [Hire Vendor]

Goods Repossessed A/c
To M/s Akbar A/c 39,445 By Bank 52,500
To Bank (Repair) 7,500
To P/L A/c (Gain) 5,555
52,500 52,500
Note 1: Loss to Hire Purchaser due to Default

Book value of 2 TV sets being Repossessed = 2*57,500*80%*80%*80%
= 58,880

Agreed value of 2 TV sets being repossessed = 2*57,500*70%*70%*70%

= 39,445
Loss to Hire Purchaser = 19,435
Chapter: Accounting for Lease

Value of Leased Assets (initial recognition) = Present value of all lease payments discounted at
interest rate implicit on lease
Year Present Value factor

Lease Payment @ 10% Net Present Value
0 200,000 1.0000 200,000
1 220,000 0.9091 200,000
2 200,000 0.8264 165,289
3 180,000 0.7513 135,237
4 145,640 0.6830 99,474
Value of Leased Assets to be recognized
at initial recognition 800,000
Statement showing Finance charge to be charged to Income Statement each year:

Opening Finance Reduction in Closing
Year Liability Lease Rent Charge Liability Liability
0 [N1] 800,000 200,000 - 200,000 600,000
1 600,000 220,000 60,000 160,000 440,000
2 440,000 200,000 44,000 156,000 284,000
3 284,000 180,000 28,400 151,600 132,400
4 132,400 145,640 13,240 132,400 -
Note 1: Year 0 refers to initial amount paid to lessor at the time of lease agreement at the very
start of the Year 1 hence denoted as 0 and no Finance charge is calculated on that amount.

Chapter: Insurance Claim

Statement of claim Rs.

Stock on the date of fire
Normal items 72,500
Slow moving items 2,500
Stock as on date of fire 75,000
Less: Salvage 20,000
Total Loss 55,000
Claim(Considering Average Clause) = Policy Amount / Stock as on date of Fire X Total Loss
= 70,000/75,000 X 55,000 = Rs 51,333
Memorandum Trading Account for the period from 1.4.2079 to 30.9.2079
Particulars Normal Abnormal Particulars Normal Abnormal
To Opening Stock 95,000 5,000 By Sales 2,75,000
Less: Sale of Abnormal Item (2,000)
Less : Sales not Approved (33,000) 240,000 2,000
To Purchases By Stock with customer [33,000*2/3] 22,000
Less: Furniture 140,000 By Goods sent on consignment 16,500
(180000-40000) By Goods drawn:
To Carriage In 47,000 - Proprietor [15,000 X 2/3] 10,000
To Gross Profit 80,000 - Free samples [1500 X 2/3] 1,000
(240,000*1/3) By Loss - 500
By Closing Stock (Bal fig) 72,500 2,500
Total 362,000 5,000 Total 362,000 5,000
WN-1- Previous Year Trading A/c (To Compute G. P Rate)

Particulars Amount Particulars Amount
To Op. Stock 1,00,000 By Sales 1,25,000
To Purchases 1,00,000 By Closing Stock 99,000 1,00,000
Add: Written off 1,000
To Gross Profit 25,000
Normal G.P Rate (Previous Year) = 25,000/ 1, 25,000 X 100 = 20%

Particulars Sales Cost Gross Profit
Previous Year 100 80 20
Current Year(100+20% of 100) 120 80 40
G. P Rate for current year = 40/120 or 1/3 and Cost = 1-1/3 = 2/3

Chapter: Investment Accounting

Books of Crystal Ltd.
13.5% Convertible Debentures in Clear Ltd. Account
Date Particulars No Interest Amount Date Particulars No Interest Amount
1.5.
To Bank 10,000 11,250 1,050,000 30.9. By Bank 101,250
2076
2076
To Bank
1.8.
[5000*107- 5,000 22,500 512,500 1.10. By Bank 4,000 - 412,000
2076
22500] 2076
By Equity
300,000
31.12 Shares of 2,200
(Note 1)
.2076 Clear Ltd
[15000-
4000] X 20%
31.12 By Bank 7,425

.2076
To P & L
By Balance 8,800 932,800
31.12 (balancing 104,625 82,300 31.12 29,700
c/d (b/f) (Note 2)
.2076 fig) .2076
15,000 138,375 1,644,800 15,000 138,375 1,644,800
WN 1:
Statement for computation of Interest
Date Working Amount(Rs)
1.5.2076 10000 X 100 X13.5% X1/12 11,250.00
1.8.2076 5000 X100 X 13.5% X 4/12 22,500.00
30.9.2076 15000 X 100 X 13.5% X 6/12 101,250.00
31.12.2076 2200 X 100 X 13.5% X3/12 7,425.00
31.12.2076 8800 X 100 X 13.5% X3/12 29,700.00
WN 2: Value of share received = 20,000 X 15 = Rs 3,00,000

Notes:
1. At initial recognition, an entity shall measure a financial asset at its fair value plus or
minus, in the case of a financial asset not at fair value through profit or loss, transaction
costs that are directly attributable to the acquisition or issue of the financial asset or financial
liability. As investment in equity shares generally classifies as fair value through profit or
loss, measurement of 20,000 equity shares obtained is done at its Fair Value of Rs. 15 per
share.

2. Financial assets other than those required to be measured at amortized cost is measured
at Fair value through PL and transaction costs incurred for the purchase of such
investment is charged to P & L and therefore, the equity shares obtained and balance of
investment in debentures have been measured at Fair value or Market Value and not at
average cost.
Chapter: Underwriting of Shares and Debentures
Statement showing liability of underwriters
Particulars Dhurmus Suntali

Gross Liability 16,00,000 16,00,000
Less: Firm Underwriting (60,000) (60,000)
Less: Marked Applications from public (15,00,000) (10,20,000)
Less: Unmarked Applications [1:1] (1,20,000) (1,20,000)
Balance /surplus (80,000) 4,00,000
Adjustment of Surplus 80,000 (80,000)
Net Liability - 3,20,000
Note: As underwriters had already applied the shares committed under firm, only Suntali
has to apply for remaining 320,000 shares.
Total share = 32,00,000 out of which shares taken by underwriters is [60,000 + 60,000 +
320,000] = 440,000 and remaining number of shares which are subscribed by public are
[32,00,000-440,000] = 27, 60,000
Journal Entries
Bank A/c Dr 1,44,00,000

To Equity Share Application A/c [28,80,000 X 5] 1,44,00,000
Equity Share Application A/c Dr 1,44,00,000

To Equity Share Capital A/c 1,44,00,000
Equity Share Allotment A/c [27,60,000 X 2] Dr 55,20,000

To Equity Share Capital [27,60,000 X 1.5] 41,40,000
To Securities Premium a/c [27,60,000 X 0.5] 13,80,000
Bank a/c Dr 55,08,000

Calls in Arrears [6000 X 2] Dr 12,000
To Share Allotment 55,20,000

Dhurmus [60,000 X 2] Dr 1,20,000

Suntali [60,000 X 2 +3,20,000 X 7] 23,60,000
To Equity Share Capital 22,60,000
To Securities Premium a/c [4,40,000 X 0.5] 2,20,000
Underwriting Commission A/c 13,44,000

To Dhurmus [16,00,000 X 10.5 X 4%] 6,72,000
To Suntali [[16,00,000 X 10.5 X 4%] 6,72,000
(Maximum commission = 4% of issue price)*
Bank Dr 16,88,000
To Suntali 16,88,000
Dhurmus Dr 5,52,000
To Bank 5,52,000
*Annexure 10 of Securities Businessperson (Merchant Banker) Regulation 2064
Chapter: Accounting of Share Capital

Journal Entries in the books of Everest Ltd
General Reserve A/c Dr. 40,000
To Dividend Payable A/c 40,000
(Being Dividend declared)
Dividend Payable A/c Dr. 40,000

To Bank A/c
(Dividend Paid to the shareholders) 40,000
General Reserve A/c Dr. 40,000

To Bonus to equity shareholders A/c 40,000
(Bonus payable to equity shareholders.)
Bonus to Equity shareholders A/c Dr. 40,000

To Equity Share Capital A/c 40,000
(Allotment of 4000 equity shares of Rs.10 each as bonus shares
to the equity shareholders.)

Bank A/c Dr. 140,000

To Equity Share Capital A/c 100,000
To Shares Premium A/c 40,000
(Allotment of 10,000 equity shares of Rs.10 each at Rs.4 per
share premium on right basis.)
12% Debentures A/c Dr. 1,20,000

Premium on Redemption of Debentures (loss) A/c Dr. 6,000
To Debenture holders A/C 1,26,000
(Amount payable on redemption of debentures along with the
premium)
Debenture holders A/c Dr. 1,26,000
To Bank A/c 75,600
To Equity Share Capital [3600 X 10] 36,000
To Securities Premium Account [3600 X4] 14,400
(Being amount due to the debenture holders paid off in cash and
shares)
Note:
Bonus Shares Issued: 20,000 * 1/5 = 4,000
Right Shares Issued: 20,000 * 2/4 = 10,000
Shares Issued for Redemption of Debentures: (120,000*(1+5%))*40%*1/14 = 3,600
Chapter: Business Combination

In the books of Better Ltd.
Realization Account
Particulars Rs Particulars Rs
To Goodwill 20,000 By 10% Debentures 4,00,000
To Property, plant and 6,80,000 By Interest accrued on 40,000
equipment debentures
To Inventory 1,60,000 By Trade payables 3,00,000
To Trade receivables 2,20,000 By Best Ltd. 3,30,800

(Purchase
consideration) (W.N. 1)

To Bank By Equity shareholders A/c

(40,000 - 10,000) 30,000 (loss on realization) 60,000
(Bal. fig.)
To Preference
shareholders A/c 10,800
(W.N.2)
To Cash (Expenses) 10,000
11,30,800 11,30,800
Equity shareholders’ Account

To Profit & loss A/c 3,40,000 By Equity Share capital 6,00,000
To Equity shares in Best Ltd. 2,00,000
To Realization A/c 60,000
6,00,000 6,00,000
In the books of Best Ltd.

Bank Account
To Business Purchase 30,000 By Balance c/d (Bal. fig.) 2,19,200
To Equity shares Capital
(W.N. 3) 1,89,200
2,19,200 2,19,200
Balance Sheet as at 31st Ashad, 2080
Particulars Note No.
I. Equity and Liabilities
(1) Shareholder's Funds
Share Capital 1 8,00,000
(2) Non-Current Liabilities

Long-term borrowings 2 4,00,000
Total 12,00,000
II. Assets
(1) Non-current assets
(a) Property, plant and equipment 6,16,800
(2) Current assets

(a) Inventories 1,44,000

(b) Trade receivables 2,20,000
(c) Cash and cash equivalents 2,19,200
[30,000+ 1,89,200]
Total 12,00,000
Notes to Accounts
S.No. Particulars Amount

1 Share Capital
Authorized share capital
80,000 equity shares of Rs 10 each 8,00,000
Issued and Subscribed
80,000 shares of Rs 10 each fully paid up 8,00,000
(out of the above, 61,080 (W.N.3) shares
have been allotted as fully paid-up for non-
cash consideration)
2 Long Term Borrowings
10% Debentures 4,00,000
Working Notes:
WN-1 Calculation of Purchase consideration
Particulars Rs
Payment to preference shareholders
12,000 equity shares @ Rs 10 1,20,000
For arrears of dividend: (12,000 x Rs 10) x 9% 10,800
Payment to equity shareholders
(60,000 shares x 1/3) @ Rs 10 2,00,000
Total purchase consideration 3,30,800
WN-2 Preference shareholders’ Account in books of Better Ltd.

Particular Rs Particulars Rs
To Equity Shares in By Preference Share
Best Ltd. 1,30,800 capital 1,20,000
By Realization A/c
(Bal. fig.) 10,800
1,30,800 1,30,800
WN-3 Calculation of number of Equity shares issued to public

Particulars Number of shares

Authorized equity shares 80,000
Less: Equity shares issued for
Interest accrued on debentures 4,000
Trade payables of Better Ltd. 24,000
Preference shareholders of Better Ltd. 12,000
Arrears of preference dividend 1,080
Equity shareholders of Better Ltd. 20,000 (61,080)
Number of equity shares issued to public at par for cash 18,920
WN-4 Computation of Goodwill or Capital Reserve

Amount(Rs)
Total Assets Acquired [A][30,000+2,20,000+1,44,000 10,10,800
+6,16,800]
Total Liabilities Taken Over[B] [2,40,000 +4,00,000 6,80,000
+40,000]
Net Assets Taken Over [ A – B] 3,30,800
Purchase Consideration (W.N. 1) 3,30,800
Goodwill/ Capital Reserve Nil
Chapter: Internal Reconstruction

Journal Entries In the books of Reconstruction Ltd.
Particulars Dr. Cr.

Rs Rs
8% Cumulative Preference share capital (Rs 10) A/c Dr. 3,00,000
To 8% Cumulative Preference share capital (Rs 75,000
2.5) A/c
To Capital reduction (Rs 7.5) A/c 2,25,000
(Preference shares being reduced to shares of Rs 2.5
per share and remaining transferred to capital
reduction account )
Equity share capital A/c (Rs10) Dr. 4,00,000
To Equity Share capital A/c (Rs 1) 40,000
To Capital reduction A/c (Rs 9) 3,60,000
(Equity shares reduced to Rs 1 per share with the
remaining amount transferred to capital reduction)

Capital reduction A/c Dr 96,000

To Equity share capital A/c . 96,000
(Equity shares of Rs 1 issued in lieu of the arrears of
preference dividend for 4 years)
9% Debentures A/c Dr 1,00,000

Accrued interest on debentures A/c Dr 10,000
Bank A/c (150,000-110,000) Dr 40,000
To Freehold property A/c 2,40,000
(Settlement made with Debenture holder)
Capital reduction A/c Dr 1,80,000

To Plant and Machinery Ac 60,000
To Goodwill A/c 1,00,000
To Inventory A/c 20,000
(The assets written off as a part of the internal
reconstruction scheme)
Bank A/c Dr 64,000

To Investments A/c 80,000

(Investments sold at a loss debited to capital
reduction account )
Capital Reduction A/c Dr 14,000

To Bank A/c 14,000
(Contingent liability paid )
Bank A/c Dr 12,600

To Capital Reduction 12,600
Capital reduction A/c Dr. 1,60,000

To Profit and loss A/c 1,60,000
(Accumulated losses written off to capital reduction
account).
Capital reduction A/c Dr. 41,600

To Capital reserve A/c 41,600
(The balance in capital reduction account transferred

to capital reserve )
WN: 1 Capital Reduction A/c

To Equity Share Capital 96,000 By 8% Cumulative Preference 2,25,000
Shares
To Freehold Property 90,000 By Equity Share Capital 3,60,000
To Plant and Machinery 60,000 By Bank 12,600
To Goodwill 1,00,000
To Inventory 20,000
To Investment 16,000
To Bank 14,000
To Profit and Loss A/c 1,60,000
To Capital Reserve (Balacing 41,600
figure)
Total 5,97,600 Total 5,97,600

Chapter: Winding up of Company

Liquidator’s Final Statement of Account
Receipts Rs Payments Rs
Sundry Assets realized: Liquidator’s Remuneration (WN) 50,040
Bank Balance 4,80,000 Liquidation Expenses (given) 7,200

Plant 11,80,000 Secured Creditors:
6% Mortgage
Debtors 2,72,000 Loan 9,20,000
(3, 40,000 X 80%)
Less: Realization Expenses (7,400) Add: Interest 27,600 9,47,600
2,64,600 (9,20,000 × 6% × 6/12)
Stock (14, 40,000× 90%) 12,96,000 Unsecured Creditors: Creditors
8,39,800
(8, 84,000 X 95%)
Outstanding Expenses 80,000 9,19,800
Preference Shareholders:
Capital 5,00,000
Dividend 45,000 5,45,000

(for 1 year @ 9%)
Equity Shareholders: (WN)
Fully Paid Shares 5,75,480

(8,000×71.935)
Partly Paid Shares 1,75,480 7,50,960
(8,000×21.935)
32,20,600 32,20,600
Working Note:
Computation of Liquidations’ Remuneration and Payment to Equity Shareholders
Rs
Balance left for Liquidator’s Remuneration, Pref. Capital and Equity 13,01,000
Shareholders
Liquidator’s Remuneration (13,01,000 × 4/104 = Rs 50,040 or Rs 40,000
whichever is higher) (50,040)
Refund of Capital to Preference Shareholders (5,00,000)
Balance money before Notional Call 7,50,960
Notional Call on 8,000 Partly Paid Shares at Rs50 each (to make all

Shares Rs100 paid up) [8000 X 50] 4,00,000

Surplus Cash balance after Notional Call (A) 11,50,960
Number of Equity Shares deemed fully paid (B) (8,000 + 8,000)
Hence, Refund on every Rs 100 paid up Share (A÷ B) = Rs 11,50,960 ÷ 71.935
16,000
21.935
Refund per Rs 50 Partly Paid-Up Equity Share = Notional refund – notional
call [71.935-50]
Chapter: Partnership Accounting

In the books of Ratna Emporium
Realization Account
To Land and Buildings 14,00,000 By Creditors 6,00,000
To Machinery 11,00,000 By Ratna Emporium (Pvt.) Ltd. A/c 42,00,000
To Furniture 6,10,000
To Stock 8,40,000
To Cash at Bank 1,90,000
To Debtors 6,00,000
To Rajesh’s capital 30,000
To Krishna's capital 20,000
To Dilip’s capital 10,000
48,00,000 48,00,000
Partners’ Capital Accounts
Particulars Rajesh Krishna Dilip Particulars Rajesh Krishna Dilip
Rs Rs Rs Rs Rs Rs
To Shares in 21,00,000 14,00,000 7,00,000 By Balance 16,80,000 11,60,000 6,70,000
Ratna Emporium b/d
By General
Reserve
3,15,000 2,10,000 1,05,000
By Realization
To Bank A/c - - 85,000 A/c (Profit) 30,000 20,000 10,000
(Settlement)(b By Bank A/c
alancing fig) (Settlement)(
Balancing
75,000 10,000 -
fif)
21,00,000 14,00,000 7,85,000 21,00,000 14,00,000 7,85,000
Journal Entries in the books of Ratna Emporium (Private) Ltd.

S.No. Particulars Amount Amount

1 Business Purchase A/c Dr. 4,200,000
To M/s Ratna Emporium 4,200,000
(Consideration payable for business purchased)
2 Land and Buildings A/c Dr. 1,640,000
Machinery A/c Dr. 990,000
Furniture A/c Dr. 610,000
Stock A/c Dr. 840,000
Debtors A/c Dr. 600,000
Bank A/c Dr. 190,000
To Creditors A/c 600,000
To Provision for doubtful debts A/c 30,000
To Business Purchase A/c 4,200,000
To Capital Reserve A/c 40,000
(Assets and liabilities taken over for Rs
42,00,000; balance credited to capital reserve)
3 Capital reserve A/c Dr. 23,000
To Bank A/c 23,000
(Expenses for take over debited to capital
reserve)
4 M/s Ratna Emporium Dr. 4,200,000
To Equity share capital A/c 4,200,000
(Allotment of fully paid equity shares to
discharge consideration for business)
5 Preliminary expenses A/c Dr. 57,000
To Bank A/c 57,000
(Expenses incurred to get the company
incorporated)

Chapter: Pre & Post Incorporation Profit

Statement showing allocation of Income , Expenses and Profit
Total Basis of Pre - Post-

Particulars
Amount Allocation incorporation incorporation
Gross Profit 1,200,000 1:3 300,000 900,000
Less: Salaries &
240,000 1:2 80,000 160,000
Allowances
Rent 160,000 1:2 53,333 106667
Sales’ commission 42,000 2:5 12,000 30,000
Depreciation 50,000 1:2 16,667 33,333
Interest on Loan 64,000 Post 64,000
Directors’ fee 24,000 Post 24,000
Advertisement 72,000 Post 72,000
Net profit 548,000 138,000 410,000
Working Note: 1
Let the monthly sales for first 4 months (i.e. from 1.4.2078 to 31.7.2078) be = x
Monthly sales for next 8 months (i.e. from 1.8.78 to 31.3.2079) = x + 25% of x= 1.25x
Pre & Post Incorporation sales: 4x: 8 X 1.25x = 4x:10x or 2:5
Working Note: 2
Gross Profit Ratio = 4x X 25% : 10x X 30% = 1:3
Working Note: 2
Time Period Ratio: 4: 8 or 1:2

Chapter: Cash Flow Statement

XYZ Ltd.
Cash Flow Statement
For the Year 2023
Particulars Amount Amount
Net Profit before Tax [N1] 400,000
Add: Non-operating Expenses
Depreciation on Plant and Machine 140,000
Premium on redemption of debenture (100,000*10%) 10,000 150,000
Less: Non-operating Income
Profit on sale of Investment (80,000) (80,000)
Operating Profit 470,000
Add: Increase in Trade Payables 60,000

Less: Increase in Trade Receivables (100,000)
Less: Tax Paid (200,000)
Net Cash Inflow from Operating Activities 230,000
Cash Flow From Investing Activities
Purchase of Plant and Machine [N2] (680,000)
Sale of Investment 160,000
Net Cash Outflow from Investing Activities (520,000)
Cash Flow From Financing Activities
Issue of Share Capital 400,000
Increase in Share Premium 40,000
Redemption of Debentures (100,000*110%) (110,000)
Net Cash Inflow from Financing Activities 330,000
Net Changes in Cash & Cash Equivalents [A+B+C] 40,000
Add: Opening Cash & Cash Equivalents 100,000
Closing Cash & Cash Equivalents 140,000
Note 1: Calculation of Net Profit before Tax

Changes in Retained Earnings 140,000
Add: Provision for Tax expense 260,000
Profit Before Tax 400,000
Note 2: Plant & Machinery A/c

To Balance b/d 720,000 By Depreciation 140,000
To Bank (bal fig.) 680,000 By Balance c/d 1,260,000
1,400,000 1,400,000
Chapter: Accounting from Incomplete Records

Statement of Profit or Loss

For the Year Ended 31.12.2022

To Purchase By Sales
- Jeans 6,000 - Jeans (5800+500) 6,300
- Tshirt 1,200 - Tshirt 1,500 7,800
- Calculator 200 7,400 By Closing Stock
- Jeans
(6000/2000*500) 1,500
- Tshirt [N1] 50
To Gross Profit 2,150 - Calculator [N1] 200 1,750
To Rent 350 By Gross Profit 2,150
To Depreciation [N2] 140
To Petrol Expenses 400
To Misc Expenses 250
To Interest on Loan 100
(1000*10%)
To Provision for Debtors 50
To Net Profit 860
Statement of Financial Position

As on 31.12.2022
Capital & Liability Amount Assets Amount

Capital 5,000 Lorry 840
Add: Net Profit 860 Less: Depreciation (140) 700
Less: Drawings (1,640) 4,220 Debtors 500
Loan (Friend) 1,000 Less: Provision (50) 450
Creditors for Lorry 640 Prepaid Rent 50
Creditors for Jeans 2,000 Stock 1,750
Creditors for Calculator 200 Bank A/c [N3] 4,900
Interest on Loan 100 Cash A/c [N4] 310

Note 1: Closing Stock of T-shirt and Calculator

For T-shirt (Remaining Qty= 800-700=100),
Cost =(1,200/800*100)= 150
NRV = Expected selling Price – Expected selling cost
= 50-Nil = 50
Hence, closing stock of t-shirt is valued at lower of cost or NRV, i.e. Rs. 50.
For Calculator,
Cost = 200
NRV = Expected selling Price – Expected selling cost (cost to Repair)
= (50*8)-(50*1) = 350
Hence, closing stock of calculator is valued at lower of cost or NRV, i.e. Rs. 200.
Note 2: Depreciation on Lorry

Purchase Price of Lorry = 840
Useful Life (1 +5 years) = 6 years (as it would fall into pieces into another 5 years from now)
Depreciation per annum for 6 years = 840/6 = 140
Note 3: Bank A/C

To Cash 5,500 By Lorry 200
To Sales
(Jeans) 5,800 By Rent 400
By Purchase (Jeans) 4,000
By Purchase (Tshirt) 1,200
By Drawings 600
Note 4: Cash A/c

To Capital 5,000 By Bank 5,500
To Loan 1,000 By Petrol Expenses 400
To Sales 1,500 By Misc Expenses 250
By Drawings 1,040
By Balance c/d 310

Chapter: Banks and Financial Institutions

Statement showing Risk Weighted Exposure for Market Risk

Open Open Relevant
S. Ex.
Currency Asset Liability Position Position Open
N. Rate
(FCY) (NPR) Position
1 USD (U.S. Dollar) 15,000 17,500 (2,500) 132 (330,000) 330,000
2 EUR (Euro) 6,500 4,200 2,300 141 324,300 324,300
3 GBP (UK Pound Sterling) 450 80 370 158 58,460 58,460
4 CHF (Swiss Franc) 520 - 520 140 72,800 72,800
5 AUD (Australian Dollar) 120 - 120 89 10,680 10,680
6 CAD (Canadian Dollar) 50 20 30 95 2,850 2,850
7 SGD (Singapore Dollar) 100 40 60 92 5,520 5,520
Total Open Position (a) 804,610
Fixed Percentage (b) 5.00%
Capital Charge for Market Risk [c=(axb)] 40,231
Risk Weight in times (d) 9.09
Equivalent Risk Weight Exposure [e=(cxd)] 365,732
Chapter: Accounts of Insurance Companies

Amount in
Particulars
"000"
Income on Government Securities and Securities
43,852.00
guaranteed by Government
Income on fixed deposit of commercial bank 8,852.00
Income on Fixed Deposit of Development Bank 11,036.00
Dividend on equity shares of public company 5,850.00
Income from Bonds 486.00
Profit on sale of investments – loss on sale of investment 1,888.00
Profit on sale of fixed assets – loss on sale of fixed assets 1,108.00
Total Income 73,072.00
Statement of Computation of Weight for Revenue Accounts

Particulars Fire Marine Motor Engineering Misc.

Opening Unexpired Risk Reserve [A] 18,426 5,624 128,304 4,404 16,000
Opening provision for Outstanding
8,362 2,040 88,672 5,524 9,026
Claim [B]
Net insurance premium [C] 14,780 10,682 429,986 5,262 47,784
Reinsurance Commission income [D] 42,588 14,280 14,950 18,272 35,306
Agent commission [E] 14,138 3,846 52,362 11,346 15,276
Reinsurance Commission Expense [F] 1262 114 690 808
Claim Paid [G] 5,304 2,330 171,076 3,064 25,546
Weight [A + B + C +D - E -F - G ] 63,452 26,336 437,784 19,052 66,486
Distribution of Income from Investment on the basis of Weight

% of Distributed Income [ 73,072
Particulars
Weight Weight X % of Weight]
P & L Account 322,000 34.43 25,162
Fire 63,452 6.79 4,958
Marine 26,336 2.82 2,058
Motor 437,784 46.82 34,210
Engineering 19,052 2.04 1,489
Miscellaneous 66,486 7.11 5,195
935,110 100 73,072
Chapter: Accounting for NPOs

Income & Expenditure A/c of Helping Club
For the year ended 31.12.2018
Expenditure Amount Income Amount

To Groundman Fees 7,500 By Subscription [26000+1500-1000] 25,500
To Ground Rent 2,500 By Bank Interest (300+200) 500
To Printing and office Exp. 2,600 By Receipt from Tea 3,000

To Depreciation [N1] 4,700 Less: Cost of Tea (2,500) 500
To Repairs to equipment 4,000 By Contribution for fares 1,000
To Honoraria [4000+2000] 6,000 By proceeds from event 7,800
To Travelling Expenses 4,000
To Bonus to groundman 3,000
To Surplus 1,000

Statement of Financial Position of Helping Club

As on 31.12.2018
Liabilities Amount Assets Amount

Capital Fund [N2] 33,800 Machinery & Equipment 17,500
Add: Surplus 1,000 34,800 Subscription Receivable 1,000

Tournament Fund 10,000 Interest Receivable 200
O/s Honoraria
Expenses 6,000 Deposit A/c 30,900
O/s Printing Expenses 800 Current A/c 1,500
O/s Bonus 3,000 Cash 3,500
Note 1: Machinery & Equipment A/c
To Balance b/d 8,000 By Depreciation 4,700

To Bank 15,000 By Bank (Sale) 800
(purchase) By Balance c/d 17,500
Note 2: Opening Balance Sheet of Helping Club

As on 01.01.2018
Liabilities Amount Assets Amount
Capital Fund 33,800 Machinery & Equipment 8,000
(Bal. Fig) Subscription Receivable 1,500
Deposit A/c 22,300
O/s Printing Expenses 1,000 Current A/c 6,000
O/s Honoraria expenses 4,000 Cash 1,000
Note: Unpresented cheques have no impact in preparing financials of this organization as such
transaction (i.e. issue of cheque to parties) have already been recorded in organization’s book. It
is pending to be recorded at Bank’s end in Bank Statement.

Chapter: Provisions, Contingent Liability and Contingent Assets

Basis Provision Contingent Liability

A contingent liability is:
It is a present obligation as a result - a possible obligation as a result of past
of past event due to which there is event dependent upon future contingent
a probable outflow of economic events, or
Meaning
resources and a reliable estimate - a present obligation as a result of past
of the amount of provision can be event not recognized because there is no
made. probable outflow of resources or reliable
estimate of the amount cannot be made.
It should be recognized in books
by passing entry:
Recognition It is not recognized in books of account.
Dr. P/L A/c
Cr. Provision (Liability)
Opening Balance, Addition,
Fact and Amount of liability (where
Disclosure Reversal and Closing balance
possible) shall be disclosed.
should be disclosed separately.
Contingent Liability is not accounted and
Impact on A probable liability is accounted
hence has no impact on profits for the
Net Profit and hence it reduces the net profit.
period.
Liability on Bills Discounted not yet
Provision for Warranties,
matured, Claims against the business, not
Examples Provision for Tax Liability,
acknowledged as debts, Guarantees given,
Provision for Expenses, etc.
if the principal debtor is solvent, etc.

Section 3: Exam Tips to Students

Tip 1:
First of all, read the question very carefully because most of the times students are making answers
differently while the question has asked differently. More often, small adjustments, figures,
numbers, ratios, date, rate, etc. are ignored due to not reading questions carefully.
Tip 2:
Do not panic or take stress while appearing in exams. Taking stress will only make the situation
worse. Go with the flow and try to attempt from the easiest/ simplest one or you are confident in.
You need not solve the questions chronologically.
Tip 3:
Time management. Allocate total time for each question accordingly. You can set margin for some
lengthy questions and make some adjustments for simple and short questions. If you feel like you
are stuck in between and it is consuming much more time than allocated, skip to the next because
you can score by attempting the next one.
Tip 4:
Fair presentation. Always try to present in neat and clean way. For this you should prepare and
practice accordingly from the beginning. Fair does not mean neat and clean only, it also means
proper workings for your main answer as well.
Tip 5:
Revise, repeat and practice frequently. Be consistent in your studies. This will have definitely
impact on your exam result.

Paper 2
Audit & Assurance

Section 1: Questions:
Chapter: REGULATORY AND ETHICAL ISSUES
Question No. 1:
You are audit manager of PZC & Co., a large audit firm that specializes in the audit of retailers.
The firm currently is statutory auditor of Alpha Co., a food retailer, but its main competitor Beta
Co. has approached the audit firm to act as its auditor. Both the companies are highly competitive
and Alpha Co. is concerned that if PZC & Co. audits both the companies then confidential
information can pass across Beta Co. You are required to explain the safeguards that your firm
should implement to ensure that this conflict of interest is properly managed.
Question No. 2:
The audit report of Medico Ltd. was signed by Mr. Shyam, a member of the Institute of Chartered
Accountants of Nepal, who is working as audit manager of Pandey & Associates, a Chartered
Accountant firm.
Question No. 3:
While submitting the financial proposal on consultancy works of Emiliya Gypsum Limited, PZT
Associates, a CA. firm has calculated the cost as follows:
▪ FCA Rs. 10,000 per day/person
▪ CA Rs. 7,500 per day/person
▪ Semi Qualified Rs. 2,500 Per day/person
▪ Assistants Rs. 2,000 Per day/person
You are required to comment on the calculation of cost pursuant to minimum audit fee guidelines
issued by the Institute of Chartered Accountants of Nepal.
Question No. 4:
Mr. A, a Chartered Accountant, was the auditor of 'A Limited'. During the financial year 2079-80,
an investment of Rs. 10 lakhs appeared in the Balance Sheet of the company with the same amount
as in the last year(comparative figure). Later on, it was found that the company's investments were
only Rs. 25,000, but the value of investments was inflated for the purpose of obtaining higher
amount of Bank loan.
Question No. 5:
Mr. X & Mr. Y, partners of a Chartered Accountant Firm, one in-charge of Head Office and
another in-charge of Branch at a distance of 80 kms from the municipal limits, puts up a name-
board of the firm in their respective residences.
Question No. 6:
Mr. S, a Chartered Accountant published a book and gave his personal details as the author. These
details also mentioned his professional experience and his present association as partner with M/s
RST, a Chartered Accountant firm.
Chapter: COMPLETING AND REPORTING ON AN ASSURANCE ENGAGEMENT

Question No. 7:
D Ltd. is a company engaged in publishing business magazines. CA. P is the statutory auditor of
the company. The company takes property in the barter deal from its real estate customers against
publication of their advertisements. The properties obtained during the year through such barter
deals have been considered in the books of accounts on the basis of possession letter only and have
been included in PPE in the financial statements. Considering this matter as of such importance
that is fundamental to the users understanding, CA. P has decided to communicate the same in his
report. CA. P seeks your guidance in reporting this matter in his audit report.
Question No. 8:
An auditor is required to make specific evaluations while forming an opinion in an audit report.
State those specific evaluations.
Chapter: NEPAL STANDARDS ON AUDITING (NSA)

Question No. 9:
With reference to NSA 530 “Audit Sampling”, briefly explain the following factors that the auditor
may consider when determining the sample size for the Test of Details –
(i) The desired level of assurance
(ii) Stratification of the population.
Question No. 10:
You are the audit manager on the audit of a listed company, Shyam Limited (SL). Prior to
completion of audit, you came across to a prospectus issued by Neelum Limited (NL) according
to which a director of SL was the Chief Executive Officer of NL. However, the name of NL was
not included in the list of related parties provided by SL. On being confronted, the management
has advised that the name was omitted inadvertently as the appointment took place just two months
prior to the year end.
Question No. 11:
Tree Limited presented its financial statements for the F.Y. 2021-2022 to its auditor for expressing
an opinion thereon. The auditor while carrying out the audit started comparing various items of
profit and loss account of the year under audit with previous financial years. What is the auditor
trying to achieve by carrying out those comparisons?
Question No. 12:
While commencing the statutory audit of B Company Limited, the auditor undertook the risk
assessment and found that the detection risk relating to a certain class of transactions cannot be
reduced to the acceptance level.
Question No. 13:

An auditor who, before the completion of the engagement, is requested to change the engagement
to one which provides a lower level of assurance, should consider the appropriateness of doing so.
Explain stating the factors based on which the client can request the auditor to change the
engagement.
Question No. 14:
“Professional judgment is essential to the proper conduct of an audit.” Discuss.
Question No. 15:
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often
begins shortly after the completion of the previous audit and continues until the completion of the
current audit engagement. Planning includes the need to consider certain matters prior to the
auditor’s identification and assessment of the risks of material misstatement. Explain clearly
stating those matters also.
Question No. 16:
The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence
that all events occurring between the date of the financial statements and the date of the auditor’s
report that require adjustment of, or disclosure in, the financial statements have been identified.
Explain.
Question No. 17:
Management’s assessment of the entity’s ability to continue as a going concern involves making
a judgment about inherently uncertain future outcomes of events or conditions. What are the
relevant factors to that judgment?
Question No. 18:
CA K audited the books of accounts of E Ltd. for the financial year 2020-2021. The auditor used
an audit procedure according to which all the documents and records maintained by the company
were checked in detail to obtain audit evidence. Explain the audit procedure used by the auditor
and its reliability.
Question No. 19:
Saburi Yarns Ltd. is engaged in the manufacturing and trading of yarns of different types. Its huge
amount is locked up in account receivables. Moreover, Management of Saburi Yarns Ltd is
worried about its Internal Control system over receipts from account receivables and other receipts.
Management wants to understand from you as an auditor a few techniques as to how receipts can
be suppressed resulting into frauds and finally incurring losses.
Question No. 20:
On going through the financial statements of PQR Ltd, its auditors Kamal Rai and Associates
observed that the company has taken Loans from banks and financial institutions. Further, the audit
team discusses the following about Liabilities: “Liabilities are the financial obligations of an
enterprise other than owners’ funds. Liabilities include loans/ borrowings, trade payables and other

current liabilities, deferred payment credits and provisions. Verification of liabilities is as

important as that of assets, for, if any liability is omitted (or understated) or over stated, the Balance
Sheet would not show a true and fair view of the state of affairs of the company.” Advise stating
clearly the audit procedures generally required to be undertaken for verification of the existence
of Borrowings.
Chapter: Government Audit

Question No. 21:
The post of Auditor General was vacant for 4 months. There was a huge protest from the opponent
political parties regarding the vacant post. The President of Nepal upon the recommendation of
ICAN appointed Mr. Lokman Tamang, a Chartered Accountant member of ICAN having over 25
years of experience in audit as Auditor General of Nepal. Examine the validity of the appointment
of Mr. Lokman Tamang.
Question No. 22:

Ram & Hari Associates, Chartered Accountants is appointed as an assistant auditor by the Auditor
General Office to conduct the audit of a corporation fully owned by Sudur Paschim Province. Mr.
Ram, a partner of the firm, thinks that he shall have to audit independently. Mr. Ram started to
bargain for remuneration with the client. Can he perform an audit independently and ask for
remuneration from a client? Give your opinion based on the provisions of the Audit Act, 2075.
Chapter: INTERNAL CONTROL AND THE COMPUTERISED ENVIRONMENT

Question No. 23:
The overall objective & scope of the audit does not change in an EDP environment. Explain
Question No. 24:

Distinguish between Manual Accounting & Computerized Accounting
Question No. 25: Short Notes

a. Agreed Upon Procedure
b. Audit Completion Memorandum
c. Tagging & Tracing
d. Corporate body as per Audit Act
Question No 26.: Difference Between

a. Management Representation Letter and Management Letter
b. Reserve & Provision

Revision Test Paper (RTP), December 2023 CAP II – Group I
Section 2: Answers:
As per Section 310 of the Code of Ethics, a threat to objectivity or confidentiality may be created
when a professional accountant in public practice performs services for clients whose interests
conflict. A professional accountant in public practice shall evaluate the significance of any threats
and apply safeguards when necessary to eliminate the threats or reduce them to an acceptable level.
Both companies should be notified that PZC & Co. would be acting as auditors for each company
and, if necessary, consent obtained. Further safeguards could be:
▪ Advising one or both clients to seek additional independent advice.
▪ The use of separate engagement teams with different engagement partners and team
members.
▪ Procedures to prevent access to information, for example, strict physical separation of
both teams, and confidential and secure data filing.
▪ Clear guidelines for members of each engagement team on issues of security and
confidentiality. These guidelines could be included within the audit engagement letters.
▪ Potentially the use of confidentiality agreements signed by employees and partners of the
firm.
▪ Regular monitoring of the application of the above safeguards by a senior individual in
PZC & Co. not involved in either audit.
▪ In case the consent has been refused by the client, then the firm shall not continue to act
for one of the parties (either Alpha or Beta).

Section 116 of the Companies Act, 2063 requires that only a person appointed as the auditor of the
company or where a firm is so appointed, the member who has been authorized by a decision of
the partners of such institution, may sign the auditor's report or sign or authenticate any other
document of the company required by law to be signed or authenticated by the auditor.
Therefore, Mr. Shyam, a member of the Institute and a manager of M/s Pandey & Associates.,
Chartered Accountants, cannot sign on behalf of the firm in view of the specific requirements of
the Companies Act, 2063.
Further, as per Section 29 of Nepal Chartered Accountants Act 2053, to carry out an accounting
profession, a Certificate of Practice (COP) is a must and the Institute of Chartered Accountants of
Nepal restricts its Chartered Accountant member in service even to holding a COP. So, Mr. Shyam
cannot sign the audit report.

Nepal Chartered Accountants Act, 2053, Nepal Chartered Accountants Rules, 2061 and the Code
of Conduct of the Institute have given authority to make certain standards on the charging of fees
by its members. Applying the power as provided in the above statutes, the Council has decided
and fixed certain fundamental principles on minimum fees, consultancy services fee and fee on
certification work. As per the decision of the Minimum fee guidelines, the minimum consultancy
charges are as follows:
▪ FCA member at least Rs. 15,000/- per working days

▪ CA member at least Rs. 10,000/- per working days

▪ Semi Qualified Rs. 3000/- per working days
▪ Assistant Rs. 2000/- per working days
In a given case, the fee as quoted by the CA firm does not comply with the Minimum fee guidelines
except assistant charge which is as per the guidelines.

Section 34(14) of the Nepal Chartered Accountants Act 2053 requires a member to obtain
sufficient information prior to giving any audit opinion. Similarly, Section 34(8) of the Act
requires a member to clearly indicate all the material facts or any false statements or explanations
known to him or to the best of his knowledge in order to truly present the financial statements
certified by him. The primary duty of physical verification and valuation of investments is of the
management. However, the auditor's duty is also to verify the physical existence and valuation of
investments placed, at least on the last day of the accounting year. The auditor should verify the
documentary evidence for the cost/value and physical existence of the investments at the end of
the year. He should not blindly rely upon the management's representation. In the instant case,
such non-verification happened for two years. It also appears that auditors failed to confirm the
value of investments from any proper source. In case the auditor has simply relied on the
management's representation, the auditor has failed to perform his duty. Accordingly, Mr. A will
be held liable for professional misconduct under the Chartered Accountants Act, 2053 in terms of
Sections 34(8) and (14).

Putting Name Board of the Firm at Residence: As per the Marketing Guidelines issued by ICAN
with regard to the use of the name board, there will be no bar to the putting up of a name-board in
the place of residence of a member with the designation of Chartered Accountant, provided, it is a
name-plate or board of an individual member and not of the firm.
In the given case, partners of XY & Co., put up a name board of the firm in both offices and also
in their respective residences. Thus, the chartered accountants are guilty of misconduct. The
distance given in the question is not relevant for deciding.

Soliciting Professional Work: It refers to professional misconduct of a member in practice if he
solicits client or professional work either directly or indirectly, by circular, advertisement, personal
communication or interview or by any other means. Therefore, members should not adopt any
indirect methods to advertise their professional practice with a view to gain publicity and thereby
solicit clients or professional work. Such a restraint must be practiced so that members may
maintain their independence of judgement and may be able to command the respect of their
prospective clients.
As per marketing guidelines issued by ICAN, for a member writing a book, monograph, pamphlet,
etc., other personal particulars, are as usual, viz, education, hobbies and interests, other
qualifications, and previous publications. But it is not permitted to indicate in a book or

monograph, pamphlet, etc. published by him/her, the association with any firm of practicing
member.
In this case, Mr. S, Chartered Accountant, published the book and mentioned his professional
experience and his association as a partner with M/s RST, a firm of chartered accountants. Mr. S
being a chartered accountant in practice has committed the professional misconduct by mentioning
that at present he is a partner in M/s. RST, a chartered accountants firm.

Emphasis of Matter Paragraphs in the Auditor’s Report: If the auditor considers it necessary
to draw users’ attention to a matter presented or disclosed in the financial statements that, in the
auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the
financial statements, the auditor shall include an Emphasis of Matter paragraph in the auditor’s
report provided:
(i) The auditor would not be required to modify the opinion in accordance with NSA 705 as a
result of the matter; and
(ii) When NSA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the auditor’s report.
In the given case, as the properties obtained during the year through barter deals and included in
the PPE in the books of accounts on the basis of possession letter only, hence there is a need to
add Emphasis on Matter Paragraph in the Auditor’s Report.
The draft of the same is as under:
Emphasis of Matter – Effect of Properties obtained through barter deals by the company
We draw attention to Note (Y) of the financial statements, which describes the effects of the
properties obtained through barter by the company. Our opinion is not modified in respect of this
matter.

Specific Evaluations by the auditor: The auditor shall evaluate whether the financial statements
are prepared, in all material respects, in accordance with the requirements of the applicable
financial reporting framework. This evaluation shall include consideration of the qualitative
aspects of the entity’s accounting practices, including indicators of possible bias in management’s
judgments. In particular, the auditor shall evaluate whether :
(i) The financial statements adequately disclose the significant accounting policies selected and
applied; (ii) The accounting policies selected and applied are consistent with the applicable
financial reporting framework and are appropriate;
(iii) The accounting estimates made by management are reasonable;
(iv) The information presented in the financial statements is relevant, reliable, comparable, and
understandable;
(v) The financial statements provide adequate disclosures to enable the intended users to
understand the effect of material transactions and events on the information conveyed in the
financial statements; and

(vi)The terminology used in the financial statements, including the title of each financial statement,
is appropriate.

Examples of factors influencing Sample Size for Test of Details:
(i) Desired Level of Assurance: An increase in the auditor’s desired level of assurance that
tolerable misstatement is not exceeded by actual misstatement in the population will increase the
sample size. Hence, greater the level of assurance that the auditor requires that the results of the
sample are in fact indicative of the actual amount of misstatement in the population, the larger the
sample size needs to be.
(ii) Stratification of population: When stratification of the population is appropriate then sample
size will decrease as when there is a wide range (variability) in the monetary size of items in the
population, it may be useful to stratify the population. When a population can be appropriately
stratified, the aggregate of the sample sizes from the strata generally will be less than the sample
size that would have been required to attain a given level of sampling risk, had one sample been
drawn from the whole population.

In the scenario, a previously undisclosed related party has been identified. As per NSA 550 Related
Parties, I shall:
▪ Communicate the relevant information to the audit team.
▪ Assess as to why the entity’s system failed to identify or disclose the related party
relationship.
▪ Request management to identify all transactions with NL and disclose them accordingly.
▪ Perform appropriate substantive procedures on the newly identified related parties or
significant related party transactions.
▪ Assess the reasonableness of the management’s explanation and; & evaluate the
implications on the audit, if the non-disclosure appears intentional.

Purpose of Applying Analytical Procedure: Analytical procedures use comparisons and
relationships to assess whether account balances or other data appear reasonable. The auditor of
Tree Ltd. would achieve the following by carrying out the comparison stated in the question:
(i) If balances included in the Statement of Profit and Loss of an entity are compared with those
contained in the Statement of Profit and Loss with that of the previous period, it would be possible
to find out the reasons for increase or decrease in the amount of profits of those years.
(ii) By setting up certain expenses’ ratios on the basis of balances included in the Statement of
Profit and Loss, for the year under audit, comparing them with the same ratios for the previous
year, it is possible to ascertain the extent of increase or decrease in various items of expenditure in
relation to sales and that of trading profit in relation to sales.

(iii) If differences are found to be material, the auditor would ascertain the reasons thereof and
assess whether the accounts have been manipulated to inflate or suppress profits.
(iv) It would be possible to identify the existence of unusual transactions, amounts, ratios and
trends that might indicate matters that have audit implications.

NSA 315 and NSA 330 "Identifying and Assessing the Risk of Material Misstatement Through
Understanding the Entity and its Environment" and "The Auditor's Responses to Assessed Risks"
establish standards on the procedures to be followed to obtain an understanding of the accounting
and internal control systems and on audit risk and its components: inherent risk, control risk, and
detection risk. NSA 315 and NSA 330 require that the auditor should use professional judgment
to assess audit risk and to design audit procedures to ensure that it is reduced to an acceptably low
level. "Detection risk" is the risk that an auditor's substantive procedures will not detect a
misstatement that exists in an account balance or class of transactions that could be material. The
higher the assessment of inherent and control risks, the more audit evidence the auditor should
obtain from the performance of substantive procedures. When both inherent and control risks are
assessed as high, the auditor needs to consider whether substantive procedures can provide
sufficient appropriate audit evidence to reduce detection risk, and therefore audit risk, to an
acceptably low level. The auditor should use his professional judgment to assess audit risk and to
design audit procedures to ensure that it is reduced to an acceptably low level. If it cannot be
reduced to an acceptable level, the auditor should express a qualified opinion, or a disclaimer of
opinion as may be appropriate.

An auditor who, before the completion of the engagement, is requested to change the engagement
to one which provides a lower level of assurance, should consider the appropriateness of doing so.
A request from the client for the auditor to change the engagement may result from
1. a change in circumstances affecting the need for the service,
2. a misunderstanding as to the nature of an audit or related service originally requested.
3. a restriction on the scope of the engagement, whether imposed by management or caused by
circumstances.
Professional judgment is essential to the proper conduct of an audit. This is because the
interpretation of relevant ethical requirements and the NSAs and the informed decisions required
throughout the audit cannot be made without the application of relevant knowledge and experience
to the facts and circumstances. Professional judgment is necessary in particular regarding decisions
about:
(i) Materiality and audit risk.

(ii) The nature, timing, and extent of audit procedures used to meet the requirements of the NSAs
and gather audit evidence.
(iii) Evaluating whether sufficient appropriate audit evidence has been obtained and whether more
needs to be done to achieve the objectives of the NSAs and thereby, the overall objectives of the
auditor.
(iv) The evaluation of management’s judgments in applying the entity’s applicable financial
reporting framework.
(v) The drawing of conclusions based on the audit evidence obtained, for example, assessing the
reasonableness of the estimates made by management in preparing the financial statements.
In the context of recurring audits, as per NSA-300, “Planning an Audit of Financial Statements”,
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often
begins shortly after (or in connection with) the completion of the previous audit and continues
until the completion of the current audit engagement. Planning, however, includes consideration
of the timing of certain activities and audit procedures that need to be completed prior to the
performance of further audit procedures. For example, planning includes the need to consider,
prior to the auditor’s identification and assessment of the risks of material misstatement, such
matters as:
1. The analytical procedures to be applied as risk assessment procedures.
2. Obtaining a general understanding of the legal and regulatory framework applicable to the entity
and how the entity is complying with that framework.
3. The determination of materiality.
4. The involvement of experts.
5. The performance of other risk assessment procedures
The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence
that all events occurring between the date of the financial statements and the date of the auditor’s
report that require adjustment of, or disclosure in, the financial statements have been identified.
The auditor is not, however, expected to perform additional audit procedures on matters to which
previously applied audit procedures have provided satisfactory conclusions. The auditor shall
perform the procedures required above so that they cover the period from the date of the financial
statements to the date of the auditor’s report, or as near as practicable thereto. The auditor shall
consider the auditor’s risk assessment which shall include the following:
(a) Obtaining an understanding of any procedures management has established to ensure that
subsequent events are identified.

(b) Inquiring of management and, where appropriate, those charged with governance as to whether
any subsequent events have occurred that might affect the financial statements.
(c) Reading minutes, if any, of the meetings, of the entity’s owners, management and those charged
with governance, that have been held after the date of the financial statements and inquiring about
matters discussed at any such meetings for which minutes are not yet available.
(d) Reading the entity’s latest subsequent interim financial statements, if any.
Management’s assessment of the entity’s ability to continue as a going concern involves making
a judgment, at a particular point in time, about inherently uncertain future outcomes of events or
conditions. The following factors are relevant to that judgment:
• The degree of uncertainty associated with the outcome of an event or condition increases
significantly the further into the future an event or condition or the outcome occurs. For that reason,
most financial reporting frameworks that require an explicit management assessment specify the
period for which management is required to take into account all available information.
• The size and complexity of the entity, the nature and condition of its business and the degree to
which it is affected by external factors affect the judgment regarding the outcome of events or
conditions.
• Any judgment about the future is based on information available at the time at which the
judgment is made. Subsequent events may result in outcomes that are inconsistent with judgments
that were reasonable at the time they were made.
Inspection involves examining records or documents, whether internal or external, in paper form,
electronic form, or other media, or a physical examination of an asset. Inspection of records and
documents provides audit evidence of varying degrees of reliability, depending on their nature and
source and, in the case of internal records and documents, on the effectiveness of the controls over
their production.
Example of inspection used as a test of controls is inspection of records for evidence of
authorization. Some documents represent direct audit evidence of the existence of an asset, for
example, a document constituting a financial instrument such as a inventory or bond. Inspection
of such documents may not necessarily provide audit evidence about ownership or value. In
addition, inspecting an executed contract may provide audit evidence relevant to the entity’s
application of accounting policies, such as revenue recognition. Inspection of tangible assets may
provide reliable audit evidence with respect to their existence, but not necessarily about the entity’s
rights and obligations or the valuation of the assets. Inspection of individual inventory items may
accompany the observation of inventory counting.
In view of the above, it can be concluded that CA K used Inspection as an audit procedure.

Few Techniques of how receipts are suppressed are:

(1) Teeming and Lading: Amount received from a customer being misappropriated; also to prevent
its detection the money received from another customer subsequently being credited to the account
of the customer who has paid earlier. Similarly, moneys received from the customer who has paid
thereafter being credited to the account of the second customer and such a practice is continued so
that no one account is outstanding for payment for any length of time, which may lead the
management to either send out a statement of account to him or communicate with him.
(2) Adjusting unauthorized or fictitious rebates, allowances, discounts, etc. to customers’ accounts
and misappropriating amounts paid by them.
(3) Writing off as debts in respect of such balances against which cash has already been received
but has been misappropriated.
(4) Not accounting for cash sales fully.
(5) Not accounting for miscellaneous receipts, e.g., sale of scrap, quarters allotted to the
employees, etc.
(6) Writing down asset values in their entirety, selling them subsequently, and misappropriating
the proceeds.
Review board minutes for approval of new lending agreements. During review, make sure that any
new loan agreements or bond issuances are authorized. Ensure that significant debt commitments
should be approved by the board of directors.
• Agree details of loans recorded (interest rate, nature and repayment terms) to the loan agreement.
Verify that borrowing limits imposed by agreements are not exceeded.
• Agree overdrafts and loans recorded to bank confirmation / confirmation to lenders.
• Agree details of leases and hire purchase creditors recorded to underlying agreement.
• Examine trust deed for terms and dates of redemption, borrowing restrictions and compliance
with covenants.
• When debt is retired, ensure that a discharge is received on assets securing the debt.
• If we become aware of significant transactions that are outside the normal course of business or
that otherwise appear to be unusual given our understanding of the entity and its environment,
perform the following procedures:
(a) Gain an understanding of the business rationale for such significant unusual transaction.
(b) Consider whether the transactions involve previously unidentified related parties or parties that
do not have the substance or the financial strength to support the transaction without assistance
from the entity we are auditing.

Article 240(1) of the Constitution of Nepal, 2072 has laid down provisions regarding the
appointment of Auditor General. It provides that the President of Nepal shall on the
recommendation of the Constitutional Council, appoint Auditor General. The term of office of the
Auditor General shall be six years from the date of appointment. As per the provisions provided
in Article 240(6) of the Constitution of Nepal, the qualification of Auditor General shall be as
follows:
(a) Having experience in the special class of Government of Nepal or having at least 20 years of
experience in audit related work after having obtained a bachelor's degree in management,

commerce or accounting from recognized university by the Government of Nepal or having passed
a chartered accountancy examination,
(b) Not being a member of any political party at the time of appointment,
(c) Having attained the age of 45 years, and
(d) Being of high moral character. Mr. Lokman Tamang is a CA having over 25 years of experience
in audit. Considering Mr. Tamang, not being a member of any political party, attained the age of
45 years and having high moral character, he is qualified for the appointment.
The constitution provides that the President of Nepal shall on the recommendation of the
Constitutional Council, appoint Auditor General. In the given case, the Auditor General is
appointed on the recommendation of the ICAN. Thus, the appointment is invalid.
Answer to Question No. :

Section 3 of Audit Act, 2075 states that the audit of corporate body wholly owned by Government
of Nepal, Provincial Government or Local level shall be audited by Auditor General. Further,
section 10 of the Act provides that the Auditor General may appoint license holder auditor under
the prevailing laws an assistant as per necessity for the audit of the corporate bodies wholly owned
by Nepal Government, Provincial Government or Local level. The auditor appointed as assistant
of Auditor General shall act under the direction, supervision and control of the Auditor General.
The powers, functions, duties and responsibilities of the auditor appointed as assistant and the
procedures to be followed by him/her in the course of audit and provisions relating to report shall
be as prescribed in the Act, and in the matters not prescribed in the Act, it shall be as prescribed
by the Auditor General.
Thus, Mr. Ram cannot do the audit independently, since he has been appointed as an assistant
auditor of Auditor General. Similarly, remuneration of such an assistant auditor shall be fixed by
Auditor General keeping in view of volume of financial transactions, status of accounts, number
of branches, work load etc. and paid by client.

As per NSA-200, the overall objectives of the auditors are:
o To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the auditor to express
an opinion on whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework; and
o To report on the financial statements, and communicate as required by the NSAs, in accordance
with the auditor’s findings.
The scope of audit of financial statements is determined by the auditor considering the
requirements of relevant legislation, Pronouncements of ICAN & the terms of engagement. Thus,
he studies & evaluate the internal control system & accounting system of the client in order to
express an opinion on financial statement.
If the client is using EDP, there is an impact on the internal control procedures adopted by the
client as these are different than the procedures adopted in manual systems. Moreover, the use of
computer changes the way financial information is processed & stored. Thus, EDP environment
affects the procedures adopted by auditor to assess the risk (RAP) & responses to risk.
In an EDP environment, the auditor needs to obtain sufficient understanding of the computer
software, hardware and processing systems so as to plan his audit effectively. Moreover, he may
require use of CAATs as well, as there may be lack of audit trail. However, the overall objective
& scope of audit does not change in the EDP environment as ultimately, he has to express his
opinion on financial statements following NSAs and relevant legislations. Whether the client is
using manual system or EDP environment just makes an impact on procedures adopted by the
auditor but overall objective & scope of audit remains the same.

DIFFERENCE BETWEEN MANUAL ACCOUNTING SYSTEM & COMUTERIZED
ACCOUNTING SYSTEM
MANUAL ACCOUNTING COMPUTERIZED ACCOUNTING
Speed & 1.The process of entering transactions, 1. Accounting software processes
Efficiency posting to ledgers, and preparing financial transactions instantly and
statements can be time-consuming and automatically, which is significantly
prone to human error. faster and less prone to mistakes.
2.Physical space is needed to store ledgers, 2. All data are stored electronically,
Data journals, and other accounting records. which reduces physical storage space.
Storage
Retrieving specific records can be time- The system can quickly retrieve any
and
consuming. transaction or report at any time.
Retrieval
3.Mistakes can easily occur in manual data 3. Software automatically calculates

Accuracy entry, calculations, and balancing totals and balances accounts, reducing
and Error accounts. Detecting errors requires careful the risk of errors. The system can also
Detection review and can be difficult. detect and highlight errors.
4.Preparing reports or performing financial 4. Accounting software can quickly

analysis manually can be complex and generate a wide range of financial
Reporting time-consuming. Flexibility in reporting is reports, charts, can also perform
and limited. complex financial analyses quickly.
Analysis
5.Audit Trail is visible 5. Audit Trail is not visible
Audit
Trail
Answer to Question No 25:

a. Agreed Upon Procedure
This is an engagement where the practitioner is engaged to carry out those procedures of an audit
nature to which the practitioner and the entity and any appropriate third parties have agreed and to
report on factual findings.

This is very different from an audit engagement, where the auditor decides the procedures to be
followed in order to reach an audit opinion.
The practitioner provides a report on factual findings from the procedures performed. No assurance
is provided.
It is left to the user to assess the procedures and findings and to draw their own conclusions.
The report issued at the end of an agreed-upon procedure should be made available only to those
who have agreed the procedures with the auditor/accountant. This is because other people who are
unaware of the agreed upon procedures may misinterpret the meaning of the report.
b. Audit Completion Memorandum

A summary prepared by the auditor describes:
1. Significant matters identified during the audit.
2. How the matters were addressed.
This summary facilitates effective and efficient review & inspection of audit documentation,
particularly in large and complex audits.
c. Tagging & Tracing

o Tagging and Tracing is a technique better than Integrated Test Data Facility. It involves
tagging the client's input data in such a way that relevant information is displayed at key
points.
o It uses the actual data, and so the question of elimination of ‗special entries' test data
designed under Integrated Test Data Facility does not arise.
o The hard copy, so produced, is available only to the auditor and may describe such inputs
as hours worked in a pay period in excess of 50; or sales orders processed in excess of Rs.
100,000.
o This enables the auditor to examine transactions at the intermediate steps in processing.
The advantage of the tagging and tracing approach lies in the use of actual data and
elimination of the need for reversing journal entries. The disadvantage is that the erroneous
data will not necessarily be tagged.
o An effective combination approach may be to use the Integrated Test Facility approach for
a few hypothetical transactions and the tagging and tracing approach to follow line data
through a complex system.
d. Corporate body as per Audit Act

"Corporate body" means a corporate body whose more than fifty percent shares or assets are owned
by Government of Nepal, province government or federal government and this term also includes
a body in which Government of Nepal, province government or federal government or any entity
in which there is majority ownership of government of Nepal, province government or federal
government holds more than fifty percent share ownership.
Answer to Question No 26:

a. Management Representation Letter & Management Letter

Criteria Management Representation Management Letter
Meaning It is a written statement provided by the Management letter is a letter to

management to confirm certain matters management regarding internal
& to support other audit evidence. control deficiencies/weaknesses.
Purpose To emphasize or impress upon To communicate appropriately to
management its ultimate responsibility those charged with governance and
for the financial statements management deficiencies in internal
control that the auditor has identified
in an audit of financial statements.
Providers Provided by management to Provided by auditors to
auditors management
Content Confirms the accuracy and Provides recommendations for

completeness of financial improving internal controls and
business processes
information and disclosures
Signed by Signed by senior management, such as May be addressed to a variety of

the CEO or CFO stakeholders, including the Board of
Directors, investors, and management
b. Reserve & Provision

Reserves are amounts appropriated out of profits that are not intended to meet any liability,
contingency, commitment or diminution in the value of assets known to exist as at the date of the
Balance Sheet. On the contrary, provisions are amounts charged against revenue to provide for:
(i) Renewal or diminution in the value of assets; or
(ii) a known liability, the amount whereof could only be estimated and cannot be determined with
accuracy; or
(iii) a claim which is disputed. Amounts contributed or transferred from profits to make good the
diminution in value of assets because some of them have been lost or destroyed as a result of some
natural calamity or debts have proved to be irrecoverable are also described as provisions.
Provisions are normally charged to the Statement of Profit and Loss before arriving at the amount
of profit. Reserves are appropriations out of profits

Section 3: Exam tips to students:

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

Paper 3
Corporate and Other Laws

Section 1: Questions
Chapter 1: Companies Act, 2063
Question No. 1
Homemaker International Ltd. was incorporated on January 1, 2024. Prior to its incorporation, Mr.
Amrit Thapa, entered into a lease agreement on behalf of the proposed company, for hiring office
space. The company officially commenced its operations from March 1, 2024. On March 7, 2024,
Mr. Bimal Sharma, the owner of the leased asset requested for payment of lease rent. Mr. Amrit
Thapa refused to make payment saying that Mr. Bimal should seek payment from the company
instead of him as the company is liable to pay the rent. Discuss the legal implications of this pre-
incorporation contract under the Companies Act, 2063?
Question No. 2
Raghu Khola Hydropower Co. Ltd. has a paid-up capital of three hundred million rupees of which
Mr. Suvod Paudel, one of the shareholders, holds 2% ordinary shares with full voting rights.
Answer the following questions in the light of the Companies Act, 2063.
1. What are the provisions regarding substantial shareholders?
2. Is Mr. Suvod a substantial shareholder of Raghu Khola Hydropower Co. Ltd.?
Question No. 3
Mr. Bhuban Dahal is a person disqualified under law of Nepal to make contact. He intends to
purchase shares of Sagarmatha Insurance Company Ltd. Describe the provisions regarding the
restriction on minors and person disqualified under law to make contract to be promoter as per the
Companies Act, 2063? Can Mr. Dahal purchase shares of Sagarmatha Insurance Company Ltd.?
Question No. 4
During the Annual General Meeting (AGM) of Homeland Pvt. Ltd. conducted on Poush 4, 2079,
CA. Ramesh Rai, proprietor of R. Rai & Associates, was appointed as an auditor for fiscal year
2079/80. However, due to six-month family visit to Canada, CA. Rai was unable to conduct the
audit and subsequently resigned from the appointment. Subsequently, The Board of Directors of
the company appointed another auditor, CA. Mahesh Suwal, who completed the audit. At the
AGM held on Poush 5, 2080, one of the shareholders, Ms. Smita Baral raised concerns about the
validity of the appointment of auditor, CA. Mahesh Suwal and the audit report issued by him.
Evaluate the validity of the auditor's appointment in accordance with the Companies Act, 2063.
Chapter 2: Securities Act, 2063

Question No. 5
The Securities Board of Nepal (SEBON) intends to spend the revolving fund being operated by it.
Please advise the Board in line with the Securities Act, 2063, whether SEBON can spend the
revolving fund and if yes, in what sectors can it be spent?
Question No. 6

Mr. Biraj Bhatt is the Chairman of the Securities Board of Nepal (SEBON). The Board comprises
seven members including the Chairman. Two members of the board requested in writing to
convene the meeting of the Board but Chairman declined to do so stating that a written request
from at least 50% of the Board members, excluding the Chairman is required to call a board
meeting. Explain as per Securities Act, 2063 if the justification provided by the Chairman for not
convening a Board Meeting is correct?
Chapter 3: Banks and Financial Institution Act, 2073

Question No. 7
The board of directors of Sumina Bank Ltd. intended to buy back its shares. The board is not aware
whether the company is eligible for the buy back and approached you as an advisor. Please outline
the circumstances in which buy back of shares is permissible under Banks and Financial
Institutions Act, 2063
Question No. 8
Under what grounds, The Rastra Bank may refuse to issue license to operate banking and financial
transactions to a bank or financial institution?
Chapter 4: Nepal Rastra Bank Act, 2058

Question No. 9
The Board of Directors of Nepal Rastra Bank on 15th Jestha, 2080 approved the estimated budget
of income and expenditure and the programs for the upcoming fiscal year 2080/81. Mr. Raghunath
Bimali, Secretary of Ministry of Finance contemplated that the budget should be forwarded to the
Government of Nepal for amendment and approval.
i. Explain the role of Board of Directors of Nepal Rastra Bank regarding the approval of
budget of Nepal Rastra Bank as per Nepal Rastra Bank Act, 2058?
ii. Is Mr. Raghunath Bimali, Secretary of Ministry of Finance correct regarding the approval
of budget of Nepal Rastra Bank?
Question No. 10
The Finance Minister of Government of Nepal on 13th Magh, 2080 issued a notice for recalling
the bank notes and coins in circulation within Nepal. Mr. Gajendra Acharya filed a petition against
the Ministry of Finance with a view that only Nepal Rastra Bank is authorized for recalling the
bank notes and coins in circulation. Explain the provision of currency recall or withdrawal as per
Nepal Rastra Bank Act, 2058?
Chapter 5: Industrial Enterprises Act, 2076

Question No. 11
Mr. Hari Pd. Rawal obtained a permit from The Industrial and Investment Promotion Board to
register an industry with an objective of producing cigarette, bidi, cigar, chewing tobacco and other
goods utilizing tobacco as the basic raw materials, and electronic cigarettes. Due to weak financial
position of Mr. Hari, he decided to transfer ownership of the permit to Sugam Group of Companies.

Answer the following questions as per the provisions of The Industrial Enterprises Act, 2076
(2020).
i. Can Mr. Hari sell the ownership of permit to Sugam Group of Companies in current
scenario?
ii. Can the ownership of permit be transferred to Sugam Group in case of death of Mr Hari?
Question No. 12
Describe Micro Industry and Cottage Industry as per The Industrial Enterprises Act, 2076?
Chapter: 6 Bonus Act, 2030 (Amended 2074)

Question No. 13
Makalu Corporation is a manufacturing company fully owned by the Government of Nepal. At the
end of the fiscal year 2079/80, it retained a surplus balance of Rs. 100,000 after fulfilling all the
statutory obligations including the distribution of the bonus to its employees from the amount
allocated for bonus. In compliance with the Bonus Act, 2030, the company decided to allocate the
surplus amount to the welfare of its employees. Please answer the following question as per the
Bonus Act, 2030.
i. How should Makalu Corporation distribute the residual amount for the welfare of its
employees?
ii. Will your answer be the same as above, if the Makalu Corporation is a private sector
company?
Chapter 7: Insurance Act, 2079

Question No. 14
Mr. Nazir Hussen has taken a non-life insurance policy from Himalayan Insurance Company Ltd.
On occurrence of damage, he claimed for loss as per the policy. The Surveyor deputed inspected
the damage and submitted the report to the company within 25 days of inspection. The company
paid Mr. Nazir after 45 days of submission of the report by the Surveyor. Mr. Nazir believes that
his payment was delayed and the determined claim amount didn’t cover the loss caused to him.
Please answer the following questions as per Insurance Regulation, 2049;
i. What is the time limit for submission of report by Surveyor to the company and the time
limit to make payment to the insured?
ii. Explain the procedure to be taken by the Board if Mr. Nazir files a complaint stating that
the claim determined by the company didn’t cover his loss?
Chapter 8: Negotiable Instrument Act, 2034

Question No. 15
Mr. Arjun issued a negotiable instrument dated March 1, 2023, in favor of Mr. Bhaskar for a sum
of Rs. 50,000 as a repayment for a loan. The negotiable instrument mentioned to pay an interest at
the rate of 10% per annum in case of delay in payment. Due to unforeseen circumstances, Mr.
Bhaskar was only able to present the negotiable instrument to the bank for payment on September
10, 2023 after six months from the date of the negotiable instrument. The bank refused the payment

based on the stipulation that negotiable instrument must be presented within six months from the
date they are drawn. Mr. Bhaskar, seeking to recover his money, decided to take legal action
against Mr. Arjun, demanding not only the principal amount but also the interest at the rate
specified in the negotiable instrument.
Given the scenario and referring to sections 53 and 54 of the Negotiable Instrument Act regarding
payment and interest on negotiable instruments answer the following:
i. Was the bank correct in refusing the payment of the negotiable instrument presented by
Mr. Bhaskar? Why or why not?
ii. Is Mr. Bhaskar entitled to interest as specified in the negotiable instrument from Mr. Arjun?
Chapter 9: Labour Act, 2074

Question No. 16
Ms. Sumitra Dulal, follower of Hindu religion is being employed as a domestic labour by Ms.
Radhika Rai. Ms. Sumitra requested for leave during Dashain festival to which Ms. Radhika
refused and threatened to deduct one month’s salary if Sumitra stays on leave. Please answer the
following based on the provisions of the Labour Act, 2074.
i. Whether Labour Act of Nepal is applicable for domestic labour? If yes, what are the
provisions regarding domestic labour?
ii. Can Ms. Radhika deduct the salary during the leave taken by Ms. Sumitra for celebrating
Dashain festival of Hindu religion?
Question No. 17
Satya Narayan & Associates, Chartered Accountants is an audit firm registered under The Nepal
Chartered Accountants Act. Mr. Satya Narayan Rayamaji, the proprietor, has employed Mr.
Shyam Sundar Shrestha as a trainee in accordance with the approved curriculum of The Institute
of Chartered Accountants of Nepal. There are 20 employees in the firm including 5 trainees. Mr.
Shyam Sundar a trainee was paid as per the provisions applicable to the trainee under The Institute
of Chartered Accountants Act and Regulations.
Mr. Shyam Sundar was dissatisfied with the payment of remuneration made by Mr. Satyna
Narayan and demands the payment of remuneration of labour in regular employment as per the
Labour Act of Nepal.
Is the demand of Mr. Shyam Sundar Shrestha reasonable in accordance with the provision of the
Labour Act, 2074?
Chapter 10: Civil Code, 2074 (Part 5)

Question No. 18
Mr. Firoj Mahat works as a carrier of goods. The owner, Mr. Sanjay Pathak assigned Mr. Firoj on
13th December, 2023 to deliver a truck of second hand clothes from Kathmandu to Sahid Park of
Hetauda and handover the same to Mr. Arun Rai within 15th December, 2023 since the clothes
were to be distributed on 17th December, 2023. Mr. Firoj delivered the goods to Sahid Park of
Hetauda and handed them over to Mr. Rai on 16th December, 2023 and the goods were distributed

on 17th December, 2023 as per the intended schedule. Describe the liabilities of a carrier on the
basis of Civil Code, 2074 (Part 5).
Chapter 11: Social Welfare Act, 2049

Question No. 19
Full Moon Foundation, a newly established social organization, is affiliated to the Social Welfare
Council. As on today, the organization has not operated any projects in Nepal. Dr. Ojaswi Acharya
the Country Director, is negotiating with an organization in Japan to obtain economic assistance
but she is not aware about the procedures required to be fulfilled while obtaining economic
assistance from a foreign country.
Please describe the provisions relating to economic assistance as per the Social Welfare Act, 2049.
Chapter 12: Nepal Chartered Accountants Act, 2053 and Rules, 2061
Question No. 20
CA. Sanop Chettri is a member holding a Certificate of Practice and has been in practice for 15
years. Before finalizing the audit of one of his clients, he incurred severe illness and was admitted
to ICU. Due to regulatory pressure on the client, the final audit report was to be signed within the
prescribed deadline. Since the health of CA. Sanop was not improving, his son CA. Anup, a
member of the Institute of Chartered Accountants of Nepal, signed the audit report. Subsequently,
Mr. Ram Bahadur Sharma filed a complaint with The Institute of Chartered Accountants of Nepal
(ICAN) regarding the signing of the audit report by a member without Certificate of Practice.
Explain the consequences in accordance with the Nepal Chartered Accountants Act, 1997?
Question No. 21
In the examination conducted by The Institute of Chartered Accountants of Nepal (ICAN) on
December 2023 of CAP-II level, Mr. Hem Kafle received the following marks.
Subjects
Marks Obtained
GROUP I
Advanced Accounting 62
Audit & Assurance 29
Corporate & Other Laws 19
GROUP II
Financial Management 78
Cost & Management Accounting 58
Business Communication & Marketing 48
Income Tax & VAT Absent
In light of the provisions outlined in Nepal Chartered Accountants Rule, 2061, describe whether
the exemption on Advanced Accounting and Financial Management granted to Mr. Kafle?

Chapter 13: World Trade Organization and Nepalese Laws

Question No. 22
What are the roles of WTO in international business?

Section 2: Answers
Chapter 1: Companies Act, 2063

In the given case, Homemaker International Ltd. was incorporated on January 1, 2024, but prior
to its incorporation, Mr. Amrit Thapa, representing the proposed company, entered into a lease
agreement for hiring office space. Despite the company not initiating its operations until March 1,
2023, Mr. Bimal Sharma, the lessor, requested payment for the lease. However, Mr. Thapa
declined to make the payment and suggested that Mr. Sharma should seek payment from the
company.
According to section 17(1) a contract made prior to the incorporation of a company shall be a
proposed contract only, and such contract shall not be binding on the company.
(2) If, prior to the incorporation of a company, any person carries on any transaction or borrows
money on behalf of the company, such person shall be personally liable for any contract related
with the transaction so carried on, subject to Sub-section (3).
(3) If, within the time mentioned in any transactions or within the reasonable time after the
incorporation of a company, the company, through its act, action or conduct, accepts any act, action
or conduct, accepts any act, action to borrowing done or made prior to the date of authorization to
commence its transactions or endorses such act or action, that transaction shall be binding on the
company and the other contracting party; and the person carrying out such act or action shall be
released from the personal liability to be borne pursuant to Sub-section(2).
(4) Notwithstanding anything contained elsewhere in this Section, the consensus agreement of a
private company shall govern any contracts made prior to the incorporation of such company.
Thus, as per section 17, since Mr. Amrit Thapa had entered into a lease agreement for office space
before the incorporation of Homemaker International Ltd., it is a pre incorporation contract and
Mr. Thapa would be personally liable for the agreement and he cannot deny to make the payment.
However, if within a reasonable time after incorporation, the company accepts the lease agreement
or takes actions that imply acceptance, such as commencing operations in the leased office space,
then the lease agreement would become binding on the company and Mr. Thapa would be released
from his personal liability as per section 17(3) of the Companies Act, 2063.
Hence, in this case Mr. Amrit Thapa would be personally liable for the lease agreement.

In the given question, Mr. Suvod Paudel, one of the shareholders of Raghu Khola Hydropower Co.
Ltd. with a paid-up capital of three hundred million rupees, holds 2% shares.
i. The provision regarding substantial shareholder is as follows:
As per section 50(1) of Companies Act, 2063, if any person subscribes ordinary shares with
full voting rights that are five percent or more of the paid up capital of any public company of
which shares that person has held in his/her name or through his/her agent, that person shall be
deemed to have his/her substantial shareholding in such company.
Provided, however, that in the case of a company having the paid up capital of more than two
hundred fifty million rupees, any person shall be deemed to have the substantial shareholding

despite that such person has subscribed one percent or more of the total paid-up capital of such
company.
(2) A substantial shareholder of every public company shall give the company information
setting out his/her name, address as well as full particulars of the shares registered in his/her
or his/her agent’s name, within thirty five days after the knowledge of being a substantial
shareholder of that company.
(3) If a person ceases to be a substantial shareholder of any public company, that person shall
give the company information setting out his/her name, the date on which he ceases to possess
the status of a substantial shareholder of that company and other particulars as well as the
reason why he/she has ceased to be a substantial shareholder, within thirty-five days after the
date of knowledge of that matter.
(4) Every public company shall maintain a separate register for the purposes of sub-section (1),
(2) and (3).
ii. Since, Raghu Khola Hydropower Co. Ltd. has a paid-up capital of three hundred million rupees
which is more than prescribed and Mr. Suvod holds 2% ordinary shares with full voting rights,
as per section 50(1), Mr. Suvod Paudel is a substantial shareholder of Raghu Khola
Hydropower Co. Ltd.

In the given case Mr. Bhuban Dahal, a person disqualified under law of Nepal to make a contact
intends to purchase shares of Sagarmatha Insurance Company Ltd.
The provisions regarding the restriction on minor and person disqualified under law to make
contract to be promoter as per the Companies Act, 2063 are as follows;
As per section 66(1), a minor who has not attained the age of sixteen years and a person who is
not qualified to make contract under the law shall not be eligible to become the promoter of a
company.
Provided, however, that this section shall not be deemed to prevent a minor or a person who is
disqualified under the law to make contract from acquiring the title to the shares of a company
subscribed by the promoter, by virtue of succession or operation of law.
As per section 66(2) where any minor or any person who is disqualified under the law to make
contract is to purchase or sell any shares or debentures of any company, the father, mother or
husband or wife or legally appointed protector or guardian of such person shall do so.
Thus, as per section 66(2) the father, mother or husband or wife or legally appointed protector or
guardian of Mr. Bhuban Dahal can buy shares of Sagarmatha Insurance Company Ltd.

In the given case, the AGM on Poush 4, 2079 of Homeland Pvt. Ltd., appointed CA. Ramesh Rai
as auditor for F/Y 2079/80 who resigned due to a 6-month family visit to Canada. The Board then
appointed CA. Mahesh Suwal to complete the audit. During the next AGM on Poush 5, 2080, Ms.
Smita Baral questioned the validity of the appointment of the auditor and the audit report.
As per section 113 of Companies Act, 2063, where the annual general meeting of a company fails
to appoint an auditor for any reason or where the annual general meeting itself cannot be held or

where the auditor appointed pursuant to this Act ceases to continue his/her office for any reason,
the Office may, at the request of the board of directors of the company, appoint another auditor.
Thus, as per section 113, The Board of Directors of the company should request the Office of
Company Registrar to appoint the auditor of the company. Hence, the contention of shareholder
Ms. Smita Baral is correct. The appointment of CA. Mahesh Suwal and the audit report issued by
him is not valid.
Chapter 2: Securities Act, 2063

In the given case, The Securities Board of Nepal (SEBON) intends to spend the revolving fund
being operated by it.
As per section 23(1) of Securities Act, 2063, The Board may establish a revolving fund to manage
its source of income and such amounts as specified by the Board shall be credited to that fund each
year.
(2) The amounts of the revolving fund may be held in securities issued by the Government of
Nepal or in such a periodic account as may be prescribed by the Board.
(3) Generally, no money held in the revolving fund, other than income earned out of the money in
that fund, shall be spent.
(4) Provisions relating to the operation of the revolving fund shall be as prescribed.
Thus, as per section 23(3) SEBON can generally only spend the income earned out of the moneys
in the revolving fund.

In the given case, Chairman Mr. Biraj Bhatt of the Securities Board of Nepal (SEBON), leading a
seven-member board, refused to conduct meeting even after obtaining written request from two of
the members, citing a need for at least 50% (three out of six) member requests, excluding himself,
to call a meeting.
As per section 6(1) of Securities Act, 2063, The chairperson shall call the meeting of the Board as
per necessity. Such a meeting shall be held at least once a month.
(2) The meeting of the Board shall be held on such date, at such time and at such place as may be
specified by the chairperson.
(3) The meeting of the Board shall be presided over by the chairperson and by a member chosen
by the members from amongst themselves, in the absence of the chairperson.
(4) Where at least two members request in writing to call a meeting of the Board, the chairperson
shall have to call a meeting of the Board within seven days from the date of receipt of such a notice.
(5) The secretary of the Board shall provide the agenda to be discussed at the meeting to the
members, along with the notice for the meeting.
(6) The presence of more than fifty percent of the total number of members of the Board shall be
deemed to have been constituted a quorum for a meeting of the Board.

(7) A majority opinion shall prevail at the meeting of the Board and in the event of a tie; the person
presiding over the meeting shall exercise the casting vote.
(8) There shall be maintained a separate minute book recording the names of members present at,
matters discussed at and decisions made by each meeting of the Board, and such a book shall be
signed by members present.
(9) The decisions made by the Board shall be authenticated by the secretary of the Board and shall
provide to all members.
(10) Other procedures relating to the meeting of the Board shall be as determined by the Board
itself.
Therefore, in accordance with section 6(4), where at least two members request in writing to call
a meeting of the Board, the chairperson shall have to call a meeting of the Board within seven days
from the date of receipt of such a notice. Thus, the justification provided by the Chairman for not
convening a meeting is not correct.
Chapter 3: Banks and Financial Institution Act, 2073

In the given case, the board of directors of Sumina Bank Ltd. intended to buy back its share but is
not aware about the provisions laid out in the act for buy back of share. The circumstances under
which buy back of the share can be done are as follows:
As per section 13(1) no bank or financial institution shall purchase its own shares or lend loan
against security of its own shares.
(2) Notwithstanding anything contained in sub-section (1), in the following circumstances, a bank
or financial institution may, with the approval of the Rastra Bank, purchase its shares out of its
free reserves available for being distributed as dividends not exceeding the percentage prescribed
by the Rastra Bank: -
(a) If the shares issued by the bank or financial institution are fully paid up,
(b) If the shares issued by the bank or financial institution have already been listed in the securities
market,
(c) If the buy-back of own shares is authorized by the Articles of Association of the concerned
bank or financial institution,
(d) If a special resolution has been adopted at the General Meeting of the concerned bank or
financial institution authorizing the buy-back of own share,
(e) If the ratio of the debt owed by the bank or financial institution is not more than double of the
capital and general reserve fund after such buy-back of shares,
Explanation: For the purposes of this sub-section, “debt” means all amounts of secured or
unsecured debts borrowed by the bank or financial institution.
(f) If the value of shares to be bought back by a bank or financial institution is not more than twenty
percent of the total paid up capital and general reserve fund of that bank or financial institution,
(g) If the buy-back of shares comply with the directives relating to capital fund issued by the Rastra
Bank to the bank or financial institution,

(h) If it is not against the directives issued by the Rastra Bank from time to time with regard to buy
back of shares.
(3) Any bank or financial institution shall have to make an application before the Rastra Bank for
getting approval to buy-back own share pursuant to sub-section (2) with the following details:-
(a) The reason, necessity, time duration and modus-operandi for the buy-back of shares,
(b) A statement of the evaluation of possible impacts on the financial situation of the bank or
financial institution as a result of the buyback of shares,
(c) The type of share, par value of share and number of shares proposed to buy-back,
(d) The maximum or minimum amount required to buy-back shares as referred to in Part (c), and
source of such amount,
(e) Such other matters as specified by the Rastra Bank with regard to the buy-back of shares,
(f) Other necessary matters to be mentioned as per the prevailing laws.
(4) The Rastra Bank may, in case it deems appropriate to grant approval to such bank or financial
institution to buy back its own shares based on the application acquired pursuant to sub-section (3)
and details enclosed with it, grant such approval.
(5) Upon receipt of the approval pursuant to sub-section (4), the concerned bank or financial
institution may buy back its shares in any of the following manners, within six months from the
date of receipt of such approval or within twelve months of the adoption of a special resolution at
the General Meeting, whichever occurs later:
(a) Purchasing through the securities market,
(b) Purchasing from the existing shareholders on a proportional basis
(6) If a bank or financial institution buys back its own shares pursuant to sub-section (5), it shall
file with the Rastra Bank a return containing the number of shares bought back, amount paid for
the same and other necessary details within thirty days of the date of such buy-back.
(7) There shall be established a separate capital redemption reserve fund, to which a sum equal to
the face value of the shares bought back pursuant to sub-section (5) shall be transferred; and the
amount of such fund shall be maintained as if it is the paid-up capital.
(8) If the bank or financial institution buys back its shares pursuant to sub-section (5), it shall
cancel the shares so bought back within one hundred twenty days of the date of such buy-back.
(9) Other provision regarding to buy-back of own shares by the bank or financial institution shall
be as prescribed by the Rastra Bank.

As per section 35 of Bank and Financial Institution Act, 2073, The Rastra Bank may deny to issue
license to operate banking and financial transactions to a bank or financial institution in any of the
following circumstances:-
(a) If it causes adverse effects on the stability, fair competition and credibility of the financial
system of Nepal,
(b) If it is not reasonable and appropriate to issue license for operation of financial transaction for
protection of interests of depositors,

(c) If the infrastructure to operate banking and financial transactions are not completed,
(d) If other particulars or conditions pursuant to this Act are not found to be completed.
(2) The Rastra Bank shall, in case there is a situation that the license to operate banking and
financial transactions could not be issued according to this section, inform to the concerned bank
or financial institution stating the reasons thereof within ninety days of the date of filing of the
application.
Chapter 4: Nepal Rastra Bank Act, 2058

In the given case, The Board of Directors of Nepal Rastra Bank on 15th Jestha, 2080 approved the
estimated budget of income and expenditure and the programs for the coming fiscal year 2080/81.
Mr. Raghunath Bimali, Secretary of Ministry of Finance contemplated that the budget should be
forwarded to the Government of Nepal for amendment and approval.
i. As per section 43 of Nepal Rastra Bank Act, 2058, The Board shall, prior to the beginning of
each fiscal year, approve the estimated budget of income and expenditure and the programs
for the coming fiscal year. The Board may evaluate and amend the approved budget in each
three months on the basis of actual position and the matters that can be estimated. Such budget
shall be sent to Government of Nepal for information.
ii. Thus, Mr. Raghunath Bimali, Secretary of Finance Ministry contemplation that the budget
should be sent to the Government of Nepal for amendment and approval is not correct. The
budget shall be sent to Government of Nepal for information only.

In the given case, The Finance Minister of Government of Nepal issued a notice on 13th Magh,
2080 for recalling the bank notes and coins in circulation within Nepal. Mr. Gajendra Acharya
filed a petition against the Ministry of Finance with a view that only Nepal Rastra Bank is
authorized for recalling the bank notes and coins in circulation. The provision of currency recall
or withdrawal as per Nepal Rastra Bank Act, 2058 is as follows:
As per section 60(1) The Bank may recall the bank notes and coins in circulation within Nepal by
issuing in exchange there for other bank notes and coins in equivalent amount. The Bank shall
publish and transmit pubic notice clearly specifying the period during which the bank notes or
coins must be presented for exchange and where they are to be so presented.
(2) Notwithstanding anything contained in section 53, upon expiry of the time prescribed pursuant
to sub-section (1), bank notes and coins to be exchanged shall cease to be a legal tender.
(3) The Bank may cut, break or demolish or destroy in any manner whatsoever, the banknotes and
coins withdrawn from circulation and the currency with defect, as prescribed.
Thus, Mr. Gajendra Acharya’s view that only Nepal Rastra Bank is authorized for recalling the
bank notes and coins in circulation is correct. The Finance Minister of Government of Nepal cannot
issue notice for recalling the bank notes and coins in circulation within Nepal.

Chapter 5: Industrial Enterprises Act, 2076

In the given case, Mr. Hari Pd. Rawal obtained a permit from The Industrial and Investment
Promotion Board to register an industry with an objective of producing cigarette, bidi, cigar,
chewing tobacco and other goods utilizing tobacco as the basic raw materials and electronic
cigarettes. Due to weak financial position of Mr. Hari, he decided to transfer the ownership of the
permit to Sugam Group of companies.
As per section 8(1) notwithstanding anything contained elsewhere, permission shall be obtained
from the Board prior to registering any industry mentioned in Schedule-1 of the Act. Provided that
permission shall be obtained from the Government of Nepal, Council of Ministers, prior to
registering any industry mentioned in serial number 1 of that Schedule.
(2) A person who intends to register an industry requiring permission under subsection (1) shall
make an application to the Board through the industry registration body in such a form and
accompanied by such details as prescribed.
(3) If, when examining the application and relevant documents under subsection (2), it appears
that the required details or documents are attached, the industry registration body shall submit the
matter, along with its opinion, to the Board for decision within seven days.
(4) The Board shall decide to or not to give permission for the registration of industry with respect
to the application received under subsection (2) within thirty days.
(5) When deciding to give permission under subsection (4), the Board may also specify necessary
additional terms and criteria.
(6) If the Board decides to give permission under subsection (4), the Department shall provide a
permit in the prescribed form, along with notice of the decision, to the concerned applicant within
five days after the making of the decision.
(7) A person who obtains permit under subsection (6) shall apply to the industry registration body
for the registration of industry within the period mentioned in the permit. If no application is made
within such specified period, such permit shall ipso facto become inoperative.
(8) If the Board decides not to give permission for the registration of industry under subsection
(4), the industry registration body shall give notice thereof to the applicant within five days after
the making of the decision.
(9) An applicant who obtains permit under subsection (6) shall not sell or dispose of the permit,
transfer the right or change the ownership in it in any manner, prior to the commencement of
operation, commercial production or transaction of the industry.
Provided that if any applicant dies prior to the commencement of operation, commercial
production or transaction of the industry, nothing shall prevent his or her heir under the prevailing
law from performing the remaining acts in the capacity of applicant.
i. As per section 8(9) of Industrial Enterprises Act, 2076, an applicant who obtains permit shall
not sell or dispose the permit, transfer the right or change the ownership in it in any manner
prior to the commencement of operation, commercial production or transaction of the
industry. Thus, Mr. Hari cannot sell the ownership of permit to Sugam Group of Companies.

ii. As per section 8(9) of Industrial Enterprises Act, 2076, if any applicant dies prior to the
commencement of operation, commercial production or transaction of the industry, nothing
shall prevent his or her heir under the prevailing law from performing the remaining acts in
the capacity of applicant. Thus, although in case Mr. Hari dies, the ownership of permit cannot
be transferred to Sugam Group of Companies but it can transferred to his legal heir.

According to section 17(a) of The Industrial Enterprises Act, 2076 (2020), an industry with the
following conditions other than an industry requiring permission under section 8 is considered to
be a micro-enterprise:
(1) with the fixed capital not exceeding two million rupees, excluding house and land;
(2) the entrepreneur himself or herself is involved in the operation and management of the industry;
(3) with a maximum of nine workers including the entrepreneur;
(4) with annual transaction of less than ten million rupees;
(5) with the capacity of electric energy, fuel or other oil engine to be consumed by the engine,
equipment or machine, if any, used being twenty KW or less.
According to section 17(b) an industry in the following condition is considered to be a cottage
industry:
(1) based on traditional skills and technology;
(2) labour-oriented and based on specific skills or local raw materials and local technology, arts
and culture;
(3) with the capacity of electric energy to be consumed by the engine, equipment or machine, if
any, used being up to fifty KW;
(4) any industry mentioned in Schedule-2 of The Industrial Enterprises Act, 2076.
Chapter: 6 Bonus Act, 2030 (Amended 2074)

In the given case, Makalu Corporation, a Government owned manufacturing company, announced
its annual profits for the fiscal 2079/80, which after fulfilling all statutory obligations including
the distribution of the bonus to its employees, resulted in a surplus balance of Rs. 100,000.
i. As per Section 13 of the Bonus Act, 2030, Makalu Corporation is required to allocate 20%
of the residual amount, after the distribution of bonus to its employees, from the amount
allocated under Section 5 of the Act, to a welfare fund established in accordance with the
prevailing law. The remaining 80% of the residual amount should be transferred to a
National Level Welfare Fund established by the Government of Nepal (GON) for the
benefit of enterprise employees. Therefore, Rs. 20,000 should go to the company's welfare
fund, and Rs. 80,000 to the National Level Welfare Fund.
ii. If the Makalu Corporation is a private sector company, as per Section 13 of the Bonus Act,
2030, Makalu Corporation is required to allocate 70% of the residual amount, after the
distribution of bonus to its employees, from the amount allocated under Section 5 of the
Act to a welfare fund established in accordance with the prevailing law. The remaining
30% of the residual amount should be transferred to a National Level Welfare Fund
established by the Government of Nepal (GON) for the benefit of enterprise employees.
Therefore, Rs. 70,000 should go to the company's welfare fund, and Rs. 30,000 to the
National Level Welfare Fund.
Chapter 7: Insurance Act, 2079

In the given case, Mr. Nazir Hussen, on occurrence of damage, filed a claim for loss with
Himalayan Insurance Company Ltd. as per the policy. The Surveyor conducted the inspection and
reported to the company within 25 days and the company paid Mr. Nazir after 45 days of
submission of report by the Surveyor. Mr. Nazir believes that his payment was delayed and that
the determined claim didn’t cover his loss.
i. As per Rule 32 of Insurance Regulation, 2049, if any claim has to be made under the
Insurance Policy by an Insured who has taken up a Non-Life Insurance Policy, the Insured
shall submit an application to the Insurer stating all the details relating to it. On receipt of
an application of the Insured for the payment against the Insurance claim of the Non-Life
Insurance, the Insurer shall immediately designate a Surveyor to make inquiry, if
necessary. The Surveyor deputed shall make necessary inquiry and determine the liability
of the Insurer within 15 days. Surveyor shall submit a report to the Insurer including the
comprehensive details and inform the insured relating to it, by mentioning the amount to
be received by the Insured subject to the terms and conditions and facilities of the Insurance
Policy. The Insurer shall determine the liability and shall provide the payment against the
claim of the Non-Life Insurance to the Insured generally within 35 days from the
submission of the report by the surveyor.
ii. As per Rule 33 of Insurance Regulation, in case a complaint is filed to the Board by Mr.
Nazir, the following procedures are to be taken by the board against the complaint;
• After receiving the complaint, the Board may issue an order to the concerned Insurer
to submit a written response stating the reasons within 15 days,
• If a written response is submitted to the Board- it shall make an inquiry into it and may
examine other matters with the Insurer or Insured or may issue an order to submit
other document and details, if necessary,
• If no written response or the necessary documents or the details has been submitted-
the Board shall make one-sided decision upon the complaint and shall give its
information to the concerned Insurer.
While making an inquiry into the complaint filed, if it is found that the liability is not determined
by the Insurer to be determined by it, the Board may issue an order to the Insurer to determine or
re-determine the liability.
Chapter 8: Negotiable Instrument Act, 2034

In the given case, Mr. Arjun issued a negotiable instrument dated March 1, 2023, in favor of Mr.
Bhaskar. The negotiable instrument mentioned an interest rate of 10% per annum in case of any

delay in payment. Mr. Bhaskar was only able to present the negotiable instrument to the bank for
payment on September 10, 2023, six months later the negotiable instrument is issued. The bank
refused the payment of the negotiable instrument. Mr. Bhaskar is seeking legal action to recover
not only the principal amount but also the interest at the rate specified in the negotiable instrument.
i. Yes, the bank was correct in refusing payment of the negotiable instrument presented by Mr.
Bhaskar. According to section 53 of the Act, the bank is not obliged to honor the payment of
a negotiable instrument if it is not presented within six months from the date it was drawn.
ii. Yes, Mr. Bhaskar is entitled to the interest as specified in the negotiable instrument from Mr.
Arjun, as per section 54 of the Act. Since the instrument specified an interest rate of 10% per
annum in case of delay, Mr. Bhaskar can claim this interest from the date of the negotiable
instrument until the payment is made.
Chapter 9: Labour Act, 2074

In the given case, Ms. Radhika Rai denied providing Dashain leave to her domestic labour Ms.
Sumitra Dulal and threatened to deduct one month salary if Ms. Sumitra, follower of Hindu
religion stays on leave during Dashain festival.
i. Yes, Labour Act of Nepal is applicable to domestic labour. The provisions regarding
domestic labour are;
As per section 88(1) of Labour Act, 2074, The Government of Nepal may fix separate
minimum remuneration for domestic labours. As per section 88(2) provisions relating to
public leave, weekly leave of domestic labours and other provisions related thereto shall
be as prescribed. As per section 88(3) where the employer has arranged for food and shelter
of a domestic labour in his or her house or assisted in his or her study, the employer may
deduct the amount for such purpose from the remuneration of the labour. Further, as per
section 88(4), the employer shall allow a domestic labour to celebrate festivals as per his
or her culture, religion or tradition.
ii. Thus, as per section 88(4) Ms. Radhika should allow Ms. Sumitra to celebrate festivals as
per her culture, religion or tradition and provide Dashain leave without deducting her
salary.

In the given case, Satya Naraya & Associates, Chartered Accountants employed Mr. Shyam
Sundar Shrestha as a trainee in accordance with the approved curriculum of The Institute of
Chartered Accountants of Nepal. Mr. Shyam Sundar was paid as per the provisions applicable to
the trainee under The Nepal Chartered Accountants Act and Regulations. Mr. Shyam Sundar is
not satisfied with the payment and demanding the remuneration of labour in regular employment
as per the Labour Act of Nepal.
As per section 16 of The Labour Act, 2074, trainees may be engaged in work. As per section 16(1)
any enterprise may, by making an agreement with any educational institute, employ any person as
a trainee in accordance with the approved curriculum of such an institute.
As per section 16(2) the trainee shall not be deemed to be a labour. However, if the person is
employed contrary to the approved curriculum, he or she shall be deemed to be a labour in regular
employment.

Thus, the demand of Mr. Shyam Sundar Shrestha is not reasonable according to the provision of
the Labour Act, 2074.
Chapter 10: Civil Code, 2074 (Part 5)

In the given case, Mr. Firoj Mahat, a carrier of goods, delivered the goods assigned in the same
place to the same person but one day after the agreed date.
As per section 603 of the Civil Code, 2074, the liabilities of a common carrier are as follows:
• To be liable to deliver the goods received from the owner to the proper place in the proper
condition.
• To be liable for compensation for the loss, damage or destruction of the goods or not
delivered in good condition at the fixed place whatsoever may be the reason.
• To be liable to carry the goods at a fixed time or within a reasonable time and deliver to
the owner of goods or his agent or other person deputed by him.
Chapter 11: Social Welfare Act, 2049

In the given case, Full Moon Foundation, a social organization is negotiating with an organization
in Japan to obtain economic assistance, but Dr. Acharya is not aware about the procedures required
to be fulfilled while obtaining economic assistance from foreign country. The provisions relating
to economic assistance as per the Social Welfare Act, 2049 are as follows:
As per section 16(1), social organizations and institutions willing to get material, technical,
economic or any other kind of assistance either from Government of Nepal or foreign countries,
international social organizations and institutions or missions or individuals shall submit a project
proposal and application along with details to Council as prescribed.
Provided that, yearly assistance up to two lakh (two hundred thousand) rupees for the project that
to be finished immediately may take only giving prior notice to the Council and after the
completion of said work, a report should be submitted to the Council, within the period of three
months.
As per section 16(2) after receiving an application pursuant to sub-section (1) the Council shall
provide permission coordinating with the concerned ministry or agency within the period of forty-
five days.
Provided that, no permission may be given to the work or project which is against the national
interest.
As per section 16(3) the social organization should co-operate and co-ordinate with local agency
while implementing the approved project.
As per section 16(4) no pre-permission shall be required to those international institutions
established under International Agreements in which Government of Nepal is a party for assistance
that relates emergency relief services.

Provided that, notice shall be given to the council after receiving such assistance.
As per section 16(5) while providing economic assistance to the approved projects by the foreign
organizations, assistance shall be channelized through the commercial banks operating within the
kingdom of Nepal.
Chapter 12: Nepal Chartered Accountants Act, 2053 and Rules, 2061
In the given case, CA. Sanop Chettri, a member holding Certificate of Practice, was unable to sign
the final audit report due to adverse health condition. His son CA. Anup, who is also a member of
the Institute of Chartered Accountants of Nepal, signed the audit report on his behalf. Mr. Ram
Bahadur Sharma complained in the Institute regarding the signing of the audit report by member
not holding a Certificate of Practice.
As per section 41 of ICAN Act, a person, who has not obtained a Certificate of Practice and is
proved to have signed any document in capacity of the member holding Certificate of Practice,
shall be liable to punishment with a penalty up to two thousand rupees or imprisonment for a period
of up to three months or both.
Thus, CA. Anup shall be liable to punishment with a penalty up to two thousand rupees or
imprisonment for a period up to three months or both for signing an audit report without obtaining
Certificate of Practice.

In the given case, Mr. Hem Kafle attained marks above 60 percent in one subject of both groups,
scored below 30 percent in Group I, and did not participate in one exam of Group II during the
December 2023 CAP-II level examination conducted by The Institute of Chartered Accountants
of Nepal (ICAN).
According to Rule 16 of Nepal Chartered Accountants Rule, 2061, for eligibility to obtain an
exemption at the CAP II and CAP III levels, a student must score a minimum of 30 percent in one
subject and 60 percent in another subject of a group. This allows them to qualify for exemptions
in the subsequent three exams related to the subject in which they obtained 60 percent marks.
However, the student must have attained the exam of all subjects in a group.
As Mr. Kafle scored below 30 percent in Corporate & Other Laws of Group I, he is ineligible for
an exemption in Advanced Accounting for Group I. Additionally, his absence in Income Tax &
VAT for Group II disqualifies him from obtaining an exemption in Financial Management for
Group II.
Chapter 13: World Trade Organization and Nepalese Laws

World Trade Organization (WTO) was set up to play a very important role in the world economics
though settling trade related disputes through rules, regulations and consensus based agreement
mechanisms that would prevent trade related wars between powerful countries. Through resolving
trade related disputed WTO has got the potential to maintain world peace and bilateral relations
between its member countries through following negotiations, consultations and mediations.

The fundamental role of WTO in international business can be listed as under-

• WTO facilitates implementation, administration and smooth operations of trade
agreements between the countries.
• It provides a forum for the trade negotiations between its member countries.
• Settlements of disputes between the member countries through the established rules and
regulations.
• It cooperates with the IMF (International Monitory Fund) and World Bank in terms of
making cohesiveness in making global economic policies.

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

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Cap II Group I RTP June 2024

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

CHARTERED ACCOUNTANCY PROFESSIONAL II

Revision Test Paper

The Institute of Chartered Accountants of Nepal

The Institute of Chartered Accountants of Nepal 1

The Institute of Chartered Accountants of Nepal 2

The Institute of Chartered Accountants of Nepal 3

Chapter: Branch Accounting

The Institute of Chartered Accountants of Nepal 1

Head Office Branch

The Institute of Chartered Accountants of Nepal 2

Chapter: Hire Purchase Transaction

The Institute of Chartered Accountants of Nepal 3

Chapter: Insurance Claim

Stock as per Balance Sheet as at 32nd Ashadh 2079 99,000

Chapter: Investment Accounting

The Institute of Chartered Accountants of Nepal 4

Chapter: Underwriting of Shares and Debentures

Chapter: Accounting of Share Capital

The Institute of Chartered Accountants of Nepal 5

Chapter: Business Combination

The Institute of Chartered Accountants of Nepal 6

Chapter: Internal Reconstruction

4 Property, Plant and Equipment

The Institute of Chartered Accountants of Nepal 7

Freehold property 2,40,000

The Institute of Chartered Accountants of Nepal 8

Chapter: Partnership Accounting

Chapter: Pre & Post Incorporation Profit

The Institute of Chartered Accountants of Nepal 9

Chapter: Cash Flow Statement

The Institute of Chartered Accountants of Nepal 10

c) Investment was sold for Rs. 160,000.

Chapter: Accounting from Incomplete Records

The Institute of Chartered Accountants of Nepal 11

Chapter: Banks and Financial Institutions

Chapter: Accounts of Insurance Companies

The Institute of Chartered Accountants of Nepal 12

Question No. 19:

Receipts Amount Payments Amount

You are given the following additional information:

Chapter: Provisions, Contingent Liability and Contingent Assets

The Institute of Chartered Accountants of Nepal 13

General PL A/c (Combined PL)

Note 1: Value of goods Transferred

Note 2 : Stock Reserve on Closing Stock

Total Closing Stock Reserve = 16,667 + 10,000 + 3,333 = 30,000

Basis of Allocation of Expenses

The Institute of Chartered Accountants of Nepal 14

Salary Staffs Employed (75:50:25)

Chapter: Branch Accounting

Dang Branch Stock A/c [at Invoice Price]

Dang Branch Debtors A/c

Dang Branch Adjustment A/c

Dang Branch P/L A/c

Dang Branch Cash A/c

The Institute of Chartered Accountants of Nepal 15

To Cash (Sent by HO) 50,000 By Branch PL 15,000

Chapter: Branch Accounting

Agreed value of 2 TV sets being repossessed = 257,50070%70%70%