Kanoria PG Mahila Mahavidyalaya

Department of ABST

B.Com Part III

Paper-I (Auditing and Management Accounting)

Answer the following questions:

1. What is meant by Audit? Write objectives and advantages of Audit.

2. Discuss any five types of Audit in detail.

3. “Two main functions of Audit are the prevention and detection of errors and frauds.”

Explain.

4. Write the limitations of Audit in detail.

5. Give the main types of errors and frauds found in accounts with illustrations. Can the

auditor prevent such errors and frauds?

6. Explain the difference of book-keeping, accountancy and auditing in detail

7. “Accountancy is a necessity while auditing is a luxury for a business enterprise.” Do

you agree? Give reasons for your opinion and examine critically the role of auditing in

the efficient, honest and economical conduct of a business concern.

8. Differentiate between audit principles, process and techniques.

9. What is Audit Programme? Discuss objects of audit programme and its construction.

10. Discuss essential elements of a good audit programme.

11. What is Routine Checking and Test Checking? Describe the advantages and

disadvantages of both.

12. Define Internal Control. Differentiate between Internal Check and Internal Audit.

13. Explain the following:

 Internal Audit can not replace Internal Check

 Internal Audit is no substitute for Statutory Audit.

14. What do you mean vouching? Describe the importance of vouching.

15. How will you vouch the following:

 Cash Sales

 Income from Investments

 Rent

 Bad Debts

16. “Vouching is the backbone of auditing.” In the light of this statement discuss the

importance of vouching.

17. What do you mean by Verification and what are the objects of such verification.

18. “Stock should be valued at cost or market price whichever is lower.” Examine this

statement critically and point out any possible departure from this principle

19. What do you understand by Verification of Assets and Liabilities?” Describe the

principle of verification of Assets.

20. How will you verify the following:

 Goodwill

 Stock

 Investment

 Contingent Liabilities

21. What are the provisions of Companies Act 2013 regarding the appointment, removal

and remuneration of auditors of companies.

22. Discuss the methods of appointments of company auditor in brief.

23. Write notes on:

 Appointment of Auditor by Company

 Removal of Company Auditor

 Remuneration of Company Auditor

24. “An Auditor is not an insurer. He does not guarantee complete correctness of

Balance Sheet.” Discuss

25. Discuss briefly, giving illustration the auditor liability for negligence in the

performance of the auditor.

26. Discuss the liability of an auditor towards third party.

27. “An auditor is a watch dog, not a blood hound” Explain the statement.

28. “Existence of power is quite essential to enable the compliance of duties.” Explain in

detail the provision of Companies Act in the context of above statement.

29. Discuss the statutory duties of a company auditor. Can they be restricted or

increased by the articles or memorandum of the company.

30. State the decision given in “London and General Bank Case” in relation to

misfeasance.

31. Explain the meaning, scope and objectives of Management Accounting.

32. How Management Accounting is different from Financial and Cost Accounting?

Explain the utility of Management Accounting in Business Management.

33. “Management Accounting has been evolved to meet the needs of Management.”

Explain this statement fully.

34. What do you understand by Capital Structure of a company? Distinguish it from

financial structure and asset structure.

35. Explain the principle of Trading on Equity? Discuss its utility to the management and

point out its limitations.

36. The capital structure of Jai Bharat Ltd. as on 1st April, 2019 was as under:

Equity Shares of Rs. 100 each 3,20,000

7% Preference Shares of Rs. 100 each 2,00,000

6% Debentures of Rs. 100 each 2,00,000

Reserves 80,000

The rate of return of capital is 10%. The company needs ` 2,00,000 for expansion

programme. The rate of corporate Tax is 50%. There are three alternatives available

to the company to finance its expansion programme, viz:

 (i) Issue of 1,600 equity shares of ` 100 each at a premium of ` 25.

(ii) Issue of 8% preference shares.

(iii) Issue of 7% debentures.

Which alternative is best and why?

37. The capital structure of ABC Ltd. is as under:

Equity Shares of ` 100 each 40,00,000

Retained Earnings 20,00,000

8% Preference Shares 24,00,000

7% Debentures 16,00,000

The Company earns 12% on its capital. The rate of Tax applicable is 35%. The

company requires as sum of ` 50,00,000 for which following options are available to

it:

(i) Issue of 40,000 equity shares at a premium of ` 25 per share.

(ii) Issue of 9% preference shares.

(iii) Issue of 8% debentures.

It is estimated that the P/E ratios in the cases of equity shares, preference shares

and debentures financing would be 22.5, 18.5 and 15.2 respectively. Which of the

three financing alternatives would you recommend and why?

38. Discuss briefly the ‘Net Income’, ‘Net Operating Income’ and ‘Traditional Approaches’

to capitalisation.

39. XYZ Ltd. has net operating income of ` 2,00,000 on an investment of ` 10 lakhs in

assets. It has debt of ` 3,00,000 at 16% rate of interest. Assume that taxes does not

exist.

(i) Using Net Income Approach and an equity capitalisation rate of 18%; compute the

total value of the firm and overall cost of capital.

(II) Using Net Operating Income Approach and an overall capitalisation rate of 12.5%;

compute the total value of the firm, value of shares and cost of equity.

40. There are two firms P and Q which are exactly identical except that P does not use

any debt in its financing while Q has ` 4,00,000 10% debentures in its financing. Both

the firms having earnings before interest and tax of ` 3,20,000 and the after tax

capitalisation rate is 16%. Assuming the corporate tax of 50%, calculate the value of

the firm according to M-M Approach.

41. “It is said that financial statements reflect a combination of recorded facts, accounting

conventions and personal judgement.” Explain this statement.

42. What do you mean by Analysis of Financial Statements? Discuss its objects and

limitations.

43. From the following Statement of Profit and Loss, prepare Comparative Statement of

Profit and Loss of ABC Ltd:

Particulars 31st March 31st March

2020 2019

(`) (`)

A. Income

Revenue from Operations 33,00,000 30,00,000

Other Income 60,000 60,000

Total (A) 33,60,000 30,60,000

B. Expenses

Purchases of Stock-in-Trade 24,00,000 23,00,000

Change in Inventories of Stock-in- 1,20,000 1,00,000

trade 90,000 70,000

Employees Benefit Expenses 60,000 60,000

 Finance Costs 90,000 80,000

Other Expenses

Total (B) 27,60,000 26,10,000

Profit (A-B) 6,00,000 4,50,000

44. Construct Common Size Balance Sheet from the following Balance Sheet of ABC

Ltd. and comment on the significant changes:

Balance Sheet of ABC Ltd.

As on 31st March 2020 and 2019

Particulars 31st March 31st March

2020 2019

(`) (`)

A. Equity and Liabilities

(i) Shareholders’ Funds
(a) Share Capital 2,70,000 2,74,000
(b) Reserves and Surplus 70,000 1,52,000
(ii) Non-Current Liabilities
Long-Term Borrowings: (Secured 2,32,000 1,00,000
Loans) 2,06,000 5,96,000
(Unsecured Loans)
(iii) Current Liabilities 50,000 1,25,000
(a) Short Term Borrowings (Secured Bank
Overdraft) 20,000 1,00,000
(b) Trade Payables 3,000 50,000
(c) Other Current Liabilities 5,000 23,000
(d) Short Term Provisions
Total (A) 8,60,000 14,20,000
B. Assets
(i) Non-Current Assets
(a) Fixed Assets-Tangible Assets (Net) 4,30,000 5,68,000
(b) Non-Current Investments 4,000 6,000
(ii) Current Assets
(a) Inventories 2,16,000 4,26,000
 (b) Trade Receivables 1,40,000 3,30,000
(c) Cash and Cash Equivalents 65,000 80,000
(d) Other Current Assets (Prepaid 5,000 10,000
Expenses)
Total (B) 8,60,000 14,20,000

45. Following is the Balance Sheet of Ram Mills Limited as on 31st March 2020.

Particulars ` `

A. Equity and Liabilities

(a) Shareholders’ Funds

i. Equity Share Capital 5,70,000

ii. 12% Preference Shares Capital 1,00,000 6,00,000

iii. Reserve an Surplus

(b) Non-Current Liabilities 4,00,000

14% Debentures

(c) Current Liabilities 7,00,000

(c) Trade Payables

(d) Short Term Provisions(Provision for 1,60,000

Tax) 1,30,000

(e) Other Current Liabilities

10,000

Total (A) 20,00,000

B. Assets

(a) Non-Current Assets

Fixed Assets-Tangible Assets 13,00,000

(b) Current Assets

 (a) Current Investments 1,50,000

(b) Inventories 3,00,000

(c) Trade Receivables 2,00,000

(d) Cash and Cash Equivalents 50,000

Total (B) 20,00,000

45. The ratios relating to Sterling Ltd. are given below:

Gross Profit Ratio 15%

Inventory Velocity 6 Months

Trade Receivables Velocity 3 Months

Trade Payable Velocity 3 Months

Gross Profit for the year ending March 31, 2020 amounts to ` 60,000. Closing

Inventory is equal to Opening Inventory.

Find out:

(i) Revenue from Operations

(ii) Closing Inventory

(iii) Trade Receivables

(iv) Trade Payables

46. The following are the ratios extracted from the Balance Sheet of a company as at 31st

March 2020. Draw up Balance Sheet of the Company.

Current Liabilities 1.0

Current Assets 2.5

Liquidity Ratio 1.5

Inventory Turnover Ratio (based on cost of revenue from operations) 6

 Fixed Asset Turnover (based on revenue from operations) 2

Gross Profit as percentage of revenue from operations 20%

Trade Receivables Collection Period 2 Months

Working Capital ` 3,00,000

Share Capital ` 5,00,000

Reserves and Surplus ` 2,50,000

47. What is Cash Flow Statement? Discuss its main uses and limitations and give a

specimen of cash flow statement by indirect method using imaginary figures.

48. Following is the balance sheet of S.K Limited as at 31st March 2020 and 31st March

2019.

Particulars 31st March 31st March

2020 2019

(`) (`)

A. Equity and Liabilities

(i) Shareholders’ Funds
(a) Equity Share Capital 3,50,000 3,00,000
(b) Reserves and Surplus
Securities Premium 30,000 -
General Reserve 65,000 45,000
Statement of Profit & Loss 80,800 30,000
(ii) Non-Current Liabilities
Long-Term Borrowings: 14% 70,000
Debentures
(iii) Current Liabilities 90,700 85,000
Trade Payables 40,500 22,500
Provision for Taxation 35,000 30,000
Proposed Dividend
Total (A) 7,62,000 5,12,000
B. Assets
(i) Non-Current Assets
 Fixed Assets-Tangible Assets
Land and Building 3,90,000 2,30,000
Plant and Machinery 1,40,000 85,400
Furniture 6,500 5,500
(ii) Current Assets
Inventories 95,700 82,400
Trade Receivables 85,500 75,000
Cash and Cash Equivalents 44,300 34,200
Total (B) 8,60,000 14,20,000
Additional Informations:

Depreciation written off during the year:

Land and Building ` 60,000

Plant and Machinery ` 50,000

Furniture ` 1,200

You are required to prepare a Cash Flow Statement.

49. From the following Balance Sheets of XYZ Ltd., prepare a Cash Flow Statement.

Particulars 31st March 31st March

2020 2019

(`) (`)

A. Equity and Liabilities

Shareholders’ Funds
Equity Share Capital 4,00,000 3,00,000
12% Preference Share Capital 1,00,000 1,50,000
General Reserve 70,000 40,000
Statement of Profit & Loss 48,000 30,000
Current Liabilities
Short Term Borrowings (Cash Credit) 16,000 20,000
Trade Payables 83,000 55,000
Short Term Provisions 1,00,000 82,000
Total (A) 8,17,000 6,77,000
 B. Assets
Non-Current Assets
Fixed Assets-
Tangible Assets 3,70,000 2,80,000
Intangible Assets : Goodwill 90,000 1,15,000
Current Assets
Inventories 1,09,000 77,000
Trade Receivables 2,30,000 1,80,000
Cash and Cash Equivalents 18,000 25,000
Total (B) 8,17,000 6,77,000

Additional Informations:

(i) Depreciation of ` 10,000 and ` 20,000 have been charged on Plant and

Machinery & Land and Building respectively in 2019-20.

(ii) An interim dividend of ` 20,000 has been paid in 2019-20.

(iii) Income Tax of ` 35,000 was paid during the year 2019-20.

50. Shailendra Ltd. has the following balance as on 1st April 2019.

Fixed Assets 6,00,000

Less: Depreciation 2,10,000

3,90,000

Bank Balance 35,000

Current Assets (Except Bank Balance) 2,50,000

Current Liabilities 1,00,000

Capital (Shares of ` 100 each) 3,00,000

The company made the following estimates for 2019-20.

(i) The profit would be ` 55,000 after depreciation of ` 60,000.

(ii) The company will acquire fixed assets costing ` 1,00,000 after selling one

machine for ` 20,000; costing ` 50,000 on which depreciation provided amounted to `

35,000.

(iii) Current Assets and Current Liabilities, other than bank balance, at the end of

2019-20 are expected to be ` 2,95,000 and ` 1,30,000 respectively.

(iv) The company will pay a free of tax dividend of 10%, the rate of tax being 25%.

Ascertain the bank balance (or overdraft) of Shailendra Ltd. at the end of 2019-20.