Unit 2 Accounting and Auditing PYQ’s 3rd January 2026 Shift 1

The correct answer is – B and D Only

Key Points

• Statement B: Vouching is concerned only with items of balance sheet
  • This statement is incorrect. Vouching is not limited to balance sheet items; it includes the examination of transactions recorded in both the profit and loss account and the balance sheet.
  • The objective of vouching is to ensure the authenticity and accuracy of all recorded transactions, not just balance sheet items.
• Statement D: The object of vouching is to satisfy the auditor as to existence, ownership, possession, completeness, valuation, and disclosure of items mentioned in the Balance Sheet
  • This statement is incorrect. The primary purpose of vouching is to verify the accuracy and authenticity of recorded transactions in the books of accounts, not specifically for balance sheet verification.
  • While vouching ensures the validity of transactions, aspects like valuation and ownership are typically addressed during other stages of an audit, such as substantive testing or analytical procedures.

Additional Information

• Statement A: Management audit is not compulsory under any law
  • This statement is correct. Management audit is a voluntary exercise and is not mandated by any statutory requirement.
  • It is conducted to evaluate the efficiency and effectiveness of management processes and decision-making.
• Statement C: Section 148 of the Companies Act, 2013 has made Cost Audit mandatory for some limited companies
  • This statement is correct. Section 148 of the Companies Act, 2013 mandates cost audit for certain classes of companies engaged in production of specified goods or services.
  • The rules for applicability are governed by the Companies (Cost Records and Audit) Rules, 2014.
• Statement E: Independent financial audit has been made compulsory for many entities established under respective Acts
  • This statement is correct. Financial audits are mandatory for entities like companies, banks, and government organizations as per the respective governing laws, such as the Companies Act, 2013 or banking regulations.
  • The objective is to ensure compliance with statutory requirements and provide assurance to stakeholders.

The correct answer is – (A) is correct but (R) is not correct

Key Points

• Minority Interest
  • Minority interest refers to the portion of a subsidiary’s net assets and profits attributable to shareholders other than the parent company.
  • It represents the ownership stake held by external investors in the subsidiary.
• Assertion (A)
  • The statement is correct because minority interest is indeed the share of the subsidiary’s net assets held by outsiders.
• Reason (R)
  • The statement is incorrect because minority interest is presented separately in the consolidated balance sheet and is not considered part of the equity of the parent’s shareholders.
  • Minority interest is shown as a distinct category under equity or liabilities.

Additional Information

• Presentation of Minority Interest
  • In consolidated financial statements, minority interest is generally presented as a separate item in the equity section.
  • It is based on the shareholding percentage of external investors in the subsidiary.
• Consolidation Accounting
  • In consolidation, the parent company combines the financial statements of its subsidiaries.
  • Ownership interests of external shareholders are calculated and shown as minority interest.
• Importance of Minority Interest
  • It ensures transparency regarding the ownership structure of consolidated entities.
  • Helps stakeholders understand the financial results attributable to external investors.

The correct answer is – A-I, B-II, C-III, D-IV

Key Points

• Historical Cost Approach
  • Proposed by Brummet, Flamholtz, and Plye.
  • This approach values human resources based on the costs incurred in acquiring, training, and developing employees.
  • It emphasizes the historical investment made in employees.
• Opportunity Cost Approach
  • Suggested by Hekimian and Jones.
  • This approach calculates the value of human resources based on the opportunity cost of employing them in alternative roles.
  • It is most applicable when resources are scarce and there is competition for certain positions.
• Standard Cost Approach
  • Developed by David Watson.
  • This method uses pre-determined standard costs for training and developing employees, simplifying the valuation process.
  • It focuses on efficiency and uniformity in calculating costs.
• Present Value of Future Earnings Model
  • Formulated by Lav and Schwartz.
  • This model estimates the present value of an employee’s future earnings, discounted to reflect the time value of money.
  • It is widely used for assessing the long-term contribution of employees.

Additional Information

• Human Resource Valuation
  • Refers to the process of quantifying the value of human resources within an organization.
  • It is important for decision-making related to recruitment, training, and development.
• Importance of Human Resource Valuation
  • Helps organizations recognize employees as valuable assets.
  • Enables better strategic planning and resource allocation.
  • Supports financial reporting and enhances transparency in accounting practices.

The correct answer is – ₹ 3,60,000

Key Points

• Capital Adjustment
  • After A’s death, B and C decided to adjust their capitals according to their new profit-sharing ratio.
  • The profit-sharing ratio between B and C is 3:2.
  • The total adjusted capital of the firm is the sum of B’s and C’s capitals: ₹ 3,56,000 + ₹ 2,44,000 = ₹ 6,00,000.
• New Capital of B
  • In the ratio 3:2, the total ratio parts are 3 + 2 = 5.
  • B’s share of capital is calculated as: (3/5) × ₹ 6,00,000 = ₹ 3,60,000.

Additional Information

• Profit-Sharing Ratio
  • The profit-sharing ratio represents the division of profits or losses among partners based on their mutual agreement.
  • In this case, after A’s death, B and C agreed to share profits in the ratio 3:2.
• Capital Adjustment through Current Accounts
  • When partners adjust their capitals, the excess or deficit is either credited or debited to their current accounts.
  • This ensures that the adjusted capitals are in line with the new profit-sharing ratio.

The correct answer is – ₹ 26,40,000

Key Points

• Break-Even Point (Sales in ₹)
  • The Break-Even Point is calculated using the formula:
    Break-Even Sales (₹) = Fixed Costs ÷ Contribution Margin Ratio.
  • Contribution Margin per unit is given by:
    Selling Price per unit – Variable Cost per unit = ₹ 20 – ₹ 14 = ₹ 6.
  • Contribution Margin Ratio:
    Contribution Margin ÷ Selling Price = ₹ 6 ÷ ₹ 20 = 0.3 (30%).
  • Break-Even Sales (₹) = ₹ 7,92,000 ÷ 0.3 = ₹ 26,40,000.
• Correct calculation
  • Using the above formula and values, the correct Break-Even Point (Sales in ₹) is ₹ 26,40,000.

Additional Information

• Importance of Break-Even Analysis
  • Helps businesses determine the minimum sales required to cover costs.
  • Provides clarity on the impact of cost structure on profitability.
• Fixed Costs vs Variable Costs
  • Fixed Costs: Costs that remain constant irrespective of production level (e.g., rent, salaries).
  • Variable Costs: Costs that vary directly with production (e.g., raw materials).
• Contribution Margin and Profitability
  • The Contribution Margin reflects the portion of sales revenue available to cover fixed costs and generate profit.
  • A higher contribution margin indicates better profitability for the business.

The correct answer is – D, A, C, B

Key Points

• Net Profit before taxation and extraordinary items
  • This is the starting point in the indirect method of preparing the Cash Flow Statement.
  • It represents the net profit calculated before considering any extraordinary items or taxation adjustments.
• Operating profit before Working Capital Changes
  • Adjustments for non-cash expenses, such as depreciation and amortization, are added back to the net profit.
  • Non-operating incomes like dividends or interest earned are deducted to compute the operating profit.
• Cash generated from operations
  • Changes in working capital, such as adjustments to current assets and liabilities, are factored in here.
  • This step provides the cash flow generated from the core business operations.
• Cash flow before extraordinary items
  • Extraordinary items (if any) are considered in this step to finalize the cash flow from operating activities.
  • This amount reflects the cash flow before tax payments and any unusual or infrequent events.

Additional Information

• AS-3 (Revised): Cash Flow Statement
  • Issued by the Institute of Chartered Accountants of India (ICAI), this standard provides guidelines for preparing Cash Flow Statements.
  • Cash flows are categorized into three activities: Operating, Investing, and Financing.
• Indirect Method for Operating Activities
  • This method begins with the Net Profit and adjusts for non-cash and non-operating items.
  • Changes in working capital are accounted for to determine cash flows from operating activities.
• Working Capital Adjustments
  • Involves changes in current assets (like receivables, inventory) and current liabilities (like payables, provisions).
  • An increase in current assets reduces cash flow, while an increase in current liabilities adds to cash flow.

The correct answer is – Unmodified opinion report

Key Points

• Unmodified opinion report
  • An unmodified opinion is issued when the auditor concludes that the financial statements are free from material misstatement and comply with the applicable financial reporting framework.
  • This indicates that the financial statements provide a true and fair view and are prepared in accordance with generally accepted accounting principles (GAAP) or other frameworks.
  • The auditor does not identify any significant issues that require modifications to the report.
  • This is the most common type of audit report and reflects the highest level of assurance provided by an auditor.

Additional Information

• Other types of audit reports
  • Qualified report: Issued when the auditor finds certain exceptions or disagreements with the financial reporting but overall, the statements are fairly presented.
  • Disclaimer of opinion: Issued when the auditor is unable to obtain sufficient evidence to provide an opinion on the financial statements.
  • Adverse opinion: Issued when the financial statements contain material misstatements and do not comply with the applicable financial reporting framework.
  • Audit report with ’emphasis of matter’: Adds a paragraph to highlight a specific issue, but does not modify the overall opinion.
• Key components of an unmodified opinion report
  • Title: Clearly states it is an independent auditor’s report.
  • Opinion paragraph: Contains the auditor’s conclusion regarding the financial statements.
  • Basis for opinion: Explains the standards followed during the audit and confirms the auditor’s independence.
  • Responsibilities: Defines the responsibilities of the auditor and management.

The correct answer is – Shareholders of the transferor company need not become equity shareholders of the transferee company

Key Points

• Amalgamation in the nature of merger
  • It requires that the shareholders of the transferor company must become equity shareholders of the transferee company.
  • This is a key condition to classify an amalgamation as a merger under the Accounting Standard (AS) 14.
• The statement “Shareholders of the transferor company need not become equity shareholders of the transferee company” violates the definition of amalgamation in the nature of a merger.
• In an amalgamation in the nature of merger, there is a continuity of ownership between the two companies.
• As a result, this statement is incorrect.

Additional Information

• Key Features of Amalgamation in the Nature of Merger
  • All the assets and liabilities of the transferor company are transferred to the transferee company.
  • The business of the transferor company is intended to be carried on by the transferee company.
  • Payment of purchase consideration is made in equity shares, except for cash payments for fractional shares, if any.
  • There is no significant change in the shareholding pattern of the transferee company post-amalgamation.
• Difference Between Merger and Purchase
  • In an amalgamation in the nature of purchase, the shareholders of the transferor company are not required to become shareholders of the transferee company.
  • In contrast, an amalgamation in the nature of merger ensures continuity of ownership and business operations.

The correct answer is – A-IV, B-II, C-I, D-III

Key Points

• Ind AS 7 corresponds to Statement of Cash Flows.
  • Ind AS 7 specifies requirements for presenting cash flow information and provides insights into an entity’s cash inflows and outflows.
• Ind AS 24 corresponds to Related Party Disclosures.
  • Ind AS 24 requires disclosure of relationships, transactions, and balances with related parties to ensure transparency.
• Ind AS 36 corresponds to Impairment of Assets.
  • Ind AS 36 ensures that an entity’s assets are not carried at more than their recoverable amount.
• Ind AS 110 corresponds to Consolidated Financial Statements.
  • Ind AS 110 establishes principles for presenting consolidated financial statements when an entity controls one or more other entities.

Additional Information

• Ind AS 7 – Statement of Cash Flows:
  • Provides classification of cash flows into operating, investing, and financing activities.
  • Helps stakeholders assess an entity’s liquidity, solvency, and financial adaptability.
• Ind AS 24 – Related Party Disclosures:
  • Focuses on disclosing the nature and extent of related party relationships and transactions to avoid conflicts of interest.
  • Promotes accountability and transparency in financial reporting.
• Ind AS 36 – Impairment of Assets:
  • Ensures that assets are carried at no more than their recoverable amount, which is the higher of fair value less costs to sell and value in use.
  • Requires entities to perform impairment testing when there is an indication of impairment.
• Ind AS 110 – Consolidated Financial Statements:
  • Focuses on the principles of control and requires the consolidation of all entities under the parent entity’s control.
  • Ensures consistent accounting policies across the group entities in consolidated financial statements.

The correct answer is – A-IV, B-III, C-II, D-I

Key Points

• A-IV: Making provision for bad and doubtful debts and for discount on debtors – Conservatism Concept
  • Under the Conservatism Concept, potential losses are accounted for even if they are uncertain, ensuring that profits are not overstated.
  • Making provisions for bad debts reflects this principle, as it prepares for a possible loss in debtor payments.
• B-III: Expenses should be recognised in the period in which associated revenue is recognised – Matching Concept
  • The Matching Concept ensures that expenses are recorded in the same period as the revenues they help generate.
  • This is crucial for accurate profit calculation and financial reporting.
• C-II: Assets are not shown at their current realisable value – Going Concern Concept
  • The Going Concern Concept assumes that a business will continue to operate in the foreseeable future.
  • As a result, assets are recorded at their original cost and not at their realisable value.
• D-I: Internally generated goodwill is not recorded in the books of account – Cost Concept
  • The Cost Concept ensures that only those assets and liabilities that can be measured reliably are recorded in the books.
  • Internally generated goodwill lacks a reliable measurement, so it is not recorded.

Additional Information

• Conservatism Concept
  • Also known as the Prudence Concept, it avoids overstatement of assets or income.
  • Examples include creating provisions for doubtful debts and recording inventory at cost or net realisable value, whichever is lower.
• Matching Concept
  • Ensures accurate reporting of profits by matching revenues with related expenses.
  • For example, depreciation expense is matched with the revenue generated by the use of the asset.
• Going Concern Concept
  • Assumes that the business will continue its operations indefinitely, affecting how assets and liabilities are recorded.
  • If a business is not a going concern, assets must be shown at their realisable value.
• Cost Concept
  • Assets are recorded at their original purchase price, not their current market value.
  • This concept provides a reliable and verifiable basis for recording assets.