Unit 2 Accounting and Auditing PYQ’s 6th Dec 2019 Shift 2

The following are the explanation for the correct match:

Therefore, the correct match is (a) – (iii), (b) – (i), (c) – (iv), (d) – (ii).

Key Points

Assertion (A): Indian Accounting Standards contain some ‘carve outs’ and for convergence with IFRS with some changes applied in India.

Explanation:

1. Indian AS is set of accounting standards notified by the Ministry of Corporate Affairs (MCA), converged with International Financial Reporting Standards (IFRS), these accounting standards are formulated by the Accounting Standard Board (ASB) of the Institute of Chartered Accountants of India (ICAI).

2. Convergence means alignment of the standards of different standard setters with a certain rate of compromise, by adopting the requirements of the standards either fully or partially.

Therefore, Assertion (A) is the correct statement

Reason (R): Financial statements prepared in India with Indian Accounting Standards will not be IFRS compliant

Explanation:

1. Indian Accounting Standards are almost similar to IFRS but with few carve-outs so as to make them suitable for the Indian Environment.

Therefore, Reason (R) is the correct answer, but R) is NOT the correct explanation of A)

Management Audit is a process of examination and evaluation of the performance of managerial functions. It also covers the organizational structure of a company. It involves a critical review of policies, processes, procedures, and operations which form part of the internal control system. It analyses the effectiveness of the utilization of different resources. Management audit thus is an appraisal of both policies and actions.

Management Audit, in effect, investigates the soundness of management and its efficiency of operations. It is an assessment of the systems which are being used in an organization. It identifies areas of weakness in internal control and suggests measures to improve performance.

Objectives

The main objectives of the management audit are as follows:

1. to promote organizational efficiency;
2. to enhance operational profitability;
3. to encourage an effective involvement and participation of staff in attaining the goals of the management;
4. to discover deficiencies or irregularities in the system and suggest appropriate measures for best possible results;
5. to assist the achievement of targets fixed by the management by ;
6. to help the development of harmonious relationships both within and outside the organization;
7. to facilitate performance evaluation of resource inputs; and
8. to segregate appropriate activities according to centers of responsibility (A responsibility center is a segment of an organization for which a particular executive is responsible. There are three types of responsibility centers—expense (or cost) centers, profit centers, and investment centers).

Important Points

Investigating the depreciation method and its application on fixed assets in the company is the objective of Cost Audit.

Audit:

1. Audit, as it exists today, is the result of the Industrial Revolution in the 18th century.
2. The word ‘audit’ is derived from the Latin word ‘audire’ which means ‘to hear’.
3. Auditing is the systematic and scientific examination of the books of accounts and records of a business to enable the auditor to satisfy himself that the Balance Sheet and the Profit and Loss Account are properly drawn up so as to exhibit a true and fair view of the financial state of affairs of the business and profit or loss for the financial period.

Key Points

Some of the duties of an auditor:

• Verifying ownership of fixed assets by examining the title deed by the auditor,
• ascertaining that the assets are in the possession of the client,
• satisfying himself that the assets have been valued in the financial statements according to the accounting principles, etc.

Physical verification of fixed assets is primarily the responsibility of the Management.

Therefore, Physical verification of fixed assets is primarily the responsibility of the auditor is NOT correct regarding the duties of an auditor.

An auditor is a professional who is qualified to conduct an audit of the company. Such a person evaluates the validity of the company’s financial statements. This is undertaken to report if the company adheres to the established set of standards or procedures.

Who can be appointed as an Auditor?

Only a qualified Chartered Accountant within the meaning of the Chartered Accountants Act, 1949 can be appointed as an auditor. However, the following points should also be considered for the appointment of an auditor.

If the Chartered Accountant is holding a Certificate of Practice and practicing in his individual capacity, he may be appointed as an auditor only as an individual.

If the Chartered Accountant is holding a Certificate of Practice and is a partner of a firm of chartered accountants, the firm may be appointed as auditor. Any partner of the firm may perform his duties in the name of the Firm.

If any person is holding a certificate authorizing him to act as an auditor, even though he is not a chartered accountant, he may be appointed as auditor. Such Certificates are not being issued since November 1, 1956.

Important Points

An officer or employee of the company is not qualified to be appointed as auditors of a company.

Cost behavior analysis:

1. Cost behavior analysis refers to management’s attempt to understand how operating costs change in relation to a change in an organization’s level of activity.
2. These costs may include direct materials, direct labor, and overhead costs that are incurred from developing a product.

Key Points

The following are the methods of determining cost behavior:

1. High-Low Method:

• In cost accounting, the high-low method is a way of attempting to separate out fixed and variable costs given a limited amount of data.
• The high-low method involves taking the highest level of activity and the lowest level of activity and comparing the total costs at each level.

2. Least square regression method:

• The least-squares method of cost estimation involves using mathematical regression techniques to calculate the slope and intercept of the best-fit line for the costs used in estimation.
• In order to determine these estimates, a manager will assemble cost data by cost and level of production.
• Once the manager has put together these ordered pairs, spreadsheet software can be used to calculate the slope and intercept.
• The intercept represents the company’s fixed cost and the slope represents the variable cost per unit.
• For example, spreadsheet software may tell the manager that the slope is 4 and the intercept is 24,000. This implies that the best-fit line has the equation: Total Cost = 4(units produced) + 24,000. Using this information, the manager can estimate the total cost for any given level of production.

3. Accounting or analytical approach

• The account analysis method is a cost accounting method for estimating the different costs associated with producing a product.
• The accounts analysis method is easy to use and useful when a quick cost forecast is required.
• However, it assumes that what occurred in the past will be reflected in the future.

Additional Information

The non-parametric method refers to a type of statistic that does not require that the population being analyzed meet certain assumptions or parameters. Often nonparametric methods will be used when the population data has an unknown distribution, or when the sample size is small.

Purchase Consideration:

In the case of amalgamation, purchase consideration is the agreed amount that the transferee company (Purchasing company) pays to the transferor company (Vendor company) in exchange of the ownership of the transferor company. It may be in form of cash, shares, or any other assets as agreed between both companies.

Key Points

Methods of Purchase Consideration:

There are four various methods that can be used in this calculation:

1. Net asset method:

The purchase consideration is equal to the total net assets of the transferor company.

The total agreed amount of asset – Total agreed amount of liabilities

2. Net payment method:

Payment made to the shareholders of the transferor company in form of cash, shares, or debentures.

3. Lump-sum method:

Fixed amount paid by the transferee company to the transferor company. This method does not require any calculation as the amount is decided by the mutual consent of both companies.

4. Intrinsic value/ Share exchange method:

It is calculated by dividing the net asset value of the transferor company by the price of one share of the transferee company.

The resulting figure then divided by the number of existing shares of the transferor company to find out the ratio.

Therefore, Gross Receipts Method is NOT a method for calculating or ascertaining the amount of purchase consideration.