Cap II June 2024 Group I

SUGGESTED ANSWERS TO
THE QUESTIONS SET AT

CHARTERED ACCOUNTANCY PROFESSIONAL (CAP)-II LEVEL
JUNE 2024 EXAMINATIONS
Group-I
The Institute of Chartered Accountants of Nepal (ICAN)

ICAN Marg, Satdobato, Lalitpur
Suggested Answers June 2024 Examination (CAP II - Group I)
The Institute of Chartered Accountants of Nepal
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Year and month of Publication: 2024 September
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The suggested answers published herein do not constitute the basis for evaluation of the students'
answers in the examination. The answers are prepared by the concerned resource persons and
compiled by the Technical Directorate of the Institute with a view to assist the students in their
education. While due care has been taken in the compilation of answers, if any errors or omissions
are noted, the same may be brought to the attention of the Technical Directorate. The Council or
the Board of Studies of the Institute is not any way responsible for the correctness or otherwise of
the answers published herewith.
2
Contents
Paper 1 – Advanced Accounting .................................................................................................... 4

Paper 2 – Audit and Assurance .................................................................................................... 23
Paper 3 – Corporate and Other Laws ......................................................................................... 35
Examiner’s Commentary on Students' Performance in June 2024 Examinations ................. 49
3
Paper 1 – Advanced Accounting

All questions are compulsory. Working notes should form part of the answer.
Make assumptions wherever necessary.
1. The financial position of X Ltd. and Y Ltd. as on 31st December, 2022 was as under:
Particulars X Ltd. Y Ltd.
Equity and Liabilities
Equity Share Capital of Rs. 10 each 3,000,000 900,000
9% Preference Shares of Rs. 100 each 300,000 -
10% Preference Shares of Rs. 100 each - 300,000
General Reserve 210,000 210,000
Long term Employee Benefits 150,000 60,000
Trade Payables 390,000 240,000
Total 4,050,000 1,710,000
Goodwill 150,000 75,000

Land and Buildings 900,000 300,000
Plant and Machinery 1,500,000 450,000
Inventories 750,000 525,000
Trade Receivables 600,000 300,000
Cash and Bank 150,000 60,000
Total 4,050,000 1,710,000
X Ltd. absorbs Y Ltd. on the following terms:

i) 10% Preference Shareholders are to be paid at 10% premium by issue of 9%
Preference Shares of X Ltd.
ii) Goodwill of Y Ltd. on absorption is to be computed based on two times of average
profits of preceding three financial years 2021: Rs. 90,000; 2020: Rs. 78,000
and 2019: Rs. 72,000. The profits of 2019 included credit of an insurance claim
of Rs. 25,000 (fire occurred in 2018) and loss by fire Rs. 30,000 was booked in
Profit and Loss Account of that year. In the year 2020, there was an embezzlement
of cash by an employee amounting to Rs. 10,000.
iii) Land & Buildings are valued at Rs. 500,000 and the Plant & Machinery at Rs.
400,000.
iv) Inventories are to be taken over at 10% less value and Provision for Doubtful
Debts is to be created @ 2.5%.
v) There was an unrecorded current asset in the books of Y Ltd. whose fair value
amounted to Rs. 15,000 and such asset was also taken over by X Ltd.
vi) The trade payables of Y Ltd. included Rs. 20,000 payables to X Ltd.
vii) Equity Shareholders of Y Ltd. will be issued Equity Shares @ 5% premium.
You are required to:
a) Prepare Realization A/c in the books of Y Ltd.
b) Show journal entries in the books of X Ltd.
c) Prepare the Balance Sheet of X Ltd. after absorption as at 31st December 2022 20
4
1. Answer:
In the books of Y Ltd.
Realization A/c
Particulars Amount (Rs) Particulars Amount (Rs)
To Sundry Assets:
Goodwill 75,000 By Long term employee 60,000
Land and Building 300,000 benefit 240,000
Plant and Machinery 450,000 By Trade Payables 1,590,000
Inventory 525,000 By X Ltd (Purchase
Trade Receivables 300,000 Consideration)
Bank 60,000
To Preference 30,000
Shareholders
(Premium on Redemption) 150,000
To Equity Shareholders
(Profit on Realization)
1,890,000 1,890,000
In the Books of X Ltd.

Journal Entries Amount (Rs)
S.N. Particulars Debit Credit
1. Business Purchase A/c Dr. 15,90,000
To Liquidators of Y Ltd. Account 15,90,000
(Being business of Y Ltd. taken over)
2. Goodwill Account Dr. 1,50,000
Land & Building Account Dr. 5,00,000
Plant & Machinery Account Dr. 4,00,000
Inventory Account Dr. 4,72,500
Trade receivables Account Dr. 3,00,000
Bank Account Dr. 60,000
Unrecorded assets Account Dr. 15,000
To Long term Employee Benefit 60,000
To Trade payables Account 2,40,000
To Provision for Doubtful Debts Account 7,500
To Business Purchase A/c 15,90,000
(Being Assets and Liabilities taken over as per agreed
valuation).
3. Liquidators of Y Ltd. A/c Dr. 15,90,000
To 9% Preference Share Capital A/c 3,30,000
To Equity Share Capital A/c 12,00,000
To Securities Premium A/c 60,000
(Being Purchase Consideration satisfied as above)
5
Balance Sheet of X Ltd. (after absorption)

as at 31st December, 2022
Particulars Amount (Rs)
Equity and Liabilities
Equity Share Capital (420,000 equity shares of Rs. 10 each) 4,200,000
9% Preference Shares (6,300 Preference share capital of Rs. 100 each) 630,000
General Reserve 210,000
Securities Premium 60,000
Long term Employee Benefit 210,000
Trade Payables 610,000
Provision for doubtful debts 7,500
Total 5,927,500
Goodwill 300,000
Land and Buildings 1,400,000
Plant and Machinery 1,900,000
Inventories 1,222,500
Trade Receivables 880,000
Cash and Bank 210,000
Other Current Assets 15,000
Total 5,927,500
1. Computation of Goodwill:
Particulars Amount
Profit of 2021 90,000
Profit of 2020 (78,000+10,000) 88,000
Profit of 2019 (72,000-25,000) 47,000
Total Profit 225,000
Average Profit (225,000/3) 75,000
Goodwill to be valued at 2 times of average profits = 75,000 x 2 = 150,000.
2. Calculation of Purchase Consideration;

Goodwill 1,50,000
Land & Building 5,00,000
Plant & Machinery 4,00,000
Inventory 4,72,500
Trade receivables 3,00,000
Unrecorded assets 15,000
Cash at Bank 60,000
Total Assets 18,97,500
Less: Liabilities:
Long term Employee Benefit 60,000
Trade payables 2,40,000
Provision for doubtful debts 7,500
Total Liabilities (3,07,500)
Net Assets/ Purchase 15,90,000
Consideration
6
3. Settlement of Purchase Consideration:

Total Purchase Consideration 1,590,000
Preference Shareholder of Y Ltd.
10% Preference shareholder of Y Ltd 300,000
Add: 10% Premium 30,000
Issued 9% Preference Shares at X Ltd. 330,000
Equity Shareholders of Y Ltd.

120,000 ((1,590,000-330,000)/10.5) Equity 1,200,000
Shares of Rs. 10 each of X Ltd.
Securities Premium 60,000
Issued to Equity Shareholders at X Ltd 1,260,000
2.
a) Jayram and Balaram carrying on business in partnership sharing Profit and Losses
equally, wished to dissolve the firm and sell the business to Sriram Co Ltd. on
31.03.2080, when the firm‘s position was as follows:
Liabilities Amount (Rs.) Assets Amount (Rs.)
Jayaram’s Capital 175,000 Land and Building 125,000
Balaram’s Capital 130,000 Furniture 52,500
Sundry Creditors 80,000 Stock 112,500
Debtors 91,000
Cash 4,000
Total 385,000 Total 385,000
The arrangement with Sriram Limited Company was as follows:
i) Land and Building was purchased at 20% more than the book value.
ii) Furniture and stock were purchased at book values less 15%.
iii) The goodwill of the firm was valued at Rs. 40,000.
iv) The firm debtors, cash and creditors were not to be taken over, but the company
agreed to collect the book debts of the firm and discharge the creditors of the
firm as an agent, for which services, the company was to be paid 5% on all
collections from the firm‘s debtors and 3% on cash paid to firm‘s creditors.
v) The purchase price was to be discharged by the company in fully paid equity
shares of Rs. 10 each at a premium of Rs. 2 per share.
The company collected all the amounts from debtors. The creditors were paid off
less by Rs. 1,000 allowed by them as discount. The company paid the balance due
to the vendors in cash.
Prepare the Realization Account, the Capital Accounts of the partners and the Cash
Account in the books of partnership firm along with necessary workings 10
b) M Ltd. has branch office at Kailali to which the goods are supplied from M Ltd.,
but the cost thereof is not recorded in the head office books. On 30 September 2023
Branch Balance Sheet was as follows:
Liabilities Rss Assets Rs.
Creditors balance 496,000 Debtors Balance 1,792,000
Head office 1,504,000 Cash at Bank 208,000
closed by transfer to HO a/c -
Total 2,000,000 Total 2,000,000
7
In the six months ending on 31-03-2024 period, the following transaction took place
at Kailali Branch.
Sales 2,224,000 Manager's salary 131,200
Purchase 516,000 Collection from debtors 2,056,000
Wages paid 192,000 Discount allowed 128,000
Salaries inclusive of
Discount earned
advance Rs.10,000
124,800 36,800
General Expenses 62,400 Cash paid to creditors 708,000
Fire insurance paid of one Building a/c further
year 89,600 paid 112,000
Remittance to HO 423,200 Cash in hand 44,800
Cash at bank 376,000
Required:
Prepare head office account in the Kailali books and Branch's Balance Sheet as on
31.03.2024 and give journal entries in Kailali books. 10
Answer:2(a)
Books of Partnership firm of Jayram and Balram

Dr Realization A/c Cr
Amount
Particulars Amount (Rs) Particulars
(Rs)
To Land & Building 125,000 By Sundry Creditors 80,000
By Sriram Co-
To Furniture 52,500 Purchase consideration 330,250
(W.N-1)
To Stock 112,500
By Sriram Co- Sundry
Debtors 91,000
To Debtors 91,000 86,450
Less:5% commission
(4,550)
To Sriram Co-Sundry Creditors 79,000
To Sriram Co-Sundry Commission
2,370
(3% on 79,000)
To profit transferred to
Jayram Capital - 17,165 34330
Balram Capital- 17,165
Total 496,700 Total 496,700
Dr Capital A/c Cr
Particulars Jayaram Balaram Particulars Jayaram Balaram
To Land & Building 187,023 143,227 By Balance b/d 175,000 130,000
To Furniture 5,142 3,938 By Realization a/c 17,165 17,165
Total 192,165 147,165 192,165 147,165
8
Dr Cash A/c Cr
By Jayaram's Capital (Final
To balance b/d 4,000 5,142
payment)
To Sriram Co a/c
By Balaram's Capital (Final
Amount realized from debtors 5,080 3,938
payment)
less paid to creditors (W-N-3)
9,080 9,080
Working notes:
1. Calculation of Purchase Consideration
Land & Building (125,000+20% of 125,000) 150,000
Furniture (52,500-15% of 52,500) 44,625
Stock (112,500-15 % of 112,500) 95,625
Goodwill ( given) 40,000
Total 330,250
2. The shares received from the company have been distributed between the two partners
Jayaram & Balaram in the ratio of their final claims i.e., 192,165: 147,165
No of shares received from the company=330,250/12= 27,521
Jayaram gets (Shares valued at 15,585*12 =NPR.187, 023. Sriram gets the remaining
11,936 shares valued at 11,936*12 = NPR.143, 227
3. Calculation of net amount received from Sriram Co on account of amount realized from
debtors less amount paid to creditors.

Amount realized from debtors 91,000
Less: Commission for realization from debtors (5% on 91,000) (4,550)
86,450
Less: Amount paid to creditors (79,000)
7,450
Cash paid to creditors (80,000-1000) x 103% 81370
Less: Commission for cash paid to creditors (3% on 79,000) (2,370)
Total (Alternative) 5,080
9
Answer:2 (b)
Dr Head office a/c Cr
Amount Amount
Date Particular (Rs) Date Particular (Rs)
31-Mar To cash remittance 423,200 1-Sep By balance b/d 1,504,000
To Revenue a/c 1,189,200
To Building a/c 112,000 By revenue a/c 2,260,800
To Balance c/d 2,040,400
Total 3,764,800 Total 3,764,800
#Alternative (If net profit of 1,071,600 is shown in total, also correct)
Balance sheet at 31-03-2024

Liabilities Amount (Rs) Assets Amount (Rs)
Creditors 267,200
Head office accounts 2,040,400 Debtors 1,832,000
Salary advance 10,000
Prepaid insurance 44,800
Cash in hand 44,800
Cash at bank 376,000
Total 2,307,600 Total 2,307,600
Dr Cash and Bank Account Cr

Amount
Particular (Rs) Particular Amount (Rs)
To Balance b/d 208,000 By Wages paid 192,000
To Collection from
debtors 2,056,000 By Salaries 124,800
By Insurance 89,600
By General
Expenses 62,400
By HO a/c 423,200
By Managers
salary 131,200
By Creditors 708,000
By Building a/c 112,000
By Cash in hand 44,800
By Cash at bank 376,000
Total 2,264,000 Total 2,264,000
Dr Debtors Account Cr
Particular Amount (Rs) Particular Amount (Rs)
By Cash
To Balance b/d 1,792,000 collection 2,056,000
To sales 2,224,000 By Discount 128,000
By Balance c/d 1,832,000
Total 4,016,000 Total 4,016,000
10
Dr Creditors Account Cr
Particular Amount (Rs) Particular Amount (Rs)
By Balance
To Cash a/c 708,000 b/c 496,000
To Discount By Purchase
a/c 36,800 a/c 516,000
To Balance
c/d 267,200
Total 1,012,000 Total 1,012,000
Journal entries in the books of Kailali Branch Amount (Rs)

Particular Debit Credit
1 Salary advance A/c 10,000
To salary account A/c 10,000
(Being the amount paid as advance adjusted by debit to salary
a/c)
2 Head office a/c 1,189,200
To Purchase 516,000
To Wages paid 192,000
To Salaries inclusive of advance 10000 114,800
To General Expenses 62,400
To fire insurance for 6 months 44,800
To Managers salary 131,200
To Discount allowed 128,000
(Bening the transfer of various accounts to the HO a/c for
closing the account
3 Sales A/c 2,224,000
Discount Earn a/c 36,800
To Head Office a/c 2,260,800
being transfer various revenue account to HO
4 Head office a/c 112,000
To Building a/c 112,000
being the amount transfer
5 Prepaid insurance A/c 44,800
to Fire insurance 44,800
(Being the six months premium transferred to the prepaid
insurance a/c
Alternate solution for 2 (b)
Journal Entry in the books of Kailali Branch Amount (Rs)

S.N. Particulars Debit Credit
1 Debtors A/c Dr. 22,24000

To sales 2224000
2 Purchase A/c Dr. 516,000
To Creditors 516,000
11
3 Wages A/c Dr 192,000

To Cash. 192,000
4 Salary Account DR. 114,800
Prepaid/ Advance Salary 10,000 ( B/S Item)
To Cash 124,800
5 General Expenses 624,00
To Cash 624,00
6 Fire Insurance Premium 44800
Prepaid Insurance 44,800 ( B/S Item)
To Cash 89,600
7 Head Office A/c Dr. 423,200
To Cash 423,200
( Remittance to Head Office )
8 Managers Salary A/c Dr. 131,200
To Cash 131,200
9 Cash A/c Dr. 2,056,000
To Debtors 2,056,000
10 Discount Allowed 128,000
To Debtors 128,000
11 Creditors A/c Dr. 36800
To Discount Received 36,800
12 Creditors A/c Dr. 708,000
To Cash 708,00
13 Head Office A/c Dr. 112,000
To Cash 112,000
( Building Extention Paid)
14 P/L A/c Dr. 1071,600
To Head office 1071,600
3.
a) Janaki, a readymade garment trader, keeps his books of account under single entry
system. On the closing date, i.e. on 31st Ashadh, 2078 his statement of affairs stood
as follows:
Capital & Liabilities Amount (Rs.) Assets Amount (Rs.)
Ram's capital 480,000 Building 325,000
Loan 150,000 Furniture 50,000
Creditors 310,000 Motor car 90,000
Stock 200,000
Debtors 170,000
Cash in hand 20,000
Cash at bank 85,000
Total 940,000 Total 940,000
Riots occurred and a fire broke out on the evening of 31st Ashadh, 2079, destroying
the books of accounts. On that day, the cashier had absconded with the available
cash. You are furnished with the following information:
i) Sales for the year ended 31st Ashadh, 2079 were 20% higher than the previous
year's sales, out of which, 20% sales were for cash. He always sells his goods
at cost plus 25%. There were no cash purchases.
ii) Collection from debtors amounted to Rs. 1,400,000, out of which Rs. 350,000
was received in cash.
iii) Business expenses amounted to Rs. 200,000, of which Rs. 50,000 were
outstanding on 31st Ashadh, 2079 and Rs. 60,000 paid by cheques.
iv) Gross profit as per last year's audited accounts was Rs. 300,000.
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v) Provide depreciation on building and furniture at 5% each and motor car at

20%.
vi) His private records and the Bank Statement disclosed the following
transactions for the year 2078/79:
Particulars Amount (Rs.)

Payment to creditors (paid by cheques) 1,375,000
Personal drawings (paid by cheques) 75,000
Repairs (paid by cash) 10,000
Travelling expenses (paid by cash) 15,000
Cash deposited in bank 715,000
Cash withdrawn from bank 120,000
vii) Stock level was maintained at Rs. 300,000 all throughout the year.
viii) The amount defalcated by the cashier is to be written off to the Profit and Loss
A/c.
Required: Prepare Trading and Profit and Loss A/c for the year ended 31st Ashadh,
2079 and Balance Sheet as on that date of
Janaki. 10
b) Based on the following information complete the Statement of Financial Position

of P Ltd. As on 30-12-2080. 5
a. Gross Profit of sales 25%
b. Gross Profit 1,800,000
c. Shareholder's equity 1,500,000
d. Credit Sales to Total Sales 80%
e. Total Turnover to Fixed Assets 4 times
f. Cost of sales to inventory 10 Times
g. Average Collection Period, assume 360 days in a year 5 days
h. Long Term Debt ?
i. Acid Test Ratio 1.2
j. Sundry Creditors 420,000
Statement of Financial Position of P Ltd. as on 30-12-2080.
Liability Rs. Assets Rs.
Share Capital - Fixed Assets -
Long Term Debt - Inventory -
Sundry Creditors - Sundry Debtors -
Cash -
Total - Total -
13
Answer: 3(a)
Trading and Profit and Loss Account of Janaki
For the year ended 31st Ashadh 2079
To Stock 2,00,000 By Sales 18,00,000
To Purchases (Bal. fig.) 15,40,000 By Closing Stock 3,00,000
To Gross Profit c/d 3,60,000
2,100,000 2,100,000
To Business Expenses 2,00,000 By Gross Profit 3,60,000

b/d
To Depreciation:
Building: 16,250
Machinery: 2,500
Motor Car: 18,000 36,750
To Repairs 10,000
To Travelling Expenses 15,000
To Loss by theft (cash defalcated) 20,000
Net Profit 78,250
Total 360,000 Total 360,000
Balance Sheet of Janaki as at 31st Ashadh 2079

Capital & Liabilities Amount (Rs) Assets Amount (Rs)
Capital: 480,000 Building: 325,000
Add: Net Profit: 78,250 Less: Depreciation: 308,750
Less: Drawing (75,000) 483,250 (16,250)
Loan 150,000 Furniture: 50,000
Less: Depreciation (2,500) 47,500
Sundry Creditors 475,000 Motor car 90,000
Less: Depreciation 72,000
(18,000)
Outstanding business 50,000 Stock in Trade 300,000
Expenses
Sundry Debtors 210,000
Bank Balance 220,000
Total 1,158,250 Total 1,158,250
Working Notes
Dr Cash and Bank Account Cr
Particulars Cash Bank Particulars Cash Bank
To Balance b/d 20,00085,000 By Payment to - 1,375,000
Creditors
To Collection from 350,000 1,050,000 By Business 90,000 60,000
Debtors Expenses
To Sales 3,60,000 – By Repairs 10,000 –
(1,800,000 x 20%)
To Cash (C) – 7,15,000 By Cash (C) 120,000
(withdrawal)
By Bank (C) 715,000
To Bank (C) 1,20,000 - By Travelling 15,000 –
Expenses
By Private Drawings - 75,000
14
By Balance c/d 220,000

By Cash defalcated 20,000
(balancing fig.)
Total 850,000 1,850,000 Total 850,000 1,850,000
2. Calculation of sales during 2078-79

Gross profit (last year i.e. for year ended 31.3.2078) 300,000
Goods sold at cost plus 25% i.e. 20% of sales Sales for 2077-78: 1,500,000
3,00,000/0.2
Sales for 2078-79 (15,00,000 x 1.2) 1,800,000
Credit sales for 2078-79 (80% of 18,00,000) 1,440,000
3. Debtors a/c
To, Bal. b/d 170,000 By Cash 350,000
To, Sales (1,800,000 x 80%) 1,440,000 By Bank 1,050,000
Bal. c/d 210,000
Total 1,610,000 Total 1,610,000
4. Dr Creditors a/c Cr
To Bank 1,375,000 By Bal. b/d 310,000
To Bal. c/d (bal. fig.) 475,000 By Purchases 1,540,000
Total 1,850,000 Total 1,850,000
Answer: 3 (b)
Statement of Financial Position P Ltd. As on 30-12-2080
Liability Rs. Assets Rs.
Share Capital 1,500,000 Fixed Assets 1,800,000
Long Term Debt 924,000 Inventory 540,000
Sundry Creditors 420,000 Sundry Debtors 80,000
Cash 424,000
Total 2,844,000 Total 2,844,000
1 Fixed Assets:
Gross Profit= 25% of sales
Sales =Gross Profit/25% 7,200,000
Credit sales=80% of total sales 5,760,000
Total turnover /Fixed assets 4 times

Fixed assets Total turnover/4 times
Fixed assets 1,800,000
2 Inventory
Cost of sales to inventory 10 Times
cost of sales to inventory 75% of sales
so inventory 75% sales /10
540,000
3 Sundry debtors
15
Average Collection Period 5 days, assume 360 days in a

year 5
Debtors credit sales*5/360
80,000
4 Cash
Acid Test Ratio 1.2
cash be x than x+80000/420000=1.2
X+80000 504,000
Cash (504,000-80,000) 424,000
5 Long Term Debt

sum of all the assets-equity +creditors 924,000
4.
a) The following Balance Sheet exposures and Off-balance Sheet Exposure are
extracted from the record of National Commercial Bank Limited.
A. Balance Sheet Exposures Amount (in Millions)
Cash Balance 3,450
Balance With Nepal Rastra Bank 11,600
Investment in Nepalese Government Securities 54,300
Investment in Nepal Rastra Bank Securities 5,460
Claims secured by residential properties 14,000
Regulatory Retail Portfolio (Not Overdue) 157,000
Claims secured by Commercial real estate 3,350
Lending against Shares (upto Rs.5 Million) 260
Personal Hire-purchase/Personal Auto Loans (upto Rs.
480
2.5 Million)
Lending against Shares(above Rs.5 Million) 1,010
Personal Hire-purchase/Personal Auto Loans (above Rs.
450
2.5 Million)
High Risk claims 17,100
Total (A) 268,460
B. Off-Balance Sheet Exposures
Bills Under Collection 50
Advance Payment Guarantee 17,280
Financial Guarantee 120
Other Contingent Liabilities 2,560
Unpaid Guarantee Claims 3,560
Total (B) 23,570
Total Risk Weighted Exposure for Credit Risk
292,030
(A+B)
Required: 10
Risk Weighted Exposure for Credit Risk in the format prescribed in Capital
Adequacy Framework.
16
b) X limited received a grant of Rs.4 crores from the government for purchase of
special purpose machinery during the year 2076/77 The cost of machinery was Rs.76
crores and had a useful life of 9 years. During the current year 2079/80 the grant has
become refundable due to nonfulfillment of certain conditions attached to it.
Assuming that the entire amount of grant was deducted from the cost of machinery
in the year of acquisition, state with reasons, and the accounting treatment to be
followed in the year 2079/80.
5
Answer: 4(a)
Amount in Risk Risk weighted

A. Balance Sheet Exposures Millions Weight Exposures
0% 0
Cash Balance 3,450
0% 0
Balance With Nepal Rastra Bank 11,600
Investment in Nepalese Government
0% 0
Securities 54,300
0% 0
Investment in Nepal Rastra Bank securities 5,460
60% 8,400
Claims secured by residential properties 14,000
75% 117,750
Regulatory Retail Portfolio (Not Overdue) 157,000
100% 3,350
Claims secured by Commercial real estate 3,350
Lending against Shares(upto Rs.5 Million) 260 100% 260
Personal Hirepurchase/Personal Auto Loans
100% 480
(upto Rs. 2.5 Million) 480
125% 1,262.5
Lending against Shares(above Rs.5 Million) 1,010
Personal Hirepurchase/Personal Auto Loans
125% 562.5
(above Rs. 2.5 Million) 450
150% 25,650
High Risk claims 17,100
Total (A) 268,460 157,715
B. Off-Balance Sheet Exposures
Bills Under Collection 50 0% 0
100% 17,280
Advance Payment Guarantee 17,280
Financial Guarantee 120 100% 120
100% 2,560
Other Contingent Liabilities 2,560
200% 7,120
Unpaid Guarantee Claims 3,560
Total (B) 23,570 27,080
Total Risk Weighted Exposure for Credit
184,795
Risk (A+B) 292,030
Answer:4 (b)
As per NAS 20 ‘Government Grants’ specifies that the repayment of government grant related
to assets shall be recorded by increasing the carrying amount of the asset. Accordingly, the
17
cumulative additional depreciation that would have been recognized to date as expenses in the
absence of grant shall be recognized immediately as an expense. Hence the repayment of grant
for the non-compliance in the terms shall be treated remaining within NAS 20.
As such the shortfall in depreciation of the 3 prior years from financial year 2076.077 to
078/079 amounting to Rs.1.33 crore shall be treated as expense during FY 2079/080 together
with the depreciation for the year 2079/080 amounting to Rs.8.44 crores and the carrying
amount will be Rs.42.22 crores.
Particular Rs. in Crores
Value of assets without grant 76.00
Value after deducting grant 72.00
Depreciation per annum (72/9) 8.00
Depreciation provided from FY 2076.077 to 2078.079 24.00
After refund of grant
Value of assets to restated 76.00
New depreciation per annum (76/9) 8.44
New depreciation from FY 2076.077 to 2078.079 25.33
Short depreciation (25.33-24) 1.33
Revised book value for FY 2079.080 (76 – 8.44 × 4 years) 42.22
5.
a) M Ltd. adopts fair value for subsequent measurement of its intangible assets. An
intangible with an estimated useful life of 9 years was acquired on 1st Shrawan,
2073 for Rs. 270,000. It was revalued to Rs. 326,400 on 31st Ashadh, 2074 and the
revaluation surplus was correctly recognized on that date. As at 32nd Ashadh, 2075,
the asset was revalued at Rs. 192,000. Required: State the accounting treatment
required in the financial statements of FY 2073/74 and FY 2074/75. 5
b) HSEB ltd. a franchisor supplied equipment and other tangible assets as on
2080.01.01 at Rs. 1,000,000 to the franchise which is the fair market value of assets.
In addition, it has collected initial fee of Rs. 300,000 for staff training and use of
brand name. There is an agreement to charge Rs. 100,000 per annum for each of
the next 5 years which is the tenure of franchise agreement as continuing franchise
fee. HSEB Ltd. has agreed to provide continuous staff training for updating about
the product technology and usage manual with free repair and maintenance of the
equipment transferred. It has been estimated that cost of rendering this service is
Rs. 100,000 annually and a profit of 20% on the cost of service rendered is
considered appropriate. How should HSEB Ltd. recognise initial and subsequent
franchise fees? Incremental borrowing cost of the company is 12% p.a. 5
c) Mr. A bought a forward contract for three months of US$ 1,00,000 on 1st Ashadh
at 1 US$ = NRs. 135.10 when exchange rate was US$ 1 = NRs. 135.02. On 31st
Ashadh when he closed his books exchange rate was US$ 1 = Rs. 135.15. On 31st
Shrawan, he decided to sell the contract at NRs. 135.18 per dollar. Show how the
profits from contract will be recognized in the books along with disclosure
requirements. 5
Answer: 5(a)
FY 2073/74
The Income statement for FY 2073/74 shows an amortization of Rs. 30,000 [Rs. 270,000/9
years].
The statement of financial position as at 31st Ashadh 2074 shows the following:
The asset at a carrying amount of Rs. 326,400 under non-current asset.
A revaluation surplus of Rs. 86,400 [Rs. 326,400 – Rs. 240,000] under equity.
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FY 2074/75
Amortization of Rs. 40,800 [Rs. 326,400/ 8 years (remaining useful life)] is charged to income
statement.
A transfer should be made from revaluation surplus to retained earnings through the statement
of changes in equity of the excess amortization of Rs. 10,800 [Rs. 40,800 charged less Rs.
30,000 based on the original cost] and thereby reducing the revaluation surplus to Rs. 75,600.
Measurement after Initial Recognition

Intangible Asset should be measured either applying cost model or revaluation model.
a. Cost Model
Under the cost model, an Intangible Asset is carried at cost less accumulated amortization less any
accumulated impairment losses.
b. Revaluation Model
Under revaluation model, an Intangible Asset is carried at revalued amount less accumulated amortization
less accumulated impairment losses.
Treatment of revaluation figure
i. First time downward revaluation

The decrease amount below the carrying amount is debited to profit and loss account.
ii. First time upward revaluation

The increase amount above the carrying amount is credited to revaluation account which is part of other
comprehensive income.
iii. First time downward revaluation and subsequent upward revaluation

The increase amount above carrying amount can be credited to profit and loss account to the extent earlier
debited to profit and loss account. And balance amount should be credited to revaluation account.
iv. First time upward revaluation and subsequent downward revaluation

The Decrease amount above carrying amount can be debited to revaluation account to the extent the amount
earlier credited is unutilized. And balance amount should be debited to profit and loss account.
Answer:5 (b)
Recognition of initial and subsequent franchise fees;
Initial Revenue:
Particulars Amount (Rs.)
a) Sale of Equipment (PPE) 1,000,000
b) Present Value of Initial fee 227,904
(WN-1)
WN-1 1,227,904
Subsequent Revenue:
The Company Should book service fee of Rs.120,000 /- every year.
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Working Notes-1
Cost of service (Normal) 100,000
+ Normal Profit 20,000
120,000
Fee Charged 100,000
Under Charged Amount 20,000
Deferred Income (Initially Received) 100,000 (20,000 *5)
Net present value of Deferred income 72,096
Discount at 12% 20,000* PVIFA (12% 5 years)
Therefore, Net Present Value of Initial 227,904
fee (Total Fee – P.V. of Def. Income)
300,000 – 72,096
Journal entries:
Date Particular Debit Credit
Bank A/c 1,300,000
Property plant and
2080.01.01 equipment A/c 1,000,000
Initial Franchise fee A/c 200,000
Deferred Fee A/c 100,000
Bank a/c 100,000
2081.01.01 Deferred Fee A/c 20,000
Franchise Fee a/c 120,000
Bank a/c 100,000
2082.01.01 Deferred Fee A/c 20,000
Bank a/c 100,000
2083.01.01 Deferred Fee A/c 20,000
Answer :5 (c)
Since the forward contract was for speculation purpose the premium on contract i.e. the
difference between the spot rate and contract rate will not be recorded in the books. Only
when the contract is sold, the difference between the contract rate and sale rate will be
recorded in the Profit & Loss Account.
Sale Rate Rs. 135.18
Less: Contract Rate Rs. 135.10
Premium on Contract Rs. 0.08
Contract Amount US$ 1,00,000
Total Profit (1,00,000 x 0.08) = NRs. 8,000
Disclosure
An enterprise should disclose:
a. The amount of exchange differences included in the net profit or loss for the period.
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b. Net exchange differences recognized in other comprehensive income and accumulated in a

separate component of equity, and a reconciliation of the amount of such exchange
differences at the beginning and end of the period.
6. Write short notes: (5×3=15)

a) Average Clause
b) Supplementary capital of banks and financial institutions
c) Recognition for Revenue of Services
d) Biological Assets or Agricultural Produce
e) Difference between Government Accounting and Business Accounting
Answer
6 a) Average Clause
Some unscrupulous businessmen may resort to under- insurance of stocks in order to save
some amount of premium. Under-insurance means insuring for a lesser value. Under-
insurance is resorted to because, usually the loss will not be total and therefore, in spite of
under- insurance the business men can recover his loss. For example, stocks worth Rs.
1,00,000 may be insured for, say, Rs. 60,000, because the insured knows, from experience,
that in the event of fire not all his stocks are likely to be lost. (Of course there can be
exceptions) So, if there is a fire and the actual loss is Rs. 50,000, the insured can recover the
amount in the absence of an 'average clause'. To prevent such misuse of insurance, the policy
incorporates an 'average clause'. By inserting average clause, the insured is called upon to
bear a portion of loss himself in the event of under-insurance. The main object of this clause
is to discourage under- insurance, to encourage full-insurance and above all to impress upon
the property owner the necessity of having his property valued accurately before insurance.
Under this clause the loss is suffered by both insurer and insured proportionately. This is based
on the principle that, in case of under-insurance, the owner of the property himself acts as an
insurer to the extent the property has not been insured with the insurance company. For
example, A building of Rs. 60,000 is insured for Rs. 50,000 then to the extent of Rs. 10,000,
the owner himself is acting as insurer. Insurance company will bear only Rs. 50,000 and the
owner of the building will bear Rs. 10,000. If the loss is less than Rs. 60,000, then the share
of the insurance company is reduced proportionately.
The formula, therefore may be laid down as follows: Loss to be borne by the insurance
company:
Amount of the policy
____________________ X Actual loss
Total Value of property insured
6 b) Supplementary capital of banks and financial institutions

As per section 2 (y) of the Bank and Financial Institutions Act 2073, “supplementary capital”
means the funds of a bank or financial institution kept under such headings as may be
prescribed by the Rastra Bank from time to time. Provisions of Directive 1 of Unified
Directives 2076 on “Provisions relating to Capital Adequacy” states that with a condition of
not allowing to include more than core capital, the amount under the following heads shall be
included in the supplementary capital:
Supplementary Capital (Tier II)
a. Cumulative and/or Redeemable Preference Share
b. Subordinated Term Debt
c. Hybrid Capital Instruments
d. Stock Premium
e. General loan loss provision
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f. Exchange Equalization Reserve

g. Investment Adjustment Reserve
h. Assets Revaluation Reserve
i. Other Reserves
6 c) When the outcome of a transaction involving the rendering of services can be estimated
reliably, revenue associated with the transaction shall be recognized by reference to the stage
of completion of the transaction at the end of the reporting period.The outcome of a
transaction can be estimated reliably when all the following conditions are satisfied:
• The amount of revenue can be measured reliably.
• It is probable that the economic benefits associated with the transaction will flow to the
entity
• The stage of completion of the transaction at the end of the reporting period can be
measured reliably.
• The cost incurred for the transaction and the costs to complete the transaction can be
measured reliably.
6 d) Biological Assets or Agricultural Produce

As defined in NAS 41, biological asset is a living animal or plant and agricultural produce is
the harvested product of the entity’s biological assets. These assets are inventories of Farm
Accounting and measurement requirement of NAS 4 is not applicable for these inventories.
As per NAS 41, an entity shall recognize a biological asset or agricultural produce when and
only when:
(a) the entity controls the asset as a result of past events;
(b) it is probable that future economic benefits associated with the asset will flow to the entity;
and
(c) the fair value or cost of the asset can be measured reliably
At each Statement of Financial Position date, the entity shall valuate the inventories such
as biological assets or agricultural produce at it fair value less cost to sell.
6 e) As there are some notable differences between government and business organizations,
the objectives of maintaining books of account in both types of offices differ to some
extent. But the accounting, in both types of offices, must be based on the fundamental
principles of double entry system in order to make the complete records of the financial
transactions.
Basis of Government Accounting Business Accounting
Differences
Use It is used to record revenues and It is used to record financial
expenditures of the transactions of business firms to
government. determine the amount of profit or
loss.
Communication It provides information relating It provides information about the
receipts, disposition and firm’s performance and financial
transfer of public by legal condition.
provisions
Basis It is based on the cash basis of It is based on accrual basis of
accounting system. accounting system.
Auditing Process Government accounts are Business accounts are audited by the
audited by the constitutional professional persons licensed as
body i.e. office of the Auditor’ auditors from regulating authority.
general.
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Paper 2 – Audit and Assurance
Attempt all questions.

1. As an auditor, give your opinion with explanations on the following cases: (45=20)
a) The plant of YUI Limited was destroyed by fire in Kartik 2080, and the company's financial
statements are not approved by the board of directors. The reported value of the destroyed
plant is Rs. 90 crore, which represents 40% of the total assets reported in the financial
statements for FY 2079/80.
b) Sunshine Ltd. appointed Trust Ltd. as an external auditor for 2079/80. The Trust Ltd. has
chartered accountants as owner and employees and provides expert services on accounting,
auditing and taxation matters. The Trust Ltd. assigned CA. X for this engagement. Further
CA. X was invited to be one of the members of audit committee of Sunshine Ltd.
c) Matribhumi Salt Industries Limited is the entity importing, processing and packaging salt
in Nepal. The entity, at times, collaborates with Government of Nepal to ensure that the
Salt, as a basic need, is timely and adequately transported to rural parts of the country.
Doing so, the company is eligible to receive Subsidy from Government of Nepal to
compensate for additional cost incurred due to sales to be done in rural areas. In FY
2079/80, the company had entered into such arrangement with Government of Nepal and
as a process of subsidy claim, company had submitted claim to government on Ashadh
2080. However, due to the lengthy approval process, company was not timely notified
about the approval of such subsidy and company collected cheque only on first week of
Shrawan 2080. Due to non-receipt of such amount during 2079/80, the company did not
account for subsidy in its financial statements. While finalizing financial statements for FY
2080/81, it was identified that the amount received during first week of Shrawan 2080 was
recognized as income in financial statement of FY 2080/81.
d) Godawari Automobiles Industry Limited is a manufacturer of Automobiles having its
manufacturing setup in its own land in Bhairahawa which is financed by a commercial
bank in Nepal. The company has its corporate headquarters in its own property located in
Kathmandu. The company has been preparing its financial statements based on Nepal
Financial Reporting Standards. The company had been using cost model for subsequent
recognition of its Property, Plant & Equipments. During the year 2080/81, the company
requested for additional financing for working capital and the Bank, for the purpose,
decided to revalue the land of factory located in Bhairahawa. Subsequently, the company
decided to revalue that land in its financial statement by increasing the value of land and
General Reserve. Since, there is no bank financing on its corporate headquarters property,
management does not feel the necessity to revalue such property.
Answer: 1 (a)
As per Nepal Accounting Standards 10, "Events after the Reporting Period," events
occurring between the end of the reporting period and the date when financial statements
are authorized for issue can be favorable or unfavorable. These events include;
i) Adjusting events: These events provide evidence of conditions that existed at the
end of the reporting period and should be reflected in the financial statements
through adjustments.
ii) Non-adjusting events: These events indicate conditions that arose after the
reporting period and are not adjusted in the financial statements but are disclosed.
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In the given scenario, the major plant, which holds 40% of the total assets, was destroyed
by fire in Kartik 2080. This event does not provide evidence of conditions that existed at
the end of the reporting period; therefore, it should be considered a non-adjusting event.
Proper disclosure should be made in the financial statements regarding the fire that
destroyed the company's major plant. If adequate disclosure is not made in F.S., auditor
should consider modification in audit opinion.
Answer: 1(b)
Section 112 (1) of Companies Act, 2063 disqualifies appointment of a company or
corporate body with limited liability as a statutory auditor. Section 112 (2) of Companies
Act, 2063 requires that the auditor before the appointment shall provide information to the
appointing company in written that he/she is not disqualified for such
appointment/engagement . Section 29 of Nepal Chartered Accountants Act, 2053 restricts
any person other than person holding Certificate of Practice issued by ICAN from
conducting statutory audit of the company. Section 164 of Companies Act, 2063 has
provision related to composition of audit committee and Section 165 mentions the
functions, duties and power of audit committee. Some of the functions of audit committee
are to recommend the external auditors for appointment and to review the conduct of
appointed auditors.
From above provision, it can be concluded that appointment of Trust Ltd as an external
audit is against the provision of Companies Act, 2063. Further CA X also has violated the
provision of Nepal Chartered Accountants Act, 2053. Appointment of CA X as a member
of audit committee is not valid.
Answer:1 (c)
As per NAS 20, Accounting for Government Grants and Disclosure of Government
Assistances, Government grants, including non-monetary grants at fair value, shall not be
recognised until there is reasonable assurance that:
(a) the entity will comply with the conditions attaching to them; and
(b) the grants will be received
As per NAS 8, Accounting Policies, Changes in Accounting Estimates and Errors, Errors
can arise in respect of the recognition, measurement, presentation or disclosure of elements
of financial statements. Entity shall correct material prior period errors retrospectively in
the first set of financial statements authorised for issue after their discovery by:
(a) restating the comparative amounts for the prior period(s) presented in which the error
occurred; or
(b) if the error occurred before the earliest prior period presented, restating the opening
balances of assets, liabilities and equity for the earliest prior period presented.
In the given case, Matribhumi Salt Industries Limited had entered into an arrangement with
Government to supply salt to rural areas and doing so, company would be eligible to receive
subsidy from government. During FY 2079/80, the company applied for the subsidy.
However, it collected payment in subsequent fiscal year 2080/81 and recognized income
in that year 2080/81.
Based on above provisions and cases, we can say that, though the company collected
payment in 2080/81, the company had already complied with the condition attached to the
subsidy and also there existed certainty to receive grant during FY 2079/80. The company
had already met the recognition criteria of grant. However, there was an error in recognition
of income. Such error, as per NAS 8 as explained above, should be rectified by restating
the comparative amounts for the prior period(s) presented in which the error occurred.
However, the company has recognized income in FY 2080/81.
As an auditor, the company should be required to correct the error as per the
aforementioned provision. If management disagrees, modification on audit opinion,
depending on materiality and pervasiveness, should be considered.
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Answer: 1(d)
As per para 29 of NAS 16, Property, Plant and Equipment, an entity shall choose either the
cost model or the revaluation model as its accounting policy and shall apply that policy to
an entire class of property, plant and equipment. As per para 36 of the standard, if an item
of property, plant and equipment is revalued, the entire class of property, plant and
equipment to which that asset belongs shall be revalued.
Further, as per para 39 of the standard, if an asset’s carrying amount is increased as a result
of a revaluation, the increase shall be recognised in other comprehensive income and
accumulated in equity under the heading of revaluation surplus.
Godawari Automobiles has been using the cost model for its PPE. To secure additional
working capital financing, the bank requested a revaluation of the Bhairahawa factory land.
The company revalued, increasing the land value and crediting both "Land" and "General
Reserve" accounts. However, they didnot revalue the Kathmandu based headquarter's
property, claiming no bank financing was there on it.
The policy adopted by the company to revalue only factory land located in Bhairahawa is
inconsistent with the requirement of NAS 16. If the company revalues its land at
Bhairahawa, the company should also revalue its land at corporate headquarters as well,
which falls under same class of assets.
Further, The accounting treatment of such revaluation surplus is incorrect. The revaluation
increase should be recorded in "other comprehensive income" and accumulated in
"revaluation surplus" as per para 39, not directly credited to "General Reserve."
As an auditor, if such error remain uncorrected after communication with management,
audit opinion should be modified after examining the materiality of such misstatement and
pervasiveness of such misstatement.
2. Give your comments on the following cases: (45=20)

a. BTC Limited operates multiple product lines that are sold throughout the country.
One of the company's products has experienced a gradual decrease in sales over the
past three years. In the FY 2079/80, the auditor raised concerns that this particular
product is not performing well in the market and that the product line might be
experiencing losses. Consequently, the auditor intends to qualify the audit report
based on this concern. Additionally, the auditor does not have any issues with the
recording and presentation of revenue and expenses.
b. You are requested by Mechi Ltd to audit their books of accounts of 2079/80. From
the initial inquiry it was found that Mechi Ltd had previously appointed and
terminated a chartered accountant firm for same engagement. In light of Guidelines
on Professional Appointments, 2023, what will be your actions?
c. DEF & Associates, Chartered Accountants, during an audit of financial statements
of GBO Limited for FY 2079/80, were not able to obtain sufficient appropriate
audit evidence regarding Property Plant & Equipment amounting Rs. 90 crore.
Total Assets of the company for the year amounts to Rs. 100 crore. DEF &
Associates has a dilemma on forming an audit opinion on what kind of audit
opinion is to be issued. The firm is still to decide on how to report on key audit
matter of the company identified during the audit.
d. Achal & Associates have attended physical verification of their client Reliance
Garments Limited for the year end and no discrepancies were noted. The
management provides a statement of value of inventory but refuses to provide with
the cost sheet and calculations regarding how the value has been arrived. The
company discloses that the value of inventory is as “certified by the management”
in the financial statements. The management is ready to disclose the same in the
Written Representation Letter.
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Answer: 2(a)
According to NSA 705, 'Modifications to the Opinion in the Independent Auditor's Report,'
the standard outlines circumstances under which the auditor considers modifying the audit
opinion and specifies the types of modifications that may be required.
An auditor shall express a qualified opinion when either of the following circumstances
prevail:
1. The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material but not pervasive to the
financial statements.
2. The auditor is unable to obtain sufficient appropriate audit evidence on which to base
the opinion but concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive.
In the given scenario, where there is no issue with the recording of revenue or expenses,
the auditor decides to qualify the audit opinion based on the decreased sales and resulting
loss in one product line. However, it's important to note that the auditor's contention may
not be correct in this case because the circumstances required to determine the modification
of the auditor's opinion or issue a qualified audit opinion, as specified in NSA 705, do not
exist. Experiencing a loss in a product line alone does not meet the criteria outlined in NSA
705 for qualifying the auditor's opinion.
Alternate Suggested Answer:

NSA 570, Going Concern focuses on the auditor's responsibilities concerning the going
concern assumption used in preparing financial statements. The auditor must assess
whether there are events or conditions that may cast significant doubt on the entity's ability
to continue as a going concern. This includes evaluating management's assessment and
plans, obtaining sufficient appropriate audit evidence, and ensuring that adequate
disclosures are made in the financial statements regarding any material uncertainties.
In the given scenario, BTC Limited is experiencing a gradual decrease in sales for one of
its products over the past three years. The auditor has raised concerns about the product's
market performance and potential losses, suggesting these issues might significantly
impact the company's financial health. Despite no issues with the recording and
presentation of revenue and expenses, the auditor is worried that the declining sales could
affect the company's overall ability to continue as a going concern. Therefore, the auditor
must evaluate management's plans to address the declining sales, ensure that these plans
are feasible, and assess whether the financial statements adequately disclose any material
uncertainties related to the going concern assumption.
Based on NSA 570, the auditor should first determine whether management's use of the
going concern assumption is appropriate and whether any material uncertainties are
adequately disclosed. If the auditor concludes that there is a material uncertainty that is
adequately disclosed in the financial statements, an unmodified opinion with a "Material
Uncertainty Related to Going Concern" section will be included in the audit report.
However, if the disclosures are inadequate, the auditor may need to issue a qualified or
adverse opinion, depending on the materiality and pervasiveness of the inadequate
disclosure. Thus, the auditor's primary focus should be on the adequacy of management's
assessment and the transparency of disclosures in the financial statements regarding the
declining sales and potential impact on BTC Limited's ability to continue as a going
concern. Further, if there is no material uncertainty regarding going concern, modification
in audit opinion is not required.
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Answer: 2(b)
As suggested by Guidelines on Professional Appointments, 2023, before responding to any
offer or communicate to potential clients, it is necessary for a professional accountant to
gather adequate information about the owners, management and business activities of the
client. Responsibilities of the professional accountants in relation to changes in
professional appointments are as under:
i. Think tactfully if there is any reason that might indicate not to accept engagement.
Threats such as self-interest threat, non-compliance of fundamental principles in
respect to professional competence and due care might be present.
ii. Shall obtain the permission from the potential client to communicate with
predecessor accountant to get information about the reason for change in
appointment and enquire whether there are any reasons for non-acceptance of
engagement.
iii. Ensure that potential client is carrying out the lawful business activities and is not
involved in activities such as tax evasion or manipulation, money laundering etc.
Hence as a professional accountant, I will carry out the above procedure and ensure the
validity of acceptance of new engagement.
Answer: 2 (c)
As per para 6 of NSA 705 Modifications to the Opinion in the Independent Auditor’s
Report, the auditor shall modify the opinion in the auditor’s report when the auditor is
unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement.
As per para 9 of NSA 705, the auditor shall disclaim an opinion when the auditor is unable
to obtain sufficient appropriate audit evidence on which to base the opinion, and the auditor
concludes that the possible effects on the financial statements of undetected misstatements,
if any, could be both material and pervasive.
As para 29 of NSA 705, unless required by law or regulation, when the auditor disclaims
an opinion on the financial statements, the auditor’s report shall not include a Key Audit
Matters section in accordance with NSA 701.
In the given case, DEF & Associates, Chartered Accountants, during an audit of financial
statement of GBO Limited for FY 2079/80, were not able to obtain sufficient appropriate
audit evidence regarding Property Plant & Equipment amounting Rs 90 Crores. Total
Assets of the company for the year amounts to Rs 100 Crores. Here, the auditor is unable
to obtain audit evidence related to PPE which forms a significant part of total assets of the
company. The possible effects on the financial statements of undetected misstatements in
this case can be material.
Further, though the effect of not obtaining the audit evidence is confined to Property, Plant
and Equipment, it is so confined that it represent a substantial proportion of the financial
statements. So, the possible effects on the financial statements of undetected misstatements
in this case can be pervasive.
Based on above explanation, we can conclude that, since the possible effects on the
financial statements of undetected misstatements, if any, could be both material and
pervasive, DEF & Associates should issue disclaimer of Opinion.
Since disclaimer of opinion is required in this case, DEF & Associates shall not report on
Key Audit Matter as per NSA 701.
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Answer: 2 (d)
NSA 500, Audit Evidence suggests that the auditor should consider the sufficiency and
appropriateness of audit evidence to support financial statement assertions. The assertions
about account balances at the period end are existence, rights and obligations, completeness
and valuation and allocation.
In the given case, Audit evidence regarding an assertion of existence of inventory will not
compensate for failure to obtain assertion regarding valuation. The auditor should satisfy
himself that the valuation of inventories is in accordance with the Nepal Accounting
Standard -2 “Inventories”. The auditor should examine the methods of applying the basis
of inventory valuation which include examination of stock sheets, costing records and
treatment of overhead expenses as a part of cost of inventories. In the given case, it will be
construed as limitation on the scope of auditors. Accordingly, the auditor will have to issue
a modified opinion. Certification by Management of Reliance Garments Ltd. cannot be
taken as conclusive evidence and it cannot relieve the duty of auditors when there are other
procedures and means of gathering audit evidence. Just because management had owned
responsibility for the correctness of its valuation of Stock/inventory, the auditor cannot be
excused for his responsibility. This is negligence on his part if he relies on the management
representation without assessing the corroborative available evidences.
3. Answer the following: (35=15)
a. The auditor shall establish an overall audit strategy that sets the scope, timing and
direction of the audit, and that guides the development of the audit plan. What shall
an auditor do in establishing the overall audit strategy?
b. Explain about negative confirmation request as a method of obtaining audit
evidence. In what circumstances this method can be considered useful?
c. Explain the amendments required in description of auditor’s responsibility section
of auditor's report when the auditor disclaims the opinion on financial statements
due to inability to obtain sufficient appropriate audit evidence.
Answer: 3(a)
As per NSA 300, the auditor shall establish an overall audit strategy that sets the scope,
timing and direction of the audit, and that guides the development of the audit plan.
In establishing the overall audit strategy, the auditor shall:
i. Identify the characteristics of the engagement that define its scope;
ii. Ascertain the reporting objectives of the engagement to plan the timing of the audit
and the nature of the communications required;
iii. Consider the factors that, in the auditor’s professional judgment, are significant in
directing the engagement team’s efforts;
iv. Consider the results of preliminary engagement activities and, where applicable,
whether knowledge gained on other engagements performed by the engagement
partner for the entity is relevant; and
v. Ascertain the nature, timing and extent of resources necessary to perform the
engagement
Answer: 3(b)
External Confirmation, as guided by NSA 505 “External Confirmations”, is the process of
obtaining and evaluating audit evidence through a direct communication from a third party
in response to a request for the information about a particular item affecting assertions
made by management in the financial statements.
Negative confirmation request is a request that the confirming party responds directly to
the auditor only if the confirming party disagrees with the information provided in the
request.
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However, when no response has been received to a negative confirmation request, the
auditor remains aware that there will be no explicit evidence that intended third parties
have received the confirmation requests and verified that the information contained therein
is correct.
Accordingly, the use of negative confirmation requests ordinarily provides less reliable
evidence than the use of positive confirmation requests, and the auditor considers
performing other substantive procedures to supplement the use of negative confirmations.
Negative confirmation requests may be used to reduce audit risk to an acceptable level
when:
i. The auditor has assessed the risk of material misstatement as low and has obtained
sufficient appropriate audit evidence regarding the operating effectiveness of
controls relevant to the assertion;
ii. The population of items subject to negative confirmation procedures comprises a
large number of small, homogeneous account balances, transactions or conditions;
iii. A very low exception rate is expected; and
iv. The auditor is not aware of circumstances or conditions that would cause recipients
of negative confirmation requests to disregard such requests.
Answer: 3 (c)
According to NSA 705 when the auditor disclaims an opinion on financial statements due to
an inability to obtain sufficient appropriate audit evidence, the auditor shall amend the
description of the auditor’s responsibilities to include only the following:
i. A statement that the auditor’s responsibility is to conduct an audit of the entity’s
financial statements in accordance with NSA and to issue an auditor’s report.
ii. A statement that, however, because of the matters described in Basis of Disclaimer of
Opinion section, the auditor was not able to obtain sufficient appropriate audit
evidence to provide a basis for an audit opinion on the financial statements; and
iii. The statement about auditor’s independence and other ethical responsibilities.
4. Answer/Comment on the following: (35=15)
a) RDC & Associates, a chartered accountants are approached by their audit client ABC
Ltd to provide internal audit services. Can RDC & Associates do so according to Code
of Ethics for Professional Accountants?
b) Mr Star, a professional accountant recently resigned from PQR Associates (CA Firm)
and opened his own firm, Star Associates. Due to his extensive work period in PQR
Associates, he was familiar with most of its client. Right after opening his firm, he
started to communicate with the clients of PQR Associates. Comment on his behavior
in light of Guidelines on Marketing Professional Services, 2023 and mention other
matters to be observed by a professional accountant in respect to solicitation.
c) MNO & Associates, a firm of chartered accountants, is approached by Mr. Majnu and
Mrs. Laila, a married couple going through a divorce. Mr. Majnu requested that MNO
assist him in the financial aspects of their divorce settlement. This includes valuing
marital assets, dividing debts and income streams, and preparing financial
disclosures. Mrs. Lalila also approached MNO to assist in the same manner. MNO &
Associates feels that working on behalf of both the parties would make the job easier.
Explain in light of ehical requirements set by ICAN.
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Answer: 4 (a)
As per Handbook of the Code of Ethics for Professional Accountants, 2023 the professional
accountant shall identify threats to compliance with the fundamental principles. After
identifying threat, the accountant shall evaluate whether such a threat is at an acceptable
level. If the professional accountant determines that the identified threats are not at an
acceptable level, the accountant shall address the threats by eliminating them or reducing
them to an acceptable level or declining or ending the specific professional activity.
In the given case, when a RDC & Associates’s provides internal audit services to an ABC
Ltd. which is their audit client creates a Self-review threat to fundamental principal of
independence and objectivity. The threat created would be so significant that no safeguards
could reduce it to an acceptable level. Thus, the firm should decline the proposal for
internal audit services. The firm shall provide internal audit services to an audit client only
if it can avoid assuming management responsibility, and it is satisfied that:
• The client designates an appropriate and competent resource, preferably within
senior management, to be responsible at all times for internal audit activities and to
acknowledge responsibility for designing, implementing, and maintaining internal
control;
• The client's management or those charged with governance reviews, assesses and
approves the scope, risk and frequency of the internal audit services;
• The client's management evaluates the adequacy of the internal audit services and
the findings resulting from their performance;
• The client's management evaluates and determines which recommendations
resulting from internal audit services to implement and manages the
implementation process; and
• The client's management reports to those charged with governance the significant
findings and recommendations resulting from the internal audit services.
Answer: 4 (b)
As per Guidelines on Marketing Professional Services, 2023, Section 4.5 Solicitation: A
professional accountant should not in any circumstances obtain or seek professional work
for himself or another member in any unprofessional manner. Former employees of
practicing accountants leaving to become independent practitioner should avoid the
initiation of communication with clients of former employers telling them of their new
activities.
According to above provision, the action of Mr Star is not proper.
Other matters, members should observe are as under:
i. A member, who is an employee, other than an employee of a Professional
Accountant in Practice, should not, on behalf of his employer, carry on in his own
name, any business which is normally carried on by a Public Accountant in
Practice.
ii. A member, who is employed by another member or by a firm of members engaged
in public practice, should not undertake professional work on his own account or
in partnership with another member(s) without consent of his employer.
iii. When the member is retained by organization for providing advice on accountancy
matters, member should ensure that in any relevant literature issued by the
organization neither his name or name of his firm is given undue publicity.
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Answer: 4 (c)
As per Section 310 of Handbook of Code of ethics, 2023 issued by ICAN, a conflict of
interest creates threats to compliance with the principle of objectivity and might create
threats to compliance with the other fundamental principles.
Such threats might be created when a professional accountant provides a professional
service related to a particular matter for two or more clients whose interests with respect to
that matter are in conflict.
A professional accountant shall not allow a conflict of interest to compromise professional
or business judgment.
A professional accountant should evaluate the level of threat created, may attempt to apply
safeguard to address threats created and if such threats are not at acceptable level, end or
decline to perform professional services that would result in the conflict of interest.
In the given case, MNO & Associates faces a significant ethical dilemma in the case of Mr.
Majnu and Mrs. Laila's divorce. Representing both spouses in a divorce, creates a clear
conflict. MNO would be privy to confidential financial information from both parties,
which could be misused to favor one party over the other. Working for both Mr. Majnu
and Mrs. Laila could compromise MNO's ability to provide impartial financial analysis.
Negotiations during a divorce can be contentious, and MNO might feel pressured to favor
one client's position based on the information obtained from the other.
Based on above explanations, we can conclude that MNO & Associates should prioritize
ethical conduct over convenience. Taking on both clients in this situation creates a high
risk of violating the fundamental principles. The best course of action is to decline the
joint engagement and recommend separate representation to ensure a fair and ethical
divorce settlement.
5. Answer/Comment on the following: (25=10)
a) Mahesh & associates, chartered accountants, was appointed as an auditor of TTR
Limited for FY 2080/81. However, the Board of Directors of TTR Limited removed
Mr. Mahesh from his post before the audit entry meeting was held.
b) Mr. A, a Chartered Accountant was statutory auditor of ABC Ltd., a public company
for FY 2077/78 and FY 2078/79 appointed by Annual General Meeting. The Annual
General Meeting could not be conducted after FY 2078/79 due to various reasons.
The Board of Directors appointed Mr. A as statutory auditor for FY 2079/80 saying
that the auditor can be appointed for three consecutive terms to perform the audit of
a public company. Give your view regarding the validity of appointment.
Answer: 5 (a)
According to Section 119(1) of the Company Act, 2063, auditors appointed under the
Companies Act cannot be removed until the audit of accounts for the respective financial
year is completed. Sub-section (2) allows for removal if auditors violate the code of
conduct, act against the company's interests, or breach laws. Removal requires following
the same process as appointment, including prior notification to the Institute of Chartered
Accountants of Nepal (ICAN) and approval from the regulatory authority or the Office of
the Registrar if no regulatory authority exists. Auditors must be given a fair opportunity to
defend themselves. Hence, auditors appointed through the Annual General Meeting
(AGM) cannot be removed without providing a reasonable opportunity to defend
themselves. Thus, the Board of Directors of TTR Limited Company's action contradicts
the provisions of the Companies Act, 2063.
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Answer: 5 (b)
According to section 111 of Companies Act, 2063, the auditor of a company shall be
appointed by the Annual General Meeting in the case of a public company. The auditor
appointed in such way shall hold office only until the next Annual General Meeting.
According to section 113 of Companies Act, 2063, where the annual general meeting itself
cannot be held, or the auditor appointed under this Act could not continue due to any
reasons, the Office of Company Registrar may, at the request of the Board of Directors of
the company, appoint another auditor. In the given case, the Board of ABC Ltd. appointed
Mr. A , Chartered Accountants as statutory auditor for FY 2079/80 saying that the auditor
can be appointed for three consecutive terms to perform the audit of a public company.
Here, the Board cannot appoint the auditor and auditor should be appointed by Annual
General Meeting. If the general meeting could not be conducted, the board should request
office of company registrar to appoint the auditor. Therefore, the appointment of the auditor
by the board is not valid.
6. Write short notes on the following: (42.5=10)

a) Limited Assurance Engagement
b) Concept of true and fair view
c) Control Risk
d) Sampling Risk
Answer: 6 (a)
A limited assurance engagement entails reducing engagement risk to an acceptable level,
albeit higher than in a reasonable assurance engagement. The team must understand the
subject matter adequately to identify potential significant deviations. Unlike reasonable
assurance engagements, understanding internal control relevant to the engagement is
usually unnecessary. Evidence in a limited assurance engagement typically involves
inquiry, analytical procedures, and discussion to ascertain the subject matter's plausibility.
Unlike in reasonable assurance engagements, corroborating evidence is not typically
sought, as long as the information obtained appears plausible to the practitioner. The
conclusion for a limited assurance engagement is framed negatively, indicating that based
on the procedures performed and evidence obtained, nothing significant has come to the
attention of the practitioner.
Answer: 6 (b)
The concept of true and fair is a fundamental concept in auditing. The phrase "true and
fair" in the auditors‟ report signifies that the auditor is required to express his opinion as
to whether the state of affairs and the results of the entity including the cash flows as
ascertained by him in the course of his audit are truly and fairly represented in the accounts
under audit. This requires that auditor should examine the accounts with a view to verify
that all assets, liabilities, income and expenses are stated as amounts which are in
accordance with accounting principles and policies which are relevant and no material
amount, items or transactions has been omitted.
Answer: 6 (c)
Control Risk is the risk that a misstatement that could occur in an account balance or class
of transactions or in disclosure and that could be material individually or when aggregated
with the misstatements in other balances or classes, will not be prevented or detected and
corrected on timely basis by the accounting and internal control systems. The auditor
ordinarily assesses control risk at a high level for some or all assertions when:
i) The entity’s accounting and internal control systems are not effective or
ii) Evaluating the effectiveness of the entity’s accounting and internal control systems
would not be efficient.
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The auditor should document in the audit working papers:

i) The understanding obtained of the entity’s accounting and internal control systems
and
ii) The assessment of control risk. When control risk is assessed at less than high, the
auditor would also document the basis for the conclusion.
Answer: 6 (d)
Sampling risk is one of the many types of risks an auditor may face when performing the
necessary procedure of audit sampling. Audit sampling exists because of the impractical
and costly effects of examining all or 100% of a client's records or books. As a result,
sample of a client’s accounts are examined. Due to the negative effects produced by
sampling risk, an auditor may have to perform additional procedures which in turn can
impact the overall efficiency of the audit.
Sampling risk represents the possibility that an auditor's conclusion based on a sample is
different from that reached if the entire population were subject to audit procedure. The
auditor may conclude that material misstatements exist, in fact they do not; or material
misstatements do not exist but in fact they do exist. Auditor can lower the sampling risk by
increasing the sampling size
7. Distinguish between: (25=10)

a) Qualified Opinion and Adverse Opinion
b) Engagement Quality Control Review and Quality Assurance Review
Answer: 7 (a)
A qualified opinion is expressed by the auditor when he/she concludes that the
misstatements, individually or in the aggregate, are material, but not pervasive, to the
financial statements or the auditor is unable to obtain sufficient appropriate audit evidence
on which to base the opinion, but the auditor concludes that the possible effects on the
financial statements of undetected misstatements, if any, could be material but not
pervasive. While expressing the qualified opinion, auditor should clearly express the nature
of qualification on the report. A qualified opinion should be expressed as being “except
for” the matter to which the qualification relates.
An adverse opinion is expressed by the auditor when he/ she, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in aggregate, are
both material and pervasive to the financial statements. While expressing the adverse
opinion auditor mentions that financial statements do not present fairly the financial
position, operating results and the cash flows of the entity.
Answer: 7 (b)
Feature Engagement Quality Control Review Quality Assurance Review
Overall firm's quality control
Focus Individual audit engagement system
Assess effectiveness of firm's
Purpose Ensure quality of a specific audit report quality control procedures
As and when felt necessary by
Timing Before audit report is finalized Quality Assurance Board of ICAN
Engagement quality control reviewer
appointed by firm, whether internal or Quality Assurance Board
Performed by external (independent)
Person Independent to
Responsibility Engagement partner engagement
Type Hot file review Cold file review
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Reviews engagement team's work, Reviews firm's policies,

Scope significant judgments, and conclusions procedures, resources, and culture
Identifies and resolves any issues before Improves firm's overall quality
Outcome report issuance control practices
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Paper 3 – Corporate and Other Laws

Attempt all questions.
1. Answer the following questions: (5×5=25)

a) Ms. Shrijana has incorporated a company named Shrijana Crafts Private Limited with the
majority of shares in her name. She holds the sole and whole authority to run the business
along with the monies to retain under her control and use. When the income tax was in
arrears, the Inland Revenue Office asked Ms. Shrijana to pay all the tax to be paid by the
company. However, when she failed to pay the said taxes as asked by the Office, it withheld
immovable properties registered in her name.
Ms. Shrijana, then consulted you to advise her on this issue. You are required to explain her
with reference to a case law.
Answer:1 (a)
The fundamental attribute of incorporation of a company is its independent legal existence apart
from its shareholders. As per section 7 of the Companies Act, 2063, once a company is
incorporated, it is treated as a legal person distinct from its shareholders and capable to enjoy
all the rights as like a natural person with certain exceptions. Further, the company is not the
agent of shareholders; shareholders cannot treat the company’s assets as their own;
shareholders’ property is not the company’s property; liability of the company is not the liability
of shareholders; directors are not the employer of the company’s employees and the directors’
or shareholders’ liability is not the company’s liability.
This principle of corporate personality or distinct legal entity has also been affirmed by the
decision of the Supreme Court of Nepal. In the case of Piyush Raj Pandey v. Tax Office
Kathmandu, 2040, Mr. Piyush Raj incorporated a company along with wife where majority
shares were subscribed by him. He was the sole and whole authority to run business and the
monies and assets were under his control and use. When the income tax was in arrear, Tax
Office asked to pay all the tax to be paid by the company. When he failed to pay tax as asked
by the Tax Office, it withheld his immovable property registered in his name. He filed a writ
petition before the Supreme Court claiming that the Office could not charge the shareholder's
private property for the satisfaction of the company's liabilities.
The Supreme Court accepting the plea held that the company being a separate legal person with
distinct personality apart from its members, the Office cannot with hold the shareholder’s
personal property against the company's liability to pay tax. The shareholders property cannot
be used for the payment of the company's obligation. Finally, a company has its separate and
independent corporate existence and vested with corporate personality which is a legal person
distinct from those who have incorporated it-the shareholders. Hence, it is capable of enjoying
rights and being subjected to duties which are not the same as those enjoyed or borne by its
shareholders.
As explained above, Ms. Shrijana should oppose the instruction of the Inland Revenue Office
and file a petition that the action taken by the Office is unjust and does not honor one of the
fundamental characteristics of a company i.e. “separate legal entity”.
b) Mr. Shanker, chairperson of Planning Corporate Pvt. Ltd, approached XYZ Bank Ltd. for
loan of NRs 5 crores with term of a year along with decision of the Board of Directors for
the purpose. The company has paid up capital and free reserves of NRs 4 crores only. As a
compliance officer of the bank, advise Mr. Shanker regarding the validity of such decision
in light of Companies Act, 2063.
35
Answer: 1(b)
Fact:
Mr. Shanker, chairperson of Planning Corporate Pvt. Ltd., approached XYZ Bank Ltd. for loan
of NRs 5 crores with term of a year along with decision of the Board of Directors for the
purpose. The company has paid up capital and free reserves of NRs 4 crores only.
Legal Provision:
Section 105 “Restrictions on authority of directors” of Companies Act, 2063 has mentioned in
regard to the restriction on authority of director.
Section 105 (1) states that the board of directors of a public company, or of a private company
receiving loans from any bank or financial institution, shall not, except with a special resolution
being adopted by the general meeting of shareholders, do or cause to be done the following act:
(a) selling, donating, gifting, leasing or otherwise disposing of more than seventy per cent of
one or more undertakings being operated by it;
(b) borrowing moneys, where the moneys to be borrowed will exceed the aggregate of the paid
up capital of the company and its free reserves, apart from any loans and faculties with a
term of less than six months obtained by it from a bank or financial institution in the ordinary
course of business transaction;
(c) Making a contribution, donation or gift in a sum exceeding one hundred thousand rupees in
one financial year or a sum exceeding one per cent of the average net profits of the company
during the last three financial years, whichever is the lesser, except the contribution,
donation, gift etc. made for the welfare of its employees or for the promotion of its business.
Provided, however, that:
(i) Nothing contained in Clause (a) shall affect the title of a buyer who buys any property
or undertaking of a company on payment of the prevailing market price from a company
which his solely engaged in the business of buying and selling of movable and
immovable properties.
(ii) The provision of Clause (b) shall not be applicable to the acceptance by a company
carrying on banking or financial transaction or insurance business of deposits or
insurance premium from the general public in the ordinary course of its business
transaction.
Section 105 (2) states that the general meeting may specify appropriate terms and conditions
while giving approval for the purposes as outlined above.
Conclusion:
In the given case, as loan amount to be borrowed (NRs 5 crores) for 1 year exceeds the aggregate
of paid of capital and free reserves (NRs. 4 crores). I advise Mr. Shanker, chairperson of
Planning Corporate Pvt. Ltd., to decide the matter of loan from general meeting of shareholders
via special resolution as mere decision of the board of directors is not enough to avail the
proposed loan as per Companies Act, 2063.
c) Everest Agro Ltd. passed a special resolution at a general meeting to issue its shares at a
discount to MB Commercial Bank Ltd. The objective of the issue is to convert the loan
borrowed by the company from the bank to equity share. Discuss the validity of resolution
passed in the context of the provisions to issue shares at a discount as specified in the
Companies Act, 2063.
36
Answer: 1 (c)
Section 64 of Companies Act, 2063 deals with the provisions for issue of shares at discount.
According to Sec 64(1) of the Companies Act 2063, a company shall not issue or sell its
shares at a discount.
However, as per Sec 64(2), a company may, on the following circumstances, issue shares at
a discount by adopting a special resolution at the general meeting to that effect and the
discount shall not be less than the percentage specified in such resolution:
(a) While issuing or selling shares pursuant to capital restructuring scheme of the
company.
(b) While issuing or selling shares pursuant to the scheme for converting the loan of a
company into shares with the consent of the creditors.
(c) While issuing shares pursuant to employee share scheme.
(d) While issuing shares for any other condition as approved by the office of the Company
registrar.
As the company has passed a special resolution to convert the loan borrowed by the
company from the MB commercial bank to equity share, resolution passed is valid as per
the provision mentioned above.
d) Fusion Nepal Ltd. is in its first year of operation. As its annual general meeting is yet to be
held, board of directors of the company appointed CC & Associates as its 1st statutory
auditor. 1 month after the appointment, a partner of the audit firm Mr. Kundan Mahara tried
to influence the management of the company to hire his close relative in a managerial
position of the company and pressurized the company management to accept his proposal.
So,the managing director of the company decided to remove CC & Associates from its
statutory auditor's position and hired another audit firm. Answer the following questions
with reference to the Companies Act, 2063:
i) Is the appointment of CC& Associates valid?
ii) In what conditions the statutory auditor can be removed from its position?
iii) Is the act of the managing director of the company in line with Companies Act,
2063?
Answer: 1(d)
i) As per Section 111 (1) of Companies Act 2063, the auditor of a company shall be appointed,
from amongst the auditors licensed to carry out audit under the prevailing law, by the
general meeting, subject to Chapter-18, in the case of a public company and in accordance
with the provision as contained in the memorandum of association, articles of association
or consensus agreement, any failing such provision, by the general meeting, in the case of a
private company; and his/her name shall be forwarded to the Office within fifteen days from
the date of such appointment.
Provided, however, that the board of directors may appoint the auditor prior to the holding
of the first annual general meeting.
In the given case Fusion Nepal Ltd. appointed CC& Associates as its first statutory auditor
through its board of directors as per proviso of Section 111(1) of the Act. Hence the
appointment is valid.
ii) As per Section 119(2) of the Act, if any auditor breaches the code of conduct of auditors or
does any act against the interest of the company which has appointed him as the auditor or
commits any act contrary to the prevailing law, such auditor may be removed through the
same process whereby he/she was appointed as auditor, by giving prior information to the
Institute of Chartered Accountants of Nepal, and with the approval of the regulatory
authority, if any authorized by the prevailing law for the regulation of business of the
37
company concerned , and failing such authority, with the approval of the Office. While
removing an auditor, the auditor shall be provided with a reasonable opportunity to defend
him/herself.
iii) In the given case, the appointment of auditor is done by its board of directors. However,
managing director of the company upon his sole decision removed the existing auditor and
hired the new one which is against Section 119(2) of the Act. Hence, the removal of CC &
Associates and hiring of new one is not in line with Companies Act 2063 and is invalid.
e) Progessive Ltd. is a textile manufacturing company which has been facing loss for last 4
consecutive fiscal years. During the current year, the company is declared insolvent by a
court. After the declaration of insolvency, the company decides to reduce its share capital
by passing a special resolution in its general meeting.
i) Discuss the substantive provision regarding reduction of share capital of a public
company with reference to relevant Section of Companies Act, 2063.
ii) Discuss the validity of action of the company.
Answer: 1(e)
i) As per Section 57(1) of the Companies Act, 2063, if a company intends to reduce its share
capital, it may, by adopting a special resolution to that effect at its general meeting, reduce
its share capital by obtaining approval of the Court and making necessary amendment to or
alteration in the memorandum of association and articles of association, accordingly.
As per Section 57(2) on receipt of approval of the Court pursuant to Sub-section (1), the
company may reduce its share capital as follows:
(a) By reducing the capital to such amount as has been paid up where calls for payment of
amount on shares are not fully paid up,
(b) By paying back any paid-up share capital,
(c) By devaluating the face value of shares where the company has sustained a big loss or
suffered a natural calamity.
As per section 57(3), notwithstanding anything contained in subsection (2), a company
which has already become insolvent in accordance with the prevailing law shall not reduce
its capital pursuant to this Section.
ii) In the given case, after the insolvency declaration made by court the company intends to
reduce its share capital which is against Section 57(3) of the Companies Act, 2063. Hence,
it's invalid.

a) Ms. Pramita Singh, a newly appointed CFO of Ramro Bank Ltd, wants to know about the
capital fund that a bank should maintain as per Banks and Financial Institutions Act, 2073.
As a consultant of the bank, you are asked to advise her the following:
i) What is capital fund?
ii) If bank is unable to maintain the capital fund, what actions should be undertaken by the
bank?
38
Answer: 2(a)
i) As per Section 2 (y) of Banks and Financial Institutions Act, 2073 “Capital Fund” means
the total sum of primary capital and supplementary capital of a bank or financial institution
as prescribed by the Rastra Bank and the term also includes other fund or amount as
prescribed by the Rastra Bank from time to time.
ii) Section 42 of Banks and Financial Institutions Act, 2073 prescribes provision about Capital
Fund and actions that a bank shall undertake if fails to maintain it which are as follows:
(1) A bank or financial institution shall have to maintain a capital fund in the ratio as
prescribed by the Rastra Bank on the basis of its total assets or total risk-weighted
assets. The Rastra Bank may, while prescribing such ratio, also prescribe the ratio of
additional capital fund.
(2) If any bank or financial institution fails to maintain the capital fund in accordance with
(1) above, the Board of Directors of such bank or financial institution shall have to
give information thereof to the Rastra Bank within one month.
(3) The information given pursuant to (2) above shall also be accompanied by, inter alia,
the reasons for the failure to maintain the capital fund and the plans or programs
prepared by the Board of Directors to increase the capital fund and restore it to the
position as prescribed by the Nepal Rastra Bank.
(4) On receipt of the information referred to in (2) and (3) above, if the Rastra Bank deems
the plan or program submitted by the Board of Directors reasonable, it may give
directive to the concerned bank or financial institution to implement such plans or
programs; and if any amendment or alteration is to be made in the proposed plans or
programs it may give a direction to the concerned bank or financial institution to
amend or alter such plan or programs stating the reasons for such amendment or
alteration, and to implement the same.
b) ABC Infrastructure Development Bank Limited is planning to issue financial instruments

in foreign currency for collecting funds required to invest in projects concerning
infrastructure development.
i) What are the banking and financial transactions that can be carried out by
Infrastructure Development Bank as per Banks and Financial Institutions Act, 2073?
ii) Is the plan of the bank in line with Banks and Financial Institutions Act, 2073?
Answer: 2 (b)
i) As per Section 49(5) of Banks and Financial Institutions Act, 2073, the infrastructure
development banks may carry on the following transactions subject to this Act,
Memorandum of Association, Articles of Association, and limits, conditions and directives
of Nepal Rastra Bank:
a) To disburse loans and finance in shares of projects relating to infrastructure
development,
b) To finance in securities of the companies operating projects relating to infrastructure
development,
c) To open letters of credits and issue guarantees for purchase, sale or supply or installation
of machineries, equipment and tools required for construction and operation of projects
relating to infrastructure development,
d) To issue financial instruments in national or foreign currencies with approval of the
Rastra Bank for collecting fund required for investment in projects concerning
infrastructure development and to acquire loan to that effect,
e) To mobilize resources by accepting long term deposits or issuing debenture,
f) To carry on leasing transactions with approval of the Rastra Bank,
39
g) To provide loans and facilities for projects by accepting guarantee of foreign banks and
financial institutions,
h) To carry out other acts as prescribed by the Rastra Bank.
ii) In the given case, ABC Infrastructure Development Bank Limited is planning to issue
financial instruments in foreign currency for collecting funds required to invest in projects
concerning infrastructure development. It may do so by taking approval of Rastra Bank. So,
the plan of the bank is in line with Section 49(5)(d) of the Act.
c) Mr. Krishna dropped a bundle of notes worth NRs 10,000 in the colored water while playing
Holi. The notes were entirely colored and detail became unrecognizable. Mr. Krishna was
of the view that the colored notes shall be replaced even though details are unrecognizable
and approached nearby bank for the purpose. Mention if he can get replacement of the notes
based on Nepal Rastra Bank Act, 2058.
Answer: 2 (c )
Fact
Mr. Krishna dropped a bundle of notes worth NRs 10,000 in the colored water while playing
Holi and approached nearby bank for exchange of those notes whose detail became
unrecognizable.
Legal Provision
Section 57 “Soiled or Counterfeit Currency” of Nepal Rastra Bank Act, 2058 states in regard to
the soiled or counterfeit currency.
Section 57(1) states that the Bank may withdraw, destroy or replace the soiled currency with
other banknote or coin.
Section 57(2) states that notwithstanding anything contained in Sub-section (1), the Bank may
deny to replace the banknote or coin the design of which has been deleted, or which is torn,
defaced or more than fifty percent of its portion has been destroyed.
Section 57(3) states that the Bank may withdraw or destroy such bank notes or with or without
compensation to the owner of the bank notes or coins referred to in Sub-section (1).
Section 57(4) states that no owner of the lost or stolen bank notes or coins shall be entitled to a
reimbursement from the Bank. The Bank may forfeit without any compensation, the coins or
notes the outer appearance of which is changed, or which is counterfeit coins or fake note.
Conclusion
As the bundle of notes worth NRs 10,000 whose detail became unrecognizable may not be
exchanged as claimed by Mr. Krishna as per the Nepal Rastra Bank Act, 2058.

a) As per Section 39 of Insurance Act 2079, every insurer shall maintain a compulsory reserve
fund for bearing the liability relating to insurance business.
In the light of this provision, explain the amount to be deposited by insurers in Compulsory
Reserve Fund.
Answer: 3 (a)
As per section 39(1), every Insurer shall maintain a separate compulsory reserve fund for
bearing the liability relating to its Insurance Business.
Pursuant to sub-section (2), the following amount shall be deposited in the compulsory
reserve fund:
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(a) An amount not less than the total liability as specified by the Actuary on the basis
of the Insurance Policies issued by the Insurer of the Life Insurance Business within
Nepal.
(b) A proportionate amount of the Net Insurance Premium shown in the income and
expenditure of the Non-Life Insurance Business as prescribed by the Authority.
(c) 50 % of the profit earned until the amount equals the paid-up capital of the Insurer
operating the Non-Life Insurance Business.
Pursuant to sub-section (3), the Insurer may establish other reserve fund as required for
operation of its business.
Pursuant to sub-section (4), the other provisions relating to compulsory reserve fund of the
Insurer operating re-insurance business shall be as determined by the Authority.
Pursuant to sub-section (5), other provisions related to compulsory reserve fund and other
reserve fund shall be as determined by the Authority.
b) Mr. Hiranya Pradhan, representative of ICAN and Mr. Rajeev Agrawal, representative of
FNCCI are the members of Securities Board of Nepal (SEBON). They had some agenda for
the Board Meeting and so wrote a request letter to the Chairperson to call the Board Meeting.
The Chairperson refused to call the meeting mentioning that the request letter should be
signed by all members of the Board. State the meeting and decision provision of Securities
Act, 2063 and explain whether the refusal decision of the Chairperson is valid.
Answer: 3 (b)
Section 6 of the Securities Act, 2063 states the provision of meeting and decision of the
Board which are as follows:
1. 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 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.
Conclusion: As per sub-section (4) above, the Chairperson should call the meeting of
the board within seven days from the date of receipt of such notice at the request of the
two members. Hence, the Chairperson's views that the request letter should be signed
by all the members of the Board is not valid.
41

a) Explain provisions regarding work permit of foreign workers with reference to Section 22
of Labour Act, 2074.
Answer: 4 (a)
As per Section 22(1) of Labour Act, 2074, no foreign nationals can be engaged in work
without having obtained work permit from the Department.
Section 22(2) of the Act allows the employer to employ foreign workers subject to the scope
of this Act if the employer is unable to acquire skilled workers from among Nepali citizens
as required.
For this the entity must publish an advertisement in national level daily newspaper to fill
the vacant posts by Nepali citizens as specified in the advertisement or Nepali citizens could
not be selected, the employer may give an application along with the supporting documents
for work permits to the Department for hiring foreign workers. Provided that publication of
advertisement shall not be required by different ministries of the Government of Nepal,
departments, investment board, institution, organization fully or partly owned by the
Government of Nepal or other authorities with regard to foreign citizen coming to work as
technician or expert pursuant to this Act at subject mentioned under investment agreement
concluded after taking approval of the Government of Nepal or concerned ministries.
Pursuant to sub-section (4), the Department may, if it deems reasonable upon inquiring into
the application received under sub-section (3) and the evidence attached therewith, issue a
work permit for the employment of a foreign skilled labour.
Pursuant to sub-section (5), any employer who employs a foreign labour by obtaining the
work permit pursuant to sub-section (4) shall make arrangement for making Nepali citizens
skilled and gradual replacement of foreign labours.
b) ASB Private Limited had a profit of NPR 90 million available before bonus and taxes for
FY 2079-80. The accountant was happy that he would definitely be eligible for staff bonus
of the said FY based on his experience. However, he was doubtful on the following
questions:
i) How much money should he provide for bonus provision?
ii) The company had 100 employees out of which some employees had joined the company
quite recently. Will all the employees be eligible for bonus payment?
iii) What is the deadline for distribution of bonus to employees?
Answer:4 (b)
i) As per the Bonus Act 2030, each profit making enterprise shall have to allocate an amount
equivalent to ten percent (10%) of its net income of one fiscal year for bonus to the employees.
In the given case, since ASB Pvt. Ltd. has a profit of NPR 90 million, it shall allocate 10% of it
i.e. NPR 9 million as provision for bonus.
ii) Under Section 6 of the Act, an employee who has worked for half of the period to be worked in
a fiscal year, shall be entitled to obtain bonus under to this Act. Provided that, no employee
shall be entitled to obtain Bonus who has worked casually or in a shift basis.
Hence, out of 100 employees, only those employees who have worked for half of the period to
be worked in F/Y 2079-80, shall be eligible for bonus.
iii) The bonus, to be distributed pursuant to this Act shall be paid in cash and it shall have to
distribute within a period of eight months from the close of the fiscal year. However, under
42
Sub-section (3) of Section 9 of the Act, if an application, specifying reasons of not being able
to distribute the bonus within the period of 8 months is submitted to the Labour Office by any
Management, the Labour Office may, if the reasons are found genuine, extend the time for a
period of three months at maximum for distribution of bonus or may allow to distribute the
bonuses of two years at a time in the next fiscal year.
5. Mr. Barun Rimal is a renowned Fellow Chartered Accountant of Nepal who has been practicing
the profession for last 15 years. He is known for his expertise in taxation law in Nepal and has
been providing consultancy services in corporate sector. One of his clients, Mr. Jaya Ram
Hamal lodged a complaint against him without any reasonable cause, just to harass him.
(2×5=10)
a) Explain about nature of offence and punishment with reference to Nepal Chartered
Accountants Act,2053.
b) Is the act and behavior of Mr. Jaya Ram Hamal amounts to an offence in Nepal
Chartered Accountants Act, 2053?
Answer: 5 (a)
(a) The nature of offences and the forms of punishment prescribed under section 41 of the Nepal
Chartered Accountants Act,2053 are as follows:
S.N. Nature of Offence Punishment

1 Carry out audit without obtaining a Penalty of maximum two thousand
certificate of practice (COP) pursuant to rupees or with an imprisonment for a
this Act maximum period of three months or
with both
2 Use of the name or the seal of the Penalty of one thousand rupees
institute or exercise any type of maximum on first conviction , and on
authority bestowed to the institute in any subsequent conviction thereafter, a
contravention of Section 6 of the Act maximum penalty of five thousand
rupees or imprisonment for a
maximum period of six months or both
3 Verifying any document in capacity of Penalty of maximum two thousand
the member holding COP who has not rupees or with an imprisonment for a
obtained a COP maximum period of three months or
with both
4 Commission of any act contrary to the Suspension for a maximum period of
provision of this Act or Regulations five years and shall be liable of
framed under this Act punishment with a maximum penalty
of two thousand rupees or
imprisonment for a maximum period of
three months or both
5 Lodgment of a complaint without any Punishment with fine up to one
reasonable cause to make complaint and thousand rupees.
it is proved that the complaint was made
with an intention to harass a member
6 The complains, except those to be heard Shall be instituted in the concerned
under section 14 of this Act, lodged in high court.
the council against any member
pursuant to section 35
43
Answer :5 (b)
Pursuant to sub-section (5) of section 41 of the Act, if any person lodges a complaint without
any reasonable cause to make complaint and it is proved that the complaint was made with
an intention to harass a member, he/she shall be punished with fine up to one thousand
rupees.
In the given case, Mr. Jaya Ram Hamal lodged a complaint against Mr. Barun Rimal without
any reasonable cause with mala fide intention to harass him which comes under nature of
offence under Nepal Chartered Accountants Act, 2053.
Hence, Mr Jaya Ram Hamal is subject to punishment with fine up to one thousand rupees
under Section 41 (5) of the Act.

a) Mr. Acharya involved in the wholesale business entered into a contract with Mr. Pokhrel to
supply 1,000 pieces of imported T-shirt at price of NRs 500 each by end of June. On due
date, while requesting for the delivery of the product as contracted, Mr. Acharya rejected to
supply the product claiming the existence of fundamental changes in the circumstances due
to closure of border resulted from flood & landslide. Mr. Pokhrel purchased the 1,000 T-
shirts from other local supplier at NRs 600 each and wants to sue Mr. Acharya for loss
incurred. Suggest Mr. Acharya if he needs to execute the contract in event of fundamental
changes in the circumstances with reference to Muluki Dewani Samhita, 2074 (National
Civil Code, 2074).
Answer: 6 (a)
Section 531 – “Contracts need not be executed in the event of fundamental changes in the
circumstances.
Section 531(1) states that in case it becomes impossible to execute a contact as a result of
fundamental change in the situation prevailing at the time of signing of the contract, the work
under the contract need not be performed.
Section 531(2) states that circumstances that lead to fundamental changes arises if:
(a) In case the contract becomes illegal and it cannot be executed;
(b) In case it becomes impossible to execute the contract due to emergence of such situations
as war, floods, landslides, fire, earthquakes, volcanic eruptions which are beyond the control
of human beings;
(c) In case anything essential for executing the contract is destroyed or damaged or no longer
exists or cannot be obtained;
(d) In case the contract has been signed with a provision to provide services on the basis of
efficiency, skill or talent and the person providing such services dies or loses his/her sense
or becomes incapable of performing the contract because of physical or mental disability.
Conclusion: As the execution of the contract was effected by the emergences of situation
beyond the control of human beings, Mr. Acharya need not require performing the contract.
Further, Mr. Pokhrel cannot sue him for non-executing of the contract under such
circumstances.
44
b) What are the rights of a bailor against the bailee or upon the goods bailed as per the National
Civil Code, 2074?
Answer: 6(b)
The rights of a bailor which he can use as against the bailee or the goods bailed are given as
under:
▪ Right to enforce the duties of bailee as his right: The bailor can enforce by suit all the
duties or obligations of the bailee as his own right. Therefore, he can inspect that whether
or not the bailee has taken care of the goods, or mixing up the goods bailed with his own
goods, or unauthorized use of goods, etc. It follows that the duties of bailee are the rights
of bailor.
▪ Right to terminate the contract: If the bailee has not fulfilled his duties or there is
unauthorized use of goods. The bailor, at any time can terminate the bailment and can
take back the goods bailed in his own custody though the contract period is still lapsed.
▪ Right to return the goods lent gratuitously: When the goods are lent free of cost, the
bailor can demand for return of the goods whenever he pleases so even though he had
lent them for a specified time or purpose. But if the bailee suffers any loss exceeding
the benefits actually derived by him from the use of such goods because of such
premature return, the bailor shall have to indemnify the bailee.
▪ Right to sue for damages against wrong doer: If third person wrongfully deprives the
bailee from the possession of the goods bailed, or does them any injury, the bailor or the
bailee may bring a suit against third person for such deprivation or damage caused by
any third persons.
▪ Right to recover compensation for loss or destruction of the goods bailed or wrong
delivery: While the goods in the custody of the bailee get damaged, or destroyed or the
bailee makes wrong delivery of the goods to an unauthorized person, the bailor has right
to claim for such loss or wrong delivery of the goods bailed.
c) Discuss the presumptions as to Negotiable Instruments under Negotiable Instruments Act,

2034.
Answer:6 (c)
Section 103 of Negotiable Instrument Act, 2034 states the presumptions as to Negotiable
Instruments. Until the contrary is proved, the following presumptions shall be made:
• That every negotiable instrument was made or drawn for consideration, and that
every such instrument, when it has been accepted, endorsed, negotiated or
transferred, was, accepted, endorsed, negotiated or transferred for consideration in
accordance with the prevailing law.
• That every negotiable instrument bearing a date was made or drawn on such date,
• That every transfer of a negotiable instrument was made before its maturity,
• That every accepted bill of exchange was accepted within a reasonable time after its
date and before its maturity.
• That the endorsements appearing upon a negotiable instrument were made in the
order in which they appear thereon.
• That the Holder of a negotiable instrument is a Holder in due course.
45
d) Explain about the Council Fund under Social Welfare Act, 2049.
Answer: 6 (d)
Pursuant to section 17 of the Social Welfare Act, 2049, the Council shall have own separate
fund and the fund shall contain the following money:
(a) Money received from Government of Nepal.
(b) Money received from foreign Governments, international organizations or foreign
organizations, through Government of Nepal.
(c) Money received from the sale of movable or immovable property of the Council.
(d) Money received from any individual, institutions or countries in the form of
donation, assistance, grants and presents.
(e) Money received from any other sources.
All money of the Council shall be deposited by opening an account in the name of the
Council in Nepal Rastra Bank or any Commercial Bank.
All expenditure of the Council shall be borne from this fund.
The operation of the account of the Council shall be as prescribed.
e) Industrial Enterprises Act, 2076 has been enacted for the protection and promotion of
Industrial establishments and also for the promotion of investment with a view to speed up
the industrialization by making simple policy in Nepal. State the legal provisions regarding
the registration of an industry under the Industrial Enterprises Act, 2076.
Answer: 6 (e)
According to Section 3 of the Industrial Enterprises Act, 2076 no one can establish or cause
to establish or operate an industry without registering it pursuant to the Act.
Section 4 of the Act prescribes the process of registration of industry. According to it, an
application is to be made for registration of Industry. Under Section 4(1) any person desirous
of establishing any industry under the Act, an application is required to be made to the
concerned industry registration body for its registration setting out the nature, documents,
and particulars in a prescribed manner. Documents to be attached can be submitted with
digital attestation through electronic means.
Section 5 prescribes the provision relating to granting certificate of registration. According
to it, on receipt of the application pursuant to Section 4 for the registration of industry the
concerned registration body will, after making necessary examination regarding the
compliance of required documents as per the Act and regulation thereof, issue registration
certificate as prescribed.
The Registration certificate shall contain the following matters:
(a) Date of issue of registration certificate,
(b) Duration within which the industry shall commence its commercial production or
transaction,
(c) Conditions to be abided by the industry,
(d) Other conditions to be abided by the industry according to the nature of industry as
prescribed by the Industry Registration Body.
46
7. Write Short notes: (2×5=10)
a) Mention about the establishment of the World Trade Organization (WTO) and its key
objectives.
Answer: 7 (a)
The World Trade Organization (WTO) precursor General Agreement on Tariffs and Trade
(GATT) was established by a multilateral treaty of 23 countries in 1947 after World War II in
the wake of other new multilateral institutions dedicated to international economic cooperation.
GATT proved remarkably successful in liberalizing world trade. By the late 1980s there were
calls for a stronger multilateral organization to monitor trade and resolve trade disputes.
Following the completion of the Uruguay Round (1986–94) of multilateral trade negotiations,
the WTO began operations on January 1, 1995. Nepal became the 147th WTO member on 23
April 2004. Nepal is the first Least Developed Country (LDC) to join the WTO through the
full working party negotiation process.
The WTO is an intergovernmental organization headquartered in Geneva, Switzerland that
regulates and facilitates international trade. Governments use the organization to establish,
revise, and enforce the rules that govern international trade in cooperation with the United
Nations System. The WTO is the world's largest international economic organization, with 164
member states representing over 98% of global trade and global Gross Domestic Product
(GDP).
The WTO has six key objectives:

(i) Establishing and Enforcing Rules for International Trade,
(ii) Acting as A Global Apex Forum,
(iii) Resolution of Trade Disputes,
(iv) Increasing Transparency in the Decision-Making Process,
(v) Collaboration between International Economic Institutions, and
(vi) Safeguarding the Trading Interest of Developing Countries.
b) How has the Labour Act, 2074 differentiated between “interns” and “trainees”?
Answer:7 (b)
Interns: As per Sub-section (1) of Section 16 of the Labour Act, 2074, any enterprise, by
signing an agreement with any educational institution, may hire any person as an intern
pursuant to the requirement of the approved syllabus of such institution. However, for the
purpose of this Act, the person so appointed shall not be considered a worker. Provided that
any person hired in contravention to the approved syllabus shall be deemed to be a worker
under the regular employment relationship.
Applicability of labour provisions: The Labour Act, 2074 has provided the provisions to be
applied to the interns. Section 17 under different Sub-sections has provided that the interns
hired shall not be required to work more than 8 hours a day and 48 hours a week. Similarly,
the provisions relating to occupational health and safety shall be applicable to interns also.
Further, pursuant to Sub-section (3) where an intern meets with an accident during the work,
unless otherwise agreed between the enterprise and the educational institution, the enterprise
shall provide medical treatment and compensation, which a worker of such enterprise is
normally entitled to under this Act, if injured. In other cases except than the matters stated
above, the agreement between the enterprise and the educational institution shall be applicable.
47
Trainees: As per section 18 of the Labour Act, 2074, the employer may employ any person as
a trainee providing on the job training and the training period shall not exceed more than one
year period of time. However, if a training period is prescribed for a specific nature of work
under the prevailing law or specific training period is required, a trainee may be accordingly
employed for such period as prescribed.
Further, the Act has imposed obligation to the employer of an enterprise to provide, at the
minimum, the benefits equivalent to the minimum wage and other social security benefits
including sick leave, gratuity, provident fund and insurance when employing a person as a
trainee. Further, no employer shall be under compulsion to continue the employment of the
trainee after the completion of the training period and if the employment of such a trainee, after
the training period is continued by the employer, he/she shall not be kept in probation.
48
Examiner’s Commentary on Students' Performance in June

2024 Examinations
Subject: Advanced Accounting

List of Questions Specific Comments on the Performance of the Students
Question no. 1 Most of the students lack on knowledge of calculation of Goodwill
and purchase consideration.
Question no. 2 a. Good attempt by students. Many students did not understand
to share the equity shares between partners.
b. Majority of students are confused in Branch Accounting and
most of them have not written journal entry.
Question no. 3 a. Student fails to calculate the sales.
b. Most of the students are confused about the term Acid Test
Ratio.
Question no. 4 a. Most of the students attempt the question but fails to
appropriately mention the Risk Weight.
b. Most of the students fail to accurately mention the provision
of NFRS and to calculate the additional dep. during grant
refund.
Question no. 5 Student doesn’t have clear concept with regard to the provision of
NFRS.
Question no. 6 Required clear concept regarding basic accounting terminology.
Subject: Audit and Assurance

Question no. 1 a. Most students got proper reference on standard.
b. Most students didn’t mention proper Act, provisions of the
Act.
c. Conclusion ok but reference with both standard is rare.
d. Mentioning all provisions of NAS is missing.
Question no. 2 a. Conclusion correct.
b. Many have answered as per common sense.
c. No clarity regarding KAM in case of disclaimer.
d. Conclusion ok but relating to standards is missed.
Question no. 3 a. Answered nicely by few, others have generalized.
b. Most of the students answered nicely.
c. Students don’t have proper idea about the answer.
Question no. 4 a. More clarity is required in Code of Ethics.
b. Answered more in a generalized way than specific.
c. Proper analysis is missing but conclusion is correct.
Question no. 5 a. Students missed to mention sub section.
b. Answered in specific manner.
Question no. 6 Attempted satisfactorily.
Question no. 7 a. Proper differentiation could not be provided.
b. Only few understands the concept.
49
Subject: Corporate and Other Laws

Question no. 1 • Most of the students seem confused with corporate veil and
lifting corporate veil cases.
• Most of the students lack knowledge on restrictive power of
BOD under sec 105 of Companies Act.
• Most of the students doesn’t have knowledge on process of
share reduction.
Question no. 2 • Most of the students didn’t answer properly on action to be
taken by Banks in failure to maintain Capital Fund.
• Most of the students lack knowledge on specific function of
Infrastructure Bank.
Question no. 3 • Many students lack clear knowledge on the content of
compulsory reserve fund of insurance company, some seem
confused with fund of bank too.
• Instead of 2 members for securities board meeting many write
25%.
Question no. 4 • The answer seems satisfactory for work permit for foreign
national but only few has mentioned clauses where permit is
not required.
• Students have given answer for bonus provision.
Question no. 5 Many students have correctly answer fines & punishment under
ICAN Act, however few students write only action of disciplinary
committee but not specific fines.
Question no. 6 • Many students have correctly answer about fundamental
changes in contract however most of them doesn’t mention
other points where contract cannot be executed.
• Most of the students get confused between role of bailor &
bailee and they answer role of bailee instead of bailor.
• Most of the students didn’t clearly answer presumption of
Negotiable Instrument.
Question no. 7 Students get confused between interns and trainees. Many lack clear
knowledge in it.
50

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SUGGESTED ANSWERS TO

THE QUESTIONS SET AT

The Institute of Chartered Accountants of Nepal (ICAN)

The Institute of Chartered Accountants of Nepal

Year and month of Publication: 2024 September

Paper 1 – Advanced Accounting .................................................................................................... 4

Paper 1 – Advanced Accounting

Goodwill 150,000 75,000

X Ltd. absorbs Y Ltd. on the following terms:

In the Books of X Ltd.

Balance Sheet of X Ltd. (after absorption)

Goodwill to be valued at 2 times of average profits = 75,000 x 2 = 150,000.

2. Calculation of Purchase Consideration;

3. Settlement of Purchase Consideration:

Equity Shareholders of Y Ltd.

Books of Partnership firm of Jayram and Balram

Particulars Amount (Rs)

Balance sheet at 31-03-2024

Total 2,307,600 Total 2,307,600

Dr Cash and Bank Account Cr

Journal entries in the books of Kailali Branch Amount (Rs)

Alternate solution for 2 (b)

Journal Entry in the books of Kailali Branch Amount (Rs)

1 Debtors A/c Dr. 22,24000

3 Wages A/c Dr 192,000

v) Provide depreciation on building and furniture at 5% each and motor car at

Particulars Amount (Rs.)

b) Based on the following information complete the Statement of Financial Position

To Business Expenses 2,00,000 By Gross Profit 3,60,000

Balance Sheet of Janaki as at 31st Ashadh 2079

By Balance c/d 220,000

2. Calculation of sales during 2078-79

Total 1,850,000 Total 1,850,000

Total turnover /Fixed assets 4 times

Average Collection Period 5 days, assume 360 days in a

5 Long Term Debt

Amount in Risk Risk weighted

Measurement after Initial Recognition

Treatment of revaluation figure

i. First time downward revaluation

ii. First time upward revaluation

iii. First time downward revaluation and subsequent upward revaluation

iv. First time upward revaluation and subsequent downward revaluation

b. Net exchange differences recognized in other comprehensive income and accumulated in a

6. Write short notes: (5×3=15)

6 b) Supplementary capital of banks and financial institutions

f. Exchange Equalization Reserve

6 d) Biological Assets or Agricultural Produce

Paper 2 – Audit and Assurance

Attempt all questions.

2. Give your comments on the following cases: (45=20)

Alternate Suggested Answer:

6. Write short notes on the following: (42.5=10)

The auditor should document in the audit working papers:

7. Distinguish between: (25=10)

Reviews engagement team's work, Reviews firm's policies,

Paper 3 – Corporate and Other Laws

1. Answer the following questions: (5×5=25)

2. Answer the following questions: (3×5=15)