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CA FINAL (May 2024)

GROUP II – PAPER 6
INTEGRATED BUSINESS SOLUTIONS
(Series 2)
Time Allowed: - 4 Hours Maximum Marks: 100

Attempt any four out of five case study based questions.

Each Case Study carries 25 Marks.

CASE STUDY 1

About You
You are part of a renowned firm of Chartered Accountants based in New Delhi which is engaged in
modern fields of practice such as Forensic Audit, International Taxation (Direct and Indirect),
Information Systems Audit, Risk Based Audit, Registered Valuers etc.,
About FSL
One of your friends has recommended your name to M/s Forever Source Limited (FSL), a listed entity
engaged in the manufacturing and export of speciality chemicals used in textile industry and having
annual turnover of ₹ 50 crores.
Issues
I. Management has finalized financial results for half year ended 30th September 2024. Revenue, net
profit and cash profit of the company has increased manifold, hence, the management has
decided to buy-back shares of company and has gone ahead with its decision after complying
with all the requirements. Company has utilized the balance lying in free reserves and securities
premium account for the purpose of buy-back. Following relevant information is available for
your kind perusal which is before buy-back:

Particulars Amount (₹ In Lakh)

EQUITY AND LIABILITIES
(1) Shareholders' funds
(a) Share capital 1000.00
(b) Reserves and Surplus 2000.00
Total 3000.00
Company has bought back five percent of its share capital (three percent from open market and
balance from Mr. Raman, one of the investors in the company).
II. Since the company deals in specialty chemicals, different types of inventories are lying with the
company. For valuation purposes, the same is classified into four categories (Category 1, Category
2, Category 3 and Category 4). Company has to comply with inventory valuation norms
prescribed by IND AS 2 -INVENTORIES. Following information (category wise) is available from

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 the company records.
(Amount in Rupees Thousands)
Inventory Item Cost Estimated Sales Price Selling Cost Fair Value
Category 1 10,000 9,800 700 9,500
Category 2 16,000 20,000 400 19,600
Category 3 18,000 19,000 400 18,100
Category 4 8,000 9,500 350 9,000
Staff of the Company has valued the inventory at ₹ 52,000 (in 000's) as by every other means
(Fair Value or the selling price) valuation is greater than ₹ 52,000 (in 000's)
III. Company, to increase its customer reach, keeps on advertising through various modes in national
and international market. Recently, one of the friends of Mr. Rohit suggested him to use the
online advertisement platform being operated by Worldwide Online Advertisement Agency
(WOAA). WOAA do not have any permanent establishment (PE) in India. Mr. Rohit has used the
online advertising platform for certain period of time for an agreed consideration of ₹ 2,50,000.
WOAA has rendered services as per the terms and conditions and agreed payment has been made
by FSL after complying with all the legal requirements as per Income Tax Act, 1961.
Result of using online advertisement has started pouring in. Company has received various
enquiries and one enquiry has matured into sales contract of ₹ 75 Lakh (excluding GST @ 18%)
with M/s Agro Research Limited (ARL). ARL is a newly incorporated company (during the year
2023-24) and has started its business in month of August 2023 and has a turnover of ₹ 150.00
Lakh only till date. ARL has provided all documents including its PAN to the seller company. The
product was supplied in month of September 2023 and the entire contract consideration has also
been received in the same month itself.
IV. On 1st April 2023, FSL has invested in the equity shares of newly formed company DEF Limited
(DEF) at a cost of ₹ 1 Lakh to acquire 20% share in the voting power of DEF. As per technical
terms, DEF is considered to be an associate of FSL. At the end of F.Y. 2023-24, DEF earned profit
of ₹ 10,000 and other comprehensive income of ₹ 2000. In that year, DEF also declared dividend
of ₹ 4,000. This transaction has been appropriately reflected in cash flow statement of FSL
prepared for the F.Y 2023-24.
During the year ended 31st March 2024, FSL has capitalized development costs which satisfied
criteria as per Ind AS 38 'Intangible Assets'. The total amount capitalized was ₹ 16 Lakh. The
development project has begun to generate economic benefits for FSL from 01 st January 2024.
The directors of FSL have estimated that the project would generate economic benefits for five
years from that date. The development expenditure is fully deductible against taxable profits for
the year ended 31st March 2024.
V. FSL has an Audit Committee which regularly meets and considers the financial statements. FSL
has 6 Directors which consist of 3 independent directors. Audit Committee consists of 3 directors
out of which 2 directors are independent directors. All the directors are persons with ability to
read and understand the financial statement. Statutory auditors of FSL are invited by the Audit
Committee from time to time to attend the meeting. However, statutory auditors are reluctant to
attend the meeting.
Note that the company is an Ind AS compliant.

Multiple Choice Questions

1. What is the status of reporting requirement of transaction of buy-back of securities done by

Forever Source Limited (FSL) under the Income-tax Act 1961?

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 (a) No reporting is required under the Income-tax Act as the same is applicable for companies
having share capital of ₹ 100.00 Crores and above.
(b) Reporting of ₹ 50.00 lakhs will be done in Statement of Financial Transactions.
(c) Reporting of buy back of ₹ 30.00 lakhs will be done in Statement of Financial Transactions.
(d) Reporting of ₹ 20.00 lakhs will be done in Statement of Financial Transactions.
2. What is your opinion on valuation of inventories done by the company officials?
(a) Valuation done by company is correct.
(b) Valuation done by company is incorrect and the correct valuation is ₹ 51,100 (in 000's)
(c) Valuation done by company is incorrect and the correct valuation is ₹ 51,500 (in 000's)
(d) Valuation done by company is incorrect and the correct valuation is ₹ 51,800 (in 000's)
3. The deferred tax Asset/liability in relation to development cost incurred by the company
(assuming tax rate 20%) and its classification while reporting in the financial statements will be:
(a) Deferred Tax Asset of ₹ 3,60,000 will be recognised as current asset.
(b) Deferred Tax liability of ₹ 3,04,000 will be recognised as non-current liability.
(c) Deferred Tax Asset of ₹ 3,04,000 will be recognised as non-current asset.
(d) Deferred Tax liability of ₹ 3,04,000 will be recognised as current liability.
4. What are the tax liabilities (deduction or collection of tax i.e. TDS/TCS) on Sale/Purchase
transaction between Forever Source Limited (FSL) and Agro Research Limited (ARL)?
(a) TCS is required to be collected by FSL amounting to ₹ 7,500.
(b) TDS will be deducted by ARL amounting to ₹ 7,500.
(c) TDS will be deducted by ARL amounting to ₹ 8,850.
(d) TCS is required to be collected by FSL amounting to ₹ 3,850.
5. What will be the amount of tax leviable on the payment made by First Source Limited (FSL) to
Worldwide Online Advertisement Agency (WOAA)?
(a) TDS will be deducted on payment made to non-resident amounting to ₹ 75,000.
(b) Equalisation levy amounting to ₹ 15,000 u/s 165 of Finance Act, 2016.
(c) Equalisation levy amounting to ₹ 5,000 u/s 165 of Finance Act, 2016.
(d) TDS will be deducted on advertisement u/s 194C amounting to ₹ 5000.

Descriptive Questions

6. In view of reluctance of statutory auditor to attend the Audit Committee meeting in the given case
study, you are required to comment on the Role of Auditor in Audit Committee. Also comment
whether the constitution of Audit Committee is valid. (5 Marks)
7. Give examples of temporary differences transactions that may affect taxable profit or loss of an
enterprise. (5 Marks)
8. In case investment in DEF Limited has been done in a way other than cash, do you think that
transaction would also have been reported in Cash Flow Statement? Which are non-cash
transactions relating to investing activities which are not required to be reported in Cash Flow
Statement? (5 Marks)

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 CASE STUDY 2

Facts of the Case:

BMY LLP, a firm of Chartered Accountants has various divisions/verticals. Each division is headed by a
Chartered Accountant who is qualified and has done specialised course. Each head is known for his
knowledge and integrity amongst professionals and in Industry. BMY is also known as financial analyst
as well as consultant for mergers and acquisitions. The firm has been approached by its clients to
render professional advice on several issues highlighted in the under mentioned case scenarios:
CASE SCENARIO - 1
Tame Limited is a company engaged in telecommunication services and presently its major presence is
in North India. The company wants to expand its business in South. The company has got two options.
One is to expand itself by opening its own network which will take substantial time and efforts and
results will also be not fast. On the other hand, the company may target to acquire an existing telecom
company having sufficient customer base in South and to integrate its North India operation with the
acquired company. It will yield quick results.
The company is willing to appoint the firm to identify and to take the process of acquisition forward.
After study the M&A vertical of the firm has identified a company M/s Pool Limited which has got
presence in South but is not doing too well. The information of both the companies is given below:
Tame Ltd. Pool Ltd.
Total Earnings (E) (in lakh) ₹ 1200 ₹ 400
Number of outstanding shares (S) (in lakh) 400 200
Price earnings ratio (PIE) 8 7
The PIE ratio of the combined entity is expected to be 10?
CASE SCENARIO - 2
Ms. Devina is fond of making cakes, pickles, papad and other eatables homemade and her friends
persuaded her to take it as a venture. Before starting it as a venture, she wants to try it whether she
should turn her hobby into a regular business or not. She lives in New Delhi. To start with, she
promoted her products through her social media friends and started getting orders from nearby places
like Noida (Uttar Pradesh), Faridabad (Haryana); Gurugram (Haryana). All these places fall within
'National Capital Region (NCR). She expects to have monthly turnover of ₹ 10,000.
CASE SCENARIO - 3
M/s GAAR Limited enters into a 3 years lease of an immovable property with M/s GAP Limited for
annual lease rental of ₹ 60,000 per annum. There is extension clause in the agreement which provides
that lease may be extended to 5 years and in the present circumstances, it is most likely that the lease
term will be extended. In case of extended period, the lease rent will be increased by 10%. Lessee's
incremental rate of borrowing is 9%. M/s GAAR Limited has given residual guarantee to M/s GAP
Limited of ₹ 50,000. If the lessee terminates the contract at any time before 3 years, the Jessee will be
required to pay ₹ 30000 as penalty to the lessor. PV Ratio of 5 years at 9% are as 0.917,0.842,
0.772,0.708, 0.650 respectively.
CASE SCENARIO - 4
Mr. B one of the partners of the firm is facing a dilemma as to whether the firm BMY LLP should accept
the appointment as Statutory Auditors of M/s Foam Limited wherein Mr. B had sent a communication
in writing addressed to the outgoing auditor Mr. Dalai under certificate of posting and the outgoing
auditor has sent an acknowledgement vide their official email, but this email address of the outgoing
auditor is not registered with the Institute of Chartered Accountants of India. Mr. B is of the opinion

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that this is not a positive evidence of delivery and violates the code of ethics, if the firm accepts the
audit assignment.
CASE SCENARIO - 5
An investor has got investment in 3 stocks and is willing to know the beta of his portfolio. The following
information in respect of these 3 stocks is given below:
Security No. of Shares Market Price
SVL SCL MLS 15000 60 0.90
8000 35 1.00
7500 30 1.50

Multiple Choice Questions

1. The exchange ratio acceptable to M/s Pool Limited in case scenario - 1 will be:
(a) 0.42:1
(b) 0.50:1
(c) 0.35:1
(d) 0.65:1
2. Will Ms. Devina in case scenario - 2 be required to take registration under GST Act, 2017 and
whether she will be entitled to avail the composition levy scheme under the said Act:
(a) She will not be required to take registration as her turnover is less than the basic limit fixed
for registration.
(b) She will be required to take registration as Composition supplier and will be eligible to take
benefit of composition levy scheme.
(c) As her sales are inter-state, she will be required to take registration but can take benefit of
composition levy scheme.
(d) She will be required to take registration and will not be entitled to take benefit of
composition levy scheme as her sales are inter-state and when there is inter-state sale,
there is neither basic exemption nor composition levy can be availed except for notified
supplies.
3. What shall be the amount of lease liability and the finance cost for first year of M/s GAAR Limited
under case scenario - 3:
(a) Lease Liability ₹ 2,41,488 and Finance Cost ₹ 21,733
(b) Lease Liability ₹ 3,62,000 and Finance Cost ₹ 32,580
(c) Lease Liability ₹ 2,73,988 and Finance Cost ₹ 24,659
(d) Lease Liability ₹ 3,03,988 and Finance Cost ₹ 27,359
4. With respect to the dilemma being faced by Mr. B partner of the firm in case scenario-4 regarding
acknowledgment of the communication from the retiring auditor's vide their official email is not a
positive evidence of delivery?
(a) The dilemma of Mr. B is correct as it is not a positive evidence of delivery.
(b) The dilemma of Mr. B is not correct as it is a positive evidence of delivery as the same is
received from the official email of the outgoing auditor, as per the code of ethics.
(c) The dilemma of Mr. B is not correct as statutory auditors are not required to communicate
with the retiring or outgoing auditors in this case.

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 (d) The dilemma of Mr. B is correct as the email address of the outgoing auditor vide which
acknowledgement has come is not registered with the Institute of Chartered Accountants of
India.
5. What would be the portfolio beta in case scenario - 5 above?
(a) 1.133
(b) 1.016
(c) 1.074
(d) 1.213

Descriptive Questions

6. Explain about the professional misconduct as defined in Part I of the First Schedule to the
Chartered Accountants Act regarding accepting a position as an auditor previously held by
another chartered accountant without first communicating with him in writing. (5 Marks)
7. Define 'Lease' as per Ind AS and explain its various components. (5 Marks)
8. Explain the circumstances when a supplier is required to seek registration under the Goods and
Services Tax Act 2017 and can avail the benefit of Composition Scheme. (5 Marks)

CASE STUDY 3

ABOUT YOU
You are an open minded, highly sensible, competent professional with value added; decision making
capabilities. You are also a Director on the Board, Chairman and/or Member of Committees of the
Board of many listed and unlisted entities. You are also in the Board of SF Limited (SFL) as a
Professional Director.
BACKGROUND OF SFL
It is fundamental to any business to keep updating the business strategies and plans to suit the
changing business scenario. In the modern marketplace, there is no mercy for the mediocre. The rule
applies to all sectors, be it a small scale industry or a big contributor. SFL is one such small scale
growing enterprise belonging to SF Group of Companies which has several companies in its umbrella
including listed and unlisted public limited/private limited companies engaged in various businesses.
SFL is involved in development of castings applicable for automobiles and tractors to industrial
engines, construction equipment and power generation equipment. It meets the stringent requirement
of diverse segments. It even caters to the exceptionally high standards of Defence applications. The
indigenous expertise that drives the organisation enables it to keep pace with the constantly changing
requirements of the market.
It has won the much coveted quality certifications including ISO 9000, QS 9000 and ISO 14001
certifications that endorse its capabilities.
MANAGEMENT OVERVIEW
The top Management of SFL is driven by a highly competent Board of Directors. The Board drives the
business plans, operating, investment and financing activities besides taking all key decisions. The
Board is supported by Mr. Seshadri, Special Director (Costing and Finance) who has a thorough insight
of the day-to-day activities.
CORPORATE CULTURE

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While the Company is historically Board managed, nevertheless, it believes in the principle of
developing with everyone. SFL looks at its responsibilities to all stakeholder and is equally concerned
with society, environment and work force. SFL spends on an average ₹ 5 Lakhs on CSR activities which
is the approved budget every year.
BUDGET OVERVIEW
For an efficient functioning of the Company and to have hands on information as to what is happening
in the Company on a day to day basis, Budgets are set by the Board which is pushed down to various
teams and the actuals are regularly compared with the budgets for taking remedial actions in case of
any adverse situations. As compared to earlier years, it was found that of late, the variance between the
budget and the actual is widening and has become a cause of concern to the top management. Under
the circumstances, it was emphasized that every personnel in the Company should participate in the
budgetary process and perhaps even asking every manager to set his own targets and consolidate the
same for setting the targets for Company.
YOUR CALL
At the Board Meeting of the Company proposed to be convened on 10 th January, 2024, besides
approving and taking on record, inter alia, the unaudited financial results of the Company for the third
quarter and nine months ended 30.09.2023, certain additional matters are proposed to be discussed as
below. You have been specially invited to the said Board Meeting for your valuable inputs.
DISCUSSION - 1
(a) New venture of online shopping of automobile spares has been proposed to be added by the
Company during the current year.
DISCUSSION - 2
(b) To evaluate the cost and price statement in respect of an enquiry for the supply of 2,50,000
numbers of special type of auto components.
Back Up
The Company has received an enquiry for supply of 2,50,000 numbers of special type of auto
components. The Company can execute the assignment provided a capital investment of ₹ 3,00,000 and
working capital to the extent of 3 months' cost of sales are made available. The costs estimated are as
follows:

Raw Materials @ ₹ 3.25 per unit

Direct Labour Hours 8,000
Labour Rate ₹ 4.50 per hour
Factory Overheads ₹ 4 per direct labour hour
Selling and Distribution expenses ₹ 30,000
Borrowed funds will be available @ 11.5% on additional capital outlay. The company expects a net
Return of 25% on Sales.
DISCUSSION - 3
(c) To evaluate the requirements of the Companies Act, 2013 regarding appointment of Internal
Auditors for the group companies. (This information is sought by the Independent Directors).
Certain Financial Information of Group Companies
Figures are in ₹ crores and correspond to the previous year
Name Nature Equity Share Turnover Loan from Bank Public Deposit
Capital and PFI
ABC Ltd. Listed 100 190 50 24

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 XYZ Ltd. Unlisted Public 60 190 50 24
LMN Ltd. Unlisted Private 60 190 50 -

OTHER INPUTS FOR DISCUSSION:

Post your introduction meeting with SFL, Mr. Karthik, the Senior Manager (Finance) of SFL explained
his expectations from you and has also put forward the following inputs tor your suitable advice:
(i) Despite a robust internal check and internal control system prevailing in the Company, a theft of
Cash of ₹ 15 lakhs by the cashier in January 2024 was detected only in May 2024 on which date
the final accounts were not yet approved by the Board as the accounts were under audit.
(ii) Mr. Q, a Director of SFL proceeding on a long foreign tour, appointed Mr. Y as an alternate
director to act for him during his absence. The articles of the company provide for appointment
of alternate directors. Mr. Q claims that he has a right to appoint an alternate director.
(iii) Mr. Karthik expressed his apprehension that giving utmost freedom and flexibility- to the
employees to set their own targets in the budget setting process would have a potential danger.
(iv) Mr. Karthik also informed that in view of the excellent contributions for the progress of the
Company, there is a proposal to appoint Mr. Seshadri, who is the Special Director (Costing and
Finance) of SFL as the Managing Director of two other Companies unrelated to SFL.
(v) Mr. Karthik also affirmed that there is a Corporate Insolvency Resolution Process going on before
the Hon'able NCLT in one of the group companies and he wants to know which of the following
statements are correct under Section 21 of the Insolvency and Bankruptcy Code, 2016:
(1) A financial creditor or the authorized representative of the financial creditor, if it happens
to be a related party of the corporate debtor shall not have any right of representation,
participation or voting in a meeting of the committee of creditors.
(2) A financial creditor regulated by a financial sector regulator, if it is a related party of the
corporate debtor solely on account of conversion or substitution of debt into equity shares
or instruments convertible into equity shares prior to the insolvency commencement date
shall not have any right of representation, participation or voting in a meeting of the
committee of directors.
You are requested to thoroughly go through the following questions and provide the correct answer in
your capacity as an advisor. Please note that an advisor cannot afford to do mistakes. Hence, utmost
care is required while giving your answer.

Multiple Choice Questions

1. The theft of cash of ₹ 15 lakhs:

(a) Need not be adjusted to the reported value of assets, liabilities, incomes or expenses for the
year ended 31.03.2024.
(b) Need to be adjusted to the reported value of assets, liabilities, incomes or expenses for the
year ended 31.03.2024
(c) Need to be adjusted to the reported value of assets, liabilities, incomes or expenses only for
the year ended 31.03.2025
(d) A provision for bad debts should be made in the accounts.
2. With reference to Mr. Karthik's apprehension in para (iii) above, there is potential danger of
having:
(a) Sheer Failure
(b) Non-Performance

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 (c) Resistance
(d) Slackness in Budget
3. The contention of Mr. Q to appoint an alternate director is:
(a) Correct as the Articles of the Company provide for appointment of alternate Directors.
(b) Incorrect as the authority to appoint alternate director has been vested in the board of
directors only and that too subject to empowerment by the Articles.
(c) Incorrect as the authority to appoint alternate director has been vested in the board of
directors only and with approval of shareholders by passing a special resolution.
(d) Incorrect as the authority to appoint alternate director has been vested only with the
approval of shareholders by passing a special resolution.
4. As per Section V of Part II of Schedule V of the Companies Act, 2013 in respect of managerial
remuneration where Mr. Sheshadri is appointed as managerial person in 2 companies, he may
draw remuneration provided:
(a) Total remuneration drawn from the companies shall be as per their effective capital.
(b) Total remuneration drawn from the companies does not exceed the higher maximum limit
admissible from anyone of the companies of which he is a managerial person.
(c) A person cannot be appointed as managerial person in 2 companies at the same time.
(d) Remuneration shall be paid subject to approval of members in general meeting.
5. Under the provisions of the Insolvency and Bankruptcy Code as enshrined in Section 21 of the
Code, analyse the correctness of the statements as given in above para (v) in "Other inputs for
discussion":
(A) Statement 1 is correct whereas, statement 2 is incorrect.
(B) Statement 1 is incorrect whereas, statement 2 is correct.
(C) Both the statements (Statement 1 and 2) are correct
(D) Both the statements (Statement 1 and 2) are incorrect.

Descriptive Questions
6. Considering the inputs in Discussion 1 as an advisor, what factors would be considered by you in
formulating the audit strategy of the Company? (5 Marks)
7. In the light of the inputs given above in Discussion 2, compute a Cost and Price Statement,
indicating the price that should be quoted to the customer. (5 Marks)
8. In the light of the inputs given above in Discussion 3, explain which of the group companies are
required to appoint an internal auditor under the provisions of the Companies Act, 2013?
(5 Marks)

CASE STUDY 4

You have been appointed as statutory auditors of XYZ Limited in its 12 th annual general meeting for a
period of five years. Your appointment has been made in place of M/s AB and Company, Chartered
Accountants.
XYZ Limited is unlisted public company in which CDE Limited, a listed company, holds 50 % equity
shares. The balance 50% equity shares are held by Mr. FG and his close relatives. The management of
XYZ Limited is being done by Mr. FG and his son. CDE Limited has also appointed two of his directors as
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directors of XYZ Limited. CDE Limited is listed on both National Stock Exchange (NSE) as well as
Bombay Stock Exchange (BSE). XYZ Limited is a manufacturing company engaged in production of
piston, an auto part for commercial trucks. CDE Limited is also a manufacturing company engaged in
the production of commercial trucks having its assembly plants at three different locations in the
country.
Upto 31st March, 2020, the entire production of XYZ Limited of pistons was purchased by CDE Limited.
However, with effect from April 1st 2020, XYZ Limited has started contract manufacturing for CDE
Limited and for that purpose an agreement has been entered into between the two companies.
The salient features of the Agreement are as follows:
(1) The installed capacity of XYZ Limited is 200,000 piston per annum. The optimum production
level is expected to be not less than 80% of the installed capacity.
(2) All the raw materials/parts for production shall be procured and supplied by CDE Limited to XYZ
Limited. Sufficient quantity levels of raw material/parts shall be maintained with XYZ Limited for
smooth and uninterrupted production.
(3) 5% production loss shall be permitted to XYZ Limited.
(4) Any production scrap shall be disposed of by XYZ Limited at its own expense. Receipt from sale of
scrap shall be to the credit of XYZ Limited only.
(5) An estimated cost sheet shall be prepared by XYZ Limited based on the prevailing cost of raw
materials/parts, wages and stores/consumables and shall be approved by CDE Limited in
advance before the start of every new financial year.
(6) XYZ Limited shall be given 30% of the cost of production as its contract receipt.
(7) The production shall be stored by XYZ Limited in its warehouse and shall be despatched to
various assembly plants of CDE Limited as per delivery schedule provided to it three months in
advance.
(8) The payment of invoices raised by XYZ Limited on respective assembly plants of CDE Limited
shall be made by respective plants where products shall be delivered with 30 days from receipt
of the products.
(9) CDE will not interfere in day to day operation.
During the financial year ended 31.03.2024, you noticed the following transactions in accounts of XYZ
Limited:
(1) An advance against supplies of ₹ 2,00,00,000 was received from CDE Limited. However, the same
has been utilised by XYZ Limited to replace an old machinery with the new one to improve the
quality of the finished products. No supplies were made against the said advance by the company
to CDE Limited.
(2) An export order has been fulfilled by XYZ Limited at the instruction of CDE Limited at a price
mutually agreed by the importer and CDE Limited.
(3) A consignment of 2500 pistons supplied to one of the units of CDE Limited has been rejected due
to inferior quality material used for production.
(4) The Assessing officer has disallowed depreciation on plant and machinery claimed by the
company on the ground that the arrangement of contract manufacturing has been made by the
parties with malafide to claim depreciation on plant and machinery whereas the substance of the
arrangement is nothing but giving the entire plant on lease and therefore, the income has been
assessed under the 'Income from House Property' instead of under the head 'Profit or gains from
business or profession. The company has filed an appeal against said assessment order before
CIT (appeals) and appeal was pending as on date.

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 Multiple Choice Questions

1. After you have received your appointment as statutory auditor of XYZ Limited, you were required
to:
(a) start your audit assignment immediately.
(b) communicate with the previous auditors for knowing their objection in accepting the
assignment by you, if any.
(c) wait for the retiring auditor to communicate with you.
(d) start your audit assignment pending confirmation from previous auditor about their
objection, if any.
2. As provided in the Companies Act, 2013, the relationship of XYZ Limited with CDE Limited is that
of an associate because:
(a) CDE Limited holds 50% equity shares of XYZ Limited.
(b) CDE Limited was purchasing the entire production of XYZ Limited.
(c) XYZ Limited has utilised a sum of ₹ 2,00,00,000 given by CDE Limited.
(d) CDE Limited hold significant influence over XYZ Limited and does not fulfil definition of
control under Ind AS.
3. In terms of Indian Accounting Standard (Ind AS)-16 Property, Plant and Equipment, the
replacement of old machinery shall be accounted for by XYZ Ltd. as:
(a) an addition to PPE as the expenditure fulfils the definition of PPE.
(b) an addition to PPE as it is a very big expenditure.
(c) revenue expenditure as it is relating to replace of existing plant.
(d) revenue expenditure, as management has incurred that expenditure from its short term
resources.
4. As the statutory auditors of XYZ Limited, your query for using the advance against supplies
towards replacement of machinery, shall be that:
(a) whether it was used with the consent of the party.
(b) advance against supplies can never be used for any other purpose, why it was done?
(c) company has actually used short term funds for long term purpose. Reasons required as
this matter needs to be reported.
(d) All of the above.
5. What will be the depreciation rate on plant and machinery used in production under Income Tax
Rules, 1962:
(a) 10%
(b) 15%
(c) 20%
(d) 40%

Descriptive Questions

6. What are the compliances which XYZ Limited, must have taken to comply with the provisions of
the Companies Act, 2013 for entering into an agreement for contract manufacturing for CDE
Limited? (5 Marks)
7. What are the disclosure requirements which you would like to verify from the financial statement

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 of XYZ Limited for the year ended 31.03.2024 with respect to its transactions with CDE Limited?
Whether your audit scope will include TDS and GST compliances also? (5 Marks)
8. Please explain with reasoning, whether the disallowance of depreciation made and the income
being assessed under the head 'Income from House Property' instead of Business Profits by the
Assessing Officer, was justified. (5 Marks)

CASE STUDY 5

Facts of the Case:

1. A public limited company (hereinafter referred to as ‘the company’), which is a wholly owned
subsidiary of a listed company, is in the business of exploration and production of oil and gas and
other hydrocarbon related activities outside India.
2. The company operates overseas projects directly and/or through subsidiaries, by participation in
various joint arrangements and investment in associates. The company was following Accounting
Standards as notified under the Companies (Accounting Standards) Rules, 2006 (ASs) until 31 st
March, 2016. However, in accordance with the Notification of Ministry of Corporate Affairs, the
company has adopted Indian Accounting Standards (Ind ASs) with effect from 1st April, 2016;
3. Mineral rights are granted by the host governments in accordance with the applicable legal and
fiscal regime in the host country which are incorporated into the binding contractual
arrangements entered into with the host governments. Mineral rights can be granted through
direct license or through Production Sharing Agreement (PSA), under which the host government
having ownership rights over the hydrocarbons, grants the rights to a company or consortium
(usually called contractor) subject to certain obligations/payments by the contractor including
sharing of hydrocarbons, with the government or its nominated agency as per principles
contained in PSA.
4. The overseas oil and gas operations are generally conducted in joint arrangements with other
partners. Main reason for holding mineral rights through jointly controlled entities/subsidiaries
is because of host country's regulations and/or various business considerations (strategic/risk
management/financing etc.). When the project is already in existence through a corporate
structure and the company joins the project later on, the investment in jointly controlled
entities/subsidiaries is a legacy issue.
5. Till the financial year 2014-15, the company has been preparing its consolidated financial
statements for the group comprising of standalone financial statements of the company, its
subsidiaries and jointly controlled entities in accordance with the applicable Accounting
Standards (AS).
6. The company accounted for the investments in subsidiaries and jointly controlled entities in its
standalone financial statements in accordance with the requirement of Accounting Standard (AS)
13, 'Accounting for Investments'. In consolidated financial statements of the company, the
company was consolidating financial statements of its subsidiaries on a line by line basis
following the consolidation procedures mentioned in paragraph 13 of Accounting Standard (AS)
21, 'Consolidated Financial Statements'. Similarly, in its consolidated financial statements, the
company was reporting its interest in jointly controlled entities using proportionate
consolidation as per the requirements of paragraphs 29 to 39 of Accounting Standard (AS) 27,
'Financial Reporting of Interests in Joint Ventures'.
7. Further, the company recognised goodwill in respect of subsidiaries and jointly controlled

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 entities in accordance with the requirements of paragraph 13(b) of AS 21 and paragraph 36 of AS
27 respectively in its consolidated financial statements.
8. The company considered that such goodwill mainly arises due to corporate structure and the line
by line consolidation of subsidiaries' I proportionate consolidation of jointly controlled entities'
financial statements prepared on historical costs convention which do not take into consideration
the valuation of underlying oil and gas reserves for which excess amount (i.e. goodwill calculated
as per the relevant AS requirements) has been paid by the company at the time of acquisition.
9. The company further considered that in oil and gas E&P companies, the goodwill generated on
acquisition of mineral rights either through jointly controlled entities or subsidiaries, inherently
derives its value from the underlying mineral rights and, accordingly, value of such goodwill
depletes as the underlying mineral resources are extracted.
10. Therefore, taking a prudent approach and considering the above substance, the company framed
the accounting policy for amortisation of the goodwill in respect of its subsidiaries/jointly
controlled assets over the life of the underlying mineral rights using UOP method as under:
"Goodwill Amortisation: The company amortises goodwill (on consolidation) based on 'Unit of
Production Method' considering the related Proved Reserves."
11. This allowed the company to utilise the value of goodwill over the life of mineral rights and
completely charging off the goodwill over the life of the reserves.
12. For financial year 2015-16, company has stated that it had availed transition exemption under
Ind AS 101, 'First-time Adoption of Indian Accounting Standards' and has not applied principles
of Ind AS 103, 'Business Combinations' retrospectively and, therefore, did not fair value the
acquisition of shares in joint ventures (jointly controlled entities as per ASs) / subsidiaries which
happened before the transition date of 1st April, 2015. Carrying amount of goodwill at the date of
transition to Ind AS in accordance with applicable ASs has been taken as carrying value of the
goodwill in the opening Ind AS Balance sheet.
13. According to the company, prospectively from the transition date, i.e., 1 st April, 2015, acquisition
of interest/share in subsidiary is to be accounted for in accordance with Ind AS 103 and
acquisition of interest/share in joint venture/associate will be accounted for in accordance with
Ind AS 28, 'Investments in Associates and Joint Ventures'.
14. The company understands that paragraph 32(a) of Ind AS 28 specifically prohibits amortisation
of goodwill relating to an associate or a joint venture. It is noticed that there is no such specific
prohibition laid down by Ind AS 103. It is also noticed that paragraph 10 (b) of Ind AS 36,
Impairment of Assets requires testing of goodwill acquired in a business combination for
impairment, annually.
15. Accordingly, as per the company, by simple reading of the applicable Ind ASs, it appears that Ind
ASs envisage testing of goodwill annually for impairment rather than its amortisation. This seems
to align with the concept of fair valuation of acquired assets and liabilities and goodwill/capital
reserve being a residual amount. This however may not be the case where goodwill is carried at
historical value in the manner as stated above. Accordingly, considering the substance over form
of the goodwill to be in the nature of 'acquisition costs' ( as discussed in paragraphs 8 to 13
above), the company intends to continue amortisation of the goodwill recognised under ASs in
respect of its subsidiaries/ joint ventures (jointly controlled entities under ASs) over the life of
the underlying mineral rights using Unit of Production method, under Ind ASs also post transition
date in accordance with the same accounting policy as under: "Goodwill amortization: The
company amortises goodwill (on consolidation) based on 'Unit of Production Method'
considering the related proved reserves."

Multiple Choice Questions

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1. As per Ind AS 110 which of the following parent entities are not exempted to present
consolidated financial statement:
(a) If debt or equity instruments are not traded in a public market; it did not file, nor is it in the
process of filing, its financial statements with a securities commission or other regulatory
organisation for the purpose of issuing any class of instruments in a public market; and its
ultimate or any intermediate parent produces financial statements that are available for
public use and comply with Ind AS. Further its other owners, including those not otherwise
entitled to vote, have been informed about, and do not object to, the parent not presenting
consolidated financial statements.
(b) An investment entity that is required to measure all of its subsidiaries at fair value through
profit & loss account.
(c) Subsidiaries to which post-employment benefit plans or other Iong term employee benefit
plans applies.
(d) The parent that controls one or more other associate companies.
2. On consolidated financial statements the Auditor issues:
(a) Independent Auditors Report on Consolidated Financial Statement.
(b) Companies (Auditor's Report) Order, 2020 on Consolidated Statement.
(c) Independent Auditors Report on Consolidated Financial Statement as well as Companies
(Auditor's Report) Order, 2020 on Consolidated Statement.
(d) Neither Independent Auditors Report on Consolidated Financial Statement nor Companies
(Auditor's Report) Order, 2020 on Consolidated Statement.
3. In the consolidated financial statements the financial statement of parent and group prepared as
one entity with respect to:
(a) assets, liabilities and equity only.
(b) income and expenses only.
(c) income, expenses and cash flows only.
(d) assets, liabilities, equity, income, expenses and cash flows.
4. In preparation of consolidated financial statements, which of the following are examples of
permanent consolidation adjustments:
(a) Determination of goodwill or capital reserve as per applicable accounting standards.
(b) Determination of amount of equity attributable to minority/ non-controlling interests.
(c) Both (a) and (b).
(d) Neither (a) or (b).
5. The general permission is not available to persons (individual) resident in India for
purchase/acquisition of securities abroad when such purchase/acquisition is:
(a) out of the funds held in the RFC account.
(b) by way of bonus shares on existing foreign currency shares.
(c) by remitting up to the limit prescribed by the Reserve Bank from time to time, per financial
year under the Liberalised Remittance Scheme (LRS).
(d) None of the above.

Descriptive Questions
6. You have been asked to explain regarding appropriate accounting treatment under Ind AS for

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 amortisation of the goodwill by the company and that whether the accounting treatment as
suggested in paragraph 15 of the case study in respect of amortisation of goodwill by the
company is appropriate? (10 Marks)
7. What is the process of acquiring of shares of an existing company abroad under the Foreign
Exchange Management Act, 1999? (5 Marks)

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