SUGGESTED ANSWERS TO

THE QUESTIONS SET AT

CHARTERED ACCOUNTANCY PROFESSIONAL (CAP)-II LEVEL (Group-I)

DECEMEBER 2020 EXAMINATIONS

The Institute of Chartered Accountants of Nepal (ICAN)

Satdobato, Lalitpur
© The Institute of Chartered Accountants of Nepal
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Year and month of Publication: 2021 March

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 Table of Contents
Paper 1: Advanced Accounting ...................................................................................................................... 4
Paper 2: Audit and Assurance....................................................................................................................... 19
Paper 3: Corporate and Other Laws.............................................................................................................. 28
Paper 1: Advanced Accounting

Attempt all questions. Working notes should form part of the answer.
1. Laxmi and Hari are partners of the firm LH & Co., from 1.4.2072. Initially both of
them contributed Rs. 1,00,000 each as capital. They did not contribute any capital
thereafter. They maintain accounts of the firm on mercantile basis. They were sharing
profits and losses in the ratio of 5:4. After the accounts for the year ended 31.3.2076
were finalized, the partners decided to share profits and losses equally with effect
from 1.4.2072.
It was also discovered that in ascertain the results in the earlier years certain
adjustments, details of which are given below, had not been noted.
Year ended 31st Ashadh 2073 2074 2075 2076
Rs Rs Rs Rs
Profit as per accounts prepared 1,40,000 2,60,000 3,20,000 3,60,000
and finalized
Expenses not provided for (as at 30,000 20,000 36,000 24,000
31st Ashadh)
Incomes not taken into account (as 18,000 15,000 12,000 21,000
at 31st Ashadh)
The partners decided to admit Mohan as a partner with effect from 1.4.2076. It was
decided that Mohan would be allotted 20% share in the firm and must bring 20% of
the combined capital of Laxmi and Hari.
Following is the Balance sheet of the firm as on 31.3.2076 before admission of
Mohan and before adjustment of revised profits between Laxmi and Hari.
Balance Sheet of LH & Co. as at 31.3.2076
Liabilities Rs Assets Rs
Capital Accounts: Plant and machinery 60,000
Laxmi 2,11,500 Cash on hand 10,000
Hari 1,51,500 Cash at bank 5,000
Trade payables 2,27,000 Stock in trade 3,10,000
Trade Receivables 2,05,000
5,90,000 5,90,000
You are required to prepare:
i) Profit and Loss Adjustment account;
ii) Capital accounts of the partners; and
iii) Balance Sheet of the firm after the admission of Mohan. 20 marks

Answer
1)
a) Profit and Loss Adjustment Account*
Particulars Rs Particulars Rs
To Expenses not provided (for 1,10,000 By Income not considered 66,000
years 2072/73-2075/76) (for years 2072/73-2075/76
By Partners' capital
account (loss):
Laxmi 22,000
Hari 22,000
1,10,000 1,10,000
*It is assumed that expenses and incomes not taken into account in earlier years were fully
ignored. Further, it has been considered that they are still outstanding and accrued on 1.4.2076.
b) Partners' Capital Accounts
Laxmi Hari Mohan Laxmi Hari Mohan
Rs Rs Rs Rs Rs Rs
To P&L 22,000 22,000 - By Balance b/d 2,11,500 1,51,500 -
Adjustment A/c
To Hari (WN 1) 60,000 By Laxmi (WN 1) - 60,000 -
To Balance c/d 1,29,500 1,89,500 63,800 By Cash - - 63,800
2,11,500 2,11,500 63,800 2,11,500 2,11,500 63,800
By Balance b/d 1,29,500 1,89,500 63,800

c) Balance Sheet of LH & Co. as on 1.4.2076 (After admission of Mohan)

Equity & Liabilities Rs Assets Rs
Capital accounts: Plant and machinery 60,000
Laxmi 1,29,500 Trade receivables 2,05,000
Hari 1,89,500 Stock in trade 3,10,000
Mohan 63,800 Accrued income 66,000
Trade payables 2,27,000 Cash on hand (10,000 + 63,800) 73,800
Outstanding expenses 1,10,000 Cash at bank 5,000
7,19,800 7,19,800
Working Notes:
1. Computation of Profit and Loss distributed among partners
Rs
Profit for year ended 31.3.2073 1,40,000
31.3.2074 2,60,000
31.3.2075 3,20,000
31.3.2076 3,60,000
Total Profit 10,80,000
 Particulars Laxmi Hari Total
Rs Rs Rs
Profit shared in old ratio i.e. 5:4 6,00,000 4,80,000 10,80,000
Profit to be shared as per new ratio i.e. 1:1 5,40,000 5,40,000 10,80,000
Excess share 60,000
Deficit share (60,000)
Laxmi to be debited by Rs 60,000 and Hari to be credit by Rs 60,000.
2. Capital brought by Mohan
Particulars Rs
Capital to be brought in by Mohan must be equal to 20% of the combined capital of Laxmi and Hari.
Capital of Laxmi (2,11,500-22,000-60,000) 1,29,500
Capital of Hari ( 1,51,500-22,000+ 60,000) 1,89,500
Combined Capital 3,19,000
20% of the combined capital brought by Mohan (20% of Rs 3,19,000) 63,800
2.
a) Following are selected balance sheet accounts of A Ltd. at Ashadh End, 2076, and
2075, and the increases or decreases in each account from 2074-75 to 2075-76. Also
presented is selected income statement information for the year ended Ashadh, 2076,
and additional information.

Selected balance sheet accounts

Assets Ashadh end Ashadh end Increase
Accounts receivable 34,890 23,340 11,550
Property, plant, and equipment 2,76,380 2,46,070 30,310
Accumulated depreciation-plant (1,78,810) (1,67,930) (10,880)
Liabilities and shareholders'
Ashadh end Ashadh end Increase
equity
Bonds payable 49,180 45,920 3,260
Dividends payable 8,180 5,330 2,850
Equity share, Rs. 1 par 23,000 19,720 3,280
Additional paid-in capital 9,260 2,820 6,440
Retained earnings 104,740 90,850 13,890
Selected income statement information for the year ended Ashadh, 2076:

Sales revenue 1,54,410

Depreciation 38,320
Gain on sale of equipment 14,080
 Net income 30,970
Additional information:
1. During the year, equipment costing Rs. 44,020 was sold for cash.
2. Accounts receivable related to sales of merchandise.
3. During the year Rs. 25,300 of bonds payable were issued in exchange for property,
plant, and equipment. There was no amortization of bond discount or premium.
Required: 10 marks
Determine the category (operating, investing, or financing) and the amount that
should be reported in the statement of cash flows for the following items.
a. Payments for purchase of property, plant, and equipment.
b. Proceeds from the sale of equipment.
c. Cash dividends paid.
d. Redemption of bonds payable.
b) The following is the Balance Sheet of Blue Star Ltd. as at 31st Ashadh, 2077:
Capital & Liabilities Amount (Rs) Assets Amount (Rs)
8,000 equity shares of Rs.100 8,00,000 Building 3,40,000
each
10% debentures 4,00,000 Machinery 6,40,000
Loan from A 1,60,000 Stock 2,20,000
Creditors 3,20,000 Debtors 2,60,000
General Reserve 80,000 Bank 1,36,000
Goodwill 1,30,000
Deferred Revenue
34,000
Exp.
Total 17,60,000 Total 17,60,000
Big Star Ltd. agreed to absorb Blue Star Ltd. on the following terms and
conditions:
i) Big Star Ltd. would take over all Assets, except bank balance at their book
values less 10%. Goodwill is to be valued at 4 year’s purchase of super profits,
assuming that the normal rate of return be 8% on the combined amount of
share capital and general reserve.
ii) Big Star Ltd. is to take over creditors at book value.
iii) The purchase consideration is to be paid in cash to the extent of Rs.6,00,000 and
the balance in fully paid equity shares of Rs.100 each at Rs.125 per share. The
average profit is Rs.1,24,400. The liquidation expenses amounted to Rs.16,000
to be borne by Big Star Ltd. Blue Star Ltd. had purchased prior to 31st Ashadh,
2076 goods costing Rs. 1,20,000 from Big Star Ltd. for Rs.1,60,000.
Rs.1,00,000 worth of goods is still in stock of Blue Star Ltd. on 31st Ashadh,
2076. Creditors of Blue Star Ltd. include Rs.40,000 still due to Big Star Ltd.
Required:
Prepare realization A/C and the Balance Sheet (extract) of Big Star Ltd. as at
1st Shrawan, 2076 after the takeover 10 marks

Answer
2. a)
 Particulars Activity Amount
(a) Payments for purchase of property, plant and equipment. Investing (49,030)
(b) Proceeds from the sale of equipment. Investing 30,660
(c) Cash dividends paid. Financing (14,230)
(d) Redemption of bonds payable. Financing (22,040)

Working notes:
1. Payments for purchase of property plant and equipment
Ending balance (at cost) = Beginning balance (at cost) + Payment for purchase –
Cost of asset sold + Non-cash source of financing (bonds payable)
Or, 276,380 = 246,070+ x – 44,020 + 25,300
Or, x = 276,380 – 246,070 + 44,020 – 25,300
Payments for purchase of property, plant and equipment = Rs. 49,030
2. Proceeds from the sale of equipment
Accumulated Depreciation- plant A/c:
Ending balance = Beginning balance + Depreciation for the year – Accumulated
Depreciation on equipment sold
Or, 178,810 = 167,930 + 38,320 - x
Or, x = 167,930 + 38,320 - 178,810
Accumulated depreciation on equipment sold = Rs. 27,440
Therefore, net book value of equipment sold = 44,020 - 27,440 = Rs. 16,580
Proceeds from the sale of equipment = net book value + gain on sale of equipment
= (16,580 + 14,080) = Rs. 30,660
3. Cash Dividends Paid
Retained earnings A/c:
Ending balance = Beginning balance + Net income – Increase in Dividends payable
– Cash dividends paid
Or, 104,740 = 90,850 + 30,970 – 2,850 – x
Or, x = 90,850 + 30,970 – 2,850 – 104,740
Cash dividends paid = Rs. 14,230
4. Redemption of bonds payable
Bonds payable A/c:
Ending balance = Beginning balance + New bonds payable issued for PPE –
Redemption of bonds payable
 Or, 49,180 = 45,920 + 25,300 – x
Or, x = 45,920 + 25,300 – 49,180
Redemption of bonds payable = 22,040

2 b) In Books of Blue Star Limited

Realization Account
Particulars Amount (Rs) Particulars Amount (Rs)
To Building 340,000 By Creditors 320,000
To Machinery 640,000 By B Ltd. (WN 2) 1,210,000
To Stock By Equity Shareholders A/c 60,000
220,000
(Loss)
To Debtors 260,000
To Goodwill 130,000
Total 1,590,000 Total 1,590,000

Big Star Limited

Balance Sheet
as at 1st Shrawan 2076 (extract)
Amount
Equity & Liabilities Assets Amount (Rs.)
(Rs.)
4,880 Equity shares of Rs.100 each Goodwill (WN 1 & WN 4) 232,000
488,000
(Shares have been issued for
consideration other than cash)
Securities Premium 122,000 Building 306,000
Profit and Loss A/c …. Machinery 576,000
(15,000)
Less: unrealized profit 15,000 (WN 3)
Creditors (320,000 - 40,000) 280,000 Stock (198,000 -15,000) 183,000
Bank Overdraft (WN 5) Debtors 194,000
(260,000 – 40,000) 220,000
616,000
Less: Prov. for bad debts 26,000

Total 1,491,000 Total 1,491,000

Working Notes
1. Valuation of Goodwill Rs.
Average profit 124,400
Less: 8% of Rs. 880,000 70,400
Super profit 54,000
Value of Goodwill = 54,000 x 4 216,000

2. Net Assets for purchase consideration

Goodwill as valued in W.N.1 216,000
Building 306,000
Machinery 576,000
Stock 198,000
Debtors 260,000
Total Assets 1,556,000
Less: Creditors 320,000
Less: Provision for bad debts 26,000
346,000
Net Assets 1,210,000
 Out of this Rs. 600,000 is to be paid in cash and remaining i.e., (1,210,000–600,000) Rs.
610,000 in shares of Rs. 125/-. Thus, the number of shares to be allotted 610,000/125 =
4,880 shares.
3. Unrealized Profit on Stock Rs.
The stock of Blue Star Ltd. includes goods worth Rs. 100,000 which was
sold by Big Star Ltd. on profit. Unrealized profit on this stock will be 25,000
(40,000/160,000*100,000)
As Big Star Ltd. purchased assets of Blue Star Ltd. at a price 10% less than
the book value, 10% need to be adjusted from the stock i.e., 10% of (10,000)
Rs.100,000.
Amount of unrealized profit 15,000

4. Liquidation expenses borne by the Big Star Ltd. so that should be debited to
Goodwill Account.
5. Bank Overdraft in the Balance Sheet of Blue Star Ltd. = purchase
consideration paid in cash + Liquidation expenses borne = 6,00,000 + 16,000
= Rs. 6,16,000
3.
a) A company has three branches at Thimi, Kapan and Gwarko. The Head Office at
Newroad purchases goods and sends them to branches, to be sold at a uniform
percentage of profit on cost. The following particular are made available to you.
Newroad Thimi Kapan Gwarko
Rs. Rs. Rs. Rs.
st
Stock on 1 Shrawan, 2075 54,000 16,000 12,500 10,000
Purchases in the year 274,000 - - -
Sales - 180,000 20,000 100,000
Stock on 31st Ashadh, 2076 28,000 6,000 5,000 2,500
Branch Accounts on 1st Shrawan, 2075:
Thimi 15,000
Kapan 32,000
Gwarko 4,000
Remittances from Branch 320,000 150,000 100,000 70,000
Newroad Office invoices goods to the branches at fixed sales prices but maintains
branch accounts in its ledgers at cost price.
Required:
Prepare a combined Trading Account for the year ended 31st Ashadh, 2076. 10 marks
b) From the following particulars of III Insurance Co. Ltd., prepare the Fire Revenue
Accounts for the year 2074-75. 5 marks
Rs. in Lakhs
Claims paid 235
Legal expenses regarding claims 5
Premiums received 600
Reinsurance premiums 60
Commission 100
Expenses of management 150
Provision against unexpired risk on 1.4.2074 260
Claims unpaid on 1.4.2074 20
Claims unpaid on 31st Ashadh 2075 35 5 marks
Answer
3 a) Combined Trading Account
For the year ended 31st Ashadh 2076
Particulars Newroad Thimi Kapan Gwarko Total
To Opening stock at cost (WN 4) 54,000 17,454 13,636 10,909 95,999
To Purchases 274,000 274,000
To Goods received from HO at
- 185,453 13,638 100,909 300,000
cost (balancing figure)
Total 328,000 202,907 27,274 111,817 669,999
By Sales - 180,000 20,000 100,000 300,000
By Goods sent to branch at cost
300,000 - - - 300,000
(WN 1)
By Closing Stock at cost (WN 4) 28,000 6,545 5,456 2,728 42,729
By Gross loss @ 9.09% on Sales 16,362 1,818 9,090 27,270
Total 328,000 202,907 27,274 111,818 669,999
Working Notes:
1) Calculation of cost of stock sent to all branches
Opening stock at HO 54,000
Add: Total Purchases at HO 274,000
Less: Closing stock at HO (28,000)
Goods sent to branches at cost 300,000
2) Calculation of invoice of goods received from HO by all branches
Closing stock at branch level (total) 13,500
Add: Total sales 300,000
Less: Opening stock at branch level (total) (38,500)
Goods received from HO (total) 275,000
3) Calculation of profit margin on goods sent to the branches
Goods sent to branches at Invoice Price 275,000
Less: Goods sent to branches at cost price (300,000)
Profit/ (Loss) (25,000)

Rate of profit margin/ loss = -25,000/300,000 = -8.33% on cost

Rate of profit margin/ loss = -25,000/275,000 = -9.09% on sales

4) Valuation of stock at cost price

Opening Stock Closing Stock
Thimi 16,000 x 1.0909 = 17,454 6,000 x 1.0909 = 6,545
Kapan 12,500 x 1.0909 = 13,636 5,000 x 1.0909 = 5,456
Gwarko 10,000 x 1.0909 = 10,909 2,500 x 1.0909 = 2,728

3 b) III Insurance Co. Ltd.

Fire Revenue Account
For the year ended on 31st Ashadh 2075

Particulars Rs. Particulars Rs.

In Lakh In Lakh
To Claims paid (235+5) 240 By Provision against unexpired
Add: Claims unpaid on 31.3.2075 35 risk on 1.4.2074 260
Less: Claims unpaid on 1.4.2074 (20) 255 By Premiums 600
To Commission 100 Less: Reinsurance Premiun 60 540
To Expenses of management 150
 To Provision against unexpired risk
(Note) 270
To Surplus transferred to P/L Account 25
800 800
Note: Provision against unexpired risk has been made as per Beema Samiti’s Directives
to set aside at least 50% of net premiums of the current year. Similarly, provision of
previous years has been recognized to Revenue Account.
4.
a) Mahalakshmi Bank Ltd. has the following capital, assets and additional information
as on 31st Ashadh 2075.
Capital Rs. (in million)
Paid up equity share capital 10,315
Statutory general reserve 2,038
Retained earnings 798
Other free reserves 309
Subordinate term debt 1,000
General loan loss provision 1,249
Investment adjustment reserve 118
Deduction from core Capital 426
Assets: Net Value Rs. million
Cash Balance 3,488
Balance with NRB 7,554
Investment with Government securities 14,335
Claims on Government of Nepal 529
Balance with other banks 6,776
Loans to customers 94,936
Other assets 8,670
Off-balance sheet exposures
Forward exchange contract 4,434
Letter of credit 7,002
Bid Bond and Performance Bond 15,646
The following other information is provided:
i) Risk weighted exposure for operational risk 5,266
ii) Risk weighted exposure for market risk 268
iii) NRB has directed to add risk weighted exposure at 3% of immediate previous
gross income (audited) as capital charge for weak management of operational
risk i.e. Rs. 1,436.
iv) Similarly, the bank is also directed to allocate risk weighted exposure to 3% for
unsatisfactory overall risk management policies and procedures of the bank
which is calculated at Rs. 3,840.
Required:
Compute Risk weighted exposures, Tier 1 and Total Capital Adequacy Ratio of
Mahalakshmi Bank Ltd. 10 marks
b) When the construction of a qualifying asset is performed by a third party, are
borrowing costs capitalized on the prepayments made to the third party for the
acquisition of the asset? State on the basis of relevant NAS. 5 marks

Answer

4 a)
i) Computation of Capital:
Capital Rs. (in million)
Paid up equity share capital 10,315
Statutory general reserve 2,038
Retained earnings 798
Other free reserves 309
Deduction from core capital (426)
Tier 1 Capital 13,034

Subordinated term debt 1,000

General loan loss provision 1,249
Investment adjustment reserve 118
Tier 2 Capital 2,367
Total Capital 15,401

ii) Computation of risk weighted exposures for credit risks:

Assets Net Value Risk Weight RWE
Cash Balance 3,488 0% 0
Balance with NRB 7,554 0% 0
Investment with Government securities 14,335 0% 0
Claims on Government of Nepal 529 0% 0
Balance with other banks 6,776 20% 1,355.2
Loans to customers 94,936 100% 9,4936
Other assets 8,670 100% 8,670
Off-balance sheet exposures
Forward exchange contract 4,434 10% 443.4
Letter of credit 7,002 50% 1,400.4
Bid Bond and Performance Bond 15,646 40% 7,823
Total RWE for credit risks 114,628

iii) Computation of Total Risk Weighted Exposures:

Risk Weighted Exposures Rs. In million
Risk Weighted Exposure for Credit Risk 114,628.00
Risk Weighted Exposure for Operational Risk 5,266.00
Risk Weighted Exposure for Market Risk 268.00
Total Risk Weighted Exposures (Before adj. of Pillar II) 120,162.00
Adjustments under Pillar II
RWE for operational Risk 1,436.00
RWE for overall risk management 3,840.00
Total Risk Weighted Exposures (After adj. of Pillar II) 125,438.00

iv) Computation of Capital Adequacy Ratio

Tier 1 Capital 13,034.00
Tier 2 Capital 2,367.00
Total Capital 15,401.00
Total Risk Weighted Exposures 125,438.00
Tier 1 to Risk Weighted Exposure Ratios 10.39%
Total Capital to Risk Weighted Exposure Ratio 12.28%
4 b) As per NAS 23, the borrowing costs incurred by an entity to finance prepayments on a
qualifying asset are capitalised on the same basis as the borrowing costs incurred on
assets constructed by the entity. The capitalisation starts when all three conditions are
met: expenditures are incurred, borrowing costs are incurred, and the activities
necessary to prepare the asset for its intended use or sale are in progress.
Expenditures on the asset are incurred when the prepayments are made (payments of
the instalments). Borrowing costs are incurred when borrowing is obtained. The last
condition – the activities necessary to prepare the asset for its intended use or sale are in
progress – can vary depending on facts and circumstances. When the construction
process by the third party does not start at the prepayment date, management assesses
whether it is appropriate to start capitalisation from this date or whether it should be
deferred to a later date.

5.
a) Gorkha Company Ltd. imported raw materials worth USD 9,000 on 24th Jestha, 2076,
when the exchange rate was Rs. 104 per USD. The transaction was recorded in the
books at the above mentioned rate. The payment of the transaction was made on 10th
Shrawan, 2076, when the exchange rate was Rs. 108 per USD. At the year end 31st
Ashadh, 2076, the rate of exchange was Rs. 109 per USD. Account Officer of the
company passed an entry on 31st Ashadh, 2076 adjusting the cost of the raw material
consumed for the difference between Rs. 108 and Rs. 104 per USD. Discuss whether
this treatment is justified as per the provision of NAS-21. 5 marks
b) Bibek Ltd. took a factory premises on lease on 01.04.2073 for Rs. 1, 00,000 per month.
The lease is operating lease. During Ashadh, 2074, Bibek Ltd. relocates its operation to
a new factory building. The lease of the old factory premises continues to live upto
31.12.2076. The lease cannot be cancelled and cannot be sub-let to another user. The
auditor insists that lease rent of balance 33 months upto 31.12.2076 should be provided
in the accounts for the year ending 31.03.2074. Bibek Ltd. seeks your advice. 5 marks
c) On 01.04.2072, Environmental Clean Pvt. Ltd. received a conditional grant of Rs. 300
Lakhs from municipality for acquisition of a recycling plant costing Rs. 1,500 Lakhs.
The grant was credited to the cost of the plant which has useful life of five years. The
company has the policy of charging depreciation at 20 percent p.a. on WDV basis. The
company had to refund the grant on Bhadra 2075 due to non-fulfillment of the certain
conditions.
How would you deal with the refund of grant in the books of Environmental Clean Pvt.
Ltd? 5 marks
Answer
5 a) As per NAS 21, The Effects of Changes in Foreign Exchange Rates,
i. Initial recognition of a foreign currency transaction is done in the functional currency, by
applying the spot exchange rate between the functional currency and foreign currency at
the date of the transaction.
ii. At the end of each reporting period, foreign currency monetary items shall be translated
using the closing rate.
iii. Exchange difference arising on settlement of monetary items or on translating monetary
items at rates different from those at which they were translated on initial recognition
during the period or in previous financial statement shall be recognized in profit or loss in
the period in which they arise.
 In the given case, at the date of transaction the raw material purchased and its creditors will
be recorded at USD 9,000 × Rs. 104= Rs. 936,000.
At Balance Sheet date such transaction is reported at closing rate of exchange, hence it will
be valued at the closing rate i.e. Rs. 109 per USD (USD 9,000 × Rs. 109=Rs. 9,81,000)
The difference of exchange rate between the closing date and transaction date is Rs. 5 per
USD (i.e. Rs. 109-Rs. 104). The difference of Rs. 45,000 (USD 9,000 × 5) will be shown as
an exchange loss in the profit or loss account for the year ended 31st Ashadh, 2076 and will
not be adjusted against the cost of raw materials.
At the settlement date, the company would recognize or provide in the profit and loss
account an exchange gain of Rs. 9,000 (i.e. at the rate Rs. 1 per USD, the difference of
exchange rate between the balance sheet date and the date of settlement, i.e. Rs. 109 and Rs.
108 per USD).
Hence the accounting treatment adopted by the Account officer is not as per NAS-21.
5 b) In accordance with the provisions of NAS 37, Provisions, Contingent Liabilities and
Contingent Assets, if an entity has a contract that is onerous, the present obligation under
the contract shall be recognized and measured as a provision. An onerous contract is a
contract in which the unavoidable cost of meeting the obligations under the contract exceed
the economic benefits expected to be received under it.
In the given case, the operating lease contract has become onerous as the economic benefit
of lease contract for next 33 months up to 31.12.2076 will be nil. However, the lessee,
Bibek Ltd., has to pay lease rent of Rs.3,300,000 (i.e. Rs.100,000 p.m. for next 33 months).
Therefore, provision on account of Rs.3,300,000 is to be provided in the accounts for the
year ending 31.03.2074.
Hence auditor’s contention to provide for the lease rent of balance 33 months upto
31.12.2076 in the accounts for the year ending 31.03.2074 is correct.
5 c) According to NAS 20, Accounting for Government Grants and Disclosure of Government
Assistance, government grants relating to assets may be presented in one of two ways as
deferred income, or by deducting the grant from the asset's carrying amount. If such grant
becomes repayable, it should be treated as a change in accounting estimate. Where the
original grant related to an asset, the repayment shall be recognized by increasing the
carrying amount of the asset.
Date Particulars Rs. in Lakhs
1.4.2072 Cost of Machinery 1,500.00
Grant (300.00)
Balance as on 1.4.2072 1,200.00
31.03.2073 Depreciation @ 20% (240.00)
Balance as on 1.4.2073 960.00
31.03.2074 Depreciation @ 20% (192.00)
Balance as on 1.4.2074 768.00
31.03.2075 Depreciation @ 20% (153.60)
Balance as on 1.4.2075 614.40
1.5.2075 Refund of Grant 300.00
Revised Balance 914.40
The depreciation @ 20 percent on revised balance of Rs. 914.40 is to be provided in
the remaining two years prospectively.
The cumulative additional depreciation that would have been recognized in profit or
loss to date in the absence of the grant shall be recognized immediately in profit or
loss.
 Cumulative additional depreciation
Date Particulars Rs. in Lakhs
1.4.2072 Cost of Machinery 1,500.00
31.03.2073 Depreciation @ 20% (300.00)
Balance as on 1.4.2073 1,200.00
31.03.2074 Depreciation @ 20% (240.00)
Balance as on 1.4.2074 960.00
31.03.2075 Depreciation @ 20% (192.00)
Balance as on 1.4.2075 768.00

A Cumulative depreciation to be recognized 732.00

B Cumulative depreciation recognized to date 585.60
A–B Cumulative additional depreciation 146.40

Thus, Rs. 146.40 lakhs should be immediately recognized in profit or loss.

6. Write short notes on: (5×3=15 marks)
a) Non-Integral Foreign Operation
b) Prediction of insolvency on the basis of ratios
c) Effective interest rate
d) Public Financial Management System
e) Biological assets and their measurement

Answer

6 a) Non-integral foreign operation (NIFO) is a foreign operation that is not an integral

foreign operation. The business of a NIFO is carried on in a substantially independent
way.
The following are the indicators of NIFO:
i. Independent operation without much dependence on reporting entity;
ii. Activities of foreign operation are mainly financed by its operations or from local
borrowings;
iii. Foreign operation sales are mainly in currencies other than reporting entity;
iv. There is an active sales market for the foreign operation product;
v. All the expenses incurred by foreign operations are primarily paid in local
currency, not in reporting currency.
vi. Transactions with the reporting entity are not a high proportion of the foreign
operation’s activities.
All the assets and liabilities of NIFO are translated by using closing exchange rate
whereas income and expenses are translated using the rate prevailing on the date of
transaction or average rate. The exchange gain/loss will be transferred to foreign
currency translation reserve.
6 b) Prediction of insolvency on the basis of ratios
 The relevance of the ratios in predicting insolvency can be elaborated with the help of
the following illustrative ratios as below:
Working capital to total assets indicates the liquidity position of the firm. If the ratio is
too low it indicates inability of the firm to carry on its day to day activities. If it is
negative, the firm will not have funds for its day to operations. If such situation
continues, the firm may be forced to suspend its operations and it may result in
insolvency in the long run.
Similarly, ratio of sales to total assets indicates the utilization of its assets to generate
sales which ultimately generates surplus for the firm. If it is too low, it indicates that the
firm is keeping idle assets which in long run may result in insolvency.
Another example can be given of retained earnings to total assets. Retained earnings are
cushion for firm's health. So if it is too thin it may indicate that firm has very low
leverage and is posed to insolvency earlier.

6 c) Effective interest rate is the discount rate which equates the present value of the cash
inflows to the present value of cash outflows. This means that the effective interest rate
is the Internal Rate of return (IRR). Effective interest rate amortize the fees, points paid
or received, transaction costs and other premiums or discounts over the expected life of
the investment on a systematic basis by adopting the internal rate of return of the
investment.
6 d) The Public Financial Management (PFM) and budgetary policies of the Nepal
Government during the Nineties were directed towards economic liberalization,
privatization, poverty reduction and decentralization. Policies and programs of the
budget were mainly concerned with agriculture, modernization, employment promotion,
women's empowerment, financial sector reform, government expenditure management,
tax reform, good governance, social service and the development of basic and physical
infrastructure. PFM system of Nepal, like most developing countries, continued to be
dominated by the traditional objectives of control and accountability rather than a
concern for allocating limited public sector resources to well defined programs and
projects that were intended to serve a set of national objectives.
The extension of the budget coverage involved a combination of formal and informal
incorporation of expenditure activities. The other formal extension involved the
incorporation of foreign assistance programs, which were previously outside the budget.
Planning the allocation of scarce resources was not given due priority. The pattern of
government expenditure followed more or less the uniform course till the 1990's. Public
expenditure and revenue both increased; but the expenditure increase trend was greater
than the revenue. The inadequate mobilization of domestic resources through
government revenue resulted in a serious problem of widening resource gap in Nepal.
Foreign aid was the main source of development financing and deficit financing
continued to increase. Planning, budgeting, and implementation had inherent problems
such as lack of capacity, coordination and monitoring. In spite of a number of initiatives
taken, one of the main problems of Nepal has been the lack of proper domestic resource
mobilization. Several factors have contributed in varying degrees to the lack of
effectiveness of public spending in Nepal. The institutional factors played major role in
the over-programming (having too many programs in scarce resources) of the budget, its
lack of focus and prioritization and the implementation problems. The lack of ownership
of projects/programs at various levels and the absence of accountability also undermined
 the quality and effectiveness of public spending. Managing the national budget became
increasingly difficult for Nepal Government to further their objectives of poverty
alleviation.
6 e) Biological assets and their measurement:
Biological assets are living animals and plants. They include sheep, pigs, beef cattle,
poultry, fish, dairy cows, trees in a forest, plants for harvest (for example, wheat and
vegetables), trees, plants and bushes from which agricultural produce is harvested (for
example, fruit trees, vines and tea bushes)
Biological assets within the scope of NAS 41 are measured on initial recognition and
subsequent reporting dates at fair value less costs to sell, unless fair value cannot be
measured reliably.
Paper 2: Audit and Assurance

Attempt all questions.

1. As an auditor, give your opinion with explanations on the following cases: (4 5=20 marks)
a) Upto previous year 2076, Sharma & Co. were the auditors of Fishtail Bank Ltd.
Principal auditor of Sharma & Co., Mr. Kumar Sharma, has retired from the practice in
the fiscal year then ended. The Bank is looking to appoint Independent Director and
applications were sought for this purpose. You were asked if Mr. Kumar Sharma could be
potential candidate.
b) During the previous year ABC Limited has followed the straight line method of
depreciation. During the current year it has been changed to written down value
method.
c) You are the financial consultant of Corona Distillery Ltd. The accountant is in dilemma
for booking the revenue from interest, royalty and dividend. Suggest him in this regard.
d) Miss Deepa is a partner at BD & Associates which is the external auditor of ABC Ltd.,
public company. During the audit, she identified a regulatory non-compliance. She is
supposed to report it to the audit committee. Suggest her in the light of NSA 250, what
should be taken into consideration for reporting the same to the audit committee.
Answer:
a) Section 89(2)(d) of Companies Act 2063 states that the person who is an officer, auditor or
employee of the concerned company and a period of three years has not lapsed after his/her
retirement from any such office shall not be eligible to be appointed to the office of
independent director. Hence, Mr. Kumar Sharma cannot be a potential candidate for the post
of Independent Director.
b) NAS 8, Accounting Policies, Changes in Accounting Estimates & Errors, describes about
the criteria for selecting and changing accounting policies; treatment and disclosures
together with changes in accounting estimates and corrections of errors.
Para 32(d) provides that due to uncertainties inherent in business, management shall exercise
judgments to estimate amount involved with particular items of Financial Statements.
Accordingly, the useful life of, or expected pattern of consumption of future economic
benefits embodied in depreciable assets requires management estimation. This estimation
may not be measured with precision due to uncertainties involved therein. The estimation
may change in future as new information emerge. So, the change from SLM to WDV is a
changes in accounting estimate.
Therefore, the auditor must ensure that the change in method of depreciation on plant and
machinery from SLM to WDV basis from the current year is made in accordance therewith.
When such a change in the method of depreciation is made, depreciation is recalculated in
accordance with the new method and any changes should be recognized prospectively. So, it
should be ensured that the deficiency (since change is from SLM to WDV) arising to be
adjusted in the year of change by way of a charge to the Statement of Profit and Loss. The
auditor may also ascertain that the change in the method and the effect thereof on the profits
of the entity is quantified and disclosed. If it is not done by the management, the auditor has
to bring it to the notice of the shareholders through qualification in the audit report.
c) NAS 18, Revenue states that Revenue arising from the use by others of entity assets yielding
interest, royalties and dividends shall be recognized on the following bases:
 (a) interest shall be recognized using the effective interest method;
(b) royalties shall be recognized on an accrual basis in accordance with the substance of the
relevant agreement; and
(c) dividends shall be recognized when the shareholder’s right to receive payment is
established.
Aforesaid revenue shall be booked when (a) it is probable that the economic benefits
associated with the transaction will flow to the entity; and (b) the amount of the revenue can
be measured reliably.
Based on the aforesaid provision of NAS 18, I as a financial consultant, will guide the
accountant of Corona Distillery Ltd.
d) Miss Deepa should follow the procedures prescribed by NSA 250, Consideration of Laws
and Regulations in an Audit of Financial Statements.
If she becomes aware of information concerning an instance of non-compliance or suspected
non-compliance with laws and regulations, she shall obtain:
a. An understanding of the nature of the act and the circumstances in which it has occurred;
and
b. Further, information to evaluate the possible effect on the financial statements.
Following points should be considered for reporting identified non-compliance to audit
committee:-
 Miss Deepa should evaluate the implications of non-compliance in relation to other
aspects of the audit, including the auditor’s risk assessment and the reliability of written
representations, and take appropriate action.
 Unless all the members of audit committee are aware of such non-compliance, she should
communicate non-compliance with laws and regulation that come to his attention during
the course of audit.

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

a) During the auditing assignment of financial statements of Axon Nepal Pvt. Ltd., you came
to notice that the supplementary information that is not required by the applicable
financial reporting framework is presented with the financial statements to comply with
the Axon Global Group of Companies (Group Company) disclosure guidelines.
b) During the course of audit Mr. A, auditor of Hydro Company observed a serious non-
compliance (substantiated by a valid evidence) of Mr. XYZ; one of the staff of the
organization. Mr. XYZ requested not to disclose or communicate it to any other person
even in audit observation.
c) "When determining whether data is reliable for the purpose of designing substantive
analytical procedures, the reliability of data is influenced by its source and nature and is
dependent on the circumstances under which it is obtained".
d) Mr. Acharya, a practicing chartered accountant was appointed as auditor of Riverside
Ltd. He mentioned his remuneration as Rs. 5 lakhs in engagement letter whereas the
audit fee of previous year was Rs. 5.75 lakhs.
Answer:
a) As per Para 54 of NSA 700: If the supplementary information is not required by the
applicable financial reporting framework and which is not considered an integral part of
 the audited financial statements but presented with the audited financial statements, the
auditor shall evaluate whether such supplementary information is presented in a way that
sufficiently and clearly differentiates it from the audited financial statements. If this is not
the case, the auditor shall ask management to change how the unaudited supplementary
information is presented. If management refuses to do so, the auditor shall identify the
unaudited supplementary information and explain in auditor's report that such
supplementary information has not been audited. So, the auditor of Axon Nepal Pvt. Ltd.
is required to perform these procedures in his audit.
b) As per NSA 250, Consideration of Laws and Regulation in an Audit of Financial
Statements, if any non-compliance is reported then it should be communicated to
appropriate level of authority that may be management or those charged with governance,
to the user of the audit report on the financial statement or to the regulatory and
enforcement authorities.
 The auditor should as soon as practicable, either communicate with those charged
with governance or obtain audit evidence that they are appropriately informed
regarding non-compliance that comes to the auditor's attention.
 If in the auditor’s judgment the non-compliance is believed to be intentional and
material, the auditor should communicate the finding without delay.
 If auditor suspects that the members of senior management including the board of
directors are involved in non-compliance, the auditor should report to the higher level
of authority at the entity if that exits. If no higher authority exits or auditors believe
that report may not be acted upon or is unsure to whom to report, the auditor should
consider legal action.
In the given case when Mr A has found serious non-compliance with the evidence, he
should communicate it to appropriate authority of the company immediately.
c) This statement is correct in line with NSA 520, Analytical Procedures. It has been
justified with examples as follows:
(i) Source of the information available. For example, information may be more reliable
when it is obtained from independent sources outside the entity;
(ii) Comparability of the information available. For example, broad industry data may
need to be supplemented to be comparable to that of an entity that produces and
sells specialized products;
(iii) Nature and relevance of the information available. For example, whether budgets
have been established as results to be expected rather than as goals to be achieved;
and
(iv) Controls over the preparation of the information that are designed to ensure its
completeness, accuracy and validity. For example, controls over the preparation,
review and maintenance of budgets.
d) As per the Handbook of the Code of Ethics, 2018 Section 330 and 410, the nature and
level of fees quoted might impact a professional accountant’s ability to perform
professional services in accordance with professional standards. A professional
accountant might quote whatever fee is considered appropriate. Quoting a fee, which is
lower than another auditor, is not itself unethical. However, the level of fees quoted
creates a self-interest threat to compliance with the principle of professional competence
and due care if the fee quoted is so low that it might be difficult to perform the
 engagement in accordance with applicable technical and professional standards. Factors
that are relevant in evaluating the level of such a threat include:
 Whether the client is aware of the terms of the engagement and, in particular, the
basis on which fees are charged and which professional services the quoted fee
covers.
 Whether the level of the fee is set by an independent third party such as a regulatory
body.
Examples of actions that might be safeguards to address such a self-interest threat
include:
 Adjusting the level of fees or the scope of the engagement
 Having an appropriate reviewer review the work performed.
Thus, in the given case, if the remuneration fixed by the auditor is based on the scope of
audit as mentioned in engagement letter and accordingly the auditor can comply with the
principle of professional competence and get audit reviewed from appropriate reviewer,
the quotation of fee is not unethical.
3. Answer the following: (35=15 marks)
a) What is fraud as per NSA 240? Give few techniques of fraud committed by management
overriding controls.
b) Elaborate the circumstances/events when the reconfirming the written representation
would be appropriate.
c) "The nature and timing of the audit procedures to be used may be affected by the fact that
some of the accounting data and other information may be available only in electronic
form or only at certain points or periods in time". Elaborate it.
Answer:
a) As per NSA 240, fraud refers to an intentional act by one or more individuals among
management, those charged with governance, employees, or third parties involving the
use of deception to obtain an unjust or illegal advantage.
Examples of fraud committed by management overriding control
 Recording fictitious journal entries, particularly close to the end of an accounting
period, to manipulate operating results or achieve other objectives.
 Inappropriately adjusting assumptions and changing judgments used to estimate
account balances.
 Omitting, advancing or delaying recognition in the financial statements of events and
transactions that have occurred during the reporting period.
 Concealing or not disclosing facts that could affect the amounts recorded in the
financial statements.
 Engaging in complex transactions that are structured to misrepresent the financial
position or financial performance of the entity.
 Altering records and terms related to significant and unusual transactions.
b) NSA 580 deals with the auditor’s responsibilities to obtain written representation from
the management of the entity. The written representations in NSA 580 require the
acknowledgement and understanding of management of its responsibilities of preparation
 and presentation of financial statements and exercise appropriate level of control over this
process.
The auditor may also ask management to reconfirm its acknowledgement and
understanding of those responsibilities in written representations. This may be
particularly appropriate when:
• Those who signed the terms of the audit engagement on behalf of the entity no longer
have the relevant responsibilities;
• The terms of the audit engagement were prepared in a previous year;
• There is any indication that management misunderstands those responsibilities; or
 Changes in circumstances make it appropriate to do so.
c) NSA 500, Audit Evidence states the audit procedures for obtaining audit evidence. The
nature and timing of the audit procedures to be used may be affected by the fact that
some of the accounting data and other information may be available only in electronic
form or only at certain points or periods in time.
For example, source documents, such as purchase orders and invoices, may exist only in
electronic form when an entity uses electronic commerce, or may be discarded after
scanning when an entity uses image processing systems to facilitate storage and
reference.
Certain electronic information may not be retrievable after a specified period of time, for
example, if files are changed and if backup files do not exist. Accordingly, the auditor
may find it necessary as a result of an entity’s data retention policies to request retention
of some information for the auditor’s review or to perform audit procedures at a time
when the information is available.
4. Answer/Comment on the following: (3 5=15 marks)
a) During the previous year the auditor of Paint Company was Mr. A. During the year Mr.
B was appointed as auditor and Mr. B received an appointment letter from the company.
What are the responsibilities of Professional Accountant when they receive the
information about the changes in professional appointment?
b) The brother of Principal auditor of Adhikari & Co. has taken a vehicle loan of NPR 5
Million from ABC Bank Limited. Adhikari & Co. is the auditor of such Bank.
c) CA. Surili Kant, is the proprietor of Kant Associates, Chartered Accountants since 2070.
In 2077 she wants to join ANLA Associates, Chartered Accountants in the capacity of
partner together with existing three partners.
Answer:
a) As per Section 320.4 of Code of Ethics, 2018 in the event of any information received
about the changes in professional appointment, the professional accountant:
 shall think seriously whether there is any reason that might indicate not to accept
engagement. There could be reasons of self-interest threat and also accepting the
engagement without knowing all relevant facts might create non-compliance of
fundamental principles relating to professional competence and due care. Therefore, it
becomes the responsibility of the professional Accountant, before communicating or
responding to the client’s request, to verify seriously all relevant facts that caused to
changes in the professional engagements;
  shall be allowed, as explicitly mentioned in the tender or mode of requesting
documents of the proposed client, to contact the predecessor accountant to get
information about the reason responsible for such change in the profession
engagement. Such contact gives the professional accountant the opportunity to
enquire whether there are any reasons why the engagement should not be accepted;
 shall, in the event if asked to undertake work that is complementary or additional to
work of an existing predecessor accountant, gather all relevant information and find
out whether any reason exists which might create self -interest threat to compliance
with the principle of professional competence and due care might be created as a
result of incomplete information.
 shall not undertake any step to respond to the client’s offer through any means
without verifying reasons for changes in professional engagements or complete
information of the activities of the client for example whether the client is indulging
in illegal activities such as tax evasion or manipulation, money laundering etc.
b) Code of Ethics, 2018 Section 900 requires auditors to be an independent. There are two
interlinked perspectives of independence of auditors, one, independence of mind; and
two, independence in appearance.
(i) Independence of mind – the state of mind that permits the provision of an opinion
without being affected by influences that compromise professional judgement,
allowing an individual to act with integrity, and exercise objectivity and professional
skepticism; and
(ii) Independence in appearance – the avoidance of facts and circumstances that are so
significant that a reasonable and informed third party, having knowledge of all
relevant information, including any safeguards applied, would reasonably conclude a
firm's, or a member of the assurance team's integrity, objectivity or professional
skepticism had been compromised of.
A loan from an assurance client that is a bank or a similar institution, to a member of the
assurance team or their immediate family would not create a threat to independence
provided the loan, or guarantee, is made under normal lending procedures, terms and
requirements. Examples of such loans include home mortgages, bank overdrafts, car
loans and credit card balances.
c) As per Rule 62 of Nepal Chartered Accountants Rules, 2061 a member of ICAN cannot
open a more than one firm or be partner of more than one firm at one time. If any
member having proprietorship firm wants to be partner of a firm, the member should
suspend the proprietorship firm. The proprietorship firm can be renewed. However, one
cannot do any work in the capacity of COP holder of ICAN till the time the member is in
partnership at other firm.
In the given case, CA. Surili Kant has a proprietorship firm and she want to join a
partnership ANLA Associates, Chartered Accountant. CA. Surili Kant has to suspend the
Kant Associates, Chartered Accountants if she want to join the partnership firm. She
cannot be proprietor of Kant Associates and partner of ANLA Associates at the same
time.
5. Answer/Comment on the following: (2 5=10 marks)
a) Explain the procedures for appointment of auditor of corporate bodies wholly owned by
Government of Nepal.
 b) The auditor A of CA & Associates, a firm of Chartered Accountants is conducting audit
of X Ltd. The auditor requests management to provide Bank certificate in support of fixed
deposits whereas management provides only written representation on the matter.
Answer:
a) Section 10 of Audit Act 2075 deals with the provision for appointing auditor of corporate
bodies wholly owned by Government of Nepal. The related provisions are:
(i) Notwithstanding anything contained in the existing laws, the audit of the corporate
bodies wholly owned by Government of Nepal shall be audited by the Auditor
General pursuant to this Act.
(ii) If the Auditor General is constrained by time and resources to audit the corporate
bodies wholly owned by Government of Nepal, he/she may appoint the auditors
licensed under the prevailing laws as an assistant. While appointing auditor as such,
he/she shall give priority to Nepali citizens.
(iii) The auditor so appointed shall act under the direction, supervision and control of
the Auditor General.
(iv) The powers, functions, duties and responsibilities of the auditors so appointed and
the procedures to be followed by them in course of audit and provisions relating to
their report shall be as prescribed by the Auditor General.
(v) The remuneration to be paid by the concerned organization to the auditors so
appointed shall be fixed by the Auditor General keeping in view the volume of
financial transactions, status of accounts, number of branches and sub-branches,
work load and work progress of the concerned organization.
b) Although written representations provide necessary audit evidence, they do not provide
sufficient appropriate audit evidence on their own about any of the matters with which
they deal. Furthermore, the fact that management has provided reliable written
representations does not affect the nature or extent of other audit evidence that the
auditor obtains about the fulfilment of management’s responsibilities, or about specific
assertions.
Applying the above to the given case, the auditor would further request the
management to provide him with the Bank certificate in support of fixed deposits held
by the company. If such evidence is significant to the audit, the auditor should find
other alternative procedures and consider the fact while forming an audit opinion, in the
event management does not provide bank certificates.
6. Write short notes on the following: (4 2.5=10 marks)
a) Performance Audit
b) Those Charged with Governance
c) EDP Audit
d) Environmental Audit
Answer:
a) Performance Audit
A performance audit is an objective and systematic examination of evidence for the
purpose of providing an independent assessment of the performance of a government
organization, program, activity or function in order to provide information to improve
 public accountability and facilitate decision making by the parties with responsibility to
oversee or initiate corrective action.
Elements of Performance Audit:
 Economy,
 Efficiency, and
 Effectiveness
b) Those Charged with Governance
Those charged with governance mean the person(s) or organization(s) with responsibility
for overseeing the strategic direction of the entity and obligations related to the
accountability of the entity. This includes overseeing the financial reporting process. It
describes the role of persons entrusted with the supervision, control and direction of an
entity. Those charged with governance ordinarily are accountable for ensuring that the
entity achieves its objectives, financial reporting, and reporting to interested parties.
Those charged with governance include management only when it performs such
functions. In some cases, those charged with governance are responsible for approving
the entity’s financial statements (in other cases management has this responsibility). For
entities with a board of directors, this term encompasses the term board of directors or
audit committee used elsewhere in generally accepted auditing standards.
c) EDP Audit
The prime objective of EDP audit is to determine whether computer systems safeguard
assets, maintain data integrity, achieve organizational goals effectively and consume
resources efficiently. A proper system of internal control is necessary to ensure that the
objectives are met. It may be remembered that the overall objectives and scope of an
audit does not change in an EDP environment. However, the use of a computer changes
the processing and storage of financial information and may affect the organization and
procedure employed by the entity to achieve adequate internal control. Similarly; EDP
environment may affect auditor's procedures to be applied in conduct of audit.
d) Environmental Audit
It is a general term that can reflect various types of evaluations intended to identify
environmental compliance and management system implementation gaps, along with
related corrective actions. A management tool comprising a systematic, documented
periodic and objective evaluation of how well environmental issues have been organized
and managed by the entity to safeguard the environment by:
a) Facilitating management control of environmental practices; and
b) Assessing compliance with related national and international laws, conventions and
the company policies, which would include meeting regulatory requirements.
7. Distinguish between: (2 5=10 marks)
a) Reasonable Assurance Engagements and Limited Assurance Engagements
b) Audit Plan and Audit Programme
Answer:
a) Distinction between Reasonable Assurance Engagements & Limited Assurance
Engagements:
Reasonable Assurance Engagements:
 Objectives: A reduction in assurance engagement risk to an acceptably low level in the
circumstances of the engagement, as the basis for a positive form of expression of the
practitioner’s conclusion
Evidence-gathering procedures: Sufficient appropriate evidence is obtained as part of a
systematic engagement process that includes: Obtaining an understanding of the
engagement circumstances; Assessing risks; Responding to assessed risks; Performing
further procedures using a combination of inspection, observation, confirmation,
recalculation, re-performance, analytical procedures and inquiry. Such further procedures
involve substantive procedures, including, where applicable, obtaining corroborating
information, and depending on the nature of the subject matter, tests of the operating
effectiveness of controls; and evaluating the evidence obtained.
The assurance report: Description of the engagement circumstances, and a positive
form of expression of the conclusion.
Limited Assurance Engagements:
Objectives: A reduction in assurance engagement risk to a level that is acceptable in the
circumstances of the engagement but where that risk is greater than for a reasonable
assurance engagement, as the basis for a negative form of expression of the practitioner’s
conclusion.
Evidence-gathering procedures: Sufficient appropriate evidence is obtained as part of a
systematic engagement process that includes obtaining an understanding of the subject
matter and other engagement circumstances, but in which procedures are deliberately
limited relative to a reasonable assurance engagement.
The assurance report: Description of the engagement circumstances, and a negative
form of expression of the conclusion.
b) The distinction between Audit Plan and Audit Program are outlined as follows:
Audit plan is described as developing a general strategy and a detailed approach for the
expected nature, timing and extent of the audit. The auditor plans to perform the audit in
efficient and timely manner whereas audit program is the step and guidance and works as
a tool for performing or implementing audit at the execution level. The distinctions of
those two are:
 Audit plan is prepared before preparing audit program.
 Audit plan is broader in scope than audit program.
 Audit plan assists acquiring knowledge of client's business and concentrating on risk
areas which will help for preparing effective audit program.
 Audit plan is generally prepared by senior auditors and program may be prepared by
juniors based on plan and duly approved by seniors.
 Audit plan focuses on broader area whereas programme breaks them into small areas
or in form of audit questions, checklists or time frames etc.
Paper 3: Corporate and Other Laws
Attempt all questions.
1. Answer the following questions: (5×5=25 marks)
a) ABC Private Limited Company is a private company having five members only. All the
members of the company were going by car to pokhara in relation to some business. An
accident took place and all of them were killed in the accident. In such situation whether
existence of the company has also come to the end? Write your answer with reasons as
per the Companies Act, 2063.
b) Mr. Rajeev Sharma, newly appointed company secretary of MN Ltd wants to know the
subject matter for which special resolution is required in general meeting. Mention the
subject matters for which special resolution should be presented in the general meeting
of a company for decision.
c) Suravi, a director of River Palace Ltd. was involved in preparing prospectus and with her
some objections she signed on it. The prospectus is approved and registered to the Office
of Company Registrar and accordingly published. When she knew that the director
signing on the prospectus with false contents shall be liable personally for loss caused to
the investors, therefore, asked you whether she can be freed from such obligation. Advise
her.
d) Mr. A and his friends are directors of the Techno Trade Pvt. Ltd. They arranged a
meeting of the Board of the Directors(BoD). You are invited in this meeting as corporate
specialist. They asked about the powers and duties of BoD as provided in the Companies
Act. Explain the powers and duties of a BoD in accordance with the Companies Act,
2063.
e) Mr. Deo had signed in an agreement with Mr. Park to purchase 5 acres of land for the
purpose of the Deo soap Industries Pvt. Ltd. before its incorporation. The company
obtained a certificate of incorporation but collapsed before the money was paid for the
purchase of the land. Examine the status of the contract in such situation, whether it is
binding to the company or Mr. Deo individually liable. Write your answer with reference
to the provision of the pre-incorporation contract as provided in the Companies Act,
2063 and relevant case law.
Answer
a) As per Section 7 of the Companies Act, 2063 company incorporated shall be an
autonomous and body corporate with perpetual succession.
Company's life does not depend upon the death, insolvency or retirement of any or all
shareholders or directors. Provision for transferability or transmission of the share helps
to preserve the perpetual existence of a company. Law creates company and law alone
can dissolve it. Shareholders may come and go but the company can go on forever. Death
of all the shareholders of the company does not affect the continuity of the company.
In such case, ABC Private Limited does not cease to exist. By way of transmission of
shares, shares are transmitted to their legal representatives. The company ceases to exist
only on the winding up of the company. Therefore, even with the death of all
shareholders, ABC Private Limited does not cease to exist.
b) In a general meeting of the Company, it is required to submit matters to be decided as
resolution which may be either ordinary or special resolution. However Section 83 of the
Companies Act, 2063 prescribes the subject matter which requires to be presented as
special resolutions in the general meeting of a company for decision.
 Subject matter which requires to be presented as special resolutions in the general
meeting of a company for decision are:
a. Increasing the authorized capital of the company,
b. Decreasing or altering share capital of the company,
c. Altering the name or main objectives of the company,
d. Amalgamating one company into another company,
e. Issuing bonus shares,
f. Buying back of own shares by the company,
g. Selling shares at a discount ,
h. Converting a private company into a public company or public company into private
company.
i. Such other matter in respect of which the company is required by Companies Act or
the articles of association to adopt a special resolution.
c) As per Section 24 (1) of the Companies Act, 2063 it shall be the duty and obligation of
the concerned company to abide by the matters contained in the prospectus published.
And the directors who have signed the prospectus as referred to in Subsection (1) shall be
liable for the matters mentioned in that prospectus.
Similarly, Subsection (3) states that if any published prospectus contains false statements
made maliciously or deliberately and any person sustains any loss or damage by reason of
his/her subscription of securities on the faith of that prospectus, the directors who have
signed that prospectus shall be personally liable to pay compensation for the actual loss
or damage so sustained.
A promoter who resigns before the decision made by the company to publish the
prospectus or whom on becoming aware of any false statement in the prospectus,
publishes a notice of that matter to the information of the general public prior to the sale
or allotment of securities or who proves that he/she did not know that the prospectus
contained any false statement shall not be liable to bear such compensation. Hence,
Suravi by publishing a notice as stated above can be freed from her obligation. However
she has to prove that she had no knowledge of the prospectus containing false statement.
d) A company is an artificial legal person having no physical existence and intelligence.
Because of this, a company in itself is inactive and constant. So, a body of persons is
necessary to handle the business affairs to make proper management and to instruct and
control the parties of the concerned company. A supreme executive authority in the
control of a company and its affairs resides in persons are known as Board of directors.
Section 95 has explained the powers and duties of board of directors as follows:
(1) Subject to the provisions contained in this Act and the articles of association and the
decisions of the general meeting, the directors shall manage all transactions, exercise
of powers and perform duties of the company through the board of directors
collectively.
(2) Except in accordance with a decision of the general meeting no director of a public
company shall do anything yielding personal benefit to him/her through the company.
Provided, however, that a private company may make a reasonable provision on the
 benefit which the director may derive thought the company, as mentioned in the
memorandum of association and articles of association or consensus agreement.
(3) Except as otherwise provided in this Act, the memorandum of association and articles
of association or the consensus agreement in the case of a private company, the board
of directors may appoint any director from amongst themselves or any employee of
the company as its representative and so delegate to him/her any or all of its powers,
inter alia, to do any act or thing, make correspondences or sign bills of exchange or
cheques etc. On behalf of the company that such powers are to be exercised
individually or jointly. In so delegating the powers, at least one director and their
company secretary, if any, shall certify such delegation, pursuant to a decision of the
board of directors.
(4) A company may recover damages from a person acting in the capacity of director or
representative of the company for any loss or damage caused to the company from
any act or action done by such person beyond his jurisdiction.
(5) If any person enters into any transaction with the director or with a representative as
referred to in Sub-section (3) despite the knowledge or having reason to believe that
such director or representative is dealing with any transaction for his/her personal
interest or for causing loss or damage to the company, such person shall not be
entitled to make any claim against the company in respect of such transaction.
(6) Notwithstanding anything contained in Sub-section (3), the board of directors shall
not delegate the following powers conferred to the company and shall exercise such
powers only by means of resolutions passed at meetings of the board of directors :
(a) The power to make calls on shareholders in respect of amount unpaid on their
shares;
(b) The power to issue debentures;
(c) The power to borrow loans or amounts except through debentures;
(d) The power to invest the funds of the company;
(e) The power to make loans.
(7) The provision of Clause(e) of Sub-section(6) shall not apply to loans to be let and
deposits to be received in the ordinary course of business by the companies carrying
on banking and financial transactions.
(8) If the board of directors considers necessary to form a subcommittee for the discharge
of any specific business, it may form one or more than one sub-committee as required
and get such business discharged.
e) A contract made before the company's incorporation cannot bind the company. It takes
effect as a personal contract with the persons who purport to contract on the company's
behalf and they are liable to pay damages for failure to perform the promises made in the
company's name, even though the contract expressly provides that only the company's
paid-up capital shall be answerable for performance. Preliminary contracts are contracts
purported to be made on behalf of a company before its incorporation. A contract by a
promoter purporting to act on behalf of a company prior to its incorporation never binds
the company because at the time the contract was concluded the company was not in
existence. Therefore, it has no legal existence. As explained in the Northumberland
Avenue Hotel Co (1886) even if the parties act on the contract it will not bind the
company. Further, it is strictly explained in the Kelner v. Baxter (1866) that even after,
 incorporation such a purported contract cannot be ratified by the company. It is
concluded that the person purporting to act as agents on behalf of the company would be
personally liable. In Howard v. Patent Ivory Co. (1888), it is explained that a company
cannot ratify a pre-incorporation contract, but it is open to it to enter into a new contract
after its incorporation to give effect to a contract made before its formation.
Pre-incorporation contract has been accepted as non-binding instruments. Section 17 of
the Companies Act, 2063 has provided for the pre-incorporation contracts as follows:
(1) A contract made prior to the incorporation of a company shall be a proposed contract
only, and such contract shall not be binding on the company.
(2) If, prior to the incorporation of a company, any person carries on any transaction or
borrows money on behalf of the company, such person shall be personally liable for
any contract related with the transaction so carried on, subject to Sub-section (3).
(3) If, within the time mentioned in any transactions or within the reasonable time after
the incorporation of a company, the company, through its act, action or conduct,
accepts any act, action or conduct, accepts any act, action to borrowing done or made
prior to the date of authorization to commence its transactions or endorses such act or
action, that transaction shall be binding on the company and the other contracting
party; and the person carrying out such act to action shall be released from the
personal liability to be borne pursuant to Subsection (2).
(4) Notwithstanding anything contained elsewhere in this Section, the consensus
agreement of a private company shall govern any contracts made prior to the
incorporation of such company.
This is clear that the company hasn't endorsed the contract before its collapse. So, the
contract is the legal instrument governing to the parties themselves only. Due to the non-
endorsement of the contract, it operated and binding to the parties. Therefore the contract
is not binding to the company, but is binding to the parties and should be the liability by
oneself.
2. Answer the following questions: (3 × 5=15 marks)
a) Mr. Satish Shrestha is a promoter of Bright Bank Limited established in 2073 Baisakh
and commenced financial transactions from 2073 Ashadh. Mr. Satish Shrestha wants to
sell out the shares undertaken by him. Advice Satish for sell of shares based on Banks
and Financial Institutions Act, 2073.
b) Board of Directors of Agricultural Development Bank decided to appoint Sunil Man
Shakya, a Chartered Accountant with master degree in rural development who was a
deputy director and officer level post of the bank for 7 years as a Chief Executive. After
his appointment, an action was filed challenging his appointment being not qualified for
the post. Write your answer by referring the relevant legal provisions of the Banks and
Financial Institutions Act, 2073 whether or not he is qualified for the post.
c) Enumerate the power of the Nepal Rastra Bank for the management of Foreign Exchange
as per the Nepal Rastra Bank Act, 2058.
Answer
a) Section 11 of Bank and Financial Institutions Act, 2073 states that the promoter of a bank
or financial institution shall not be entitled to sell or pledge any share registered in his or
her name for at least five years from the date of commencement of financial transactions.
Provided that if there arises a special circumstance due to the emergence of any
obstruction or hindrance in the operation of a bank or financial institution or a promoter
 shareholder is included on the blacklist owing to transaction with another bank or
financial institution shares may be sold or purchased amongst promoter by obtaining
approval from Nepal Rastra Bank.
If the promoter of a bank or financial institution wishes to sell or pledge the shares held
in his or her name after five years from the date of commencement of financial
transactions and after issue of public share by the bank or financial institution, he or she
may sell or pledge such shares, with the permission of Nepal Rastra Bank. However,
promoter holding shares less than 2% of paid up share capital need not obtain permission
of Nepal Rastra Bank to sell or pledge promoter shares.
As Bank has commenced financial transactions from 2073 Aasadh only 5 years is not
completed. Consequently, Mr. Satish Shrestha cannot sell or pledge his promoter shares.
b) Business and day-to-day administration and management of bank or financial institution
is under control of the chief executive officer. The Act has intended to appoint chief
executive as a leader of management. Sub-section (1) of Section 29 of the Act has
provided that the board of directors shall, subject to this Act, Memorandum and Articles
of Association, appoint one Chief Executive for management of the bank or financial
institution.
Sub-section (5) of Section 29 has laid down the qualifications of Chief Executive as
under-
 Person having attained Master’s degree in management, banking, finance, monetary,
economics, commerce, bookkeeping, statistics, account, mathematics, business
administration or law.
 Person having work experience of at least ten years as an officer level or above in
banking or finance sector, government agency, corporate body, university or an
international institution or organization to carry on similar works after having attained
chartered accountancy or bachelor’s degree in management, banking, finance,
monetary, economics, commerce, bookkeeping, statistics, account, mathematics,
business administration or law, provided that in case of the Chief Executive of a Class
"D" financial institution, one shall have to possess the academic qualifications and
work experience as specified by the Rastra Bank.
 Person having completed the criteria as prescribed by the Rastra Bank with regard to
appointment of the Chief Executive.
 Person who is not been disqualified pursuant to Sub-Section (1) of Section 18 except
(i) and (n).
Under Sub-section (6), the Rastra Bank may issue order to the concerned bank or
financial institution to remove such Chief Executive and to appoint another person being
qualified to get appoint in the post of Chief Executive in case the Chief Executive
appointed pursuant to Sub-Section (1) has not been found qualified according to this Act.
c) As per Section 63 of the Nepal Rastra Bank Act, 2058; the Bank shall manage the foreign
exchange. The Bank shall have the following powers for such management: -
(a) To issue license under this Act or any other prevailing laws to the persons willing to
deal in foreign exchange transaction;
(b) To frame Rules and Bye-laws and to issue necessary order, directives or circulars in
order to regulate dealings in the foreign exchange transaction by the foreign exchange
dealer;
 (c) To inspect, supervise and monitor the foreign exchange dealer;
(d) To set the bases, limitations and terms and conditions for the transaction of the
foreign exchange dealer; and
(e) To prescribe the system of determining the foreign exchange rates of the Nepalese
currency.
3. Answer the following questions: (2×5=10 marks)
a) State the grounds under which the Insurance Board may cancel the registration of an
insurance company (insurer) under the Insurance Act, 2049.
b) State the provision of Revolving Fund as per Securities Act, 2063.
Answer
a) Section 13 of the Insurance Act, 2049 provides the grounds for the cancellation of
registration of insurer by the Insurance Board.
As per Section 13 of Insurance Act, the Insurance Board may cancel the registration of an
insurer by providing a written notice with effect from the date prescribed in the same
notice in the following circumstances:
a) If the insurance business is not started within six months from the date of obtaining
the certificate.
b) If it is felt that the liability of the insurer exceeds its assets within Nepal.
c) If the insurer could not fulfill the liability pursuant to the decision within three
months from the date of final decision of the court in the case filed under the
insurance policy issued within Nepal.
d) If the head office of the insurance business of any foreign insurer is situated outside
Nepal and in case it felt that Nepalese insurer has not obtained equal facilities there
which are enjoyed by the foreign insurer pursuant to the prevailing law of such
company.
e) If the insurer does not open its office inside Nepal.
f) If the insurer does not perform the functions to be performed or has performed any
functions which is not to be performed pursuant to this Act or the rule made under
this Act.
Before cancelling the registration of an insurer pursuant to sub-section (1) above, the
Insurance Board shall provide a reasonable time-limit to submit clarification to the
concerned insurer, stating the reason for cancelling its registration.
If the concerned insurer does not submit its clarification within the time period mentioned
in sub-section (2) above or clarification submitted by it is found not to be satisfactory, the
Insurance Board shall cancel the registration of such insurer pursuant to sub-section (1)
above, and shall publish a notice in two major newspapers published in Nepal for the
public information in general.
b) As per section 23 of the Securities Act, 2063 regarding Revolving Fund:
(1) The Securities Board may establish a revolving fund to manage its source of income
and such amounts as specified by the Board shall be credited to that fund each year.
(2) The amounts of the revolving fund may be held in securities issued by the Government
of Nepal or in such a fixed deposit account as may be prescribed by the Board.
 (3) Generally, no moneys held in the revolving fund, other than income earned out of the
moneys in that fund, shall be spent.
(4) Provisions relating to the operation of the revolving fund shall be as prescribed.
4. Answer the following questions: (2×5=10 marks)
a) Mr. X has been engaged supplying labour in India that is noticed from Maiti Nepal
Sunauli Unit after Mr. Y's rescue. Mr. X has disclosed in his statement that he has no
license and work permit to supply of labour. During the investigation it is also revealed
that he has actively engaged in the bonded labour also. In this act and omission as well
as non-compliance of the Labour law what is the consequences of the non-compliance
that is attracted the jurisdiction of the Labour Depatrment and Labour court? Write your
answer referring the relevant provision of the Labour Act, 2074.
b) Industrial Enterprises Act, 2076 has prescribed various facilities, concessions and
exemption to the industries. State the custom duty exemption provisions under the
Industrial Enterprises Act, 2076.
Answer
a) Labour Act, 2074 has provided the labour affairs management. While engaging in the
supply of laour without its legal compliance and engaging in bonded labour, it is
prohibited as a labour offence. In the circumstances of the above, jurisdiction of the
Labour Department and Labour Court has been attracted and Mr. X can be punished
under the Labour Act, 2074 as Follows:
Sanction by Labour Department: Section 163
Non-Compliance Consequence of Non-compliance
1. Supplying labour without license 1. Fine up to Rs. 2,00,000 and necessary
and engaging labour in work order.
from such supplier
2. Engaging a foreign national in 2. Fine up to Rs. 2,00,000 depending upon
work without work permit. the number of workers, and on repetition
even after being punished shall be fined
with the additional fine of Rs. 5,000 per
month and per head.
3. Discriminating among the 3. Fine up to Rs. 1,00,000 and the order to
workers. maintain the equality may be given.
4. Engaging a worker without 4. Fine up to Rs. 5,00,000 at a rate of Rs.
appointment letter or 10,000 per worker, the order to conclude
employment agreement. an employment agreement and provide
an appointment letter shall also be given.
Sanction by Labour Court: Section 164
Non-Compliance Consequence of Non-compliance
1. For engaging a bonded labour in 1. Imprisonment up to 2 years or fine up to
Nepal and outside thereof. Rs. 5,00,000 or both. The Labour Court
can order the entity to provide such
bonded labour with remuneration,
allowance and other facilities, as well as
indemnity to the bonded labour with an
amount double such remuneration,
allowance and other facilities. The Court
can order to provide the travel expenses
that is incurred in the travel.
 2. If the entity does not make the
health and safety arrangements
knowingly and recklessly as a
result the worker dies or suffers
physical or mental injury.
b) The provisions relating to the customs duty exemptions applied to the different industries
have been provided under Section 23 of the Act. These exemptions can be listed as
shown under-
Industry
Industries not having bonded
warehouse or passbook facility
Industries not having Bonded
Warehouse approval exporting
goods through existing banking
channel or Letter of Credit or
selling such goods in domestic
market in convertible currency
Laboratories for Quality
Assurance
All Industries
2. Imprisonment up to 2 years, except
otherwise provided. Such person
suffering the injury should be
compensated reasonably.
Benefits
The Government of Nepal may
refund the amount of Duty
Drawback in export of goods after
determining the aggregate of costs
incurred in import (Samadar) as
prescribed in Nepal Gazette.
Raw materials or auxiliary raw
materials as well as packaging
materials that are not produced in
Nepal can be imported by furnishing
the required guarantees under
prescribed conditions and
procedures.
However, in case of packaging
materials not produced in Nepal, a
recommendation is required from
IRD to enjoy stated benefit.
The Custom Duty levied in the
import of such raw materials,
auxiliary raw materials and
packaging materials required for
production shall be one level below
the existing Custom Duty rate in
import of finished goods using such
materials.
Custom Duty is levied at the
minimum rate for the import of
machinery and scientific devices
that are being imported to ensure
quality as well as such machinery
and equipment imported by
industries for research and
development.
Custom duty is levied at the
minimum rate on import of
 machinery, transformers, generators
having a capacity of 10 Kilowatt and
other industrial devices imported by
an industry for commercial purpose.

5. Answer the following questions: (2×5=10 marks)

a) Mr. 'X' and 'Y', were elected from amongst the Chartered Accountant and the Registered
Auditors as a council member for three years respectively. Among them Mr. 'X' died due
to Novel Corona (Covid-19) after his two and one month service as a member. Mr.' Y'
resigned from the member after his one and half years service as a member due to his
non-possession of qualifications required to be a Council Member. Suggest the Institute
of Chartered Accountants of Nepal (ICAN) that how the vacancy of membership
including those is fulfilled? What is the validity of the acts and actions of the Council that
Mr.'Y' has been involved'? Write your answer in accordance with the relevant provision
of the Nepal Chartered Accountants Act, 2053.
b) A Council may be constituted to take up necessary actions required to attain objectives of
the Institute and to manage and supervise all activities of the Institute. State the
constitution of the Council and Circumstances the seat to remain vacant of the member of
the Council as prescribed by the Nepal Chartered Accountants Act, 2053.
Answer
a) Pursuant to Section 9 of the Nepal Chartered Accountants Act 2053, any post of the
Council member is deemed to be vacant due to:
 death, or
 resignation, or
 disqualification to continue as a member of the Institute.
Provision of the fulfillment of the remaining terms:
As per Section 9:
1. The Council shall, if any seat of any Council member elected pursuant to clause (a) or
(b) of sub-section (3) of Section 7 turns vacant due to death or resignation or
disqualification to continue as a member of the Institute pursuant to the other
provisions of this Act, designate any member as Council member for the remaining
term of office, provided the remaining period of such vacated office is of less than a
year; and if such term is of more than a year, the vacancy shall be filled through
election.
2. A seat, falling vacant owing to death or resignation of any Council member,
nominated pursuant to clause (c) of sub-section (3) of Section 7, shall be fulfilled, for
the remaining term of office, as per the procedure set forth in the same section.
Fulfillment of the vacancy of remaining post: Section 9
As mentioned above a membership is vacant due to the death of Mr. 'X'. The Council
may fulfill the vacant post fulfilling the legal requirements as provided in the Section 9 of
the Act. Less than one year is remained in case of Mr. 'X'. If any post of the membership
is vacant less than a year then the Council may designate any Chartered Accountant
member of the Council.
 For fulfillment of the member that is vacant due to the resignation of the Mr. 'Y', Council
may determine the remaining terms of the member so fulfilled. Referring to the case of
the question, more than a year has been remained in the tenure of the member. Therefore,
the Council may elect a member amongst the registered auditors for the remaining tenure
pursuant to the section 9.
Validity of the actions: Section 12
Section 12 has expressly provided that any action undertaken according to decision of the
Council, where any seat of any Council member has remained vacant or a person, without
possessing qualifications required to be a Council member, has been elected or
nominated as the Council member, shall not be invalid merely on the ground thereof.
As having the reference of the provision that the action taken by the Council, in presence
of the member Mr. 'Y' though his qualification is questioned, is valid.
b) The Constitution of the Council has been prescribed in Section 7 of the Nepal Chartered
Accountants Act 2053 as follows:
(1) A Council, to take up necessary actions required to attain objectives of the Institute in
a well-planned manner and to manage and supervise all activities of the Institute,
shall be constituted.
(2) The Council shall, except as otherwise provided elsewhere in this Act, exercise all
authority and discharge all duties conferred on and assigned to the Institute subject to
the Act and Regulations and Bye-laws framed under this Act.
(3) The Council shall consist of the following Council members:-
(a) Ten persons elected by and amongst Chartered Accountant members -Member
(b) Four persons elected by and amongst Registered Auditors -Member
(c) Three persons nominated by the Government of Nepal, upon the recommendation
of the Auditor General, from amongst the persons well experienced in the field of
accounting profession. -Member
(4) The Council members shall elect a President and a Vice-President from the Fellow
Chartered Accountants (F.C.A.) Council members referred to in clause (a) of sub-
section (3).
(5) The term of office of the President and the Vice-President shall be of one year and
upon expiry of the term of office, they shall be eligible to be elected for one more
term.
(6) The term of office of the Council members shall be of three years and upon expiry of
the term of office, they shall be eligible to be re-elected or re-nominated.
(7) The procedures relating to the election of Council members shall be as prescribed.
(8) The functions, duties and authorities of the President and the Vice-President shall be
as prescribed.
Circumstances Wherein the Council Member's Seat to Remain Vacant: Section 8
(1) The seat of a Council member shall be deemed to remain vacant, if:
(a) He ceases to be a member of the Institute, provided that this provision shall not be
applicable to the nominated Council member.
(b) The Council accepts his resignation,
 (c) He, without giving a notice with reason, absconds himself from three consecutive
meetings of the Council,
(d) His term of office expires,
(e) His non-compliance with the code of conduct referred to in Section 34 is proved,
(f) He dies.
(2) Pursuant to clause (b) of sub-section (1), the President shall tender resignation to the
Vice-President and other Council members to the President.
6. Answer the following questions: (5 × 4=20 marks)
a) State any four differences between promissory note and bill of exchange.
b) State the legal character of the Social Welfare Council under the Social Welfare Act,
2049.
c) Mr. Noon has been working in the Seti Fiber Pvt. Ltd. The company has set out him in
reserve for seven months. In this reserve period, he was involved in the riots, and
company declared him breaching the discipline. Discuss about the eligibility for bonus,
its restriction grounds and his eligibility for bonus.
d) Mention the provision related to transfer of ownership of goods as specified in the
National Civil Code, 2074.
e) State the nature of the Cottage Industries with respect to Industrial Enterprises Act,
2076.
Answer
a)
Basis of Difference Promissory Note Bill of Exchange
1. Number of parties There are two parties. There are three parties.
2. Maker and payee Maker and payee cannot be the Maker/ drawer and payee
same and single person. can be the same and
single person.
3. Promise and order There is a promise to pay a There is an order to pay a
sum of money. sum of money.
4. Acceptance Acceptance is not required as it Acceptance is necessary
is signed by the person liable by the drawee before it
to pay on it. can be presented for
payment.
5. Nature of liability Liability of the maker of a Liability of the maker of a
promissory note is primary. bill is secondary.

b) The Act under Section 5 has provided the provision for the establishment of Social
Welfare to make effective co-ordination, co-operation, mobilization and promotion of the
social organizations and institutions, in order to run social activities in more organized
way. Section 6 of the Act has listed the legal character of the council as under-
 The Council shall be an autonomous corporate body having perpetual succession.
 The Council shall have a separate seal of its own to carry out its all activities.
 The Council may have power to acquire, enjoy, sell or otherwise dispose of movable
and immovable property, as a person.
 The Council may sue on its behalf or be sued against it as a person.
  The Council shall have a separate flag of its own.
c) Eligibility for Bonus:
As per Section 6 of Bonus Act, 2030:
(1) An employee who has worked for the half period to be worked in a fiscal year, shall
be entitled to obtain bonus under this Act.
Provided that, no employee shall be entitled to obtain bonus who has worked casually
or in a shift basis.
(2) For the purpose of Sub-section (1), the following periods shall also be computed as a
period where an employee has worked.
(a) A period kept on reserve under any contract or under the Labour Act.
(b) A period under which an employee is on any leave with salary.
(c) A period of disablement caused by accident arising in course of business of the
enterprise.
Restriction to Obtain Bonus:
Section 8 of the Bonus Act provides that an employee shall not be entitled to obtain
bonus under this Act, if he/she is punished or dismissed from service for committing any
act as follows:
Provided that, this Section shall not be deemed to be prejudiced to obtain in the case of
the bonus for a period before committing such a punishable act.
(a) Theft of the property of the enterprise or any damage to such property.
(b) Illegal strike or abetment to other for such strike,
(c) Riots or breaching of discipline.
In accordance with the above provision of the Bonus Act, 2030, Mr. Noon has been kept
in reserve for seven month and he has engaged in riots and declared breaching the
discipline. Therefore, he has not eligible for bonus.
d) The transfer of ownership of goods has been mentioned in Section 554 of National Civil
Code, 2074.
As per Section 554 of the National Civil Code, 2074,
(1) If contract made for sale of any certain or specified goods, transfer of such goods will
be done as mentioned in the contract, if not mentioned in the contract, such goods
will be transferred as per the conditions of contract, code of conduct of the parties and
as per intension expressed by the parties from the related circumstances.
(2) Apart from somethings else has provided in the contract, if contract has done for any
specified goods which can be transferred instantly then after such contract or after the
payment for such goods, it is supposed to have an intention of the parties for transfer.
(3) If any contract has been done for any specified goods that can be handed over
immediately, then it is not supposed to be transferred unless an information has been
provided to the seller at an appropriate time bound regarding measurement, weight,
inspection or any other activities performed by the buyer.
(4) Unless something else specified in the contract, the place where goods sold or sales
take place is considered to be a place for transfer of the goods.
 (5) Unless somethings else specified in the contract, it is assumed that right or ownership
of the buyer on the goods is established once the goods has been transferred to the
buyer.
e) As per section 17(1) (kha) of the Industrial Enterprises Act, 2076; those industries
fulfilling the following conditions are taken as Cottage Industries:
1. Industries based upon traditional skill and technology,
2. Industries utilizing specific skill or local raw materials and resources, and labor
intensive and related with local technology, arts and culture,
3. Industries utilizing engine, equipment or machine having capacity of electrical power
consumption up to 10 Kilowatt.
4. Industries mentioned in Annexure – 2 of the Act.
7. Answer the following questions: (2×5=10 marks)
a) State briefly the functions of World Trade Organization (WTO).
b) State the objectives of Nepal Rastra Bank.
Answer
a) The function of WTO can be listed as follows:
1) Administering WTO agreements:
The WTO agreements cover goods, services and intellectual property. They include
individual countries' commitments to lower customs tariffs and other trade barriers
and to open and keep open services markets. It has different mechanism like General
Council which works on behalf of ministerial conference. It meets to Dispute
Settlement Body and Trade Policy Review Body to oversee procedures for settling
disputes members and to analyze members' trade policies. There are Goods Council,
Services Council and TRIPS Council with various committees to works on related
sectors. The ministerial conference can take decisions on all matters under any of the
multilateral trade agreements.
2) Forum for trade negotiation:
It provides forum for trade negotiation. For this purpose, its different mechanism
activate to work for their responsible sectors. Issues on trade related aspects could be
submitted through committees and councils for negotiations. It has priority to settle
dispute not to judgement.
3) Handling trade disputes:
It has dispute settlement mechanism like Dispute Settlement panels and Dispute
Settlement Body (General Council in another guise). It is under the General Council
and finally ministerial conference. The Dispute Settlement Body has the sole
authority to establish “panels” of experts to consider the case, and to accept or reject
the panels’ findings or the results of an appeal. It monitors the implementation of the
rulings and recommendations, and has the power to authorize retaliation when a
country does not comply with a ruling.
4) Monitoring national trade policies:
It monitors national trade policies through General Council Meetings as Trade Policy
Review Body. Finally, the general council submits the report before conference.
5) Technical assistance and training for developing countries:
 It provides technical assistance and training as it thinks fit. It has technical assistance
missions that work in this field.
6) Cooperation with other international organizations:
It cooperates with and assists to IMF and IBRD for establishing coherence in
universal economic policy determination. The WTO maintains extensive institutional
relations with many of its sister organizations, participates as observer in their work
and has established several partnerships to help improve the trading opportunities and
capacities of developing and least-developed countries. Examples of such
partnerships are the Enhanced Integrated Framework (EIF), the Standards and Trade
Development Facility (STDF) and the Aid for Trade Initiative. WTO cooperation
with other international organizations continues to evolve and is more than ever a
function of the need for increased global coordination and better governance.
b) Objectives of Nepal Rastra Bank
Section 4 of Nepal Rastra Bank Act, 2058 has prescribed the objectives of the Nepal
Rastra bank as follows:
(a) To formulate necessary monetary and foreign exchange policies in order to maintain
the stability of price and balance of payment for sustainable development of
economy, and manage it;
(b) To promote stability and liquidity required in banking and financial sector;
(c) To develop a secure, healthy and efficient system of payment;
(d) To regulate, inspect, supervise and monitor the banking and financial system; and
(e) To promote entire banking and financial system of the Nepal and to enhance its public
credibility.
The Bank shall, without any prejudice to the objectives referred to above, extend
cooperation in the implementation of the economic policies of Government of Nepal.