Prometrics Finance

Accountants History

2020-09-27T18:31:00.001+05:30

Early in his career, Hyder Ali retained as one of his chief financial assistants a Brahmin named Khande Rao. Hyder Ali, who was illiterate, was reported to be blessed with a prodigious memory and numerical acumen.

Hyder Ali could rival or outperform expert accountants with his great arithmetic skills and worked to develop a system, with Rao, that included checks and balances so sophisticated that all manner of income, including plunder of physical goods of all types, could be accounted for with little possibility for fraud or embezzlement.

This financial management may have played a role in Hyder Ali's rise in power.

types of graphs in excel

2020-07-13T21:29:00.001+05:30

column line	cluster
histogram perito	frequency
Line charts & trendline	time series

Statistics

2020-07-12T20:20:00.000+05:30

Regulation of Foreign Company under CA 2013

2020-06-25T23:20:00.003+05:30

1 Companies Incorporated Outside India (A Brief Overview) by A. K
Companies Incorporated Outside India (A Brief Overview) by A. K. KUCHHAL Managing Partner IndiaCorp LawCorporate Consultants and AdvocatesIn Association with M/s A. K. Kuchhal & Co.Company Secretaries

2 Foreign CompaniesCompanies Act, 2013

3 PROVISIONS UNDER WHICH FOREIGN COMPANY IS COVERED UNDER CA 2013
ActRulesChapter 22 (Companies Incorporated outside India) of Companies Act, 2013Companies (Registration of Foreign Companies) Rules, 2014

4 Foreign Company -What it is ?

5 Definition - [sec-2(42)]Foreign Company means any Company or body corporate incorporated outside India which-Has a place of business in India whether by itself or through an agent, physically or through electronic mode; andConducts any business activity in India in any other manner.

6 ENTRY GATEWAYS TO FOREIGN COMPANIES
As an incorporated entityJoint VentureWholly Owned SubsidiaryAs an unincorporated entityBranch OfficeProject OfficeLiaison Office

7 BRANCH OfficeForeign companies engaged in manufacturing and trading activities abroad are allowed to set up Branch Offices in India for specified purposesBranch Offices are established with the approval of RBIPermitted to remit outside India profit of the branchNo approval required from RBI for a company to establish a branch/unit in SEZs to undertake manufacturing and service activities

8 BRANCH Office – Permitted Activities
1. Export/import of goods. 2. Rendering professional or consultancy services. 3. Carrying out research work, in areas in which the parent company is engaged. 4. Promoting technical or financial collaborations between Indian companies and parent or overseas group company. 5. Representing the parent company in India and acting as buying/ selling agent in India. 6. Rendering services in Information Technology and development of software in India. 7. Rendering technical support to the products supplied by parent/group companies. 8. Foreign airline/shipping company.

9 BRANCH Office – Permitted Activities
Retail trading activities of any nature is not allowed for a Branch Office in India.A Branch Office is not allowed to carry out manufacturing or processing activities in India, directly or indirectly.

10 LIAISON OFFICELiaison office not permitted to undertake any commercial/trading/industrial activityThe role of the liaison office is limited to collecting information about possible market opportunities and providing information about the company and its products to prospective Indian customers and acting as a communication channel between the parent company and Indian Companies.It can promote export/import from/to India and also facilitate technical/financial collaboration between parent company/Group companies and companies in IndiaApproval for establishing a liaison office in India is granted by RBI

11 LIAISON OFFICE – Permitted Activities
Representing in India the parent company / group companies.Promoting export / import from / to India.Promoting technical/ financial collaborations between parent / group companies and companies in India.Acting as a communication channel between the parent company and Indian companies.- Will not undertake any business activities, Sale/ Purchase.

12 PROJECT OFFICEGeneral permission to foreign entities to establish Project / Site Offices (temporary in nature)Such offices cannot undertake or carry on any activity other than the activity relating and incidental to execution of the projectGeneral permission also for remitting surplus funds after completion of project on production of the following documents:Certified copy of the final audited project accounts;A Chartered Accountant’s certificate showing the manner of arriving at the remittable surplus;

13 Income tax assessment order or other documentary evidence showing payment of income-tax and other applicable taxes, or a chartered accountant’s certificate stating that sufficient funds have been set aside for meeting all Indian Tax liabilities;Auditor’s certificate stating that no statutory liabilities in respect of the Project are outstanding.

14 PROCEDURE FOR SETTING UP OF BO/ LO
As per Regulation 3, a Branch / Project/ Liaison Office can be set up only with the prior permission of RBI.RBI Route - Where principal business of the foreign entity falls per cent FDI Sectoral Cap.Government Route - Where principal business of the foreign entity falls - where 100 per cent FDI is not permissible under the automatic route.Applications from entities falling under this category and those from NGO’s / NPO’s / Government Bodies / Departments are considered by the Reserve Bank in consultation with the Ministry of Finance, Government of India.

15 PROCEDURE FOR SETTING UP OF BO/ LO
The application has to be made in form FNC - 1 and submitted along with the following documents:Copies of last Five years (For LO 3 Years) audited Balance Sheet, Profit & Loss Account of the PC.Profit Track RecordFor BO — Five YearsFor LO — Three Years

16 PROCEDURE FOR SETTING UP OF BO/ LO……………. Cotd..
Net Worth- For BO — not less than USD 100,000 or its equivalent.- For LO — not less than USD 50,000 or its equivalent.Translated English version of the Company’s Certificate of Incorporation/Registration, Memorandum & Articles of AssociationEnglish version of the Copy of the Board resolution for opening office in India.

17 All the documents are required in duplicate.
Reasons for opening office in India like business transacted, details of customers, vendors etc.Company’s profile with brief history, product details, group companies etc.Special Power of Attorney in favor of a local representative duly notarizedFor obtaining approval from RBI and to register with the Registrar of Companies, the following documents are required for opening a branch in India:A copy of Board Resolution for opening Branches in India. (Notary and consulate by Indian embassy)A copy of Certificate of incorporation of your company abroadA copy of Memorandum of the company.List of Directors/Key Persons of the companyList of Branches in other countries if anyBrief profile of the business activityProposed address of the branch in India.All the documents are required in duplicate.

18 They do not need to maintain any reserves in India.
Certain specific information that needs to be furnished in this application include –Global history of operations of the company.Proposal of activities and interest areas in India.Reasons for opening office.For exchange issues.The branch offices set up by the foreign companies in India are allowed to carry out the payment issues outside India under the regulations of RBI.They do not need to maintain any reserves in India.In cases of possessing income or profits in India, the branch offices can send back profits directly to their Head Office, which is located in the foreign country, and they do not need any prior approval from RBI for that.

19 APPLICATION OF ACT TO FOREIGN COMPANIES - Sec 379
Whereas equal to or more than 50% of the paid up share capital (whether equity or preference) of a Foreign Company is held whether singly or in the aggregate by :-one or more citizens of India-one or more companies or bodies corporate incorporated in IndiaSuch foreign company shall need to comply with the provisions of chapter 22 (Companies Incorporated outside India) of Companies Act, 2013In addition of above also need to comply with the provisions of Companies Act, 2013 as may be prescribed with regard to business carried on by it in India as if it were incorporated in India

20 STATUTORY COMPLIANCES FOR FOREIGN COMPANIES

21 COMPLIANCES AT THE TIME OF REGISTRATION
Foreign company shall deliver following docs within 30 days from the date of establishment of place of business in India for registration with Registrar in form FC-1*:-*Such application shall be supported with an attested copy of approval from Reserve Bank of India (RBI) under FEMA Act or Regulations and also from other regulators, if required.certified copy of the charter, statutes/ memorandum / articles of the company in English language.The full address of the registered or principal office.A detailed list of the directors and secretary of the company.the name(s) and address (s) of one or more persons resident in India – who will act as Authorized Representative of the Company.

22 COMPLIANCES AT THE TIME OF REGISTRATION ……...(CONT.)
the full address of the office in Indiaparticulars of opening and closing of a place of business in India on earlier occasion or occasions;declaration that none of the directors of the company or the authorized representative in India has ever been convicted or debarred from formation of companies and management in India or abroad; andAny other information as may be prescribedNote :- Any document which any foreign company is required to deliver to Registrar shall be delivered to Registrar having jurisdiction over New Delhi and fees for registration of documents is Rs. 6000

23 COMPLIANCES – post registration
The accounts of foreign companies are to be delivered to the Registrar within 6 months from the end of the financial year and it shall includes:Balance Sheet and Profit & Loss Account as per Schedule III of the ActDocuments to be annexed as per the provisions of Chapter IX (Accounts of Companies) of the Act, 2013Statement of related party transactionsStatement of repatriation of profit

24 COMPLIANCES – post registration ….(cont.)
Statement of transfer of fund between place of business of foreign company in India and other related party of foreign company outside IndiaList of places of business in form FC-3 established by the foreign company in India as on the date of balance sheet

25 COMPLIANCES – post registration ….(cont.)
If any alteration made or occurs in documents that were delivered to Registrar the company shall file a return of such alteration with Registrar in form FC-2 within 30 days of such change or alteration.Documents required to be filed with Registrar in case of alterations in documents (sec- 380)

26 COMPLIANCES – post registration ….(cont.)
Display of name of foreign company [sec-382]Every Foreign Company shall-Exhibit the name of the Company and the Country in which it is incorporated, in letters easily legible in English characters, and also in the characters of the language or one of the language in general use in the locality in which the office or place is situate;Outside of every office or place where it carries on business in India,All business letters, bill-heads, notices, and official publications of the Company.

27 COMPLIANCES – post registration ….(cont.)
Display of name of foreign company [sec-382]If the liability of members of the Company is limited, cause notice of that fact-To be stated in every such prospectus issued, in all business letters, bill heads, official publications, in legible English characters;To be exhibited on the outside of every office or place where it carries on business in India.

28 COMPLIANCES – post registration ….(cont.)
Filing of Annual Return [sec-384]Every Foreign Company shall prepare and file an Annual Return in form FC-4 to registrar within 60 days from the last day of its financial year.Following provisions of the Act are applicable to foreign companies also: [sec-384]•Section 71 regarding issue of debentures;•Section 128 regarding books of accounts to be kept by the company; •Chapter VI regarding registration of charges created by the company;•Chapter XI regarding inspection and investigation with regards to the business carried on in India

29 STATUTORY COMPLIANCES FOR FOREIGN COMPANIES ….(cont.)
If any foreign company cease to have a place of business in India it shall require to file a notice of the fact to Registrar andAs from the date on which notice is so given the obligation of the company to deliver documents with Registrar shall ceaseDocuments required to be filed with Registrar when foreign company ceases to have a place of business in India (Rule -8)

30 Service on Foreign Company – Sec 383
Any document required to be served on a Foreign Company shall be deemed to be sufficiently served, if addressed to any person whose name and address have been delivered to registrar under Section 380 and left at, or sent by post to, the address which has been so delivered to the Registrar or by electronic mode.

31 Companies Failure to comply with provisions of this chapter not to affect validity of contracts – Sec 393Any Failure by a company to comply with the provisions of this chapter shall not affect the validity of any contract, dealing or transaction entered into by the Company or its liability to be sued in respect thereofBut the Company shall not be entitled to bring any suit, claim any set-off, make any counter- claim or institute any legal proceeding in respect of any such contract, dealing or transaction, until the company has complied with the provisions of this Act applicable to it.Plus : Applicable provisions wrt Penalties and Prosecutions

32 Compliance issues for Indian companies incorporated abroad
The new Companies Act has widened the regulations for foreign companies controlled by Indian corporate, putting the latter under increased pressure of compliance…..Foreign companies / companies incorporated outside India had always had some provisions of the Companies Act, 1956 (Old Act) being applicable to them under part XI of the Old Act.Such foreign companies which would have established a place of business in India before or after the commencement of the Old Act had to comply with some of the provisions of Old Act which included submitting with the registrar charter documents of the place of business in India, its address, details of directors etc for registration, accounts of the Indian entity, details of charges made on property in India and so on.

33 Changed position under Act, 2013
The new Act, 2013, expanded its scope of such foreign companies and has increased the compliance requirements as well.Chapter XXII of the New Act, Section 379 onwards provides for provisions of the Act as applicable to such foreign companies in which Indian individuals or body corporates jointly/ severally hold not less than 50% of the paid-up share capital either in the form of equity or preference and have a place of business in India.At first blush the provisions of the Old Act and the New Act seem similar, but on a little careful reading one would understand the change in the scope of coverage of such foreign companies.

34 Changed position under Act, 2013
Sec 379 – Application of Act to Foreign CompaniesSec 2 (42) – Foreign CompanyRule 2 (1) (c) – Electronic ModeA joint reading of these sections brings to the fore that earlier only if the foreign companies owned by Indians had a physical presence in India, the provisions of the chapter were to apply. But now ???

35 impact of the change under Act, 2013 ?
With the New Act, the need for physical presence has been done away with, as entities with no physical presence yet having any virtual presence would also now come under the net.

36 Compliances to be made by such companies
Under the New Act apart from the compliances under the Old Act now the foreign companies will also have to comply with theProvisions of Section 71 as applicable to debenture issuances.Annual returns with the Registrar in India u/s 92 of the New Act.Also the Old Act required the foreign companies to provide for details of charges created on property in India, under the New Act any charge created by such foreign company will have to be registered with the Registrar of Companies.

37 Compliances to be made by such companies…………..
File a statement with regard torelated party transactions,repatriation of profits,transfer of funds including dividends from the place of business in India and any other related party of the foreign company outside India.The foreign company will also have to get its accounts audited by a practicing Chartered Accountant in India and the chapter of audit and auditors including rotation of auditors will apply.

38 PENAL PROVISIONSIf a foreign company contravenes any of the provisions of Chapter 22 then it shall be :-punishable with fine of not be less than Rs. 1 lakh but which may extend to Rs. 3 lakh andin the case of a continuing offence additional fee of Rs. 50,000 till the default continuespunishable with imprisonment for a term which may extend to 6 months or with fine which shall not be less than Rs. 25,000 but which may extend to Rs. 5 lakh, or with bothEvery officer of the foreign company who is in default shall be

Economics CFA L2

2020-05-09T20:01:00.002+05:30

Forward contract is - locking of Spot rate plus interest rate differential

FRA CFA Level 2

2020-05-03T23:38:00.000+05:30

Inventories
Long Lived Assets
Intercorporate Investments
Employee Compensation
Multinational Operations

Equity - CFA Level 2

2020-05-03T23:25:00.002+05:30

Quant CFA level 2

2020-05-03T23:18:00.001+05:30

Regression Analysis

Least Square Regression Analysis

The aim of a least squares regression is to minimize the distance between the regression line and error terms (e).

5 The Constant

6 The Slope Coefficient (β)

7 T-testWhen conducting a t-test, we can use either a 1 or 2 tailed test, depending on the hypothesisWe usually use a 2 tailed test, in this case our alternative hypothesis is that our variable does not equal 0. In a one tailed test we would stipulate whether it was greater than or less than 0.Thus the critical value for a 2 tailed test at the 5% level of significance is the same as the critical value for a 1 tailed test at the 2.5% level of significance.

8 T-testWe can also test whether our coefficient equals 1.

9 Gauss-Markov Assumptions
There are 4 assumptions relating to the error term.The first is that the expected value of the error term is zeroThe second is that the error terms are not correlatedThe third is that the error term has a constant varianceThe fourth is that the error term and explanatory variable are not correlated.

10 Gauss-Markov assumptions
More formally we can write them as:

11 Additional Assumptions
There are a number of additional assumptions such as normality of the error term and n (number of observations) exceeding k (the number of parameters).If these assumptions hold, we say the estimator is BLUE

12 BLUE Best or minimum variance Linear or straight line
Unbiased or the estimator is accurate on average over a large number of samples.Estimator

13 Consequences of BLUEIf the estimator is not BLUE, there are serious implications for the regression, in particular we can not rely on the t-tests.In this case we need to find a remedy for the problem.

14 AutocorrelationAutocorrelation occurs when the second Gauss-Markov assumption fails.It is often caused by an omitted variableIn the presence of autocorrelation the estimator is not longer Best, although it is still unbiased. Therefore the estimator is not BLUE.

15 Durbin-Watson Test This tests for 1st order autocorrelation only
In this case the autocorrelation follows the first-order autoregressive process

16 Durbin-Watson Test- decision framework
dl du 2 44-dub-dlZone of indecision

17 DW StatisticThe DW test statistic lies between 0 and 4, if it lies below the dl point, we have positive autocorrelation. If it lies between du and 4-du, we have no autocorrelation and if above 4-dl we have negative autocorrelation.The dl and du value can be found in the DW d-statistic tables (at the back of most text books)

18 Lagrange Multiplier (LM) Statistic
Tests for higher order autocorrelationThe test involves estimating the model and obtaining the error term .Then run a second regression of the error term on lags of itself and the explanatory variable: (the number of lags depends on the order of the autocorrelation, i.e. second order)

19 LM TestThe test statistic is the number of observations multiplied by the R-squared statistic.It follows a chi-squared distribution, the degrees of freedom are equal to the order of autocorrelation tested for (2 in this case)The null hypothesis is no autocorrelation, if the test statistic exceeds the critical value, reject the null and therefore we have autocorrelation.

20 Remedies for Autocorrelation
There are 2 main remedies:The Cochrane-Orcutt iterative processAn unrestricted version of the above process

21 HeteroskedasticityThis occurs when the variance of the error term is not constantAgain the estimator is not BLUE, although it is still unbisased it is no longer BestIt often occurs when the values of the variables vary substantially in different observations, i.e. GDP in Cuba and the USA.

22 ConclusionThe residual or error term is the difference between the fitted value and actual value of the dependent variable.There are 4 Gauss-Markov assumptions, which must be satisfied if the estimator is to be BLUEAutocorrelation is a serious problem and needs to be remediedThe DW statistic can be used to test for the presence of 1st order autocorrelation, the LM statistic for higher order autocorrelation.

Multiple Regression

1 Multiple Regression

2 IntroductionDescribe some of the differences between the multiple regression and bi-variate regressionAssess the importance of the R-squared statistic.Examine the F-test and distributionShow how we can use the F-test to determine joint significance.

3 Multiple RegressionIn general the regression estimates are more reliable if:i) n is large (large dataset)ii) The sample variance of the explanatory variable is high.iii) the variance of the error term is smalliv) The less closely related are the explanatory variables.

4 Multiple RegressionThe constant and parameters are derived in the same way as with the bi-variate model. It involves minimising the sum of the error terms. The equation for the slope parameters (α) contains an expression for the covariance between the explanatory variables.When a new variable is added it affects the coefficients of the existing variables

5 Regression

6 RegressionIn the previous slide, a unit rise in x produces 0.4 of a unit rise in y, with z held constant.Interpretation of the t-statistics remains the same, i.e /0.4=1 (critical value is 2.02), so we fail to reject the null and x is not significant.The R-squared statistic indicates 30% of the variance of y is explainedDW statistic indicates we are not sure if there is autocorrelation, as the DW statistic lies in the zone of indecision (Dl=1.43, Du=1.62)

7 Adjusted R-squared Statistic
This statistic is used in a multiple regression analysis, because it does not automatically rise when an extra explanatory variable is added.Its value depends on the number of explanatory variablesIt is usually written as (R-bar squared):

8 Adjusted R-squaredIn generally rises when the t-statistic of an extra variable exceeds unity (1),so does not necessarily imply the extra variable is significant.It has the following formula (n-number of observations, k-number of parameters):

9 The F-test The F-test is an analysis of the variance of a regression
It can be used to test for the significance of a group of variables or for a restrictionIt has a different distribution to the t-test, but can be used to test at different levels of significanceWhen determining the F-statistic we need to collect either the residual sum of squares (RSS) or the R-squared statisticThe formula for the F-test of a group of variables can be expressed in terms of either the residual sum of squares (RSS) or explained sum of squares (ESS)

10 F-test of explanatory power
This is the F-test for the goodness of fit of a regression and in effect tests for the joint significance of the explanatory variables.It is based on the R-squared statisticIt is routinely produced by most computer software packagesIt follows the F-distribution, which is quite different to the t-test

11 F-test formulaThe formula for the F-test of the goodness of fit is:

12 F-distributionTo find the critical value of the F-distribution, in general you need to know the number of parameters and the degrees of freedomThe number of parameters is then read across the top of the table, the d of f. from the side. Where these two values intersect, we find the critical value.

13 F-test critical value

14 F-distribution Both go up to infinity
If we wanted to find the critical value for F(3,4), it would be 6.6The first value (3) is often termed the numerator, whilst the second (4) the denominator.It is often written as:

15 F-statisticWhen testing for the significance of the goodness of fit, our null hypothesis is that the explanatory variables jointly equal 0.If our F-statistic is below the critical value we fail to reject the null and therefore we say the goodness of fit is not significant.

16 Joint SignificanceThe F-test is useful for testing a number of hypotheses and is often used to test for the joint significance of a group of variablesIn this type of test, we often refer to ‘testing a restriction’This restriction is that a group of explanatory variables are jointly equal to 0

17 F-test for joint significance
The formula for this test can be viewed as:

18 F-testsThe test for joint significance has its own formula, which takes the following form:

19 Joint Significance of a group of variables
To carry out this test you need to conduct two separate OLS regression, one with all the explanatory variables in (unrestricted equation), the other with the variables whose joint significance is being tested, removed.Then collect the RSS from both equations.Put the values in the formulaFind the critical value and compare with the test statistic. The null hypothesis is that the variables jointly equal 0.

20 Joint SignificanceIf we have a 3 explanatory variable model and wish to test for the joint significance of 2 of the variables (x and z), we need to run the following restricted and unrestricted models:

21 Example of the F-test for joint significance
Given the following model, we wish to test the joint significance of w and z. Having estimated them, we collect their respective RSSs (n=60).

22 Joint significance

23 Joint significanceHaving obtained the RSSs, we need to input the values into the earlier formula (slide 18):

24 Joint significanceAs the F statistic is greater than the critical value (28>3.15), we reject the null hypothesis and conclude that the variables w and z are jointly significant and should remain in the model.

25 ConclusionMultiple regression analysis is similar to bi-variate analysis, however correlation between the x variables needs to be taken into accountThe adjusted R-squared statistic tends to be used in this caseThe F-test is used to test for joint explanatory power of the whole regression or a sub-set of the variablesWe often use the F-test when testing for things like seasonal effects in the data.

TIme Series

1 Time-series analysis

2 Basic time seriesData on the outcome of a variable or variables in different time periods are known as time-series data.Time-series data are prevalent in finance and can be particularly challenging because they are likely to violate the underlying assumptions of linear regression.Residual errors are correlated instead of being uncorrelated, leading to inconsistent coefficient estimates.The mean and/or variance of the explanatory variables may change over time, leading to invalid regression results.Example of a basic time series known as an autoregressive process:This slide introduces time series as a concept, and the basic autoregressive process makes it easy to see where the correlation of the error terms can be a problem. If we are using time-series observations on a given variable, x, then observations in two or more periods are likely to be related to observations from the prior period purely by construction (they may not be so but are likely to be so) as seen in the autoregressive process in the slide.𝑥 𝑡 = 𝑏 0 + 𝑏 1 𝑥 𝑡−1 + ε 𝑡

3 Trend analysisThe most basic form of time-series analysis examines trends that are sustained movements in the variable of interest in a specific direction.Trend analysis often takes one of two forms:Linear trend analysis, in which the dependent variable changes at a constant rate over time.Ex: if b0=3 and b1=2.3, then the predicted value of y after three periods is2. Log-linear trend analysis, in which the dependent variable changes at an exponential rate over time or constant growth at a particular rateEx: if b0=2.8 and b1=1.4, then the predicted value of y after three periods is𝑦 𝑡 = 𝑏 0 + 𝑏 1 𝑡+ ε 𝑡LOS: Compute the predicted trend value for a time series modeled as either a linear trend or log-linear trend, given the estimated trend coefficients.Pages 377–381Recall that the inverse process of ln() is raising e to the () power. Because it is the slope of the trend line, b1 is referred to as the trend coefficient. Log-linear growth should be familiar already, it is the foundation for continuous compounding from earlier chapters.ln ( 𝑦 𝑡 ) = 𝑏 0 + 𝑏 1 𝑡+ ε 𝑡

4 Linear or log-linear?How do we decide between linear and log-linear trend models?Is the estimated relationship persistently above or below the trend line?Are the error terms correlated?We can diagnose these by examining plots of the trend line, the observed data, and the residuals over time.LOS: Discuss the factors affecting the choice between a linear trend and a log-linear trend model for a time series incorporating a trend.Pages 381–384The first plot has a linear trend, and the second, an exponential trend. Point out the curvature in the second plot and the fact that the error terms frequently lie above or below the line for consistent periods of time—both signs that your trend (here shown, again, as a linear trend) isn’t the right model.

5 Trend models and serial correlation
Are the results of our trend model estimation valid?Trend models, by their very construction, are likely to exhibit serial correlation.In the presence of serial correlation, our linear regression estimates are inconsistent and potentially invalid.Use the Durbin–Watson test to establish whether there is serial correlation in the estimated model.If so, it may be necessary to transform our data or use other estimation techniques.LOS: Discuss the factors affecting the choice between a linear trend and a log-linear trend model for a time series incorporating a trend.Page 385

6 Autoregressive time-series models
Abbreviated as AR(p) models, the p indicates how many lagged values of the dependent variable are used and is known as the “order” of the model.Current values are a function of prior values.The “order” of the AR(p) models is the number of prior values used in the model.AR(1) 𝑥 𝑡 = 𝑏 0 + 𝑏 1 𝑥 𝑡−1 + ε 𝑡AR(2) 𝑥 𝑡 = 𝑏 0 + 𝑏 1 𝑥 𝑡−1 + 𝑏 2 𝑥 𝑡−2 + ε 𝑡We can use longer interval differences to account for seasonality.LOS: Discuss the structure of an autoregressive model of order p.Page 386Notice the notation of x and y, which we have used for independent and dependent, are now gone because the distinction is a moot point. In a time-series model, we are only focused on the underlying statistical process.𝑥 𝑡 = 𝑏 0 + 𝑏 1 𝑥 𝑡−1 + 𝑏 2 𝑥 𝑡−4 + ε 𝑡

7 Covariance-stationary series
A time series is said to be covariance stationary if its mean and variance do not change over time.Time series that are not covariance stationary have linear regression estimates that are invalid and have no economic meaning.For a time series to be stationary,The expected value of the series must be finite and constant across time.The variance of the series must be finite and constant across time.The covariance of the time series with itself must be finite and constant for all intervals over all periods across time.Visually, we can inspect the time-series model for a mean and variance that appear stationary as an initial screen for likely stationarity.LOS: Explain the requirements for a time series to be covariance stationary, differentiate between stationary and nonstationary time series by visual inspection of time-series plots, and explain the impact of nonstationarity in the context of autoregressive time-series models.Pages 386–387“Weakly stationary” is a synonym for covariance stationary. Most financial time series are unlikely to be stationary, and visual stationarity of the mean and variance do NOT guarantee covariance stationarity.

8 Residual autocorrelation
We can use the autocorrelation of the residuals from our estimated time-series model to assess model fit.The autocorrelation between one time-series observation and another one at distance k in time is known as the kth order autocorrelation.A correctly specified autoregressive model will have residual autocorrelations that do not differ significantly from zero.Testing procedure:Estimate the AR model and calculate the error terms (residuals).Estimate the autocorrelations for the error terms (residuals).Test to see whether the autocorrelations are statistically different from zero.This is a t-test, which, if the null hypothesis of no correlation is rejected, mandates modification of the model or data.A failure to reject the null indicates that the model is statistically valid.LOS: Explain how autocorrelations of the residuals from an autoregressive model can be used to test whether the model fits the time series.Pages 387–389The Durbin–Watson test is invalid for AR(p) series; hence, we need another test to assess the presence of serial correlation and model fit.

9 Mean reversion For an AR(1)  the values will Stay constant when
A series is mean reverting if its values tend to fall when they are above the mean and rise when they are below the mean.For an AR(1) the values willStay constant whenRise whenFall when𝑥 𝑡 = 𝑏 0 + 𝑏 1 𝑥 𝑡−1 + ε 𝑡LOS: Explain mean reversion and determine whether particular time series are mean reverting.Page 391Mean reversion is extremely common, particularly for a long-run macro-economic series. However, it is often misapplied. It is worth noting that all covariance-stationary time series will have finite mean-reverting levels.

10 Multiperiod forecasts
We can use the chain rule of forecasting to gain multiperiod forecasts with an AR(p) model.Consider an AR(1) model wherein the estimated 𝑏 0 =3 and 𝑏 1 =2.3.What is the one-step ahead forecast of x1 when x0 = 3?What is the two-step ahead forecast of x2?This is the chain rule of forecasting. We are using the forecast for x1 to then forecast for x2.LOS: Compute the one- and two-period-ahead forecasts of a time series using an autoregressive model.Pages 391–394We can do this indefinitely into the future, but recall that each forecast includes the parameter estimation error. So the forecast for x2 includes the error in the forecast of x1, which itself includes the parameter estimation error plus any other model or data error, and then x2 also “re-includes” the parameter estimation error again because we are using the same parameters we used to get x1 to get x2. It should be easy to see that as we move progressively further into the future, the error of the forecast gets larger as a multiplicative function of the parameter estimation errors. A confidence interval on the forecast must then get progressively larger, quickly making forecasts further out less reliable even if the underlying parameters don’t change over time.

11 In- and out-of-sample forecasting
In-sample forecast errors are simply the residuals from a fitted time series, whereas out-of-sample forecast errors are the difference between predicted values from outside the sample period and the actual values once realized.An in-sample forecast uses the fitted model to obtain predicted values within the time period used to estimate model parameters.An out-of-sample forecast uses the estimated model parameters to forecast values outside of the time period covered by the sample.In both cases, the forecast error is the difference between the forecast and the realized value of the variable.Ideally, we will select models based on out-of-sample forecasting error.Model accuracy is generally assessed by using the root mean squared error criterion.Calculate all the errors, square them, calculate the average, and then take the square root of that average.The model with the lowest mean-squared error is judged the most accurate.LOS: Explain the difference between in-sample forecasts and out-of-sample forecasts, and contrast the forecasting accuracy of different time-series models based on the root mean squared error criterion.Pages 394–395Refer to the prior forecasting example. Both of the forecasts in the prior example would be out-of-sample forecasts, and the forecast errors (uncalculated) would be the difference between the forecasts and the actual values.

12 Coefficient instability
Time-series coefficient estimates can be unstable across time. Accordingly, sample period selection becomes critical to estimating valuable models.This instability can also affect model estimation because changes in the underlying time-series process can mean that different time-series models work better over different time periods.Ex. A basic AR(1) model may work well in one period, but an AR(2) may fit better in another period. If we combine the two periods, we are likely to select either the AR(1) or AR(2) model for the combined time span, thereby poorly fitting at least one time span of data.There are no clear-cut rules for selecting an appropriate time frame for a particular analysis.Rely on basic sampling theory  Don’t use two clearly different populations.Rely on basic time-series properties  Don’t mix stationary and nonstationary series or series with different mean or variance terms.The longer the sample period  The more likely the samples come from different populations.LOS: Discuss the instability of coefficients of time-series models.Page 397Selection of appropriate sample periods for time-series estimation is notoriously difficult, but users should follow, at a minimum, basic statistical common sense. For example, don’t mix regimes (different populations).

13 Random walks 𝑥 𝑡 = 𝑥 𝑡−1 + ε 𝑡
An AR(1) series where b0=0 and b1=1 is known as a random walk because the best prediction for tomorrow is the value today plus a random error term.Very prevalent in financeUndefined mean-reversion level because b0/(1 – b1) = 0/0  undefinedNot covariance stationaryThere is another common variation, known as a random walk with a drift, where b0 is a constant number that is not zero.LOS: Define a random walk.Page 400Burton Malkiel’s, A Random Walk Down Wall Street, is a reference to this type of series. Demonstrate the first bullet point by pointing out that E(error) = zero; hence, xt = 0 +(1)xt = xt-1 .

14 Unit rootsFor an AR(1) time series to be covariance stationary, the absolute value of the b1 coefficient must be less than 1.When the absolute value of b1 is 1, the time series is said to have a unit root.Because a random walk is defined as having b1 = 1, all random walks have a unit root.We cannot estimate a linear regression and then test for b1 = 1 because the estimation itself is invalid.Instead, we conduct a Dickey–Fuller test, which is available in most common statistics packages, to determine if we have a unit root.LOS: Explain the relationship between a random walk and unit roots, and discuss the unit root test for nonstationarity.Page 404If the presenter has sufficient time, covering the derivation of the Dickey–Fuller test is a nice transition to first differencing on the next slide

15 Unit roots and estimation
We cannot use linear regression to estimate parameters for a series containing a unit root without transforming the data.“Differencing” is the process we use to transform data with a unit root; it is performed by subtracting one value in the time series from another.Differencing also has an “order,” which is the number of time units the two differenced variables lie apart in time.For a random walk, we first-difference the time series.𝑦 𝑡 = 𝑥 𝑡 − 𝑥 𝑡−1 = ε 𝑡A properly differenced random walk time series will be covariance stationary with a mean-reversion level of zero.LOS: Discuss how a time series with a unit root can be transformed so that it can be analyzed with an autoregressive model.Pages 400–403The differencing process can be used with all time series that exhibit nonstationarity, including those in which the nonstationarity occurs at greater than order 1, although most financial time series will become nonstationary with first-order differencing. A first-differenced variable is often denoted d(1).

16 Smoothing modelsThese models remove short-term fluctuations by smoothing out a time series.An n-period moving average is calculated asConsider the returns on a given bond index as x0 = 0.12 , x-1 = 0.14, x-2 = 0.13, x-3 = 0.2.What is the three-period moving-average return for one period ago (t = –1)?What is the three-period moving-average return for this period (t = 0)?LOS: Compute an n-period moving average of a time series.Pages 407–409One weakness of these models is that they will always “turn late” when the actual data turns. Accordingly, there is a class of n-period average models that may perform better.It is worth noting that this is an equally weighted n-period moving average. We can also use unequally weighted n-period moving averages, in which the weight of each past observation is different and all weights sum to 1. By doing so, we can, for example, place more weight on more recent observations (i.e., wt = 0.5,wt-1 = 0.3, wt-2 = 0.2).We often use root mean squared error to assess the quality of an n-period moving-average model.

17 Moving-average time-series models
Called MA(q) modelsNot commonly usedHave order just like AR modelsMA(1)  𝑥 𝑡 = ε 𝑡 +θ ε 𝑡−1Not the same as smoothing models on the prior slide.LOS: Discuss the structure of a moving-average model of order q.Pages 407–409Moving-average models are much less common in financial applications than AR models except when we use more advanced models that include both MA and AR terms.

18 Determining the order of a MA(q)
For a MA(q) model, the first q autocorrelations will be significantly different from 0, and all autocorrelations beyond that will be equal to 0.For a MA(1) such as, 𝑥 𝑡 = ε 𝑡 +θ ε 𝑡−1 , we would expect all autocorrelations beyond the first to be statistically zero.What is the likely MA order of this process?LagAutocorrelationt-Statistic11.4609–6.891221.43845.458931.45896.120440.9875–0.234550.03560.0132LOS: Determine the moving-average order of a time series from the autocorrelations of that series.Pages 409–411This is likely a MA(3) because the size of the autocorrelations and the statistical significance of the autocorrelations drop off rapidly after the third lag.

19 AR(p) vs. MA(q)To determine whether a time series is an AR(p) or a MA(q), examine the autocorrelations.The autocorrelations for an AR model will generally begin as large values and gradually decline.The autocorrelations for a MA model will drop dramatically after q lags are reached, identifying both the MA process and its order.LOS: Distinguish an autoregressive time series from a moving-average time series.Page 410Distinguishing between these time series is more of an art than a science, and has led to a great number of tests designed to assess the quality of the “fit” for time-series models. Such tests are beyond the scope of this book, but those interested are recommended to further research time-series models before moving much beyond a basic AR or MA process.

20 seasonalityTime series that show regular patterns of movement within a year across years.Seasonal lags are most often included as a lagged value one year before the prior value.We detect such patterns through the autocorrelations in the data.For quarterly data, the fourth autocorrelation will not be statistically zero if there is quarterly seasonality.For monthly, the 12th, and so on.To correct for seasonality, we can include an additional lagged term to capture the seasonality.For quarterly data, we would include a prior year quarterly seasonal lag asLOS: Discuss how to test and correct for seasonality in a time-series model.Pages 412–414Balance sheet and income statement data, in particular, will often have seasonality related to the underlying nature of the business (the fourth-quarter retail bump in sales, third-quarter wholesale bump in sales, etc.).𝑥 𝑡 = 𝑏 0 + 𝑏 1 𝑥 𝑡−1 + 𝑏 2 𝑥 𝑡−4 + ε 𝑡

21 Forecasting with seasonal lags
Recall our AR(1) model, wherein the estimated 𝑏 0 =3 and 𝑏 1 =2.3. We have determined that the model, which uses monthly data, has a one-year seasonal component with 𝑏 12 =0.4.What is the one-step ahead forecast of x1 when x0 = 3 and x-12 = 1.1?LOS: Compute a forecast using an autoregressive model with a seasonal lag.Pages 412–414

22 Autoregressive Moving-Average models
It is possible for a time series to have both AR and MA processes in it, leading to a class of models known as ARMA (p,q) models (and beyond).𝑥 𝑡+1 = 𝑏 0 + 𝑏 1 𝑥 𝑡 …+ ε 𝑡 +θ ε 𝑡−1Although it is an attractive proposition, using an ARMA (p,q) model gains the flexibility of both AR and MA models, but comes at the cost of increased likelihood of parameter instability.Selecting the correct order (p and q) is more art than science.ARMA models generally do not forecast well.LOS: Discuss the limitations of autoregressive moving-average models.Pages 416– 417

23 Autoregressive conditional heteroskedasticity
Heteroskedasticity is the dependence of the error term variance on the independent variable.When heteroskedasticity is present, the variance of the error terms will vary with a varying independent variable, thereby violating the underlying assumptions of linear regression.AR models with conditional heteroskedasticity are known as ARCH models.An AR(1) model with conditional heteroskedasticity is therefore, an ARCH(1) model.To test for ARCH(1) conditional heteroskedasticity:Regress the squared residuals from each period on the prior period squared residuals.Estimate: ε 𝑡 2 = 𝑎 0 + 𝑎 1 ε 𝑡−1 2 + ω 𝑡If the estimated slope coefficient, 𝑎 1 , is statistically different from zero, the series exhibits an ARCH(1) effect.LOS: Discuss how to test for autoregressive conditional heteroskedasticity.Pages 417–418

24 Predicting varianceIf a series is an ARCH(1) process, then we can use the parameter estimates from our test for conditional heteroskedasticity to predict next period variance as σ 𝑡 2 = 𝑎 0 + 𝑎 1 ε 𝑡−1 2LOS: Discuss how to predict the variance of a time series using an autoregressive conditional heteroskedasticity model.Pages 417–420

25 CointegrationTwo time series are cointegrated when they have a financial or economic relationship that prevents them from diverging without bound in the long run.We will often formulate models that include more than one time series.If any time series in a regression contains a unit root, the ordinary least squares estimates may be invalid.If both time series have a unit root and they are cointegrated, the error term will be stationary and we can proceed with caution to estimate the relationship via ordinary least squares and conduct valid hypothesis tests.The caution arises because the regression coefficients represent the long- term relationship between the variables and may not be useful for short- term forecasts.We can test for cointegration using either an Engle–Granger or Dickey– Fuller test.LOS: Discuss the effects of cointegration on regression results.Pages 420–424Cointegration is a “good thing” from the standpoint of our ability to obtain valid estimates, but it is a “bad thing” from the standpoint of our ability to interpret those estimates as being economically meaningful and/or to exploit them.

26 Selecting an appropriate time-series model
Focus On: Regression OutputYou are modeling the rate of growth in the money supply of a developing country using 100 years of annual data. You have estimated an AR(1) model and used the residuals to form the table to the right.Is the AR(1) model sufficient?If not, how would you modify it?LagAutocorrelationt-Statistic10.06991.301920.10070.198530.09641.637040.05568.055350.03770.11056–0.0933–0.9724LOS: Select and justify the choice of a particular time-series model from a group of models, given regression output and other information for those models.Pages throughout the chapterThis topic is huge in time series. As the careful reader will note, we generally do not select an appropriate time-series model from the regression output per se, but from the autocorrelations and their statistics.This model looks like it needs a four-year “seasonal” term. It might be worth asking what could explain a four-year seasonal component to the money supply. One possible answer is a political business cycle in which politicians run up the money supply to get themselves reelected. The likelihood of this explanation could be examined by seeing if the country has a four-year term cycle.

27 SummaryMost financial data are sampled over time and, accordingly, can be modeled using a special class of estimations known as time-series models.Time-series models in which the value in a given period depends on values in prior periods, are known as autoregressive, or AR models.Time-series models in which the value in a given period depends on the error values from prior periods, are known as moving average, or MA models.Models whose error variance changes as a function of the independent variable are known as conditional heteroskedastic models.For an AR dependency, these are known as ARCH models.

Ultra Vires vs Doctrine of Constructive Notice Vs Doctrine of Indoor management( Royal British Bank Vs Turquand )

2016-01-23T18:41:00.000+05:30

Business Laws, Ethics and Communicaton

2016-01-10T10:33:00.000+05:30

QUESTION NO. 1 :

( a ) Àmit` stands surety for `Bikram` for any amount which `Chander` may lend to `Bikram` from time to time during the next three months subject to a maximum amount of Rs. 1,00,000 ( one lakh only ). One month later Àmit` revokes the surety, when `Chander` had already lent to `Bikram` Rs. 10,000 ( ten thousand ). Referring to the provisions of the Indian Contract Act, 1872. Decide : ( i ) Whether Àmit` is discharged from all the liabilities to `Chander` for any subsequesnt loan given to `Bikram` ? ( ii ) What would be your answer in case `Bikram` makes a default in paying back to `Chander` the already borrowed amount of Rs. 10,000 ?

( b ) MNO Private Limited, a subsidiary of PQR Limited decides to give a loan of Rs. 4,00,000 to the HR ( Human Resourse ) Manager, who is not a Key Managerial Personnel ( KMP ) of MNO Private Limited drawing salary of Rs. 30,000 per month, to buy 500 partly paid-up Equity Shares of Rs. 1000 each in MNO Private Limited. Examine the validity of company`s decision under the provisions of the Companies Act, 2013.

( c ) State with reason whether the following statements are correct or incorrect: ( i ) Business ethics helps to promote public reputation. ( ii ) In the long run, those business entities which responds to society needs favorably will survive.

( d ) State reasons for selecting oral mode of communication instead of written mode of communication .

The problem as asked in this question is based on the provisions of the Indian Contract Act, 1872, as contained in Section 130 relating to revocation of a continuing guarantee as to future transactions which can be done mainly in the following two ways :

1. BY NOTICE : A continuing guarantee may, at any time , be revoked by the surety as to future transactions , by notice to the creditor.

2. BY DEATH OF THE SURETY : The death of the surety operates , in the absence of any contract to the contrary, as a revocation of continuing guarantee so far as regards future transactions ( Section 131 ) .

So far as the transactions before revocation are concerned, the liability of the surety remains.

Thus, applying the above provisions of the said Act to the instant case: ( i ) Amit is discharged from all the liabilities to Chander for any subsequent loan. ( ii ) In the second case, the answer would differ i.e. Amit is liable to Chander for Rs. 10,000 on default of Bikram since the loan was taken before the notice of revocation was given to Chander.

ANSWER TO QUESTION NO. 1 ( b ) : RESTRICTIONS ON PURCHASE BY COMPANY OR GIVING LOANS FOR PURCHASE OF ITS SHARES ( SECTIONS 2 ( 51 ) AND 67 ( 3 ) OF THE COMPANIES ACT, 2013 ) ( BUSINESS LAWS ) ( 5 MARKS ) : According to Section 67 ( 3 ) of the Companies Act, 2013 a company is allowed to give a loan to its employees subject to the following limitations :-

( a ) The employee must not be a key managerial personnel ; ( b ) The amount of such loan shall not exceed an amount equal to six months` salary of the employee ; ( c ) The shares to be subscribed must be fully paid shares. Section 2 ( 51 ) of the Companies Act, 2013 defines the “ Key Managerial Personnel “ ( KMP ) whereby a KMP includes the chief executive, company secretary, whole time director, chief financial officer or any other officer who may be prescribed. In the instant case the HR Manager is not a Key Managerial Personnel of the MNO Private Limited. He is drawing salary of Rs. 30,000 per month and the loan taken to buy 500 partly paid up equity shares of Rs. 1000 each in MNO Private Limited. Keeping in mind the above mentioned provisions of the Companies Act, 2013 the decision of the company ( MNO Private Limited ) is not valid due to two reasons : 1. The amount of loan being more than six months` salary of the HR Manager, which should have restricted the loan to 1.8 Lakh ; 2. The shares subscribed are partly paid shares whereas the benefit is available only for subscribing fully paid shares.

---------------------------------------------------------------------------------------------------------------------------------------5 MARKS : BREAK-UP : PROVISIONS – 3 MARKS ; ANSWER – 2 MARKS. TO BE AWARDED TOGETHER. NOTE : MARKS NOT TO BE DEDUCTED ON THE GROUND THAT THE CANDIDATE DID NOT CITE THE RELEVANT SECTIONS OF THE COMPANIES ACT, 2013. IMPORTANT NOTE : THIS QUESTION, IN TERMS OF SECTION 67 ( 3 ) ( C ) CONTAINS SEVERAL ISSUES TO BE EXAMINED UNDER VARIOUS PROVISIONS OF THE COMPANIES ACT, 2013 AND HENCE TOO COMLICATED AND CRITICAL FOR THE CANDIDATES , KEEPING IN MIND THE LEVEL OF KNOWLEDGE. THE QUESTION MIGHT HAVE CONFUSED THE CANDIDATES. IN VIEW OF THIS, GENERAL ANSWER GIVEN BY THE CANDIDATES MAY BE GIVE DUE WEIGHTAGE. NOTE : DEFINITION OF “KMP” NEED NOT BE GIVEN BY THE CANDIDATES.

ANSWER TO QUESTION NO. 1 ( C ) ( i ) : STATEMENT ; CORRECT / INCORRECT ( ETHICS ) ( 3 MARKS ) : CORRECT : Ethics helps to promote a strong public image. An organization that pays attention to its ethics can portray a strong and positive image to the public. People see such organizations as valuing people more than profit and striving to operate with the integrity and honour.

---------------------------------------------------------------------------------------------------------------------------------------3 MARKS : BREAK-UP : CORRECT ANSWER – 1 MARK ; REASON – 2 MARKS. TO BE AWARDED TOGETHER.

ANSWER TO QUESTION NO. 1 ( c ) ( ii ) : STATEMENT : CORRECT / INCORRECT ( ETHICS ) ( 2 MARKS ) : CORRECT : Society gives business its license to exist and this can be amended or revoked at any time if it fails to live up to society`s expectations. Therefore, if a business intends to retain its existing role and power, it must respond to society`s needs constructively.

---------------------------------------------------------------------------------------------------------------------------------------2 MARKS : BREAK-UP : CORRECT ANSWER – 1 MARK ; REASON – 1 MARK. TO BE AWARDED TOGETHER. NOTE : TOTAL OF MARKS AWARDED IN PART ( c ) ( i ) AND IN PART ( c ) ( ii ) BE GIVEN AT THE END AND BE POSTED ON THE COVER PAGE OF THE ANSWER-BOOK. NOTE : ANSWER GIVEN IN GENERAL MAY ALSO BE GIVEN DUE CREDIT WHILE AWARDING MARKS.

ANSWER TO QUESTION NO. 1 ( d ) : REASONS FOR SELECTING ORAL MODE OF COMMUNICATION ( COMMUNICATION ) ( 5 MARKS ) : Oral communication is a face to face communication with others. Oral communication is characterized by seven Cs – Candidness, Clarity, Completeness, Conciseness, Concreteness, Correctness and Courtesy. These act as principles for selecting the mode of communication. In addition to the above seven principle, oral communication has its own benefits as under : * More personal and informal; * Make immediate impact ; * Provides opportunity for interaction and feed back ; * Helps us to correct ourselves ; * Better for conveying feelings and emotions ; * More effective because one can understand the message better by observing facial expressions, eye contact, tone of voice , gestures, postures etc. of the sender. It is said that it does not matter what you say, what matters is how you say it. Your way of saying includes your choice of words, your confidence and sincerity.

---------------------------------------------------------------------------------------------------------------------------------------5 MARKS : TO BE AWARDED ON THE BASIS OF OVERALL PERFORMANCE .

QUESTION NO. 2 : ( a ) ( i ) State with reasons whether the following persons are entitled to receive bonus under the Payment of Bonus Act, 1965: ( I ) A retrenched employee. ( II ) A dismissed employee reinstated with back wages.

( ii ) Mr. X was an employee of Green Sugars Ltd. The whole of undertaking of Green Sugars Ltd. was taken over by a new company named Modern Sugars Ltd. The services of Mr. X remained continuous in the new company. After serving for one year Mr. X met with an accident and became permanently disabled. Mr. X applied to the new company for the payment of Gratuity. The new company refused to pay Gratuity on the ground that Mr. X had served only for a year in the new company. Examine the validity of the refusal of the company in the light of the provisions of the Payment of Gratuity Act, 1972.

( b ) Explain the pragmatic reasons for maintaining ethical behavior in marketing through marketing executives.

( c ) Write short notes on the following : ( I ) Proxemics ( II ) Haptics .

ANSWER TO QUESTION NO, 2 ( a ) ( i ) : ENTITLEMENT TO BONUS ( SECTIONS 2 ( 13 ) AND SECTION 9 OF THE PAYMENT OF BONUS ACT, 1965 ) ( BUSINESS LAWS ) ( 4 MARKS ) : ( I ) RETRENCHED EMPLOYEE : A retrenched employee is eligible to get bonus provided that he has worked for minimum qualifying period of 30 days in the accounting year and who has drawn a salary of less than Rs. 10,000 per month in the year. ( East Asiatic Company (P) Ltd. v. Industrial Tribunal ). ( II ) DISMISSED EMPLOYEE RE-INSTATED WITH BACK WAGES : According to Section 9 of the Payment of Bonus Act, 1965 an employee who is dismissed from service for fraud or riotous or violent behavior on the premises of the establishment or who is guilty of theft, misappropriation or sabotage of the property of any establishment , is disqualified from receiving bonus for the accounting year. A dismissed employee who has been reinstated with back wages is clearly not guilty of the above crimes nor has been dismissed. Hence, he is entitled to bonus. ( Gammon India Ltd. v. Niranjan Das )

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS : BREAK-UP : PART (I) – 2 MARKS ; PART (II) – 2 MARKS. TO BE AWARDED TOGETHER. NOTE : MARKS NOT TO BE DEDUCTED ON THE GROUND THAT THE CANDIDATE DID NOT REFER TO CASE LAWS OR DID NOT CITE THE RELEVANT SECTION/S OF THE PAYMENT OF BONUS ACT, 1965.

ANSWER TO QUESTION NO. 2 ( a ) ( ii ) : ENTITLEMENT TO GRATUITY ( SECTION – 4 OF THE PAYMENT OF GRATUITY ACT, 1972 ) ( BUSINESS LAWS ) ( 4 MARKS ) : According to Section 4 ( 1 ) of the Payment of Gratuity Act, 1972 gratuity shall be payable to an employee on the termination of his employment after he has rendered continuous service for not less than five years on his superannuation, or on his retirement or resignation or on his death or disablement due to accident or disease. The proviso to sub-section ( 1 ) of the said section states that the condition of completion of five years of continuous service is not essential in case of the termination of employment of any employee due to death or disablement for the purpose of this section. Disablement has been explained as such disablement which incapacitates an employee for the work which he was capable of performing before the accident or disease resulting in such disablement. Further, by the change of ownership , the relationship of employer and employee subsists and the new employer can not escape from the liability of payment of gratuity to the employee; it was held in the case of Pattathurila K. Damodaran v. M. Kassim Kanju. The given problem fulfils all the above requirements as stated. Therefore, Mr. X is entitled to recover gratuity after becoming permanently disabled and continuous service of five years is not required in this case. Hence, the company can not refuse to pay gratuity on the ground that he has served only for one year.

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS : BREAK-UP : PROVISIONS – 3 MARKS ; ANSWER – 1 MARK. TO BE AWARDED TOGETHER. NOTE : MARKS NOT TO BE DEDUCTED ON THE GROUND THAT THE CANDIDATE DID NOT REFER TO CASE LAW OR DID NOT CITE THE RELEVANT SECTION OF THE PAYMENT OF GRATUITY ACT, 1972. NOTE : TOTAL OF MARKS AWARDED IN QUESTION NO. 2 ( a ) ( i ) AND 2 ( a ) ( ii ) BE GIVEN AT THE END AND BE POSTED ON THE COVER PAGE OF THE ANSWER-BOOK.

ANSWER TO QUESTION NO. 2 ( b ) : PRAGMATIC REASONS FOR MAINTAINING ETHICAL BEHAVIOUR ( ETHICS ) ( 4 MARKS ) : Marketing executives should practice ethical behavior because it is morally correct. To maintain ethical behavior in marketing , the following positive reasons may be useful to the marketing executives : 1. TO REVERSE DECLINING PUBLIC CONFIDENCE IN MARKETING : Sometimes misleading package labels, false claim in advertisement, phony list prices, infringement of trademarks pervert the market trends and such behavior damages the marketers` reputation. To reverse this situation, business leaders must demonstrate convincingly that they are aware of their ethical responsibility and will fulfil it. Companies must set high ethical standards and enforce them. Moreover, it is in management`s interest to be concerned with the well being of consumers, since they are the lifeblood of a business. 2. TO AVOID INCREASE IN GOVERNMENT REGULATION : Business apathy, resistance or token responses to unethical behavior increase the probability of more governmental regulation. The governmental limitations may also result from management`s failure to live up to its ethical responsibilities. Moreover, once the government control is introduced , it is rarely removed. 3. TO RETAIN POWER GRANTED BY SOCIETY : marketing executives wield a great deal of social power as they influence market and speak out on economic issues. However, there is a responsibility tied to that power. If marketers do not use their power in a socially acceptable manner, that power will be lost in the long run. 4. TO PROTECT THE IMAGE OF THE ORGANISATION : Buyers often form an impression of an entire organization based on their contact with one person. That person represents the marketing function. Sometimes a single sales clerk may pervert the market opinion in relation to that company which he represents. Therefore, ethical behavior in marketing may be strengthened only through the behavior of the marketing executives.

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS : TO BE AWARDED ON THE BASIS OF OVERALL PERFORMANCE. NOTE : BRIEF BUT CORRECT ANSWER BE GIVEN FULL CREDIT. GENERAL ANSWER GIVEN BY THE CANDIDATES BE GIVEN CREDIT WHILE AWARDING MARKS.

ANSWER TO QUESTION NO. 2 ( c ) : SHORT NOTES ( COMMUNICATION ) ( 4 MARKS ) :

( I ) PROXEMICS : It is a form of non-verbal communication which refers to the space that exists between us when we talk or relate to each other as well the way we organize space around us. We can also call it “space language” as the following four space zones indicate the type of communication and the relationship of the source and receiver : INTIMATE – Physical contact to 18 inches. PERSONAL – 18 inches to 4 feet. SOCIAL – 4 to 12 feet. PUBLIC – 12 feet to as far as we can see or hear.

( II ) HAPTICS : It is a communication through touch. How we use touch sends important messages about us. It reveals our perceptions of status, our attitudes and even our needs. The amount of touching we do or find acceptable is atleast in part culturally conditioned.

QUESTION NO. 3 : ( a ) ( i ) Under what circumstances the original contract need not be performed as stated under section 62 to 67 of the Indian Contract Act, 1872 ?

( ii ) Mr. U offered to sell his house to Mr. X for Rs. 15,00,000. Mr. X accepted the offer by post. On the very next day Mr. X sent a telegram revoking the acceptance which reached Mr. U before the later of acceptance. Is the revocation of acceptance valid ? Would it make any difference if both the letter of acceptance and the telegram of revocation of acceptance reach Mr. U at the same time ?

( b ) ( i ) Explain any four sources of ethical standard. ( ii ) List out the characteristics of group personality under Group Dynamics.

ANSWER TO QUESTION NO. 3 ( a ) ( i ) : CONTRACTS WHICH NEED NOT BE PERFORMED ( SECTIONS 62 TO 67 OF THE INDIAN CONTRACT ACT, 1872 ) ( BUSINESS LAWS ) ( 4 MARKS ) : A contract would not require performance under circumstances spelt out in Sections 62 to 67 of the Indian Contract Act, 1872. Section 62 of the said Act provides for “novation”, “rescission” and “ alteration” and Section 63 of the said Act provides for “remission”. Thus, the circumstances are as follows : ( 1 ) NOVATION : Novation means substitution. Where a given contract is substituted by a new contract, it is novation. The old contract, on novation ceases. It need not be performed. Novation can take place with mutual consent . However, novation can take place by substitution of new contract between the same parties or between different parties. Novation results in discharge of old contract. ( 2 ) RESCISSION : In case of rescission , the old contract is cancelled and no new contract comes in its place. A contract is also discharged by rescission. Sometimes, parties may enter into an agreement to rescind the previous contract. Sometimes, the contract is rescinded by implication or by non-performance for a long time without each other complaining about it. ( 3 ) ALTERATION : Where the contract is altered, the original contract is rescinded. Hence , the old one need not be performed whereas the new one has to be performed. Alteration involves both rescission and novation. The line of difference between alteration and novation is very thin. While there can be very minor alterations, there can not be unilateral material alteration to a contract. If it is done , it will be void. ( 4 ) REMISSION : Section 63 of the Indian Contract Act, 1872 provides for remission which means waiver. The said section lays down that “every promisee may dispense with or remit wholly or in part, the performance of the promise made to him or extend the time for such performance or may accept instead of it any satisfaction which it thinks fit”. Thus the promisee can waive either in full or in part the obligation of the promisor or extend the time for performance.

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS : TO BE AWARDED ON THE BASIS OF OVERALL PERFORMANCE. NOTE : BRIEF ANSWER CORRECTLY COVERING ALL POINTS BE GIVEN FULL CREDIT. NOTE : MARKS NOT TO BE DEDUCTED ON THE GROUND THAT THE CANDIDATED DID NOT CITE THE RELEVANT SECTIONS OF THE INDIAN CONTRACT ACT, 1872.

ANSWER TO QUESTION NO. 3 ( a ) ( ii ) : COMMUNICATION AND REVOCATION OF ACCEPTANCE WHEN COMPLETE (SECTIONS 4 AND 5 OF THE INDIAN CONTRACT ACT, 1872 ) ( BUSINESS LAWS ) ( 4 MARKS ) : The problem is related with the communication and time of acceptance and its revocation. As per Section 4 of the Indian Contract Act, 1872 , the communication of an acceptance is complete as against the acceptor when it comes to the knowledge of the proposer. Whereas Section 5 of the said Act lays down that an acceptance may be revoked at any time before the communication of the acceptance is complete as against the acceptor, but not afterwards. Referring to the above provisions : ( i ) Yes , the revocation of acceptance by Mr. X ( the acceptor ) is valid. ( ii ) If Mr. U opens the telegram first ( and this would be normally so in case of a rational person ) and reads it , the acceptance stands revoked. If he opens the letter first and reads it , revocation of acceptance is not possible as the contract has already been concluded.

ALTERNATE ANSWER : As per Section 4 of the Indian Contract Act, 1872 which deals with the communication of revocation, the communication of revocation is complete as against the person who makes it , when it is put into a course of transmission to the person to whom it is made, so as to be put out of the power of the person who makes it. Accordingly, an acceptance is complete as against the offeror ( U ) as soon as the letter of acceptance is posted.

Revocation of acceptance given by X by telegram, a day after the letter of acceptance is posted , is not valid against U.

With respect to the second part of the question, where both the letter of acceptance and telegram of revocation of acceptance reach Mr. U at the same time , is not appropriate since an acceptance is complete as against the offeror as soon as the letter of acceptance is posted, no question of revocation of acceptance arises.

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS : BREAK-UP : PROVISIONS – 2 MARKS ; ANSWER – 2 MARKS . TO BE AWARDED TOGETHER . NOTE : MARKS NOT TO BE DEDUCTED ON THE GROUND THAT THE CANDIDATE DID NOT CITE THE RELEVANT SECTION/S OF THE IDIAN CONTRACT ACT, 1872. NOTE : TOTAL OF MARKS AWARDED IN 3 ( a ) ( i ) AND IN 3 ( a ) ( ii ) BE GIVEN AT THE END AND BE POSTED ON THE COVER-PAGE OF THE ANSWER-BOOK.

ANSWER TO QUESTION NO. 3 ( b ) ( i ) : FOUR SOURCES OF ETHICAL STANDARDS ( ETHICS ) ( 4 MARKS ) : 1* THE UTILITARIAN APPROACH : Some ethicists emphasize that the ethical action is the one that provides the most good or does the least harm, or to put it another way, produces the greatest balance of good over harm. The ethical corporate action, then, is the one that produces the greatest good and does the least harm for all who are affected – customers, employees, shareholders, the community and the environment. The utilitarian approach deals with consequences, it tries both to increase the good done and to reduce the harm done.

2* THE RIGHTS APPROACH ( THE DENTOLOGICAL APPROACH ) : Other philosophers and ethicists suggest that the ethical action is the one that best protects and respects the moral rights of those affected. This approach starts from the belief that humans have a dignity based on their human nature per se on their ability to choose freely what they do with their lives. On the basis of such dignity, they have a right to be treated as ends and not merely as means to other ends. The list of moral rights – including the rights to make one`s own choices about what kind of life to lead, to be told the truth , not to be injured , to a degree of privacy and so on – is widely debated; some now argue that non-humans have rights , too. Also, it is often said that rights imply duties – in particular, the duty to respect others` rights .

3* THE FAIRNESS OR JUSTICE APPROACH : Aristotle and other Greek philosophers have contributed the idea that all equals should be treated equally. Today we use this idea to say that ethical actions treat all human beings equally – or if unequally, then fairly based on some standard that is defensible. We pay people more based on their harder work or the greater amount that they contribute to an organization, and say that is fair. But there is a debate over CEO salaries that are hundreds of time larger than the pay of others, many ask whether the huge disparity is based on a defensible standard or whether it is the result of an imbalance of power and hence is unfair.

4* THE COMMON GOOD APPROACH : The Greek philosophers have also contributed the notion that life in community is a good in itself and our action should contribute to that life. This approach suggests that the interlocking relationships of society are the basis of ethical reasoning and that respect and compassion for all others – especially the vulnerable – are requirements of such reasoning. This approach also calls attention to the common conditions that are important to the welfare of everyone. This may be a system of Laws , effective police and fire departments, health care, a public educational system, or even public recreational areas.

5* THE VIRTUE APPROACH : A very ancient approach to ethics is that ethical actions ought to be consistent with certain ideal virtues that provide for the full development of our humanity. These virtues are dispositions and habits that enable us to act according to the highest potential of our character and on behalf of values like truth and beauty. Honesty, courage, compassion, generosity, tolerance, love, fidelity, integrity, fairness, self-control and prudence are all examples of virtues. Virtue ethics asks of any action, “What kind of person will I become if I do this ?” or “Is this action consistent with my acting at my best.

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS : TO BE AWARDED ON THE BASIS OF OVERALL PERFORMANCE. NOTE : THE CANDIDATES ARE REQUIRED TO STATE ANY FOUR SOURCES. GENERAL AND BRIEF ANSWER BE CONSIDERED FOR AWARDING MARKS.

ANSWER TO QUESTION NO. 3 ( b ) ( ii ) : CHARACTERISTICS OF GROUP PERSONALITY ( COMMUNICATION ) ( 4 MARKS ) : Following are the characteristics of group personality :

1* SPIRIT OF CONFORMITY : Individual members soon come to realize that in order to gain recognition, admiration and respect from others they have to achieve a spirit of conformity. Our beliefs, opinions and actions are influenced more by group opinion than by an individual`s opinion, even if it is an expert`s opinion.

2* RESPECT FOR GROUP VALUES : Any working group is likely to maintain certain values and ideals which make it different from others. In order to deal effectively with a group we must understand its value which will guide us in foreseeing its programmes and actions. 3* RESISTENCE TO CHANGE : It has been observed that a group generally does not take kindly to social change. On the other hand the group may bring about its own changes, whether by dictation of its leader or by consensus. The degree to which a group resists change serves as an important index of its personality. It helps us in dealing with it efficiently.

4* GROUP PREJUDICE : Just as hardly any individual is free from prejudice, groups have their own clearly evident prejudices. It is a different matter that the individual members may not admit their prejudiced attitude to other`s race, religion, nationality etc. But the fact is that the individual`s prejudices get further intensified while coming in contact with other members of the group holding similar prejudices.

5* COLLECTIVE POWER : It need not be said that groups are always more powerful than individuals, how so ever influential the individual may be. That is why individuals may find it difficult to speak out their minds in groups. There is always the risk of the one-against-many situation cropping up.

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS : TO BE AWARDED ON THE BASIS OF OVERALL PERFORMANCE. NOTE : THE CANDIDATES ARE REQUIRED TO STATE ANY FOUR CHARACTERSTICS. GENERAL AND BRIEF ANSWER BE CONSIDERED FOR AWARDING MARKS. NOTE: TOTAL OF MARKS AWARDED IN QUESTION NO. 3 ( b ) ( i ) AND 3 ( b ) ( ii ) BE GIVEN AT THE END AND BE POSTED ON THE COVER-PAGE OF THE ANSWER-BOOK.

QUESTION NO. 4 : ( a ) ( i ) Explain the concept of Deemed Prospectus under the Companies Act, 2013. Under what circumstances such prospectus need not be issued ?

( ii ) Diminution of share capital does not constitute a reduction within the meaning of Companies Act, 2013. State in what respects they differ from each other.

( b ) What is meant by ‘Critical thinking’ ? Suggest the measures to develop critical thinking.

( c ) Prepare a check list for organizing the messages in a business firm as a job of composing business messages being assigned to you.

ANSWER TO QUESTION NO. 4 ( a ) ( i ) : DEEMED PROSPECTUS ( SECTIONS 23 AND 25 OF THE COMPANIES ACT, 2013 ( BUSINESS LAWS ) ( 4 MARKS ) : Under Section 25 ( 1 ) of the Companies Act, 2013any document by which an offer for sale of any securities is made to the public and the company allots or agrees to allot securities in terms thereof, then such document shall for all purposes, be deemed to be a prospectus and all enactments and rules of law as to be the contents in a prospectus and as to liability in respect of mis-statement and omissions therein shall apply and shall have effect as they apply to a prospectus. From the above provision it is quite clear that the deemed prospectus is not intended to be a document with any exceptions or concessions vis a vis a prospectus. It only broadens the scope of a prospectus to include not only the formal document issued as a prospectus but also all nature of communication made by the company with the intention of selling an issue. It is designed to prevent companies from making misleading statements through various documents, notices or circulars while keeping the formal prospectus document clean. WHEN PROSPECTUS NEED NOT BE ISSUED : Under Section 23 of the Companies Act, 2013 the issue of prospectus is not necessary in the following circumstances : 1. Where a person is a bonafide invitee into an underwriting agreement with regard to any securities. 2. Where securities are offered through private placement by complying with the provisions related thereto in the Companies Act, 2013. 3. Where securities are issued through a rights issue or a bonus issue in accordance with the applicable provisions of the said Act and in case of listed companies also in accordance with the provisions of the rules and regulations made by SEBI in this behalf.

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS : BREAK-UP : CONCEPT – 2 MARKS ; NEED NOT BE ISSUED – 2 MARKS. TO BE AWARDED TOGETHER. NOTE : MARKS NOT TO BE DEDUCTED ON THE GROUND THAT THE CANDIDATE DID NOT CITE THE RELEVANT SECTIONS OF THE COMPANIES ACT, 2013. NOTE : THE STUDY MATERIAL ( PRACTICE MANUAL , PAGE 6.58 ) PROVIDES FOR NON-ISSUING OF “PROSPECTUS” AND NO EXPRESS OR SEPARATE PROVISION IN RELATION TO “DEEMED PROSPECTUS”.

ANSWER TO QUESTION NO. 4 ( a ) ( ii ) : DIMINITION OF SHARE CAPITAL AND REDUCTION OF SHARE CAPITAL ( SECTIONS 61,64,OF THE COMPANIES ACT, 2013 AND SECTIONS 101, 102 AND 103 OF THE COMPANIES ACT, 1956 ) ( BUSINESS LAWS ) ( 4 MARKS ) : The term “diminution” denotes a cancellation of that portion of issued capital which has not been subscribed for. Section 61 of the Companies Act, 2013 states the cancellation of “shares which at the date of passing of the resolution in that behalf have not been taken or agreed to be taken by any person”. Section 61 of the Companies Act, 2013 specifically states that the diminution does not constitute a reduction within the meaning of the Companies Act. The expression “diminution of share capital” and “reduction of share capital” differ from each other in the following respects:

( 1 ) Reduction may involve reduction inter alia of issued capital, whereas diminution may be in respect of authorized capital but not of issued capital. ( 2 ) If the Articles provides the procedure, diminution can be effected by an ordinary resolution, while reduction ( which also need authorization by Articles ), can be effected only by special resolution. ( 3 ) Diminution needs no confirmation by the Court ( Section 61 of the Companies Act, 2013 ), but reduction needs such confirmation ( Section 101 of the Companies Act, 1956 ). ( 4 ) Where a company is ordered to add to its name the words “and reduced” these words shall , until the expiry of the period specified in the order, be deemed to be part of the company`s name ( Section 102(3) of the Companies Act, 1956 ) but such a provision does not exist in the case of diminution of the share capital as envisaged in Section 61 of the Act of 2013. ( 5 ) In the case of diminution, notice is to be given to the Registrar within 30 days from the date of cancellation whereupon the Registrar shall record the notice and make the necessary alteration in the Memorandum or Articles or both ( Section 64 of the Companies Act, 2013 ), whereas in the case of reduction more detailed procedure regarding notice to the Registrar has been prescribed by Section 103 of the Companies Act, 1956, though there is no such time limit as aforesaid ( i.e.30 days ).

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS : TO BE AWARDED ON THE BASIS OF OVERALL PERFORMANCE. NOTE : ANY FOUR POINTS OF DIFFERENCE BE TREATED AS COMPLETE ANSWER. NOTE : MARKS NOT TO BE DEDUCTED ON THE GROUND THAT THE CANDIDATE DID NOT CITE THE RELEVENT SECTIONS OF THE COMPANIES ACT, 1956 OR THE COMPANIES ACT, 2013. NOTE : TOTAL OF MARKS AWARDED IN QUESTION NO. 4 (a) (i) AND 4 (a) (ii) BE GIVEN AT THE END AND BE POSTED ON THE COVER PAGE OF THE ANSWER-BOOK.

ANSWER TO QUESTION NO. 4 ( b ) : CRITICAL THINKING ( COMMUNICATION )( 4 MARKS ) : Critical thinking is the is the discipline of rigorously and skillfully using information, experience, observation and reasoning to guide one`s decision, actions and beliefs. Critical thinking refers to the act of question of every step of the thinking process e.g. Have you considered all the facts ? Have you tested your assumptions ? Is your reasoning sound ? Can you be sure that your judgment is unbiased ? Is your thinking process logical, rational and complete ?

DEVELOPING CRITICAL THINKING : To develop as a critical thinker, one must be motivated to develop the following attributes : 1. OPEN MIND : Readiness to accept and explore alternative approaches and ideas. 2. WELL INFORMED : Knowledge of the facts and what is happening on all fronts. 3. EXPERIMENTAL : Thinking through what if scenario to create probable options and then test the theories to determine what will work and what will not be acceptable. 4. CONTEXTUAL : Keeping in mind the appropriate context in the course of analysis. Apply factors of analysis that are relevant or appropriate. 5. RESERVED IN MAKING CONCLUSION : Knowledge of when a conclusion is a fact and when it is not only true conclusions supporting decisions.

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS : BREAK-UP : MEANING – 2 MARKS ; MEASURES TO DEVELOP – 2 MARKS. TO BE AWARDED TOGETHER. NOTE : CANDIDATES REQUIRED TO STATE ANY TWO MEASURES TO DEVELOP CRITICAL THINKING.

ANSWER TO QUESTION NO. 4 ( c ) : CHECK-LIST FOR ORGANISING THE MESSAGE ( COMMUNICATION ) ( 4 MARKS ):

1. RECOGNISE GOOD ORGANISATION : ( a ) Subject and purpose are clear. ( b ) Information is directly related to subject and purpose. ( c ) Ideas are grouped and presented logically. ( d ) All necessary information is included.

2. ACHIEVE GOOD ORGANIZATION THROUGH OUTLINING : ( a ) Decide what to say – i. Main idea , ii. Major points, iii. Evidence. ( b ) Organize the message to respond the audience is probable reaction – i. use the direct approach when audience will be neutral pleased, interested or eager. ii. Use the indecent approach when audience will be displeased, interested or unwilling.

3. CHOOSE THE APPROPRIATE ORGANIZATION PLAN : ( a ) Short messages - i. Direct request, ii. Routine, good news and good message, iii. Bad news message, iv. Persuasive message. ( b ) Longer message - i. Information pattern, ii. Analytical pattern.

QUESTION NO. 5 : ( a ) ( i ) Mr. A is the payee of an order cheque. Mr. B steals the cheque and forges Mr. a signatures and endorses the cheque in his own favour. Mr. B then further endorses the cheque to Mr. C, who takes the cheque in good faith and for valuable consideration. Examine the validity of the cheque as per the provisions of the Negotiable Instruments Act, 1881 and also state whether Mr. C can claim the privileges of a holder-in-Due course?

( ii ) Explain the concept and different forms of Restrictive and Qualified endorsement.

( b ) Examine the validity of the following referring to the provisions of the Companies Act, 2013 and /or Rules:

“The Articles of Association of X Ltd. contained provision that up to 4% of issue price of the shares may be

paid as underwriting commission to the underwriters. The Board of Directors of X Ltd. decided to pay 5%

underwriting commission.”

( c ) Discuss different environmental phenomena of ethical concern ?

---------------------------------------------------------------------------------------------------------------------------------------ANSWER TO QUESTION NO. 5 ( a ) ( i ) : TITLE TO FORGED CHEQUE (THE NEGOTIABLE INSTRUMENTS ACT, 1881 ) ( BUSINESS LAWS ) ( 4 MARKS ) : Forgery confers no title and a holder acquires no title to a forged instrument. A forged document is a nullity. The property in the instrument remains vested in the person who is the holder at the time when the forged signature were put on it. Forgery is also not capable of being ratified. In case of forged endorsement , the person claiming under forged endorsement even if he is purchaser for value and in good faith, can not acquire the rights of a holder in due course. Therefore, Mr. C acquires no title on the cheque . ( Mercantile Bank v. D`Silva ). Such holder is not a holder in due course and hence no privilege is available.

ANSWER TO QUESTION NO. 5 ( a ) ( ii ) : RESTRICTIVE / QUALIFIED ENDORSEMENT ( THE NEGOTIABLE INSTRUMENTS ACT, 1881 ( BUSINESS LAWS ) ( 4 MARKS ) : 1. RESTRICTIVE ENDORSEMENT : Such an endorsement has the effect of restricting further negotiation and transfer of the instrument.

Example : ( 1 ) Pay to A only S. Mukerjee

( 2 ) For the account of A only N. Aiyar

2. CONDITIONAL OR QUALIFIED ENDORSEMENT : Such an endorsement combines an order to pay with condition.

Example: Pay to A on safe receipt of goods. V. Chopra

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS : BREAK-UP : 2 MARKS FOR EACH FORM OF ENDORSEMENT. TO BE AWARDED TOGETHER. NOTE : TOTAL OF MARKS AWARDED IN QUESTION NO. 5 (a) (i) AND ( a ) ( ii ) BE GIVEN AT THE END AND BE POSTED ON THE COVER PAGE OF THE ANSWER-BOOK.

---------------------------------------------------------------------------------------------------------------------------------------ANSWER TO QUESTION NO. 5 ( b ) :

UNDERWRITING COMMISSION ( THE COMPANIES ( PROSPECTUS AND ALLOTMENT OF SECURITIES ) RULES, 2014 ) ( BUSINESS LAWS ) ( 4 MARKS ) :

Under the Companies ( Prospectus and Allotment of Securities ) Rules, 2014 the rate of commission paid or agreed to be paid shall not exceed, in case of shares , five percent ( 5 % ) of the price at which the shares are issued or at a rate authorized by Articles, whichever is less.

In the given problem, the Articles of X Ltd. have prescribed 4 % underwriting commission but the directors decided to pay 5 % underwriting commission.

Therefore, the decision of the Board of Directors to pay 5 % commission to the underwriters is invalid.

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS : TO BE AWARDED ON THE BASIS OF OVERALL PERFORMANCE .

ANSWER TO QUESTION NO. 5 ( c ) :

ENVIRONMENTAL PHENOMENA OF ETHICAL CONCERN ( ETHICS ) ( 4 MARKS ) :

An ecological system is an interrelated and interdependent set of organism and environments, such as a lake, in which a fish depend on small aquatic organism, which in turn live off decaying plant and fish waste products. Since the various parts of an ecological system are interrelated, the activities of one of its parts will affect all the other parts. Business firms ( and all other social institutions ) are parts of a larger ecological system. Business firms depend on the natural environment for their energy, material resources and waste disposal , and that environment in turn is affected by the commercial activities of business firms.

The issue of environmental ethics goes beyond the problems relating to protection of environment or nature in terms of pollution, resource utilization or waste disposal. It is the issues of explosive human nature and attitudes that should be addressed in a rational way. Problems like Global warming, Ozone depletion and disposal of hazardous wastes that concern the entire world. They require International cooperation and have to be tackled at the global level.

Few decades ago, the corporate world , the industry or others engaged in the use of natural resources or environmental services were mainly concerned with good business in economic sense. There is now a growing concern for social responsibility and ethical norms in all spheres of human activities; be it public behavior, business or environment and there are ethical concerns to look after not only the interest of stakeholders but also that of community ; as the regulatory / mandatory requirements have have also become more stringent. This translates into providing safety for the workers at work place, concern for their health, reducing pollution and incorporating environmental values in governance.

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS : TO BE AWARDED ON THE BASIS OF OVERALL PERFORMANCE.

NOTE : GENERAL AND BRIEF ANSWER BE CONSIDERED WHILE AWARDING MARKS.

QUESTION NO. 6 :

( a ) What is the importance of registered office of a company ? State the procedure for shifting of a registered office of the company from one state to another state under the provisions of the Companies Act, 2013.

( b ) Draft a notice for convening the Board of Directors Meeting of M/s Growmore Limited where the agenda is to consider buy-back of company`s equity share capital to an extent of 5 % of its issued share capital and also where Mr. Anand is to be co-opted as an additional director.

( c ) State whether the following statements are correct or incorrect :

( i ) A limited company can become a partner in a partnership firm.

( ii ) A special resolution is one, to pass, requires the votes cast in favour be twice the votes cast against it.

( iii ) A cheque marked “Not negotiable” is not transferable.

( iv ) A promissory note duly executed in favour of a minor , is valid.

ANSWER TO QUESTION NO. 6 ( a ) :

IMPORTANCE AND SHIFTING OF REGISTERED OFFICE OF A COMPANY ( SECTIONS 11, 12 AND 13 OF THE COMPANIES ACT, 2013 ) ( BUSINESS LAWS ) ( 8 MARKS ) :

IMPORTANCE OF REGISTERED OFFICE :

The importance of the registered office of a company is clearly established in two sections of the Companies Act, 2013. Section 11 ( 1 ) ( b ) states that a company having share capital shall not commence business unless it has filed with the Registrar a verification of its registered office as required by Section 12 ( 2 ) which requires every company to furnish to the Registrar a verification of its registered office within a period of 30 days of its incorporation in such manner as may be prescribed.

Further, Section 12 ( 1 ) states that a company shall, on and from the fifteenth day of its incorporation and every time thereafter, having a registered office capable of receiving and acknowledging all communications and notices addressed to it.

Section 12 ( 3 ) of the said Act further requires every company to

· Paint or affix its name and address of its registered office, and keep the same painted and affixed, on the out side of every office or place in which its business is carried on. Such display must be in a conspicuous position, in legible letters in characters and letters of the local language ( if chosen by the company ) ;

· Get its name, address of its registered office and the corporate identity number and other details, on all its business letters , bill heads, notices and other publications.

From the above provisions of the Companies Act, 2013, the extremely high importance of the registered office of a company can be well understood as it serves as the location where : ( a ) necessary documents may be served upon or deposited; ( b ) notices, letters etc. may be issued, ( c ) inspection may be done and ( d ) communication may be made. The domicile and the nationality of the company is determined by the place of its registered office. This is also important for determining the jurisdiction of the Court governing it.

Notice of the situation of the registered office and of every change therein must be sent to the Registrar ( otherwise than through statement as to the address of the registered office in the annual report ) within 30 days of the date of incorporation and the date of change. This provision is designed to locate the spot where the records of the company could be inspected and where the letters should be addressed and notices served upon the company.

PROCEDURE OF SHIFTING THE REGISTERED OFFICE :

In order to shift the registered office from one state to another the following procedure will have to be followed:

1. Hold a Board Meeting for the purpose of calling a general meeting of the members of the companyin which the shifting of the registered office from one state to another will have to be approved.

2. The general meeting of the members will have to pass a special resolution approving the ahange of address of the registered office from one state to another as required by Section 13 ( 1 ) of the Companies Act, 2013.

3. Make an application toe the Central Government in such form and manner as may be prescribed, for getting its approval under Section 13 ( 4 ) of the said Act.

4. Under Section 13 ( 7 ) of the Companies Act, 2013 where an alteration of the Memorandum results in the transfer of the registered office of the company from one state to another, a certified copy of the order of the Central Government approving the alteration shall be filed by the company with the Registrar of each of the states, within such time and such manner as may be prescribed, and the Registrar shall register the same. The Registrar of the state where the registered office is being shifted to , shall issue a fresh certificate of incorporation indicating the alteration.

5. The change in name will be effective only after the issue of the fresh certificate of incorporation by the Registrar of the state where the registered office is being shifted to.

---------------------------------------------------------------------------------------------------------------------------------------8 MARKS : BREAK-UP : IMPORTANCE – 4 MARKS ; PROCEDURE OF SHIFTING – 4 MARKS. TO BE AWARDED TOGETHER.

NOTE : A BRIEF ANSWER COVERING BASIC POINTS BE GIVEN FULL CREDIT.

NOTE : MARKS NOT TO BE DEDUCTED ON THE GROUND THAT THE CANDIDATE DID NOT CITE THE RELEVANT SECTIONS OF THE COMPANIES ACT, 2013.

ANSWER TO QUESTION NO. 6 ( b ) :

NOTICE OF MEETING OF BOARD OF DIRECTORS ( COMMUNICATION ) ( 4 MARKS ) :

Notice is hereby given that meeting of the Board of Directors of M/s Growmore Limited will be held at the registered office on ………………at ………….a.m. /p.m. to transact the following :

AGENDA :

1. Confirmation of the minutes of the previous Board Meeting held on …………. To ……………. .

2. Discussion of the progress in business.

3. Co-option of Mr. Anand as Additional Director of the company

4. Buy back of 5 % of the equity shares of the company.

5. Any other matter with the permission of the chair.

Place ………………………….

Date ………………………….. By Order of the Board of Directors

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS. TO BE AWARDED ON THE BASIS OF OVERALL PERFORMANCE.

NOTE : GENERAL DRAFTING OF THE NOTICE MAY BE CONSIDERED WHILE AWARDING MARKS.

ANSWER TO QUESTION NO. 6 ( c ) :

STATEMENTS : CORRECT OR INCORRECT ( THE COMPANIES ACT, 2013 / THE NEGITIABLE INSTRUMENTS ACT, 1881 ) ( BUSINESS LAWS ) ( 4 MARKS ) :

( i ) CORRECT. ( A limited company can become a partner in the partnership firm )

( ii ) INCORRECT. ( A special resolution is one, to pass, requires the votes cast in favour be twice the votes cast against it )

( iii ) INCORRECT. ( A cheque marked “ Not negotiable “ is not transferable )

( iv ) CORRECT. ( A promissory note duly executed in favour of a minor is valid )

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS : BREAK-UP : 1 MARK EACH FOR CORRECT ANSWER.

NOTE : THE LANGUAGE OF THE QUESTION IS VERY CLEAR. THE CANDIDATES ARE REQUIRED TO STATE WHETHER THE STATEMENT IS CORRECT OR INCORRECT. GIVING REASONS IS NOT REQUIRED. HENCE, MARKS NOT TO BE DEDUCTED ON THE GROUND THAT THE CANDIDATE DID NOT GIVE REASON.

QUESTION NO. 7 :

ANSWER ANY FOUR OF THE FOLLOWING :

( a ) State the provisions of the Employees` Provident Funds and Miscellaneous Provisions Act, 1952 regulating the quantum of contribution to be made by the employer and the employee in the Provident Fund. Is it possible for an employee to increase the amount of his contribution to the Provident Fund more than the minimum contribution as statutorily prescribed ?

( b ) A company refuses to register transfer of shares made by Mr. X to Mr. Y. The company does not even send a notice of refusal to Mr. X or Mr. Y respectively within the prescribed period. Has the aggrieved part any right(s) against the company for such refusal ? Advise as per the provisions of the Companies Act, 2013.

( c ) When is an allotment of shares treated as an irregular allotment ? Briefly state the effects of an irregular allotment.

( d ) Explain the practices widely recognized as discriminatory in employment.

( e ) What are the basic principles of inter-personal communication ?

---------------------------------------------------------------------------------------------------------------------------------------ANSWER TO QUESTION NO. 7 ( a ) :

( CONTRIBUTION TO PROVIDENT FUND ) ( SECTION 6 OF THE EMPLOYEES PROVIDENT FUNDS AND MISCELLANEOUS PROVISIONS ACT, 1952 ) ( BUSINESS LAWS ) ( 4 MARKS ) :

Section 6 of the Employees Provident Funds and Miscellaneous Provisions Act, 1952 regulates contribution to Provident Fund Scheme established under the Act.

The employer`s contribution shall be 10 % of the basic wages, dearness allowance and retaining allowance , if any payable to each of the employee whether employed by him directly or by through a contractor.

The employee`s contribution shall be equal to the contribution payable by the employer in respect of him.

In case the employee so desires , he may contribute an amount exceeding ten percent of his basic wages, dearness allowance and retaining allowance if any, subject to the condition that the employer shall not be under an obligation to pay any contribution over and above his contribution payable under this section.

Dearness allowance includes cash value of any food concession allowed to the employees. Retaining allowance means the sum paid for retaining the service , when the factory is not working.

The Central Government may by notification make the employer`s contribution equal to 12 % for certain establishments or class of establishments.

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS. TO BE AWARDED ON THE BASIS OF OVERALL PERFORMANCE.

NOTE : MARKS NOT TO BE DEDUCTED ON THE GROUND THAT THE CANDIDATE DID NOT CITE THE RELEVANT SECTION OF THE RELEVANT ACT.

ANSWER TO QUESTION NO. 7 ( b ) :

REFUSAL OF REGISTRATION OF TRANSFER OF SECURITIES : REMEDIES AGAINST ( SECTION 58 OF THE COMPANIES ACT, 2013 ) ( BUSINESS LAWS ) ( 4 MARKS ) :

The problem as asked in the question is governed by Section 58 of the Companies Act, 2013 dealing with the refusal to register transfer of securities and appeal against such refusal.

In the present case the company has committed a wrongful act of not sending the notice of refusal of registering the transfer of shares.

Under Section 58 ( 3 ) , if a public company, without sufficient cause refuses to register the transfer of securities within a period of thirty days from the date on which the instrument of transfer is delivered to the company, the transferee may, within a period of sixty days of such refusal or where no intimation has been received from the company, within ninety days of the delivery of the instrument of transfer of transfer , appeal to the Tribunal ( CLB ).

Section 58 ( 4 ) of the said Act further provides that the Tribunal ( CLB ) , while dealing with an appeal made under sub-section ( 3 ), may, after hearing the parties , either dismiss the appeal , or by order –

( a ) direct that the transfer or transmission shall be registered by the company and the company shall comply with such order within a period of ten days of the receipt of the order, or

( b ) direct rectification of the register and also direct the company to pay damages , if any, sustained by any party aggrieved.

Thus, in the instant case Mr. X can appeal to the Tribunal ( CLB ) and claim damages.

NOTE : MARKS NOT TO BE DEDUCTED ON THE GROUND THAT THE CANDIDATE DID NOT CITE THE RELEVANT SECTION OF THE COMPANIES ACT, 2013.

ANSWER TO QUESTION NO. 7 ( c ) :

IRREGULAR ALLOTMENT / EFFECT OF ( SECTIONS 23, 26, 39 AND 40 OF THE COMPANIES ACT, 2013 ) ( BUSINESS LAWS ) ( 4 MARKS ) :

IRREGULAR ALLOTMENT :

The Companies Act, 2013 does not separately provide for the term ‘Irregular Allotment” of securities. Hence, one will have to examine the requirements of a proper issue of securities and consider the consequences of non-fulfilment of those requirements.

In broad terms, an allotment of shares is deemed to be irregular when it has been made by a company in violation of Sections 23, 26, 39 and 40 of the Companies Act, 2013. Irregular allotment, therefore, arises in the following instances :

1. Where a company does not issue a prospectus in a public issue as required by Section 23; or

2. Where the prospectus issued by the company does not include any of the matters required to be included therein under Section 26 ( 1 ), or information given is misleading, faulty and incorrect; or

3. Where the prospectus has not been filed with the Registrar for registration under Section 26 ( 4 ); or

4. The minimum subscription as specified in the prospectus has not been received in terms of Section 39; or

5. The minimum amount receivable on application is less than 5 % of the nominal value of the securities offered offered or lower than the amount prescribed by SEBI in this behalf ; or

6. In case of a public issue, approval for listing has not been obtained from one or more of the recognized stock exchanges under Section 40 of the Companies Act, 2013.

EFFECTS OF IRREGULAR ALLOTMENT :

The consequences of an irregular allotment depend on the nature of irregularity. However, the Companies Act, 2013 does not mention ( unlike the previous Companies Act ) that in case of irregular allotment the contract is voidable at the option of the allottee.

Under Section 26 ( 9 ) of the Companies Act, 2013 if a prospectus is issued in contravention of the provisions of Section 26, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees and every person who is knowingly a party to the issue of such prospectus shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees , or with both.

Similarly, in case the company has not received the minimum subscription amount within 30 days of the date of issue of the prospectus, it must refund the application money received by it within the stipulated time. Any allotment made in violation of this will be void and the defaulting company and officers will be liable to further punishment as provided in Section 39 ( 5 ) of the said Act.

Under Section 40 ( 5 ) of the said Act any default made in respect of getting the approval to listing of securities in one or more recognized stock exchange in case of a public issue, will render the company punishable with a fine which shall not be less than five lakh rupees but which may extend to fifty lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees , or with both.

Thus, under various provisions of the Companies Act, 2013 stringent punishment has been provided for against irregular allotment of securities but the option of going ahead with such allotment even if desires by the allottee is not specifically permitted.

NOTE : MARKS NOT TO BE DEDUCTED ON THE GROUND THAT THE CANDIDATE DID NOT CITE THE RELEVANT SECTIONS OF THE COMPANIES ACT, 2013. NOTE : BRIEF ANSWER COVERING THE BASIC POINTS BE GIVEN FULL CREDIT OF MARKS.

ANSWER TO QUESTION NO. 7 ( d ) :

DISCRIMINATORY PRACTICES IN EMPLOYMENT ( ETHICS ) ( 4 MARKS ) :

Discrimination in employment is wrong because it violates the basic principle of justice by differentiating between people on the basis of characteristics ( race or sex ) that are not relevant to the tasks they must perform.

It is consequently understandable that the law has gradually been changed to conform to these moral requirements, and that there has been a growing recognition of the various ways in which discrimination in employment occurs. Among the practices now widely recognized as discriminatory are the following :

*RERUITMENT PRACTICE :

Firms that rely solely on the world-of –mouth referrals of present employees to recruit new workers tend to recruit only from those racial and sexual groups that are already represented in their labor force. Also, when desirable job positions are only advertised in media that are not used by minorities or are classified as for men only, recruitment would also tend to be discriminatory.

*SCREENING PRACTICES :

Job qualifications are discriminatory when they are not relevant to the job to be performed ( e.g. requiring a high school diploma or a credential for an essentially manual task ). Job interviews are discriminatory if the interviewer routinely disqualifies certain class of people – for example, assumptions about occupations “suitable for women” or the propriety of putting women in “ male “ environments.

*PROMOTION PRACTICES:

Promotion, job progression and transfer practices are discriminatory when employers place males on job tracks separate from those open to women and minorities. When promotions rely on the subjective recommendations of immediate supervisors.

*CONDITIONS OF EMPLOYMENT :

Many times wages and salaries are discriminatory to the extent that equal wages and salaries are not given to people who are doing essentially the same work. Another issue is related to fair wages and treatment to workers. Companies subcontracting manufacturing operations abroad are now aware of the ethical issues associated with supporting facilities like child labour that abuse and / or underpay their work force. Such facilities have been termed “sweatshops”.

*DISMISSAL :

Firing an employee on the basis of his or her race or sex is a clear form of discrimination. Less blatant but still discriminatory are layoff policies that rely on a seniority system, in which women and minorities have the lowest seniority because of past discrimination.

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS . TO BE AWARDED ON THE BASIS OF OVERALL PERFORMANCE.

NOTE : ANY FOUR POINTS WRITTEN BY THE CANDIDATE BE GIVEN FULL CREDIT.

NOTE : A BRIEF AND GENERAL ANSWER BE CONSIDERED WHILE AWARDING MARKS.

ANSWER TO QUESTION NO. 7 ( e ) :

PRINCIPLE OF INTER-PERSONAL COMMUNICATION ( COMMUNICATION ) ( 4 MARKS ) :

The following principles are key to interpersonal communication :-

*INTERPERSONAL COMMUNICATION IS INESCAPABLE :

We can not keep ourselves away from communication. The very attempt not to communicate , communicates something. Not only through words but also through the tone of voice and gestures, postures, facial expressions etc. we constantly communicate to others.

*INTERPERSONAL COMMUNICATION IS IRREVERSIBLE :

It is rightly said that a word uttered once can not be taken back. *INTERPERSONAL COMMUNICATION IS COMPLICATED :

No form of communication is simple due to the number of variables involved; even simle request can be extremely complex.

*INTERPERSONAL COMMUNICATION IS CONTEXTUAL :

Communication does not take place in isolation. They are context specific.

*PSYCHOLOGICAL CONTEXT :

It refers to who the communicators are and what they bring to the interaction ? Their needs, desires, values, personality etc. all form the psychological context.

*RELATIONAL CONTEXT :

This is concerning the nature of interaction and reactions and the way it all affects the communication process.

*SITUATIONAL CONTEXT :

Refers to social concept of communication viz. an interaction that takes place in a classroom will be very different from one that takes place in a board room.

*ENVIRONMENTAL CONTEXT :

It is all about the surroundings in which communication takes place e.g. furniture location, noise level, temperature, season, time of day etc. are all examples of elements in the environmental context.

*CULTURAL CONTEXT :

Includes all the learned behaviours and rules that affect the interaction. If one comes from a culture where it is considered rude to establish long, direct eye contact, one will out of politeness avoid eye contact. If the other person comes from a culture where long direct eye contact signals trustworthiness, then we have a basis for misunderstanding.

---------------------------------------------------------------------------------------------------------------------------------------4 MARKS. TO BE AWARDED ON THE BASIS OF OVERALL PERFORMANCE.

NOTE : ANY FOUR POINTS CORRECTLY WRITTEN BY THE CANDIDATES BE GIVEN FULL CREDIT.

NOTE : GENERAL AND BRIEF ANSWER GIVEN BY THE CANDIDATE BE CONSIDERED WHILE AWARDING MARKS.

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Selection of Audit Procedures

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Selection of the appropriate audit procedure is again a matter of experience and judgment. Take extreme example of contingent liability in respect of pending suits : no entry or other records for this would be available to the auditor; verification of the estimate of the liability would become difficult for lack of basis. In such cases it would be more reasonable for the auditor to get the estimate confirmed by the solicitors of the company. In addition, he should examine the correspondence pertaining to the case and should discuss the matter with the company’s officials. If the company was involved in a similar suit in the past, by going through the records thereof; the auditor would be able to pull out relevant considerations for estimating the liability. In any case the auditor is not precluded from making his own estimate on the basis of similar cases reported in the law journals.

The normal procedure for verification of cash balance is counting but this is not practicablein respect of the cash-in-transit. The auditor has to think in advance about the possibilities of departure from the normal procedure and the areas likely to be affected thereby. The procedure should provide for such situations in the programme.

It has been emphasised earlier that all available evidence should be used by the auditor but it is not intended to stretch it too far. Sometimes evidence collection becomes costly both in terms of money and time involved. If you are checking the cost of a building constructed by the client in addition to having recourse to all internal evidence, you may have the temptation of getting an independent valuation certificate by a professional valuer. This would be an unwise course in the absence of any suspicious circumstances- it would cost the company a lot of money for procuring that evidence for the satisfaction of the auditor; it may also give rise to an unwarranted feeling suspicion about the bonafide of the management, though there was no evidence available with the auditor to suggest it. The auditor must be cautious and reasonable in his attitude. If, however, the situation was otherwise, i.e., the evidence normally made available to the auditor failed to provide him with satisfactory evidence about the cost incurred, it may be absolutely necessary for him to insist on an independent valuation.

While collecting audit evidence through an audit procedure, the auditor collects the same by employing different techniques. In order to verify a particular item in financial statements, say, cash, he may have to collect audit evidence from different sources. For instance, in case of cash at bank, reference may be made to bank column in cash book, reference to bank reconciliation statement followed by examination of bank statement/bank pass book. Further, the auditor may like to obtain confirmation from the client’s asset. During all this process, the auditor would have to see that audit evidence obtained from different sources does not contradict each other and the cost of obtaining more and more audit evidence is justified by the benefit flowing from obtaining such evidence.

Possibility of fraud and error is ruled out while framing the audit programme. The auditor should prescribe procedures and techniques keeping this possibility in view. If he undertakes a review and testing of internal controls and checks before or while drawing up the programme, he would reasonably be in a position to focus his attention on the matters where this possibility is rather great. The consideration of the auditor should be specifically directed to provide for the discovery of serious errors and frauds, the potential of which is great. The possibility of other errors which are generally not of great consequence can be left open to be observed and discovered in the course of normal evidence collection process.

Co-ordination of the procedures : Knowledge about accounting may be conveniently used in assembling the procedures in the most rational and natural manner. Fixed assets, like plant and machinery or buildings are directly linked with charges for repairs, maintenance and depreciation; purchase is linked with inward freight and sales with outward freight, sales tax and excise duty; earnings from investments bear a relationship with the investments. Hence, in assembling the procedures and methods, if the related items are grouped together, the programme becomes cohesive, comprehensive, purposeful and easy to coordinate; the work can also he conveniently distributed amongst assistants on the basis of the groupings so that, say the assistant assigned the work in connection with plant and machinery would be responsible for carrying out also the related work, e.g., repairs and depreciation. This would help easy flow of work with the least possibility of any information gap to the assistant concerned.

Steps involved in the process of Audit

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The scheme of auditing process involves the following :

1. Formulating audit programme on the basis of knowledge of client’s business.

2. Determination of the extent of checking on the basis of compliance procedures.

3. Carrying out the steps in the procedure on the basis of programme and the extent of

substantive checking that may be required.

4. Keeping a record of notes and inquiries and maintenance of working papers.

5. Formulation of opinion about financial statements and review with reference to

accounting standards.

6. Issuance of the audit report.

Audit Techniques

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For collection and accumulation of audit evidence, certain methods and means are available and these are known as audit techniques. Some of the techniques commonly adopted by the auditors are the following :

1. Posting checking
2.Casting checking
3.Physical examination and count
4.Confirmation
5.Inquiry
6.Year-end scrutiny

7.Re-computation
8.Tracing in subsequent period
9.Bank Reconciliation

The two terms, procedure and techniques, are often used interchangeably; in fact, however, a distinction does exist. Procedure may comprise a number of techniques and represents the broad frame of the manner of handling the audit work; techniques stand for the methods employed for carrying out the procedure. For example, procedure requires an examination of the documentary evidence. This job is performed by the procedure known as vouching which would involve techniques of inspection and checking computation of documentary evidence. As per SA-500 on Audit Evidence, basically audit procedures are broadly of two types viz. compliance procedures and tests of detail. Test of details are further comprised of substantive audit procedures and analytical review procedures.

Vouching is a substantive audit procedure which involves audit techniques like casting, cross-casting, checking of posting, etc. On the other hand, verification of assets and liabilities is a substantive audit procedure which involves application of audit techniques like physical examination, confirmation from third parties, etc

Audit Planning

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Audit Planning

As per Auditing and Assurance Standard 1, “Basic Principles Governing an Audit”, Audit Planning is one of the basic principles.

Accordingly, it states “The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely manner. Plans should be based on knowledge of the client’s business.

Plans should be made to cover, among other things :

(a) acquiring knowledge of the client’s accounting systems, policies and internal control procedures;

(b) establishing the expected degree of reliance to be placed on internal control;

(d) coordinating the work to be performed.

Plans should be further developed and revised as necessary during the course of the audit.”

SA-300 further expounds this principle. According to it, planning should be continuous throughout the engagement and involves :

 developing an overall plan for the expected scope and conduct of the audit; and

 developing an audit programme showing the nature, timing and extent of audit procedures.

Changes in conditions or unexpected results of audit procedures may cause revisions of the overall plan of and the audit programme. The reasons for significant changes may be documented.

Objectives of Planning : Adequate audit planning helps to :

ensure that appropriate attention is devoted to important areas of the audit;

     ensure that  potential problems are promptly identified;
     ensure that the work is completed expeditiously;
      utilise the assistants properly; and
       co-ordinate the work done by other auditors and experts.

In planning his audit, the auditor will consider factors such as complexity of the audit, the environment in which the entity operates, his previous experience with the client and knowledge of the client’s business.

The auditor may wish to discuss elements of his overall plan and certain audit procedures with the client to improve the efficiency of the audit and to coordinate audit procedures with work of the client’s personnel. The overall audit plan and the audit programme,however, remain the auditor’s responsibility.

Audit Objective

The auditor must gather sufficient competent evidential matter as a basis for forming his opinion on :

(a) the truth and fairness of the accounts and also their compliance with the provisions of the related laws, rules and regulations;

(b) the proper keeping of the accounting records, and other records and related registers of the client.

These broad objectives may be amplified as follows :

To determine whether :

(1) all assets and liabilities are properly stated and classified on a basis consistent with that of the previous year;

(2) proper disclosure is made of securities for liabilities and of assets charged or secured;

(3) the client has complied with the provisions of the applicable laws and documents created under them, loan agreements and other documents to which he is a party;

(4) income and expenses are properly classified and disclosed and are properly matched.

They relate to the period in which they are reported and have been determined on a basis consistent with that of the previous year;

(5) all contingencies and commitments are properly disclosed;

(6) no material omissions have been made in the financial statements;

(7) no material error or inaccuracy in reporting or disclosing income, expenses, assets and liabilities has been created in the financial statements;

(8) the books and records have been properly kept in accordance with the requirements of the client.

The expression of opinion on the overall balance sheet and profit and loss account involves initially forming an opinion on each of the balance sheet or profit and loss items; it is necessary first to decide what are the essential conditions or pre-requisites for each balance sheet or profit and loss account item in order to give a true and fair view of the particular assets or liabilities or item of income or expense being represented. These conditions are well established and may be illustrated by reference to the areas of sundry debtors and sales revenues.

Sundry Debtors : The audit of sundry debtors should be sufficiently comprehensive to enable the auditor to form an opinion as to whether :

(1) The amounts shown represent bonafide receivables of the company.

(2) The receivables are properly classified.

(3) Adequate provisions have been made for uncollectible receivables and for discounts and freight allowable, returns adjustments, etc.

(4) Any receivables have been pledged, discounted, assigned or sold, and if so whether they are properly disclosed.

Sales Revenues : Specific objectives in the audit of sales revenues are to determine whether:

(1) Sales accounting procedures are operating effectively to produce reliable sales revenue figures for the period.

(2) Sales revenues have been recorded in the proper accounting period and are not overstated through improper credits for fictitious sales of goods neither supplied nor set aside. Conversely, whether sales or other revenues are understated through deferring the recording thereof to subsequent periods or omitting to record sales despatched as sales.

(3) Allowance, returns and other sales deductions are fairly stated and properly treated in the financial statements and that adequate provisions have been made for any significant additional amount that may be anticipated to be paid but not yet finally settled.

(4) Non-operating revenues have been segregated from sales revenues and have been appropriately treated in the profit and loss statement.

What is Audit Risk

Audit risk is the risk that an auditor may give an inappropriate opinion on financial information that is materially mis-stated. For example, an auditor may give an unqualified opinion on financial statements without knowing that they are materially mis-stated. Such risk may exist at overall level or while verifying various transactions and balance-sheet items.

1. Audit risk at the financial statement level : Audit risk is considered at the financial statement level during the audit planning process. At this time, the auditor should undertake an overall audit risk assessment based on his knowledge of the client’s business, industry, management, control environment and operations. Such an assessment provides preliminary information about the general approach to the engagement, the auditor’s staffing needs and the framework within which materiality and audit risk assessments can be made at the individual account balance or class of transactions level. As part of this overall risk assessment, the auditor should consider whether there is potential for pervasive problems, for example, liquidity or going concern problems.

2. Audit risk at the account balance and class of transactions level: The majority of audit procedures are directed to, and carried out at the account balance and class of transactions level. Accordingly, audit risk should be considered by the auditor at this level taking into account the results of the overall audit risk assessment made at the financial statement level. To assess inherent risk, the auditor uses professional judgement to evaluate numerous factors, examples of which are:

At the financial statement level :

 the integrity of management;

 management experience, knowledge and changes during the period (e.g. the in experience of management may affect the preparation of the financial statements of the entity);

 unusual pressures on management (e.g. circumstances that might predispose management to mis-state the financial statements, such as an entity in an industry experiencing a large number of business failures or an entity that lacks sufficient capital to continue operations);

 the nature of the entity’s business (e.g. its technological obsolescence of products and services, complex capital structure, significance of related parties, and the number of locations and geographical spread of its production facilities); factors affecting the industry in which the entity operates (e.g. economic and competitive conditions, and changes in technology, accounting practices common to the industry and, if available, financial trends and ratios);

At the Account balance and class of transaction level:

 financial statement of accounts likely to be susceptible to misstatement (e.g. a financial statement of account which required adjustment in the previous period);

 the complexity of underlying transactions which might require the use of the work of an expert;

 the amount of judgement involved in determining account balances;

 susceptibility of assets to loss or misappropriation;

 the completion of unusual and complex transactions, particularly at or near year end;

Assessment of audit risk by reference to its components : Audit risk has been discussed at length in SA-400. As per SA-400 three components of audit risk are:

 inherent risk (risk that material errors will occur);

 control risk (risk that the client’s system of internal control will not prevent or correct such errors); and

 detection risk (risk that any remaining material errors will not be detected by the auditor).

The nature of each of these types of risk and their interrelationship is discussed below:

Inherent risk is the susceptibility of an account balance or class of transactions to misstatement that could be material, individually or when aggregated with mis-statements in other balances or classes, assuming that there were no related internal controls. It is a function of the entity’s business and its environment and the nature of the account balance or class of transactions. For example, accounts involving a high degree of management judgement, or that are difficult to compute, such as a complex accounting estimate, or that involve highly desirable and movable assets, such as jewellery, or that are particularly susceptible to changes in consumer demand or technology that could affect their value, will involve more inherent risk than other accounts.

Control risk is the risk that misstatement that could occur in an account balance or class of transactions and that could be material, individually or when aggregated with misstatements in other balances or classes, will not be prevented or detected on a timely basis by the system of internal control. There will always be some control risk because of the intrinsic limitation of any system of internal control. To assess control risk, the auditor should consider the adequacy of control design, as well as test adherence to control procedures. In the absence of such an assessment, the auditor should assume that control risk is high.

Detection risk is the risk that an auditor’s procedures will not detect a misstatement that exists in an account balance or class of transactions that could be material, individually or when aggregated with misstatements in other balances or classes. The level of detection risk relates directly to the auditor’s procedures. Some detection risk would always be present even if an auditor were to examine 100 percent of the account balance or class of transaction because, for example, the auditor may select an inappropriate audit procedure, misapply an appropriate audit procedure or misinterpret the audit results.

Interrelationship of the components of audit risk : Inherent and control risks differ from detection risk in that they exist independently of an audit of financial information. Inherent and control risks are functions of the entity’s business and its environment and the nature of the account balances or classes of transactions, regardless of whether an audit is conducted. Even though inherent and control risks cannot be controlled by the auditor, the auditor can assess them and design his substantive procedures to produce an acceptable level of detection risk, thereby reducing audit risk to an acceptably low level.

Concept of Test Checking , Audit Sampling

Very often we come across this term when an audit is conducted on the basis of a part checking. This, it is said, owes its origin to the statistical theory of sampling.

The auditor according to his best judgment, having regard to the nature, size and materiality of transactions, picks up the entries for examination. Normally, entries involving large amounts or relating to material accounts are seen exhaustively and entries are picked up for verification at random from the remainder according to a certain plan.

Sometimes, entries are checked for a few specified months exhaustively and the rest go unchecked. Though it is stated that the technique is an adaptation of the sampling theory, it is in reality far from it. It lacks any acceptable basis and gives the auditor no idea about the degree of reliability that he can place on the findings for application to the whole set of entries. The so-called random picking is not random in the statistical sense. To be truly random, the selection should be free from any bias and that is possible only through a statistical process and by reference to the random number tables.

The only quality that this technique can claim lies in its keenness to cover larger amounts and material accounts. Even if errors, frauds etc., remain undetected in the part not checked, they are not likely to be too big as to upset the truth and fairness of the financial statement. But auditors cannot be certain about this even after checking 100% of transactions. The cost and time involved in conducting an audit has to be visualised in relation to benefits which shall accrue from such an approach. If fairly lesser amount of checking may lead to admit same conditions there is absolutely no point in checking entire transaction. Moreover, there are constraints within audit has to be completed.

In any audit, the question of fact is more important because essentially the auditor’s job is to test the assertions in financial statements by reference to available evidence, apart from the following aspects:

i. presentation,

ii. disclosure,

(iii) arithmetical accuracy,

(iv) adherence to accepted accounting principles, and

(v) compliance with the requirements of law.

An auditor is also concerned about the existence of errors and frauds in the financial accounts. The few matters listed above are fundamental questions affecting the true and fair concept and due consideration to these are given at the appropriate stage of audit. However, errors and frauds stand on a slightly different footing inasmuch as there is a need to eliminate them if they exist to affect truthfulness and fairness materially. It is therefore necessary that an auditor should have a fair idea about why error and frauds occur, how they are committed and what are the usual means to locate them.

Precautions to be taken in Adopting Test Checking Techniques

Generally, a large manufacturing concern is associated with a large volume of transactions. Also, the nature of the transactions is determined by the nature of the business. For example, one may find numerous purchases of raw materials, stores, spares, etc.; there may be thousands of workers to be paid wages on weekly basis; the wages again may be calculated on a job or time basis. Depending upon the product lines, the sales mechanics may be different for different products - some may be to dealers and agents, some to wholesalers and some others even to retailers and consumers directly. Sales and purchase operations may stretch even to overseas markets. There may be various forms in which such a concern can raise bank finance, like letter of credit, packing credit, overdraft, bills discounted, etc. Basically, in a large manufacturing concern the problem is the problem of volume and variety.

In the circumstances when necessarily the test check technique has got to be adopted for audit work, it should be done by taking certain precautions so that a reliable idea about the truth and fairness of the accounts can be obtained by the auditor. The precautions that should be taken may be the following :

(i) The transactions of the concern should be classified under appropriate heads and may be stratified if wide variations are there between transactions of the same kind.

(ii) Systems and procedures for entering into and processing a transaction right from the beginning to the end should be studied in a sequential order. It involves questions of authorisations, documentation and recording and evidencing the same.

(iii) The whole of the system of internal control in the areas of accounts and finance should be studied and evaluated for its efficiency, soundness and capability for producing reliable accounting and financial data. This can be done by studying the controls and internal checks, evaluating their general soundness in the context of the business of the concern and testing their actual operation. If, and only if, the auditor is satisfied about soundness of the controls and their operation in actuality, can he decide to have test checks. For testing the operation of the control system, he should select a few transactions and check them in depth by the application of procedural tests.

(iv) A properly thought-out test check plan should be prepared and the objective of each check should be clearly understood by the auditing staff. For example, each voucher may be checked by the test check method for a number of objectives - one may be to ensure that the cash payments are properly authorised and acknowledged, others may be to see whether the amount actually payable has in fact been paid and whether the payment has been debited to the proper account. If there is a mix-up in the objectives or the objective is to test a number of variables in one test scheme, the result may not be helpful. Hence it requires a clear definition of the audit objective related to the particular test check plan.

(v) The transactions falling under each test-check plan should be selected in a manner so that bias cannot enter in the selection. For the purpose, selection should be made by reference to the random number tables.

(vi) Identification of the areas where test check may not be done. For example, if there are only 20 overseas sales in the year, it would be preferable to have them all thoroughly checked.

(vii) The number of transactions to be selected for each test-check plan should be predetermined. This can be done by deciding upon the degree of reliance that should be placed on the test-check result and the confidence that can be placed - the result to be obtained should be veering round the degree of reliance set up. Once the degree of reliance and the confidence level required in the audit for expression of the opinion have been decided, the number to be tested out of the given population can be easily known by reference to the statistical tables.

(viii) Errors that may be found may be material or immaterial in the context of the particular audit. Since errors of immaterial nature are not likely to distort the overall truth and fairness of the accounts, it is necessary to decide upon the criteria to judge what constitutes a material error. Further investigation of immaterial error may be avoided and only the material errors may be properly and thoroughly investigated.

Methods of Statistical Sampling

As per SA 530, “Audit Sampling”, the auditor should select sample items in such a way that the sample can be expected to be representative of the population. This requires that all items in the population have an opportunity of being selected.

There are two major methods in which the size of the sample and the selection of individual items of the sample are determined. These methods are : (1) judgmental sampling; and (2) statistical sampling.

Whatever may be the method, judgmental or statistical sampling, the sample must be representative. This means that it must be closely similar to the whole population although not necessarily exactly the same. The sample must be large enough to provide statistically meaningful results.

Judgmental Sampling : Under this method, the sample size and its composition are determined on the basis of the personal experience and knowledge of the auditor. This method has been in common application for many years because of its simplicity in operation. Traditionally, the auditor on the basis of his personal experience, will determine the size of the sample and express it in terms that number of pages or personal accounts in the purchases or sales ledger to be checked. For example, March, June and September may be selected in year one and different months would be selected in the next year. An attempt would be made to avoid establishing a pattern of selection year after year to maintain an element of surprise as to what the auditor is going to check. It is a common practice to check large number of items towards the close of the year so that the adequacy of cut-off procedures can also be determined.

The judgmental sampling is criticised on the grounds that it is neither objective nor scientific. The expected degree of objective cannot be assured in judgmental sampling because the risk of personal bias in selection of sample items cannot be eliminated. The closeness of the qualities projected by the sample results with that of the whole population cannot be measured because the sample has not been selected in accordance with the mathematically based statistical techniques. However, it may be stated that the auditor with his experience and knowledge of the client’s business can evaluate accurately enough the sample findings to make audit decision and the mathematical proof of accuracy in some cases may be a luxury which the auditor cannot afford.

In judgmental sampling the auditor’s opinion determines the sample size but it cannot be measured how far the sample size would fulfill the audit objective. In statistical sampling, the sample results are measurable as to the adequacy and reliability of the audit objectives.

Statistical Sampling : Statistical sampling is a method of audit testing which is more scientific than testing based entirely on the auditor’s own judgment because it involves use of mathematical laws of probability in determining the appropriate sample size in varying circumstances. Statistical sampling has reasonably wide application where a population to be tested consists of a large number of similar items and more in the case of transactions involving compliance testing, debtors’ confirmation, payroll checking, vouching of invoices and petty cash vouchers.

Students may note that it is unnecessary for the auditor to gain indepth knowledge of statistics before making use of statistical sampling for audit testing since published statistical tables are available which indicate the sample size based on pre-determined criteria.

Selection of the Sample

Sample should be selected in such a manner that it is representative of the population from which the sample is being selected. It will necessitate that each item in the population has an equal chance of being included in the sample. Some of the important methods of selecting the sample are discussed below -

Random Sampling : Random selection ensures that all items in the population or within each stratum have a known chance of selection. It may involve use of random number tables. Random sampling includes two very popular methods which are discussed below:—

i. Simple random sampling : Under this method each unit of the whole population e.g. purchase or sales invoice has an equal chance of being selected. The mechanics of selection of items may be by choosing numbers from table of random numbers by computers or picking up numbers randomly from a drum. It is considered that random number tables are simple and easy to use and also provide assurance that the bias does not affect the selection. This method is considered appropriate provided the population to be sampled consists of reasonably similar units and fall within a reasonable range. For example the population can be considered homogeneous, if say, debtors balances fall within the range of Rs. 5,000 to Rs. 25,000 and not in the range between Rs. 25 to Rs.2,50,000.

(ii) Stratified Sampling : This method involves dividing the whole population to be tested in a few separate groups called strata and taking a sample from each of them. Each stratum is treated as if it were a separate population and if proportionate of items are selected from each of these stratum. The number of groups into which the whole population has to be divided is determined on the basis of auditor judgment. For example in the above case, debtors balances may be divided into four groups as follows:-

(a) balances in excess of Rs. 1,00,000;

(b) balances in the range of Rs. 75,000 to Rs. 1,00,000;

(d) balances below Rs. 25,000.

From these above groups the auditor may pick up different percentage of items from each of the group. From the top group i.e. balances in excess of Rs. 1,00,000, the auditor may examine all the items; from the second group 25 per cent of the items; from the third group 10 per cent of the items; and from the lowest group 2 per cent of the items may be selected.

The reasoning behind the stratified sampling is that for a highly diversified population, weights should be allocated to reflect these differences. This is achieved by selecting different proportions from each strata. It can be seen that the stratified sampling is simply an extension of simple random sampling.

2. Interval sampling or systematic sampling : It involves selecting items using a constant interval between selections, the first interval having a random start. The interval might be based on a certain number of items (for example every 20th voucher) or a monetary totals (for example every Rs. 1,000 in the cumulative value of the population). When using systematic selection, the auditor should determine that the population is not structured in such a manner that the sampling interval corresponds with a particular pattern in the population. For example, if in a population of branch sales, a particular branch sales occur only as every 100th item and the sampling interval selected is 100. The result would be that either the auditor would have selected all or none of the sales of that particular branch. To minimise the effect of the possible known buyers through a pattern in the population, more than one starting point may be taken. The multiple random starting point is taken because it minimises the risk of interval sampling pattern with that of the population being sampled.

(i) Block Sampling : This method involves the selection of a defined block of consecutive items. For example take the first 200 sales invoices from the sales day book in the month of September, alternatively take any four blocks of 50 sales invoices. Therefore, once the first item in the block is selected, the rest of the block follows an items to the completion. There is a close similarity between this method and judgmental sampling. Consequently it has similar characteristics, namely, simplicity and economy. On the other hand there is a risk of bias and of establishing a pattern of selection which may be noted by the auditees.

(ii) Cluster sampling : This method involves dividing the population into groups of items known as clusters. A number of clusters are randomly selected from all the clusters rather than individual items of the population. Cluster sampling can be used together with both unrestricted random and stratified sampling, for example 500 to 540, 2015 to 2055 etc. The first item i.e. 500, 2015 is randomly selected from random number tables. The items of selected cluster can either be checked completely or a randomly selected proportion of them can be examined.

The cluster is less effective for a given sample size than unrestricted random and stratified samples as items are not individually selected. However, the time saved can be utilised to have a larger sample to make the sample results more reliable. As per SA 530, when determining the sample size, the auditor should consider sampling risk, the tolerable error, and the expected error. Sampling risk arises from the possibility that the auditor‘s conclusion, based on a sample, may be different from the conclusion that would be reached if the entire population were subjected to the same audit procedure.

Advantages of Statistical Sampling in Auditing

The advantages of statistical sampling may be summarized as follows -

1. The amount of testing (sample size) does not increase in proportion to the increase in the size of the area (universe) tested.

2. The sample selection is more objective and thereby more defensible.

3. The method provides a means of estimating the minimum sample size associated with a specified risk and precision.

4. It provides a means for deriving a “calculated risk” and corresponding precision (sampling error) i.e. the probable difference in result due to the use of a sample in lieu of examining all the records in the group (universe), using the same audit procedures.

5. It may provide a better description of a large mass of data than a complete examination of all the data, since non-sampling errors such as processing and clerical mistakes are not as large.

Under some audit circumstances, statistical sampling methods may not be appropriate. The auditor should not attempt to use statistical sampling when another approach is either necessary or will provide satisfactory information in less time or with less effort, for instance when exact accuracy is required or in case of legal requirements etc.

Auditing : Knowledge of the Client’s Business

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It is one of the important principles in developing an overall audit plan. Infact without adequate knowledge of client’s business, a proper audit is not possible. SA-310 on “Knowledge of the Business” deals in detail about the significance of such knowledge on the part of the auditor.

The auditor needs to obtain a level of knowledge of the client’s business that will enable him to identify the events, transactions and practices that, in his judgment, may have significant effect on the financial information. Among other things, the auditor can obtain such knowledge from :

 The client’s annual reports to shareholders.

 Minutes of meetings of shareholders, board of directors and important committees.

 Internal financial management reports for current and previous periods, including budgets, if any.

 The previous year’s audit working papers, and other relevant files.

 Firm personnel responsible for non-audit services to the client who may be able to provide information on matters that may affect the audit.

 Discussions with client.

 The client’s policy and procedures manual.

 Relevant publications of the Institute of Chartered Accountants of India and other professional bodies, industry publications, trade journals, magazines, newspapers or text books.

 Consideration of the state of the economy and its effect on the client’s business.

 Visits to the client’s premises and plant facilities.

With respect to the previous year’s audit working papers and other relevant files, the auditor should pay particular attention to matters that requires special consideration and decide whether they might affect the work to be done in the current year.

Discussions with the client might include such subjects as :

 Changes in management, organisational structure and activities of the client.

 Current Government legislation, rules, regulations and directives affecting the client.

 Current business developments affecting the client.

 Current or impending financial difficulties or accounting problems.

 Existence of parties in whom directors or persons who are substantial owners of the entity are interested and with whom transactions are likely.

 New or closed premises and plant facilities.

 Recent or impending changes in technology, type of products or services and production or distribution methods.

 Significant matters arising from previous year’s financial statements, audit report and management letters, if any.

 Changes in the accounting practices and procedures and in the system of internal control.

 Scope and timing of the examination.

 Assistance of client personnel in data preparation.

 Relevance of any work to be carried out by the client’s internal auditors.

In addition to the importance of knowledge of the client’s business in establishing the overall audit plan, such knowledge helps the auditor to identify areas of special audit consideration, to evaluate the reasonableness both of accounting estimates and management representations, and to make judgments regarding the appropriateness of accounting policies and disclosures.

Audit Programme

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The auditor should prepare a written audit programme setting forth the procedures that are needed to implement the audit plan. The programme may also contain the audit objectives for each area and should have sufficient details to serve as a set of instructions to the assistants involved in the audit and as a means to control the proper execution of the work.

In preparing the audit programme, the auditor, having an understanding of the accounting system and related internal controls, may wish to rely on certain internal controls in determining the nature, timing and extent of required auditing procedures. The auditor may conclude that relying on certain internal controls is an effective and efficient way to conduct his audit. However, the auditor may decide not to rely on internal controls when there are other more efficient ways of obtaining sufficient appropriate audit evidence. The auditor should also consider the timing of the procedures, the coordination of any assistance expected from the client, the availability of assistants, and the involvement of other auditors or experts.

The auditor normally has flexibility in deciding when to perform audit procedures. However, in some cases, the auditor may have no discretion as to timing, for example, when observing the taking of inventories by client personnel or verifying the securities and cash balances at the year-end.

The audit planning ideally commences at the conclusion of the previous year’s audit, and along with the related programme, it should be reconsidered for modification as the audit progresses. Such consideration is based on the auditor’s review of the internal control, his preliminary evaluation thereof, and the results of his compliance and substantive procedures.

It is desirable that in respect of each audit and more particularly for bigger audits an audit programme should be drawn up. Audit programme is nothing but a list of examination and verification steps to be applied set out in such a way that the inter-relationship of one step to another is clearly shown and designed, keeping in view the assertions discernible in the statements of account produced for audit or on the basis of an appraisal of the accounting records of the client. In other words, an audit programme is a detailed plan of applying the audit procedures in the given circumstances with instructions for the appropriate techniques to be adopted for accomplishing the audit objectives. Businesses vary in nature, size and composition; work which is suitable to one business may not be suitable to others; efficiency and operation of internal controls and the exact nature of the service to be rendered by the auditor are the other factors that vary from assignment to assignment. Because of such variations, evolving one audit programme applicable to all business under all circumstances is not practicable. However it becomes a necessity to specify in detail in the audit programme the nature of work to be done so that no time will be wasted on matters not pertinent to the engagement and any special matter or any specific situation can be taken care of.

To start with, an auditor having regard to the nature, size and composition of the business and the dependability of the internal control and the given scope of work, should frame a programme which should aim at providing for a minimum essential work which may be termed as a standard programme. As experience is gained by actually carrying out the work, the programme may be altered to take care of situations which were left out originally, but are found relevant for the particular concern. Similarly, if any work originally provided for proves beyond doubt to be unnecessary or irrelevant, it may be dropped. The assistant engaged in the job should be encouraged to keep an open mind beyond the programme given to him. He should be instructed to note and report significant matters coming to his notice, to his seniors or to the partners or proprietor of the firm engaged for doing the audit.

There should be periodic review of the audit programme to assess whether the same continues to be adequate for obtaining requisite knowledge and evidence about the transactions. Unless this is done, any change in the business policy of the client may not be adequately known, and consequently, audit work may be carried on, on the basis of an obsolete programme and, for this negligence, the whole audit may be held as negligently conducted and the auditor may have to face legal consequences. For example, if the audit programme for the audit of a branch of a financing house, drawn up a number of years ago, fails to take into consideration that the previous policy of financing of a vehicle has been changed to financing of real estate acquisition, the whole audit conducted thereunder would be entirely misdirected and may even result into nothing more than a farce. [Pacific Acceptance Corporation Ltd. v. Forsyth and Others.]

The utility of the audit programme can be retained and enhanced only by keeping the programme as also the client’s operations and internal control under periodic review so that inadequacies or redundancies of the programme may be removed. However, as a basic feature, audit programme not only lists the tasks to be carried out but also contains a few relevant instructions, like the extent of checking, the sampling plan, etc. So long as the programme is not officially changed by the principal, every assistant deputed on the job should unfailingly carry out the detailed work according to the instructions governing the work. Many persons believe that this brings an element of rigidity in the audit programme. This is not true provided the periodic review mentioned earlier is undertaken to keep the programme as up-to-date as possible and by encouraging the assistants on the job to observe all salient features of the various accounting functions of the client.

An audit programme consists of a series of verification procedures to be applied to the financial statements and accounts of a given company for the purpose of obtaining sufficient evidence to enable the auditor to express an informed opinion on such statements. For the purpose of programme construction, the following points should be kept in view :

1. Stay within the scope and limitation of the assignment.

2. Determine the evidence reasonably available and identify the best evidence for deriving the necessary satisfaction.

3. Apply only these steps and procedures which are useful in accomplishing the verification purpose in the specific situation.

4. Consider all possibilities of error.

5. Co-ordinate the procedures to be applied to related items.

Amplification is not necessary of the above points except the one under evidence : that is the very basis for formulation of opinion and an audit programme is designed to provide for that by prescribing procedures and techniques. What is best evidence for testing the accuracy of any assertion is a matter of expert knowledge and evidence. This is the primary task before the auditor when he draws up the audit programme. Transactions are varied in nature and impact; procedures to be prescribed depend on prior knowledge of what evidence is reasonably available in respect of each transaction.

By evidence we mean the material, documentary or otherwise, available to prove or disprove the assertions made in the statement of accounts through the entries in the books of account. For example sales is evidenced by :

i. invoices raised by the client;

ii. price list;

(iv) stock-issue records;

(v) sales managers’ advice to the stock section;

(vi) acknowledgements of the receipt of goods by the customers, and

(vii) collection of money against sales by the client.

In most of the assertions much of the evidence be drawn and each one should be considered and weighed to ascertain its weight to prove or disprove the assertion. In this process, an auditor would be in a position to identify the evidence that brings the highest satisfaction to him about the appropriateness or otherwise of the assertion.

You may recall from chapter 2 on basic concepts in auditing that an auditor picks up evidence from a variety of fields and it is generally of the following broad types :

(a) Documentary examination

(b) Physical examination

(d) Statements and explanations of third parties

(e) Arithmetical calculations by the auditor

(f) State of internal controls and internal checks

(g) Inter-relationship of the various accounting data

(h) Subsidiary and memorandum records

(i) Minutes

(j) Subsequent action by the client and by others.

By “good evidence” we mean a highly satisfactory evidence available without any special effort or cost. For cash in hand the best evidence is ‘count’; in respect of investment pledged with a bank, the banker’s certificate. For verifying assertions about book debts, the client’s ledger invoices, debit notes, credit notes, monthly accounts statement sent to the customers are all evidence : some of these are corroborative, other being complemen- tary. In addition, balance confirmation procedure is often resorted to, to obtain greater satisfaction about the reliability of the assertion. The auditor, however, has to place appropriate weight on each piece of evidence and accordingly should prescribe the priority of verification. It is true that in all cases one procedure may not bring the highest satisfaction and it may be dangerous for the auditor to ignore any evidence that is available. By the word “available” we do not mean that the evidence available with the client is the only available evidence. The auditor should know what normally should be available in the context of the transaction having regard to the circumstances and usage. For testing the authenticity of the client as regards amount lying with bank, the auditor adopts the following procedure :

1. Examination of the counterfoils of cheques and paying-in-slips and comparing them with the entries in the concerned ledger account of the client.

2. Checking the castings, carry over and balances of the ledger account.

3. Comparison of the entries in the ledger with the bank statement (this is the reproduction of the ledger account maintained by the bank for recording the transactions with the client).

4. Examination of the bank reconciliation statement to know the items that explain the difference, if any, between the balance shown by client’s ledger and the bank statement.

5. Scrutiny of the subsequent period’s bank statement to ensure that items entering for reconciliation have been duly entered by the bank on clearance or presentation.

6. Verification of official confirmation of the balance by the bank.

If you analyse these procedures, you will see that each provides the auditor with some evidence which by itself is not adequate even if the result is satisfactory. The first one proves that the entries conform to the underlying records, but the prima facie authenticity of the underlying record is corroborated by a checking of the bank statement. The second provides evidence of the arithmetical accuracy. Procedure under step four, screens the items of difference between the two records and the bonafide of that statement is proved by step five. Sixth and the last step is most significant because the reliability of the bank statement is much enhanced by confirmation of the balance on a specified date made by a responsible official of the bank. But all these cannot give the auditor a degree of confidence or conclusiveness because he has no access to the bank’s books and records. Therefore, he must be contended with the best available evidence to arrive at a reasonable opinion.

At times, the available evidence on a single assertion may be found to be contradictory. For example, sales in quantity and value, as evidenced by some of the procedures enumerated above, may not be corroborated by a quantitative analysis of the opening stock, production, sales and closing stock. In such a situation, it would be the duty of the auditor to call for the explanation of the management before he accepts or rejects any of the contradictory evidence for the purpose of formulation of his opinion on the particular matter. Only by properly considering and evaluating the explanation of the management, the auditor is in such a situation as would enable him to accept or reject any of the evidence.

Audit Objective

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