STUDY MATERIAL

EXECUTIVE PROGRAMME

COM PA N Y ACCOU N T S
AND
AU DI T I N G PRA CT I CES
MODULE II
PAPER 5

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ii

EXECUTIVE PROGRAMME COMPANY ACCOUNTS AND

AUDITING PRACTICES
Finance and accounting have assumed much importance in todays competitive world of business wherein corporate
organisations have to show the true and fair view of their financial position. Thus, the application of accounting in
the business sector has become an indispensable factor. Company Secretary has to provide the complete and
accurate information about the financial operations of the company to management for decision making. This
emphasizes that the books of account are to be maintained accurately, up-to-date and as per the norms.
The subject Company Accounts and Auditing Practices is very important for the students. In the course of his
work, a Company Secretary is expected to have the working knowledge of Company Accounts. He should also
have the working knowledge of auditing concepts such as verification, vouching, and internal control. This will
help a company secretary in carrying out his duties in a more professionalized manner. The entire paper has
been discussed in fourteen study lessons. In starting nine study lessons we have discussed about the Share
Capital, Debentures, Final Accounts of Companies, Corporate Restructuring, Consolidation of Accounts, Valuation
of Shares and Intangible Assets, Liquidation of Company, Corporate Financial Reporting and Accounting
Standards. At last five lessons, we have discussed about Auditing Concepts, types of Company Audit, Internal
Control and its Review, Audit engagement and documentation.
In this study every efforts has been made to give a comprehensive coverage of all the topics relevant to the
subject. In all study lessons the requisite theoretical framework for understanding the practical problems in the
subject has been explained and wherever necessary practical illustrations have been given to facilitate better
understanding. At the end of each study lesson a brief about the lesson have been given under the caption
Lesson Round Up as well a good blend of theoretical and practical questions have been given under the
caption Self Test Questions for the practice of students to test their knowledge. In fact, this being a practical
paper, students need to have good theoretical knowledge and practice to attain the requisite proficiency and
confidence.
This study material has been published to aid the students in preparing for the Company Accounts and Auditing
Practices paper of the CS Executive Programme. It is part of the education kit and takes the students step by
step through each phase of preparation stressing key concepts, pointers and procedures. Company Secretaryship
being a professional course, the examination standards are set very high, with emphasis on knowledge of
concepts, applications, procedures and case laws, for which sole reliance on the contents of this study material
may not be enough.
Therefore, in order to supplement the information/contents given in the study material, students are advised to
refer to the Suggested Readings mentioned in the study material, Student Company Secretary, Business Dailies
and Journals.
In the event of any doubt, students may write to the Directorate of Academics and Professional Development in
the Institute for clarification at caap@icsi.edu.
Although due care has been taken in publishing this study material yet the possibility of errors, omissions and/
or discrepancies cannot be ruled out. This publication is released with an understanding that the Institute shall
not be responsible for any errors, omissions and/or discrepancies or any action taken in that behalf.
Should there be any discrepancy, error or omission noted in the study material, the Institute shall be obliged if
the same are brought to its notice for issue of corrigendum in the Student Company Secretary.

iii

SYLLABUS
MODULE 3 PAPER 5: COMPANY ACCOUNTS AND AUDITING PRACTICES
Level of Knowledge: Advance Knowledge
Objective: To acquire knowledge and understanding of the concepts, principles and practices of company
accounts and auditing in accordance with statutory requirements.

PART A: COMPANY ACCOUNTS (70 MARKS)

1. Share Capital
Issue of Shares: at Par, at Premium, at Discount, on Conversion and for consideration other than
Cash; Forfeiture and Re-issue of Shares, Buyback of Shares, Redemption and Conversion of Preference
Shares, Bonus Shares, Rights Issue, ESOPs, ESPS, Sweat Equity Shares
Alteration of Share Capital
Underwriting of Shares
2. Debentures
Issue of Debentures: at Par, at Premium, at Discount and for consideration other than Cash
Accounting Treatment and Procedures
Redemption of Debentures
Conversion of Debentures into Shares
3. Final Accounts of Companies
Conceptual Framework, Preparation and Presentation of Financial Statements, Schedule VI,
Interpretation and Scrutiny of Balance sheet
Treatment of Profit Prior to Incorporation, Preoperative and Preliminary Expenses
Preparation of Final Accounts under Company Law
4. Corporate Restructuring
Concept and Accounting Treatment as per AS
Methods of Amalgamations Accounting
The Pooling of Interests Method
The Purchase Method
Consideration
Treatment of Reserves, Goodwill and Pre-Acquisition & Post-Acquisition Profit
Accounting in the books of Transferor and Transferee
Merger and De-merger
Acquisition of Business
Internal Reconstruction
iv

5. Consolidation of Accounts
Holding and Subsidiary Companies - Accounting Treatment, Disclosures and Consolidation of Accounts
6. Valuation of Shares and Intangible Assets
Valuation of Shares, Methods of Valuation, Price Earning Multiple Valuation, Discounted Cash Flow
(DCF) Method
Valuation of Intangibles: Brand, Goodwill and IPRs
7. Liquidation of Company
Preparation of Statement of Affairs including Deficiency /Surplus Account
8. Corporate Financial Reporting
Various Requirements of Corporate Reporting
Value Added Statements: Economic Value Added (EVA), Market Value Added, Shareholders Value
Added
9. Accounting Standards
Relevance and Significance
National and International Accounting Standards and Authorities
Adoption, Convergence and Interpretation of International Financial Reporting Standards (IFRS) and
Accounting Standards in India

PART B: AUDITING PRACTICES (30 MARKS)

10. Auditing Concepts
Nature, Scope and Significance of Auditing
Basic Principles Governing an Audit
Overview of Auditing and Assurance Standards- National and International
11. Types of Company Audit
Statutory Audit
Internal Audit
Branch Audit
Joint Audit
Special Audit
CAG Audit
12. Internal Audit
Forms of Audit - Propriety Audit, Compliance Audit and Efficiency Audit
Nature, Scope and Techniques of Internal Audit; Functions and Responsibilities of Internal Auditors;
Organisational Status of Internal Auditing Function, Internal Audit vis--vis Statutory Audit

13. Internal Control

Nature, Scope And Elements
Internal Control distinguished from Internal Check and Internal Audit
Techniques of Internal Control System, Flow Charts, Internal Control Questionnaires
Steps for Internal Control and Audit Evaluation
Audit Testing Need For Sampling and Various Approaches to Statistical Sampling
Inter-Firm and Intra-Firm Comparisons Ratio And Trend Analysis; Audit In Depth
14. Review of Internal Control
Review of Purchasing Operations
Review of Efficacy of Management Information System
Review of Selling and Distribution Policies and Programmes
Review of Manufacturing Operations
Review of Personnel Policies
Appraisal of Management Decisions
15. Audit Engagement and Documentation
Audit Procedures: Audit Plan , Audit Programme, Vouching and Verification
Documentation: Audit Working Papers and Files
Sampling, Test Checking, Techniques of Test Checks

vi

LIST OF RECOMMENDED BOOKS

PAPER 5: COMPANY ACCOUNTS AND AUDITING PRACTICES
READINGS
1. M.C. Shukla, T.S. Grewal :
& S.C. Gupta

Advanced Accounts Vol. II; S. Chand & Company Ltd., 7361, Ram Nagar,
New Delhi-110 055.

2. R.L. Gupta &

M. Radhaswamy

Company Accounts; Sultan Chand & Sons,23, Daryaganj, New Delhi110 002.

3. S.P. Jain & K. L. Narang

Advanced Accountancy-Vol.II; Kalyani Publishers, 23, Daryaganj,

New Delhi - 110 002.

4. S. N. Maheshwari &
S.K. Maheshwari

Advance Accounting Vol. II; Vikas Publishing House (Pvt.) Ltd., A-22,
Sector 4, Noida 201 301.

5. Ashok Sehgal &

Deepak Sehgal

Advanced Accounting Vol. 2; Taxmanns,59/32, New Rohtak Road,

New Delhi-110 005.

6. J. R. Monga

Fundamentals of Corporate Accounting; Mayoor Paperbacks, A-95,

Sector 5, Noida-201 301.

7. Goel, Maheshwari Gupta :

Corporate Accounting, International Publishers, Daryaganj New Delhi

8. Kamal Gupta, Ashok Arora :

Fundamentals of Auditing: Tata McGraw Hill Education Limited

9. Kamal Gupta

Contemporary Auditing: Tata McGraw Hill Education Limited

10. International Financial

Reporting Standards
(IFRS)
11. Dolphy DSouza

Taxmann Publication (P) Limited, 59/32, New Rohtak Road, New Delhi110 005
:

Indian Accounting Standards & GAAPP; Snow White Publications Pvt.

Ltd., Her Mahal, 532, Kalbadevi Road, Mumbai 400 002.

vii

ARRANGEMENT OF STUDY LESSONS

PART A

1.

Share Capital

2.

Debentures

3.

Final Accounts of Company

4.

Corporate restructuring

5.

Consolidation of Accounts

6.

Valuation of Shares and Intangible Assets

7.

Liquidation of Company

8.

Corporate Financial Reporting

9.

Accounting Standards
PART B

10.

Auditing Concepts

11.

Types of Company Audit

12.

Internal audit

13.

Internal Control

14.

Review of Internal control

15.

Audit Engagement and Documentation

GLOSSARY
TEST PAPERS

viii

CONTENTS
PART A: COMPANY ACCOUNTS (70 MARKS)
LESSON 1
SHARE CAPITAL
Shares and Share Capital

Preference Shares

Equity Shares

Share Capital in Companys Balance Sheet

Issue of Shares for Cash

Issue of Shares at Par

Application Supplimented by Blocked Amount (ASBA)

Under & Over -Subscription of Shares

Calls-in-Advance

10

Issue of Shares at Premium

17

Issue of Shares at Discount

20

Issue of Shares for Consideration other than Cash

23

Forfeiture of Shares

27

Re-issue of Forfeited Shares

33

Forfeiture and Re-issue of Shares Allotted on Pro-rata Basis in Case of Over-subscription

37

Buy-Back of Shares

44

Difference Between Securities Premium and Share Premium

46

Redemption of Preference Shares

54

Rights Issue

76

Bonus Shares

78

ESOPs, ESPS, Sweat Equity Shares

81

Alteration of Share Capital

84

Underwriting of Shares

84

Underwriting Commission

85

Marked and Unmarked Applications

86

Determining the Liability of Underwriters

86

Accounting Treatment relating to Underwriting of Shares or Debentures

93

LESSON ROUND UP

95

SELF TEST QUESTIONS

96
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Page

LESSON 2
DEBENTURES
Introduction

102

Issue of Debentures

102

Debentures Issued for Cash

102

Issue of Debentures at Par

102

Issue of Debentures at Premium

105

Issue of Debentures at Discount

107

Debentures Issued for Consideration other than Cash

109

Debentures Issued as Collateral Security

110

Terms of Issue of Debentures

112

Interest on Debentures

114

Writing Off the Discount on Issue Of Debentures

117

Loss on Issue of Debentures

120

Redemption of Debentures

124

Mobilisation of Funds for Redemption of Debentures

124

Methods of Redemption of Debentures

125

Protection of the Interest of the Debentureholders

126

Redemption of Debentures Out of Profit

126

Redemption Out of the Proceeds of Fresh Issue of Shares or Debentures

144

Redemption Out of Sale Proceeds of Assets of the Company

144

Purchase of Debentures in the Open Market

148

Interest on Own Debentures

151

Purchase of Debentures before the Specified Date of Payment of Interest

[Cum-interest and Ex-interest Quotations]

153

Conversion of Debentures into Shares

176

LESSON ROUND UP

182

SELF TEST QUESTIONS

183
LESSON 3
FINAL ACCOUNTS OF COMPANIES

Profit or Loss Prior to Incorporation

188

Methods to Ascertain Profit or Loss Prior to Incorporation

188

Basis of Apportionment of Expenses

188
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Page

Preliminary Expenses

195

Introduction

197

Preparation and Presentation of Final Accounts

197

Form and Contents of Balance Sheet and Profit and Loss Account

197

Schedule VI of the Companies Act, 1956

199

General Instructions for preparing the balance sheet of a company

202

General Instructions for Preparation of Statement of Profit and Loss

212

Requirement of True and Fair

214

Treatment of Special Items while Preparing the Final Accounts

215

Provisions and Reserves

215

Provision for Depreciation

217

Provision for Repairs, Renewals and Replacements

218

Provision for Taxation and Advance Payment of Tax

221

Managerial Remuneration

224

Determination of Net Profit for Calculation of Managerial Remuneration

227

Appropriation or Disposition of Profits

230

Transfer of Profits to Reserves

232

Declaration of Dividend Out of Reserves

233

Declaration of Dividend

236

Tax on Distributed Profit

236

Payment of Dividend

237

Interim Dividend

238

Payment of Dividend Out of Capital Profits

239

Payment of Dividend Out of Current Profits Without Making Good Past Losses

239

Capitalisation of Profits and Reserves or Issue of Bonus Shares

240

Payment of Interest Out of Capital

245

Comprehensive illustration on Final Accounts of Companies

246

LESSON ROUND UP

261

SELF TEST QUESTIONS

261
LESSON 4
CORPORATE RESTRUCTURING

Meaning of Corporate Restructuring

266

Need and Scope of Corporate Restructuring

266
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Page

Some Examples of Corporate Restructuring

267

Why Corporate Structuring Exercise is Carried Out

267

Kinds of Restructuring

267

Accounting for Amalgamation

268

Amalgamation

268

Types of Amalgamation

268

Consideration

269

Methods of Accounting for Amalgamations

273

Accounting Entries in the Books of Transferor Company

275

Accounting Entries in the Books of Transferee Company

278

Acquisition of Business

295

Important Points to be noted in Connection with Acquisition of a Business

295

LESSON ROUND UP

303

SELF TEST QUESTIONS

303
LESSON 5
CONSOLIDATION OF ACCOUNTS

Definition

310

Legal Requirements for Preparation and Presentation of Final Accounts of a Holding

Company and its Subsidiary/ Subsidiaries

310

Consolidation of Balance Sheet and Profit and Loss Account

311

Preparation of Consolidated Balance Sheet

312

Investment in Shares of Subsidiary Company

312

Minority Interest

315

Pre-acquisition Profits and Reserves of Subsidiary Company

317

Pre-acquisition Losses of Subsidiary Company

318

Profit on Revaluation of Assets of Subsidiary Company

318

Loss on Revaluation of Assets of Subsidiary Company

318

Goodwill or Cost Control

318

Post-acquisition Profits or Losses

321

Inter-company Unrealised Profits included in Unsold Goods

321

Inter-company Transactions

321

Contingent Liabilities

322

Preference Shares in Subsidiary Company

325
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Bonus Shares

326

Treatment of Dividend Received from Subsidiaries

326

Holding Company Consisting of more than one Subsidiary

335

Preparation of Consolidated Profit and Loss Account

340

LESSON ROUND UP

343

SELF TEST QUESTIONS

344
Lesson 6
Valuation of Shares and Intangible Assets

I. Valuation of Shares

352

Determination of Normal Rate of Return and Capitalisation Factor

355

Fair Value of Shares

356

Special Factors for Valuation of Shares

356

Valuation of Preference Shares

358

II. Valuation of Intangible Assets

373

Approaches for Valuing Intangible Assets

374

Recognition and Initial Measurement of an Intangible Asset

375

Separate Acquisition of Intangible Assets

375

Cost of an Internally Generated Intangible Asset

377

Recognition of an Expense on Intangible Asset

378

Recoverability of the Carrying Amount Impairment Losses

379

Retirements and Disposals on Intangible Assets

380

Valuation of Goodwill

380

Need for Valuation of Goodwill

380

Factors Affecting Goodwill

381

Determination of Future Maintainable Profit

382

Methods of Valuing Goodwill

386

Summary of Valuation of Goodwill

392

LESSON ROUND UP

393

SELF TEST QUESTIONS

394
LESSON 7
LIQUIDATION OF COMPANY

Meaning of Liquidation of a Company

402

Consequences of Winding Up

402
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Page

Contributory

402

Fraudulent Preference

403

Order of Payment

403

Preparation of the Statement of Affairs

404

Statement of Affairs and Lists to be Annexed

405

B-List Contributories

413

LESSONS ROUND UP

414

SELF TEST QUESTIONS

415
LESSON 8
CORPORATE FINANCIAL REPORTING

Introduction

420

Concept of Corporate Financial Reporting

420

Various Requirements of Corporate Reporting in India

420

Management Discussion and Analysis Report

421

Auditors Report

422

Disclosure of Significant Accounting Policies

422

Disclosure of Notes on Accounts

423

Development in Corporate Financial Reporting

423

Characteristics of Corporate Financial Reporting

423

Definition and background of value added and the value added statement (VAS)

425

Distribution of Gross Value addition

425

Economic Value Added

429

How to Calculate Economic Value Added (EVA)

429

Market Value Added

432

Shareholder Value Added (SVA)

432

LESSON ROUND UP

433

SELF TEST QUESTIONS

434
LESSON 9
ACCOUNTING STANDARDS

Introduction

436

Meaning of Accounting Standards

436

Significance of Accounting Standards

437

Need for Accounting Standards

437
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Page

Scope of Accounting Standards

438

Compliance of Accounting Standards

439

Accounting Standards Board

439

ACCOUNTING STANDARDS

440

AS-1 Disclosure of Accounting Policies

441

AS-2 Valuation of Inventories

441

AS-3 Cash Flow Statements

442

AS- 4 Contingencies* and Events Occurring after the Balance Sheet Date

443

AS-5 Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies

443

AS-6 Depreciation Accounting

444

AS-7 Construction Contracts

444

Combination and Segmenting Construction Contracts

444

Contract Revenue

445

Contract Costs

445

Recognition of Contract Revenue and Expenses

445

Recognition of Expected Losses

445

AS-8 Accounting for Research and Development

446

AS-9 Revenue Recognition

446

AS-10 Accounting for Fixed Assets

446

AS-11 The Effects of Changes in Foreign Exchange Rates

447

AS-12 Accounting for Government Grants

447

AS-13 Accounting for Investments

448

AS-14 Accounting for Amalgamations

448

AS-15 Employee Benefits

449

AS-16 Borrowing Cost

449

AS-17 Segment Reporting

450

AS-18 Related Party Disclosures

451

AS-19 Leases

451

AS-20 Earnings Per Share

452

AS-21 Consolidated Financial Statements

453

AS-22 Accounting for Taxes on Income

454

AS-23 Accounting for Investments in Associates in Consolidated Financial Statements

455

AS-24 Discontinuing Operations

456

AS-25 Interim Financial Reporting

456
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Page

AS-26 Intangible Assets

458

AS- 27 Financial Reporting of Interests in Joint Ventures

459

AS-28 Impairment of Assets

461

AS-29 Provisions, Contingent Liabilities and Contingent Assets

463

AS 30, 31, & 32 Financial Instruments

464

Recognition and derecognition

466

International Accounting Standards (IAS)/ International Financial Reporting Standards (IFRS)

468

IAS-1 Presentation of Financial Statements

469

IAS-2 Inventories

469

IAS-7 Cash Flow Statements

470

IAS-8 Accounting Policies, Changes in Accounting Estimates and Errors

470

IAS-10 Events After the Balance Sheet Date

470

IAS-11 Construction Contracts

470

IAS-12 Income Taxes

470

IAS-14 Segment Reporting

471

IAS-16 Property, Plant and Equipment

471

IAS-17 Leases

471

IAS-18 Revenue

471

IAS-19 Employee Benefits

472

IAS-20 Accounting for Government Grants and Disclosure of Government Assistance

472

IAS-21 The Effects of Changes in Foreign Exchange Rates

472

IAS-23 Borrowing Costs

472

IAS-24 Related Party Disclosures

472

IAS-26 Accounting and Reporting by Retirement Benefit Plans

473

IAS-27 Consolidated and Separate Financial Statements

473

IAS-28 Investments in Associates

473

IAS-29 Financial Reporting in Hyperinflationary Economies

473

IAS-31 Interests in Joint Ventures

473

IAS-33 Earnings Per Share

474

IAS-34 Interim Financial Reporting

474

IAS-36 Impairment of Assets

474

IAS-37 Provisions, Contingent Liabilities and Contingent Assets

474

IAS-38 Intangible Assets

475

IAS-39 Financial Instruments: Recognition and Measurement

475

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IAS-40 Investment Property

475

IAS-41 Agriculture

476

IFRS-1 Firsttime Adoption of International Financial Reporting Standards

476

IFRS-2 Share-based Payment

476

IFRS-3 Business Combinations

477

IFRS-4 Insurance Contracts

477

IFRS-5 Non-current Assets held for Sale and Discontinued Operations

477

IFRS-6 Exploration for and Evaluation and Mineral resources

477

IFRS-7 Financial Instruments: Disclosures

477

IFRS-8 Operating Segments

478

IFRS-9 Financial Instruments

478

Convergence of Indian Accounting Standars with International Financial Reporting Standards (IFRS)

478

LESSON ROUND UP

480

SELF TEST QUESTIONS

480
PART B: AUDITING PRACTICES (30 MARKS)
LESSON 10
AUDITING CONCEPTS

Evolution of Auditing

484

Definitions of Auditing

484

Features of Auditing

485

Objectives of Auditing

485

Scope of Auditing

486

Basic principles governing an audit

486

True and Fair View

487

Advantages of an Independent Audit

488

Investigation

489

Scope of investigation

489

Reasons for carrying out investigation

489

Audit and Investigation distinguished

489

Materiality in Auditing

490

Auditing Standard

490

Procedure of issuing auditing standards

491

International Auditing standards

491

Harmonization of Indian Auditing standards with International Auditing Standards

491

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Page

Brief Overview of Auditing Standards in India

491

Standards on Quality Control (SQCs)

491

Elements of System of Quality Control

491

Standards for Audits and Reviews of Historical Financial Information

492

SA 210: Agreeing the Terms of Audit Engagements

493

SA 220: Quality Control for an Audit of Financial Statements

493

SA 230: Audit Documentations

493

SA 240: the Auditors Responsibilities Relating to Fraud in an Audit of Financial Statements

494

SA 250: Consideration of Laws and Regulations in an Audit of Financial Statements

494

SA 260: Communication with those Charged with Governance

495

SA 265: Communicating Deficiencies in Internal Control to those Charged with Governance and
Management

495

SA 299: Responsibility of Joint Auditors

495

SA 300 (Revised): Planning an Audit of Financial Statements

495

SA 315: Identifying and Assessing the Risks of Material Misstatement Through Understanding the
Entity and Its Environment

496

SA 320: Materiality in Planning and Performing an Audit

496

SA 330: the Auditors Responses to Assessed Risks

496

SA 402: Materiality in Planning and Performing an Audit

496

SA 450: Evaluation of Misstatements Identified During the Audit

496

SA 500: Audit Evidence

496

SA 501: Audit Evidence Specific Considerations for Selected Items

497

SA 505: External Confirmations

497

SA 510: Initial Audit Engagements Opening Balances

497

SA 520: Analytical Procedures

497

SA 530: Audit Sampling

497

SA 540: Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and
Related Disclosures

497

SA 550: Related Parties

497

SA 560: Subsequent Events

498

SA 570 Going Concern

498

SA 580: Written Representations

498

SA 600: Using the Work of another Auditor

498

SA 610: Using the work of Internal Auditors:

498

SA 620: Using the Work of an Auditors Expert

498
xviii