SUGGESTED ANSWERS TO QUESTIONS

SECTION - A
1. 2X10 = 20 Marks
(i) - (B)
(ii) - (A)
(iii) - (A)
(iv) - (B)
(v) - (C)
(vi) - (C)
(vii) - (C)
(viii) - (B)
(ix) - (C)
(x) - (B)

SECTION- B

[Answer any FIVE from Question No. 2 to 8]

2. (a): 4+4 = 8 Marks

(i) The Cost Auditor appointed shall submit a certificate that –

(a) The individual or the firm, as the case may be, is eligible for appointment and is not disqualified
for appointment under the Act (the Cost and Works Accountants Act, 1959) and the rules or
regulations made there under;
(b) The individual or the firm, as the case may be, satisfies the criteria provided in Section 141 of
the Companies Act, 2013 so far as may be applicable;
(c) The proposed appointment is within the limits laid down by or under the authority of the Act;
and
(d) The list of proceedings against The Cost Auditor or audit firm or any partner of the audit firm
pending with respect to professional matters of conduct, as disclosed in the certificate, is true and
correct.
The Cost Auditor is also required to give a certificate to the Audit Committee in respect of his
independence and arm’s length relationship with the company.
(ii) Institute of Cost Accountants of India (ICAI) has issued Cost Accounting Standard CAS-4 titled
‘Cost of Production for Captive Consumption’. The standard has clarified that in case of captive
consumption, cost calculation should be as per CAS-4 standard only. Cost of production of a
product consists of materials consumed, Direct Wages and Salaries, direct expenses, works
overheads, quality control costs, research development costs, packing costs, administrative
overheads relating to production. To arrive at cost of production of goods dispatched for captive
consumption, adjustment for stock of Work-in-progress, finished goods, recoveries for sales of
scrap, wastages etc. shall be made.

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2. (b): 4+4 = 8 Marks
(i) Provisions of Clause 2 of Part II of The First Schedule of The Cost and Works Accountants
Act, 1959, stipulate Professional Misconduct among Cost Accountants in Service. As per the
provisions of Part II of the First Schedule of the Act, a Cost Accountant in Service shall be
deemed to be guilty of Professional Misconduct, if he/she "accepts or agrees to accept any
part of fees, profits or gains from a lawyer, a cost accountant or a broker engaged by such a
company, firm or person or agent or customer of such company, firm or person by way of
commission or gratification".
In the given case, Mr. Arun, who is working as a Manager-Cost Accounts of PQR Ltd., accepts 10%
of profits from Mr. Raju, who is a legal consultant of the same company. This amounts to
Professional Misconduct.
(ii) As provisions of Clause 2 of Part I of The Second Schedule of The Cost and Works
Accountants Act, 1959, stipulates, the Professional Misconduct of Cost Accountants in
Practice. As per the provisions of Part, I of the Second Schedule of the Act, a Cost
Accountant in practice shall be deemed to be guilty of professional misconduct, if he/she
"certifies or submits in his/her name, or the name of his/her firm, a report of an examination
of cost accounting and related statements unless the examination of such statements has been
made by him/her or by a partner or an employee in his/her firm or by another Cost
Accountant in Practice".
In the given case, Mr. S. certifies the cost and pricing statement of a company, which
manufactures pipes. The statement is to be submitted for a Contract and is not prepared by
him. It is prepared by Mr. T. who is neither a CMA nor an employee of Mr. S. Hence, this
amounts to Professional Misconduct.

3. (a): 8 Marks
Maintenance of records for ascertaining Transportation Cost:
(i) Proper records shall be maintained for recording the actual cost of transportation showing each
element of cost such as freight, cartage, transit insurance and others after adjustment for recovery
of transportation cost. Abnormal costs relating to transportation, if any, are to be identified and
recorded for exclusion of computation of average transportation cost.
(ii) In case of a manufacturer having his own transport fleet, proper records shall be maintained to
determine the actual operating cost of vehicles showing details of various elements of cost, such
as salaries and wages of driver, cleaners and others, cost of fuel, lubricant grease, amortized cost
of tyres and battery, repairs and maintenance, depreciation of the vehicles, distance covered and
trips made, goods hauled and transported to the dept.
(iii) In case of hired transport charges incurred for despatch of goods, complete details shall be
recorded as to date of despatch, type of transport used, description of the goods, destination of
buyer, name of consignee, challan number, quantity of goods in terms of weight or volume,
distance involved, amount paid etc.
(iv) Records shall be maintained separately for Inward and outward transportation cost specifying the
details particulars of goods despatched, name of supplier/recipient, amount of freight etc.
(v) Separate records shall be maintained for identification of transportation cost towards inward
movement of material (procurement) and transportation cost of outward movement of goods
removed/sold for both home consumption and export.
(vi) Records for transportation cost from factory to depot and thereafter shall be maintained
separately.
(vii) Records for transportation cost for carrying any material/product to job-workers place and back
should be maintained separately so as to include the same in the transaction value of the product.

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(viii) Records for transportation cost for goods involved exclusively for trading activities shall be
maintained separately and the same will not be included for claiming any deduction for
calculating assessable value excisable goods cleared for home consumption.
(ix) Records of transportation cost directly allocable to a particular category of products should be
maintained separately.
(x) For common transportation cost, both, for own fleet or hired ones, proper records for basis of
apportionment should be maintained.
(xi) Records for transportation cost for exempted goods, excisable goods cleared for export shall be
maintained separately.
(xii) Separate records of cost for mode of transportation other than road like ship, air etc., are to be
maintained, which will be included in total cost of transportation.

3. (b): 8 Marks

Profit as per Cost Accounts = ` 93,97,230

4. (a): 4+4 = 8 Marks

(i) The areas of Corporate Services are the support infrastructure of a company. The activities in
such areas are stated below:

 Combine or consolidate certain enterprise-wide needed support services provided based on

specialized knowledge, best practices, and technology.
 Serve Internal (and sometimes external) customers and business partners.
 Co-ordinate the diverse organizational units and help them to focus on organizational goals.
 Exploit resources and develop core competencies that enable an organization to keep its edge
over its industry competitors.
 Combining operations with another competitor in the same industry to increase competitive
strengths and lower competition among the industry rivals.

The business world is now becoming increasingly information-intensive and complex and,
therefore, companies have begun to incorporate web-based services into the workplace. These
include public relations, customer assistance or call centers, training, engineering, human
resources, procurement, etc., to create new business value and help the company function more
effectively by improving the internal processes, managing customer relationships, and extending
the organization. The benefits of these services extend to core business areas in form of:
a) Reduced costs.
b) Less inventory.
c) Less working capital requirements.
d) Improved procurements and higher profits, and
e) Higher efficiency and productivity of the employees as new technologies can introduce an array
of new possibilities with powerful computers and integration of databases with web
technologies.

(ii) The evaluation system of the ‘Corporate Services Audit’ should consider the level of
contribution a business entity makes to society and its business environment towards raising the
quality of life through better product quality and services rather than profit maximization. The
‘corporate services audit’, thus, attempts to distinguish between the ends (i.e., profits) and means
(i.e., services) of business and provides a new dimension to the concept of audit approach. It is

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 the fulfillment of the social responsibilities of a business unit. Auditor’s responsibility lies in
evaluating the company’s response to social needs.
The focus should be on:

Target Stakeholder Corporate Service Focus

Consumer Quality goods at the proper price.
Employee Pay, Training, Safety, Welfare.
Shareholders Safety of Investment, Good return.
Community Public Relations, Social Cost, Social Benefit.
Fellow Business Business Ethics, Fair Trade.
State Compliance of Law, Fair Trade, and No Evasion of Tax.

4. (b): 8 Marks
As per Section 135(1) of the Companies Act, 2013, every company having a net worth of rupees five
hundred crores or more, or turnover of rupees one thousand crores or more, or a net profit of rupees five
crores or more during any financial year shall constitute a Corporate Social Responsibility (CSR)
Committee of the Board consisting of three or more directors, out of which, at least, one director shall
be an independent director.
In terms of Section 135(5) of the Act read with Companies (Corporate Social Responsibility Policy)
Rules, 2014, the company, in pursuance of the recommendations of the CSR Committee of the Board
and as per the declared CSR Policy of the company, spends, in every financial year, at least, two percent
of the average net profits of the company made during the three immediately preceding financial years
subject to the condition that such policy will cover the subjects enumerated in the Schedule VII of the
Act.
In Schedule VII, the following items and entries are illustrative:
(i) eradicating hunger, poverty, and malnutrition, safe drinking water,
(ii) promoting education, and vocation skills among children, women, elderly persons
(iii) promoting gender equality, empowering women, setting up homes, hostels for women and
orphans, old age homes, daycare centers, etc.
(iv) environmental and ecological balance, protection of flora and fauna
(v) protection of national heritage, art, culture, etc.
(vi) measures for the benefit of armed forces veterans, war windows, etc.
Though there is no mandatory requirement for CSR Audit, a CSR Audit program will form part of the
Management Audit and may cover all or any of the following:

 Effectiveness of the operating framework for CSR implementation,

 Effectiveness of the implementation of specific, large CSR projects,
 Adequacy of internal control and review mechanisms,
 Reliability of measures of performance, and
 Management of risks associated with external factors like regulatory compliance, management of
adverse or potentially adverse NGO attention, etc.
CSR Audit and review will in a nutshell look for the following:
 Ensuring compliance with the Act,
 Evaluating internal control and governance framework,
 Assessing the CSR project life cycle, and
 Conduct a financial review of the project to confirm the utilization of budgets for achieving
desired outcomes.

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 5. (a): 8 Marks
(i) Objectives of Internal Control:
The main objectives of internal control are to ensure that-
(a) Transactions are executed in accordance with managements general or specific authorization
(b) All transactions are promptly recorded in the correct amount in the appropriate accounts and
in the accounting period in which executed so as to permit preparation of financial
information within a framework of recognized accounting policies and practices and
relevant statutory requirements, if any, and to maintain accountability for assets
(c) Assets are safeguarded from unauthorised access, use of disposition; and
(d) The recorded assets are compared with the existing assets at reasonable intervals and
appropriate action is taken with regard to any differences.
(ii) Limitations of Internal Control:
Internal control can provide only reasonable, but not absolute, assurance that the objectives stated are
achieved. This is because there are some inherent limitations of internal control, such as
(a) Cost: It is the management’s consideration that a control be cost-effective
(b) No control for unusual transaction: It is the fact that most controls do not tend to be directed
at transactions of unusual nature
(c) Human Error: the potential for human error. These include the realities that human
judgement in decision making can be faulty and that breakdowns in internal control can
occur because of human error. For example, there may be an error in the design of, or in the
change to a control.
(d) Collusion among employees: It is the possibility of circumvention of controls through
collusion with parties outside the entity or with employees of entity. For example,
management may enter into side agreements with customers that alter the terms and
conditions of the entity’s standard sales contracts, which may result in improper revenue
recognition.
(e) Abuse of authority: It is the possibility that a person responsible for exercising control could
abuse that authority, for example, a member of management overriding a control
(f) Inadequate procedure: It is the possibility that procedures may become inadequate due to
changes in conditions and compliance with procedures may deteriorate
(g) Manipulations by management: It is the manipulations with respect to transactions or
estimates and judgments required in the preparation of financial statements.

5. (b): 8 Marks
Salient Features of Financial Administration of Local Bodies:
(a) Budgetary Procedure: The objective of local bodies budgetary procedure are financial
accountability, control of expenditure, and to ensure that funds are raised and moneys are
spent by the executive departments in accordance with the rules and regulations and within
the limits of sanction and authorisation by the legislature or Council. Different aspects
covered in budgeting are determining the level of taxation, fees, rates, and laying down the
ceiling on expenditure, under revenue and capital heads.
(b) Expenditure Control: At the State and Central level, there is a clear demarcation between the
legislature and executive. In the local body, legislative powers are vested in the Council
whereas executive powers are delegated to the officers, e.g. Commissioners. All matters of
regular revenue and expenditures are generally delegated to the executive wing. For special
situations like, reduction in property taxes, refund of security deposits, etc., sanction from
the legislative wing is necessary.

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 (c) Accounting System: Municipal Accounting System has been conventionally prepared under
the cash system. In the recent past, however, it is being changed to the accrual system of
accounting. The accounting system is characterised by:

1) Subsidiary and statistical registers for taxes, assets, cheques etc.

2) Separate vouchers for each type of transaction
3) Compulsory monthly bank reconciliation
4) Submission of summary reports on periodical basis to different authorities at regional and
state level.

6. (a): 4+4 = 8 Marks

(i) Profit as percentage of Capital Employed =
20.00% (31.03.2022)
23.97% (31.03.2021)
(ii) Profit as percentage of Sales =
18.61% (31.03.2022)
24.96% (31.03.2021)
19.28% (31.03.2020)
6. (b): 8 Marks
CALCULATION OF PROCESSWISE WASTE MULTIPLIER:
Percentage of Net output for 100
PROCESS Waste Multiplier
Wastages on input units of input
Total - 100 1.3101
Blow Room 9.14 100 - 9.14 =90.86 1.1904
Carding 7.13 90.86 - 6.47=84.39 1.1056
Drawing 1.06 84.39 - 0.89=83.50 1.0939
Roving ( Simplex) 0.20 83.50 - 0.17=83.33 1.0917
Ring Frame (Spinning) 7.11 83.33 - 5.92=77.41 1.0141
Reeling & Winding 1.40 77.41 - 1.08=76.33 1.0000
Calculation = 1/76.33 = 0.013101

7. (a): 8 Marks

Special type Auto Components: 2,50,000 Nos ₹ in ‘000 ₹ in ‘000

Materials (250,000 @ ₹ 3.25) 812,500
Labour 8000 Hrs. @ ₹ 4.50 36,000
Prime Costs 848,500
Factory Over Heads (8000 × 4) 32,000
Factory Cost 8,80,500
Selling and Distribution Cost 30,000
Cost of Sales 9,10,500
Interest @11.5% on (300000 + (0.25 × 910,500)) 60,677
Total Cost 9,71,177
Profit 323,726
Sales 12,94,903

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7. (b): 8 Marks
The amount to the tune of Rs.1,569.73 lakh, is to be treated as abnormal cost and should be excluded
from the product cost.

Answer any Four from the following five questions: 4X4 = 16 Marks

8. (a):
Determination of Capacity:
1. Capacity shall be determined in terms of units of production or services or equivalent
machine or man hours.

2. Installed Capacity:
Installed capacity is usually determined based on:
(i) Technical specifications of facility.
(ii) Technical evaluation
(iii) Capacities of individual or interrelated production or operation Centres.
(iv) Operational constraints or capacity of critical machines or equipment
(v) Number of shifts or machine hours or man hours.
In case, technical specifications of facility are not available, the estimates by technical experts on
capacity under ideal conditions shall be considered for determination of installed capacity.
In case the installed capacity is assessed as per direction of the Government or regulator it shall be in
accordance with the said directives.

3. Reassessment of Installed Capacity:

Installed capacity shall be reassessed in case of any change due to addition, deletion,
modification or for any other reason from the date of such change.
In case the installed capacity is reassessed as per direction of the Government or regulator it shall
be in accordance with the said directives.
4. Normal Capacity:
Normal capacity is determined after suitable adjustments to the Installed Capacity
The adjustments may be of the following nature:
(i) Time lost due to scheduled preventive or planned maintenance
(ii) Number of shifts or machine hours or man hours
(iii) Holidays, normal shut down days, normal idle time
(iv) Normal time lost in batch change over

8. (b):

Internal Audit mainly plays a supplementary role only in financial and compliance audits. It is a
statutory requirement but otherwise also this audit is to assist the organization in performing functions
more effectively and economically with focus on the efficiency and effectiveness of operations.
Operational auditing, on the other hand, is not the exclusive, domain of the internal auditor it is also
stated to be an early warning system for the detection of potentially destructive problems. It is therefore,
an auditor must establish the scope of an operational audit before formulating the approach to initiate an
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operational audit. The next step shall be to understand the auditee’s operation, its purpose in the total
environment of the entity, its history, its image, its staff, their skills and competence and its reporting
path. The reporting path is of very critical importance because this path is the communication route
along which, the audit results and conclusions will flow. A comparison of their respective focus is stated
below.
Internal Audit Operational Audit
Risk identification, process
Compliance focussed.
improvement
Financial transactions focussed Business focuses
Efficiency & improvement
Correctness of accounts focussed
focussed
Policies and procedure focussed Risk management focussed
Budget monitoring on profit centres Accountability for performance

8. (c):

CORPORATE DEVELOPMENT AUDIT:

A corporate development audit is an independent objective study of an organization’s capabilities. It
aims at identifying strengths and weaknesses and moving toward state-of-the-art performance. A
Corporate Development Audit gives a comprehensive picture of the status of corporate development
effectiveness and highlights developmental needs. Many organizations use the corporate development
audit to identify the state-of-the-art in business development in their industry and determine exactly how
much they differ from that ideal. The resulting feedback report highlights all key findings, with specific
recommendations for course correction or improvement.
Corporate development audit is a comprehensive audit to assist the corporate management in various
aspects of development through a process of systematic review and evaluation of long-term strategies of
the company. Such corporate development audit assures that –
a. The various factors and forces constituting a corporate enterprise are the right kind and quality.
b. Communication remains the key to the functioning of an enterprise
c. The pattern of departmentalization in an enterprise adopted in the past and proposed for the
future for dealing with multidirectional responsibilities is fully responsive to circumstances and
business environment.
d. The personnel problems are handled appropriately considering the overall objectives of
development of the corporate enterprise.
e. The responsibilities of planning, coordination, motivation and control at functional management
levels are discharges in proper spirit.
A corporate development audit is best performed by a team consisting of different experts of different
disciplines as it requires multi-disciplinary approach. Large scale corporate enterprises offer
opportunities to the conduct of corporate development audit. Contrary to other forms of audit – statutory
or non-statutory (viz. financial audit, cost audit, efficiency audit, propriety audit, etc.) Corporate
development audit plays a vital role not only lying up the loose ends, but also to forge a link in the
knowledge that emanates from different quarters and on the basis of different types of experiences in
dealing with varied types of problems.
As the corporate development audit is more of an introspective nature, necessary initiation and support
should come from a firm decision taken by the Board of Directors and its Chairman. Moreover, as this
audit highlights the corporate strengths and weakness, especially failures, inefficiencies and bottlenecks,

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it should be undertaken by a high-powered team with the corporation and acceptability of all those
concerned with it.

8. (d):
Profit before Tax = ` 26,683 (in Lakhs)
Value Added = ` 35,100 (in Lakhs)

8. (e):
(i) Installed capacity for the machine: = 43.80 lakh units.
(ii) Available Capacity: = 31.40 lakh units.
(iii) Normal capacity = 36.58 lakh units
(iv) Actual capacity utilisation:=77.92%