Auditing and assurance revision question and answer

Auditing and Assurance Revision Questions and Answers

Express your opinion in the following cases:

a) M/s ABC Company Ltd. re-valued its assets to match up it‟s huge accumulated loss. The company wants to increase its share capital using the revaluation reserve.
b) Mrs. Rukmani Sharma is a shareholder of M/s Real Company Ltd. holding 2% of paid up share capital of the company. The company wants to appoint Mrs. Rukmani‟s spouse Mr. Janardhan Sharma, a Chartered Accountant in practice, as the auditor of the company for the year 2064/65.
c) M/s Sunshine Co. Ltd. has decided to change inventory valuation method from LIFO to FIFO from the year 2063/064. What will be your recommendation as a statutory auditor in above regard?
d) M/s Durga Bhawani Hydro Power Company Limited has 8 Board members. The company seeks your view with regards to appointment of additional Board member as per requirement of Company Act, 2063.

Answer
a) Revaluation reserves created out of revaluation of assets are not distributable profit Section 56(10) of Companies Act, 2063 debars such reserve to be distributed as bonus shares or to be capitalized as shares. Hence company cannot increase share capital using the revaluation reserve.

b) As per section 112(e) of Companies Act, 2063 any shareholder or his/her close relative having shares of 1 % or more of the paid-up capital of the company is disqualified to be appointed the auditor of that company. In the given case, Mrs. Rukmani Sharma is the shareholder of M/s Real Company Ltd. holding 2% of paid up share capital of the company i.e. more than 1 % of paid up capital of the company. Her spouse, Mr. Janardhan Sharma being the close relative within the definition of the Act is thus not qualified for the appointment as the auditor of M/s Real Company Ltd.

c) The presentation and classification of items in the financial statements should be retained from one period to the next unless the change will result in a more appropriate presentation or is required the Nepal Accounting Standard. If the inventory valuation method has been changed due to the above reason, M/s ABC & Co. should reclassify its comparative information in accordance with of Nepal Accounting Standard -1, “Presentation of Financial Statements” and disclose accordingly. However, if the reclassification is not possible, the reason should be disclosed.

d) Section 86 of the Companies Act, 2063, has provision regarding appointment of members of Board of Director. The public company which has more than seven Board members, should appoint at least two independent having knowledge of the business of the Company as Board members. This limit is restricted to at least one Board member the public Company which has Board members up to seven. In this case, Durga Bhawani Hydro Power Company Limited should appoint at least two independent Board members as per provision of section86(3) of the Companies Act 2063.



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