(54) ACCOUNTING & CONTROL SYSTEMS - AAT

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THE ASSOCIATION OF ACCOUNTING TECHNICIANS OF SRI LANKA
• Instructions to candidates
INTERMEDIATE EXAMINATION - JUNE 2010
(54) ACCOUNTING & CONTROL SYSTEMS
(1) This paper consists of three (03) Sections A, B & C.
(2) Five (05) questions should be answered as follows:
• Question No.01 of Section A.
• Both questions of Section B.
• Any two (02) questions from Section C.
(3) Answers should be in one language, in the medium applied for, in the booklets provided.
(4) Attach all workings and computations. State clearly assumptions made by you, if any.
(5) Use of calculators is permitted.
(6) 100 Marks.
SECTION - A
Multiple Choice Questions
Answer all questions of this Section
30 marks
01. Select from (1), (2), (3), (4) the most correct answer to each of the following
questions. Write the number of the selected answer in your answer booklet with the
English letter assigned to the question.
(A) Of the following, the four(04) principal qualitative characteristics of financial
statements are:
(1) Going concern, relevance, reliability and materiality.
(2) Understandability, relevance, reliability and comparability.
(3) Understandability, relevance, reliability and going concern.
(4) Materiality, relevance, reliability and objectivity.
(B) The objectives of preparation of financial statements do not include:
(1) Providing information about the financial performance of the entity.
(2) Meeting the needs of the users to make economic decisions.
(3) Discharging the stewardship responsibility of the management.
(4) Ensuring that there are no frauds.
24-07-2010
Morning
[9.00 – 12.00]
No. of Pages: 09
No. of Questions: 06

(C) Need for accounting arises:
(1) Because limited resources should be accounted and controlled.
(2) For historical purposes.
(3) For purposes of satisfying the employees needs.
(4) To facilitate audit.
(D) Accounting standards when adopted in preparation of financial statements will
ensure:
(1) Comparability of financial statements of different entities.
(2) There is no fraud.
(3) To facilitate the work of internal auditor.
(4) None of the above.
(E) Which one of the following transactions results in the change of working capital?
(1) Cash discount received on cash purchases.
(2) Revaluation of the closing stock.
(3) Maturing of a short-term investment.
(4) None of the above.
(F) The main objective of providing for depreciation of assets in the accounts is:
(1) To earn a profit at the time of disposal of assets.
(2) To ensure proper charge against the profit earned by the use of assets.
(3) To calculate income tax accurately.
(4) To understate profits and avoid payment of taxes.
(G) When valuing closing stock, if the stock does not include goods sent on sale or
return basis for Rs.50,000/- with a markup of 25% on cost, the gross profit of
the company will be:
(1) Understated by Rs.50,000/-. (2) Understated by Rs.40,000/-.
(3) Not affected. (4) Overstated by Rs.50,000/-.
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(H) AB Ltd. a VAT registered company, purchased raw materials from Plastics (Pvt)
Ltd. The details of the purchase tax invoice relating to the purchase are as
follows:
Of the following, the correct set of accounting entries to record the above
purchase is:
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Dr.
Rs.’000
(1) Purchase Account 1,000
Cr.
Rs.’000
Plastic (Pvt) Ltd. 1,000
(2) Purchase Account 1,120
Plastic (Pvt) Ltd. 1,120
(3) Purchase Account 1,000
VAT Control Account 120
Plastic (Pvt) Ltd. 1,120
(4) Purchase Account 1,000
VAT Control Account 120
Plastic (Pvt) Ltd. 1,000
VAT Payable Account 120
(I) The balance in the bank statement shows Rs.230,000/- as at the end of a
month, while the cash book bank balance on the same day was Rs.130,000/-.
On perusal it was found that the bank has given credit for interest amounting to
Rs.100,000/- and debited Rs.10,000/- being withholding tax for the month. An
erroneous credit of Rs.12,500/- by the bank, and debit tax of Rs.2,500/-
charged by the bank were included in the bank statement. The adjusted cash
book balance at the end of the month should be:
(1) Rs.230,000/-. (2) Rs.217,500/-. (3) Rs.132,500/-. (4) Rs.120,000/-.
(J) The following information is given with regard to a particular company at the end
of a year. Inventory - Rs.20,000/-, Accounts Receivable - Rs.25,000/-, Cash
Balance - Rs.35,000/-, Accounts Payable - Rs.12,000/-, Bank Overdraft -
Rs.28,000/-.
Based on the above information, the Quick Asset Ratio and Working Capital of
the company, respectively, are:
Rs.’000
2,500 kg of plastic pallets at Rs.400/- per kg 1,000
Add: VAT at 12% 120
Total 1,120
(1) 3 : 2 and Rs.40,000/-. (2) 3 : 2 and Rs.20,000/-
(3) 2 : 1 and Rs.40,000/-. (4) 2 : 1 and Rs.20,000/-

(K) Internal audit is intended to be:
(1) A component of the internal control system of the entity.
(2) The flying squad of the management.
(3) Part of the accounting activity of the entity.
(4) None of the above.
(L) The item which is not considered as fraud out of the following:
(1) Manipulation, falsification or alteration of records or documents.
(2) Misappropriation of assets.
(3) Mathematical or clerical mistakes in the accounting data.
(4) Suppression of the effects of transactions from records or documents.
(M) Which of the following is not a feature in internal control?
(1) Internal check.
(2) Internal audit.
(3) Submitting of an annual report for Best Annual Report Award competition.
(4) Attendance time recorder.
(N) Internal auditor of a public company is appointed by:
(1) Board of Directors of the company.
(2) Shareholders at the Annual General Meeting.
(3) External auditors of the company.
(4) Government.
(O) Segregation of duties is:
(1) A method of cost cutting.
(2) A method to minimize unemployment.
(3) A method of identifying efficiency of employees.
(4) A method of internal control.
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(02 marks each, Total 30 marks)

SECTION - B
Compulsory Questions
Answer both questions of this Section
50 marks
02. (A) What constitutes “Stated Capital” as defined by the Companies Act No. 07 of
2007. (02 marks)
(B) As per Section 148 of the Companies Act No. 07 of 2007, every company shall
keep accounting records which correctly record and explain the company’s
transactions, and it is an offence not to comply with the said requirement.
Who are the two(02) parties held responsible for keeping of accounting records?
(02 marks)
(C) The following Trial Balance was extracted from the books of account of Luxmi
(Pvt) Ltd. as at 31 st March 2009:
Dr.
Cr.
Rs.’000 Rs.’000
Sales - 10,000
Cost of sales 7,500 -
Other income - 1,500
Administration Expenses 1,200 -
Distribution Expenses 500 -
Other Operating Expenses 200 -
Finance Expenses 100 -
Plant & Equipment, at cost / Revaluation 5,000 -
Provision for depreciation, as at 01 st April 2008 - 2,000
Long term Investments - Government Bonds 1,200 -
Inventories, as at 31 st March 2009 2,100 -
Accounts Receivables / Accounts Payables 3,200 2,400
Bank balance - 210
Cash in hand 450 -
Stated Capital - Ordinary Shares (300,000 shares) - 3,500
Dividends paid 900 -
Plant & Equipment Revaluation Reserve as at 01 st April 2008 - 1,600
12% Debentures - 650
Retained Earnings - 300
Difference in Trial Balance - 190
Total 22,350 22,350
The following additional information is provided:
(1) The double entries passed in the ledger included the following erroneous
entries. It was observed that the narrations in each case were correctly
written.
Dr. Cr.
Rs. Rs.
Sales 140,000 -
Accounts Receivable
(Recording credit sales of Rs.140,000)
40,000
Accounts Payable 320,000 -
Cash
(Settlement of creditors of Rs.230,000)
- 230,000
The difference in the Trial Balance has been caused as a result of these
errors.
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(2) The following expenses were accrued as at 31 st March 2009:
Rs.
Audit fees 50,000
Electricity 5,000
Directors fee 40,000
(3) Although the Board of Directors made the following decisions, required
entries for the current year have not been incorporated into the books of
account.
• To incorporate the current value of Plant & Equipment of
Rs.2,500,000/- determined by a professional valuar as at 01 st April
2008 into the books of account. Depreciation charge is 15% per
annum on revalued value.
• To write-off two debtors totalling Rs.380,000/-, and to maintain a
general provision for doubtful debts at 4% of the balance remaining
trade debtors (You may assume that the entire Accounts Receivables
was made up of trade debtors).
• To rectify the valuation of closing Inventories and thereby reduce the
value to Rs.2,000,000/- from Rs.2,100,000/-.
(4) The month end balance appearing in the bank statement received for the
month of March 2009 was in agreement with the cashbook bank balance.
However, when matching the entries it was revealed that the following
entries were unrecorded in the cashbook.
• Interest income of Rs.200,000/- on call deposits held in March 2009
was not entered in the cash book.
• Debit tax of Rs.23,000/- for the month of March 2009 has not been
entered in the cash book.
• Overdraft interest of Rs.177,000/- for the month of March 2009 has
not been incorporated into the cash book.
(5) The payment cheques of the annual interest on Debentures for the financial
year 2008/09 have been released on 31 st March 2009. However, those
have not been recorded in the books of account as at 31 st March 2009.
(6) Tax liability for the year was estimated as Rs.250,000/-.
You are required to prepare, the following for the use of the management:
(a) Income Statement of the company for the year ended 31 st March 2009.
(12 marks)
(b) A Balance Sheet as at 31 st March 2009. (09 marks)
(Total 25 marks)
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03. Kamal, Nimal & Sunil were partners sharing profits and losses in the ratio of
3 : 2 : 1. The Trial balance of the partnership as at 31 st March 2010 was as follows:
Dr. Cr.
Rs.’000 Rs.’000
Capital Accounts - Kamal - 300
Nimal - 200
Sunil - 100
Current Accounts - Kamal - 100
Nimal 50 -
Sunil - 70
Land, at cost 600 -
Building, at cost 800 -
Motor vehicles, at cost
Provisions for Depreciation - 01
700 -
st April 2009
Building - 350
Motor vehicles - 400
Inventories as at 01 st April 2009 350 -
Accounts Receivable / Accounts Payable 150 530
Provision for doubtful debts - 01 st April 2009 - 40
Purchases 1,800 -
Sales - 3,170
Administration Expenses 400 -
Distribution Expenses 50 -
Financial and other Expenses 180 -
Cash and bank balances 130 -
Goodwill 50 -
5,260 5,260
Sunil retired from the partnership on 30 th September 2009. New profit / loss sharing
ratio of Kamal and Nimal was agreed as 3 : 2 after Sunil’s retirement.
It was provided in the partnership deed that any retiring partner should be entitled to
a share of the goodwill of the firm to be calculated at 2½ times of the average profits
of the last three years, ended on 31 st March.
The following additional information is provided:
(1) Partners agreed to increase the provision for doubtful debts up to Rs.60,000/-
and adjust the entries in the profit and loss in the first six months. All other
income and expenses are considered to have been distributed evenly over the
year, unless otherwise specifically stated.
(2) The amount due to Sunil on his retirement was agreed to be transferred to a
loan account in his name, and annual interest at 10% should be paid to Sunil.
(3) The profits for the three years ended 31 st March 2009, 2008 and 2007 were
Rs.120,000/-, Rs.200,000/- and Rs.220,000/- respectively.
(4) Partners decided not to continue with the goodwill account in the books and
write it off in the new profit & loss sharing ratio.
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(5) Depreciation should be provided for the assets at the following rates on cost:
Buildings 05% per annum
Motor vehicles 20% per annum
(6) Cash balance shown in the Trial Balance includes an IOU chit from Kamal who
drew cash of Rs.3,000/- on 01 st January 2010. This has to be treated as
drawings.
(7) Value of closing inventories on 31 st March 2010 was Rs.240,000/- (market value
was Rs.255,000/-).
(8) Partners are entitled to the following salaries:
Kamal - Rs.2,000/- per month
Nimal - Rs.1,000/- per month
Sunil - Rs.2,500/- per month (upto the time of retirement)
Books of account were continued till the end of the year, and the Trial Balance
given was extracted from the books on 31 st March 2010. No accounting entries
were made to incorporate the above matters.
You are required to prepare:
(a) Trading, Profit and Loss and Appropriation Accounts of the partnership in
columnar form for the two six months periods ending 30 th September 2009, and
31 st March 2010 respectively. (12 marks)
(b) Capital accounts and current accounts of Partners in columnar form for the year
ended 31 st March 2010. (05 marks)
(c) Balance Sheet of partnership as at 31 st March 2010. (08 marks)
(Total 25 marks)
SECTION - C
Answer any two (02) questions only from this Section
20 marks
04. (A) Mention two(02) objectives of an Internal Control System. (02 marks)
(B) List three(03) limitations of an Internal Control System. (03 marks)
(C) Briefly explain the meanings of:
(a) Fraud, and
(b) Error. (02 marks)
(D) Give three(03) examples of fraud that an Auditor may commonly detect in
respect of cash or cheques. (03 marks)
(Total 10 marks)
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05. (A) Distinguish, in point form, Internal Audit from External Audit. (05 marks)
(B) Briefly explain five(05) types of Internal Controls. (05 marks)
(Total 10 marks)
06. Following information was extracted from the books of Alpha Sports Club for the
year ended 31 st March 2010.
(1) Subscription received during the year Rs.150,000/-.
Subscription outstanding as at 31 st March 2009 Rs.20,000/-.
Subscription outstanding as at 31 st March 2010 Rs.40,000/-.
Subscription received in advance as at 31 st March 2009 Rs.30,000/-.
Subscription received in advance as at 31 st March 2010 Rs.20,000/-.
(2) During the year a sum of Rs.50,000/- was invested in a “Sports Fund” and the
interest received on that investment Rs.1,000/-.
(3) Opening stock of sports equipment as at 01 st April 2009 was Rs.20,000/-.
Purchases of sports equipment during the year 2009/2010 on credit basis was
Rs.60,000/-, and on cash basis was Rs.30,000/-. Stock of sports equipment as
at 31 st March 2010 was Rs.40,000/-. Sale of scrapped sports equipment during
the year was Rs.5,000/-. Sports equipment were for internal use of the Club.
(4) In connection with the inauguration of the Tennis Court, the club on its own
printed a souvenir. Printing expenses of Rs.1,000/- remained unpaid as at
31 st March 2010. Amount due from the advertisers was Rs.15,000/- on account
of this souvenir. The Club has already received Rs.25,000/- on account of
advertisements.
(5) The following expenses have been incurred and paid during the year:
Salaries Rs.20,000/-
Printing and stationery Rs.15,000/-
(6) Cash balance as at 01 st April 2009 was Rs.5,000/-.
You are required to prepare, for the year ended 31 st March 2010:
(a) Receipts and Payments account, and, (04 marks)
(b) Income and Expenditure account, (06 marks)
of Alpha Sports Club. (Total 10 marks)
- o0o -
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