Fundamental of Taxation and Auditing (Mgt.218) | BBS Third Year | 4 Years Program | Model Question | With SOLUTION

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Download PDF Fundamentals of Taxation and Auditing | Mgt.218 | Question Paper | 2077-2021 | BBS Third Year.

Candidates are required to give their answer in their own words as far as practicable.

The figure in the margin indicate full marks.

Part-I : Taxation

Brief answer questions: (5x2=10)

Attempt ALL Questions:

1. Define direct tax. State any two merits of direct tax.

Answer: A direct tax is paid by the person which is legally imposed. In direct tax, which can not shift to other tax bearing and paying persons are same.

The two merits of direct tax are as follows:

i. It is equitable as it is imposed on person as per size of property or income.
ii. Time procedures and amount of tax to be paid is known with certainty.

2. Enumarate the heads of income as per section-5 of Income Tax Act.

Answer: Income Tax Act 2058 section-5 has made broad classification of income. They are:

i. Income from employment.
ii. Income from business.
iii. Income from investment.
iv. Casual gain.

3. Mr. Thapa is working in a private company at regular salary of Rs. 85,000/- per month. The company has provided him a quarter (flat) facility for his residences and a car for private as well as official purpose.

Required:

↺ Total amount to be included in employment income of Mr. Thapa.

Answer:

Statement of Income from employment of Mr. Thapa.

Note:

↺ The company also provided Dashain Allowance.
↺ Vehicle was used for office and person is 50% assumed.

4. Miss Parajuli, a disable person having only employment income is working as an office assistant in a firm located at remote area - D.

Required:

↺ Various exemptions and rebates available to her under Income Tax Act.

Answer: According to the Income Tax Act 2058, Miss Parajuli has tax rebate as following way:

i. She can have reduction of 50% of basic assumption for disabled individuals.
ii. She can have reduction of Rs. 20,000/- as remote care under group D.
iii. Due to woman having remuneration income only she entitled to rebate of 10% on tax liability.

5. A special industry which is in operation from last six years in a highly undeveloped area has shown it's taxable income for the year ended Rs. 1,000,000/-. The industry is providing direct employment to 350 Nepalsese citizens through the year.

Required:

↺ Applicable rate of income tax for the industry.

Answer: Applicable tax ratefor undeveloped (remote) area = 10% of 20 = 2%.

Applicable tax rate for providing employment to 350

Nepalese citizen = 90% of 20 = 18%

Hence, tax liability = 1,000,000 x (20-2-18) = Nil

The company operates high underdeveloped area 1st 10 years taxed at 50% of normal rate, their after tax liability for year 10 = Nil.

Short answer questions: (4x10=40)

Attempt ALL Questions:

6.

a) B and Sons a dealer provided the following detail regarding it's transactions during the month of Bhadra:

i. Purchased merchandise for Rs. 75,000 (no VAT was paid on it).
ii. Purchased merchandise for Rs. 67,800 (Including VAT).
iii. All the merchandise were sold for Rs. 2,26,000 (Including VAT).
iv. The dealer submitted VAT return to the office on 5th Kartik.

Required:

↺ Added value as well as VAT and fine payable by the dealer to the government. (2+2+2=6)

Answer:

i. Here,

Amount of VAT = 75,000x13% = 9,750.

ii. Here,

Amount of VAT = 67,800-97,800/113 x 100 = 8,065.4867

iii. Total cost price excluding VAT

= 75,000+(67,800-8,065.4867)

= 134,734.513

Total VAT payable when purchase

= 8,065.4867+9,750

= 17,185.4867

Selling price excluding VAT

= 226,000/113 x 100

= 200,000

Value added when sales = selling price excluding VAT - Cost price

= 200,000 - 134,734.513

= 6,5265.487

Therefore, Total VAT payable to government = 226,000-200,000 = Rs. 26,000.

iv. If any registered businessman fail to payable the VAT due for each month within 25 days after complete such month tax payer is liable to pay @ 5% in VAT due up to closing of the first full month from the date of the VAT first becomes due.

Therefore, Penalty period = 10 days (5 days in Ashwin and 5 days in Kartik)

= 26,000 x 5% x 10/360

= 36.11.

Note: Days in a year is to be assumed 360 days.

b) Mr. X an American citizen came to Nepal on 1st Falgun of previous year and involved in a business and investment activities. He submitted the following statement for the revelant year.

i. Income from business Rs. 400,000.
ii. Income from investment Rs. 300,000.
iii. Payment against lease of an aircraft in Nepal Rs. 500,000 (after TDS).

Required:

↺ Residental status of Mr. X.
↺ Taxable income and tax liability. (2+1+1=4)

Answer:

i. Length of stay = 1st Falgun to Ashadh end Previous year = 30 x 5 = 150 days (approx).

ii. Calculation of taxable income.

iii. Calculation of Tax liability = 111,764.71 X 25% = Rs. 27941.178.

7.

a) Mr. Baniya, a trader presented his income statement to the tax office showing total net assessable income amounted to Rs. 2,500,000. On scrutiny made by the tax officer the following facts were revealed.

i. Donation to a public school Rs. 150,000 and pollution control cost Rs. 500,000 were included in total deductions.

ii. Income from investment amounted to Rs. 2,200,000 was included in total income.

iii. The unrecovered losses of previous year Rs. 500,000 and Rs. 100,000 from business and investment respectively were not adjusted in the profit.

Required:

↺ Statement of total taxable income. (5)

Answer:

Calculation of Income from business.

Calculation of income from investment.

Calculation of taxable income.

b) State the expenses which re not allowed for deduction while computing taxable income under income Tax Act. (5)

Answer: Following cost are not allowed for deduction as per section 21 of Income Tax Act 2058.

1. Personal Domestic Expenses: Personal or Domestic expenses are the cost incurred by individual to satisfy their personal needs. They induce-
↺ Personal expenses for the provision of shelter as well as meals, refreshment, or entertainment activities.
↺ Cloth expenses for the individual that is not suitable wearing outside work.
↺ Expenses for education and training of an individual does not lead to generate degree or diploma not link to business or investment activities.
↺ Interest on loan for borrowed personal expenses.

2. Interest and penalties paid under income tax act 2058 are not allowed for deduction.

3. Fine and penalties paid to the government or it's local bodies for breach of any law or regulation.

4. Distribution of profits by an entity (eg. dividend).

5. Capital nature expenses.

6. Foreign income tax paid: not exceeding average rate of Nepal income tax.

8. Mr. Amar Raj furnished the following information regarding his income for the relevant income year.

i. Reciept as royalty Rs. 90,000 (net).
ii. Income from natural resources Rs. 350,000.
iii. Agriculture income Rs. 65,000.
iv. Interest income received from a Pvt. Party Rs. 185,000 (net).
v. Pension @ Rs. 18,000 p.m. for 13 months from Nepal Government.
vi. Gift received in respect of investment Rs. 10,000.
vii. Windfall gain Rs. 10,000 (net).
viii. Rent received by letting an asset Rs. 180,000 (After TDS).
ix. Divident from a non resident company (fross) Rs. 100,000.

He claimed following expenses for deduction:

i. Dividend collection charge Rs. 500.
ii. Tax paid to foreign income amounting to Rs. 15,000.
iii. Purchase of urea (chemical fertilizer) Rs. 3,000 for agriculture use.
iv. Commission to a broker 10,000 in respect of royalty.
v. Taxi fare amounting to Rs. 5,000 (total) incurred while going to receive pension and royalty.
vi. Donation to a public hospital Rs. 25,000.

Required:

↺ Assessable income, Taxable income, Tax liability. (7+1+2=10)

Answer:

Calculation of Assessable income of Mr. Amar Raj for the relevant income year.

Calculation of taxable income.

Calculation of tax liability.

Average rate of Net Income Tax = Total taxable income for tax purpose = 208632.353/1114529.412 x 100 = 18.719%

Allowable foreign tax credit = 18.719% of 100,000 or Actual 15,000 whichever is less.

9. Mr. Bir Bahadur Rana a retired army of indian government a Nepalese citizen joined B&B Hospital as a chief security officer on 1st Baishakh of 2066 B.S. at a pay scale of Rs. 28,000-500-35,000 plus city compensatory allowence Rs. 18,000 p.m. He received Rs. 30,000 as dearness allowance. He received one month current salary as a Dashain Kharcha and two months basic salary as bonus. His children education expenses Rs. 48,000 reimburshed by the hospital. His telephone bill Rs. 10,000 pad by the office. He is getting meal and tiffin facilities in the hospital canteen as the hospital provided to all the employees in an equal terms. Other details furnished by Mr. Rana:

Pension from Indian government Rs. 11,000 p.m.
Dividend from an Indian company Rs. 90,000 for which he paid Rs. 15,000 income tax to the indian government.
Dividend from Nepal Investment Bank Rs. 28,500.
Donation to a public sport Club Rs. 12,000.

Required:

↺ Assessable income from employment Statement of taxable income.
↺ Tax payable by Mr. Rana. (6+2+2=10)

Answer:

Computation of assessable income from employment of Mr. Bir Bahadur Rana for the previous year.

Calculation of Tax liabilities.

Working Note:

Calculation of Salary.
Income year 2066/67 = 28,000
Income year 2067/68 = 28,000x9+28,500x3
Income year 2068/69 = 28,500x9+29,000x3
Income year 2069/70 = 29,000x9+29,500x3
Income year 2070/71 = 29,500x9+30,000x3
Income year 2071/72 = 30,000x9+30,500x3

Note:

Lack of information company will not provide contribution fund. Pension income from foreign government is not taxable income.

Average Income Tax for foreign tax credit = Total tax liability/tax payable income for tax purpose = 88,750/635,000 x 100 = 13.97%

Therefore, 13.97% of 90,000 or actual (15,000) whichever is lower.

Comprehensive questions: (2x15=30)

Attempt any TWO Questions:

10.

a) Define "Jeopardy Assessment of Tax". In which circumstance this method is applied? (8)

Answer: Jeopardy Assessment is a special assessment done by inland revenue department. It is a tax assessment baseon the best judgement of IRD.

The act has given the authority to carryout jeopardy assessment under the following circumstances:

↺ A person becomes bankrupt, is wound up or goes into liquidation.
↺ A person about to leave Nepal indefinitely.
↺ A person is otherwise.
↺ Is about cease activity in Nepal
↺ The Department consider it is appropriate.

b) 'Value Added Tax is one of the major sources of income of Nepal Government'. Justify this statement analyzing it's contribution to the national revenue for last three years. (7)

Answer: Value Added Tax (VAT) is a modern taxation system, under this system tax burden is born by final customer although it is charged ab each stage of production and distribution chains.

The main features of Value Added Tax (VAT) are as follows:

↺ It is based on self assessmeny system.
↺ It holds mass participation.
↺ It avoids cascading problem of sales tax which protect the tax payers from huge amount of tax burden.

It is practiced in Nepal since 2053 by in acting VAT Act 2052. Now a day is applied 13% VAT Rate. It has been compiled all types of tax which replace sales tax, entertainment tax, etc.

11.

a) A individual running special industry furnished the following information regarding it's assets under block - D:

i. Beginning depreciation base Rs. 1,000,000.
ii. Purchase during the year.
↺ Chaitra 29, - Rs. 600,000
↺ Ashadh 15, - Rs. 300,000
iii. Disposal during the year.
↺ Book value at the beginning Rs. 100,000 sold for Rs. 150,000.
iv. Actual repair cost - Rs. 100,000.

Required:

↺ Allowable depreciation for the year.
↺ Closing WDV at the end of the year. (6+2=8)

Answer:

Calculation of the Allowable depreciation for the year block (D).

Now, Calculation of closing WDV at the end of the year = Depreciation basis - Allowed Depreciation for the year = 1,350,000 - 202,500 = Rs. 1,147,500.

b) The following are the operation results of a company for the last nine years:

Balance of unrecovered loss at the beginningof year 3 was Rs. 150,000 out of which Rs. 100,000 was related to year 1 and balance was for the year 2. On the inquiry made by the tax officer it is found that the company had paid Rs. 150,000 for R and D cost and Rs. 50,000 donation to a public hospital in the years 7. These amounts were deducted before ascertaining the above result.

Required:

↺ Taxable income of the company giving explanation wherever necessary. (7)

Answer:

Explanation:

↺ Loss of during year 1 and 2 also cumulate in year 3rd.
↺ Donation: 5% of assessable income (5% of 350,000) or actual or maximum 100,000 which is lower.

12. Mr. Dhungana is a sole industrialist furnishes the following Trading and Profit and Loss accounts for the previous year.

Additional information:

i) Opening and closing stock both are overvalued by 20%.
ii) Opening WDV of the plant was Rs. 600,000. An asset was purchased on 1st Asadh of the previous year of the same block, but it was not used in the manufacturing process. The purchase cost of plant was Rs. 300,000. The depreciation charged in the above statement is also related to this asset.
iii) Insurance on inventories include legal expenses Rs. 10,000.
iv) 50% of legal expenses is related to appeal against IT officer.
v) He is the member of an approved retirement fund and has contributed Rs. 150,000 to the fund.
vi) Previous year business loss Rs. 40,000 is not included in the above statement.

Required:

↺ Statement of total taxable income and tax liability (13+2=15)

Answer:

Part-II : Auditing

Brief answer questions: (5x2=10)

Attempt ALL Questions:

13. Briefly explain the objectives of audit note book.

Answer: An auditary diary where matters observed during the course of audit are recorded is known as audit note book. The objective of audit note book are as follows:

↺ Provide detail regarding accounting and financial policies followed in the business.
↺ To provide list of books of account maintained by the client.
↺ To provide information about technical term used in business.
↺ To copy of audit program.

14. Point out any two qualities required in a successful auditor.

Answer: In order to perform audit work properly should posses several qualities generally following qualities are need for an auditor to success in audit work.

The qualities required in a successful auditor are-

a. Knowledge of accounting and auditing.
b. Knowledge of financial rules and regulation.
c. Tactfulness.
d. Common sense.

15. Differentiate between cash audit and cost audit.

Answer: The main differences between cash audit and cost audit are -

a. Audit work is limited to cash received and cash payment is known as cash audit but cost audit means an audit of cost record.
b. Cash audit does not consider to the debtor and creditor but cost audit is useful for the purpose of cost control, cost reduction and proper utilization of scare resources.
c. Cash audit is popular only those institution where cash transcation are so larger but cost audit is done in big manufacturing concern.

16. Mention any two advantages of internal check.

Answer: Internal check is a continuous process and is a part of day to day activities. The main objectives of internal check is prvention and detection of error and frauds at the earliest. Advantages of internal check are as follows:

a. Advantages to business: Internal check is based on principle of division of labour. Work of the staff is checked automatically. So, staffs remain honest which increase profitability of the business.
b. Advantages to an auditor: If internal check system is effective, an auditor can apply test check rather than checking books of account in detail. So, auditor can save his time and simultaneously saves the cost.

17. Express whether the following are frauds or errors:

i) Showing loss to avoid tax
ii) Wrong totaling of a subsidiary book
iii) Posting to wrong side of an account
iv) Concealing the receipts.

Answer:

i) Showing loss to avoid tax.