It is common knowledge that candidates do not get the desired marks not because they do not know the answers, but more because of poor presentation. While valuing the papers, the examiner would want to see if the candidate has written all the relevant points and the justification for the conclusions drawn.

The following is a model answer to Question 1(a) of the paper:

Bonafide Ltd has taken a Group Gratuity Policy from an insurance company. During accounting year 2004-05 it received a communication from the said company informing that the premium amount for the AY 2003-04 was less charged by Rs 75 lakh on account of arithmetical error on the part of insurance company.

Bonafide paid the Rs 75 lakh during the AY 2004-05 by debiting the same to prior period expenses.

Solution: This question has two possible answers. The candidates would have done well to write as follows:

As per AS 5, an item is said to be a prior period if it is caused due to an error or omission in the earlier year. In the given question, Bonafide has paid the premium amount due on group gratuity scheme as per the demand raised by the insurance company.

Hence, there is no error or omission. A revised demand was received from the insurance company only in the current year.

There was no demand pending as on the balance-sheet date. Therefore, when the premium is paid, the company is not justified in debiting the prior period item account.

But as the policy was taken and a contract is subsisting, prudence requires Bonafide to calculate the amounts correctly and pay the premium. Both the insurance company and the insured are responsible for the arithmetical calculations. It is not expected that the company would pay the premium as raised by the insurers.

From the question, it is indicative that the company has not made the provision. Since there is a lapse on the part of the company so to do, treating it as a prior period item may also be permissible.

This answer gives justification for either of the possibilities. That is, under what circumstances it can and cannot be a prior period item. If the examiner is looking for both, the answer has it. Both have been justified with equal force. The examiner can ignore that part of the answer which he does not think relevant. In any case, the candidate gets his marks.

Question 1(c): Mr A was appointed auditor of AAS Ltd by the board to fill the casual vacancy that arose due to the death of the auditor appointed in an AGM. Subsequently, Mr A also resigned on health grounds during the tenure of appointment. The board filled this vacancy by appointing you through a duly passed board resolution

In this question, the candidate is expected to answer the validity of appointing A on the death of the previous auditor as well as the second appointment on resignation of A. The answer would be incomplete if both the situations are not covered.

An ideal answer would as follows:

The board of directors is empowered to fill up a casual vacancy arising otherwise than by resignation of the auditor. The power to appoint an auditor upon the resignation of the existing auditor vests only with the members of the company. This provision is made to uphold the independence of the auditor.

In the given question, the board of directors is well within their powers to appoint A as the auditor upon death of the earlier auditor.

This is permissible by law. But the board has no power to fill up the vacancy caused by resignation of A. The power to appoint the auditor in this situation is only with the shareholders of the company.

Therefore, the appointment by the board of directors of A is valid but the subsequent appointment upon resignation of A is invalid.

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