CMA Inter Paper 10 common mistakes
CMA Inter Paper 10 · Understand the traps and how to avoid them.
In a buy-back question, debits the whole buy-back consideration (nominal value plus premium) to Securities Premium, creates no Capital Redemption Reserve, and balances the balance sheet with a plug figure.
Candidates remember the phrase 'buy-back can be funded from securities premium' but never separate the nominal value from the premium, and forget the Section 69 requirement to transfer the nominal value of the shares bought back from free reserves to CRR.
What to do instead
Use a three-line working before any journal entry: (i) nominal value bought back → CRR out of free reserves; (ii) premium payable → securities premium or free reserves; (iii) total cash outflow = nominal + premium + expenses. Then test the post-buy-back debt-equity ratio under Section 68(2)(c) before writing entries.
Records the purchase of own debentures cum-interest at the full price paid, ignores the accrued interest element, and computes profit or loss on cancellation using the cum-interest price instead of the ex-interest cost.
The cum-interest/ex-interest convention is learned only as an investment-account formula and is not linked to the actual settlement date and the interest dates; candidates also forget that own debentures sit as an investment until they are cancelled.
What to do instead
Draw the interest timeline first: last interest date → purchase date → next interest date. Split the price into ex-interest cost and accrued interest, pass separate entries for interest accrued, then for cancellation, and reconcile the investment account to the number of debentures still held.
Computes managerial remuneration directly on reported net profit, without adding back the remuneration already charged or excluding profit on sale of fixed assets, and ignores the Schedule V limits where profits are inadequate.
The Section 197 computation is treated as a fixed percentage of accounting profit, so candidates do not rebuild the 'net profit for managerial remuneration' figure and mix it up with the dividend and DRR workings.
What to do instead
Prepare a separate statement: profit before tax → add back managerial remuneration and other disallowables → apply the Section 197 slabs (5% for one MD/WTD, 10% for all MD/WTD, 11% overall) and, where profits are inadequate, the effective capital test under Schedule V. Keep this schedule physically separate from the dividend working.
In an amalgamation in the nature of merger, revalues the transferor's assets to fair value, records goodwill and creates an amalgamation adjustment reserve, instead of carrying over book values and merging the reserves.
Candidates apply the purchase method mechanically to every amalgamation because that is the method they have practised most, and they never run the five AS 14 conditions that decide whether the amalgamation is in the nature of merger.
What to do instead
Before writing any entry, test and write the five AS 14 conditions at the top of the answer, then label the answer 'merger' or 'purchase'. Merger: book values, no goodwill, reserves merge, only statutory reserves adjusted. Purchase: fair values, goodwill or capital reserve, amalgamation adjustment reserve for statutory reserves.
Adds the parent's and subsidiary's balance sheets line by line without eliminating the parent's investment in the subsidiary against the subsidiary's share capital, and computes minority interest only on post-acquisition profits.
Consolidation is memorised as an addition exercise; the cost-of-control and pre-acquisition reserve workings are skipped because they are time-consuming under exam pressure.
What to do instead
Always prepare four workings before the consolidated balance sheet: shareholding pattern, analysis of pre-acquisition profits, cost of control/goodwill, and minority interest. Build minority interest on the subsidiary's total equity - share capital plus pre- and post-acquisition reserves and revaluation - not on post-acquisition profit alone.
Shows 'calls in arrears' as an asset under current assets, and computes subscribed capital without deducting it, so share capital and the balance sheet totals are overstated.
The word 'arrears' suggests a receivable, and candidates do not visualise the Schedule III presentation in which calls in arrears are deducted from subscribed capital.
What to do instead
Write the share capital note in statutory order: authorised → issued → subscribed → paid-up, with calls in arrears deducted in the 'subscribed but not fully paid' line. Never carry calls in arrears to the assets side; on forfeiture, transfer the amount to the forfeited shares account.
Answers an audit-evidence question with generic procedures such as 'obtain management representation' or 'review last year's working papers', without stating the assertion addressed or whether the procedure is a test of control or a substantive test.
Audit evidence is treated as a memory list rather than an assertion-by-assertion design task; candidates rarely practise mapping procedures to occurrence, completeness, valuation, rights and obligations, cut-off and presentation.
What to do instead
For every procedure write four things: assertion → direction (test of control or substantive) → source (external or internal) → reliability ranking. Practise with a two-column table for each balance sheet caption so no procedure is offered without an assertion tag.
Cites standards by approximate number, writing 'SA 700 for modified opinion' or 'SA 500 for materiality', and applies one fixed percentage of revenue as materiality for the whole engagement without judgement or revision.
Candidates memorise SA titles loosely and never link SA 700, 705, 706 and 320 to their specific decision points; materiality is treated as a single number rather than a judgement that changes as the audit progresses.
What to do instead
Build a one-page SA map covering 200, 210, 220, 230, 240, 250, 260, 265, 300, 315, 320, 330, 450, 500–580, 700, 701, 705, 706 and 720. In materiality answers, state benchmark, percentage, rationale, performance materiality and the revision trigger.
Issues a disclaimer for a material but not pervasive scope limitation, or an adverse opinion for a disagreement confined to one caption; also omits the 'Basis for Qualified Opinion' section or places it after the opinion paragraph.
The modification matrix is remembered as a feeling ('serious problem means disclaimer') instead of two axes: nature of the problem (misstatement versus scope limitation) crossed with pervasiveness.
What to do instead
Draw the 2×2 matrix before writing: disagreement and material → qualified; disagreement and material and pervasive → adverse; limitation and material → qualified; limitation and material and pervasive → disclaimer. Then follow the SA 705 paragraph order: Opinion → Basis for Qualified Opinion → Emphasis of Matter/Other Matter.
Describes internal audit as 'checking of books by an internal auditor' and forensic audit as 'audit done by forensic experts', without distinguishing scope, reporting line, governing standard or the fraud-risk approach.
The recent-trends chapter is skimmed as a set of definitions; candidates do not connect internal audit to the SIA and IFC framework, cost audit to the cost records rules, or forensic audit to litigation support and evidence handling.
What to do instead
Prepare a comparison grid for internal, management, cost, energy, forensic and information systems audit: objective, scope, appointing authority, reporting line, governing standard or rule, and output. Anchor each with one trigger, such as suspected misappropriation → forensic audit, or prescribed turnover and regulated sector → cost audit.