CMA Inter Paper 10 flashcards

32 cards. Read the term and the definition here. The deck at the top of this page is optional.

Authorised share capital

Maximum amount of share capital a company may issue, stated in its memorandum of association; also called nominal or registered capital, and altered only by complying with Section 61.

Reserve versus provision

A reserve is an appropriation of profit, while a provision is a charge against profit made for a known liability or a known diminution in asset value; a provision is created even when there is a loss.

Schedule III Division I

Format prescribed under the Companies Act 2013 for financial statements of companies that do not follow Ind AS; it specifies the balance sheet, the statement of profit and loss and notes.

Capital Redemption Reserve

Reserve created under Section 69 when shares are bought back out of free reserves; equal to the nominal value of shares bought back minus proceeds of a fresh issue, and usable only for bonus shares.

Buy-back debt-equity rule

After buy-back the company's debt-equity ratio must not exceed 2:1; shares bought back must be fully paid and the buy-back must be completed within twelve months of the resolution.

Section 68 buy-back limit

Buy-back cannot exceed 25% of the aggregate of paid-up capital and free reserves; buy-back of equity shares in a financial year cannot exceed 25% of paid-up equity capital.

Bonus issue sources

Bonus shares may be issued out of free reserves, securities premium and capital redemption reserve; revaluation reserve cannot be capitalised and shares must be fully paid up.

Debenture Redemption Reserve

Reserve created out of profits available for dividend under Rule 18 of the Companies (Share Capital and Debentures) Rules 2014 to ensure funds are available for redeeming debentures.

Securities premium permitted uses

Section 52(2) allows securities premium to be used for bonus shares, writing off preliminary expenses, issue expenses or discount, premium on redemption of preference shares or debentures, and buy-back under Section 68.

Debenture holder status

A debenture holder is a creditor of the company, receives interest that is a charge against profit, has no voting rights, and ranks ahead of shareholders on winding up.

CSR threshold Section 135

CSR applies when net worth is ₹500 crore or more, turnover ₹1,000 crore or more, or net profit ₹5 crore or more in the preceding year; spending is 2% of average net profits of the last three years.

Schedule II depreciation

Depreciation under the Companies Act 2013 is charged on the useful life method, using either straight line or written down value; component accounting is required for significant components.

Section 123 dividend rule

Dividend may be declared from current year profits after charging depreciation, or from accumulated profits; it cannot be declared from unrealised gains or out of capital.

Amalgamation in nature of merger

Under AS 14 a merger requires all assets and liabilities to be taken over, shareholders of the transferor to become shareholders of the transferee, consideration mainly in equity shares, and continuation of business.

Purchase method of amalgamation

Method where the transferee records assets and liabilities at fair values; consideration above the net assets acquired is goodwill, and consideration below net assets is capital reserve.

External reconstruction

Formation of a new company specifically to take over the business of an existing company, which is then liquidated; unlike amalgamation, only one existing business is involved.

Goodwill on consolidation

Cost of the parent's investment minus the parent's share of the fair value of the subsidiary's identifiable net assets at acquisition date; a negative result is capital reserve.

Non-controlling interest

The portion of a subsidiary's net assets and profits not attributable to the parent; shown separately within equity in the consolidated balance sheet and in consolidated profit.

Equity method of accounting

Used for associates and joint ventures under Ind AS 28 and Ind AS 111; investment is recorded at cost and adjusted for the investor's share of post-acquisition profits, losses and other comprehensive income.

Reasonable assurance

Audit provides high but not absolute assurance that financial statements are free from material misstatement; limitations arise from sampling, judgement, availability of evidence and inherent limitations of internal control.

Auditing versus accounting

Accounting records transactions and prepares financial statements; auditing independently examines those statements and the underlying evidence to express an opinion on their truth and fairness.

Statutory audit

Audit required by a statute such as the Companies Act 2013; the auditor is appointed by members under Section 139 and reports to members on the financial statements.

Audit risk model

Audit risk equals inherent risk multiplied by control risk multiplied by detection risk; the auditor reduces detection risk by designing appropriate nature, timing and extent of audit procedures.

Materiality under SA 320

Materiality is the amount of misstatement that could influence the economic decisions of users; the auditor determines overall materiality, performance materiality and specific materiality for particular items.

SA 230 documentation

Audit working papers must be sufficient for an experienced auditor with no previous connection to understand the work performed, evidence obtained and conclusions reached; retention is at least seven years.

Section 139 auditor tenure

An auditor is appointed for five consecutive years at a general meeting; the first auditor is appointed by the Board within 30 days of incorporation, or by members within 90 days.

Section 141 disqualifications

An auditor is disqualified if a body corporate, officer or employee, partner or employee of such persons, indebted above ₹5 lakh, has a business relationship, or a relative holds securities above ₹1 lakh face value.

CARO 2020

Companies (Auditor's Report) Order 2020; requires auditors of specified companies to report on fixed assets, inventory, loans, related party transactions, statutory dues, fraud and going concern, among other matters.

Qualified audit opinion

Expressed when misstatements or insufficient evidence are material but not pervasive; the auditor states that except for the matter described, the financial statements give a true and fair view.

Emphasis of Matter paragraph

A paragraph in the auditor's report drawing attention to a matter appropriately presented in the financial statements; it does not modify the opinion and is used under SA 706.

Forensic audit

Investigation of financial information for use in legal proceedings; it focuses on detecting fraud, gathering evidence, quantifying losses and supporting litigation through expert reports.

Cost audit

Audit of cost accounting records under Section 148 of the Companies Act 2013; a cost accountant examines cost statements and reports on accuracy and compliance to the Board and the government.