(a) From the following information, prepare Process A/cs and calculate the actual profits earned by X Ltd. for the month of April…

(a) Process accounts and actual profit

Stock in process is valued at prime cost (so it carries no profit of its own), and finished stock at the Process C transfer price. Each process takes the previous transfer at its transfer price and adds 33⅓% (A) or 25% (B, C) on its own total cost.

Process A account (₹): Debit: opening stock 8,000; direct material 16,000; direct wages 12,000; overheads 11,200. Credit: closing stock 4,000. Cost of the process = 47,200 − 4,000 = 43,200. Profit at 33⅓% on cost = 14,400. Transfer to B = 57,600.

Process B account (₹): Debit: opening stock 9,600; transfer from A 57,600; direct material, wages and overheads 16,800 + 12,000 + 4,800 = 33,600. Credit: closing stock 4,800. Cost = 1,00,800 − 4,800 = 96,000. Profit at 25% = 24,000. Transfer to C = 1,20,000.

Process C account (₹): Debit: opening stock 6,400; transfer from B 1,20,000; direct material, wages and overheads 24,000 + 12,800 + 32,000 = 68,800. Credit: closing stock 3,200. Cost = 1,95,200 − 3,200 = 1,92,000. Profit at 25% = 48,000. Transfer to finished stock = 2,40,000.

Finished stock account (₹): Opening stock 24,000 + transfer from C 2,40,000 = 2,64,000; less closing stock 12,000 gives cost of goods sold 2,52,000. Sales 2,80,000 − 2,52,000 = profit of 28,000 on sales.

Inter-process profit adjustment. Profit in the opening stocks, as given, is 1,600 + 1,600 + 8,800 = 12,000, and it is realised this month. Profit in the closing stocks is not yet realised:

• Closing stock of A is at prime cost, so nil.
• Closing stock of B: 4,800 × 14,400 / 57,600 = 1,200.
• Closing stock of C: 3,200 × (14,400 + 24,000) / 1,20,000 = 1,024.
• Finished stock: 12,000 × (14,400 + 24,000 + 48,000) / 2,40,000 = 4,320.

Closing reserve = 6,544.

Profit shown by the books = 14,400 + 24,000 + 48,000 + 28,000 = 1,14,400 (the 28,000 is the profit on the sale of finished stock).

Actual profit = 1,14,400 + 12,000 (opening reserve released) − 6,544 (closing reserve) = ₹1,19,856.

(b) House property income, AY 2022-23

House I (self-occupied, built February 2022). Gross annual value is nil (Section 23(2)). Municipal tax is not allowed for a self-occupied house. Interest on the construction loan, ₹22,500, is allowed under Section 24(b), as construction was completed in the previous year (limit ₹2,00,000). Income = (−) ₹22,500.

House II (let for residence, built 2012). Expected rent is the higher of municipal valuation (45,000) and fair rent (60,000), which is 60,000, but limited to the standard rent of 36,000. So expected rent = 36,000. Actual rent received = 45,000. Gross annual value = the higher, 45,000.

Less municipal taxes paid during the year: 7,250. Net annual value = 37,750.

Less standard deduction under Section 24(a), 30% of NAV: 11,325. Less interest under Section 24(b): 5,750. Income = 37,750 − 11,325 − 5,750 = ₹20,675.

Fire insurance premium, unpaid water benefit tax and unpaid lease rent are not deductible: Section 24 allows only the standard deduction and interest, and insurance and ground rent are covered by the 30%. (Municipal taxes are allowed only when actually paid.)

Income from house property = 20,675 − 22,500 = (−) ₹1,825.

Treatment of the loss. It arises from interest on a self-occupied house, so it can be set off against income from other heads in the same year under Section 71(3A), up to ₹2,00,000. The ₹1,825 loss is fully within this limit and is set off against other income such as salary. Any unabsorbed amount would be carried forward for 8 assessment years under Section 71B against house property income only. (The Income-tax Act, 2025 re-enacts these provisions from 1.4.2026.)

(c) Audit and investigation

Why an audit is not essentially an investigation. An audit examines whether the financial statements give a true and fair view under an accounting framework, and it ends in an opinion. It is periodic and often statutory, it relies on sampling and test checks, and its scope is set by law or engagement. An investigation is a special enquiry into a specific matter, such as fraud, the value of a business, or the profitability of a proposed venture. It is done for a particular person, without a fixed standard form, goes to the roots of transactions, and often covers several years. An audit can reveal something that needs investigation, but it does not of itself become one.

General procedure of an investigation.

1. Fix the terms of reference and the scope, and obtain authority and access to records.
2. Plan the work and form a team with the skills needed (accounting, legal, forensic).
3. Collect evidence: books, bank records, contracts, third-party confirmations, and interviews.
4. Analyse and verify it, tracing transactions to their source and testing for the matter investigated.
5. Quantify the findings and cross-check them.
6. Report in writing to the person who commissioned the investigation, with findings, conclusions and recommendations, and follow up.