Page 335 - CA Final PARAM Digital Book.

Part 2- Investigation

QNO Investigation (Incoming Partner) Old Course-- (N10R, M14R, SM17, PM17, M18M, SM21, M20M, M23M)
625.000 TITANIUM CNO – INTG.100 New Course-- (SM23)
What are the important steps involved while conducting Investigation on behalf of an Incoming Partner?
OR
Dalal, Banerji and Mallick are partners in a firm sharing profits and losses in the ratio 2:2:1. The partners

have agreed to take Mr. Mistri as a partner with effect from 1st April 2018 as 1/4th partner.
What are the important steps involved while conducting investigation on behalf of Mr. Mistri, the
incoming partner?
Answer ➢ Purpose: -
• To know whether the terms offered to him are reasonable having regard to the nature of

the business, profit records, capital distribution, personal capability of the existing
partners, socio-economic setting, etc.
• To ascertain whether the capital to be contributed by him would be safe and applied
usefully.
➢ Areas to be covered: -
• Reasons & History
o Ascertain reasons for the offer of admission to a new partner should be ascertained
and it should be determined whether the same synchronizes with the retirement of
any senior partner whose association may have had considerable bearing on the firm’s
success.
o Ascertainment of the history of the firm, since inception and growth of the firm.

• Present Situation & Partnership Deed
o Study the composition and quality of key personnel employed by the firm and any
likelihood of their leaving the organization.
o Assess position of orders at hand and the range and quality of clientele should be
thoroughly examined, which the firm is presently operating.
o Studies of the provisions of the Deed of partnership, particularly for composition of
partners, their capital contribution, drawing rights, retirement benefits, job allocation,
financial management, goodwill, etc.
o Examine whether any special clause exists in the deed of partnership to allow
admission in future of a new partner, who may be specified, on concessional terms.

• Financial Statement Analysis

o Appraisal of the record of capital employed and the rate of return. It is necessary to
have a comparison with alternative business avenues for investments.
o Ascertain manner of computation of goodwill on admission as also on retirement, if
any
o Scrutinize terms of loan finance to assess its usefulness and implication for the overall
financial position.
o Examine whether the incomplete contracts which will be transferred to the
reconstituted firm will be a liability or a loss.
o Scrutiny of the record of profitability of the firm’s business over a suitable number of
years.
o Examination of the asset and liability position to determine the tangible asset backing
for the partner’s investment, appraisal of the value of intangibles like goodwill, know
how, patents, etc. impending liabilities including contingent liabilities and those for
pending tax assessment.

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