Accountancy and Auditing Paper I 2026

FEDERAL PUBLIC SERVICE COMMISSION

COMPETITIVE EXAMINATION-2026 FOR RECRUITMENT
TO POSTS IN BS-17 UNDER THE FEDERAL GOVERNMENT

ACCOUNTANCY AND AUDITING, PAPER-I

NOTE: (i) First attempt PART-I (MCQs) on separate OMR Answer Sheet which shall be taken back after 30 minutes.
(ii) Overwriting/cutting of the options/answers will not be given credit.
(iii) There is no negative marking. All MCQs must be attempted.

PART-I (MCQs)(COMPULSORY)

Q.1. (i) Select the best option/answer and fill in the appropriate Box (☐) on the OMR Answer Sheet. (20×1=20)
(ii) Answers given anywhere else, other than OMR Answer Sheet, will not be considered.

1. Assume a company has a Rs.350 credit (net cash) sale, How would the transaction appear if the business uses accrual accounting?
   
   (A) Rs.350 would show up on the balance sheet as a sale.
   
   (B) Rs.350 would show up on the statement of cash flows as a sale.
   
   (C) Rs.350 would show up on the statement of cash flows as a cash outflow.
   
   (D) The transaction would not be reported because the cash was not exchanged.
2. Which of the following is an example of capital expenditure?
   
   (A) Paying for refurbishment as part of upgrading a building
   
   (B) Paying carriage outwards in respect of selling goods
   
   (C) Paying legal fees in order to recover customer debts
   
   (D) Paying bonuses to production workers
3. Mahmor invests her car into her business. Which parts of the business’ accounting equation will change?
   
   (A) Capital and liabilities  (B) Capital and profit  (C) Liabilities and assets  (D) Assets and capital
4. Which of the following errors would be found by extracting a trial balance?
   
   (A) A transaction has been completely omitted in the accounts
   
   (B) The double entries have been made the wrong way round
   
   (C) Different figures have been entered for the debit and credit entries
   
   (D) An expense item has been posted to a non-current asset account
5. Working capital is an indication of the firm’s ____.
   
   (A) Asset utilization  (B) Amount of noncurrent liabilities  (C) Amount of noncurrent assets  (D) Liquidity
6. Which of the following principles matches expenses with associated revenues in the period in which the revenues were generated?
   
   (A) revenue recognition principle  (B) Matching principle  (C) cost principle  (D) full disclosure principle
7. If the existing current ratio of a company is more than 1, what would be the impact of a credit purchase of inventory on the current ratio?
   
   (A) Current ratio would increase  (B) Current ratio would decrease
   
   (C) Current ratio would decrease and remain higher than 1  (D) Current ratio would remain same
8. Which financial statement represents the accounting equation?
   
   (A) Income Statement  (B) Statement of Cash Flows
   
   (C) Balance Sheet  (D) Statement of Changes in equity
9. The original cost of the machine is Rs.19,00,000; machine installation charges are Rs.1,00,000; working life of the machine is 5 years and residual value is Rs. 40,000. If the depreciation is charged on Straight Line basis then 4th year’s depreciation will be:
   
   (A) 372,000  (B) 400000  (C) 392000  (D) 352000
10. Amount set apart to meet loss due to bad debt is a:
    
    (A) Provision  (B) Appropriation  (C) Reserve  (D) Commission
11. House Building advance of Rs.2 Million paid to employees. It is a:
    
    (A) Asset  (B) Revenue Expenditure  (C) Capital Expenditure  (D) Deferred Revenue Expenditure
12. Prime cost may be correctly termed as:
    
    (A) The total of all cost items which can be directly charged to product units
    
    (B) The sum of all direct materials and labor cost excluding all other cost
    
    (C) The total costs incurred in producing a finished unit
    
    (D) The sum of the large cost in product cost
13. The costs are differentiated between fixed and variable costs under:
    
    (A) Absorption Costing  (B) Direct Costing  (C) Standard Costing  (D) Marginal Costing
14. From the following information, find out purchases when raw material consumed is Rs.26,500;
    Closing stock Rs. 4500 and opening stock Rs.3,000.
    
    (A) Rs.28500  (B) Rs.25000  (C) Rs.28000  (D) Rs.34000

15. If an adjustment includes an entry to Accumulated Depreciation, which type of adjustment is it?
    
    (A) accrual  (B) deferral  (C) reserve  (D) call
16. A company’s statement of profit or loss for the year ended 31 December 2025 showed a net profit of Rs.83,600. It was later found that Rs.18,000 paid for the purchase of a motor van had been debited to the motor expenses account. It is the company’s policy to depreciate motor vans at 25% per year on the straight line basis, with a full year’s charge in the year of acquisition. What would the net profit be after adjusting for this error?
    
    (A) Rs.105,100  (B) Rs.70,100  (C) Rs.97,100  (D) Rs.101,600
17. At 30 June 2025 a company’s allowance for receivables was Rs.39,000. At 30 June 2026 trade receivables are Rs.517,000. It was decided to write off debts Rs.17,000 and to adjust the allowance for receivables to the equivalent of 5% of the trade receivables based on past events. What figure should appear in the statement of profit or loss for the year ended 30 June 2026 for receivables expense?
    
    (A) Rs.61,000  (B) Rs.52,000  (C) Rs.22,000  (D) Rs.17,100
18. Nishat Textiles computed the following items from its financial records for the current year: Current ratio = 2 to 1; Average age of inventory = 60 days; Average collection period = 30 days; Average payable period = 60 days. The number of days to Nishat Textile’s cash conversion cycle for the current year was:
    
    (A) 30  (B) 90  (C) 78  (D) 42
19. Ideally, which of these ratios will indicate the highest return for a levered firm?
    
    (A) Return on assets  (B) Return on invested Capital
    
    (C) Return on Common Equity  (D) Return on common equity
20. Given a quick (acid-test) ratio of 2.0, current assets of Rs.5,000, inventory of Rs.2,000, prepaid expense = 0, the value of current liabilities is:
    
    (A) Rs.1,500  (B) Rs.2,500  (C) Rs.3,500  (D) Rs.6,000

PART – II

NOTE:
(i) Part-II is to be attempted on the separate Answer Book.
(ii) Attempt ONLY FOUR questions from PART-II by selecting TWO questions from EACH SECTION. ALL questions carry EQUAL marks.
(iii) All the parts (if any) of each Question must be attempted at one place instead of at different places.
(iv) Write Q. No. in the Answer Book in accordance with Q. No. in the Q-Paper.
(v) No Page/Space be left blank between the answers. All the blank pages of Answer Book must be crossed.
(vi) Extra attempt of any question or any part of the question will not be considered.
(vii) Use of Calculator is allowed.

SECTION – I

Q. 2.

Shakeel formed a business entity to provide bus service for a fee to public and private schools in the Walnut Creek area. The business is organized as a sole proprietorship, called Walnut Creek Transportation Services. The transactions during July, while the new business was being organized, are listed below.

July 1, Shakeel opened a bank account in the name of the business with a deposit of Rs.325,000 cash.

July 3 The new company purchased land and a building at a cost of Rs.120,000, of which Rs.72,000 was regarded as applicable to the land and Rs.48,000 to the building. The transaction involved a cash payment of Rs.30,000 and the issuance of a note payable for the balance of the purchase price.

July 5 Purchased 9 new buses at Rs.27,000 each from Fleet Sales Company. Paid Rs.28,300 cash and agreed to pay the remaining balance (Rs.6,000.00) by July 31 and the remaining balance by August 15. The liability is viewed as an account payable.

July 7 Sold one of the buses at cost to Young Camping Services. The buyer paid Rs.15,000 in cash and agreed to pay the balance within 30 days.

July 8 Upon inspection, one of the buses was found to be defective and was returned to Fleet Sales Company. The account payable to this creditor was thereby reduced by Rs.27,000.

July 20 Purchased office equipment at a cost of Rs.12,600 cash.

July 31 Issued a check for Rs.60,000 in partial payment of the liability for buses purchased on July 5.

Required

1. Journalize the July transactions.    8
2. Post to ledger accounts.    6
3. Prepare a trial balance at July 31, 2025    6  (20)

Q. 3.

On April 1, 1997, Hamid Hassan, an attorney, opened her own legal practice, to be known as the Law Office of Hamid Hassan. The business adjusts its accounts at the end of each month. The following trial balance was prepared at April 30, 2025, after one month of operations:

LAW OFFICE OF HAMID HASSAN
Trial Balance April 30, 2025

Other Information:

1. No interest has yet been paid on the note payable. Accrued interest at April 30 amounts to Rs. 100.
2. Salaries earned by the office staff but not yet recorded or paid amounted to Rs. 3,470 at April 30.
3. Many clients are asked to make an advance payment for the legal services to be rendered in future months. These advance payments are credited to the Unearned Retainer Fees account. During April, Rs. 7,700 of these advances were earned by the business.
4. Some clients are not billed until all services relating to their matter have been rendered. As of April 30, services priced at Rs. 4,700 had been rendered to these clients but had not yet been recorded in the accounting records.
5. A professional liability insurance policy was purchased on April 1. The premium of Rs. 3,600 for the first two months was paid and recorded as Unexpired Insurance.
6. The business rents an office at a monthly rate of Rs. 1,600. On April 1, three months’ rent was paid in advance and charged to the Prepaid Office Rent account.
7. Office supplies on hand at April 30 amounted to Rs. 1,100.
8. The office equipment was purchased on April 1 and is being depreciated over an estimated useful life of 10 years.

Required:

a) Prepare the adjusting entries required at April 30. (10)

b) Determine the amount of net income to be reported in the company’s income statement for the month ended April 30, 2025. (10) (20)

Q. 4.

(a) June 2025 of Hassan Traders, following errors were highlighted. You are required to prepare journal entries to correct the below errors.

1. Sales included an outstanding balance of Rs. 500,000 for which a customer would need to pay Rs. 485,000 only if payment is made within 30 days. The customer is expected to pay within 30 days.
2. An item was included in closing inventory at its net realisable value of Rs. 480,000. However, the item had a cost of Rs. 480,000. Periodic inventory method is used to record the inventory transactions.

3. A sub-total of Rs. 224,000 was carried forward in the purchase day book as Rs. 432,000. Correct amounts are not disclosed for Debtors and Creditors.
4. A credit note issued to a customer of Rs. 128,000 was recorded as credit note received from supplier.
5. An office machine costing Rs. 3,340,000 with a carrying value of Rs. 2,040,000 as on 1 July 2021 was disposed off on 28 February 2022 for Rs. 1,850,000. The sale proceeds were credited to accumulated depreciation account and full year’s depreciation was provided on the machine. Office machines are depreciated at 10% per annum using reducing balance method.

(b) Compare and contrast the “Incurred Loss Model” (IAS 39) with the “Expected Credit Loss (ECL) Model” (IFRS 9). Why was the shift to the ECL model considered necessary by standard setters following the 2008 financial crisis? 10 (20)

Q. 5.

(a) Explain how a cash flow statement can reveal earnings quality and liquidity risk. Identify at least four diagnostic indicators from cash flows that analysts monitor and what each may imply. 12

(b) Following is the statement of financial position of Qasim Limited (QL) as at 30 June 2025 8 (20)

Additional information:

1. During the year, land and building were revalued for the first time, resulting in a surplus of Rs. 150 million and incremental depreciation of Rs. 15 million.
2. Depreciation on building charged to profit or loss amounted to Rs. 70 million.
3. During the year, vehicles having book value of Rs. 8 million were sold for Rs. 11 million received in cash. Further sale proceeds of Rs. 5 million of another vehicle (book value Rs. 7 million) disposed off in May 2024 were received in August 2024.
4. Vehicles costing Rs. 51 million were purchased during the year of which Rs. 12 million is still unpaid.
5. Inventories as at June 30, 2025 included work in process inventories of Rs. 96 million (2024: Rs. 80 million) which are not available for sale.
6. Interest on loan for the year amounted to Rs. 45 million of which Rs. 14 million was capitalized in the cost of a building constructed during the year.

Required:

Prepare QL’s statement of cash flows for the year ended 30 June 2025.

SECTION – II

Q. 6.

National Limited is engaged in the production of a single product Lamn-1 and uses standard absorption costing system. NL has total production capacity of 6,250 units per month whereas it operates at a normal capacity of 80%. Standard information for the month of August 2025.
Standard cost card per unit:

Sales and production data:

Additional information:

1. There was no inventory at the beginning of the month.
2. 38,000 kg direct material was purchased in bulk to order during August at Rs. 1,470,000
3. Actual material loss was 3% as against the budgeted loss of 6%

4. Workers’ wages were increased by 10% effective from 1 August 2025 due to prevailing high inflation. This increased workers’ efficiency by 5% as compared to the budget.
5. Actual overheads (both fixed and variable) amounted to Rs.770,000. Fixed overheads were over absorbed by Rs. 30,000.

Required

Compute the following variances for the month of August 2025:

1. Sales volume variance
2. Material price and usage variances
3. Labour rate and efficiency variances
4. Fixed overhead expenditure variance
5. Variable overhead expenditure and efficiency variances

Q. 7.

(a) There are two plants manufacturing the same products under one corporate management which decides to merge them. Following particulars are available regarding the two plants:

You are required to calculate for the consideration of the Board of directors:

1. What would be the capacity of merged plant to be operated for purpose of break-even?
2. What would be the profitability on working at 75 per cent of the merged capacity?

(b) Target Costing reverses the traditional pricing equation. Explain the process of Target Costing. How does this approach encourage ‘Value Engineering’ and cost reduction during the design phase rather than the production phase? 10 (20)

Q. 8.

Itifaal Limited (IL) is engaged in the production of three products J1, J2 and J3 which it sells in the local market. Presently, IL’s manufacturing plant is operating at 80% of its capacity. Following information has been extracted from IL’s records for the year ended 31 August 2025:

In order to enter into the international market, on 1 August, 2025, IL hires the services of an export house to market its products, at a monthly payment of Rs. 100,000. IL mandatorily receives first export order from a USA based company, Asteroid Limited. Details of the export order are as follows:

It is estimated that due to additional packaging, the direct material cost will increase by 10%, quality control, other variable overheads will increase by 15%.
A toll manufacturer offers IL to produce J1, J2 and J3 at Rs. 1,800, Rs. 1,600 and Rs. 2,500 respectively subject to provision of material by IL.
The management has decided to produce local orders on priority.

Required:

Prepare a product wise (in-house production and outsourcing) to maximize IL’s profitability for the upcoming year.