Chapter 1:

Q6. M/s NK & Co., Chartered Accountants were appointed as Statutory Auditors of Fresh Juice
Limited for the F.Y 2019-2020. The previous year's audit was conducted by M/s. LP & Associates.
After the audit was completed and report submitted, it was found that closing balances of last
financial year i.e., 2018-19 were incorrectly brought forward. It was found that M/s NK &
Co. did not apply any audit procedures to ensure that correct opening balances have been
brought forward to the current period.

Accordingly, a complaint was filed against NK & Co. in relation to this matter. You are required to
inform what policies are required to be implemented by NK & Co. for dealing with such complaints
and allegations as required by Standard on Quality Control (SQC). (PYQ Jan 2021)

Answer

In the given question, NK & Co. did not apply audit procedures to ensure that opening balances
had been correctly brought forward. A complaint was filed against the auditors in this context.
As per Standard on Quality Control (SQC) 1 “Quality Control for Firms that Perform Audits and
Reviews of Historical Financial Information, and Other Assurance and Related Services
Engagements”,

1) The firm should establish policies and procedures designed to provide it with reasonable
assurance that it deals appropriately with:
a. Complaints and allegations that the work performed by the firm fails to comply
with professional standards and regulatory and legal requirements; and
b. Allegations of non-compliance with the firm’s system of quality control.
2) Complaints and allegations (which do not include those that are clearly frivolous) may
originate from within or outside the firm. They may be made by firm personnel, clients
or other third parties. They may be received by engagement team members or other firm
personnel.
3) As part of this process, the firm establishes clearly defined channels for firm personnel
to raise any concerns in a manner that enables them to come forward without fear of
reprisals.
4) The firm investigates such complaints and allegations in accordance with established
policies and procedures. The investigation is supervised by a partner with sufficient and
appropriate experience and authority within the firm but who is not otherwise involved
in the engagement, and includes involving legal counsel as necessary. Small firms and sole
practitioners may use the services of a suitably qualified external person or another firm
to carry out the investigation. Complaints, allegations and the responses to them are
documented.
5) Where the results of the investigations indicate deficiencies in the design or operation
of the firm’s quality control policies and procedures, or non -compliance with the firm’s
system of quality control by an individual or individuals, the firm takes appropriate action.

Q5. J.A.C.K. & Co., a CA firm was appointed as the statutory auditor of Falcon Ltd. after ensuring
the compliance with relevant provisions of the Companies Act, 2013. Mr. Jay was the engagement
partner for the aforesaid audit and prior to commencement of the audit, Mr. Jay had called for
a meeting of the engagement team in order to direct them and assign them their responsibilities.
At the end of meeting, Mr. Jay assigned review responsibilities to two of the engagement team
members who were the most experienced amongst all, for reviewing the work performed by the
less experienced team members. While reviewing the work performed by the less experienced
members of the engagement team, what shall be the considerations of the reviewers? (MTP -
2021)
OR
CA. H, partner of the firm, has been handling the audit assignment very well since the
appointment. The audit work of CA. H and her team is reviewed by a senior partner CA. K to assure
that audit is performed in accordance with professional standards and regulatory and legal
requirements. CA. K was out of India for some personal reasons, so this year CA. G has been
asked to review the audit work. In your opinion, what areas CA. G should consider at the time of
review. List any four areas and also comment whether firm is complying with Standard on Quality
Control or not. (PYQ July-21)

Answer

Compliance with Standard on Quality Control on review of audit work –

As per SQC 1, an engagement quality control review for audits of financial statements of listed
entities
includes considering the following:
1) Work has been performed in accordance with professional standards and regulatory and
legal requirements;
2) Significant matters have been raised for further consideration;
3) Appropriate consultations have taken place and resulting conclusions have been documented
and implemented;
4) There is a need to revise the nature, timing and extent of work performed;
5) The work performed supports the conclusions reached and is appropriately documented;
6) The evidence obtained is sufficient and appropriate to support the report; and
7) The objectives of the engagement procedures have been achieved.

The firm should establish policies and procedures:

1) Setting out criteria for determining the need for safeguards to reduce the familiarity
threat to an acceptable level when using the same senior personnel on an assurance
engagement over a long period of time; and
2) For all audits of financial statements of listed entities, requiring the rotation of the
engagement partner after a specified period in compliance with the Code.

Familiarity threat is particularly relevant in the context of financial statement audits of listed
entities.

For these audits, the engagement partner should be rotated after a pre-defined period,
normally not more than 7 years.
From the facts given in the question and from the above stated paras of SQC 1, it can be concluded
that firm is not complying with SQC 1 as Engagement Partner H is continuing for more than 7
years.
Q15. During the audit of FMP Ltd, a listed company, Engagement Partner (EP) completed his
reviews and also ensured compliance with independence requirements that apply to the audit
engagement. The engagement files were also reviewed by the (EQCR) Engagement Quality Control
Reviewer except the independence assessment documentation. Engagement Partner was of the
view that matters related to independence assessment are the responsibility of the Engagement
Partner and not Engagement Quality Control Reviewer. Engagement Quality Control Reviewer
objected to this and refused to sign off the documentation. Please advise as per SA 220. (SM)

Answer

As per SA 220, Engagement Partner shall form a conclusion on compliance with independence
requirements that apply to the audit engagement. In doing so, Engagement Partner shall:

1) Obtain relevant information from the firm and, where applicable, network firms, to identify
and evaluate circumstances and relationships that create threats to independence;

2) Evaluate information on identified breaches, if any, of the firm’s independence policies and
procedures to determine whether they create a threat to independence for audit
engagement; and

3) Take appropriate action to eliminate such threats or reduce them to an acceptable level
by applying safeguards, or, if considered appropriate, to withdraw from the audit
engagement, where withdrawal is permitted by law or regulation. The engagement partner
shall promptly report to the firm any inability to resolve the matter for appropriate action.

Engagement Partner shall take responsibility for reviews being performed in accordance with the
firm’s review policies and procedures.
As per SA 220, “Quality Control for Audit of Financial Statements”, for audits of financial
statements
of listed entities, Engagement Quality Control Reviewer (EQCR), on performing an engagement
quality control review, shall also consider the engagement team’s evaluation of the firm’s
independence in relation to the audit engagement.

In the given case, Engagement Partner is not right. The independence assessment documentation
should also be given to Engagement Quality Control Reviewer for his review.

Chapter 2

SA 260

Q22.SA 260 requires the auditor to communicate with those charged with governance on a timely
basis. The appropriate timing for communications about key audit matters will vary with the
circumstances of the engagement. However, the auditor may communicate preliminary views about
key audit matters when discussing the planned scope and timing of the audit, and may further
discuss such matters when communicating about audit findings. Doing so may help to alleviate the
practical challenges of attempting to have a robust two-way dialogue about key audit matters at
the time the financial statements are being finalized for issuance.

Explain in detail why it is important to communicate key audit matters to those charged with
governance.
OR
Q. CA. Vallabh Sundar is auditor of a leading private sector bank. “IT Systems and controls” is
under his consideration to be reported as “Key audit matter” in audit report of the bank due to
high level of automation and complexity of the IT architecture and its impact on the financial
reporting system.

At what time he should communicate such identified “Key audit matter”? What are relevant
considerations in this regard and their usefulness?

Answer

SA 260 requires the auditor to communicate with TCWG on a timely basis. The appropriate
timing for communications about key audit matters will vary with the circumstances of the
engagement.

However, auditor may communicate preliminary views about key audit matters when discussing
planned scope and timing of the audit, and may further discuss such matters when communicating
about audit findings.
Doing so may help to alleviate the practical challenges of attempting to have a robust two-way
dialogue about key audit matters at the time financial statements are being finalized for issuance.

Communication with those charged with governance enables them to be made aware of key
audit matters that the auditor intends to communicate in auditor's report, and provides them
with an opportunity to obtain further clarification where necessary.

Auditor may consider it useful to provide TCWG with a draft of the auditor's report to
facilitate this discussion.

Communication with TCWG recognizes their important role in overseeing the financial reporting
process, and provides the opportunity for TCWG to understand the basis for auditor's decisions
in relation to key audit matters and how these matters will be described in the auditor's report.

It also enables TCWG to consider whether new or enhanced disclosures may be useful in light
of the fact that these matters will be communicated in the auditor's report.

Chapter 3

SA 610

Q38. Smart Ltd is a manufacturing unit and you are External Auditor of the company. Internal
auditors are also appointed as per the provisions of the Companies Act, 2013. As an external
auditor you want to use the internal auditors to provide direct assistance for the purposes of
audit.

State the circumstances where the internal auditors cannot be used to provide direct
assistance. What would you include in the audit documentation? (PYQ - July 2021)

Answer

In the given case of Smart Ltd, a manufacturing unit, an external auditor shall not use internal
auditors to provide direct assistance as per SA 610, Using the work of Internal Auditor, to
perform procedures that:

(1) Involve making significant judgments in the audit;

(2) Relate to higher assessed risks of material misstatement where the judgment required in
performing the relevant audit procedures or evaluating the audit evidence gathered is more
than limited;
(3) Relate to work with which the internal auditors have been involved and which has already been,
or will be, reported to management or those charged with governance by the internal audit
function; or
(4) Relate to decisions the external auditor makes in accordance with this SA regarding the
internal audit function and the use of its work or direct assistance.

Further, if the external auditor uses internal auditors to provide direct assistance on the audit,
the external auditor shall include in the audit documentation:

(1) Evaluation of existence & significance of threats to the objectivity of the internal auditors,
and level of competence of the internal auditors used to provide direct assistance;
(2) Basis for the decision regarding the nature and extent of the work performed by the internal
auditors;
(3) Who reviewed the work performed and the date and extent of that review in accordance with
SA 230, Audit Documentation;
(4) Written agreements obtained from an authorized representative of the entity and the
internal auditors; and
(5) Working papers prepared by the internal auditors who provided direct assistance on the
audit engagement.

Chapter 5

Q4. During the course of audit of a Limited company, the statutory auditors collected written
representations from the Management. The Audit was finalized in addition to other audit
procedures but, without making any Inquiries, as the statutory auditors were short of time. In
the light of this information, state the importance of Inquiry as one of the methods of collecting
Audit Evidence.

Answer

Inquiry: As per SA 500 Audit Evidence:

1) Inquiry consists of seeking information of knowledgeable persons, financial and non-

financial, within the entity or outside the entity. Inquiry is used extensively throughout the
audit in addition to other audit procedures, Inquiries may range from formal written
inquiries to informal oral inquiries. Evaluating responses to inquiries is an integral part of
the inquiry process.
2) Responses to inquiries may provide the auditor with information not previously possessed
or with corroborative audit evidence. Alternatively, responses might provide information
that differs significantly from other information that the auditor has obtained, for
example, information regarding the possibility of management override of controls. In some
cases, responses to inquiries provide a basis for the auditor to modify or perform
additional audit procedures.

3) Although corroboration of evidence obtained through inquiry is often of particular

importance, in the case of inquiries about management intent, the information available
to support management's intent may be limited. In these cases, understanding
management's past history of carrying out its stated Intentions, management's stated
reasons for choosing a particular course of action, and management's ability to pursue a
 specific course of action may provide relevant information to corroborate the evidence
obtained through inquiry.
4) ln respect of some matters, the auditor may consider it necessary to obtain written
representations from management and, where appropriate, those charged with governance
to confirm responses to oral inquiries

SA 500

Q5. Mr. Shreyansh, while performing the audit of Red Rock & Silver Sand Limited which was
involved in phosphorus mining, decided to appoint an auditor’s expert for the valuation of
environmental liabilities and site clean-up costs. Red Rock & Silver Sand Limited re- appointed
Mr. Sheetal as an independent expert for this engagement. For the last five years, management
has been re-appointing Mr. Sheetal. Mr. Sheetal calculated the environmental liabilities
pertaining to completed mining sites and the sites which will be discarded in the near future and
a provision for cleanup costs. This provision was accepted by management. Mr. Shreyansh, after
performing the inquiries with management, was of the opinion that the objectivity of the
independent expert cannot be questioned just because he was appointed by management as
their expert. Hence, there is no need to raise a question on the objectivity of Mr. Sheetal or
on his work performed for the company.

However, the audit partner was of the opinion that the audit team needs to evaluate the
objectivity of an expert engaged by the entity, irrespective of the fact that he was appointed
as an independent expert. Kindly guide the audit partner and Mr. Shreyansh with respect to
requirements pertaining to evaluating the objectivity of the management expert. (RTP N-23)

Answer

As per SA 500 “Audit Evidence”, when information to be used as audit evidence has been
prepared using the work of a management’s expert, the auditor shall, to the extent necessary,
have regard to the significance of that expert’s work for the auditor’s purposes evaluate the
competence, capabilities and objectivity of that expert.

A broad range of circumstances may threaten objectivity, for example, self interest threats,
advocacy threats, familiarity threats, self-review threats and intimidation threats.

Safeguards may reduce such threats and may be created either by external structures (for
example, the management’s expert’s profession, legislation or regulation), or by the management’s
expert’s work environment (for example, quality control policies and procedures). Although
safeguards cannot eliminate all threats to a management expert’s objectivity, threats such
as intimidation threats may be of less significance to an expert engaged by the entity than to an
expert employed by the entity, and the effectiveness of safeguards such as quality control
policies and procedures may be greater. Because the threat to objectivity created by being an
employee of the entity will always be present, an expert employed by the entity cannot ordinarily
be regarded as being more likely to be objective than other employees of the entity.

When evaluating the objectivity of an expert engaged by the entity, it may be relevant to discuss
with management and that expert any interests and relationships that may create threats
to the expert’s objectivity and any applicable safeguards, including any professional requirements
that apply to the expert; and to evaluate whether the safeguards are adequate.

Interests & relationships creating threats may include:

• Financial interests.
• Business and personal relationships.
• Provision of other services.

In the current case, Red Rock & Silver Sand Limited re-appointed Mr. Sheetal for this
engagement as an independent expert. The audit team was of the view that the objectivity of the
independent expert cannot be questioned just because he was appointed by management as their
expert. However, the audit partner had a contrary view.

Hence, the audit team should evaluate the objectivity of an expert engaged by the entity as
the threat to objectivity, created by being an employee of the entity, will always be present.
An expert appointed by the entity cannot ordinarily be regarded as being more likely to be
objective than other employees of the entity. As a result, audit partner is correct in his view.

Nbfc

Q1. “Fin crazy” is a P2P online platform owned by Future Technologies Pvt Limited which is
registered with RBI as NBFC. Peer to Peer Platform (P2P) means an intermediary providing
the services of loan facilitation via online medium or otherwise to the participants.
Participants have to enter into an arrangement with NBFC-P2P to lend on its platform or
avail loan facilitation services provided by it. It provides only as a medium connecting lenders
and borrowers. It also carries out the credit assessment and risk profiling of the participants
on the platform. It also provides services relating to loan documentation and loan recovery.
The company falls outside purview of upper layer.
Where does such NBFC fit into in accordance with scale-based regulations? Suggest few
audit procedures for above NBFC-P2P. (SM-TYU)

Answer

NBFC-P2P falls in base layer in accordance with scale-based regulations of RBI. Few
audit procedures for NBFC-P2P are as under: -
1) Gaining an understanding of business conducted by NBFC-P2P. It should be verified
that company undertakes only permissible activities applicable to such type of
NBFCs like providing online marketplace to participants for lending and borrowing. It
should not be engaged in business of lending funds on its own.

2) Verifying certificate of registration obtained from RBI for carrying business of P2P
platform.

3) Verifying Board approved policy setting out eligibility criteria for participants i.e.,
lenders and borrowers.

4) Verifying board approved policy for pricing of services provided by P2P platform
 5) Verification of adherence to lending and borrowing guidelines prescribed by RBI

6) Verifying appropriate arrangements have been entered into among participants &
NBFC-P2P.

7) Compliance with reporting requirements of RBI.

8) Verifying board approved policy for grievance redressal and complaints

Chapter 16

Q5. State the important aspects to be considered by the External auditor in the
evaluation of the Internal Audit Function. (SM)

Answer

Evaluation of Internal Audit Functions by External Auditor: The external auditor’s general
evaluation of the internal audit function will assist him in determining the extent to which he can
place reliance upon the work of the internal auditor. The external auditor should document his
evaluation and conclusions in this respect. The important aspects to be considered in this
context are:

a) Organisational Status - Whether internal audit is undertaken by an outside agency or by

an internal audit department within the entity itself, the internal auditor reports to the
management. In an ideal situation, his reports to the highest level of management and are
free of any other operating responsibility. Any constraints or restrictions placed upon his
work by management should be carefully evaluated. In particular, the internal auditor should be
free to communicate fully with the external auditor.

b) Scope of Function - The external auditor should ascertain the nature and depth of coverage
of the assignment which the internal auditor discharges for management. He should also
ascertain to what extent the management considers, and where appropriate, acts upon internal
audit recommendations.

c) Technical Competence - The external auditor should ascertain that internal audit work is
performed by persons having adequate technical training and proficiency. This may be
accomplished by reviewing the experience and professional qualifications of the persons
undertaking the internal audit work.

d) Due Professional Care - The external auditor should ascertain whether internal audit work
appears to be properly planned, supervised, reviewed and documented. An example of the
exercise of due professional care by the internal auditor is the existence of adequate audit
manuals, audit programmes and working papers .

Chapter 7 SA 710

Q33. It was observed from the modified audit report of the financial statements of ULFA Ltd.
for the year
ended 31st March, 2019 that depreciation of Rs. 4.25 crore for the year 2018-2019 had been
charged off to the Statement of Profit and Loss instead of including it in "carrying value of
asset under construction". State in relation to the audit for the year ended 31st March 2020,
whether such modification in the previous year's audit report would have any audit implication
for the current year i.e. FY 2019-20 and if yes, how the auditor is required to deal with the
same in his audit report for the current year? (MTP NOV 20)
OR
Audit report of P Ltd. for the year 2016-17 contained a qualification regarding non-provision
of doubtful debts. As the statutory auditor of the company for the year 2017-18, decide how
would you report, if:

1) The company does not make provision for doubtful debts in 2017-18?

2) The company makes adequate provision for doubtful debts in 2017-18?

Answer

Auditor’s responsibility in cases where audit report for an earlier year is qualified is given in
SA 710
“Comparative Information – Corresponding Figures and Comparative Financial Statements”.

As per SA 710, when the auditor’s report on the prior period, as previously issued, included a
qualified opinion, a disclaimer of opinion, or an adverse opinion and the matter which gave rise
to the modified opinion is resolved and properly accounted for or disclosed in the financial
statements in accordance with the applicable financial reporting framework, the auditor’s opinion
on the current period need not refer to the previous modification.

SA 710 further states that if the auditor’s report on the prior period, as previously issued,
included a qualified opinion and the matter which gave rise to the modification is unresolved,
the auditor shall modify the auditor’s opinion on the current period’s financial statements.

In the Basis for Modification paragraph in the auditor’s report, the auditor shall either:

❑ Refer to both the current period’s figures and the corresponding figures in the
description of the matter giving rise to the modification when the effects or possible
effects of the matter on the current period’s figures are material; or

❑ In other cases, explain that the audit opinion has been modified because of the
effects or possible effects of the unresolved matter on the comparability of the
current period’s figures and the corresponding figures.

In the instant case, if ULFA Ltd. does not correct the treatment of depreciation to the extent
of rupees 4.25 crore for previous year, the auditor will have to modify his report for both
current and previous year’s figures as mentioned above. If, however, the figures and provisions
are corrected, the auditor need not consider to the earlier year’s modification.