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INTERMEDIATE COURSE – TEST SERIES FOR MAY 2024 EXAM

PAPER 6 – AUDITING AND ASSURANCE
Day: Thursday, Marks: 100
Date: 18th April, 2024 Time: 3 Hours (Reading Time 15 mins Extra)

PART – I (30 MARKS)

MULTIPLE CHOICE QUESTIONS (MCQs)
➢ Integrated Case Scenario – 1 [5 x 2 = 10 Marks]
Ravish and Co, a chartered accountancy firm, has been auditing the books of PQ groups of banks,
from the past 6 years. Ravish and Co. has a good standing reputation as auditor and there are regular
quality control activities performed by the firm’s engagement partner. The recent weekly meeting of
the firm’s staff included discussions on each of the element of the firm’s system of quality control as
per SQC 1 and code of ethics as per SA 200.

During the 7th year of audit, there have been some changes in the bank due to which the firm is
considering revision of audit terms as per SA 210. Also, new laws and updates in the field of
accounting makes the auditor feel that the financial reporting framework used by the bank is not
acceptable as per law and is considering the impact of this on his audit report.

Owing to the changes, Mr. Ravish instructs his articles to go through the audit programme once again
and make necessary changes to it. He also reviews the audit plan developed for the bank.

After the above exercise of re-planning and revision in terms of the engagement as per SA 210, Mr.
Ravish and Co. carries on the audit of the 7th year and observes the following issues:
a) As per the Income Tax Act 1961, the banks are to report certain high value transactions to the
department. On verification of certain records, the auditor suspects that there is
noncompliance with the law and in his judgment; the effect of the suspected non-compliance
may be material to the financial statements. On discussion with management, he does not get
sufficient information supportive that the bank is in compliance with the law.
b) The management of the bank shows recent investigation reports by external authorities to the
auditor wherein red flags have been raised in the internal control system of the bank. The
management blames the auditor that he has not audited the entity’s internal system correctly
and threatens to hold the auditor responsible for the same.

Considering the above facts, answer the following questions by choosing the correct answer.
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Q.1. Which among the following is NOT an element of firm’s system of quality control?
a) Ethical Requirements
b) Acceptance and continuance of client relationships and specific engagements
c) Engagement review
d) Monitoring

Q.2. When conducting an audit of financial statement, which of the following is NOT a fundamental
principle of professional ethics?
a) Integrity b) Professional Skepticism
c) Confidentiality d) Objectivity

Q.3. Which of the following statement is incorrect considering the context of revision in audit terms as per
SA 210?
a) Indication that the entity has misunderstood the objective and scope of the audit
b) A significant change in ownership of the bank
c) A change in legal or regulatory requirements
d) Significant change in the audit team

Q.4. The auditor has found that the financial reporting framework provided by law or regulation is
unacceptable. What should be the impact of this on his report?
a) Issue an adverse opinion owing to unacceptable financial reporting framework
b) Include an “Emphasis of Matter Paragraph” drawing user’s attention to additional disclosures
other than those as per law.
c) Include an “Other Matter paragraph” drawing user’s attention to additional disclosure other than
those as per law.
d) No need of any mention in report as law or regulation has prescribed the framework and law
holds highest authority.

Q.5. Which among the following best defines an Audit Programme?

a) An audit programme consists of a series of verification procedures to be applied to the financial
statements and accounts of a given company for the purpose of obtaining sufficient evidence to
enable the auditor to express an informed opinion on such statements.
b) An audit programme is a statement containing the details of the hours worked, work done and
output achieved by the staff of the audit firm used by the principal for review purpose .
c) An audit programme is a checklist developed by the audit firm covering verification aspects which
are common to clients handled by the audit firm.
d) An audit programme is the policies and procedures adopted by the company for ensuring orderly
and efficient conduct of audit, including timely provision of records to auditors and prompt
response to audit queries.
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➢ Integrated Case Scenario – 2 [4 x 2 = 8 Marks]
M/s. K. Goenka & Associates have been appointed as the statutory auditors of ABC Ltd. for the FY
2021-22. The engagement partner, CA K. Goenka established the overall audit strategy and made the
detailed plan with respect to the audit assignment of ABC Ltd. after discussing the same with the
engagement team.

The strategy adopted by M/s. K. Goenka & Associates consisted of relying on the internal control
system of the company and the audit plan and programme were developed accordingly and the audit
team started to work in accordance with the developed audit plan and programme. During the course
of audit, the engagement partner, CA K. Goenka found that some internal controls implemented by
the company were not operating effectively. So, he decided not to rely on the internal control system
of the company & accordingly changed the overall audit strategy, audit plan & audit programme.

While conducting the audit, the engagement partner also discussed with his team regarding the audit
procedures to be performed to verify the debtors’ balances of the company. CA K. Goenka asked for
the addresses of various debtors from the management of ABC Ltd. for the purpose of sending
balance confirmation request to such debtors. The management provided such addresses to the audit
team. However, the management of ABC Ltd. asked the debtors to send the responses of such
confirmation requests to General Manager of accounts department of the company, who will in turn
provide such responses to the audit team.

Further, the audit team found that a legal case has been filed against the company on account of
customer complaint. CA K. Goenka discussed with his team regarding the audit procedures that can
be performed by the audit team to verify the implications of such litigation on the financial
statements of the company.

One of the audit team members, Mr. Girish had the following understanding with respect to the audit
file to be maintained by the audit team with respect to the audit assignment:
Point no. 1: The completion of assembly of final audit file after the date of the auditor’s report is an
administrative process involving the performance of new audit procedures or drawing of new
conclusions.
Point no. 2: After the assembly of the final audit file has been completed, the auditor shall not delete
or discard audit documentation of any nature before the end of its retention period.

CA K. Goenka briefed his engagement team regarding the documents to be included in the audit file
with respect to the audit assignment of ABC Ltd. and also discussed with his team in detail regarding
the various aspects of audit file.

Considering the above facts, answer the following questions by choosing the correct answer.
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Q.6. Is CA K. Goenka right in changing the overall audit strategy and plan after the audit team has started
working as per the earlier strategy established & plan so developed?
a) CA K. Goenka is not right as once the audit team has started the audit work, it is not correct to
change the audit strategy and plan.
b) CA K. Goenka is not right as once the overall audit strategy has been established the same cannot
be changed. Audit plan however can be revised.
c) CA K. Goenka is right in making changes to the overall audit strategy and the audit plan.
d) CA K. Goenka can change the overall audit strategy and audit plan only after taking due
permission from the management of ABC Ltd.

Q.7. Is management correct in asking the debtors to provide the reply of confirmation request directly to
the General Manager of accounts department of the company?
a) Yes, the management has correctly asked the debtors to respond directly to the GM of accounts
department.
b) No, management is not correct in asking for a direct response to GM of accounts department as
external confirmation is the response obtained directly by the auditor.
c) Yes, the management is correct in advising direct response to the GM of accounts department as
this will ensure that only correct confirmation is provided to the auditors.
d) No, management is not correct as this is the option of the auditor to see if the response to
external confirmation is to be obtained by management or auditor himself.

Q.8. For confirming/verifying the litigation going against the company which of the following audit
procedures is not correct?
a) M/s. K. Goenka & Associates can enquire the management including in house legal counsel.
b) M/s. K. Goenka & Associates should review the minutes of meetings of those charged with
governance.
c) M/s. K. Goenka & Associates can review the legal expense account.
d) M/s. K. Goenka & Associates need not perform audit procedures with respect to litigation claims
of the company except for obtaining written representation from the management in this regard.

Q.9. Is the understanding of Mr. Girish regarding the assembly of audit file with respect to an audit
assignment, mentioned as point no. 1 & point no. 2 in the case scenario, correct?
a) Only understanding as per point no. 1 is correct
b) Only understanding as per point no. 2 is correct.
c) Understanding as per point no. 1 & point no. 2 both are correct.
d) Understanding as per point no. 1 & point no. 2, both are incorrect.
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➢ Integrated Case Scenario – 3 [3 x 2 = 6 Marks]
The books of accounts of WZ Limited were required to be audited for the FY 2021-22. WZ Limited was
into business of manufacturing door mats. The demand of the door mats manufactured by WZ
Limited was huge. Due to this reason the business of WZ Limited was growing quickly.

As the business transactions of WZ Limited were in large numbers, two different firms of Chartered
Accountants were appointed to jointly audit books of accounts of WZ Limited for the FY 2021-22. The
names of two Partnership Firms of Chartered Accountants were M/s MH and Associates and M/s NR
and Associates. The partners of M/s MH and Associates were Mr. M and Mr. H, while the partners of
M/s NR and Associates were Mr. N and Mr. R.

Before conducting the audit of WZ Limited, Mr. M, Mr. H, Mr. N and Mr. R had a discussion to
develop a plan for audit of WZ Limited. As far as allocation of work was concerned it was decided that
Incomes and Assets part of financial statements would be audited by M/s MH and Associates, while
Expenses and Liabilities part of financial statements would be audited by M/s NR and Associates.
Certain other work was not divided between the two Firms of Chartered Accountants and was to be
carried out by both the auditors.
Mr. K one of the employees of WZ Limited has an understanding that each of the auditors were
required to issue separate audit reports regarding the audit conducted for the FY 2021-22, even
though there was no disagreement regarding opinion between the two auditors.

Considering the above facts, answer the following questions by choosing the correct answer.

Q.10. To jointly audit books of accounts of WZ Limited for the FY 2021- 22 two different firms of Chartered
Accountants namely M/s MH and Associates and M/s NR and Associates were appointed. Both the
firms can together be called as:
a) Auditors of WZ Limited.
b) Branch Auditors of WZ Limited.
c) Individual Auditors of WZ Limited.
d) Joint Auditors of WZ Limited.

Q.11. Certain work was not divided between the two firms of Chartered Accountants. Which statement
would be correct regarding the responsibility of audit of such other work which was not divided:
a) Only M/s NR and Associates would be responsible.
b) Only M/s MH and Associates would be responsible
c) Both M/s MH and Associates and M/s NR and Associates would not be responsible as such certain
other work was not divided between them.
d) Both M/s MH and Associates and M/s NR and Associates would be jointly and severally
responsible for such certain other work which was not divided between them
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Q.12. Assume that there was a disagreement regarding opinion between M/s MH and Associates and M/s
NR and Associates for the audit conducted for the FY 2021-22 of the books of accounts of WZ
Limited. In such scenario who is required to issue Audit Report.
a) Only M/s MH and Associates.
b) Only M/s NR and Associates
c) M/s MH and Associates and M/s NR and Associates were required to issue Common Audit Report.
d) M/s MH and Associates and M/s NR and Associates were required to issue Separate Audit Reports
and the audit reports issued by joint auditors shall make a reference to each other’s audit report.

General MCQ’s: [3 x 2 = 6 Marks]

Q.13. SA 320 on “Materiality in Planning and Performing an Audit” requires that an auditor
a) Should not consider materiality and its relationship with audit risk while conducting an audit.
b) Should consider materiality and its relationship with audit risk while conducting an audit.
c) Should not consider materiality but should consider its relationship with audit risk while
conducting an audit.
d) Should consider materiality but need not consider its relationship with audit risk while
conducting an audit.

Q.14. CA Vijay is the statutory auditor of XYZ Ltd. for the FY 2021-22. During the process of assembling the
audit file, CA Vijay briefed his team as to what all changes can be made to the audit documentation at
that stage. Which of the following changes cannot be made to the audit documentation during the
final assembly process?
a) Sorting, collating & cross referencing of working papers
b) Signing off completion checklists relating to the file assembly process.
c) Deleting or discarding superseded documents.
d) Recalculation of Depreciation.

Q.15. 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, having regard to the significance of
that expert’s work for the auditor’s purposes:
i) Evaluate the competence, capabilities and objectivity of that expert
ii) Obtain an understanding of the work of that expert
iii) Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion
a) (i) and (ii)
b) (ii) and (iii)
c) (i) and (iii)
d) (i), (ii) and (iii)
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PART – II (70 MARKS)

Question No. 1 is compulsory.
Attempt any four questions from the Rest.
Q.1.
(a) CA R is the statutory auditor of QRS Ltd. While performing testing of additions during the year, he
wanted to verify that:
(i) All PPE (property, plant and equipment) are in the name of the entity he is auditing.
(ii) For all additions to land and building in particular, the auditor desires to have concrete about
the ownership.
(iii) The auditor wants to know whether the entity has valid legal ownership rights over the PPE,
where it is kept as security for any borrowings.
Advise the auditor on the audit procedure to be undertaken by him to establish the Rights and
Obligations of the entity over the PPE. [4 Marks]

(b) CA Jignesh Desai is in midst of audit of a company. The company is fairly large one and has a well -
functioning internal audit department. While considering sending out external confirmation requests
to trade receivables outstanding as on date of financial statements, he has delegated the process of
choosing trade receivables, designing requests and receiving responses from customers to internal
audit department. The responses are also received on the mail id of internal audit department. Is
approach of CA Jignesh Desai proper? [4 Marks]

(c) On reviewing internal control over inventories as part of statutory audit of a company, auditor finds
that physical verification is not being conducted at regular intervals as stipulated by the
management. The auditor finds it to be significant deficiency in internal control over inventories. He
points it out to the management in a one-liner as under: - “Physical verification of inventories is not
being conducted at regular intervals as stipulated by management.” Is above communication by
auditor proper? Ignore statutory reporting requirements, if any in this regard. [3 Marks]

(d) CA. Ravi Patnaik is conducting audit of a company for which reporting requirements under CARO,
2020 are applicable. He finds that cash credit facilities amounting to ` 4 crores were released to the
company by branch of a bank for meeting its working capital requirements. He finds that out of
above funds, ` 1 crore have been used by company for installing effluent treatment plant to meet
State pollution control Board requirements. Is there any reporting obligation upon him under CARO,
2020? [3 Marks]

Q.2.
(a) Planning is not a discrete phase of an audit, but rather a continual and iterative process that often
begins shortly after the completion of the previous audit and continues until the completion of the
current audit engagement. Planning includes the need to consider certain matters prior to the
auditor’s identification and assessment of the risks of material misstatement. Explain clearly stating
those matters also. [4 Marks]
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(b) In the course of audit of SMP Limited for the financial year ended 31st March, 2020 you have
observed as an auditor that the company has provided a sum of ` 20 Lakhs in the books of account as
Gratuity payable to employees based on certificate obtained from an actuary. Give your comments
with reference to the Standard on Auditing. [4 Marks]

(c) M/s TP & Co., a firm of Chartered Accountants, is auditor of KSR Ltd. for many years. KSR Ltd. has
diversified their business into newer areas during the last year. The senior member of the audit team
handed over the standard audit programme of earlier years to the audit assistants and instructed
them to follow the same. The assistants are conducting the audit accordingly. Whether the attitude
of the audit assistants is justified or they are required to keep an open mind? Guide them. [3 Marks]

(d) As a Statutory Auditor of the company list out audit procedure required to be undertaken for the
recognition of following other income:
(i) Interest income from fixed deposit
(ii) Dividend income
(iii) Gain/(loss) on sale of investment in mutual funds. [3 Marks]

Q.3.
(a) With Ref. to SA 320 "Materiality in planning and performing an audit" Indicate the factors which may
effect the identification of an appropriate benchmark while determining materiality for the financial
statements as a whole. [4 Marks]

(b) Define audit documentation. Also give some examples. [4 Marks]

(c) M/s S & Associates are the Statutory Auditors of Real Ltd., a company engaged in the business of
manufacturing of garments. The auditor has completed the audit and is in the process of forming an
opinion on the financial statements for the F.Y. 2020 -2021. CA K, the engagement partner, wants to
conclude that whether the financial statements as a whole are free from material misstatements,
whether due to fraud or error. What factors he should consider to reach that conclusion? [3 Marks]

(d) CA Raman Gupta is offered appointment as auditor of a company. One of his distant uncles held
some shares in the same company. Holding of such shares, by a distant relative, is not prohibited
under provisions of law nor does it affect his independence. Before he could accept appointment, he
received unfortunate news of death of his uncle who had died without any children. He came to
know that he was nominee of these shares having substantial value. It landed him in a tricky
situation. What should be proper course of action for him? [3 Marks]

Q.4.
(a) No inspection under Section 79 of Multi-State Co-operative Societies Act, 2002 shall be made unless a
notice has been given to the multi-state co-operative society. Explain stating clearly when and how
such inspection can be made. Also state the powers available with the Central Registrar in this regard
along with provisions relating to communication of the inspection report under the said section.
[4 Marks]
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(b) What an auditor should state in "Basis for opinion" section of auditor's report and when the auditor
modifies the opinion on the financial statements, what amendments he should make in this section?
[4 Marks]

(c) An assurance engagement involves a three-party relationship. Discuss meaning of three parties in
such an engagement. [3 Marks]

(d) MNO & Associates are the statutory auditor of Venus Ltd. for the FY 2021-22. During the course of
audit, one of the audit team members, Mr. Viaan noticed that the company has made loans totaling
to ` 50 lakhs to the promoters of the company, namely, Mr. Raj and Mr. Rajeev without specifying
the period of repayment. Mr. Viaan discussed with Mr. Manik, the engagement partner, about the
disclosure requirements with respect to such loans required by Schedule III to the Companies Act,
2013. What should Mr. Manik advise Mr. Viaan? [3 Marks]

Q.5.
(a) The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence
that all events occurring between the date of the financial statements and the date of the auditor's
report, that requires adjustment of, or disclosure in, the financial statements have been identified.
With reference to SA 560, what are the audit procedures included in the auditor's risk assessment?
[4 Marks]

(b) Being statutory auditor of JAL Limited, a company engaged in manufacturing of chemicals, CA Gopika
has understood that company is expected to have material work-in-progress as on 31st March, 2024.
State few audit procedures to verify existence and valuation assertions for work-in-progress.
[4 Marks]

(c) N Ltd. has been sanctioned a Cash Credit Facility by XYZ Bank Ltd. for INR 1 crore and drawing power
as per the stock statements furnished for the last quarter is INR 80 Lakh. Outstanding balance in the
account is INR 75 lakh. Interest charged to the account is INR 3.5 Lakh and total credit into the
account for the quarter is INR 2.5 Lakh. As an auditor how will you report this account in your report.
[3 Marks]

(d) You have been appointed as an auditor of VJM Schools. Discuss the points which merit your
consideration as an auditor while verifying Assets and Liabilities of VJM Schools. [3 Marks]

Q.6.
(a) The auditor of a company is having concerns about following of going concern basis of accounting
followed by management for preparation of financial statements. It asks the management to justify
preparation of financial statements. However, management is not willing to make its assessment and
share with auditor. What are implications for auditor’s report in such a scenario? [4 Marks]
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(b) Audit against propriety seeks to ensure that expenditure conforms to certain principles which have
for long been recognised as standards of financial propriety. Explain those principles. [4 Marks]

(c) In an initial audit engagement, in the case of inventories, the current period’s audit procedures on
the closing inventory balance provide little audit evidence regarding inventory on hand at the
beginning of the period. Therefore, in such a case, additional audit procedures become necessary so
that auditor may obtain sufficient appropriate audit evidence. Discuss those additional audit
procedures. [3 Marks]

(d) CA PK Nair is offered appointment as auditor of a company engaged in providing tourism services.
While making due diligence of the proposed client, he comes to know that there have been raids on
premises of the company and residences of its directors by National Investigation Agency (NIA) on
suspicion of links with terror outfits. It has been followed up with searches by Enforcement
Directorate hunting for illicit money trail. There is a strong suspicion of tourism services provided by
company being façade of terror funds. Should proposed offer be accepted by him? [3 Marks]

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