CA Intermediate

Auditing and
Assurance
Scanner
MOST IMPORTANT
QUESTIONS with
ANSWERS

By: Vinit Mishra Sir

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 INDEX

CHAPTER NAME PAGE NO.

CHAPTER - 1 : NATURE, OBJECTIVE AND SCOPE OF AUDIT 1–4

CHAPTER – 2 : AUDIT STRATEGY, AUDIT PLANNING AND AUDIT PROGRAMME 5–9

CHAPTER - 3 : AUDIT DOCUMENTATION AND AUDIT EVIDENCE 10 – 14

CHAPTER - 4 : RISK ASSESSMENT AND INTERNAL CONTROL 15 – 23

CHAPTER - 5 : FRAUD AND RESPONSIBILITIES OF THE AUDITOR IN THIS REGARD 24 – 29

CHAPTER - 6 : AUDIT IN AN AUTOMATED ENVIRONMENT 30 – 36

CHAPTER - 7 : AUDIT SAMPLING 37 – 41

CHAPTER - 8 : ANALYTICAL PROCEDURES 42 – 45

CHAPTER - 9A : AUDIT OF BALANCE SHEET ITEMS 46 – 51

CHAPTER - 9B : AUDIT OF STATEMENT OF P&L ACCOUNTS ITEMS 52 – 57

CHAPTER - 10 : COMPANY AUDIT 58 – 68

CHAPTER - 11 : AUDIT REPORT 69 – 75

CHAPTER - 12 : AUDIT OF BANKS 76 – 81

CHAPTER - 13 : GOVERNMENT AUDIT AND AUDIT OF LOCAL BODIES 82 – 87

CHAPTER - 14 : AUDIT OF NGO 88 - 88

CHAPTER - 15 : MISCELLANEOUS AUDIT 89 – 93

CHAPTER - 16 : AUDIT OF CO-OPERATIVE SOCIETIES 94 – 94

CHAPTER - 17 : SA AND GUIDANCE NOTES 95 - 99

 Chapter -1: Nature, Objective and Scope of Audit

Chapter -1
Nature, Objective and Scope of Audit
Question - 1
Explain the fundamental principles of professional ethics relevant to the auditor when
conducting an audit of financial statements in accordance with Code of Ethics issued by ICAI.
[Jan 2021 (4 Marks)]

ANSWER:
The auditor is subject to relevant ethical requirements, including those pertaining to independence,
relating to financial statement audit engagements. Relevant ethical requirements ordinarily comprise the
Code of Ethics issued by the Institute of Chartered Accountants of India.
The Code establishes the following as the fundamental principles of professional ethics relevant to the
auditor when conducting an audit of financial statements and provides a conceptual framework for
applying those principles;
(a) Integrity;
(b) Objectivity;
(c) Professional competence and due care;
(d) Confidentiality; and
(e) Professional behaviour.

Question - 2
State with reasons whether the following statements are correct or incorrect.
There is a very thin difference between advocacy threats and intimidation threats to an auditor
while performing his duty. [July 2021 (2 Marks)]

ANSWER:
Incorrect: Advocacy threats, which occur when the auditor promotes, or its perceived to promote, a
client’s option to a point where people may believe that objectivity is getting compromised. E.g. When
an auditor deals with shares or securities of the audited company, or becomes the client’s advocate in
litigation and third party disputes.
Intimidation threats, which occur when auditors are deferred from acting objectively with an adequate
degree of professional skepticism. Basically, these could happen because of threat of replacement over
disagreements with the application of accounting principles, or pressure to disproportionately reduce
work in response to reduced audit fees.
So, it can be concluded that there is not very thin difference between the advocacy threats and
intimidation threats.

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 Chapter -1: Nature, Objective and Scope of Audit

Question - 3
CA S is requested to accept the appointment as an auditor of Luck Ltd. With reference to SA
210, what should the auditor determine in order to establish whether the preconditions for an
audit are present? [Dec 2021 (4 Marks)]

ANSWER:
SA 210 – Agreeing the Terms of Audit Engagements:
In order to establish whether the preconditions for an audit are present, the auditor of Luck Ltd., CA S
shall:
(1) Determine whether the financial reporting framework is acceptable; and
(2) Obtain the agreement of management that it acknowledges and understands its responsibility:
(i) For the preparation of the financial statements in accordance with the applicable financial
reporting framework;
(ii) For the internal control as management considers necessary; and
(iii) To provide the auditor with:
• Access to all information such as records, documentation and other matters;
• Additional information that the auditor may request from management for the purpose
of the audit; and
• Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence.

Question - 4
Examine with reasons whether the following statements are correct or incorrect.
Even if law or regulation prescribes sufficient details of the terms of the audit engagement the
auditor should record them in a written agreement. [Nov 2020 (2 Marks)]

ANSWER:
Incorrect: If law or regulation prescribes in sufficient detail the terms of the audit engagement, the
auditor need not record them in a written agreement, except for the fact that such law or regulation
applies and that management acknowledges and understands its responsibilities.

Question - 5
Describe the guiding principles which the auditor should take into account which serves as
the safeguards to eliminate the threats to independence. [Nov 2022 (4 Marks)]

ANSWER:
The Chartered Accountant has a responsibility to remain independent by taking into account the context
in which they practice, the threats to independence and the safeguards available to eliminate the threats.
The following are the guiding principles in this regard: -

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 Chapter -1: Nature, Objective and Scope of Audit

1. For the public to have confidence in the quality of audit, it is essential that auditors should always
be and appears to be independent of the entities that they are auditing.
2. In the case of audit, the key fundamental principles are integrity, objectivity and professional
skepticism, which necessarily require the auditor to be independent.
3. Before taking on any work, an auditor must conscientiously consider whether it involves threats to
his independence. When such threats exist, the auditor should either desist from the task or put in
place safeguards that eliminate them.
4. If the auditor is unable to fully implement credible and adequate safeguards, then he must not accept
the work.

Multiple Choice Question

1. Audit is an independent examination of financial information of any entity.
(a) That entity must be profit oriented
(b) That may profit oriented or not
(c) Irrespective of its size or legal form
(d) (b) and (c)
2. Overall Objectives of the Independent Auditor describe under.
(a) SA - 200
(b) SA - 205
(c) SA - 500
(d) SA - 700
3. A comprehensive, continuous and systematic examination of all transactions by a person
other than those involved in operation is called.
(a) Statutory Audit
(b) Interim Audit
(c) Concurrent Audit
(d) Continuous Audit
4. ICAI is a member of____________.
(a) IFAC
(b) IAASB
(c) IMF
(d) SEBI
5. ________________ refers to an attitude that includes a questioning mind. While conducing
the audit.

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 Chapter -1: Nature, Objective and Scope of Audit

(a) Professional misconduct

(b) Professional behaviour
(c) Professional Skepticism
(d) Professional ethics

Answer (Multiple Choice Questions)

1. (d) 2. (a) 3. (c) 4. (a) 5. (c)

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 Chapter - 2 : Audit Strategy, Audit Planning and Audit Programme

Chapter - 2
Audit Strategy, Audit Planning and Audit
Programme
Question - 1
Examine with reasons whether the following statements are correct or incorrect.
The audit plan is more detailed than the overall audit strategy. [Nov 2020 (2 Marks)]

ANSWER:
Correct: The audit plan is more detailed than the overall audit strategy that includes the nature, timing
and extent of audit procedures to be performed by engagement team members. Once the overall audit
strategy has been established, an audit plan can be developed to achieve the audit objectives through
the efficient use of the auditor’s resources.

Question - 2
State with reasons whether the following statements are correct or incorrect.
Once the audit plan has been drafted and communicated, it is obligatory on the auditor to
follow the same. [May 2022 (2 Marks)]

Answer:
Incorrect: The auditor shall update and change the overall audit strategy and the audit plan as necessary
during the course of the audit. As a result of unexpected events, changes in conditions, or the audit
evidence obtained from the results of audit procedures, the auditor may need to modify the overall
audit strategy and audit plan and thereby the resulting planned nature, timing and extent of further
audit procedures, based on the revised consideration of assessed risks. This may be the case when
information comes to the auditor’s attention that differs significantly from the information available
when the auditor planned the audit procedures.

Question - 3
Documentation of audit plan serves as a record of the planned nature, timing and extent of risk
assessment procedures and further audit procedures at the assertion level in response to the
assessed risks. What all activities in the planning phase should form part of auditor's
documentation? State with examples. [July 2021 (4 Marks)]

ANSWER:
The documentation of the audit plan is a record of the planned nature, timing and extent of risk
assessment procedures and further audit procedures at the assertion level in response to the assessed risks.
Example
The following things should form part of auditor’s documentation:

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 Chapter - 2 : Audit Strategy, Audit Planning and Audit Programme

 A summary of discussions with the entity’s key decision makers.

 Documentation of audit committee pre-approval of services, where required.
 Audit documentation access letters.
 Other communications or agreements with management or those charged with governance
regarding the scope, or changes in scope, of our services.
 Auditor’s report on the entity’s financial statements.
 Other reports as specified in the engagement agreement (e.g., debt covenant compliance letter).

Question - 4
Examine with reasons whether the following statements are correct or incorrect.
It is not necessary for the auditor to periodically review the audit programme.
[Nov 2020 (2 Marks)]

ANSWER:
Incorrect: There should be periodic review of the audit programme to assess whether the same
continues to be adequate for obtaining requisite knowledge and evidence about the transactions. Unless
this is done, any change in the business policy of the client may not be adequately known, and
consequently, audit work may be carried on, on the basis of an obsolete programme and for this
negligence, the whole audit may be held as negligently conducted and the auditor may have to face
legal consequences.

Question - 5
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. [Dec 2021 (4 Marks)]

ANSWER:
The Assistant Engaged – Be Encouraged to Keep an Open Mind:
To start with, an auditor having regard to the nature, size and composition of the business and the
dependability of the internal control and the given scope of work, should frame a programme which
should aim at providing for a minimum essential work which may be termed as a standard programme.
As experience is gained by actually carrying out the work, the programme may be altered to take care
of situations which were left out originally, but are found relevant for the particular concern. Similarly,
if any work originally provided for proves beyond doubt to be unnecessary or irrelevant, it may be
dropped. The assistant engaged in the job should be encouraged to keep an open mind beyond the
programme given to him. He should be instructed to note and report significant matters coming to his
notice, to his seniors or to the partners or proprietor of the firm engaged for doing the audit.

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 Chapter - 2 : Audit Strategy, Audit Planning and Audit Programme

In the given case, the attuite of assistants of TP & Co. is not justified. They should keep an open mind
and go beyond the programme to take care of newer areas of the business of KSR Ltd. into which the
Company has diversified.

Question - 6
Explain whether the following statements are correct or incorrect, with reasons/ explanations/
examples:
Determining materiality involves the exercise of professional judgement.
[Jan 2021 (2 Marks)]

ANSWER:
Correct: Determining materiality involves the exercise of professional judgment. A percentage is often
applied to a chosen benchmark as a starting point in determining materiality for the financial statements
as a whole.

Question - 7
State with reasons whether the following statements are correct or incorrect.
When Profit before tax from continuing operations is non-volatile, other benchmarks will be
appropriate. [Dec 2021 (2 Marks)]

ANSWER:
Incorrect: Profit before tax from continuing operations is often used for profit-oriented entities. When
profit before tax from continuing operations is volatile, other benchmarks may be more appropriate,
such as gross profit or total revenues.

Question - 8
State with reasons whether the following statements are correct or incorrect.
Materiality is not a matter or size. [May 2022 (2 Marks)]

Answer:
Incorrect: Financial statements should disclose all ‘material items’, i.e., the items the knowledge of
which might influence the decisions of the user of the financial statement. Materiality is not always a
matter of relative size. For example -a small amount lost by fraudulent practices of certain employees
can indicate a serious flaw in the enterprise’s internal control system requiring immediate attention to
avoid greater losses in future. In certain cases, quantitative limits of materiality are specified.

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 Chapter - 2 : Audit Strategy, Audit Planning and Audit Programme

Multiple Choice Question

1. Auditor should plan his work to enable him to conduct and effective audit in _________ and
___________.
(a) A organised, systematic way.
(b) A timely, efficient manner.
(c) An efficient, timely manner.
(d) A systematic, proper way.
2. Planning is not a discreate phase of an audit, but rather a continual and iterative process.
The state is statement is.
(a) True
(b) Wrong
(c) Partially wrong
(d) Absolutely wrong.
3. _________________ may be defined as the information used by the auditor in arriving at the
conclusions of which the auditor’s opinion is based.
(a) Audit Plan
(b) Audit Programme
(c) Audit Evidence
(d) Audit System.
4. Materiality in Planning and Performing an Audit defines under
(a) SA - 300
(b) SA - 315
(c) SA - 320
(d) SA - 318.
5. Factor that may not affect the identification of an appropriate benchmark.
(a) The elements of the financial statements
(b) Some items on which the attention of the users of the particulars entity’s financial statements
tends to be focused.
(c) Management’ behaviours in the entity
(d) The nature of the entity, where the entity is at in its life cycle, and the industry and economic
environment in which the entity operates.

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 Chapter - 2 : Audit Strategy, Audit Planning and Audit Programme

Answer (Multiple Choice Questions)

1. (c) 2. (a) 3. (c) 4. (c) 5. (c)

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 Chapter – 3 : Audit Documentation and Audit Evidence

Chapter - 3
Audit Documentation and Audit Evidence
Question - 1
CA G, auditor of Sports Ltd., while auditing documented all the papers. He retained some of
the documents of the company on which he has not worked along with the documents which
were his working papers saying that as he was the auditor of the Company, so he has the right
to retain all the documents as he may require them for future references. Comment on the
action of the auditor. [May 2022 (4 Marks)]

Answer:
Right of Lien on the Books and Documents of the Company: Under section 128 of the Act, books
of account of a company must be kept at the registered office. These provisions ordinarily make it
impracticable for the auditor to have possession of the books and documents. The company provides
reasonable facility to auditor for inspection of the books of account by directors and others authorised
to inspect under the Act. Taking an overall view of the matter, it seems that though legally, auditor may
exercise right of lien in cases of companies, it is mostly impracticable for legal and practicable constraints.
His working papers being his own property, the question of lien, on them does not arise.
In view of above, CA G cannot retain the documents of the company and on which he did not work.
Alternative Solution:
In terms of the general principles of law, any person having the lawful possession of somebody else’s
property, on which he worked, may has retain the property for non-payment of his dues on account of
the work done on the property. On this premise, auditor can exercise lien on books and documents
placed at his possession by the client for non-payment of fees, for work done on the books and
documents. The Institute of Chartered Accountants in England and Wales has expressed a similar view
on the following conditions:
(i) Documents retained must belong to the client who owes the money.
(ii) Documents must have come into possession of the auditor on the authority of the client. They
must not have been received through irregular or illegal means. In case of a company client, they
must be received on the authority of the Board of Directors.
(iii) The auditor can retain the document only if he has done work on the documents assigned to him.
(iv) Such of the documents can be retained which are connected with the work on which fees have not
been paid.
In view of above, CA G cannot retain the documents of the company and on which he did not work.

Question - 2
Explain whether the following statements are correct or incorrect, with reasons/ explanations/
examples.
Sufficiency is the measure of the quantity of audit evidence. [Jan 2021 (2 Marks)]

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 Chapter – 3 : Audit Documentation and Audit Evidence

ANSWER:
Correct: Sufficiency is the measure of the quantity of audit evidence. The quantity of audit evidence
needed is affected by the auditor’s assessment of the risks of misstatement (the higher the assessed risks,
the more audit evidence is likely to be required).

Question - 3
State with reasons whether the following statements are correct or incorrect.
While auditing the books of accounts of ABC Ltd., the auditor of the company looked at the
inventory counting process to obtain audit evidence. In the present case, audit procedure
used by the auditor is known as “Inspection”. [Dec. 2021 (2 Marks)]

ANSWER:
Incorrect: The audit procedure used by the auditor of ABC Ltd. is known as “observation”. Whereas
inspection involves examining records or documents, whether internal or external, in paper form,
electronic form, or other media, or a physical examination of an asset.

Question - 4
CA K audited the books of accounts of E Ltd. for the financial year 2020-2021. The auditor
used an audit procedure according to which all the documents and records maintained by the
company were checked in detail to obtain audit evidence. Explain the audit procedure used
by the auditor and its reliability. [Dec 2021 (3 Marks)]

ANSWER:
Audit Procedure:
Inspection involves examining records or documents, whether internal or external, in paper form,
electronic form, or other media, or a physical examination of an asset. Inspection of records and
documents provides audit evidence of varying degrees of reliability, depending on their nature and
source and, in the case of internal records and documents, on the effectiveness of the controls over their
production.
Example of inspection used as a test of controls is inspection of records for evidence of authorisation.
Some documents represent direct audit evidence of the existence of an asset, for example, a document
constituting a financial instrument such as a inventory or bond. Inspection of such documents may not
necessarily provide audit evidence about ownership or value. In addition, inspecting an executed,
contract may provide audit evidence e relevant to the entity’s application of accounting policies, such
as revenue recognition. Inspection of tangible assets may provide reliable audit evidence with respect to
their existence, but not necessarily about the entity’s rights and obligations or the valuation of the assets.
Inspection of individual inventory items may accompany the observation of inventory counting.
In view of above, it can be concluded that CA K used inspection as an audit procedure.

Question - 5
CA K is re-appointed as the auditor of B Ltd. He wants to re-confirm certain matters and has
asked the management to give written representations for the same. Under what

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 Chapter – 3 : Audit Documentation and Audit Evidence

circumstances can an auditor ask the management to reconfirm its acknowledgement and
understanding of responsibilities in written representation? [Dec. 2021 (4 Marks)]

ANSWER:
Other Written representation: Other SAs require the auditor to request written representations. If, in
addition to such required representations, the auditor determines that it is necessary to obtain one or
more written representations to support other audit evidence relevant to the financial statements or one
or more specific assertions in the financial statements, the auditor shall request such other written
representations.
The written representations draw on the agreed acknowledgement and understanding of management
of its responsibilities by requesting confirmation that it has fulfilled them. The auditor, CA K of B Ltd.,
may also ask management of B Ltd. to reconfirm is acknowledgement and understanding of those
responsibilities in written representations. This is particularly appropriate when:
(i) Those who signed the terms of the audit engagement on behalf of the entity no longer have the
relevant responsibilities;
(ii) The terms of the audit engagement were prepared in a previous year;
(iii) There is any indication that management misunderstands those responsibilities; or
(iv) Changes in circumstances make it appropriate to do so.

Question - 6
When inventory under the custody and control of a third party is material to the financial
statements, the auditor can obtain sufficient appropriate audit evidence regarding the
existence and condition of that inventory by taking written representation from management.
[Dec. 2021 (2 Marks)]

ANSWER:
Incorrect: When inventory under the custody and control of a third party is material to the financial
statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and
condition of that inventory by performing one or both of the following:
(i) Request confirmation from the third party as to the quantities and condition of inventory held on
behalf of the entity.
(ii) Perform inspection or other audit procedures appropriate in the circumstances.

Question - 7
SPR Ltd has been into the media business since 1990. During the F.Y. 2021-2022 many notices
were received by the company for hurting public sentiments and financial claims were filed
against the company. As an auditor of the company, you requested the management for
arranging the meeting with company’s external legal counsel. Management is of the view that
such meetings are necessary in some certain circumstances only. Can you list down those
certain circumstances? [May 2022 (3 Marks)]

Answer:

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 Chapter – 3 : Audit Documentation and Audit Evidence

Circumstances when becoming necessary to meet with external legal counsel: In the given case of SPR
Ltd, Auditor requested the management for meeting with SPR’s external legal counsel.
In certain circumstances, the auditor also may judge it necessary to meet with the entity’s external legal
counsel to discuss the likely outcome of the litigation or claims.
This may be the case, for example, where:
(i) The auditor determines that the matter is a significant risk.
(ii) The matter is complex.
(iii) There is disagreement between management and the entity’s external legal counsel.
Ordinarily, such meetings require management’s permission and are held with a representative of
management in attendance.

Question - 8
The newly appointed auditor of BTN Limited wants to obtain sufficient appropriate audit
evidence about whether the opening balances contain misstatements that materially affect
the current period’s financial statements. What audit procedures should he perform for this
purpose? [May 2022 (3 Marks)]

Answer:
Audit Procedure Regarding Opening Balances: The newly appointed auditor of BTN Ltd shall read
the most recent financial statements, if any, and the predecessor auditor’s report thereon, if any, for
information relevant to opening balances, including disclosures.
The auditor of BTN Ltd shall obtain sufficient appropriate audit evidence about whether the opening
balances contain misstatements that materially affect the current period’s financial statements by:
(1) Determining whether the prior period’s closing balances have been correctly brought forward to
the current period or, when appropriate, any adjustments have been disclosed as prior period
items in the current year’s Statement of Profit and Loss.
(2) Determining whether the opening balances reflect the application of appropriate accounting
policies; and
(3) Performing one or more of the following:
(i) Where the prior year financial statements were audited, perusing the copies of the audited
financial statements including the other relevant documents relating to the prior period
financial statements.
(ii) Evaluating whether audit procedures performed in the current period provide evidence
relevant to the opening balances; or
(iii) Performing specific audit procedures to obtain evidence regarding the opening balances.

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 Chapter – 3 : Audit Documentation and Audit Evidence

Multiple Choice Question

1. Audit Documentation also Known as
(a) Audit Notes
(b) Audit Notes Book
(c) Working Papers
(d) Audit Evidence Book.
2. Audit Documentation Summary is also known as
(a) Audit Summary
(b) Audit File
(c) Audit Working Paper
(d) Completion Memorandum.
3. The sufficiency and appropriateness of audit evidence are
(a) Interdependent
(b) Dependent
(c) Interrelated
(d) Interrelated.
4. Audit evidence pertaining______________ may be sufficient for the auditor’s purpose.
(a) Only for a particulars period
(b) For a period of time
(c) Only to a point of time
(d) (a) or (b).
5. To ensure “true and fair” and auditor has to see except.
(a) That the assets are neither undervalued or overvalued, according to the applicable accounting
principles.
(b) No material assets is omitted and if there is any change then disclosed
(c) Audited Financial Statements of the previous periods
(d) All Unusual, exceptional or non-recurring Items have been disclosed separately.

Answer (Multiple Choice Questions)

1. (c) 2. (d) 3. (c) 4. (c) 5. (c)

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 Chapter - 4 : Risk Assessment and Internal Control

Chapter - 4
Risk Assessment and Internal Control
Question - 1
State with reasons whether the following statements are correct or incorrect.
Internal control cannot eliminate risk of material misstatements in the financial statements.
[Dec. 2021 (2 Marks)]

ANSWER:
Correct: Control risk is a function of the effectiveness of the design, implementation and maintenance
of internal control by management. However, internal control can only reduce but no eliminate risks of
material misstatement in the financial statements. This is because of the inherent limitations of internal
control.
There is possibility of human errors or mistakes, or of controls being circumvented by collusion.
Accordingly, some control risk will always exist.

Question - 2
Examine with reasons whether the following statements are correct or incorrect.
Risks of material misstatement may be greater for significant judgmental matters that require
the development of accounting estimates. [Nov 2020 (2 Marks)]

ANSWER:
Correct: Risks of material misstatement may be greater for significant judgmental matters that require
the development of accounting estimates, arising from matters such as the following:
 Accounting principles for accounting estimates or revenue recognition may be subject to differing
interpretation.
 Required judgment may be subjective or complex, or require assumptions about the effects of future
events, for example, judgment about fair value.

Question - 3
What factors are to be considered by an auditor while making control risk assessments?
[Nov 2020 (3 Marks)]

ANSWER:
Auditor assesses control risk as Rely or Not rely on Controls. When making control risk assessments, the
factors an auditor would consider are:
 The control environment’s influence over internal control. A control environment that supports the
prevention, detection and correction of material misstatements allows greater confidence in the
reliability of internal control and audit evidence generated within the entity.

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 Chapter - 4 : Risk Assessment and Internal Control

 Evaluations of the related IT processes that support application and IT-dependent manual controls.

 Our testing approach over SCOTs and disclosure processes (i.e., controls reliance or substantive only
strategy).
 The expectation of the operating effectiveness of controls based on the understanding.

Question - 4
Explain whether the following statements are correct or incorrect, with reasons/ explanations/
examples.
The Auditor is expected to, reduce audit risk to zero and can therefore obtain absolute
assurance that the financial statements are free from material misstatement due to fraud or
error. [Jan 2021 (2 Marks)]

Answer:
Incorrect: As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit
in Accordance with Standards on Auditing”, The auditor is not expected to, and cannot, reduce audit
risk to zero and cannot therefore obtain absolute assurance that the financial statements are free from
material misstatement due to fraud or error. This is because there are inherent limitations of an audit.

Question - 5
In case of certain subject matters, limitations on the auditor's ability to detect material
misstatements are particularly significant. Explain such assertions or subject matters.
[July 2021 (3 Marks)]

ANSWER:
In case of certain subject matters, limitations on the auditor’s ability to detect material misstatements are
particularly significant. Such assertions or subject matters include:

­ Fraud, particularly fraud involving senior management or collusion

­ The existence and completeness of related party relationship and transactions.

­ The occurrence of non-completeness of related party relationships and transactions.

­ The occurrence of non-compliance with laws and regulations.

­ Future events or conditions that may cause an entity to cease to continue as a going concern.

Question - 6
CA L is in the process of finalizing his Risk Assessment Procedures of Effluent Limited which
include observation and inspection that may support inquiries of management and others.
Discuss few examples of audit procedures which include observation or inspection of the
entity's operations. [July 2021 (3 Marks)]

ANSWER:

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 Chapter - 4 : Risk Assessment and Internal Control

Observation and inspection may support inquiries of management and others, and may also provide
information about the entity and its environment.
Examples of audit procedures which include observation or inspection of the entity’s operations are:
(1) Documents (such as business plans and strategies), records, and internal control manuals.
(2) Reports prepared by management (such as quarterly management reports and interim financial
statements) and those charged with governance (such as minutes of board of director’s meetings)
(3) The entity’s premises and plant facilities.

Question - 7
Auditor of Sunshine Ltd. is of the view that due to greater management intervention to specify
accounting treatment, the risk of material misstatement is greater for non-routine
transactions. Is the view of the auditor correct? Specify the other matters due to which the
risk of material misstatement is greater for significant non-routine transactions.
[Dec 2021 (3 Marks)]

ANSWER:
Risk of Material Misstatement – Greater for Significant Non-Routine Transactions:
Significant risks often relate to significant non-routine transactions or judgemental matters. Non-routine
transactions are transactions that are unusual, due to either size or nature, and that therefore occur
infrequently.
Risks of Material Misstatement – Greater for Significant Non-Routine Transactions
Risks of material misstatement may be greater for significant non-routine transactions arising from
matters such as the following:
(a) Greater management intervention to specify the accounting treatment.
(b) Greater manual intervention for data collection and processing.
(c) Complex calculations or accounting principles.
(d) The nature of non-routine transactions, which may make it difficult for the entity to implement
effective controls over the risks.
Keeping in view above, view of Auditor of Sunshine Ltd is correct.

Question - 8
State with reasons whether the following statements are correct or incorrect.
Inappropriate management can override internal controls of any organization.
[May 2022 (2 Marks)]

Answer:
Correct: Controls can be circumvented by the collusion of two or more people or inappropriate
management override of internal control. For example, management may entire into side agreements
with customers that alter the terms and conditions of the entity’s standard sales contracts, which may

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result in improper revenue recognition. Also, edit checks in a software program that are designed to
identify and report transaction that exceed specified credit limits may be overridden or disabled.

Question - 9
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. 2020-21. CA K, the engagement
partner, wants to conclude that whether the financial statements as a whole are free from
material misstatements, whether due or fraud of error. What factors he should consider to
reach that conclusion? [Dec 2021(4 Marks)]

ANSWER:
Factors to be considered to form an opinion:
The auditor shall form an opinion on whether the financial statements are prepared, in all material
respects, in accordance with the applicable financial reporting framework.
In order to form that opinion, the auditor shall conclude as to whether the auditor has obtained
reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error. That conclusion shall take into account:
(a) The auditor’s conclusion, in accordance with SA 330, whether sufficient appropriate audit evidence
has been obtained
(b) The auditor’s conclusion, in accordance with SA 450, whether uncorrected misstatements are
material, individually or in aggregate.
(c) The evaluations required
(i) The auditor shall evaluate whether the financial statements are prepared in accordance with
the requirements of the applicable financial reporting framework.
(ii) This evaluation shall include consideration of the qualitative aspects of the entity’s accounting
practices, including indicators of possible bias in management’s judgments.

Question - 10
Explain whether the following statements are correct or incorrect, with reasons/ explanations/
examples.
The objectives and scope of internal audit functions are restricted to activities relating to
evaluation of internal control only. [Jan 2021 (2 Marks)]

ANSWER:
Incorrect: As per SA-610, “Using the Work of an Internal Auditor”, the objectives of internal audit
functions vary widely and depend on the size and structure of the entity and the requirements of
management and, where applicable, those charged with governance.
The objectives and scope of internal audit functions typically include assurance and consulting activities
designed to evaluate and improve the effectiveness of the entity’s governance processes, risk
management and internal control.

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From the above, it can be concluded that the objective and scope of internal audit function are not
restricted to activities relating to evaluation of control only.

Question - 11
Discuss the objectives and scope of internal audit functions with respect to activities relating
to internal control. [Jan 2021 (3 Marks)]

ANSWER:
The objectives and scope of internal audit functions relating to Internal Control are:
(i) Evaluation of internal control: The internal audit function may be assigned specific responsibility
for reviewing controls, evaluating their operation and recommending improvements thereto. In
doing so, the internal audit function provides assurance on the control. For example, the internal
audit function might plan and perform tests or other procedures to provide assurance to
management and those charged with governance regarding the design, implementation and
operating effectiveness of internal control, including those controls that are relevant to the audit.
(ii) Examination of financial and operating information: The internal audit function may be
assigned to review the means used to identify, recognize, measure, classify and report financial and
operating information, and to make specific inquiry into individual items, including detailed testing
of transactions, balances and procedures.
(iii) Review of operating activities: The internal audit function may be assigned to review the
economy, efficiency and effectiveness of operating activities, including nonfinancial activities of an
entity.
(iv) Review of compliance with laws and regulations: The internal audit function may be assigned
to review compliance with laws, regulations and other external requirements, and with
management policies and directives and other internal requirements.

Question - 12
Care Ltd. is an unlisted public limited company, During the financial year 2019-20, the paid-up
share capital of Care Ltd. was INR 50 crore and the turnover was INR 80 crore. During the
financial year 2020-21, the Board of Directors of the company appointed an internal auditor.
Whether Care Ltd. is required to appoint an internal auditor according to the provisions of the
Companies act, 2013? [July 2021 (3 Marks)]

ANSWER:
As per section 138 of the Companies Act, 2013: following class of companies (prescribed in rule 13
of Companies (Accounts) Rules, 2014) shall be require to appoint and internal auditor or a firm of
internal auditors, namely –
(a) Every listed company;
(b) Every unlisted public company having –
(i) Paid up share capital of fifty crore rupees or more during the preceding financial year; or
(ii) Turnover of two hundred crore rupees or more during the preceding financial year; or

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(iii) Outstanding loans or borrowings from banks or public financial institutions exceeding one
hundred crore rupees or more at any point of time during the preceding financial year; or
(iv) Outstanding deposits of twenty five crore rupees or more at any point of time during the
preceding financial year.
Conclusion: Applying the above to the given problem, since Care Ltd. is an unlisted public company
and having paid up share capital of ₹ 50 crores during the preceding F.Y. 2019-20, therefore, Care Ltd.
is required to appoint and Internal Auditor.

Question - 13
Internal audit not only analyses the effectiveness with which the internal control of a company
is operating but also improves the effectiveness of internal control. Elucidate the statement.
[May 2022 (4 Marks)]

Answer:
Improvement in Effectiveness of Internal Control: Internal Audit means “An independent management
function, which involves a continuous and critical appraisal of the functioning of an entity with a view
to suggest improvements thereto and add value to and strengthen the overall governance mechanism
of the entity, including the entity’s strategic risk management and internal control system”.
Activities Relating to Internal Control:
(i) Evaluation of internal control: The internal audit function may be assigned specific responsibility
for reviewing controls, evaluating their operation and recommending improvements thereto. In
doing so, the internal audit function provides assurance on the control. For example, the internal
audit function might plan and perform tests or other procedures to provide assurance to
management and those charged with governance regarding the design, implementation and
operating effectiveness of internal control, including those controls that are relevant to the audit.
(ii) Examination of financial and operating information: The internal audit function may be
assigned to review the means used to identify, recognize, measure, classify and report financial and
operating information, and to make specific inquiry into individual items, including detailed testing
of transactions, balances and procedures.
(iii) Review of operating activities: The internal audit function may be assigned to review the
economy, efficiency and effectiveness of operating activities, including non-financial activities of an
entity.
(iv) Review of compliance with laws and regulations: The internal audit function may be assigned to
revie compliance with laws, regulations and other external requirements, and with management
policies and directives and other internal requirements.
Therefore, one of the important aspects of internal audit is not only to evaluate internal control system
of an organization but also to suggest improvements for adding value and strengthening it.

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Question - 14
The auditor shall obtain an understanding of major activities that the entity uses to monitor
internal control over financial reporting. Discuss "Monitoring of control'' as a component of
Internal control. [Nov 2020 (4 Marks)]

ANSWER:
Monitoring of Controls: Component of Internal Control
The auditor shall obtain an understanding of the major activities that the entity uses to monitor internal
control over financial reporting.
Monitoring of controls Defined: Monitoring of controls is a process to assess the effective ness of
internal control performance over time.
(i) Helps in assessing the effectiveness of controls on a timely basis: It involves assessing the
effectiveness of controls on a timely basis and taking necessary remedial actions.
(ii) Management accomplishes through ongoing activities, separate evaluations etc.:
Management accomplishes monitoring of controls through ongoing activities, separate evaluations,
or a combination of the two. Ongoing monitoring activities are often built into the normal
recurring activities of an entity and include regular management and supervisory activities.
(iii) Management’s monitoring activities include: Management’s monitoring activities may include
using information from communications from external parties such as customer complaints and
regulator comments that may indicate problems or highlight areas in need of improvement.
(iv) In case of Small Entities: Management’s monitoring of control is often accomplished by
management’s or the owner-manager’s close involvement in operations. This involvement often
will identify significant variances from expectations and inaccuracies in financial data leading to
remedial action to the control.

Question - 15
Explain how Internal Financial Control and Internal controls over financial reporting differ?
[Jan 2021(4 Marks)]

ANSWER:
Difference between internal financial control and internal control over financial reporting
Internal Financial Control as per Section 134(5)(e), “the policies and procedures adopted by the
company for ensuring the orderly and e cient conduct of its business, including adherence to company’s
policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy
and completeness of the accounting records, and the timely preparation of reliable financial
information.”
On the other hand, Internal controls over financial reporting-is required where auditors are
required to express an opinion on the effectiveness of an entity’s internal controls over financial
reporting, such opinion is in addition to and distinct from the opinion expressed by the auditor on the
financial statements.

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 Chapter - 4 : Risk Assessment and Internal Control

Multiple Choice Question

1. The assessment of risks is based on audit procedures to obtain information necessary

for that purpose and evidence obtained _____________.
(a) At the time of audit report
(b) At the time protection judgement
(c) Throughout the investigation
(d) Throughout the audit
2. ______________ may support inquires of management and others, and may also provide
information about the entity and its environment
(a) Observation
(b) Inspection
(c) Analytical procedures
(d) Observation and Inspection
3. The division of internal control into__________ components provides a useful framework
for auditors to consider how different aspects of an entity’s internal control may effect
the audit.
(a) Two
(b) There
(c) Four
(d) Five
4. _____________ is a complete and exhaustive description of the system as found in
operation by the auditor.
(a) Narrative Record
(b) Check List
(c) Questionnaire
(d) Flow Chart
5. As per the section 138 of the Companies Act, 2013, an internal auditor shall be
(a) Chartered accountant
(b) Cost accountant
(c) Other professional as may be decided
(d) All of them.

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Answer (Multiple Choice Questions)

1. (d) 2. (d) 3. (d) 4. (a) 5. (d)

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 Chapter - 5 : Fraud and Responsibilities of the Auditor in this Regard

Chapter - 5
Fraud and Responsibilities of the Auditor
in this Regard
Question - 1
State with reasons whether the following statements are correct or incorrect.
Misstatement in the financial statements is always because of a fraud.
[July 2021 (2 Marks)]

ANSWER:
Incorrect: Misstatements in the financial statements can arise from either fraud or error. The
distinguishing factor between fraud and error is whether the underlying action that results in the
misstatement of the financial statements is intentional or unintentional. Hence misstatement can arise
from error or fraud.

Question - 2
"Theft of an entity's assets is often perpetrated by employees in relatively small and immaterial
amounts." Explain the various ways in which the same can be accomplished?
[Jan 2021 (3 Marks)]

ANSWER:
Misappropriation of Assets involves the theft of an entity’s assets and is often perpetrated by employees
in relatively small and immaterial amounts. However, it can also involve management who are usually
more able to disguise or conceal misappropriations in ways that are di cult to detect. Misappropriation
of assets can be accomplished in a variety of ways including :
 Embezzling receipts (for example, misappropriating collections on accounts receivable or diverting
receipts in respect of written-o accounts to personal bank accounts).
 Stealing physical assets or intellectual property (for example, stealing inventory for personal use or
for sale, stealing scrap for resale, colluding with a competitor by disclosing technological data in
return for payment).
 Causing an entity to pay for goods and services not received (for example, payments to fictitious
vendors, kickbacks paid by vendors to the entity’s purchasing agents in return for inflating prices,
payments to fictitious employees).
 Using an entity’s assets for personal use (for example, using the entity’s assets as collateral for a
personal loan or a loan to a related party).

Question - 2
Explain any three ways where cash receipts are suppressed. [Jan 2021 (3 Marks)]

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 Chapter - 5 : Fraud and Responsibilities of the Auditor in this Regard

ANSWER:
Few techniques of how receipts are suppressed are:
(1) Teeming and Lading: Amount received from a customer being misappropriated; also to prevent
its detection the money received from another customer subsequently being credited to the
account of the customer who has paid earlier. Similarly, moneys received from the customer who
has paid thereafter being credited to the account of the second customer and such a practice is
continued so that no one account is outstanding for payment for any length of time, which may
lead the management to either send out a statement of account to him or communicate with him.
(2) Adjusting unauthorised or fictitious rebates, allowances, discounts, etc. to customer’ accounts and
misappropriating amount paid by them.
(3) Writing o as debts in respect of such balances against which cash has already been received but
has been misappropriated.
(4) Not accounting for cash sales fully.
(5) Not accounting for miscellaneous receipts, e.g., sale of scrap, quarters allotted to the employees,
etc.
(6) Writing down asset values in entirety, selling them subsequently and misappropriating the
proceeds.

Question - 3
List out any three circumstances which induce the management/ employee to commit the
fraud. [July 20212 (3 Marks)]

ANSWER:
Circumstances which induce the management/ employee to commit fraud are:
 Financial obligations/ Pressure.
 Management’s unrealistic goals.
 Dissatisfied Employees or Lack of motivation among employees.
 Name game (eg. Management using power of authority by asking employees to do something
illegal).
 Opportunity to commit fraud.

Question - 4
The accountant of CHB Limited observed that amount received from Mr. A has been recorded
in the account of Mr. B and this mistake was found at the time of tallying account statement
provided by Mr. A. What type of error is this? Can you give two more examples of such error
and how the same will be detected? [May 2022 (3 Marks)]

Answer:
Self-Revealing Error:

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 Chapter - 5 : Fraud and Responsibilities of the Auditor in this Regard

Situation mentioned in the case is a Self-Revealing Error. These are such errors the existence of which
becomes apparent in the process of compilation of accounts.
Below are two more examples of such errors:
(a) Omission to post a part of a journal entry in to the ledger. (Trial Balance is thrown out of
agreement) – Statement of account of parties will reveal the mistake.
(b) Wrong totalling of the Purchase register. Control Account (e.g., the Sundry Trade Payables
Account) balances and the aggregate of the balance in the personal ledger will disagree.
Alternative Solution:
Errors of Commission: When a transaction has been mis-recorded either wholly or partially it is called
as an error of commission. Error of commission can happen in the following ways-
(i) Errors in posting,
(ii) Errors in Casting,
(iii) Errors in carrying forward,
(iv) Errors occurring during extraction of balances, etc.
The case given in the questions is an error of posting.
Posting errors may be of a wrong account, wrong amount or wrong file.
For example,
(i) Omission of posting of any part of the Journal entity – Can be detected through trial balance.
(ii) Purchase of ₹ 360 from Mr. A posted in his account at ₹ 630 or sales returns from Mr. X posted
as the debit of his account - This error can be detected by verifying entries with underlying vouchers.

Question - 5
The auditor of RMP Limited has identified a fraud that, in his option causes a material
misstatement in the financial statements. Management personnel in higher management
cadre are associated with manipulating of accounts of the company. But the auditor has not
been able to understand as to why this type of fraud is generally committed. Guide him with
some reasons. [May 2022 (4 Marks)]

Answer:
Fraudulent Financial reporting – Manipulation of Accounts: In the given case of RMP Ltd, the
auditor identified fraud causing material misstatement in the financial statements. Auditor did not
understand the reasons of the type of fraud given in the case of RMP Ltd.
Detection of manipulation of accounts with a view to presenting a false state of affairs is a task requiring
great tact and intelligence because generally management personnel in higher management cadre are
associated with this type of fraud and this is perpetrated in methodical way. This type of fraud is generally
committed:
(1) To avoid incidence of income-tax or other taxes;
(2) For declaring a dividend when there are insufficient profits;

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 Chapter - 5 : Fraud and Responsibilities of the Auditor in this Regard

(3) To withhold declaration of dividend event hence there is adequate profit (this is often done to
manipulate the value of shares in stock market to mae it possible for selected person to acquire
shares at a lower cost); and
(4) For receiving higher remuneration where managerial remuneration is payable by reference to
profits.

Question - 6
State with reasons whether the following statements are correct or incorrect.
Misappropriation of assets is often accompanied by false or misleading records or documents
in reorder to conceal the fact that the assets are missing or have been pledged with proper
authorization. [May 2022 (2 Marks)]

Answer:
Incorrect: Misappropriation of assets is often accompanied by false or misleading records or documents
in order to conceal the fact the assets are missing or have been pledged without proper authorization.

Question - 7
As an auditor of PQR Ltd., you came across a misstatement resulting from fraud or suspected
fraud which brings into question your ability to continue performing the audit.
Explain the courses of actions available to you. [Nov 2020 (4 Marks)]

ANSWER:
In the given case of PQR Ltd, the auditor came across a misstatement resulting from fraud or suspected
fraud that brought into question the auditor’s ability to continue performing the audit. In such a
situation, the auditor shall :
(a) Determine the professional and legal responsibilities applicable in the circumstances, including
whether there is a requirement for the auditor to report to the person or persons who made the
audit appointment or, in some cases, to regulatory authorities;
(b) Consider whether it is appropriate to withdraw from the engagement, where withdrawal is possible
under applicable law or regulation; and (c) If the auditor withdraws:
(i) Discuss with the appropriate level of management and those charged with governance the
auditor’s withdrawal from the engagement and the reasons for the withdrawal.
(ii) Determine whether there is a professional or legal requirement to report to the person or
persons who made the audit appointment or, in some cases, to regulatory authorities, the
auditor’s withdrawal from the engagement and the reasons for the withdrawal.

Question - 8
State with reasons whether the following statements are correct or incorrect.
Reporting of fraud of INR 150 Lakhs by auditor will be done within three days of the fraud
coming to the knowledge of the auditor to the Board or the Audit Committee along with
remedial action taken.

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 Chapter - 5 : Fraud and Responsibilities of the Auditor in this Regard

ANSWER:
Incorrect: The auditor shall report the matter to the Board or the Audit Committee, as the case may
be, immediately but not later than 2 days of his knowledge of the fraud, seeking their reply or
observations within 45 days. Company is bound to disclose remedial action taken in Board’s report.

Multiple Choice Question

1. “The auditor’s responsibilities relating to fraud in an Audit of Financial Statement”

defines under:
(a) SA - 200
(b) SA - 205
(c) SA - 230
(d) SA - 240
2. Defalcation of cash arises when
(a) Inflating Cash Payment
(b) Suppressing Cash Receipts
(c) Casting Wrong Totals in the Cash Book
(d) Any of the Above
3. Misappropriation of assets may occur because there is:
(a) Adequate record keeping with respect to assets
(b) Lack of complete and timely reconciliations of assets
(c) Dispute between shareholders in a closely held entity
(d) Known history of violations of securities laws.
4. Company is bound to disclose certain specified details in Board’s Report as
(a) Nature of fraud with description
(b) Approximate amount involved
(c) Parties involved and remedial action taken
(d) All of the above
5. As per Rule 13 of CAAR 2014, if an auditor received the reply or observation from Board
or Audit Committee within stipulated time, the audit is required to forward report along
with reply/observation and comments to.
(a) TCWG with 15 days
(b) Shareholders within 30 days
(c) Central state Govt. Within 15 days

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 Chapter - 5 : Fraud and Responsibilities of the Auditor in this Regard

(d) Central Government within 15 days

Answer (Multiple Choice Questions)

1. (d) 2. (d) 3. (b) 4. (d) 5. (d)

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 Chapter - 6 : Audit in an Automated Environment

Chapter - 6
Audit in an Automated Environment
Question - 1
When a business operates in a more automated environment, we are likely to see several
business functions and activities happening within the systems. List down the business
functions and activities happening within the systems. List down the business functions and
activities happening within the systems. [Dec 2021 (3 Marks)]

ANSWER:
Relevance of Information Technology in an Audit:
When a business operates in a more automated environment it is likely that we will see several business
functions and activities happening within the systems. Consider the following aspects instated of:
(i) Computation and Calculations are automatically carried out (for example, bank interest
computation and inventory valuation).
(ii) Accounting entries are posted automatically (for example, sub-ledger to GL postings is automatic).
(iii) Business policies and procedures, including internal controls, are applied automatically (for
example, delegation of authority for journal approvals, customer credit limit checks are performed
automatically).
(iv) Reports used in business are produced from systems. Management and other stakeholders rely on
these reports and information produced (for example, debtors ageing report).
(v) User access and security are controlled by assigning system roles to users (for example, segregation
of duties can be enforced effectively).

Question - 2
Analyse how risks in the IT system if not mitigated could have an impact on the audit.
[Nov 2020 (3 Marks)]

ANSWER:
When risks in IT systems are not mitigated, the audit impact could be as follows:
(i) First, we may not be able to rely on the reports, data obtained from systems where such risk exist.
This means all forms of data, information or reports that we obtains from system for the purpose
of audit has to be thoroughly tested and corroborated for completeness and accuracy.
(ii) Second, we will not be able to rely on automated controls, calculations and accounting procedures
that are built into the application. Additional audit work may be required in this case.
(iii) Third, due to the regulatory requirement of auditors to report on internal financial controls of a
company, the audit report also may have to be modified in some instances.

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 Chapter - 6 : Audit in an Automated Environment

Question - 3
Explain whether the following statements are correct or incorrect, with reasons/ explanations/
examples.
The Complexity of a business environment depends on the level of automation i.e., if a
business environment is more automated, it is likely to be less complex.
[Jan 2021 (2 Marks)]

ANSWER:
Incorrect: The fundamental principle of an automated environment is the ability to carry out business
with less manual intervention and more system driven. The complexity of a business environment
depends on the level of automation i.e., if a business environment is more automated, it is likely to be
more complex. If a company uses an integrated enterprise resource planning system (ERP) viz., SAP,
Oracle etc., then it is considered more complex to audit. On the other hand, if a company is using an o
-the-shelf accounting software, then it is likely to be less automated and hence less complex
environment.

Question - 4
State with reasons whether the following statements are correct or incorrect.
With reference to General IT control, the objective of Data Central and Network Operations is
to ensure that systems are developed, configured and implemented to meet financial
reporting objectives. [July 2021 (2 Marks)]

ANSWER:
Incorrect: Objective of Data Centre and Network Operations is to ensure that production systems are
processed to meet financial reporting objectives.
Objective of Application system acquisition development, and maintenance is to ensure that systems are
developed. Configured and implemented to meet financial reporting objectives.

Question - 5
When the company is working in an automated environment, it is not necessary for its auditor
to understand its automated environment and depends upon the professional judgement of
the auditor as to whether gaining knowledge of company’s IT systems is required or not. Do
you agree with this statement? [May 2022 (3 Marks)]

Answer:
Understanding and Documenting Automated Environment: When a business operates in a more
automated environment it is likely that auditor will see several business functions and activities
happening within the systems. Consider the following aspects instead of:
(i) Computation and Calculations are automatically carried out (for example, bank interest
computation and inventory valuation).
(ii) Accounting entries are posted automatically (for example, sub-ledger to GL postings is automatic).

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 Chapter - 6 : Audit in an Automated Environment

(iii) Business policies and procedures, including internal controls, are applied automatically (for
example, delegation of authority for journal approvals, customer credit limit checks are performed
automatically).
(iv) Reports used in business are produced from systems. Management and other stakeholders rely on
these reports and information produced (for example, debtors ageing report).
(v) User access and security are controlled by assigning system roles to users (for example, segregation
of duties can be enforced effectively).
Companies derive benefit from the use of IT systems as an enabler to support various business operations
and activities. Auditors need to understand the relevance of these IT systems to an audit of financial
statements.
While it is true that the use of IT systems and automation benefit the business by making operations
more accurate, reliable, effective and efficient, such systems also introduce certain new risks, including
IT specific risks, which need to be considered, assessed and addressed by management.
To the extent that it is relevant to an audit of financial statements, even auditors are required to
understand, assess and respond to such risks that arise from the use of IT systems.
From the above discussion, it is quite apparent that it is necessary for an auditor to understand the
automated environment.
Alternative Solution
Understanding and Documenting Automated Environment: In an audit of financial statements, an
auditor is required to understand the entity and its business, including IT as per SA 315. Understanding
the entity and its automated environment involves understanding how IT department is organised, IT
activities, the IT dependencies, relevant risks and controls.
Given below are some of the points that an auditor should consider to obtain an understanding of the
company’s automated environment:
(i) Information systems being used (One or more application systems and what they are).
(ii) Their purpose (financial and non-financial).
(iii) Location of IT systems – local vs global.
(iv) Architecture (desktop based, client-server, web application, cloud based).
(v) Version (functions and risks could vary in different versions of same application).
(vi) Interfaces within systems (in case multiple systems exist).
(vii) In-house vs Packaged.
(viii) Outsourced activities (IT maintenance and support).
(ix) Key persons (CIO, CISO, Administrators).
The understanding of a company’s IT environment that is obtained should be documented.
From the above discussion, it is quite apparent that it is necessary for an auditor to understand the
automated environment.

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 Chapter - 6 : Audit in an Automated Environment

Question - 6
Discuss the common methods applied by the auditor when testing in an automated
environment is done by him. [Jan 2021 (4 Marks)]

ANSWER:
There are basically four types of audit tests that should be used. They are inquiry, observation, inspection
and reperformance. Inquiry is the most efficient audit test but it also gives the least audit evidence.
Hence, inquiry should always be used in combination with any one of the other audit testing methods.
Inquiry alone is not sufficient.
When testing in an automated environment, some of the more common methods are as follows:
 Obtain an understanding of how an automated transaction is processed by doing a walkthrough of
one end-to-end transaction using a combination of inquiry, observation and inspection.
 Observe how a user processes transactions under different scenarios.
 Inspect the configuration defined in an application.
 Inspect the system logs to determine any changes made since last audit testing.
 Inspect technical manual / user manual of systems and applications.
 Carry out a test check (negative testing) and observe the error message displayed by the application.
 Conduct reperformance using raw source data and independently applying formulae, business rules
or validations on the source data using CAATs.

Question - 7
While it is true that companies can benefit immensely from the use of data analysis in terms of
increased profitability, better customer service, etc., analyse various functions that can be
performed even by the auditor also using Data Analytics tools and techniques in the audit
process to obtain good results. [Nov 2020 (4 Marks)]

ANSWER:
In today’s digital age when companies rely on more and more on IT systems and networks to operate
business, the amount of data and information that exists in these systems is enormous. A famous
businessman recently said, “Data is the new Oil”.
The combination of processes, tools and techniques that are used to tap vast amounts of electronic data
to obtain meaningful information is called data analytics. While it is true that companies can benefit
immensely from the use of data analytics in terms of increased profitability, better customer service,
gaining competitive advantage, more e cient operations, etc., even auditors can make use of similar
tools and techniques in the audit process and obtain good results. The tools and techniques that auditors
use in applying the principles of data analytics are known as Computer Assisted Auditing Techniques or
CAATs in short.
Data analytics can be used in testing of electronic records and data residing in IT systems using
spreadsheets and specialised audit tools viz., IDEA and ACL to perform the following:

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 Chapter - 6 : Audit in an Automated Environment

 Check completeness of data and population that isused in either test of controls or substantive audit
tests. Selection of audit samples – random sampling, systematic sampling.
 Re-computation of balances – reconstruction of trial balance from transaction data. Re performance
of mathematical calculations – depreciation, bank interest calculation.
 Analysis of journal entries as required by SA240, Fraud investigation and Evaluating impact of
control deficiencies.

Question - 8
Foreceful Limited is a company dealing in mobile spare parts and having its showrooms in
almost all the states in the country. For FY 2020-21, the company transferred its accounts from
manual to computerized system (SAP). PQR & Co., Chartered Accountants have
specialization in the system audit and have been appointed as the system auditor. PQR & Co.,
at the end of the audit concludes that there are certain findings or exceptions in IT
environment and IT controls of the company which needs to be assessed and reported.
Mention those points of consideration. [July 2021 (3 Marks)]

ANSWER:
At the conclusion of each audit, it is possible that there will be certain findings or exceptions in IT
environment and IT controls of the company that need to be assessed and reported to relevant
stakeholders including management and those charged with governance viz., Board of directors, Audit
committee.
Some points to consider are as follows:
 Are there any weaknesses in IT controls?
 What is the impact these weaknesses on overall audit?
 Report deficiencies to management – Internal Controls Memo or Management Letter.
 Communicate in writing any significant deficiencies to Those Charged with Governance.
The auditor needs to assess each finding or exception to determine impact on the audit and evaluate if
the exception results in deficiency in internal control.

Question - 9
State with reasons whether the following statements are correct or incorrect.
Audit findings and control deficiencies can be evaluated or assessed arbitrary.
[May 2022 (2 Marks)]

Answer:
Incorrect: Evaluation and assessment of audit findings and control deficiencies involves applying
professional judgement that include considerations for quantitative and qualitative measures. Each
finding should be looked at individually and in the aggregate by combining with other
findings/deficiencies.

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 Chapter - 6 : Audit in an Automated Environment

Question - 10
The Auditor of HK Limited completed the audit of the company in an automated environment.
Management of the company requited the auditor to give an idea about any exceptions
observed in IT environment that need to be assessed. How the auditor should consider this
request and report in light of an audit perspective? [May 2022 (3 Marks)]

Answer:
Assess and report Audit Findings in audit in Automated Environment: At the conclusion of each
audit, it is possible that there will be certain findings or exceptions in IT environment and IT controls of
the company that need to be assessed and reported to relevant stakeholders including management and
those charged with governance viz., Board of directors, Audit committee. Some points to consider are
as follows:
(1) Are there any weaknesses in IT controls?
(2) What is the impact of these weaknesses on overall audit?
(3) Report deficiencies to management – Internal Controls Memo of Management Letter.
(4) Communicate in writing any significant deficiencies to Those Charged with Governance.
The auditor of HK Ltd needs to assess each finding or exception to determine impact on the audit and
evaluate if the exception results in a deficiency in internal control.

Multiple Choice Question

1. The fundamental principle of an automated environment is the ability to carry out
business with
(a) Manual intervention and system driven
(b) Less manual intervention and less system driven
(c) Less system driven and more manual intervention
(d) Less manual intervention and more system driven
2. Who is responsible for the implementation of internal control framework with in the
company?
(a) Directors
(b) TCWG
(c) Auditor
(d) Directors and TCWG,
3. General IT control is also known as
(a) Direct control
(b) In Direct control
(c) Pervasive control

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 Chapter - 6 : Audit in an Automated Environment

(d) (b) or (c)

4. Control based audit approach exclude
(a) Risk assessment
(b) Audit Programme
(c) Understand and Evaluation
(d) Test for Operating Effectiveness
5. _____________________ refers to the digital content that is stoned in electronic form with
computer system
(a) Data
(b) Data Science
(c) Data Analysis
(d) Data Analysis

Answer (Multiple Choice Questions)

1. (d) 2. (d) 3. (d) 4. (b) 5. (a)

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 Chapter - 7 : Audit Sampling

Chapter - 7
Audit Sampling
Question - 1
It is imperative for the auditor to project misstatements for the population while performing
audit procedures through sampling. Comment. [Nov 2022 (3 Marks)]

ANSWER:
The auditor is required to project misstatements for the population to obtain a broad view of the scale
of misstatement but this projection may not be sufficient to determine an amount to be recorded.
When a misstatement has been established as an anomaly, it may be excluded when projecting
misstatements to the population. However, the effect of any such misstatement, if uncorrected, still
needs to be considered in addition to the projection of the non-anomalous misstatements.
For tests of details, the auditor shall project misstatements found in the sample to the population whereas
for tests of controls, no explicit projection of deviations is necessary since the sample deviation rate is
also the projected deviation rate for the population as a whole.

Question - 2
The approach to audit and extent of checking are undergoing a progressive change in favour
of more attention towards the questions of principle and controls with a curtailment of non-
consequential routine checking. Discuss the given statement. [May 2022 (3 Marks)]

Answer:
Sampling: An Audit Procedure: No conscious effort in human society is divested of economic
considerations and auditing is no exception. There is a growing realisation that the traditional approach
to audit is economically wasteful because all the efforts are directed to check all transactions without
any exception. This invariably leads to more emphasis on routine checking, which often is not necessary
in view of the time and the cost involved. With the shift in favour of formal internal controls in the
management of affairs of organisations, the possibilities of routine errors and frauds have greatly
diminished i.e., the internal controls as designed by the management are for the very purpose of
Prevention, Detection and Correction of Frauds and Errors. Thus, the auditors often find extensive
routine checking as nothing more than a ritual because it seldom reveals anything material. Now the
approach to audit and the extent of checking are undergoing a progressive change in favour of more
attention towards the questions of principles and controls with a curtailment of non-consequential
routine checking. By routine checking, we traditionally think of extensive checking and vouching of all
the entries, disregarding the concept of materiality.
The extent of the checking to be undertaken is primarily a matter of judgment of the auditor. There is
nothing statutorily stated anywhere which specifies what work is to be done, how it is to be done and
to what extent it has to be done. It is also not obligatory that the auditor must adopt the sampling
technique. What he is to do as an auditor is to express his opinion on the financial statements and
become bound by that.

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 Chapter - 7 : Audit Sampling

To ensure good and reasonable standard of work, he should adopt standards and techniques that can
lead him to an informed professional opinion. On consideration of this fact, it can be said that it is in
the interest of the auditor that if he decides to form his opinion on the basis of a part checking (i.e.,
sampling), he should adopt standards and techniques which are widely followed and which have a
recognised basis.
Since statistical theory of sampling is based on a scientific law, it can be relied upon to a greater extent
than any arbitrary technique which lacks in basis and acceptability. This enables the auditor to make
conclusions and express fair opinion without having to check all of the items within the financial
statements.

Question - 3
State with reasons whether the following statements are correct or incorrect.
Statistical sampling being more scientific and without personal bias will always be
appropriate to use under all circumstances. [Dec 2021 (2 Marks)]

ANSWER:
Incorrect: Statistical sampling is widely accepted way of sampling as it is more scientific, without
personal bias and the result of sample can be evaluated and projected in more reliable way.
Under some audit circumstances, statistical sampling methods may not be appropriate. The auditor
should not attempt to use statistical sampling when another approach is either necessary or will provide
satisfactory information in less time or with less effort. For instance, when exact accuracy is required or
in case of legal requirements etc.

Question - 4
In the context of SA 530 ‘Audit Sampling’, explain the terms ‘Sampling Risk’ and ‘Non-
Sampling risk’. [Jan 2021 (4 Marks)]

ANSWER:
Sampling Risk. The risk that the auditor’s conclusion based on a sample may be different from the
conclusion if the entire population were subjected to the same audit procedure. Sampling risk can lead
to two types of erroneous conclusions:
(i) In the case of a test of controls, that controls are more effective than they actually are, or in the
case of a test of details, that a material misstatement does not exist when in fact it does. The
auditor is primarily concerned with this type of erroneous conclusion because it affects audit
effectiveness and is more likely to lead to an inappropriate audit opinion.
(ii) In the case of a test of controls, that controls are less effective than they actually are, or in the case
of a test of details, that a material misstatement exists when in fact it does not. This type of
erroneous conclusion affects audit efficiency as it would usually lead to additional work to establish
that initial conclusions were incorrect.
Non-Sampling Risk. The risk that the auditor reaches an erroneous conclusion for any reason not
related to sampling risk.
Example

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 Chapter - 7 : Audit Sampling

Examples of non-sampling risk include use of inappropriate audit procedures, or misinterpretation of

audit evidence and failure to recognize a misstatement or deviation.
Sources of Non Sampling risk are :
(i) Human Mistakes
(ii) Applying audit procedures not appropriate to the objectives of audit
(iii) Relying on erroneous information e.g. erroneous confirmation
(iv) Misinterpreting the sample results
Non sampling risk can never be mathematically measured.

Question - 5
State with reasons whether the following statements are correct or incorrect.
In stratified sampling, the conclusion drawn on each stratum can be directly projected to the
whole population. [July 2021 (2 Marks)]

ANSWER:
Incorrect: In case of stratified sampling, the conclusions are drawn on the stratum. The combination of
all conclusion on stratum together will be used to determine the possible effect of misstatement or
deviation. Hence the samples are used to derive conclusion only on the respective stratum from where
they are drawn and not the whole population.

Question - 6
CA B is appointed as an auditor of M/s. Divine Pharmacy, a wholesale medicine supplier. While
auditing for the financial year 2020-21, CA B wants to use test checking technique. Advise CA
B, what kind of precautions should be taken by him in this regard.
[July 2021 (4 Marks)]

ANSWER:
While auditing the accounts of Divine Pharmacy, CA B wanted to use Test Checking technique. The
following Precautions should to be taken by CA B while applying test check techniques:
 Thorough study of accounting system should be done before adopting sampling
 Proper study of internal control systems.
 Areas which are not suitable for sampling should be carefully considered. Eg: compliance with
statutory provisions, transactions of unusual nature etc.
 Proper planning for Sampling methods to be used and explaining the staff,
 Transactions and balances have to be properly classified (stratified)
 Sample size should be appropriately determined.
 Sample should be chosen in unbiased way,
 Errors located in the sample should be analyzed properly.

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 Chapter - 7 : Audit Sampling

Question - 7
With reference to SA 530 “Audit Sampling”, explain briefly the following factors that the
auditor may consider when determining the sample size for the Test of Details –
(i) The desired level of assurance
(ii) Stratification of the population. [Dec 2021 (3 Marks)]

ANSWER:
Examples of factors influencing Sample Size for Test of Details:
(i) Desired Level of Assurance: An increase in the auditor’s desired level of assurance that tolerable
misstatement is not exceeded by actual misstatement in the population will increase the sample
size. Hence, greater the level of assurance that the auditor requires that the results of the sample
are in fact indicative of the actual amount of misstatement in the population, the larger the sample
size needs to be.
(ii) Stratification of population: When stratification of the population is appropriate then sample size
will decrease as when there is a wide range (variability) in the monetary size of items in the
population, it may be useful to stratify the population. When a population can be appropriately
stratified, the aggregate of the sample sizes from the strata generally will be less than the sample
size that would have been required to attain a given level of sampling risk, had one sample been
drawn from the whole population.

Multiple Choice Question

1. Statistical theory of sampling is based on a _______________.
(a) Statistical law
(b) Mathematical law
(c) Scientific law
(d) Economic law
2. Auditor should select sample items in such a way that the sample can be expected to be
representative of the
(a) Groups
(b) Population
(c) Sampling
(d) Arbitrary population
3. The sample must be_____________ to provide statistically meaningful results.
(a) Smallest one
(b) Large
(c) Large enough

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 Chapter - 7 : Audit Sampling

(d) Equal to the population

4. _____________ may be improved if the auditor stratifies a population by dividing it into
discrete sub-populations which have an similar characteristics
(a) Audit evidence
(b) Audit efficiency
(c) Audit trail
(d) Audit procedure
5. _____________ is considered appropriate provided the population to be sampled consists
of reasonably similar units and fall within a reasonable range
(a) Simple random sampling
(b) Stratified sampling
(c) Systematic sampling
(d) Haphazard sampling

Answer (Multiple Choice Questions)

1. (c) 2. (b) 3. (c) 4. (b) 5. (a)

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 Chapter - 8 : Analytical Procedures

Chapter - 8
Analytical Procedures
Question - 1
The statutory auditor of ABC Ltd., CA Raj identifies certain inconsistencies while applying
analytical procedures to the financial and non-financial data of ABC Ltd. With reference to SA
520 on "Analytical Procedures", how CA Raj shall investigate such differences?
[July 2021 (3 Marks)]

ANSWER:
If analytical procedures performed in accordance with SA 520 identify fluctuations or relationships that
are inconsistent with other relevant information or that differ from expected values by a significant
amount, the auditor shall investigate such differences by:
(i) Inquiring of management and obtaining appropriate audit evidence relevant to
management’s responses: Audit evidence relevant to management’s responses may be obtained
by evaluating those responses taking into account the auditor’s understanding of the entity and its
environment, and with other audit evidence obtained during the course of the audit.
(ii) Performing other audit procedures as necessary in the circumstances: The need to perform
other audit procedures may arise when, for example, management is unable to provide an
explanation, or the explanation, together with the audit evidence obtained relevant to
management’s response, is not considered adequate.
Conclusion: In the present case CA Raj identifies certain inconsistencies while applying analytical
procedure to financial or non-financial data of ABC Ltd. CA Raj should inquire the management of
ABC Ltd, and obtain sufficient and appropriate audit evidences relevant to the management
response. Further CA Raj should also perform other audit procedures, if required in the
circumstances of the case to obtain further sufficient and appropriate evidence.

Question - 2
Explain the techniques available as Substantive Analytical procedures.
[Jan 2021 (3 Marks)]

ANSWER:
Techniques Available as Substantive Analytical Procedures
The design of a substantive analytical procedure is limited only by the availability of reliable data and
the experience and creativity of the audit team. Substantive analytical procedures generally take one of
the following forms:
Trend analysis – A commonly used technique is the comparison of current data with the prior period
balance or with a trend in two or more prior period balances. We evaluate whether the current balance

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 Chapter - 8 : Analytical Procedures

of an account moves in line with the trend established with previous balances for that account, or based
on an understanding of factors that may cause the account to change.
Ratio analysis – Ratio analysis is useful for analysing asset and liability accounts as well as revenue and
expense accounts. An individual balance sheet account is di cult to predict on its own, but its
relationship to another account is often more predictable (e.g., the trade receivables balance related to
sales). Ratios can also be compared over time or to the ratios of separate entities within the group, or
with the ratios of other companies in the same industry.
Reasonableness tests – Unlike trend analysis, this analytical procedure does not rely on events of
prior periods, but upon non-financial data for the audit period under consideration (e.g., occupancy
rates to estimate rental income or interest rates to estimate interest income or expense). These tests are
generally more applicable to income statement accounts and certain accrual or prepayment accounts.
Structural modelling – A modelling tool constructs a statistical model from financial and/or non-
financial data of prior accounting periods to predict current account balances (e.g., linear regression).

Question - 3
With respect to SA 520 "Analytical procedures", explain the following factors to be considered
by the auditor for substantive audit procedures.
(i) Account type (ii) Predictability (iii) Nature of Assertion. [Nov 2020 (3 Marks)]

ANSWER:
The auditor should consider the following factors for Substantive Audit Procedures:
Account Type – Substantive analytical procedures are more useful for certain types of accounts than
for others. Income statement accounts tend to be more predictable because they reflect accumulated
transactions over a period, whereas balance sheet accounts represent the net effect of transactions at a
point in time or are subject to greater management judgment.
Predictability – Substantive analytical procedures are more appropriate when an account balance or
relationships between items of data are predictable (e.g., between sales and cost of sales or between
trade receivables and cash receipts). A predictable relationship is one that may reasonably be expected
to exist and continue over time.
Nature of Assertion – Substantive analytical procedures may be more effective in providing evidence
for some assertions (e.g., completeness or valuation) than for others (e.g., rights and obligations).
Predictive analytical procedures using data analytics can be used to address completeness, valuation/
measurement and occurrence.

Question - 4
State with reasons whether the following statements are correct or incorrect. (Answer any
seven).
SA 520 deals with the auditor’s use of analytical procedures as substantive procedures
(“substantive analytical procedures”), and as procedures near the end of the audit, that assist
the auditor in preparation of the financial statements. [May 2022 (2 Marks)]

Answer:

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 Chapter - 8 : Analytical Procedures

Incorrect: SA 520 deals with the auditor’s use of analytical procedures as substantive procedures
(“substantive analytical procedures”), and as procedures near the end of the audit that assist the auditor
when forming an overall conclusion on the financial statements.

Multiple Choice Question

1. Which is the appropriate type for Analytical Procedures
(a) Comparison of client and industry data
(b) Comparison of client data with similar prior period data
(c) Comparison of client data with client-determined expected results
(d) All of the above.
2. Overall tests under Analytical procedures can be extended for making __________
comparison of trading results.
(a) Inter-firm
(b) Intra-firm
(c) Inter-firm or intra-firm
(d) Inter firm and intra-firm
3. While implementing substantive Audit Procedure, auditor should consider of the
following factor(s).
(a) Availability of reliable and relevant data
(b) Degree of disaggregation in available data
(c) Focused on income statement accounts rather than Balance sheet accounts
(d) All of the above.
4. Different types of analytical procedures provide different levels of assurance. The
statement is
(a) True
(b) False
(c) Partly True
(d) None
5. _____________ establishes requirements and provides guidance in determining the audit
procedures to be performed on the information to be used for substantive analytical
procedures
(a) SA - 300
(b) SA - 320

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 Chapter - 8 : Analytical Procedures

(c) SA - 500
(d) SA – 700

Answer (Multiple Choice Questions)

1. (d) 2. (d) 3. (d) 4. (a) 5. (c)

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 Chapter - 9A : Audit of Balance Sheet Items

Chapter - 9A
Audit of Balance Sheet Items
Question - 1
While conducting the audit of Amrit Ltd. the auditor A of ABC and Associates, Chartered
Accountants observes that there are a large number of trade receivables standing in the
books of account as on 31st March. The auditor wanted to send confirmation request to a few
large trade receivables but the management refused the auditor to send confirmation request.
How would the auditor proceed? [Nov 2020 (4 Marks)]

ANSWER:
In the given case of Amrit Ltd, the auditor wanted to send confirmation request to a few large trade
receivables but the management did not want the auditor to send confirmation request.
If the management refuses to allow the auditor to send a confirmation request, the auditor shall-
(1) Inquire as to management’s reasons for the refusal and seek audit evidence as to their validity and
reasonableness.
(2) Evaluate the implications of management’s refusal on the auditor’s assessment of the relevant risks
of material misstatement, including the risk of fraud, and on the nature, timing and extent of other
audit procedures; and
(3) Perform alternative audit procedures designed to obtain relevant and reliable evidences.
(4) If the auditor concludes that management’s refusal to allow the auditor to send a confirmation
request is unreasonable, or the auditor is unable to obtain relevant and reliable audit evidences
from alternative audit procedures, the auditor shall communicate with those charged with
governance in accordance with SA 260.
The auditor shall also determine the implication for the audit and the auditor’s opinion in
accordance with SA 705.

Question - 2
How is “Cash and cash equivalents” disclosed in the Financial Statements as required under
Schedule III (Part 1) to Companies Act, 2013? [Dec 2021 (3 Marks)]

ANSWER:
Disclosure of Cash & Cash Equivalent in the Financial Statements:
Regarding Cash and cash equivalents – Ensure whether the following disclosures as required under
Schedule III (Part 1) to Companies Act, 2013 have been made:
(i) Cash and cash equivalents shall be classified as:
(a) Balance with banks;
(b) Cheques, drafts on hand;

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 Chapter - 9A : Audit of Balance Sheet Items

(c) Cash on hand;

(d) Others (specify nature)
(ii) Earmarked balances with banks (for example, for unpaid dividend) shall be separately stated.
(iii) Balances with banks to the extent held as margin money or security against the borrowings,
guarantees, other commitments shall be disclosed separately.
(iv) Repatriation restrictions, if any, in respect of cash and bank balances shall be separately stated.
(v) Bank deposits with more than 12 months’ maturity shall be disclosed separately.

Question - 3
ABC Limited has a closing balance of work in progress of inventories aggregating Rs. 850
lakhs in their balance sheet as at March 31, 2020.
As Statutory Auditor of ABC Limited, explain various audit procedures which need to be
performed to confirm Work-in-progress of inventories have been valued appropriately and as
per generally accepted accounting policies and practices. [Jan 2021 (3 Marks)]

ANSWER:
Audit procedure which needs to be performed to confirm work in progress worth Rs.850 lakhs has been
valued appropriately and as per generally accepted accounting policies and practices is given hereunder:
(1) Ascertain how the various stages of production/ value add are measured and in case estimates are
made, understand the basis for such estimates.
(2) Ascertain what elements of cost are included. If overheads are included, ascertain the basis on which
they are included and compare such basis with the available costing and financial data/ information
maintained by the entity.
(3) Ensure that material costs exclude any abnormal wastage factors.

Question - 4
The value of intangible assets may diminish due to efflux of time, use and/or obsolescence.
The diminution of the value represents cost to the entity for earning revenue during a given
period. Discuss the audit procedures to be applied by the auditor to ensure that Intangible
assets have been valued appropriately and as per generally accepted accounting policies and
practices. [July 2021 (3 Marks)]

ANSWER:
The value of intangible assets may diminish due to efflux of time, use and/ or obsolescence. The
diminution of the value represent cost to the entity for earning revenue during a given period. Unless
this cost in the form of amortization is charged to the accounts, the profit or loss would not be correctly
ascertained and the values of intangible asset would be shown at higher amounts. The auditor should:
Verify that the entity has charged amortization on all intangible assets;
Verify that the amortization method used reflects the pattern in which the asset’s Future economic
benefits are expected to be consumed by the entity.

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 Chapter - 9A : Audit of Balance Sheet Items

The auditor should also verify whether the management has done and impairment assessment to
determine whether an intangible asset is impaired. For this purpose, the auditor needs to verify whether
the entity has applied AS 28 – Impairment of Assets for determining the manner of reviewing the carrying
amount of its intangible assets, determining the recoverable amount of the asset to determine
impairment loss, if any

Question - 5
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
evidence 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. [Dec 2021 (3 Marks)]

ANSWER:
Audit procedure to establish Rights and Obligations of the entity over PPE:
(i) In addition to the procedures undertaken for verifying completeness of additions to PPE during the
period under audit, CA R, the statutory auditor of B Ltd, while performing testing of additions
should also verify that all PPE purchase invoices are in the name of the entity that entitles legal title
of ownership to the respective entity. Verify whether the PPE additions have been approved by
authorized personnel
(ii) For all additions to land, building in particular, CA R, the statutory auditor of B Ltd, should obtain
copies of conveyance deed/ sale deed to establish whether the entity is mentioned to be the legal
and valid owner.
(iii) The auditor should insist and verify the original title deeds for all immoveable properties held as
at the balance sheet date.
(iv) In case the entity has given such immovable property as security for any borrowings and the
original title deeds are not available with the entity, CA R, the statutory auditor of B Ltd should
request the entity’s management for obtaining a confirmation from the respective lenders that they
are holding the original title deeds of immovable property as security.
(v) In addition, the auditor should also verify the register of charges, available with the entity to assess
that any charge has been created against the PPE.

Question - 6
D Ltd. is a company engaged in publishing business magazines. CA P is the statutory auditor
of the company. The company takes property in the barter deal from its real estate customers
against publication of their advertisements. The properties obtained during the year through
such barter deals have been considered in the books of accounts on the basis of possession

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 Chapter - 9A : Audit of Balance Sheet Items

letter only and have been included in PPE in the financial statements. Considering this matter
of such importance that is fundamental the same in his report. CA P seeks your guidance in
reporting this matter in this audit report. [May 2022 (4 Marks)]

Answer:
Emphasis of Matter Paragraphs in the Auditor’s Report: If the auditor considers it necessary to draw
users’ attention to a matter presented or disclosed in the financial statements that, in the auditor’s
judgement, is of such importance that it is fundamental to users’ understanding of the financial
statements, the auditor shall include an Emphasis of Matter paragraph in the auditor’s report provided:
(i) The auditor would not be required to modify the opinion in accordance with SA 705 as a result
of the matter; and
(ii) When SA 701 applies, the matter has not been determined to be a key audit matter to ebe
communicated in the auditor’s report.
In the given case as the properties obtained during the year through barter deals and included in the PPE
in the books of accounts on the basis of possession letter only, hence there is a need to add Emphasis on
Matter Paragraph in the Auditor’s Report.
The draft of the same is as under:
Emphasis of Matter – Effect of Properties obtained through barter deals by the company
We draw attention to Note (Y) of the financial statements, which describes the effects of the properties
obtained through barter by the company. Our opinion is not modified in respect of this matter.
Alternative Solution:
In the given case as the properties obtained during the year through barter deals and included in the PPE
in the books of accounts on the basis of possession letter only, hence there is a need to report the same
under Clause i(c) of Paragraph 3 Companies (Auditor's Report) Order,2020.
Matters to be included in auditor's report - The auditor's report on the accounts of a company to which
this Order applies shall include a statement on the following matter, namely:
(i) (c) whether the title deeds of all the immovable properties (Other than properties where the company
is the lessee and the lease agreements are duly executed in favour of the lessee) disclosed in the financial
statements are held in the name of the company, if not provide the details thereof in the format below:

Description Gross Held in Whether Period held– Reason for not

of property carrying name of promoter, indicate range, being held in
value director or their where name of
relative or appropriate company* *also
employee indicate if in
dispute
1 2 3 4 5 6

The auditor should state in the Reason (column 6) for not being held in name of company as follows
“Properties obtained during the year through barter deals and included in the PPE in the books of
accounts on the basis of possession letter only”

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 Chapter - 9A : Audit of Balance Sheet Items

Question - 7
Explain whether the following statements are correct or incorrect, with reasons/ explanations/
examples
If the purpose of an audit procedure is to test for understatement in the existence or valuation
of accounts payable then testing the recorded accounts payable may be relevant audit
procedure. [Jan 2021 (2 Marks)]

ANSWER:
Incorrect: If the purpose of an audit procedure is to test for overstatement in the existence or valuation
of accounts payable, testing the recorded accounts payable may be a relevant audit procedure.
On the other hand, when testing for understatement in the existence or valuation of accounts payable,
testing the recorded accounts payable would not be relevant, but testing such information as subsequent
disbursements, unpaid invoices, suppliers’ statements, and unmatched receiving reports may be relevant.

Multiple Choice Question

1. All transactions that were supposed to be recorded have been recognized in the financial
statement and further, transactions have been recognized in the correct accounting
period, it is known as:
(a) Occurrence
(b) Completeness
(c) Measurement
(d) Existence
2. Verifying reduction of capital, the auditor should undertake the procedure except:
(a) Verify that the meeting of the shareholder held to pass the special resolution was properly
convened and the proposal was circularised in Advance among all the shareholders.
(b) Verify, that the Memorandum of Association authorises reduction of capital.
(c) Examine the order of the Tribunal confirming the reduction and verify that a copy of the
order and the minutes have been registered and filed with the Registrar of Companies.
(d) Confirm whether the revaluation of assets has been properly disclosed in the Balance Sheet.
3. At the time of examination of the Balance Sheet, at a given time, and deduct the total
liabilities to outside trade payables from the value of assets, the difference between the
two figures will represent the __________.
(a) Equity Capital
(b) Reserve and Surplus
(c) Net worth of the company based on the intrinsic value.
(d) Net worth of the company based on the book value of assets as on the date.

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 Chapter - 9A : Audit of Balance Sheet Items

4. Inventory is valued at lower of cost and net realisable value, according to AS-2 and Ind
AS-2 except:
(a) Raw Material
(b) Finished Goods
(c) Semi-Finished Goods
(d) Work-in-progress arising under construction contracts.
5. Audit procedure should not be followed by an auditor regrading completeness of
disclosures of loan and advances and other current assets.
(a) Examine a list of all advances and other current assets and compare then with balances in the
ledger.
(b) Inspect the minutes of meeting of Board of director to confirm it all material loans and
advances were approved by the BoD,
(c) If there are any related party loans and advances, review whether they were properly
authorised and the value of such transactions were reasonable and at arm’s length.
(d) None of the above.

Answer (Multiple Choice Questions)

1. (b) 2. (b) 3. (d) 4. (d) 5. (d)

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 Chapter - 9B : Audit of Statement of P&L Accounts Items

Chapter - 9B
Audit of Statement of P&L Accounts Items
Question - 1
Discuss the audit procedures generally required to be undertaken by the auditor while
auditing Goods sent out on Sale or Return Basis. [Nov 2020 (3 Marks)]

ANSWER:
The audit procedure generally required to be undertaken by the auditor while auditing Goods sent out
on Sale or Return Basis is as under:
(i) Check whether a separate memorandum record of goods sent out on sale or return basis is
maintained. The party accounts are debited only after the goods have been sold and the sales
account is credited.
(ii) Verify that price of such goods is unloaded from the sales account and the trade receivables record.
Check the memoranda record to confirm that on the receipt of acceptance from each party, his
account has been debited and the sales account correspondingly credited.
(iii) Ensure that the goods in respect of which the period of approval has expired at the end of the year,
have either been received back or customers’ accounts have been debited.
(iv) Confirm that the inventory of goods sent out on approval, the period of approval in respect of
which had not expired till the end of the year lying with the party, has been included in the closing
inventory.

Question - 2
CA "X" while conducting an audit of Joyful Ltd. found a considerable increase in sales as
compared to the previous year, he doubts that few fictitious sales have been recorded by the
company to overstate its revenues. Discuss any four audit procedures to be undertaken by
the auditor to ensure revenue from sales of goods and services performed during the period
is not overstated? [July 2021 (4 Marks)]

ANSWER:
CA X, having doubts about fictitious sales being recorded by Joyful Ltd. would ensure that revenue is
not overstated by performing following audit procedures:
 Check whether a single sales invoice is recorded twice or a cancelled sales invoice could also be
recorded.
 Test check few invoice with their relevant entries in sales journal.
 Obtain confirmation from few customers to ensure genuineness of sales transaction
 Whether any fictitious customers and sales have been recorded.

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 Whether any shipments were done without the consent and agreement of the customer, especially
at the year end to inflate the sales figure
 Whether unearned revenue recorded as earned.
 Whether any substantial uncertainty exists about collectability
 Whether customer obligations are contingent on other actions (financing, resale etc.)

Question - 3
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. [Jan 2021 (3 Marks)]

ANSWER:
Statutory auditor would perform the following audit procedure for recognition of different
items given in the question:
(1) Interest income on fixed deposits is recognized on a time proportion basis taking into account the
amount outstanding and the applicable interest rate.
(2) Dividends are recognised in the statement of profit and loss only when:
(i) The entity’s right to receive payment of the dividend is established;
(ii) It is probable that the economic benefits associated with the dividend will flow to the entity;
and
(iii) The amount of the dividend can be measured reliably.
(3) Gain/(loss) on sale of investment in mutual funds is recorded as other income on transfer of title
from the entity and is determined as the difference between the redemption price and carrying
value of the investments.

Question - 4
Examine with reasons whether the following statements are correct or incorrect.
Dividends are recognized in the statement of profit and loss only when the amount of dividend
can be measured reliably. [Nov 2020 (2 Marks)]

ANSWER:
Incorrect: Dividends are recognised in the statement of profit and loss only when:
(i) The entity’s right to receive payment of the dividend is established;
(ii) It is probable that the economic benefits associated with the dividend will flow to the entity; and
(iii) The amount of the dividend can be measured reliably.

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 Chapter - 9B : Audit of Statement of P&L Accounts Items

Question - 5
ABC limited appointed XYZ & Company, Chartered Accountants, as a Statutory Auditor of the
Company for the year 2019-20. CA X, partner of XYZ & Company, was looking after the audit
of other income of the company which consists of interest income on fixed deposits. As a
Statutory Auditor how would CA X verify interest income on fixed deposits for the year 2019-
20? [Nov 2020 (4 Marks)]

ANSWER:
CA X, partner of XYZ & Company, would carry out the following audit procedure for verifying interest
income on fixed deposits of ABC Limited:
(1) Obtain a listing of fixed deposits opened during the period under audit along with the applicable
interest rate and the number of days for which the deposit was outstanding during the period.
Verify the arithmetical accuracy of the interest calculation made by the entity by recomputing i.e.
multiplying the deposit amount with the applicable rate and number of days during the period
under audit.
(2) For deposits still outstanding as at the period- end, trace the same to the direct confirmations
obtained from the respective bank/ financial institution.
(3) Obtain a confirmation of interest income from the bank and verify that the interest income as per
bank reconciles to the calculation shared by the entity.
(4) Also, obtain a copy of Form 26AS (TDS withholding by the bank/ financial institution) and reconcile
the interest reflected therein to the calculation shared by client.

Question - 6
Depreciation and amortisation expense generally constitute an entity's significant part of
overall expenses and have direct impact on the profit/loss of the entity. What are the
attributes, the Auditor needs to consider while verifying Depreciation and amortisation
expense. [Jan 2021 (4 Marks)]

ANSWER:
Depreciation and amortisation generally constitute an entity’s significant part of overall expenses and
have direct impact on the profit/ loss of the entity, hence auditors need to verify and ensure that such
expenditure is appropriate, accurately calculated and has been accounted as per applicable provisions of
Companies Act or other statutes, to the extent applicable on the respective industry and as per generally
accepted accounting principles.
Auditor needs to consider the following attributes while verifying for depreciation and amortisation
expenses:
• Obtain the understanding of entity’s accounting policy related to depreciation and amortisation.
• Ensure the Company policy for charging depreciation and amortisation is as per the relevant
provisions of Companies Act/ applicable accounting standards.
• Whether the depreciation has been calculated after making adjustment of residual value from the
cost of the assets.

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 Chapter - 9B : Audit of Statement of P&L Accounts Items

• Whether depreciation and amortisation charges are valid.

• Whether depreciation and amortisation charges are accurately calculated and recorded.
• Whether all depreciation and amortisation charges are recorded in the appropriate period.
• Ensure the parts (components) of each item of property, plant and equipment that are to be
depreciated separately have been properly identified.
• Whether the most appropriate depreciation method for each separately depreciable component
has been used.

Question - 7
Profit and Loss account of an organization shows various types of expenses like rent, power
and fuel, repairs and maintenance, insurance, travelling, miscellaneous expenses etc., that
are essential and incidental to running of business operations. What are the attributes that an
auditor generally prefers for vouching these types of expenses? [Dec 2021 (3 Marks)]

ANSWER:
Attributes to be preferred for vouching other expenses:
While the auditor may choose to analyse the monthly trends for expenses like rent, power and fuel, an
auditor generally preferent to vouch for other expenses to verify following attributes:
(i) Whether the expenditure pertained to current period under audit;
(ii) Whether the expenditure qualified as a revenue and not capital expenditure;
(iii) Whether the expenditure had a valid supporting documents like travel tickets, insurance policy,
third party invoice etc.;
(iv) Whether the expenditure has been classified under the correct expense head;
(v) Whether the expenditure was authorised as per the delegation of authority matrix;
(vi) Whether the expenditure was in relation to the entity’s business and not a personal expenditure.

Question - 8
Whether it is possible to independently verify the correctness of some of the items of expenses
included in the statement of profit and loss? Explain with the help of some examples.
[Dec 2021 (3 Marks)]

ANSWER:
Often it is possible to independently verify the correctness of some of the items of expenses included in
the Statement of Profit and Loss.
For instance, the cost of importing goods which are subjected to an ad-valorem duty at uniform rate
can be verified from the amount of duty paid. Similarly, a quantity of sugar sold by sugar mill can be
verified independently from the amount of excise duty/GST paid.
Similarly, the amount of any income or expenses which has a direct relationship with the amount of
profits or that of sales can be verified independently, e.g., commission paid to a manager calculated on

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the basis of net profits, commission paid to a selling agent as percentage of sales, etc. Such calculation of
ratios, and comparisons is also termed as analytical review.
Thus, it is important to note that Analytical procedures may help identify the existence of unusual
transactions or events, and amounts, ratios, and trends that might indicate matters that have audit
implications. Unusual or unexpected relationships that are identified may assist the auditor in identifying
risks of material misstatement, especially risks of material misstatement due to fraud.

Multiple Choice Question

1. Which is the following is not an example of revenue expenditure?
(a) Development expenditure of Land
(b) Salaries and wages
(c) Repairs and maintenance of fixed assets
(d) Legal and professional expenses.
2. Wages paid to workers would always qualify as:
(a) Revenue Expenditure
(b) Capital Expenditure
(c) Revenue or Capital expenditure depending upon facts and circumstances
(d) None
3. Auditor should verify the disclosure requirements under Ind AS compliant Schedule III of
the Companies Act, 2013 have been made except:
(a) Whether purchase of stock-in-trade has been specifically disclosed.
(b) Whether changes in inventories of finished goods, stock-in-trade and work-in-progress has
been specifically disclosed.
(c) Whether the transactions with related parties are appropriately disclosed in notes to accounts.
(d) None of the above
4. Profit and Loss Account will be debited regarding depreciation is:
(a) Depreciation
(b) Depreciation expenses
(c) Net Asset Value
(d) Book Value
5. Audit procedure required by an auditor except:
(a) Obtain a month wise expense schedule along with the rent agreement.
(b) Specific consideration should be given to escalation clause in the agreement to verify if the
rent was to be increased/adjusted during the period under audit.

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 Chapter - 9B : Audit of Statement of P&L Accounts Items

(c) Verify if the agreement is in the name of the entity and whether the expenses pertains to
premises used for running business operation of the entity.
(d) None of the above.

Answer (Multiple Choice Questions)

1. (a) 2. (c) 3. (d) 4. (b) 5. (d)

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 Chapter - 10 : Company Audit

Chapter - 10
Company Audit
Question - 1
CA Raj, an auditor was removed by PQR Ltd. before the expiry of his term. Discuss the
procedure to be taken by PQR Ltd to appoint an auditor other than retiring auditor under Sec.
140(4) of the Companies Act, 2013. [Jan 2021(4 Marks)]

ANSWER:
In the given question, CA Raj was removed by PQR Ltd. before the expiry of his term and PQR Ltd
wants to appoint an auditor other than retiring auditor i.e CA Raj who was removed.
Section 140(4) lays down procedure to appoint an auditor other than retiring auditor who was
removed-
(1) Special notice shall be required for a resolution at an annual general meeting appointing as auditor
a person other than a retiring auditor, or providing expressly that a retiring auditor shall not be re-
appointed, except where the retiring auditor has completed a consecutive tenure of five years or
as the case may be, ten years, as provided under sub-section (2) of section 139.
(2) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the
retiring auditor.
(3) Where notice is given of such a resolution and the retiring auditor makes with respect thereto
representation in writing to the company (not exceeding a reasonable length) and requests its
notification to members of the company, the company shall, unless the representation is received
by it too late for it to do so,-
(i) In any notice of the resolution given to members of the company, state the fact of the
representation having been made; and
(ii) Send a copy of the representation to every member of the company to whom notice of the
meeting is sent, whether before or after the receipt of the representation by the company.
and if a copy of the representation is not sent as aforesaid because it was received too late or
because of the company's default, the auditor may (without prejudice to his right to be heard
orally) require that the representation shall be read out at the meeting.

Question - 2
State with reasons whether the following statements are correct or incorrect.
As per section 139(5) of the Companies Act, 2013, in the case of a government company,
board of directors shall appoint the subsequent auditor within a period of 60 days from the
commencement of the financial year. [Dec 2021 (2 Marks)]

ANSWER:

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 Chapter - 10 : Company Audit

Incorrect: As per section 139(5), in the case of a Government company or any other company owned
or controlled, directly or indirectly, by the Central Government, or by any State Government or
Governments, or partly by the Central Government and partly by one or more State Governments, the
Comptroller and Auditor-General of India shall, in respect of a financial year, appoint an auditor duly
qualified to be appointed as an auditor of companies under this Act, within a period of 180 days from
the commencement of the financial year, who shall hold office till the conclusion of the annual general
meeting.

Question - 3
Explain whether the following statements are correct or incorrect, with reasons/ explanations/
examples
As per Section 139(8) of the Companies Act, 2013, any casual vacancy in the office of an
auditor shall in case of a company other than a company whose accounts are subject to audit
by an auditor appointed by Comptroller and Auditor General of India, be filled by the
Shareholders at an Annual General Meeting within 60 days. [Jan 2021 (2 Marks)]

ANSWER:
Incorrect: As per Section 139(8), any casual vacancy in the office of an auditor shall in the case of a
company other than a company whose accounts are subject to audit by an auditor appointed by the
Comptroller and Auditor-General of India, be filled by the Board of Directors within 30 days.

Question - 4
CA G was appointed as the auditor of RJ Ltd. at the remuneration of INR 35,000. He resigned
after 7 months on health grounds but failed to file the required statement with the registrar of
Companies. What are the responsibilities of CA G as per section 140(2) of the Companies Act,
2013? As per section 140(3) of the Companies Act, 2013, how much fine will be levied on CA
G for non-compliance of Sec 140(2) of the Companies Act 2013? [Dec 2021 (4 Marks)]

ANSWER:
Casual Vacancy by Resignation:
As per section 140(2) of the Act, the auditor CA G who has resigned from the company shall file within
a period of 30 days from the date of resignation, a statement in the prescribed Form ADT-3(as per Rule
8 of CAAR) with the company and the Registrar.
The auditor shall indicate the reasons and other facts as may be relevant with regard to his resignation.
In the given case, CA G, auditor of RJ Ltd. resigned after 7 months on health grounds and also, he did
not file ADT-3 with the Registrar. So, he did not fulfil his responsibilities as stated under Section 140(2).
So, the auditor CA G shall be liable to a penalty of fifty thousand rupees or the remuneration of the
auditor ₹ 35000, whichever is less i.e., ₹ 35,000, and in case of continuing failure, with further penalty
of five hundred rupees for each day after the first during which such failure continues, subject to a
maximum of Two lakh rupees as per section 140(3).

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 Chapter - 10 : Company Audit

Question - 5
Clue Ltd. is a Public unlisted company having paid-up share capital of Rs. 9 crores and public
borrowings from the financial institutions of Rs. 51 crores. They appointed M/s Pray and Co.,
A Chartered Accountant firm as the statutory auditor in its annual general meeting for 11
years.
(i) Is the manner of rotation of auditor applicable in case of Clue Ltd.?
(ii) Whether the appointment of M/s Pray and Co. is valid? [Nov 2020 (4 Marks)]

ANSWER:
(1) As per rules prescribed in Companies (Audit and Auditors) Rules, 2014, for applicability of section
139(2) the class of companies shall mean the following classes of companies excluding one person
companies and small companies-
(i) All unlisted public companies having paid up share capital of rupees ten crore or more;
(ii) All private limited companies having paid up share capital of rupees fifty crore or more;
(iii) All companies having paid up share capital of below threshold limit mentioned above, but
having public borrowings from financial institutions, banks or public deposits of rupees fifty
crores or more.
In the given case, Clue Ltd is an Unlisted Public company, any having paid up share capital of Rs.
9 crores and public borrowings from financial institutions of Rs. 51 crores. So, applying the above
provisions to the given problem, although paid up share capital of Clue Ltd is below threshold
limit of Rs. 10 crores yet the Company is having public borrowings from financial institutions worth
Rs. 51 crores i.e above Rs. 50 crores.
Therefore, manner of rotation of auditors is applicable in case of Clue Ltd.
(2) Clue Ltd., an unlisted public company is covered by the rotational provisions, appointed M/s Pray
and Co., a Chartered Accountant firm, as the statutory auditor in its AGM for 11 years. Here, the
appointment of M/s Pray & Co. is not valid as the appointment can be made only for one term of
five consecutive years and then another one more term of five consecutive years. It can’t be
appointed for two terms in one AGM only. Further, a cooling period of five years from the
completion of term is required i.e. the firm can’t be re-appointed for further 5 years after
completion of two terms of five consecutive years.
Keeping in view above, the appointment of M/s Pray and Co. is not valid.

Question - 6
The recommendation for appointment of auditors is only one of the several functions
performed by audit committee. Discuss atleast four other key responsibilities of Audit
Committee in accordance with Section 177 of the Companies Act, 2013.
[July 2021 (4 Marks)]

ANSWER:

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 Chapter - 10 : Company Audit

Audit committee performs wide functions. The recommendation for appointment of auditors is only
one of the several functions performed by audit committee. Under section 177 of Companies Act, 2013,
audit committee is responsible for following actions: -
(i) The recommendation for appointment, remuneration and terms of appointment of auditors of
the company;
(ii) Review and monitor the auditor’s independence and performance, and effectiveness of audit
process;
(iii) Examination of the financial statement and the auditor’s report thereon;
(iv) Approval or any subsequent modification of transactions of the company with related parties;
(v) Scrutiny of inter-corporate loans and investments;
(vi) Valuation of undertakings or assets of the company, wherever it is necessary;
(vii) Evaluation of internal financial controls and risk management systems;
(viii) Monitoring the end use of funds raised through public offers and related matters.
Hence, audit committee oversees range of matters including those related to making recommendation
for appointment of auditors.

Question - 7
CA R is the statutory auditor and Mr. P is the cost auditor of DEF Ltd., a company engaged in
the production of tyres. Mr. P noticed a fraud of INR 1.25 crores done by the senior manager
of the company and immediately informed the audit committee even before CA R was aware
of the fraud. State the duty of CA R under section 143(12) of the Companies Act on reporting
on frauds already detected and reported. [Dec 2021 (4 Marks)]

ANSWER:
Reporting on Frauds already detected and reported:
The auditor, CA R should apply professional skepticism to evaluate/verify that the fraud was indeed
identified/detected in all aspects by the management or through the company’s vigil/whistle blower
mechanism so that distinction can be clearly made with respect to frauds identified/detected due to
matters raised by the auditor vis-à-vis those identified/detected by the company through its internal
control mechanism.
Since reporting on fraud under section 143(12) is required even by the cost auditor and the secretarial
auditor of the company, it is possible that a suspected offence involving fraud may have been reported
by them even before the auditor became aware of the fraud.
Here too, if a suspected offence of fraud has already been reported under section 143(12) by such other
person, and the auditor becomes aware of such suspected offence involving fraud, he need not report
the same since he has not per se identified the suspected offence of fraud.
However, in case of a fraud which involves or is expected to involve individually, an amount of ₹ 1
crore or more, the auditor should review the steps taken by the management /those charged with
governance with respect to the reported instance of suspected office of fraud stated above, and if he is
not satisfied with such steps, he should state the reasons for his dissatisfaction in writing and request the

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 Chapter - 10 : Company Audit

management/those charged with governance to perform additional procedures to enable the auditor to
satisfy himself that the matter has been appropriately addressed. If the management /those charged with
governance fail to undertake appropriate additional procedures within 45 days of his request, the
auditor would need to evaluate if he should report the matter to the Central Government in accordance
with Rule 13 of the Companies (Audit and Auditors) Rules, 2014.

Question - 8
P Ltd. is a company from a business group “ABCD” and is engaged in trading of garments. The
promoters of the company are promoters and directors of some other group companies also.
You have been appointed as an auditor of P Ltd. has entered into various inter-company
transactions (within group companies) during the year which are outside its normal course of
business. What will be your duties as an auditor in relation to those transaction?
[May 2022 (3 Marks)]

Answer:
Duties of Auditor in identifying Significant Related Party Transactions: For identified significant related
party transactions outside the P Ltd.’s normal course of business, the auditor shall:
1. Inspect the underlying contracts or agreements, if any, and evaluate whether:
(i) The business rationale (or lack thereof) of the transactions suggests that they may have been
entered into to engage in fraudulent financial reporting or to conceal misappropriation of
assets;
(ii) The terms of the transactions are consistent with management’s explanations; and
(iii) The transactions have been appropriately accounted for and disclosed in accordance with the
applicable financial reporting framework; and
2. Obtain audit evidence that the transactions have been appropriately authorised and approved.

Question - 9
The auditor's requirement to report under clause (X) of paragraph 3 of the Companies
(Auditor's Report) Order, 2020 is restricted to frauds noticed or reported during the year.
Explain what auditors may consider for reporting under this clause?
[Nov 2020 (3 Marks)]

ANSWER:
The auditor is required to report under clause (x) of paragraph 3 of Companies (Auditor’s Report) Order,
2020,
Where the auditor notices that any fraud by the company or on the company by its officers or employees
has been noticed by or reported during the year, the auditor should, apart from reporting the existence
of fraud, also required to report, the nature of fraud and amount involved. For reporting under this
clause, the auditor may consider the following:

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 Chapter - 10 : Company Audit

(i) This clause requires all frauds noticed or reported during the year shall be reported indicating the
nature and amount involved. As specified, the fraud by the company or on the company by its
officers or employees are only covered.
(ii) Of the frauds covered under section 143(12) of the Act, only noticed frauds shall be included here
and not the suspected frauds.
(iii) While reporting under this clause with regard to the nature and the amount involved of the frauds
notice do reported, the auditor may also consider the principles of materiality outlined in Standards
on Auditing.

Question - 10
State the auditor’s reporting responsibilities under CARO 2020 when –
(i) The company has raised money by public issue.
(ii) The company has made private placement of shares. [Dec 2021 (4 Marks)]

ANSWER:
Auditor’s reporting responsibilities under CARO 2020:
(i) Clause (ix) para 3 of CARO, 2020 states – whether moneys raised by way of initial public offer
or further public offer (including debt instruments) and term loans were applied for the purposes
for which those are raised. If not, the details together with delays or default and subsequent
rectification, if any, as may be applicable, be reported.
(ii) Clause (xiv) para 3 of CARO, 2020 states – whether the company has made any preferential
allotment or private placement of shares or fully or partly convertible debentures during the year
under review and if so, as to whether the requirement of section 42 of the Companies Act, 2013
have been complied with and the amount raised have been used for the purposes for which the
funds were raised. If not, provide the details in respect of the amount involved and nature of non-
compliance.

Question - 11
State with reasons whether the following statements are correct or incorrect.
According to CARO 2020, the company auditor is required to state that whether the title deeds
of all immovable properties held in the name of the company are disclosed in its financial
statements. [May 2022 (2 Marks)]

Answer:
Incorrect: According to CARO, 2020, the company auditor is required to state whether the title deeds
of all the immovable properties (other than properties where the company is the lessee and the lease
agreements are duly executed in favour of the lessee) disclosed in the financial statements are held in the
name of the company.

Question - 12
G Pvt. Ltd. had fully paid-up Capital and Reserves of ₹ 1.20 crores as at the end of F.Y. 2020-
2021. During the F.Y. 2021-2022, business was interrupted due to Covid restrictions and

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therefore the company incurred losses to the tune of 25 lacs. During the year, the company
also borrowed ₹ 55 lakh each from a bank and a financial institution independently. It had a
turnover of ₹ 850 lakh (other than revenue of ₹ 250 lakh from discontinuing operations).
Ascertain whether CARO, 2020 is applicable to the company. [May 2022 (4 Marks)]

Answer:
Applicability of CARO, 2020 in case of Private Ltd. Company: CARO, 2020 shall apply to every
company including a foreign company except – a private limited company, not being a subsidiary or
holding company of a public company,
(i) Having a paid-up capital and reserves and surplus not more than one crore rupees as on the
balances sheet date; an
(ii) Which does not have total borrowings exceeding one crore rupees from any bank or financial
institution at any point of time during the financial year; and
(iii) Which does not have a total revenue as disclosed in Scheduled III to the Companies Act (including
revenue from discontinuing operations) exceeding ten crore rupees during the financial year as per
the financial statements.
Applying the above to the given case, G Pvt. Ltd., its paid-up capital and reserves are ₹ 95 Lakh (₹ 120
Lakh - ₹ 25 Lakh), borrowings from a Bank and financial institution are (₹ 55 Lakh + ₹ 55 Lakh) i.e., ₹
1.10 Crore, turnover {including discontinuing operations (₹ 850 lakh + ₹ 250 Lakh)} ₹ 1100 Lakh i.e., ₹
11 Crore.
Since its borrowings and turnover are exceeding the specified limit and therefore it is not exempt from
the applicability of CARO, 2020.

Question - 13
B Ltd. is covered u/s 135 of the Companies Act, 2013 i.e. Corporate Social Responsibility
(CSR). What matters (other than the amount spent, amount not spent, amount required to be
spent etc.) shall be disclosed by the company with regard to CSR activities done by the
company? [May 2022 (4 Marks)]

Answer:
Corporate Social responsibility (CSR): Since B Ltd. is covered under section 135 of the Companies
Act, the following matters shall be disclosed by the B Ltd. with regard to CSR activities:
(a) Total of previous years shortfall,
(b) Reason for shortfall,
(c) Nature of CSR activities,
(d) Details of related party transactions, e.g., contribution to a trust controlled by the company in
relation to CSR expenditure as per relevant Accounting Standard,
(e) Where a provision is made with respect to a liability incurred by entering into a contractual
obligation, the movements in the provision during the year should be shown separately.

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Question - 14
Proceedings have been initiated against False Limited for holding benami property under the
Benami Transactions (Prohibition) Act, 1988 (45 of 1988) and the rules made thereunder, but
such property is not recorded in books of accounts. As a consultant to the company, what will
you advice to the company as far as disclosure requirements are concerned in relation to said
proceedings? [May 2022 (4 Marks)]

Answer:
Disclosure in case of Benami Properties held by the Company: Where any proceedings have been
initiated or pending against the company for holding any benami property under the Benami
Transactions (Prohibition) Act, 1988 (45 of 1988) and the rules made thereunder, the company shall
disclose the following:
(a) Details of such property, including year of acquisition,
(b) Amount thereof,
(c) Details of Beneficiaries,
(d) If property is not in the books, then the fact shall be stated with reasons,
(e) Where there are proceedings against the company under this law as and abetter of the transaction
or as the transferor, then the detail shall be provided,
(f) Nature of proceedings, status of same and company’s view on same.

Question - 15
RJ Limited is in the business of trading of cycles having Head Office at Delhi and branch at
Mumbai. Statutory audit of Head Office was to be done by CA D and statutory audit of branch
at Mumbai was to be done by CA M. During the course of audit by CA D at head office, CA D
Wanted to visit branch at Mumbai and verify the inventory records at Mumbai. The
management of RJ Limited did not allow CA D to visit Mumbai office and verify the inventory
records as the branch audit of Mumbai was already being undertaken by another CA M.
In the above situation, discuss the rights available with CA D in terms of the Companies Act,
2013. [Nov 2020 (3 Marks)]

ANSWER:
Section 143(1) of the Act provides that the auditor of a company, at all times, shall have a right of access
to the books of account and vouchers of the company, whether kept at the registered office of the
company or at any other place and he is entitled to require from the officers of the company such
information and explanation as he may consider necessary for the performance of his duties as auditor.
The right of access is not limited to those books and records maintained at the registered or head office
so that in the case of a company with branches, the right also extends to the branch records, if the
auditor considers it necessary to have access thereto as per Section143(8).
In the given case where CA D was appointed as Statutory Auditor of Head office of RJ Ltd and CA M
was appointed to conduct Statutory Audit of Branch office of RJ Ltd., CA D wanted to visit Mumbai
Branch to verify the inventory records at Mumbai but management of RJ Ltd did not allow CA D to

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verify the inventory records at its Mumbai Branch on the ground that branch audit was already being
undertaken by another CA M.
Keeping in view the above provisions of the Companies Act and facts of the case, it can be concluded
that CA D has a right to visit the branch for verifying inventory records at Mumbai even if the branch
accounts are audited by another auditor CA M, if he considers it necessary to do so for the performance
of his duties as an auditor.

Question - 16
CA B, an auditor of DBF Limited engaged in the manufacturing and trading of hardware
products, while auditing got aware of some secrets of the company. The auditor acted in an
unlawful way in order to deceive or gain an advantage over other and also he encouraged and
assisted directors to do something wrong, in particular to commit crime. Now company has
requested you to guide it as to how such accts are covered under companies Act, 2013 and
what consequences auditor may face? [May 2022 (4 Marks)]

Answer:
Punishment for Non – Compliance/Contravention: Section 147 of the Companies Act, 2013
prescribes punishments:
Where, in case of audit of a company being conducted by an audit firm, it is proved that the partner or
partners of the audit firm has or have acted in a fraudulent manner or abetted or colluded in an fraud
by, or in relation to or by, the company or its directors or officers, the liability, whether civil or criminal
as provided in this Act or in any other law for the time being in force, for such act shall be of the partner
or partners concerned of the audit firm and of the firm jointly and severally.
However, in case of criminal liability of an audit firm, in respect of liability other than fine, the concerned
partner or partners, who acted in a fraudulent manner or abetted or, as the case may be, colluded in
any fraud shall only be liable. In view of the above, CA. B would be liable for fine and imprisonment as
per Companies Act, 2013.
Alternative Solution:
Direction by Tribunal in case Auditor acted in a Fraudulent Manner:
As per sub-section (5) of the section 140, the Tribunal either suo motu or on an application made to it
by the Central Government or by any person concerned, if it is satisfied that the auditor of a company
has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by,
or in relation to, the company or its directors or officers, it may, by order, direct the company to change
its auditors.
However, if the application is made by the Central Government and the Tribunal is satisfied that any
change of the auditor is required, it shall within fifteen days of receipt of such application, make an order
that he shall not function as an auditor and the Central Government may appoint another auditor in his
place.
It may be noted that an auditor, whether individual or firm, against whom final order has been passed
by the Tribunal under this section shall not be eligible to be appointed as an auditor of any company
for a period of five years from the date of passing of the order and the auditor shall also be liable for
action under section 447.

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 Chapter - 10 : Company Audit

Question - 17
What are the prohibited services for auditor as per Companies Act, 2013?
[Jan 2021 (3 Marks)]

ANSWER:
Prohibited services for an auditor as per Companies Act, 2013 are stated in Section 144.
Section 144 of the Companies Act, 2013 prescribes certain services not to be rendered by the auditor.
An auditor appointed under this Act shall provide to the company only such other services as are
approved by the Board of Directors or the audit committee, as the case may be, but which shall not
include any of the following services (whether such services are rendered directly or indirectly to the
company or its holding company or subsidiary company), namely:
(i) Accounting and book keeping services;
(ii) Internal audit;
(iii) Design and implementation of any financial information system;
(iv) Actuarial services;
(v) Investment advisory services;
(vi) Investment banking services;
(vii) Rendering of outsourced financial services;
(viii) Management services; and
(ix) Any other kind of services as may be prescribed.

Multiple Choice Question

1. A person shall be eligible for appointment as an auditor of a company only if he/she is a
(a) Cost Accountant
(b) Chartered Accountant
(c) Internal Accountant
(d) Any of the above
2. First auditor other than a Government Company shall be appointed by the Board of
Director _______________ from the date of registration of the company.
(a) Within 3 days
(b) Within 30 days
(c) Within 90 days
(d) Within 120 days

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 Chapter - 10 : Company Audit

3. When an auditor resigned from an the Government Company (u/s 139(5)], auditor shall
file ADT-3 (As per Rule 8 of CAAR) with the fails of resignation to ____________.
(a) Central Government
(b) Board of Director’s
(c) C & AG of India
(d) Registrar of the Companies
4. Ceiling on number of audits per auditor.
(a) 10
(b) 12
(c) 15
(d) 20
5. If an auditor of a company in the course of the performance of his duties as auditor, has
reason to believe that an offence of fraud, which involves or is expected to involve
individually and amount of ₹ 1 crore or above, is being or has been committed in the
company by its officers or employees, the auditor shall report the matter to the Central
Government according to.,
(a) Section 143(11) of the Companies Act, 2013
(b) Section 143(12) of the Companies Act, 2013
(c) Rule 13 of the Companies (Audit and Auditors) Rules 2014,
(d) Both (b) and (c)
6. Any casual vacancy in the of Cost Auditor, whether due to resignation, death or removal,
shall be filled ______ within ______ days of occurrence of such vacancy.
(a) Board of Directors, 30
(b) Board of Directors, 60
(c) Central Government, 15
(d) Central Government, 30

Answer (Multiple Choice Questions)

1. (b) 2. (b) 3. (c) 4. (d) 5. (d) 6. (a)

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 Chapter - 11 : Audit Report

Chapter - 11
Audit Report
Question - 1
CA N is the auditor of SR Ltd. The auditor expressed his opinion on the financial statements
without ascertaining as to whether the financial statements as a whole were free from material
misstatements or not. In your opinion, whether CA N has complied with objectives of audit
considering the applicability of relevant SA? [May 2022 (3 Marks)]

Answer:
Overall Objective of the Independent Auditor: As per SA-200 “Overall Objectives of the
Independent Auditor”, in conducting an audit of financial statements, the overall objectives of the
auditor are:
(i) To obtain reasonable assurance about whether the financial statements as a whole are free from
material misstatement, whether due to fraud or error, thereby enabling the auditor to express an
opinion on whether the financial statements are prepared, in all material respects, in accordance
with an applicable financial reporting framework; and
(ii) To report on the financial statements, and communicate as required by the SAs, in accordance with
the auditor’s findings.
In the given case of SR Ltd, CA N expressed his opinion on the financial statements of SR Ltd. without
obtaining reasonable assurance about whether the financial statements as a whole are fee from material
misstatement or not. Therefore, it can be concluded that CA N did not comply with the objective of
audit as stated in SA 200.

Question - 2
State with reasons whether the following statements are correct or incorrect.
The Location of the description of the auditor’s responsibilities for the audit of the financial
statements is always within the body of the auditor’s report. [July 2021 (2 Marks)]

ANSWER:
Incorrect: The description of the auditor’s responsibilities for the audit of the financial statement shall
be always shown as below –
• Within the body of the auditor’s report
• Within an appendix to the auditor’s report, in which case the auditor’s report shall include a reference
to the location of the appendix or
By a specific reference within the auditor’s report to the location of such a description on a website of
an appropriate authority, where law, regulation or national auditing standards expressly permit the
auditor to do so

Question - 3

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 Chapter - 11 : Audit Report

State with reasons whether the following statements are correct or incorrect.
Auditor has to disclose the impact, if any, of the pending litigations on the financial position of
the auditee in his audit report. [July 2021 (2 Marks)]

ANSWER:
Incorrect: Rule 11 of the Companies (Audit and Auditors) Rules, 2014 prescribes the other matters to
be included in auditor’s report. The auditor’s report shall also include their views and comments on -
whether the company has disclosed the impact, if any, of pending litigations on its financial position in
its financial statement.

Question - 4
As per Sec 143(3)(j) of the Companies Act, 2013, the auditor’s report shall also include such
other matters as may be prescribed by Rule 11 of the Companies (Audit and Auditors) Rule,
2014. Discuss those matters on which views and comments of the auditor is required.
[Dec 2021 (3 Marks)]

ANSWER:
Other Matters prescribed by Rule 11 to include in Auditor’s Report:
As per section 143(3)(j) – The auditor’s report shall also state such other matters as may be prescribed.
Rule 11 of the Companies (Audit and Auditors) Rules, 2014 prescribes the other matters to be included
in auditor’s report. The auditor’s report shall also include their views and comments on the following
matters, namely: -
(i) Whether the company has disclosed the impact, if any, of pending litigations on its financial
position in its financial statements
(ii) Whether the company has made provision, as required under any law or accounting standards,
for material foreseeable losses, if any, on long term contracts including derivative contracts;
(iii) Whether there has been any delay in transferring amounts, required to be transferred, to the
Investor Education and Protection Fund by the company.
(iv) (1) Whether the management has represented that, to the best of it’s knowledge and belief,
other than as disclosed in the notes to the accounts, no funds have been advanced or loaned
or invested (either from borrowed funds or share premium or any other sources or kind of
funds) by the company to or in any other person(s) or entity(ies), including foreign entities
(“Intermediaries”), with the understanding, whether recorded in writing or otherwise, that
the Intermediary shall, whether, directly or indirectly lend or invest in other persons or
entities identified in any manner whatsoever by or on behalf of the company (“Ultimate
Beneficiaries”) or provide any guarantee, security or the like on behalf of the Ultimate
Beneficiaries;
(2) Whether the management has represented, that, to the best of it’s knowledge and belief,
other than as disclosed in the notes to the accounts, no funds have been received by the
company from any person(s) or entity(ies), including foreign entities (“Funding Parties”),
with the understanding, whether recorded in writing or otherwise, that the company shall,

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 Chapter - 11 : Audit Report

whether, directly or indirectly, lend or invest in other persons or entities identified in any
manner whatsoever by or on behalf of the Funding Party (“Ultimate Beneficiaries”) or
provide any guarantee, security or the like on behalf of the Ultimate Beneficiaries; and
(3) Based on such audit procedures that the auditor has considered reasonable and appropriate
in the circumstances, nothing has come to their notice that has caused them to believe that
the representations under sub-clause (i) and (ii) contain any material mis-statement.
(v) Whether the dividend declared or paid during the year by the company is in compliance with
section 123 of the Companies Act, 2013.

Question - 5
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? [Jan 2021 (4 Marks)]

ANSWER:
An auditor should state in “Basis for Opinion” section of Auditor’s Report as under: Basis for
Opinion:
The auditor’s report shall include a section, directly following the Opinion section, with the heading
“Basis for Opinion”, that:
(i) States that the audit was conducted in accordance with Standards on Auditing;
(ii) Refers to the section of the auditor’s report that describes the auditor’s responsibilities under the
SAs;
(iii) Includes a statement that the auditor is independent of the entity in accordance with the relevant
ethical requirements relating to the audit and has fulfilled the auditor’s other ethical responsibilities
in accordance with these requirements.
(iv) States whether the auditor believes that the audit evidence the auditor has obtained is sufficient
and appropriate to provide a basis for the auditor’s opinion.
Amendments an Auditor should make :
When the auditor modifies the opinion on the financial statements, the auditor shall, in addition to the
specific elements required by SA 700 (Revised):
(i) Amend the heading “Basis for Opinion” required by para of SA 700 (Revised) to “Basis for Qualified
Opinion,” “Basis for Adverse Opinion,” or “Basis for Disclaimer of Opinion,” as appropriate; and
(ii) Within this section, include a description of the matter giving rise to the modification.

Question - 6
CA Guru is in the process of preparing the final audit report of JPA Private Limited and would
like to disclaim his opinion on the financial statements due to an inability to obtain sufficient
appropriate audit evidence. How CA Guru shall amend the description of the auditor's
responsibilities as required by SA 700 (Revised)? [July 2021 (3 Marks)]

ANSWER:

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 Chapter - 11 : Audit Report

Since the auditor, CA Guru, disclaims and option on the financial statements due to an inability to obtain
sufficient appropriate audit evidence of JPA Pvt. Ltd. the auditor (CA Guru) shall amend the description
of the auditor’s responsibilities required by SA 700 (Revised) to include only the following:
(a) A statement that the auditor’s responsibility is to conduct an audit of the entity’s financial
statements in accordance with Standards on Auditing and to issue and auditor’s report;
(b) A statement that, however, because of the matter(s) described in the Basis for Disclaimer of opinion
section, the auditor was not able to obtain sufficient appropriate audit evidence to provide a basis
for an audit opinion on the financial statements, and
(c) The statement about auditor independence and other ethical responsibilities required by SA 700
(Revised)

Question - 7
State with reasons whether the following statements are correct or incorrect.
Pervasive is a term used, in the context of misstatements, to describe the effects on the
financial statements of misstatements or the possible effects on the financial statements of
misstatements, if any, that are detected by obtaining sufficient appropriate audit evidence.
[May 2022 (2 Marks)]

Answer:
Incorrect: Pervasive is a term used, in the context of misstatements, to describe the effects on the
financial statements of misstatements or the possible effects on the financial statements of misstatements,
if any, that are undetected due to an inability to obtain sufficient appropriate audit evidence.

Question - 8
How would an auditor determine Key Audit Matters as per SA - 701, "Communicating Key
Audit Matters in the Independent Auditor's Report"? [Nov 2020 (3 Marks)]

ANSWER:
The auditor shall determine, from the matters communicated with those charged with governance, those
matters that required significant auditor attention in performing the audit.
In making this determination, the auditor shall take into account the following:
(a) Areas of higher assessed risk of material misstatement, or significant risks identified in accordance
with SA315.
(b) Significant auditor judgments relating to areas in the financial statements that involved significant
management judgment, including accounting estimates that have been identified as having high
estimation uncertainty.
(c) The e ect on the audit of significant events or transactions that occurred during the period.
The auditor shall determine which of the matters determined in accordance with above stated para were
of most significance in the audit of the financial statements of the current period and therefore are the
key audit matters.

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 Chapter - 11 : Audit Report

Question - 9
Explain whether the following statements are correct or incorrect, with reasons/ explanations/
examples
Communicating Key Audit Matters is a substitute for the auditor expressing a modified audit
opinion when required by the circumstances of a specific audit engagement in accordance
with SA 705. [Jan 2021 (2 Marks)]

ANSWER:
Incorrect: Communicating key audit matters in the auditor’s report is not a substitute for the auditor
expressing a modified opinion when required by the circumstances of a specific audit engagement in
accordance with SA 705 (Revised);

Question - 10
Tree Limited presented its financial statements for the F.Y. 2021-2022 to its auditor for
expressing an option thereon. The auditor while carrying out the audit started comparing
various items of profit and loss account of the year under audit with previous financial years.
What is auditor trying to achieve by carrying out those comparisons?
[May 2022 (4 Marks)]

Answer:
Purpose of Applying Analytical Procedure: Analytical procedures use comparisons and relationships
to assess whether account balances or other data appear reasonable.
The auditor of Tree Ltd. would achieve the following by carrying out the comparison stated in the
question:
(i) If balances included in the Statement of Profit and Loss of an entity are compared with those
contained in the Statement of Profit and Loss with that of the previous period, it would be possible
to find out the reasons for increase or decrease in the amount of profits of those years.
(ii) By setting up certain expenses’ ratios on the basis of balances included in the Statement of Profit
and Loss, for the year under audit, comparing them with the same ratios for the previous year, it
is possible to ascertain the extent of increase or decrease in various items of expenditure in relation
to sales and that of trading profit in relation to sales.
(iii) If differences are found to be material, the auditor would ascertain the reasons thereof and assess
whether the accounts have been manipulated to inflate or suppress profits.
(iv) It would be possible to identify the existence of unusual transactions, amounts, ratios and trends
that might indicate matters that have audit implications.

Question - 11
The senior member of the firm Kaur & Associates, Chartered Accountants, informed to its
auditing staff that at the time of audit reporting regarding corresponding figures, when

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 Chapter - 11 : Audit Report

corresponding figures are presented, the auditor’s option shall not refer to the corresponding
figures except in specified circumstances. What are those exceptional circumstances?
[May 2022 (4 Marks)]

Answer:
Audit reporting Regarding Corresponding Figures:
When corresponding figures are presented, the auditor’s opinion shall not refer to the corresponding
figures except in the following circumstances:
1. If 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 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:
(a) 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
(b) In other cases, explain that the audit opinion has been modified because of the effects of
possible effects of the unresolved matter on the comparability of the current period’s figure
and the corresponding figures.
2. If the auditor obtains audit evidence that a material misstatement exists in the prior
period financial statements on which an unmodified opinion has been previously issued, the
auditor shall verify whether the misstatement has been dealt with as required under the applicable
financial reporting framework and, if that is not the case, the auditor shall express a qualified
opinion or an adverse opinion in the auditor’s report on the current period financial statements,
modified.
3. Prior Period Financial Statements Not Audited- If the prior period financial statements were
not audited, the auditor shall state in an Other Matter paragraph in the auditor’s report that the
corresponding figures are unaudited. Such a statement does not, however, relieve the auditor of
the requirement to obtain sufficient appropriate audit evidence that the opening balances do not
contain misstatements that materially affect the current period’s financial statements.

Multiple Choice Question

1. “Forming an Opinion and Reporting on Financial Statements” is describe under
(a) 400
(b) 500
(c) 650
(d) 700

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 Chapter - 11 : Audit Report

2. In the case of an audit of financial statement of listed entities, the auditor shall
communicate key audit matters in the auditor’s report in accordance with ____________.
(a) SA - 570
(b) SA - 630
(c) SA - 700
(d) SA - 701
3. Communicating key audit matter in the auditor’s report constitutes a substitute for
disclosure in the financial statements.
(a) Correct
(b) Incorrect
(c) Partially correct
(d) None of the above
4. The auditor shall express an ____________ when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements, individually or in the
aggregate, are both material and pervasive.
(a) Un qualified opinion
(b) Qualified opinion
(c) Adverse opinion
(d) Disclaimer of opinion
5. Auditor shall determine, from the matters communicated with ____________ those matters
that required significant’ auditor attention in performing the audit.
(a) Management
(b) Those Change with Government
(c) Central Government
(d) Shareholders

Answer (Multiple Choice Questions)

1. (d) 2. (d) 3. (b) 4. (c) 5. (b)

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 Chapter - 12 : Audit of Banks

Chapter - 12
Audit of Banks
Question - 1
Discuss the advantages of engagement team discussion done at the planning stage of the
bank audit. [July 2021 (3 Marks)]

ANSWER:
Advantages of engagement team discussion done at the planning stage of Bank audit are:
 Specific emphasis should be provided to the susceptibility of the bank’s financial statements to
material misstatement due to fraud, that enables the engagement team to consider an appropriate
response to fraud risks, including those related to engagement risk, pervasive risks, and specific risks.
 It further enables the audit engagement partner to delegate the work to the experienced engagement
team members, and to determine the procedures to be followed when fraud is identified.
 Further, audit engagement partner may review the need to involve specialists to address the issues
relating to fraud.

Question - 2
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. [July 2021 (4 Marks)]

ANSWER:
Out of Order: An account should be treated as ‘out of order’ if:
 the outstanding balance remains continuously in excess of the sanctioned limit/drawing power or
 In cases where the outstanding balance in the principal operating account is less than the sanctioned
limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance
Sheet; or
 Credits are there but are not enough to cover the interest debited during the same period, these
accounts should be treated as ‘out of order’.
Applying the above to the given case of N Ltd, its Drawing power is ₹ 80 Lakhs, although outstanding
balance in the account is ₹ 75 Lakhs, but still the account would be reported as out of order because
credits in the account are not sufficient to cover the interest debited during the same period

Question - 3
As an Auditor of XYZ Bank Limited, how would you assess the Risk of Fraud including Money
Laundering in line with SA 240? [Jan 2021 (3 Marks)]

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 Chapter - 12 : Audit of Banks

ANSWER:
As an Auditor of XYZ Bank Limited, risk of fraud including money laundering would be assessed as
explained hereunder which is in line with SA 240.
As per SA 240 “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements”, the auditor’s objective is to identify and assess the risks of material misstatement in the
financial statements due to fraud, to obtain sufficient appropriate audit evidence on those identified
misstatements and to respond appropriately. The attitude of professional skepticism should be
maintained by the auditor so as to recognise the possibility of misstatements due to fraud.
The RBI has framed specific guidelines that deal with prevention of money laundering and “Know Your
Customer (KYC)” norms. The RBI has from time to time issued guidelines (“Know Your Customer
Guidelines – Anti Money Laundering Standards”), requiring banks to establish policies, procedures and
controls to deter and to recognise and report money laundering activities.

Question - 4
Examine with reasons whether the following statements are correct or incorrect.
Classification as NPA should be based on the availability of security and asset classification
would be facility wise and not borrower wise. [Nov 2020 (2 Marks)]

ANSWER:
Incorrect: Classification as NPA should be based on the record of recovery. Availability of security or
net worth of borrower/guarantor is not to be taken into account for purpose of treating an advance as
NPA or otherwise.
Asset classification would be borrower-wise and not facility-wise. All facilities including investments in
securities would be termed as NPA.

Question - 5
You are appointed as Statutory Auditor of DEF Bank Limited for the year 2019-20. As an
Auditor how will you verify Provisions created by DEF Bank Limited?
[Nov 2020 (4 Marks)]

ANSWER:
For audit of Provisions, the auditor should ensure that the compliances for various regulatory
requirements for provisioning as contained in the various circulars have been fulfilled. The auditor should
obtain an understanding as to how the bank computes provision on standard assets and non-performing
assets. It will primarily include checking the basis of classification of loans and receivables into standard,
sub-standard, doubtful, loss and non-performing assets. The auditor may verify the loan classification on
a sample basis.
The auditor should obtain the detailed break up of standard loans, non-performing loans and agree the
outstanding balances with the general ledger. The auditor should obtain the tax provision computation
from the bank’s management and verify the nature of items debited and credited to profit and loss
account to ascertain that the same are appropriately considered in the tax provision computation. The
other provisions for expenses should be examined vis-à-vis the circumstances warranting the provisioning

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 Chapter - 12 : Audit of Banks

and the adequacy of the same by discussing and obtaining the explanations from the bank’s
management.

Question - 6
Explain “Advances under Consortium” in the context of Prudential Norms on Income
Recognition, Assets Classification and Provisioning pertaining to Advances.
[Jan 2021 (4 Marks)]

ANSWER:
Advances under Consortium: Consortium advances should be based on the record of recovery of the
respective individual member banks and other aspects having a bearing on the recoverability of the
advances. Where the remittances by the borrower under consortium lending arrangements are pooled
with one bank and/or where the bank receiving remittances is not parting with the share of other
member banks, the account should be treated as not serviced in the books of the other member banks
and therefore, an NPA.
The banks participating in the consortium, therefore, need to arrange to get their share of recovery
transferred from the lead bank or to get an express consent from the lead bank for the transfer of their
share of recovery, to ensure proper asset classification in their respective books.

Question - 7
In a bank, all accounts should be kept within the drawing power and the sanctioned limit. The
accounts which exceed the sanctioned limit or drawing power should be brought to the notice
of the management regularly. Analyse the following points to be considered in the
computation of drawing power in case of bank audit.
(i) Bank’s Duties
(ii) Auditor’s concern
(iii) Computation of DP
(iv) Stock audit [Dec 2021 (4 Marks)]

ANSWER:
Computation of Drawing Power:
(i) Bank’s Duties: Banks should ensure that drawings in the working capital account are covered
by the adequacy of the current assets. Drawing power is required to be arrived at based on current
stock statement. However, considering the difficulties of large borrowers, stock statements relied
upon by the banks for determining drawing power should not be older than three months. The
outstanding in the account based on drawing power calculated from stock statements older than
three months is deemed as irregular.
(ii) Auditor’s Concern: The stock statements, quarterly returns and other statements submitted by
the borrower to the bank should be scrutinized in detail. The audited Annual Report submitted
by the borrower should be scrutinized properly. The monthly stock statement of the month for
which the audited accounts are prepared and submitted should be compared and the reasons for
deviations, if any, should be ascertained.

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(iii) Computation of DP: It needs to be ensured that the drawing power is calculated as per the
extent guidelines formulate by the Board of Directors of the respective bank and agreed upon by
the concerned statutory auditors. Special consideration should be given to proper reporting of
sundry creditors for the purposes of calculating drawing power.
(iv) Stock Audit: The stock audit should be carried out by the bank for all accounts having funded
exposure of more than I 5 crores. Auditors can also advise for stock audit in other cases if the
situation warrants the same. Branches should obtain the stock audit report from lead bank in the
cases where the Bank is not leader of the consortium of working capital. The report submitted by
the stock auditors should be reviewed during the course of the audit and special focus should be
given to the comments made by the stock auditors on valuation of security and calculation of
drawing power.

Question - 8
Compute the Drawing Power for Cash Credit A/c of S Limited for the months of March 2022
with following information;

(Amount in ₹)
Stock 50,000
Debtors 45,000
(Including Debtor of ₹ 5,000 for an invoice dated 17.11.2021)
Sundry creditors 15,000
Sanctioned Limit 45,000

Margin on stock is 20% and on debtors is 50%.

Note: Debtors older than 3 months are ineligible for calculation of DP
[May 2022 (3 Marks)]

Answer:
Computation of Drawing Power:
Computation of Drawing Power for CC A/c of S Ltd.

Particulars of current assets Amount (₹) DP Amt (₹)

(A) Stocks:
Stocks at realizable value 50,000
Less: Unpaid stocks:
- Sundry creditors 15000 15000
Paid for stocks 35000
Margin @ 20% 7000 28000
(B) Debtors:

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 Chapter - 12 : Audit of Banks

Total Debtors 45,000

Less: Ineligible debtors 5000
Eligible debtors 40000
Margin @ 50% 20000 20000
Total Drawing Power 48000

The sanctioned limit given in the question is ₹ 45000 whereas drawing power as per the above working
is ₹ 48000. So, drawing power would be restricted to sanctioned limit i.e., ₹ 45000

Question - 9
After becoming Chartered Accountant, you have got your first assignment as an auditor of a
bank branch dealing in various types of advances. What are the areas which you will be
looking for obtaining sufficient appropriate evidence (for advances) besides studying and
evaluating internal controls? [May 2022 (3 Marks)]

Answer:
Audit Procedure in Audit of Advances in case of Bank Audit: The auditor can obtain sufficient appropriate
audit evidence about advances by study and evaluation of internal controls relating to advances, and
by:
(i) Examining the validity of the recorded amounts;
(ii) Examining loan documentation.
(iii) Reviewing the operation of the accounts;
(iv) Examining the existence, enforceability and valuation of the security;
(v) Checking compliance with RBI norms including appropriate classification and provisioning; and
(vi) Carrying out appropriate analytical procedures.

Multiple Choice Question

1. Banks are generally divided into ________________ broad categorised on the level of
computerisation.
(a) 2
(b) 3
(c) 4
(d) 5
2. Auditor of a nationalised bank is to be appointed by Board of Director, with the previous
approval of _________________.

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(a) RBI
(b) C and AG
(c) Central Government
(d) None of the above.
3. The RBI has advice the banks, before appointing their statutory central/circle/branch
auditors, should obtain a _____________.
(a) Planning Statements
(b) Declaration of indebtedness
(c) Initial Engagements
(d) Initial Engagements
4. _______________ refers to the security offered by the borrower for bank finance or the one
against which credit has been extended by the bank. This security is the principal
security for an advance.
(a) Primary Security
(b) Secondary Security
(c) Collateral Security
(d) None of the above
5. The auditor should examine all large advances while other advances may be examined
on a sampling basis, under the method of:
(a) Substantive Procedures
(b) Compliance Procedures
(c) Sampling procedures
(d) Analytical procedures

Answer (Multiple Choice Questions)

1. (b) 2. (a) 3. (b) 4. (a) 5. (a)

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 Chapter - 13 : Government Audit and Audit of Local Bodies

Chapter - 13
Government Audit and Audit of Local
Bodies
Question - 1
Define Government Audit and explain its objectives. [July 2021 (4 Marks)]

ANSWER:
Government auditing is
 The objective, systematic, professional and independent examination
 of financial, administrative and other operations
 of a public entity
 made subsequently to their execution
 for the purpose of evaluating and verifying them,
 presenting a report continuing explanatory comments on audit findings together with conclusion
and recommendations for future actions
 by the responsible officials
 and in the case of examination of financial statements, expressing the appropriate professional
opinion regarding the fairness of the presentation.
OBJECTIVES of Govt Audit are:
(a) Accounting for Public Funds: Government audit serves as a mechanism or process for public
accounting of government funds.
(b) Appraisal of Government policies: It also provides public accounting of the operational,
management, programme and policy aspects of public administration as well as accountability of
the officials administering them.
(c) Base for Corrective actions: Audit observations based on factual data collection also serve to
highlight the lapses of the lower hierarchy, thus helping supervisory level officers to take corrective
measures.
(d) Administrative Accountability: The main objective of audit is a combination of ensuring
accountability of administration to legislature and functioning as an aid to administration.

Question - 2
What is the function of audit while examining various rules, regulations and orders with regard
Audit against Rules & Orders by C&AG? [Nov 2020 (4 Marks)]
ANSWER:

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Audit against Rules & Orders – Audit against rules and orders aims to ensure that the expenditure
conforms to the relevant provisions of the Constitution and of the laws and rules made there under. It
also seeks to satisfy that the expenditure is in accordance with the financial rules, regulations and orders
issued by a competent authority.
It is the function of the executive government to frame rules, regulations and orders, which are to be
observed by its subordinate authorities. The job of audit is to see that these rules, regulations and orders
are applied properly by the subordinate authorities. It is, however, not the function of audit to prescribe
what such rules, regulations and orders shall be. But, it is the function of audit to carry out examination
of the various rules, regulations and orders issued by the executive authorities to see that:
(a) they are not inconsistent with any provisions of the Constitution or any laws made there under;
(b) they are consistent with the essential requirements of audit and accounts as determined by the
C&AG;
(c) they do not come in conflict with the orders of, or rules made by, any higher authority; and
(d) in case they have not been separately approved by competent authority, the issuing authority
possesses the necessary rule-making power.

Question - 3
In case of Government entities, audit of accounts of stores and inventories has been
developed as a part of expenditure audit. Discuss about the duties and responsibilities
entrusted to C&AG. [Dec 2021(3 Marks)]

ANSWER:
Audit of Accounts of Stores and Inventories in Government Companies:
Audit of the accounts of stores and inventories has been developed as a part of expenditure audit with
reference to the duties and responsibilities entrusted to C&AG. Audit is conducted: -
(i) To ascertain whether the Regulations governing purchase, receipt and issue, custody, sale and
inventory taking of stores are well devised and properly carried out.
(ii) To bring to the notice of the government any deficiencies in quantities of stores held or any defects
in the system of control.
(iii) To verify that the purchases are properly sanctioned, made economical and in accordance with the
Rule for purchase laid down by the competent authority.
(iv) To ensure that the prices paid are reasonable and are in agreement with those shown in the contract
of the supply of stores, and that the certificates of quality and quantity are furnished by the
inspecting and receiving units. Cases of uneconomical purchase of stores and losses attributable to
defective or inferior quality of stores are specifically brough by the audit.
(v) To check the accounts of receipts, issues and balances regarding accuracy, correctness and
reasonableness of balances in inventories with particular reference to the specified norms for level
of consumption of inventory holding. Any excess of idle inventory is specifically mentioned in the
report and periodical verification of inventory is also conducted to ensure their existence. When
priced accounts are maintained, the auditor should see that the prices charged are reasonable and

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 Chapter - 13 : Government Audit and Audit of Local Bodies

have been reviewed from time to time. The valuation of the inventories is seen carefully so that
the value accounts tally with the physical accounts and that adjustment of profits or losses due to
revaluation, inventory taking or other causes is carried out.

Question - 4
The audit of receipts of government is not as old as audit of expenditure but with the rapid
growth of public enterprises audit of receipts tax or non-tax has come to stay. Discuss audit
of receipts with respect to Government Audit. [Nov 2020 (4 Marks)]
ANSWER:
Government auditing in India as elsewhere was primarily expenditure- oriented. Gradually, audit of
receipts-tax and non-tax was taken up.
The audit of receipts is neither all pervasive nor as old as audit of expenditure but has come to stay in
some countries. Such an audit provides for checking;
(i) Whether all revenues or other debts due to government have been correctly assessed, realised and
credited to government account by the designated authorities;
(ii) Whether adequate regulations and procedures have been framed by the department/agency
concerned to secure an effective check on assessment, collection and proper allocation of cases;
(iii) Whether such regulations and procedures are actually being carried out;
(iv) Whether adequate checks are imposed to ensure the prompt detection and investigation of
irregularities, double refunds, fraudulent or forged refund vouchers or other loss of revenue through
fraud or wilful omission or negligence to levy or collect taxes or to issue refunds; and
(v) Review of systems and procedures to see that the internal procedures adequately secure correct
and regular accounting of demands collection and refunds and pursuant of dues up to final
settlement and to suggest improvement. The basic principle of audit of receipts is that it is more
important to look at the general than on the particular, though individual cases of assessment,
demand, collection, refund, etc. Are important within the area of test check. A review of the judicial
decisions taken by tax authorities is done to judge the effectiveness of the assessment procedure.
(vi) The extent and quantum of audit required to be done under each category of audit are determined
by the C&AG. These are neither negotiable nor questioned. The prescribed extent and quantum of
audit are structured in accordance with the design of test check, random sampling, general review,
in-depth study of specified areas, etc .as may be warranted by the nature of transactions, its
importance in the scheme of activities of a department and the totality of its transactions, the
frequency of check and total plan of audit to be executed during a period.
(vii) Institutional mechanism provides for primary check by the auditor, test check by the supervisor and
control and direction by the group leader. Planning, executing and reporting of work is directed
and monitored at middle and top levels of the audit hierarchy. There are built –in arrangements
within the C&AG to ensure that the work assigned to each employee is carried out as prescribed.
(viii) The audit is conducted both centrally where accounts and original vouchers are kept and locally
where the drawing and disbursing functions are performed depending on the organisational and
institutional arrangements obtaining.

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 Chapter - 13 : Government Audit and Audit of Local Bodies

Question - 5
Explain the different types of revenue grants which local bodies may receive.
[Nov 2020 (3 Marks)]

ANSWER:
Local bodies may receive different types of grants from the state administration as well. Broadly, the
revenue grants are of three categories:
(a) General purpose grants: These are primarily intended to substantially bridge the gap between the
needs and resources of the local bodies.
(b) Specific purpose grants: These grants which are tied to the provision of certain services or
performance of certain tasks.
(c) Statutory and compensatory grants: These grants, under various enactments, are given to local
bodies as compensation on account of loss of any revenue on taking over a tax by state government
from local government.

Question - 6
Local Fund Audit Wing of a State Government has appointed you to audit accounts of one of
the Local body governed by it. As an auditor, what will be your reporting areas?
[Nov 2021 (4 Marks)]

ANSWER:
Reporting areas in audit of Local Fund:
The external control of municipal expenditure is exercised by the state governments through the
appointment of auditors to examine municipal accounts, However, the municipal corporations of Delhi,
Mumbai and a few others have power to appoint their own auditor for regular external audit.
The important objectives of audit are:
(i) Reporting on the fairness of the content and presentation of financial statements;
(ii) Reporting upon the strengths and weaknesses of systems of financial control;
(iii) Repotting on the adherence to legal and/or administrative requirements;
(iv) Reporting upon whether value is being fully received on money spent; and
(v) Detection and prevention of error, fraud and misuse of resources.

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Multiple Choice Question

1. Government audit serves as a ______________ for public accounting of government funds.

(a) Mechanism
(b) Process
(c) Auditing
(d) (a) or (b) above
2. NGO’s registered under the Companies Act, 2013 must maintain their books of account
under the _____________ as required by the provisions of Section 128 of the Act.
(a) Cash basis
(b) Accrual basis
(c) Hybrid basis
(d) Either (a) or (b) basis
3. Who determines the scope of the audit as well as the conditions under which it will be
carried out in case of a audit of a sole proprietary firm.
(a) Sole Proprietor
(b) Management of the Sole Proprietary firm
(c) Members of the BOD
(d) None of the above
4. Every LLP is required to file annual return in ____________ with ROC within __________ of
closer of financial year.
(a) Form 10, 30 days
(b) Form 10, 60 days
(c) Form 11, 30 days
(d) Form 11, 60 days
5. In the case of an audit of a charitable institution regarding Grunts:
(a) Vouching the account received with the relevant correspondence, receipts and minute books
(b) Obtaining a certificate from a responsible official showing the amount of grants received.
(c) Both (a) and (b) both
(d) Eighter (a) or (b)
6. Multi-State Co-operative Societies Act, 2002 come into force from
(a) April, 2002
(b) July, 2002
(c) August, 2002

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 Chapter - 13 : Government Audit and Audit of Local Bodies

(d) November, 2002

Answer (Multiple Choice Questions)

1. (d) 2. (b) 3. (a) 4. (d) 5. (c) 6. (c)

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 Chapter - 14 : Audit of NGO

Chapter - 14
Audit of NGO
Question - 1
As an Auditor of NGO, how do you check/verify atleast four receipts of income during the year?
[Jan 2021 (4 Marks)]

ANSWER:
The receipt of income of NGO may be checked on the following lines:
(i) Contributions and Grants for projects and programmes: Check agreements with donors and
grants letters to ensure that funds received have been accounted for. Check that all foreign
contribution receipts are deposited in the foreign contribution bank account as notified under the
Foreign Contribution (Regulation) Act, 1976.
(ii) Receipts from fund raising programmes: Verify in detail the internal control system and
ascertain who are the persons responsible for collection of funds and mode of receipt. Ensure that
collections are counted and deposited in the bank daily.
(iii) Membership Fees: Check fees received with Membership Register. Ensure proper classification is
made between entrance and annual fees and life membership fees. Reconcile fees received with
fees to be received during the year.
(iv) Subscriptions: Check with subscription register and receipts issued. Reconcile subscription
received with printing and dispatch of corresponding magazine/ circulars/periodicals. Check the
receipts with subscription rate schedule.
(v) Interest and Dividends: Check the interest and dividends received and receivable with
investments held during the year.

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 Chapter - 15 : Miscellaneous Audit

Chapter - 15
Miscellaneous Audit
Question - 1
Examine with reasons whether the following statements are correct or incorrect.
Every LLP is required to submit Statement of Account and Solvency in Form 8, which shall be
filed within a period of sixty days from the end of three months of the financial year to which
the Statement of Account and Solvency relates. [Nov 2020 (2 Marks)]

ANSWER:
Incorrect: Every LLP is required to submit Statement of Account and Solvency in Form 8 which shall be
filed within a period of thirty days from the end of six months of the financial year to which the
Statement of Account and Solvency relates.

Question - 2
Tomo Construction Engineering LLP approached CA K to understand various returns to be
maintained and filed by them. Guide/Discuss the various returns to be maintained and filed by
them. [July 2021 (3 Marks)]

ANSWER:
Returns to be maintained and filed by an LLP:
 Every LLP would be required to file annual return in Form 11 with ROC within 60 days of closer of
financial year. The annual return will be available for public inspection on payment of prescribed
fees to Registrar.
 Every LLP is also required to submit Statement of Account and Solvency in Form 8 which shall be
filed within a period of thirty days from the end of six months or the financial year to which the
Statement of Account and Solvency relates.

Question - 3
CA A is appointed as the auditor of a charitable institution. Discuss the audit procedure
undertaken by him while auditing the Subscription and Donation received by the charitable
institution. [Dec 2021 (3 Marks)]

ANSWER:
Audit Procedure in audit of Subscriptions & donations:
Audit Procedure to be undertaken by CA A in respect of Subscriptions and donations received by a
Charitable Institution is:
(i) Ascertaining, if any, the changes made in amount of annual or life membership subscription during
the year.
(ii) Whether official receipts are issued;

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 Chapter - 15 : Miscellaneous Audit

(a) Confirming that adequate control is imposed over unused receipt books;
(b) Obtaining all receipt books covering the period under review;
(c) Test checking the counterfoils with the cash book; any cancelled receipts being specially
looked into;
(d) Obtaining the system of internal check regarding moneys received from box collections, flag
days, etc. and checking the amount received from representatives, with the correspondence
and the official receipts issued; paying special attention to the system of control exercised
over collections and the steps taken to ensure that all collections made have been accounted
for; and
(e) Examining the system of internal check regarding moneys received from box collections, flag
days, etc. and checking the amount received from representatives, with the correspondence
and the official receipts issued; paying special attention to the system of control exercised
over collections and the steps taken to ensure that all collections made have been accounted
for; and
(f) Verifying the total subscription and donations received with any figures published in reports,
etc. issued by the charity.

Question - 4
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.
[July 2021 (4 Marks)]

ANSWER:
Verification of Assets & Liabilities of VJM Schools:
1. Report any old heavy arrears on account of fees, dormitory rents, etc. to the Managing Committee.
2. Confirm that caution money and other deposits paid by students on admission, have been shown
as liability in the balance sheet and not transferred to revenue, unless they are not refundable.
3. See that the investments representing endowment funds for prizes are kept separate and any income
in excess of the prizes has been accumulated and invested along with the corpus.
4. Ascertain that the system ordering inspection on receipt and issue of provisions, food stuffs, clothing
and other equipment is efficient and all bills are duly authorised and passed before payment.
5. Verify the inventories of furniture, stationery, clothing, provision and all equipment etc. These
should be checked by reference to Inventory Register or corresponding inventories of the previous
year and values applied to various items should be test checked.

Question - 5
You have been appointed as an auditor of a health care service provider. Briefly discuss the
special points that should be kept in mind as an auditor for developing an audit programme.
[July 2021 (4 Marks)]

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 Chapter - 15 : Miscellaneous Audit

ANSWER:
The special points to be kept in mind as an auditor for developing and audit programme of healthcare
service provider are:
1. Register of Patients: Auditor to vouch the Register of patients with copies of bills issued to them.
Verify bills for a selected period with the patients’ attendance record to see that the bills have been
correctly prepared. Also see that bills have been issued to all patients from whom an amount was
recoverable according to the rules of the hospital.
2. Collection of Cash: Auditor to check cash collections as entered in the Cash Book with the
receipts, counterfoils and other evidence for example, copies of patients bills, counterfoils of
dividend and other interest warrants, copies of rent bills, etc.
3. Income from Investments, Rent etc: See by reference to the property and Investment Register
that all income that should have been received by way of rent on properties, dividends, and interest
on securities have been collected.
4. Legacies and Donations: Ascertain that legacies and donations received for a specific purpose
have been applied in the manner agreed upon.
5. Reconciliation of Subscriptions: Trade all collections of subscription and donations from the
Cash Book to the respective Registers. Reconcile the total subscriptions due (as shown by the
Subscription Register and the amount collected and that still outstanding).
6. Authorisation and Sanctions: Vouch all purchases and expenses and verify that the capital
expenditure was incurred only with the prior sanction of the Trustees or the Managing Committee
and that appointments and increments to staff have been duly authorised.
7. Grants and TDS: Verify that grants, if any, received from Government or local authority has been
duly accounted for. Also, that refund in respect of taxes deducted at source has been claimed.
8. Budgets: Compare the totals of various items of expenditure and income with the amount
budgeted for them and report to the Trustees or the Managing Committee, significant variations
which have taken place.
9. Internal Check: Examine the internal check as regards the receipt and issue of stores; medicines,
Linen, apparatus, clothing, instruments, etc. so as to insure that purchases have been properly
recorded in the Inventory Register and that issues have been made only against proper
authorisation.
10. Depreciation: See that depreciation has been written off against all the assets at the appropriate
rates.
11. Registers: Inspect the bonds, share scrips, title deeds of properties and compare their particulars
with those entered in the property and Investment Registers.
12. Inventories: Obtain inventories, especially of stocks and stores as at the end of the year and check
a percentage of the items physically; also compare their total values with respective ledger balances.
13. Management Representation and Certificate: Get proper Management Representation and
Certificate with respect to various aspects covered during the course of audit.
Alternative Answer

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 Chapter - 15 : Miscellaneous Audit

Developing the Audit Programme

1. Written Audit Programme: The auditor should prepare a written audit programme setting forth
the procedures that are needed to implement the audit plan.
2. Audit Objective and Instruction to Assistants: The programme may also contain the audit
objectives for each area and should have sufficient details to serve as a set of instructions to the
assistants involved in the audit and as a means to control the proper execution of the work.
3. Reliance on Internal Controls: In preparing the audit programme, the auditor, having an
understanding of the accounting system and related internal controls, may wish to rely on certain
internal controls in determining the nature, timing and extent of required auditing procedures. The
auditor may conclude that relying on certain internal controls is an effective and efficient way to
conduct his audit. However, the auditor may decide not to rely on internal controls when there
are other more efficient ways of obtaining sufficient appropriate audit evidence. The auditor should
also consider the timing of the procedures, the coordination of any assistance expected from the
client, the availability of assistants, and the involvement of other auditors or experts.
4. Timings of Performance of Audit Procedures: The auditor normally has flexibility in deciding
when to perform audit procedures. However, in some cases, the auditor may have no discretion
as to timing, for example, when observing the taking of inventories by client personnel or verifying
the securities and cash balances at the year-end.
5. Audit Planning: The audit planning ideally commences at the conclusion of the previous year’s
audit, and along with the related programme, it should be reconsidered for modification as the
audit progresses. Such consideration is based on the auditor’s review of the internal control, his
preliminary evaluation thereof, and the results of his compliance and substantive procedures.

Question - 6
M/s T & Co. Chartered Accountants, a partnership firm, is appointed as an auditor of treatment
Hospital run by Smile Foundation, a charitable trust. Over and above the receipts of treatment
of patients, during the year trust has received donations from various donors to treat COVID-
19 patients and also incurred some capital expenditure for further development of the
hospital. On some of the investment income, income tax has been deducted. What are the
special points to be considered by M/s T & Co. while auditing such transactions of Treatment
Hospital? [May 2022 (3 Marks)]

Answer:
Audit of a Hospital:
(A) Receipts from treatment of patients
1. Register of Patients: Vouch the Register of patients with copies of bills issued to them. Verify
bills for a selected period with the patients’ attendance record to see that the bills have been
correctly prepared. Also see that bills have been issued to all patients from whom an amount
was recoverable according to the rules of the hospital.
2. Collection of Cash from patents: Check cash collections as entered in the Cash Book with the
receipts, counterfoils and other evidence for example, copes of patient’s bills.

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 Chapter - 15 : Miscellaneous Audit

(B) Donations from donors to treat the patients: Ascertain those legacies and donation received
for a specific purpose have been applied in the manner agreed upon.
(C) Capital Expenditure Incurred: Verify the Capital Expenditure was incurred only with the prior
sanction of the Trustee or the Managing Committee.
(D) Where income-tax has been deducted from the Investment income, it should be seen that a
refund thereof has been obtained since charitable institutions are exempt from payment of Income-
tax. This involves:
(i) Vouching the Income-tax refund with the correspondence with the Income-tax Department;
and
(ii) Checking the calculation of the repayment of claims/refund claim.

Question - 7
You have been appointed as internal auditor of ‘City Club’ in Delhi. The receipts of the club
were 50 lakhs during the previous year ending 2019-20. You are required to mention special
points of consideration while auditing such receipts of the club. [Jan 2021 (4 Marks)]

ANSWER:
The special steps involved, to be considered by the Internal Auditor of City Club in conducting
the audit of receipts of the club are stated below-
(1) Vouch the receipt on account of entrance fees with members’ applications, counterfoils issued to
them, as well as on a reference to minutes of the Managing Committee.
(2) Vouch members’ subscriptions with the counterfoils of receipt issued to them, trace receipts for a
selected period to the Register of Members; also reconcile the amount of total subscriptions due
with the amount collected and that outstanding.
(3) Ensure that arrears of subscriptions for the previous year have been correctly brought over and
arrears for the year under audit and subscriptions received in advance have been correctly
adjusted.
(4) Check totals of various columns of the Register of members and tally them across.
(5) See the Register of Members to ascertain the Member’s dues which are in arrear and enquire
whether necessary steps have been taken for their recovery; the amount considered irrecoverable
should be mentioned in the Audit Report.
(6) Verify the internal check as regards members being charged with the price of foodstuffs and drinks
provided to them and their guests, as well as, with the fees chargeable for the special services
rendered, such as billiards, tennis, etc.

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 Chapter - 16 : Audit of Co-operative Societies

Chapter - 16
Audit of Co-operative Societies
Question - 1
You are appointed as an auditor of co-operative society. State the special features of the co-
operative audit to be borne in mind by the auditor, concerning:
(2) Discussion of draft audit report with the management committee. [Nov 2020 (2 Marks)]

ANSWER:
Discussion of draft audit report with managing committee – On conclusion of the audit, the
auditor should ask the Secretary of the society to convene the managing committee meeting to discuss
the audit draft report. The audit report should never be finalised without discussion with the managing
committee. Minor irregularities may be got settled and rectified. Matters of policy should be discussed
in detail.

Question - 2
You are appointed as an auditor of co-operative society. State the special features of the co-
operative audit to be borne in mind by the auditor, concerning:
(1) Audit classification of society. [Nov 2020 (2 Marks)]

ANSWER:
Audit classification of society - After a judgement of an overall performance of the society, the
auditor has to award a class to the society. This judgement is to be based on the criteria specified by the
Registrar. It may be noted here that if the management of the society is not satisfied about the award of
audit class, it can make an appeal to the Registrar, and the Registrar may direct to review the audit
classification. The auditor should be very careful, while making a decision about the class of society.

Question - 3
State with reasons whether the following statements are correct or incorrect.
The first auditor of a Multi-State co-operative Society will be appointed in Annual General
Meeting. [July 2021 (2 Marks)]

ANSWER:
Incorrect: Section 70 of the Multi-State Co. operative Societies Act, 2002 provides that the first auditor
or auditors of a Multi-State co-operative society shall be appointed by the board within one month of
the date of registration of such society and the auditor or auditors so appointed shall hold office until
the conclusion of the first annual general meeting. if the board fails to exercise its powers under this sub-
section, the Multi-State Co-operative Society in the general meeting may appoint the first auditor or
auditors.

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 Chapter - 17 : SA and Guidance Notes

Chapter - 17
SA and Guidance Notes
Question - 1
XYZ Ltd. which is in the business of trading of automobile components is following Cash Basis
of Accounting for sale of spare parts. As Statutory Auditor of XYZ Ltd. explain the reporting
requirements, manner of qualification and disclosure, if any, to be made in the auditor’s report
in line with AS-1 ‘Disclosure of Accounting Policies’. [Jan 2021 (3 Marks)]

ANSWER:
Reporting requirements, Manner of qualification and disclosure to be made in the auditor’s
report in line with AS 1, “Disclosure of Accounting Policies” are given hereunder :
In the case of a company, members should qualify their audit reports in case –
(a) Accounting policies required to be disclosed under Schedule III or any other provisions of the
Companies Act, 2013 have not been disclosed, or
(b) Accounts have not been prepared on accrual basis, or
(c) The fundamental accounting assumption of going concern has not been followed and this fact has
not been disclosed in the financial statements, or
(d) Proper disclosures regarding changes in the accounting policies have not been made.
Where a company has been given a specific exemption regarding any of the matters stated above but
the fact of such exemption has not been adequately disclosed in the accounts, the member should
mention the fact of exemption in his audit report without necessarily making it a subject matter of audit
qualification.
In view of the above, the auditor will have to consider different circumstances whether the audit report
has to be qualified or only disclosures have to be given.
In making a qualification / disclosure in the audit report, the auditor should consider the materiality of
the relevant item. Thus, the auditor need not make qualification / disclosure in respect of items which,
in his judgement, are not material.
A disclosure, which is not a subject matter of audit qualification, should be made in the auditor’s report
in a manner that it is clear to the reader that the disclosure does not constitute an audit qualification.
The paragraph containing the auditor’s opinion on true and fair view should not include a reference to
the paragraph containing the aforesaid disclosure.

Question - 2
Statutory Auditors of TRB Ltd. observed various instances when either the TDS required to be
deducted has not been deducted or deducted at lower than prescribed rates resulting in non-
compliance of Income Tax provisions. Besides this, non-compliance under other acts like
Labour Laws was also noticed by the auditor. What type of policies and procedures will you

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 Chapter - 17 : SA and Guidance Notes

implement to assists in prevention and detection of non-compliance with laws and

regulations? [Dec 2021 (4 Marks)]

ANSWER:
Types of polices and procedures to assist prevention and detection of non – compliance with
laws & regulation:
The following are examples of the types of policies and procedures, TRB Ltd may implement to assist in
the prevention and detection of non-compliance with laws and regulations:
(i) Monitoring legal requirements and ensuring that operating procedures are designed to meet these
requirements.
(ii) Instituting and operating appropriate systems of internal control.
(iii) Developing, publicizing and following a code of conduct.
(iv) Ensuring employees are properly trained and understand the code of conduct.
(v) Monitoring compliance with the code of conduct and acting appropriately to discipline employees
who fail to comply with it.
(vi) Engaging legal advisors to assists in monitoring legal requirements.
(vii) Maintaining a register of significant laws and regulations with which the entity has to comply within
its particular industry and a record of complaints.

Question - 3
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. [Nov 2020 (4 Marks)]

ANSWER:
Determining materiality involves the exercise of professional judgment. A percentage is often applied to
a chosen benchmark as a starting point in determining materiality for the financial statements as a whole.
Factors that may affect the identification of an appropriate benchmark include the following:
 The elements of the financial statements (Example - Assets, liabilities, equity, revenue, expenses);
 Whether there are items on which the attention of the users of the particular entity’s financial
statements tends to be focused (Example - For the purpose of evaluating financial performance users
may tend to focus on profit, revenue or net assets)
 The nature of the entity, where the entity is at in its life cycle, and the industry and economic
environment in which the entity operates;
 The entity’s ownership structure and the way it is financed and (Example - If an entity is financed
solely by debt rather than equity, users may put more emphasis on assets, and claims on them, than
on the entity’s earnings;)
 The relative volatility of the benchmark.

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 Chapter - 17 : SA and Guidance Notes

Question - 4
Examine with reasons whether the following statements are correct or incorrect.
External confirmation procedures are restricted to the items of addressing assertions
associated with account balances & their elements only. [Nov 2020 (2 Marks)]

ANSWER:
Incorrect: External confirmation procedures frequently are relevant when addressing assertions
associated with certain account balances and their elements. However, external confirmation need not
be restricted to account balances only.

Question - 5
CA Rohit is appointed as an auditor of Grace Ltd., he wants to design a suitable confirmation
request letter for a few debtors of Grace Ltd. As a senior auditor of the firm, explain to him
with reference to SA 505 "External Confirmation" all the conditions that should be present to
use Negative Confirmation requests as the sole substantive audit procedure to address an
assessed risk of material misstatement at the assertion level.
[July 2021 (4 Marks)]

ANSWER:
Negative confirmations is a request that the confirming party respond directly to the auditor only if
the confirming party disagrees with the information provided in the request. Negative information
provide less persuasive audit evidence than positive confirmations. Accordingly, CA Rohit, Auditor of
Grace Ltd, shall not use negative confirmation requests as the sole substantive audit procedure to address
an assessed risk of material misstatement at the assertion level unless all of the following are present:
(a) The auditor has assessed the risk of material misstatement as low and has obtained sufficient
appropriate audit evidence regarding the operating effectiveness of controls relevant to the
assertion;
(b) The population of items subject to negative confirmation procedures comprises a large number of
small, homogeneous, accounts balances, transactions or conditions;
(c) A very low exception rate is expected; and
(d) The auditor is not aware of circumstances or conditions that would cause recipients of negative
confirmation requests to disregard such requests.

Question - 6
State with reasons whether the following statements are correct or incorrect.
In the context of related parties, the potential effects of inherent limitations on the auditor’s
ability to detect material misstatements are greater.

ANSWER:
Correct: In the context of related parties, the potential effects of inherent limitations on the auditor’s
ability to detect material misstatements are greater for such reasons as the following:
• Management may be unaware of the existence of all related party relationships.

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 Chapter - 17 : SA and Guidance Notes

• Related party relationships may present a greater opportunity for collusion, concealment or
manipulation by management.

Question - 7
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? [July 2021 (4 Marks)]

ANSWER:
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 require adjustment of, or disclosure in, the financial statements have been identified.
The auditor is not, however, expected to perform additional audit procedure on matters to which
previously applied audit procedures have provided satisfactory conclusions.
The auditor shall perform the procedures required above so that they cover the period from the date of
the financial statements to the date of the auditor’s report, or as near as practicable thereto. The auditor
shall take into account the auditor’s risk assessment which shall include the following:
(a) Obtaining an understanding of any procedures management has established to ensure that
subsequent events are identified.
(b) Inquiring of management and, where appropriate, those charged with governance as to whether
any subsequent events have occurred which might affect the financial statements.
(c) Reading minutes, if any, of the meetings, of the entity’s owners, management and those charged
with governance, that have been held after the date of the financial statements and inquiring about
matters discussed at any such meetings for which minutes are not yet available.
(d) Reading the entity’s latest subsequent interim financial statements, if any.

Question - 8
Management's assessment of the entity's ability to continue as a going concern involves
making a judgement about inherently uncertain future outcomes of events or conditions.
What are relevant factors to that judgement? [Jan 2021 (4 Marks)]

ANSWER:
Management’s assessment of the entity’s ability to continue as a going concern involves making a
judgment, at a particular point in time, about inherently uncertain future outcomes of events or
conditions. The following factors are relevant to that judgment:
• The degree of uncertainty associated with the outcome of an event or condition increases
significantly the further into the future an event or condition or the outcome occurs. For that reason,
most financial reporting frameworks that require an explicit management assessment specify the
period for which management is required to take into account all available information.

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 Chapter - 17 : SA and Guidance Notes

• The size and complexity of the entity, the nature and condition of its business and the degree to
which it is affected by external factors affect the judgment regarding the outcome of events or
conditions.
• Any judgment about the future is based on information available at the time at which the judgment
is made. Subsequent events may result in outcomes that are inconsistent with judgments that were
reasonable at the time they were made.

Question - 9
Explain the objectives of the auditor regarding written representations.
[Jan 2021 (3 Marks)]

ANSWER:
The objectives of the auditor regarding written representation:
(i) To obtain written representations
To obtain written representations from management. Also that management believes that it has
fulfilled its responsibility for the preparation of the financial statements and for the completeness
of the information provided to the auditor;
(ii) To support other evidence
To support other audit evidence relevant to the financial statements or specific assertions in the
financial statements by means of written representations; and
(iii) To respond appropriately
To respond appropriately to written representations provided by management or if management
does not provide the written representations requested by the auditor.

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