Inter Audit QB Addendum

Index
Ch No. Chapter Page No.
1 Introduc+on to Audit
Basics 1
SA 210 3
SQC-1/SA 220 4
2 Audit Planning 5
3 Audit Documenta+on 6
4 Risk Assessment & Internal Control 7
6 Materiality
SA 530 8
SA 450 9
7 Automated Environment 9
8 SA 500 10
SA 501 10
SA 510 11
9 SA 560 11
SA 570 12
SA 580 13
12 Audit Report 13
13 CARO 2020 14
14 Bank Audit 15
15 Government Audit 16
17 Audit of Different Types of En++es 16
18 Audit of Items of Financial Statements 17
19 Internal Audit & SA 610 21
CA Inter Audit QB Addendum
Ch-1 Introduction to Audit
1. Nature of financial repor2ng itself is one of causes of inherent limita2ons of audit of financial statements. Explain.
[MTP II May’24]

Prepara2on of financial statements involves making many judgments by management. These judgments may involve
subjec2ve decisions or a degree of uncertainty. Therefore, auditor may not be able to obtain absolute assurance that
financial statements are free from material misstatements due to frauds or errors.

One of the premises for conduc2ng an audit is that management acknowledges its responsibility of prepara2on of
financial statements in accordance with applicable financial repor2ng framework and for devising suitable internal
controls. However, such controls may not have operated to produce reliable financial informa2on due to their own
limita2ons.

Therefore, nature of financial repor2ng itself is one of causes inherent limita2ons of audit.

2. The auditor carries out his work by obtaining audit evidence through performance of audit procedures. However,
there are prac2cal and legal limita2ons on ability of auditor to obtain audit evidence. Give one example each for
such prac2cal and legal limita2ons. [MTP-1 May’24]

Example of prac2cal limita2on on ability of auditor to obtain audit evidence

An auditor does not test all transac2ons and balances. He forms his opinion only by tes2ng samples. It is an example
of prac2cal limita2on on auditor’s ability to obtain audit evidence.

Example of legal limita2on on ability of auditor to obtain audit evidence

Management may not provide complete informa2on as requested by auditor. There is no way by which auditor can
force management to provide complete informa2on as may be requested by auditor. In case he is not provided with
required informa2on, he can only report. It is an example of legal limita2on on auditor’s ability to obtain audit
evidence.

3. The auditor should decide whether relevant informa2on is properly disclosed in the financial statements. Explain
with reference to scope of audit. [MTP-1 May’24]

The auditor should decide whether relevant informa2on is properly disclosed in the financial statements.

He should also keep in mind applicable statutory requirements in this regard. It is done by ensuring that financial
statements properly summarize transac2ons and events recorded therein and by considering the judgments made
by management in prepara2on of financial statements.

The management responsible for prepara2on and presenta2on of financial statements makes many judgments in this
process of preparing and presen2ng financial statements.

For example, choosing of appropriate accoun2ng policies in rela2on to various accoun2ng issues like choosing method
of charging deprecia2on on fixed assets or choosing appropriate method for valua2on of inventories.

The auditor evaluates selec2on and consistent applica2on of accoun2ng policies by management; whether such a
selec2on is proper and whether chosen policy has been applied consistently on a period-to-period basis.

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4. KST Limited is engaged in manufacturing business. It appoints CA T to provide it an assurance report on its
financial statements prepared on the basis of historical financial informa2on. The characteris2c of such an
engagement is that it involves gathering of sufficient appropriate evidence on basis of which limited conclusions can
be drawn up by prac22oner. Iden2fy type of engagement. Which are two other features of such an engagement?

As given above, the engagement involves gathering of sufficient appropriate evidence on the basis of which limited
conclusion can be drawn up. It is a limited assurance engagement like review.
Other two features of such type of engagement are: -
1. It provides lower level of assurance than reasonable assurance engagement.
2. It performs fewer procedures than reasonable assurance engagement.

5. M Motors Ltd is a leading Indian automobile manufacturer with many offerings across commercial, passenger
and electric vehicles. The Company is pioneering India’s electric vehicle transi2on and enjoys considerable
advantage in one of the fastest growing automo2ve markets.

GR & Associates have been appointed as its statutory auditors for financial year 2022-23. J and K are newly
appointed audit assistants in the firm and are part of engagement team cons2tuted for purpose of audit of M
Motors Ltd. However, they are confused about what such an audit tends to achieve. They perceive audit as a
guarantee against possible errors or frauds in financial statements. Do you agree with percep2on of both the
assistants? In this context, outline objec2ves of an independent audit conducted in accordance with Standards on
Audi2ng. [RTP May’24]

In conduc2ng audit of financial statements, objec2ves of auditor in accordance with SA-200 “Overall Objec2ves of the
Independent auditor and the conduct of an audit in accordance with Standards on Audi2ng” are: -

a) 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 repor2ng
framework; and
b) To report on the financial statements, and communicate as required by the SAs, in accordance with the auditor’s
findings.

An analysis of above brings out following points clearly: -

(1) Auditor’s objec2ve is to obtain a reasonable assurance whether financial statements as a whole are free from
material misstatement whether due to fraud or error. Reasonable assurance is to be dis2nguished from absolute
assurance. Absolute assurance is a complete assurance or a guarantee that financial statements are free from material
misstatements. However, reasonable assurance is not a complete guarantee. Although it is a high-level of assurance
but it is not complete assurance.

Audit of financial statements is carried out by the auditor with professional competence and skills in accordance with
Standards on Audi2ng. Audit procedures are applied in accordance with SAs, audit evidence is obtained and
evaluated. On the basis of that, conclusions are drawn and opinion is formed. It leads to high level of assurance which
is called as reasonable assurance but it is not absolute assurance.

(2) Misstatements in financial statements can occur due to fraud or error or both. The auditor seeks to obtain
reasonable assurance whether financial statements as a whole are free from material misstatements caused by fraud
or error. He has to see effect of misstatements on financial statements as a whole, in totality.
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(3) Obtaining reasonable assurance that financial statements as a whole are free from material misstatements enables
the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial repor2ng framework.

(4) The opinion is reported and communicated in accordance with audit findings through a wri_en report as required
by Standards on Audi2ng.

Therefore, percep2on of both assistants is not proper. Auditor of financial statements does not seek to provide
guarantee that financial statements are free from material misstatements caused by frauds or errors. He obtains
reasonable assurance.

SA 210
1. The auditor shall agree the terms of the audit engagement with management or those charged with governance,
as appropriate. The agreed terms of the audit engagement shall be recorded in an audit engagement le_er or other
suitable form of wri_en agreement. Who gives engagement le_er to whom and what is included in such a le_er?

The audit engagement leXer is sent by the auditor to his client. It is in the interest of both the auditor and the client
to issue an engagement leXer so that the possibility of misunderstanding is reduced to a great extent.

Such a leXer includes:

a) The objec2ve and scope of the audit of the financial statements
b) The responsibili2es of the auditor
c) The responsibili2es of management
d) Iden2fica2on of the applicable financial repor2ng framework for the prepara2on of the financial statements and
e) Reference to the expected form and content of any reports to be issued by the auditor and a statement that
there may be circumstances in which a report may differ from its expected form and content.

2. CA X has been offered audit of financial statements of TDK Industries, a partnership firm. Prior to accep2ng
proposed offer, he insists upon obtaining an agreement of management regarding acknowledgment of its
responsibility of having a proper process in place to ensure that financial statements prepared are free from material
misstatements. However, management is of the view that it is auditor’s duty to detect material misstatements in
financial statements and such an insistence by auditor is totally uncalled for. Whose view is proper? Also discuss
reasons for arriving at your conclusion. What should be likely proper course of ac2on for CA X in above situa2on?
[RTP May’24]

SA 210 deals with the auditor’s responsibili2es in agreeing the terms of the audit engagement with management and,
where appropriate, those charged with governance. This includes establishing that certain precondi2ons for an audit,
responsibility for which rests with management and, where appropriate, those with governance, are present.

The objec2ve of the auditor is to accept or con2nue an audit engagement only when the basis upon which it is to be
performed has been agreed, through:
A. Establishing whether the precondi2ons for an audit are present and
B. Confirming that there is a common understanding between the auditor and management and, where
appropriate, those charged with governance of the terms of the audit engagement.

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One of the precondi2ons for an audit is to obtain the agreement of management that it acknowledges and
understands its responsibility for prepara2on of financial statements and for such internal control as is necessary to
enable prepara2on of financial statements that are free from material misstatements.

In the given situa2on, CA X is insis2ng only upon obtaining agreement of management regarding acknowledgment of
its responsibility for internal control to enable prepara2on of financial statements that are free from material
misstatements in accordance with SA 210. Design, implementa2on and maintenance of internal control to ensure
prepara2on of reliable financial statements that are free from material misstatements is management’s responsibility.
He is insis2ng on obtaining agreement of management regarding acknowledgment of its responsibility.

Therefore, CA X’s view is proper. In case management does not provide such agreement acknowledging its
responsibility, the auditor shall not accept proposed audit engagement unless required by law or regula2on.

SQC-1/SA 220
1. CA Tripad (engagement partner) based at New Delhi is external auditor of Lap of Nature, a firm, since last three
years. The firm is engaged in business of providing tourism services including holiday packages to its club members.
It has also provided auditor including his team members free holiday for a week every year in one of its premium
resorts in Ooty in the State of Tamil Nadu. The company has also booked free air travel for engagement team
members during all these years. Discuss why Chartered Accountant is not ac2ng ethically. How are familiarity
threats created in above situa2on? [MTP-1 May’24]

The firm is providing free hospitality to engagement team members including engagement partner. In such
circumstances, fundamental principles governing professional ethics are violated. Such acts of free hospitality are
capable of impairing objec2vity of auditor.

The situa2on given in the ques2on signifies that auditors have formed rela2onships with client where they may end
up being too sympathe2c to the client’s interests.

Due to free hospitality enjoyed by engagement team members, they may take a sympathe2c view to issues which
may have arisen during course of audit. In this way, familiarity threats are created in the situa2on.

2. SQC 1 dwells upon engagement quality control review (EQCR) as part of system of quality control in a firm. Why
is such a review required? For which type of engagements EQCR is mandatory? What should be approach of firm
for engagements for which EQCR is not mandatory?

Significant judgments made in an engagement should be reviewed by an engagement quality control reviewer for
taking an objec2ve view before the report is issued.

Engagement quality control review is mandatory for all audits of financial statements of listed en22es.

In respect of other engagements, firm should devise criteria to determine cases requiring performance of engagement
quality control review.

3. An engagement partner takes overall responsibility for maintaining audit quality in an audit engagement in
accordance with SA 220. What are his objec2ves in taking and emphasizing such responsibility? [MTP-1 May’24]

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Leadership responsibility of an engagement partner is to take responsibility for the overall quality on each audit
engagement. The ac2ons of the engagement partner and appropriate messages to the other members of the
engagement team, in taking responsibility for the overall quality on each audit engagement, emphasise-

(a) The importance to audit quality of:

i) Performing work that complies with professional regulatory and legal requirements
ii) Complying with the firm’s quality control policies and procedures as applicable
iii) Issuing auditor’s reports that are appropriate in the circumstances and
iv) The engagement team’s ability to raise concerns without fear of reprisals.

(b) The fact that quality is essen2al in performing audit engagements.

4. “SA 220 is premised on the basis that the firm is subject to SQC 1”. What do you understand by given statement
in context of audit quality? [RTP May’24]

Audit quality is essen2al to maintain confidence in the independent assurance provided by the auditors. It is
responsibility of auditor to maintain high audit quality.

SQC 1 and SA 220 both deal with quality control. SQC 1 applies to en2re firm. However, SA 220 applies to a par2cular
audit engagement.

Based upon quality control system of firm established in accordance with requirements of SQC 1, quality control
policies pertaining to audit engagements are decided by engagement teams. Engagement partner of a team is
responsible for quality control procedures of a par2cular audit engagement in accordance with SA 220.

Therefore, SA 220 is premised on the basis that the firm is subject to SQC 1. Within the context of the firm’s system
of quality control, engagement teams have a responsibility to implement quality control procedures that are applicable
to the audit engagement.

Ch-2 Audit Planning

1. The auditor needs to direct efforts of engagement team towards ma_ers that in his professional judgment are
significant. Preliminary iden2fica2on of material classes of transac2ons, account balances and disclosures help
auditor in establishing overall audit strategy. More energies need to be devoted to significant ma_ers to obtain
desired outcomes. Give three examples to explain the above situa2on. [MTP II May’24]

The auditor needs to direct efforts of engagement team towards maXers that in his professional judgment are
significant. Preliminary iden2fica2on of material classes of transac2ons, account balances and disclosures helps
auditor in establishing overall audit strategy. More energies need to be devoted to significant maXers to obtain desired
outcomes.

Few examples are listed as under: -

• Volume of transac2ons which may determine whether it is more efficient for the auditor to rely on internal
control
• Significant industry developments such as changes in industry regula2ons and new repor2ng requirements.
• Significant changes in the financial repor2ng framework, such as changes in accoun2ng standards.
• Other significant relevant developments, such as changes in the legal environment affec2ng the en2ty.

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2. Preliminary engagement ac2vi2es include certain ac2vi2es to be performed by an auditor while planning an
audit. Discuss such ac2vi2es briefly. How performing such ac2vi2es assists an auditor? [RTP May’24]

Preliminary engagement ac2vi2es include following ac2vi2es: -

a) Performing procedures regarding the con2nuance of the client rela2onship
b) Evalua2ng compliance with ethical requirements, including independence
c) Establishing an understanding of terms of engagement

Performing preliminary engagement ac2vi2es assists auditor in iden2fying and evalua2ng events or circumstances that
may affect auditor’s ability to plan and perform audit engagement.
3. The assistant of CA K is assigned responsibility of drajing “audit programme” rela2ng to purchases appearing in
financial statements of “Broad Industries”, a partnership firm. The said firm is a GST registered tax payer and is
engaged in manufacturing of packing boxes from a special type of paper taxable under GST. Help him by drajing a
sample audit programme for purchases. [RTP May’24]

Name of Concern : Broad Industries

Financial Year : 20XX-XX
Prepared by : Name of person with date
Reviewed by : Name of person with date
Approved by : Name of person with date

S No. Nature of procedure Extent of check Basis of sample Done by

a) Vouch few purchase invoices of paper from purchase
records of concern.
b) Trace these invoices into account books of concern.
c) Verify few purchase invoices of paper on GST portal.
d) Trace few purchase invoices of paper in stock records to
ensure that these have been added to stocks of raw
material.

Ch-3 Audit Documentation

1. What is meant by audit documenta2on? What are objec2ves of an independent auditor in accordance with SA
230? [MTP I May’24]

Audit documenta2on refers to the record of audit procedures performed, relevant audit evidence obtained, and
conclusions the auditor reached.

The objec2ve of the auditor in accordance with SA 230 is to prepare documenta2on that provides: -
i) A sufficient and appropriate record of the basis for the auditor’s report and
ii) Evidence that the audit was planned and performed in accordance with SAs and applicable legal and regulatory
requirements.

2. Rajni, a CA student, has understood that SA 230 requires auditor to prepare audit documenta2on on a 2mely
basis. While reading about SQC 1, she no2ces that 2me limit for comple2on of final audit file is ordinarily not more
than 60 days ajer the date of auditor’s report. She finds it to be puzzling. Unable to comprehend, she seeks your
guidance. Guide her. [RTP May’24]
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SA 230 requires auditor shall prepare audit documenta2on on a 2mely basis. Preparing sufficient and appropriate
audit documenta2on on a 2mely basis helps to enhance quality of audit & facilitates effec2ve review & evalua2on of
audit evidence obtained & conclusions reached before auditor’s report is finalized.

SQC 1, however, requires auditor to complete assembly of final audit file in ordinarily not more than 60 days ager
date of auditor’s report.

Comple2on of the assembly of final audit file ager date of the auditor’s report is only administra2ve process that does
not involve performance of new audit procedures or drawing of new conclusions.

Therefore, auditor shall prepare documenta2on on 2mely basis. However, comple2on of assembly of final audit file
which is an administra2ve process, 2me period of 60 days ager date of auditor’s report has been required in SQC 1.

Ch-4 RAIC
1. Internal Control Ques2onnaire is a comprehensive series of ques2ons concerning internal control. A company is
engaged in business of manufacturing of chemicals. It has two plant loca2ons in city “A” and one plant loca2on in
city “B” involving huge value of assets. Building at three loca2ons is owned by the company. The company earns
handsome profits and does not want to suffer losses due to business interrup2ons. It has a dedicated department
for looking ajer insurance ma_ers. As an auditor, prepare an internal control ques2onnaire concerning this
department for obtaining staff responses. [MTP II May’24]

Internal Control Ques2onnaire

• Are compe22ve quotes obtained from different insurers?
• Is comprehensive insurance cover obtained for fire, flood, burglary, earthquake risks etc.?
• Are all three loca2ons in city A and B covered?
• Are all assets consis2ng of building, plant & machinery and inventories covered?
• Is there an adequate procedure to ensure that assets acquired between two renewal dates are also covered
by insurance?
• Is there an official who decides on value for which policies are taken?
• Does officer who decides on policy value review periodically adequacy of insurance cover?
• Is loss-of-profits insurance cover taken?
• Have there been any instances of rejec2on of claims?
• Are pending claims followed-up with insurers?

2. Satranga Foods Private Limited is engaged in manufacturing of pickles. The auditors of the company have planned
audit procedures in respect of recogni2on of revenues of the company. Despite that, there is a possibility that
misstatements in revenue recogni2on are not iden2fied by planned audit procedures. Iden2fy and explain that
par2cular risk in detail. [RTP May’24]

There is a possibility that planned audit procedures may not achieve desired result and fail to detect misstatements
in revenue recogni2on. Such a risk is referred to as “detec2on risk”.

SA 200 defines detec2on risk as the risk that the procedures performed by the auditor to reduce audit risk to an
acceptably low level will not detect a misstatement that exists and that could be material, either individually or when
aggregated with other misstatements. For example, auditor of a company uses certain audit procedures for the
purpose of obtaining audit evidence and reducing audit risk, but s2ll there will remain a risk that audit procedures
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used by the auditor may not be able to detect a misstatement which by nature is material, then that risk is known as
detec2on Risk.

Detec2on risk comprises sampling and non-sampling risk.

(a) Sampling risk is the risk that the auditor’s conclusion based on a sample may be different from the conclusion if
the en2re popula2on were subjected to the same audit procedure. It simply means that the sample was not
representa2ve of the popula2on from which it was chosen.

(b) Non-sampling risk is the risk that the auditor reaches an erroneous conclusion for any reason not related to
sampling risk. Like an auditor may reach an erroneous conclusion due to applica2on to some inappropriate audit
procedure.

Ch-6 Materiality
SA 530
Sanjeev, an ar2cled clerk in an audit firm, is part of an engagement team conduc2ng audit of a company for year
2023-24. It is a small company having a turnover of about ₹25 crores. During the course of audit, he no2ces that
senior team member has taken following approach for selec2ng items for tes2ng reflected in financial statements
to obtain audit evidence: -
• He has selected to test items debited under the head “Machinery repair & maintenance” as expenditure
rela2ng to it during year 23-24 has increased considerably as compared to last year.
• Out of purchases, he has selected to test purchases from related par2es amoun2ng to ₹ 5 crores.
• He has also selected to test all individual items of expenditure exceeding ₹5 lakhs.
• Besides, he has also selected amount of ₹0.50 lakhs debited under head “legal expenses” to know purpose of
payment made to external legal counsel.

Sanjeev understands that senior team member is using “audit sampling” for selec2ng items for tes2ng. Do you agree
with him? Which risk is involved in above approach? Discuss with reasons. [MTP II May’24]

Audit Sampling refers to the applica2on of audit procedures to less than 100% of items within a popula2on relevant
under the audit such that all sampling units (i.e. all the items in the popula2on) have an equal chance of selec2on.

In the given situa2on, senior team member is not selec2ng items for tes2ng by means of audit sampling. He is only
selec2ng specific items from a popula2on.

In accordance with SA 500, one of the means available to auditor for selec2ng items for tes2ng is “by selec2ng specific
items.”

Specific items selected may include: -

• High value or key items: The auditor may decide to select specific items within a popula2on because they are of
high value, or exhibit some other characteris2c, for example, items that are suspicious, unusual, par2cularly risk-
prone or that have a history of error.
• All items over a certain amount: The auditor may decide to examine items whose recorded values exceed a
certain amount so as to verify a large propor2on of the total amount of a class of transac2ons or account balance.
• Items to obtain informa2on: The auditor may examine items to obtain informa2on about maXers such as the
nature of the en2ty or the nature of transac2ons.

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Therefore, Sanjeev’s understanding is not proper. The above approach for selec2ng items for tes2ng is subject to
non-sampling risk.

Non-sampling risk is the risk that auditor may reach an erroneous conclusion for any reason not related to sampling
risk. Like, erroneous conclusion may be reached due to some inappropriate audit procedure.

SA 450
Up and High Private Limited has started its export business during the year 2023-24. The company was catering to
domes2c market only in past years. CA H, statutory auditor of the company, is of the view that the company has
understated its revenue by ₹ 50.00 lacs in the year 2023-24 by not complying with requirements of AS 9 rela2ng to
revenue recogni2on.
i) Discuss responsibili2es of statutory auditor to communicate with management in the above situa2on in
accordance with SA 450. Also explain the usefulness of such communica2on.
ii) If management refuses to correct misstatement as communicated by the statutory auditor, how should he
proceed? [MTP-1 May’24]

The above situa2on is an example of misstatement rela2ng to noncompliance with requirements of AS 9 iden2fied
during audit. In accordance with requirements of SA 450, the auditor shall communicate on a 2mely basis all
misstatements accumulated during the audit with the appropriate level of management, unless prohibited by law or
regula2on. The auditor shall request management to correct those misstatements.

Timely communica2on of misstatements to the appropriate level of management is important as it enables

management to evaluate whether the items are misstatements, inform the auditor if it disagrees and take ac2on as
necessary. The correc2on by management of all misstatements, including those communicated by the auditor, enables
management to maintain accurate accoun2ng books and records and reduces the risks of material misstatement of
future financial statements because of the cumula2ve effect of immaterial uncorrected misstatements related to prior
periods.

If management refuses to correct some or all of the misstatements communicated by the auditor, the auditor shall
obtain an understanding of management’s reasons for not making the correc2ons and shall take that understanding
into account when evalua2ng whether the financial statements as a whole are free from material misstatement.

Ch-7 Automated Environment

Given below is a table containing Column A and Column B. Column A contains descrip2on of certain controls in an
automated environment. Complete Column B by sta2ng appropriate type of control.
Column A (Descrip2on of control in an automated environment) Column B (Type of Control?)
1. Reasonableness checks ?
2. Controls over Data centre and network opera2ons ?
3. Controls over applica2on system acquisi2on, development and ?
maintenance
4. Program change controls ?

1 Applica2on Controls
2,3,4 General IT Controls

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Ch-8 [SA 500/501/505/510]

SA 500
Suni2, a CA student, is part of an engagement team conduc2ng audit of a company TIM Private Limited. According
to audit programme, she is responsible for verifying purchases and PPE items appearing in books of accounts from
records/bills of company. Besides, she has also been entrusted responsibility to obtain wri_en representa2on from
management regarding carrying out of physical verifica2on of inventories during the year. During course of her
work, she finds that:
i) One purchase bill amoun2ng to ₹ 5.00 lacs pertaining to TIM Industries has been entered in books of TIM
Private Limited.
ii) The management has refused to provide a wri_en representa2on rela2ng to physical verifica2on of inventories
during the year. She has brought it to knowledge of engagement partner who has decided to use lack of such a
representa2on as audit evidence.
Discuss whether each of above cons2tutes audit evidence. State reasoning for your answer.

Audit evidence comprises both informa2on that supports and corroborates management’s asser2ons, and any
informa2on that contradicts such asser2ons. Purchase bill of ₹ 5.00 lacs pertaining to TIM Industries has been entered
in books of TIM Private Limited. Therefore, it is contradic2ng management’s asser2on rela2ng to occurrence of such
purchases. Hence, it cons2tutes audit evidence.

Further, the absence of informa2on (for example, management’s refusal to provide a requested representa2on) is
used by auditor, and therefore, also cons2tutes audit evidence. In the given case, management has refused to provide
a wriXen representa2on rela2ng to physical verifica2on of inventories during the year. Therefore, absence of
informa2on is used by auditor and it also cons2tutes audit evidence.

SA 501
While performing statutory audit of Contra Industries Private Limited, a company engaged in manufacturing and
assembling of LED lights, CA Varun has decided to a_end physical inventory count process of the company on 30th
and 31st March, 2024. The inventories are lying at three different loca2ons - two such loca2ons A and B are in one
city and third loca2on C is in another city. Further, company also sends inventories to some service providers for
quality control and tes2ng as such facili2es are not available with the company. CA Varun is well-versed with this
type of industry and has prepared a list of following ma_ers which could be relevant to him in planning a_endance
at physical inventory count process for discharging his responsibili2es in accordance with SAs: -
• Nature of inventories i.e. LED light components, parts, circuits, panels, body, WIP and finished packed LED lights
• Materiality of inventories at different loca2ons A, B and C
• Stage of comple2on of work-in-progress • Maintenance of perpetual inventory system by company
• Materiality of inventories lying with service providers
• Timing of physical inventory coun2ng i.e. year end

There are two important ma_ers which do not find place in above list. Without considering these crucial ma_ers, it
would be difficult for the auditor to properly plan his a_endance at inventory count process in accordance with
relevant SA. Discuss such ma_ers.

The list given in the ques2on does not contain following important maXers: -
• Whether adequate procedures are expected to be established and proper instruc2ons issued for physical
inventory coun2ng. The auditor has to evaluate management’s instruc2ons for recording and controlling physical

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inventory coun2ng. It is important for the auditor to know beforehand how the inventory count will be conducted
so as to assess its effec2veness.
• The nature of internal control related to inventories at different loca2ons. It is possible that inventories at one
loca2on have unsa2sfactory control leading to higher risk of material misstatement related to inventories at that
par2cular loca2on.

SA 510
In an ini2al audit engagement, in the case of inventories, the current period’s audit procedures on the closing
inventory balance provide li_le audit evidence regarding inventory on hand at the beginning of the period.
Therefore, in such a case, addi2onal audit procedures become necessary so that auditor may obtain sufficient
appropriate audit evidence. Discuss those addi2onal audit procedures.

In an ini2al audit engagement, in the case of inventories, the current period’s audit procedures on the closing
inventory balance provide li_le audit evidence regarding inventory on hand at the beginning of the period.
Therefore, addi2onal audit procedures may be necessary, and one or more of the following may provide sufficient
appropriate audit evidence:
• Observing a current physical inventory count and reconciling it to the opening inventory quan22es.
• Performing audit procedures on the valua2on of the opening inventory items.
• Performing audit procedures on gross profit and cut-off.

Ch-9 SA 550/560/570/580
SA 560
1. CA J is working as internal auditor in JKL Limited, a non-listed company. The responsibili2es of internal auditor
include reviewing financial informa2on and performing detailed tests on transac2ons and balances. He is also
responsible for compliance with laws, regula2ons and external requirements. During the year 2022-23, services of
an employee of company were terminated. The said employee had filed a suit against the company in respect of
certain compensa2on dues amoun2ng to ₹ 10 lakhs which were not paid to him. Based upon advice of legal counsel,
the company had made a provision of ₹ 10 lacs in financial statements for year 2022- 23. However, somewhere in
June 2023, there is an out of court se_lement between company and employee for ₹ 6 lakhs. The statutory audit of
company is under progress and audit report has not yet been finalized. How internal auditor should have proceeded
in situa2on? [MTP II May’24]

Subsequent events are events occurring between the date of financial statements and the date of the auditor’s report
and facts that become known to the auditor ager the date of the auditor’s report. In the given case, the company had
already made provision of ₹ 10 lakhs in financial statements for year 2022-23.

However, there is an out of court seXlement between the company and employee for ₹ 6 lakhs. It is an example of
event which provides evidence of condi2ons that existed at the date of financial statements i.e. 31st March, 2023.
It provides evidence on adjustment in provision amount already made in financial statements.

Therefore, internal auditor should ask management to revise provision downwards to ₹ 6 lakhs so that financial
statements are in accordance with applicable accoun2ng standards.

2. CA K is statutory auditor of DEMA Private Limited for the year 2022-23. The company has three plants in India.
He is nearing comple2on of audit procedures rela2ng to financial statements for the year under audit and has yet
to sign audit report. Meanwhile, a huge fire had broken out in one of plants of the company located near Nashik on
25th June, 2023 damaging substan2al part of machinery and work-in-process resul2ng in loss of about ₹ 5 crores.
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Unaware of the incident, he is in process of finalizing his report in first fortnight of July 2023. State few audit
procedures to be performed by him to obtain sufficient appropriate evidence for iden2fying such events. Also
explain auditor’s responsibili2es in this situa2on. [MTP II May’24]

In the given situa2on, a huge fire had broken out in one of plants of company on 25th June, 2023 destroying substan2al
part of machinery and work-in-process resul2ng in loss of ₹ 5 crores. The auditor has yet to sign audit report.

Before signing audit report, he should perform following audit procedures to obtain sufficient appropriate audit
evidence that all such events have been iden2fied and are appropriately reflected in financial statements: -
• Inquiry of management whether any subsequent events have occurred
• Reading minutes of the mee2ngs of owners, management that have been held ager date of financial statements
and inquiring about maXers discussed at such mee2ngs for which minutes are not available
• Reading en2ty’s latest subsequent interim financial statements
• Obtaining Wri_en representa2ons from management in accordance with SA 580

The situa2on is an example of subsequent event occurring between date of financial statements and date of audit
report requiring disclosure in financial statements. The auditor has a responsibility to obtain sufficient appropriate
audit evidence whether such an event requiring disclosure in financial statements is appropriately reflected in financial
statements.

SA 570
1. Kundan, a CA student, is part of an engagement team conduc2ng audit of an en2ty. The audit procedures are
nearing comple2on. He no2ces that engagement partner has asked for a cash flow forecast from management for
next twelve months from date of financial statements. Keeping in view above, answer the following: -
i) Discuss likely purpose of engagement partner in the above situa2on. Elaborate upon significance of such tes2ng
being performed by engagement partner.
ii) State any two audit procedures in rela2on to cash flow forecast likely to be performed by engagement partner.

In the given situa2on, the engagement partner has asked for a cash flow forecast from management for next twelve
months from date of financial statements. The audit procedures are also nearing comple2on. Therefore, purpose of
engagement partner in requiring a cash flow forecast is to obtain sufficient appropriate audit evidence regarding and
to conclude on appropriateness of management’s use of going concern basis of accoun2ng in prepara2on of its
financial statements.

Further, his purpose is also to conclude on basis of audit evidence obtained, whether a material uncertainty exists
related to events or condi2ons that may cast a significant doubt on ability to en2ty to con2nue as a going concern,
and to report in accordance with SA 570.

The significance of tes2ng going concern assump2on is due to its effect on prepara2on of financial statements.

When the use of going concern is considered as appropriate, assets and liabili2es are recorded on the basis that
en2ty will be able to realize its assets and discharge liabili2es in normal course of business.

In case it is not so viewed, financial statements are prepared on liquida2on basis.

Hence, tes2ng such an assump2on provides evidence to auditor whether use of such assump2on is appropriate or
not.

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Two audit procedures in rela2on to cash flow forecast likely to be performed
• Evaluate reliability of underlying data generated to prepare the forecast
• Determine whether there is adequate support for assump2ons underlying the forecast

SA 580
Wri_en representa2on about management’s responsibili2es involves confirma2on of fulfilment of management’s
responsibili2es in the prepara2on of the financial statements providing the relevant informa2on and also informing
about completeness of transac2ons. Explain. [MTP II May’24]

WriXen representa2on about management’s responsibili2es involves confirma2on of fulfilment of management’s

responsibili2es in following areas: -

(I) Prepara2on of the financial statements

The auditor shall request management to provide a wriXen representa2on that it has fulfilled its responsibility for the
prepara2on of the financial statements in accordance with the applicable financial repor2ng framework, including,
where relevant, their fair presenta2on, as set out in the terms of the audit engagement. Due to its responsibility for
the prepara2on and presenta2on of the financial statements and its responsibili2es for the conduct of the en2ty’s
business, management would be expected to have sufficient knowledge of the process followed by the en2ty in
preparing and presen2ng the financial statements and the asser2ons therein on which to base the wriXen
representa2ons.

(II) Informa2on provided and completeness of transac2ons

The auditor shall request management to provide a wriXen representa2on that: -
i) It has provided the auditor with all relevant informa2on and access as agreed in the terms of the audit
engagement and
ii) All transac2ons have been recorded and are reflected in the financial statements.

Ch-12 Audit Report

1. M/s S R & Associates are the Statutory Auditors of Vanee Tex2le and Garments Ltd., a company engaged in the
business of manufacturing of various tex2le products. The auditor has completed the audit and is in the process of
forming an opinion on the financial statements for the F.Y. 2023-2024. CA S, the engagement partner, wants to
conclude whether the financial statements as a whole are free from material misstatements, whether due to fraud
or error. Guide him about the factors he should consider to reach that conclusion. [MTP II May’24]

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 repor2ng 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:

(1) whether sufficient appropriate audit evidence has been obtained
(2) whether uncorrected misstatements are material, individually or in aggregate.
(3) The evalua2ons required
i) The auditor shall evaluate whether the financial statements are prepared in accordance with the
requirements of the applicable financial repor2ng framework.
ii) This evalua2on shall include considera2on of the qualita2ve aspects of the en2ty’s accoun2ng prac2ces,
including indicators of possible bias in management’s judgments.
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2. Discuss the objec2ve of the auditor as per Standard on Audi2ng (SA) 705 “Modifica2ons to The Opinion in The
Independent Auditor’s Report”. [MTP II Nov’24]

As per Standard on Audi2ng (SA) 705 “Modifica2ons to the Opinion In The Independent Auditor’s Report”, the
objec2ve of the auditor is to express clearly an appropriately modified opinion on the financial statements that is
necessary when:
a) The auditor concludes, based on the audit evidence obtained, that the financial statements as a whole are not
free from material misstatement; or
b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial statements
as a whole are free from material misstatement.

3. CA. S, while conduc2ng audit of an en2ty is facing the following issues: -

i) He has not been provided with necessary support for a_ending inventory count process of en2ty as at year
end.
ii) Accounts Manager is not providing him present addresses of customers as well as suppliers for sending external
confirma2ons. Even mail ids have not been provided on the pretext of business confiden2ality.
iii) He was not able to verify revenues of en2ty due to lack of complete details.
iv) He has been asking for bills on a sample basis for the purpose of verifying expenses, but staff has been making
lame excuses. The ma_er was brought to knowledge of higher management, but of no avail.

The auditor, CA S has come to the conclusion that the possible effects on the financial statements of undetected
misstatements would be material and affec2ng many aspects of financial statements and in such a case, a
qualifica2on of the opinion would be inadequate to communicate the gravity of the situa2on. How should the
auditor proceed in such a situa2on? [RTP May’24]

In the given case, auditor has not been able to obtain sufficient appropriate audit evidence rela2ng to inventories,
debtors, creditors, revenues and expenses. The maXer was brought to the knowledge of management but no result
has been achieved. In such circumstances, auditor should proceed as given here under: -

If the auditor concludes that the possible effects on the financial statements of undetected misstatements, if any, could
be both material and pervasive so that a qualifica2on of the opinion would be inadequate to communicate the gravity
of the situa2on, the auditor shall:
i) Withdraw from the audit, where prac2cable and possible under applicable law or regula2on; or
ii) If withdrawal from the audit before issuing the auditor’s report is not prac2cable or possible, disclaim an opinion
on the financial statements.

If auditor withdraws from such an engagement, before withdrawing, auditor shall communicate to those charged
with governance any maXers regarding misstatements iden2fied during the audit that would have given rise to a
modifica2on of the opinion.

Ch-13 CARO 2020

1. DOX Limited, a service provider company engaged in providing courier services pan-India as well as
interna2onally, has appointed an internal auditor, Mr. G, in accordance with requirements of the Companies Act,
2013 during financial year 2023-24. The company’s annual turnover during year 2022-23 and 2023-24 has been
about ₹ 300 crores during each of above years. Business of the company has been profitable. Mr. G heads internal
audit department of the company assessing governance ac2vi2es, assis2ng in improving risk management ac2vi2es
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CA Inter Audit QB Addendum
and reviewing controls. Discuss repor2ng responsibility of statutory auditor of the company under the Companies
Act, 2013 specifically in rela2on to internal audit and related ma_ers for the year 2023-24. [MTP-1 May’24]

DOX Limited is in business of providing courier services.

As name of the company and given facts suggest: -
• It is not a small company under sec2on 2(85) of Companies Act, 2013.
• It is not a private company.
• It is not a one person company.
• It is not a banking or insurance company.
• It is not a Sec2on 8 company as it does not has charitable objects etc.

Therefore, it does not qualify for any exemp2on from applicability of CARO, 2020. Hence, repor2ng requirements
under CARO, 2020 are applicable.

While repor2ng under CARO, 2020, statutory auditor is required to report under clause (xiv) of paragraph 3 as under:
(a) whether the company has an internal audit system commensurate with the size and nature of its business
(b) whether the reports of the internal auditors for the period under audit were considered by the statutory auditor

2. CA. Ravi Patnaik is conduc2ng audit of a company for which repor2ng requirements under CARO, 2020 are
applicable. He finds that cash credit facili2es amoun2ng to ₹ 4 crores were released to the company by branch of a
bank for mee2ng its working capital requirements. He finds that out of above funds, ₹ 1 crore have been used by
company for installing effluent treatment plant to meet State pollu2on control Board requirements. Is there any
repor2ng obliga2on upon him under CARO,2020? [MTP II May’24]

Clause (ix) (d) of CARO, 2020 whether funds raised on short term basis have been u2lised for long term purposes, if
yes, the nature and amount to be indicated.

In the given situa2on, funds have been raised for mee2ng working capital requirements for ₹ 4 crores. Cash credit
facili2es for mee2ng working capital requirements are, by their very nature, short term borrowings. Out of above, ₹ 1
crore have been used by the company for investment in effluent treatment plant which is ostensibly for a long-term
purpose.

Hence, the maXer needs to be reported in accordance with requirements of Clause (ix) (d) of CARO, 2020.

Ch-14 Bank Audit

1. Column A describes descrip2on of certain terms used in banking industry. Complete Column B by sugges2ng term
appropriate to descrip2on given.

A B
1. Audit of borrower client of bank carried out at bank’s request to verify borrower’s current assets ?
2. Limit up to which an en2ty can withdraw from sanc2oned working capital limit ?
3. Statutory right of a creditor to adjust debit balance in debtor’s account against any credit balance lying ?
in another account of debtor
4. Crea2on of security in a bank branch by mere delivery of 2tle deeds by a prospec2ve borrower of funds ?

1. Stock audit
2. Drawing power

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3. Set-off
4. Equitable Mortgage

2. While conduc2ng statutory audit of branch of a na2onalized bank, it is no2ced by CA Z that credit facili2es granted
to a borrower consis2ng solely of term loan have been classified as “Sub-standard Asset” during the year 2022-23
due to failure of borrower to pay EMIs on 2me. Such EMIs were outstanding for more than 90 days and account
was, therefore, classified as “Sub-Standard Asset”. CA Z has also agreed to above asset classifica2on made by branch
management. What are CA Z’s responsibili2es regarding verifica2on of compliance with income recogni2on norms
by branch in respect of above credit facili2es? [RTP May’24]

RBI norms s2pulate that if any advance account becomes NPA as at close of any year, the en2re interest accrued or
credited to income account in past periods should be reversed or provided for, if the same is not realized.

Further, in respect of NPAs, fees, commission and other similar income that have accrued should cease to accrue in
the current period and should be reversed or provided for with respect to past periods, if uncollected.

In the given case, account has turned Sub-standard asset which is a type of NPA. Therefore, auditor should make
compliance of above norms rela2ng to income recogni2on.

Ch-15 Government Audit

Goods and Services Tax Network (GSTN) is a not for profit, limited by shares, company. Its 50% shareholding is with
Union Government and 50% with different State Governments. The company provides IT infrastructure and services
to various stakeholders including governments and tax payers. The company is in opera2on since past few years
and subsequent auditor needs to be appointed during financial year 2023-24. Who appoints statutory auditor of
such a company described above in accordance with provisions of Companies Act, 2013? Can any direc2ons be
issued to statutory auditors of above company?

The above company is a government company. Sec2on 143(5) of the Companies Act,2013 states that, 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 appoint the auditor under sub-sec2on (5) of sec2on
139 i.e. appointment of subsequent auditor and direct such auditor the manner in which the accounts of the
Government company are required to be audited and thereupon the auditor so appointed shall submit a copy of the
audit report to the Comptroller and Auditor-General of India which, among other things, include the direc2ons, if any,
issued by the Comptroller and Auditor-General of India, the ac2on taken thereon and its impact on the accounts and
financial statements of the company.

Ch-17 Audit of Different Types of Entities

1. You are auditor of a college running different courses opera2ng in your city. During audit of a year, it is no2ced
that fees concessions to students have been provided in substan2al number of cases. Discuss, how, you as an
auditor, would proceed to verify the same and also explain two other points to verify fees from students.

Fee from Students:

The fees concessions have to be under proper authority of college management. The auditor would verify internal
controls in this regard. Besides, detailed checking of few cases needs to be undertaken to ensure genuineness of fees
concessions and proper management approvals.
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Other points to verify fee from students are :

1. Check names entered in the Students Fee Register for each month or term, with the respec2ve Class Registers,
showing names of students on rolls and test amount of fees charged; and verify that there operates a system of
internal control which ensures that demands against the students are properly raised.
2. Check fees received by comparing counterfoils of receipts granted with entries in the Cash Book and tracing the
collec2ons in the Fee Register to confirm that the revenue from this source has been duly accounted for.
3. Total up the various columns of the Fees Register for each month or term to ascertain that fees paid in advance
have been carried forward and that the arrears that are irrecoverable have been wri_en off under the sanc2on
of an appropriate authority.
4. Check admission fees with admission slips signed by the head of the ins2tu2on and confirm that the amount has
been credited to a Capital fund, unless the Managing CommiXee has taken a decision to the contrary.
5. Confirm that fines for late payment or absence, etc. have been either collected or remiXed under proper
authority.
6. Confirm that hostel dues were recovered before student’s accounts were closed and their deposits of cau2on
money refunded.

2. From a lessee’s perspec2ve, highlight main differences between an opera2ng lease and finance lease only in
rela2on to accoun2ng treatment and tax benefits. [RTP May’24]

Accoun2ng treatment
Opera2ng lease is generally treated like a ren2ng arrangement. Lease payments are treated as opera2ng expenses
and asset does not appear as asset in lessee’s balance sheet.

Finance lease is treated like a loan arrangement. Hence, asset ownership is considered of that of lessee and thus
appears on the balance sheet of the lessee.

Tax benefits
Opera2ng lease payment is considered like an expense just as in case of ren2ng. However, no deprecia2on can be
claimed by lessee. In case of finance lease, lessee can claim both interest and deprecia2on as it is treated like a loan.

Ch-18 Audit of Items of FS

1. Prudent Enterprises Private Limited has incurred and fully spent for the first 2me Corporate Social Responsibility
(CSR) expenditure amoun2ng to ₹ 14.50 lacs in pursuance to provisions of sec2on 135 of Companies Act, 2013. The
expenditure was spent for women empowerment programmes through an implemen2ng agency (not a related
party). As per law provisions, it was required to spend ₹ 14.00 lacs during the year. Discuss how such informa2on is
required to be disclosed in accordance with requirements of Schedule III to the Companies Act, 2013 in financial
statements of the company. [MTP-1 May’24]

In the given situa2on, following informa2on is required to be disclosed in accordance with requirements to Schedule
III to the Companies Act, 2013:
S No. Details Amount (₹’lacs)
a amount required to be spent by the company during the year 14
b amount of expenditure incurred 14.50
c shortall at the end of the year NIL
d total of previous years shortall NA
e reason for shortall NA
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CA Inter Audit QB Addendum
f nature of CSR ac2vi2es - Women empowerment ac2vi2es through implemen2ng
agency
g details of related party transac2ons, e.g., contribu2on to a trust controlled by the NIL
company in rela2on to CSR expenditure as per relevant Accoun2ng Standard
h where a provision is made with respect to a liability incurred by entering into a NIL
contractual obliga2on, the movements in the provision during the year should be
shown separately

2. WTE Private Limited is engaged in business of manufacturing a product liable to GST @ 5%. The input raw
materials for manufacturing this product are liable to GST @ 12% and 18%. As a result, at the end of financial year,
ITC on inputs amoun2ng to ₹ 60 lacs is accumulated in Electronic Credit ledger and refundable to company under
provisions of GST law. How would above amount of ₹ 60 lacs be reflected and classified in balance sheet of
company? State few audit procedures to be performed by you for verifica2on of abovesaid balance.

In the given situa2on, ₹ 60 lacs is accumulated in Electronic credit ledger of WTE Private Limited as finished product is
liable to lower GST rate whereas input raw materials for manufacturing carry higher GST rate. It is refundable to
company by virtue of provisions of GST law. The above 8 balance would be reflected and classified under current
assets. Within current assets, it would be classified into “Other current assets”.

Few audit procedures to be performed for verifica2on of above balance are:

• In rela2on to balances with statutory authori2es like GST input credit, prepare a reasonability analysis with
respect to purchases by applying the applicable rate to the purchases and in case of any variance with the asset
recorded by the en2ty, reasons for variance should be requested from the en2ty.
• Obtain copies of statutory GST returns filed on GST portal.
• In case refundable amount as on balance sheet date is s2ll outstanding, verify whether the amount recorded as
per books of account tallies with the claim made with the authori2es subsequently by going to GST portal.
• In case refundable amount as on balance sheet date is received subsequently, verify it from Bank statement.

3. Tisa Industries Private Limited has prepared its financial statements for year 2023-24. The financial statements
and notes to accounts show following informa2on and disclosure in respect of trade receivables of the company: -
S No Par2culars Amount ( ₹ in lacs)
1. Trade Receivables 240.00

Trade receivables ageing schedule. Outstandings for following periods from due date of payment
Par2culars Less than 1 year 1-2 years 2-3 years More than 3 years Total
MSME 150.00 30.00 10.00 XXX 190.00
Others 40.00 XXX XXX XXX 40.00
Disputed dues- MSME XXX XXX XXX XXX XXX
Disputed dues- Others 10.00 XXX XXX XXX 10.00

You are part of engagement team conduc2ng audit of the company. Point out discrepancies including omissions in
above disclosure. (Do not prepare another table)

The above disclosure is not in accordance with requirements of Division I of Schedule III of Companies Act, 2013.
The discrepancies are as under: -

(1) The Company has wrongly disclosed informa2on for trade receivables in a manner which is applicable for trade
payables.

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CA Inter Audit QB Addendum
(2) No dis2nc2on between MSME and other trade receivables is required.

(3) Trade receivables are to be categorised into undisputed and disputed trade receivables as under: -
• Undisputed trade receivables considered good
• Undisputed trade receivables considered doubtul
• Disputed trade receivables considered good
• Disputed trade receivables considered doubtul

(4) Aging is to be reflected for each of above categories in respect of outstandings for the following periods from due
date of payment
• for less than 6 months
• 6 months-1 year
• 1- 2 years
• 2-3 years
• more than 3 years

(5) Following informa2on is also required to be disclosed: -

Trade receivables shall be sub-classified as:
a) Secured, considered good
b) Unsecured, considered good
c) Doubtul.

(6) Allowance for bad and doubzul debts shall be disclosed under the relevant heads separately.

(7) Debts due by

• directors or other officers of the company or any of them either severally or jointly with any other person or
• firms or private companies respec2vely in which any director is a partner or a director or a member should be
separately stated.

4. Being statutory auditor of JAL Limited, a company engaged in manufacturing of chemicals, CA Gopika has
understood that company is expected to have material work-in-progress as on 31st March, 2024. State few audit
procedures to verify existence and valua2on asser2ons for work-in-progress.

Audit procedures to verify existence and valua2on asser2ons for work-in-progress are as under: -
• A_end inventory count in accordance with SA 501 and understand how work in progress is arrived at.
• Evaluate work of management expert, if any, in this regard.
• Ascertain how the various stages of produc2on/ value addi2ons are measured and in case es2mates are made,
understand the basis for such es2mates.
• 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 cos2ng and financial data/ informa2on maintained by the
en2ty.
• Ensure that material costs exclude any abnormal wastage factors.

5. It is important to carry out the Tests of Controls for checking effec2veness of internal control over sales as a part
of the debtors’ audit procedure. In above context, state the points which need to be considered in respect of trade
receivables. [MTP II May’24]

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CA Inter Audit QB Addendum
It is important to carry out Tests of Controls for checking the effec2veness of internal control over sales as a part of
the debtors’ audit procedure.

Following points need to be considered in respect of trade receivables:

• Only bona fide sales lead to trade receivables.
• All such sales are made to approved customers.
• All such sales are properly recorded in the books of accounts.
• Once recorded, the debtors can be se_led only by receipt of cash or on the authority of a responsible official.
• Segrega2on of du2es at every point in sales transac2on. (accoun2ng for debtors, collec2ng the payments,
sending reminders etc.)
• Debtors are collected on 2me.
• In case debtors are not collected in 2me, sending reminders and taking legal ac2ons if required.
• Balances are regularly reviewed.
• A proper system of follow up exists and if necessary, adequate provision for bad debt should be made by
preparing adequate ageing schedule of the debtors

6. Droma Shoes Private Limited was established in year 2022-23 for manufacturing of footwear. As funds were
needed to carry on its business ac2vi2es - including for purchase of different raw materials, incurring of regular
expenses like power and fuel and payment of wages etc., it had got sanc2oned a credit facility amoun2ng to ₹ 2
crores repayable on demand from a bank against primary security of its current assets and collateral security of
residen2al house of one of its directors. Duly signed guarantee documents by directors in favour of bank also form
part of bank’s loan documenta2on. Account statement of above facility downloaded from bank’s website shows
debit balance of ₹ 1.85 crores as on 31st March, 2023. The opera2ons in above credit facility are sa2sfactory.

In this regard: -

i) Iden2fy nomenclature of such credit facility given by banks. How would above amount of ₹ 1.85 crores be
reflected and classified in financial statements of company as on 31.3.23?
ii) Also state specific disclosure requirements of Schedule III of Companies Act, 2013 in rela2on to above.
[RTP May’24]
i) Type of credit facili2es referred in above situa2on given by banks to meet working capital requirements of business
which are repayable on demand are known as “cash credit facili2es/overdraj” facili2es.

Amount of ₹1.85 crores outstanding as on 31.3.23 reflects borrowings of Co. and classified as “short-term borrowings”
as loans repayable on demand from banks under current liabili2es in balance sheet of Co. Borrowings shall further
be subclassified as secured.

ii) Specific disclosure requirements of short-term borrowings under Schedule III to Companies Act, 2013 in given
situa2on are as under: -
• Nature of security i.e. primary security of current assets & collateral security of residen2al house belonging to a
director shall be specified.
• As loans have been guaranteed by directors, aggregate amount of such loans shall be disclosed.

To be disclosed as Addi2onal Regulatory Informa2on

Since Co. has borrowings from bank on basis of security of current assets, it shall also disclose following:-
a) whether quarterly returns or statements of current assets filed by Co. with banks or financial ins2tu2ons in
agreement with books of accounts.
b) if not, summary of reconcilia2on & reasons of material discrepancies, if any to be adequately disclosed.

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CA Inter Audit QB Addendum
3. Following is extract of notes to accounts of financial statements of STU Private Limited lis2ng some ra2os. Discuss,
whether disclosure, given in following manner meets requirements of Schedule III of the Companies Act, 2013.
Ignore other ra2os which are not listed in extract given below:

Name of Ra2o 31.03.23 31.03.22

Current Ra2o 2.50 2.30
Inventory Turnover Ra2o 3.00 6.00
Trade receivable turnover ra2o 1.75 5.00
Net profit ra2o 13% 10%
[RTP May’24]

Disclosure given in ques2on doesn’t meet requirements of Schedule III to Companies Act, 2013. Schedule III requires
that the company shall explain items included in numerator & denominator for compu2ng ra2os. Further explana2on
for any change in ra2o by more than 25% compared to preceding year.

In given table, Co. has not explained the items included in numerator and denominator for compu2ng ra2os.
Further, varia2ons in ra2os as compared to preceding year are as under: -
Name of Ra2o 31.03.23 31.03.22 Varia2on
Current Ra2o 2.50 2.30 8.69%
Inventory Turnover Ra2o 3.00 6.00 50%
Trade receivable turnover ra2o 1.75 5.00 65%
Net profit ra2o 13% 10% 30%

As calculated above, there is change in inventory turnover ra2o, trade receivables turnover ra2o and net profit ra2o
by more than 25% as compared to preceding year. Therefore, explana2ons for such changes have also to be provided
where there are changes by more than 25% as compared to preceding year.

Ch-19 Internal Audit & SA 610

CA Z is appointed as statutory auditor of BETA Private Limited for the year 2023-24. There exists an internal audit
func2on in the company headed by its Chief Internal Auditor, CA K. Valua2on of trade receivables of company is
assessed as area of higher risk by statutory auditor. He wants to take direct assistance of Chief Internal Auditor in
respect of above ma_er. Discuss along with reasons whether it would be proper for statutory auditor to: -
i) assign checking of accuracy of aging of trade receivables to Chief Internal Auditor?
ii) assign evalua2on of adequacy of provision based on aging of trade receivables to Chief Internal Auditor?

In accordance with SA 610, the external auditor shall not use internal auditors to provide direct assistance to perform
procedures that relate to higher assessed risks of material misstatement where the judgment required in performing
the relevant audit procedures or evalua2ng the audit evidence gathered is more than limited.

In the given situa2on, valua2on of trade receivables is assigned as an area of higher risk by statutory auditor. Judgment
required in checking of accuracy of aging of trade receivables is limited. Therefore, external auditor can assign the
checking of the accuracy of the aging to Chief Internal Auditor providing direct assistance as it involves limited
judgment.

However, because the evalua2on of the adequacy of the provision based on the aging would involve more than
limited judgment, it would not be appropriate to assign that laXer procedure to Chief Internal Auditor providing direct
assistance.
CA Shubham Keswani 21