CA Final Advanced

Auditing &
Professional Ethics

Additional
Questions for
May 2024

BY CA Sanidhya Saraf

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 Index (Mapping with the CA Sanidhya Saraf’s Audit Question Bank)

Chapter no. Chapter Name Page no.

1 Standards on Auditing 3-14

2 CARO 2020 and Section 143 15-16

3 Group Audit -

4 Professional Ethics 17-22

5 Audit Planning, Strategy and Execution -

6 Materiality, Risk Assessment and Internal 22-23

Control
7 Digital Auditing and Assurance -

8 Audit of Banks 24-27

9 Special Features of NBFCs Audit 28-29

10 Overview of PSU Audit 30

11 Internal Audit 31-32

12 Due diligence, Investigation and Forensic Audit 33-34

13 Emerging Areas SDG and ESG Assurance -

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Chapter 1- Standards on Auditing

SA 220 and SQC 1

Question 1
CA Ragini is offered an appointment to act as Engagement Quality Control Reviewer (EQCR)
for the audit of the financial year 2022-23 of XPM Limited, a listed company operating from a
small town. She is also based in the same town and was not engaged previously to conduct an
audit of a listed entity. She accepts the appointment to act as ECQR. She performs the review
by ticking a Yes/No checklist and signing on some of the working papers prepared by the
engagement team. The audit file does not contain any material misstatement which shows that
the work of EQCR is separate from the work of the engagement team. Do you agree with the
approach adopted by EQCR? Comment. (Nov 2023 MTP 1) (Nov 2023 MTP 2)

Answer:
As per SQC 1 engagement quality control reviewer can be a partner, other person in the firm
(member of ICAI), suitably qualified external person, or a team made up of such individuals,
with sufficient and appropriate experience and authority to objectively evaluate, before the
report is issued, the significant judgments the engagement team made and the conclusions they
reached in formulating the report.
It also states that the engagement quality control reviewer for an audit of the financial
statements of a listed entity is an individual with sufficient and appropriate experience and
authority to act as an audit engagement partner on audits of financial statements of listed
entities.
In addition, the work of EQCR involves objective evaluation of the significant judgments made
by the engagement team and ensuring that the conclusions reached by the team in formulating
audit report are appropriate. It is necessary for EQCR to have the requisite technical expertise
and experience to enable her to perform the assigned role of evaluating the work of engagement
team so that any possible misstatement can be avoided. Without ensuring the appropriate
technical expertise and experience, the whole purpose of EQCR is defeated. Therefore, it was
not appropriate for her to accept appointment as ECQR for listed entity.
Further, SA 220 states that the engagement quality control reviewer shall document, for the
audit engagement reviewed, that the procedures required by the firm’s policies on engagement
quality control review have been performed. It also states that it shall also be documented that
the reviewer is not aware of any unresolved matters that would cause the reviewer to believe
that the significant judgments the engagement team made and the conclusions they reached
were not appropriate.
In the given situation, CA Ragini is offered an appointment to act as Engagement Quality
Control Reviewer (EQCR) for the audit of the financial year 2022-23 of XPM Limited, a listed
company operating from a small town. She has accepted the appointment and performed the

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review by ticking a Yes / No checklist and signing on some of the working papers prepared by
the engagement team.
In the instant case, there are no working papers to show that evaluation has been done by EQCR
on conclusions reached by engagement team. Mere ticking of a Yes/No checklist and signing
on some working papers of engagement team shows that no such evaluation and review of
work performed by engagement team has been made by EQCR. Therefore, her approach was
not proper in performing work of EQCR.

Question 1 SA 330
While conducting a statutory audit of “Hope Solutions Limited”, CA Y has assessed the risk
of material misstatement to be low at the financial statement level and at the assertion level due
to a stable, established and relatively less risky business and extremely satisfactory internal
controls operating in the company. However, despite the low assessed risk of material
misstatement, he chooses to send external confirmation requests to third parties for
confirmation of certain material contracts entered into with them by the company. By doing
so, he intends to obtain evidence regarding certain assertions contained in the financial
statements of the company. Do you think his approach is in accordance with Standards on
Auditing? Justify your answer with reasons. (Nov 2023 MTP 2)
Answer:
SA 330 states that irrespective of the assessed risk of material misstatement, the auditor shall
design and perform substantive procedures for each material class of transactions, account
balance and disclosure. In the given situation, the auditor has assessed the risk of material
misstatement to be low. However, despite such assessment, substantive procedures have to be
performed.
SA 330 further states that the auditor shall consider whether external confirmation procedures
are to be performed as substantive audit procedures. External confirmation procedures
frequently are relevant when addressing assertions associated with account balances and their
elements but need not be restricted to these items. For example, the auditor may request
external confirmation of the terms of agreements, contracts, or transactions between an entity
and other parties.
Despite the low assessed risk of material misstatement, substantive procedures have to be
performed due to the following reasons: -
(i) The auditor’s assessment of risk is judgmental and so may not identify all risks of
material misstatement and
(ii) there are inherent limitations to internal control, including management override.
It is also in accordance with the spirit of professional skepticism. Therefore, as discussed above,
the approach of CA Y is in accordance with Standards on Auditing.

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Question 1 (SA 500)
Mr. Shreyansh, while performing the audit of Red Rock & Silver Sand Limited which was
involved in phosphorus mining, decided to appoint an auditor’s expert for the valuation of
environmental liabilities and site clean-up costs. Red Rock & Silver Sand Limited re- appointed
Mr. Sheetal as an independent expert for this engagement. For the last five years, management
has been re-appointing Mr. Sheetal. Mr. Sheetal calculated the environmental liabilities
pertaining to completed mining sites and the sites which will be discarded in the near future
and a provision for clean-up costs. This provision was accepted by management. Mr.
Shreyansh, after performing the inquiries with management, was of the opinion that the
objectivity of the independent expert cannot be questioned just because he was appointed by
management as their expert. Hence, there is no need to raise a question on the objectivity of
Mr. Sheetal or on his work performed for the company. However, the audit partner was of the
opinion that the audit team needs to evaluate the objectivity of an expert engaged by the entity,
irrespective of the fact that he was appointed as an independent expert. Kindly guide the audit
partner and Mr. Shreyansh with respect to requirements pertaining to evaluating the objectivity
of the management expert. (Nov 2023 RTP)
Answer:
As per SA 500 “Audit Evidence”, when information to be used as audit evidence has been
prepared using the work of a management’s expert, the auditor shall, to the extent necessary,
have regard to the significance of that expert’s work for the auditor’s purposes evaluate the
competence, capabilities and objectivity of that expert.
A broad range of circumstances may threaten objectivity, for example, self-interest threats,
advocacy threats, familiarity threats, self-review threats and intimidation threats. Safeguards
may reduce such threats and may be created either by external structures (for example, the
management’s expert’s profession, legislation or regulation), or by the management’s expert’s
work environment (for example, quality control policies and procedures). Although safeguards
cannot eliminate all threats to a management expert’s objectivity, threats such as intimidation
threats may be of less significance to an expert engaged by the entity than to an expert
employed by the entity, and the effectiveness of safeguards such as quality control policies and
procedures may be greater. Because the threat to objectivity created by being an employee of
the entity will always be present, an expert employed by the entity cannot ordinarily be
regarded as being more likely to be objective than other employees of the entity.
When evaluating the objectivity of an expert engaged by the entity, it may be relevant to discuss
with management and that expert any interests and relationships that may create threats to the
expert’s objectivity and any applicable safeguards, including any professional requirements

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that apply to the expert; and to evaluate whether the safeguards are adequate. Interests and
relationships creating threats may include:
• Financial interests.
• Business and personal relationships.
• Provision of other services.
In the current case, Red Rock & Silver Sand Limited re-appointed Mr. Sheetal for this
engagement as an independent expert. The audit team was of the view that the objectivity of
the independent expert cannot be questioned just because he was appointed by management as
their expert. However, the audit partner had a contrary view.
Hence, the audit team should evaluate the objectivity of an expert engaged by the entity as the
threat to objectivity, created by being an employee of the entity, will always be present. An
expert appointed by the entity cannot ordinarily be regarded as being more likely to be objective
than other employees of the entity. As a result, audit partner is correct in his view.

Question 2
Mr. Rishabh, in the course of audit of PQ Limited, wants to perform external confirmation
procedures to obtain audit evidence. Guide Mr. Rishabh, listing out the factors that may assist
him in determining whether external confirmation procedures are to be performed as
substantive audit procedures. (Nov 2023 MTP 1)
Answer:
Factors that may assist Mr. Rishabh, the auditor in determining whether external
confirmation procedures are to be performed as substantive audit procedures include:
(i) The confirming party’s knowledge of the subject matter – responses may be more
reliable if provided by a person at the confirming party who has the requisite knowledge about
the information being confirmed.
(ii) The ability or willingness of the intended confirming party to respond – for example,
the confirming party:
- May not accept responsibility for responding to a confirmation request;
- May consider responding too costly or time consuming;
- May have concerns about the potential legal liability resulting from responding;
- May account for transactions in different currencies; or
- May operate in an environment where responding to confirmation requests is not a
significant aspect of day-to-day operations.

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In such situations, confirming parties may not respond, may respond in a casual manner or may
attempt to restrict the reliance placed on the response.
(iii) The objectivity of the intended confirming party – if the confirming party is a related
party of the entity, responses to confirmation requests may be less reliable.

Question 1 (SA 570)

MZE Limited is engaged in the manufacturing and export of ready-made garments. The
company has lost overseas buyers to Asian competitors with lower raw materials and labour
costs. As a result, MZE Limited has lost out on a significant chunk of export orders, and the
trend has become more pronounced in the year 2022-23. Further, the US economic recession
caused delays in the company's overseas payments, leading to the company being unable to
keep its loan repayment commitments with bankers. Further, the company has not been able to
pay its creditors on time. Even statutory dues payable by the company are either not paid or
being paid after a gap of 5 -6 months, leading to extra costs. Due to declining revenue, the
company cannot cover its fixed costs and has begun laying off employees.
Considering all these circumstances, CA P doubts the company's ability to continue as a going
concern while conducting the statutory audit for the year 2022 -23. He is studying
management’s assessment of the company’s ability to continue as a going concern by studying
projected profitability statements for the next two years containing turnover, expenses and
profits estimates. Comment on the above situation with specific reference to audit procedures
being performed by CA P in context of relevant Standards on Auditing. (Nov 2023 MTP 2)
Answer:
The indicated events or conditions in MZE Limited may cast significant doubt on ability of
company to continue as going concern. SA 570 requires that if events or conditions have been
identified that may cast significant doubt on the entity’s ability to continue as a going concern,
the auditor shall obtain sufficient appropriate audit evidence to determine whether or not a
material uncertainty exists related to events or conditions that may cast significant doubt on the
entity’s ability to continue as a going concern through performing additional audit procedures,
including consideration of mitigating factors.
In the given situation, the auditor is studying management’s assessment of the company’s
ability to continue as going concern, including its future plan of action containing projected
profitability statements for the next two years containing estimates of turnover, expenses and
profits. However, as required in SA 570, auditor’s procedures should focus on cash flow
forecast and not on future profit projections. It is quite possible that a company may continue
to carry on as a going concern so long as it can meet its liabilities. Therefore, analysing the
projected profitability statements alone is insufficient to support the conclusion on the going
concern assumption followed by the company.
Therefore, the auditor should require management to prepare a cash flow forecast in the given
circumstances. The auditor should then analyse the cash flow forecast in the evaluation of
management’s future plan of action. It includes: -

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(i) Evaluating the reliability of the underlying data generated to prepare the forecast and
(ii) Determining whether there is adequate support for the assumptions underlying the
forecast
Further, some major overseas payments of the company are stuck up. It is quite possible that
the timing of cash inflows on account of these payments may affect the situation. The auditor
would have to evaluate the reliability of data for preparation for such a forecast and its
underlying assumptions. He should perform procedures to obtain evidence regarding
assumptions and timing of cash inflows and outflows like any restructuring undertaken by
bankers providing relief to the company, future sales and consequent cash realization in
downturn conditions, willingness of creditors to provide credit in such a situation, incurring of
expenditures to keep the company afloat. All these assumptions underlying such cash flow
forecasts need to be challenged and examined.

Question 1 (SA 600)

CA Tushar is engagement partner conducting audit of consolidated financial statements of a
group which includes parent entity and its 3 subsidiaries. The standalone financial statements
of its subsidiaries are audited by component auditors. He is considering accepting such
appointment. What specific considerations have to be kept in mind by him before accepting
appointment as principal auditor of the group?
After acceptance, he is in quandary with regard to determination of materiality during audit of
consolidated financial statements. What specific considerations have to be kept in mind while
determining materiality during audit of above group? (Nov 2023 MTP 2)
Answer:
SA 600 requires auditor should consider whether the auditor's own participation is sufficient
to be able to act as the principal auditor. For this purpose, the auditor would consider: -
(i) the materiality of the portion of the financial information which the principal auditor
audits
(ii) the principal auditor's degree of knowledge regarding the business of the components
(iii) the risk of material misstatements in the financial information of the components
audited by the other auditor and
(iv) the performance of additional procedures as set out in SA 600 regarding the components
audited by other auditor resulting in the principal auditor having significant participation in
such audit.
With regard to determination of materiality during the audit of consolidated financial
statements (CFS), the auditor should consider the following: -
• The auditor is required to compute the materiality for the group as a whole. This
materiality should be used to assess the appropriateness of the consolidation adjustments (i.e.,

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permanent consolidation adjustments and current period consolidation adjustments) that are
made by the management in the preparation of CFS.
• The parent auditor can also use materiality computed on the group level to determine
whether the component's financial statements are material to the group to determine whether
they should scope in additional components and consider using the work of other auditors as
applicable.
• While considering the observations (for instance, modification and /or emphasis of
matter/other matter in accordance with SA 705/706) of the component auditor in his report on
the standalone financial statements, the parent auditor should comply with the requirements of
SA 600 “Using the Work of Another Auditor”.

Question 1 (SA 700)

XYZ Limited involved in the hospitality business, appointed Charan & Karan Associates as their statutory
auditor for FY 2022-23. Management of XYZ Limited, while drawing up the financial statement for the
said period, decided to add the following statement after the Statement of Cash Flow as supplementary
information to be presented with financial statements. No specific mentions or labels were added to this
statement to present that this is supplementary information.
Statement of Average Revenue Per Booking (ARPB) and Comparative
(in ₹ or otherwise stated)
Total Bookings during FY
- FY 2021-22 36500
- FY 2022-23 39000
Average Revenue per Booking
- FY 2021-22 (Refer Note 28 Revenue from Operations) 3500
- FY 2022-23 (Refer Note 28 Revenue from Operations) 4200
Bookings Ratio (Organic source by Inorganic source)
- FY 2021-22 1:2
- FY 2022-23 1:1.65
Kindly guide the audit team regarding the requirement of SA 700 with respect to the Supplementary
Information Presented with the Financial Statements. (Nov 2023 RTP)

Answer:
As per SA 700 “Forming an Opinion and Reporting on Financial Statements”, if supplementary
information that is not required by the applicable financial reporting framework is presented
with the audited financial statements, the auditor shall evaluate whether, in the auditor’s
professional judgment, supplementary information is nevertheless an integral part of the
financial statements due to its nature or how it is presented. When it is an integral part of the
financial statements, the supplementary information shall be covered by the auditor’s opinion.
If supplementary information that is not required by the applicable financial reporting
framework is not considered an integral part of the audited financial statements, the auditor
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shall evaluate whether such supplementary information is presented in a way that sufficiently
and clearly differentiates it from the audited financial statements. If this is not the case, then
the auditor shall ask management to change how the unaudited supplementary information is
presented. If management refuses to do so, the auditor shall identify the unaudited
supplementary information and explain in the auditor’s report that such supplementary
information has not been audited.
The auditor’s evaluation of whether unaudited supplementary information is presented in a
manner that could be construed as being covered by the auditor’s opinion includes, for
example, where that information is presented in relation to the financial statements and any
audited supplementary information and whether it is clearly labelled as “unaudited.”
In the current case, the Statement of Average Revenue Per Booking (ARPB) and Comparative
is unaudited supplementary information that could be construed as being covered by the
auditor’s opinion. Hence, the audit team should evaluate whether such supplementary
information is presented in a way that sufficiently and clearly differentiates it from the audited
financial statements. If not, then audit can suggest management to change the presentation of
unaudited supplementary information by:

- Removing any cross-references from the financial statements to unaudited

supplementary schedules or unaudited notes so that the demarcation between the audited and
unaudited information is sufficiently clear.
- Placing the unaudited supplementary information outside of the financial statements or,
if that is not possible in the circumstances, at a minimum placing the unaudited notes together
at the end of the required notes to the financial statements and clearly labelling them as
unaudited. Unaudited notes that are intermingled with audited notes can be misinterpreted as
being audited.
If the management of XYZ Limited refuses to do so, the auditor shall identify the unaudited
supplementary information, i.e., Statement of ARPB and Comparative and explain in the
auditor’s report that such supplementary information has not been audited.

Question 1 (SA 705)

In the financial year 2022-23, MOKSH Ltd. faced an extraordinary event (earthquake), which
destroyed a lot of business activity of the company. These circumstances indicate material
uncertainty on the company’s ability to continue as going concern. Due to such event, it may
not be possible for the company to realize its assets or pay off the liabilities during the regular
course of its business. The financial statement and notes to the financial statements of the
company do not disclose this fact. What kind of opinion should the statutory auditor of
MOKSH Ltd. issue in such circumstances? (Nov 2023 RTP)
Answer:

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In the present case, there exists a material uncertainty that cast a significant doubt on the
company’s ability to continue as going concern and the same is not disclosed in the financial
statements of MOKSH Ltd.
As such, the financial statements of MOKSH Ltd. for the FY 2022 -23 are materially misstated
and the effect of the misstatement is so material and pervasive on the financial statements that
giving only a qualified opinion will be insufficient and therefore the statutory auditor of
MOKSH Ltd. should issue an adverse opinion.
The relevant extract of the Adverse Opinion Paragraph and Basis for Adverse Opinion
paragraph is as under:
Adverse Opinion
In our opinion, because of the omission of the information mentioned in the Basis for Adverse
Opinion section of our report, the accompanying financial statements do not present fairly, the
financial position of MOKSH Ltd. as at March 31, 2023, and of its financial performance and
its cash flows for the year then ended in accordance with the Accounting Standards issued by
the Institute of Chartered Accountants of India.
Basis for Adverse Opinion
MOKSH Ltd. has faced an extraordinary event (earthquake), which destroyed a lot of business
activity of the company. Due to such event, it may not be possible for the company to realize
its assets or pay off the liabilities during the regular course of its business. This situation
indicates that a material uncertainty exists that may cast significant doubt on the Company’s
ability to continue as a going concern. The financial statement and notes to the financial
statements of the company do not disclose this fact.

Question 2
While conducting audit of RAC Limited, CA R has discovered a misstatement in the financial
statements of a company due to non-write off of a huge trade receivable with an outstanding
amount of ₹ 2 crores. The party in question has fled from India and is now absconding. After
reviewing the audit evidence, it was concluded by the auditor that there is no possibility of
recovering the outstanding debt. Despite the matter being brought to the attention of the
management, they have refused to correct the misstatement. As a result, the financial
statements of the company show a profit before tax of ₹ 1 crore, which is incorrect due to the
management's refusal to correct the aforementioned misstatement. Materiality has been
determined for financial statements @ 5% of profit before tax. Comment as regards to type of
opinion to be given by CA R in above situation on the basis of provided information.
(Nov 2023 MTP 2)
Answer:
SA 705 states that the auditor shall modify the opinion in the auditor’s report when:

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(a) The auditor concludes that, based on the audit evidence obtained, 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.
In the given situation, auditor has obtained evidence in relation to non-recoverability of
outstanding trade receivable.
SA 705 further states that the auditor shall express an adverse opinion when the auditor, having
obtained sufficient appropriate audit evidence, concludes that misstatements, individually or in
the aggregate, are both material and pervasive to the financial statements.
In this scenario, the uncorrected misstatement stands at 200% of the profit before tax, while
the materiality has been determined at 5% of the profit before tax. Hence, this misstatement
should be considered as material. Additionally, if such a substantial amount is written off, it
would significantly impact the financial position of the company. As a result, losses would
have to be reported instead of profits. Taking the above factors into consideration, this
misstatement should be classified as both material and pervasive. Therefore, adverse opinion
needs to be expressed in accordance with the requirements of SA 705.
Question 1 (SA 706)
How does the inclusion of Emphasis of Matter (EOM) paragraphs in the Auditor's Report differ
from the disclosure of Key Audit Matters (KAM)? (Nov 2023 RTP)
Answer:
Relationship between Emphasis of Matter Paragraphs and Key Audit Matters in
the Auditor’s Report
Key audit matters— Emphasis of Matter paragraph –
Those matters that, in the auditor’s A paragraph included in the auditor’s report
professional judgment, were of most that refers to a matter appropriately presented or
significance in the audit of the financial disclosed in the financial statements that, in the
statements of the current period. Key audit auditor’s judgment,is of such importance that
matters are selected from matters it is fundamental to users’ understanding of
communicated with those charged with the financial statements. [SA 706]
governance. [SA 701]

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 Matters that are determined to be key audit A widespread use of Emphasis of Matter
matters in accordance with SA 701 may paragraphs may diminish the effectiveness
also be, in the auditor’s judgment, of the auditor’s communication about such
fundamental to users’ understanding of matters.
the financial statements. In such cases, Use of Emphasis of Matter paragraphs is not a
in communicating the matter as a keyaudit substitute for a description of individual key
matter in accordance with SA 701, the audit matters where SA 701 is applicable.
auditor may wish to highlight or draw
further attention to its relative importance.
Communicating key audit matters
There may be a matter that is not determined
provides additional information to
to be a key audit matter in accordance with SA
intended users of the financial
701 (i.e., because it did not require significant
statements to assist them in
auditor attention), but which, in the auditor’s
understanding those matters that, in the
judgment, is fundamental to users’
auditor’s professional judgment, were of
understanding of the financial statements(e.g., a
most significance in the audit and may
subsequent event). If the auditor considers it
also assist them in understanding the
necessary to draw users’ attention to such a
entity and areas of significant management
matter, the matter is included in an Emphasis
judgment in the audited financial
of Matter paragraph in the auditor’s report in
statements.
accordance with this SA.

The communication of key audit matters The auditor may do so by presenting the
in the auditor’s report may also provide matter more prominently than other matters
intended users a basis to further engage with in the Key Audit Matters section (e.g., as the
management and those charged with first matter) or by including additional
governance about certain matters relating information in the description of the key audit
to the entity, the audited financial matter to indicate the importance of the
statements, or the audit that was matter to users’ understanding of the financial
performed. statements.

(SA 720)
Question 1
Sujit & Co., Chartered Accountants, have been appointed as Statutory Auditors of Anand Mills
Ltd. for FY 2022-23. The audit team has completed the audit and is in the process of preparing
the audit report. The Management of the company has also prepared a draft annual report.
While reviewing the company's draft annual report, the auditor observed a section that stated a
decline in market prices for essential products compared to the previous year. Surprisi ngly,
the financial statements indicated that the company's profit margin had actually increased. The
audit Man ager discussed this issue with the firm's partner, who replied that the auditors are
not responsible for disclosures made by management in the annual report. Do you think that
the partner is correct in his approach to this issue? Discuss with reference to the relevant
Standards on Auditing the Auditor's duties with regard to reporting. (Nov 2023 MTP 1)
Answer:

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Auditor’s responsibilities as to Other Information included in Annual Report : SA 720,
"The Auditor's Responsibilities Relating to Other Information", delineates the responsibilities
of auditors in regard to other information, which can pertain to financial or non-financial
matters and is encompassed within an organisation's annual report. This encompasses
documentation of market trends pertaining to significant products and quantities or other items
that may be included in the other information.
The auditor’s discussion with management about a material inconsistency (or other information
that appears to be materially misstated) may include requesting management to provide support
for the basis of management’s statements in the other information. Based on management’s
further information or explanations, the auditor may be satisfied that the other information is
not materially misstated. For example, management explanations may indicate reasonable and
sufficient grounds for valid differences of judgment.
Auditor’s duties with regard to reporting: If the auditor concludes that a material
misstatement of the other information exists, the auditor shall request management to correct
the other information. If management:
(i) Agrees to make the correction, the auditor shall determine that the correction has been
made; or
(ii) Refuses to make the correction, the auditor shall communicate the matter with those
charged with governance and request that the correction be made.
In the given situation, Sujit & Co., Chartered Accountants, have been appointed as Statutory
Auditors of Anand Mills Ltd. The auditor, while reviewing the company’s draft annual report,
has observed a section mentioning about a decline in market prices for essential products
compared to previous year and financial statements indicated that company’s profit margin has
increased. Considering the requirements of SA 720 as stated above, it can be concluded that
contention of firm’s partner, that auditors are not responsible for disclosures made by
management, is not correct. Accordingly, partner is not correct in his approach to this issue.

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Chapter 2- CARO 2020
Question 1
CA. F has been appointed as the Statutory Auditor of XYZ Limited for the financial year 2022-
23. XYZ Limited has one subsidiary, namely AT Private Limited, whose statutory auditor is
CA. B for the same financial year i.e., 2022-23.
CA. B issued a qualification in CARO 2020 for AT Private Limited, stating that short -term
funds raised were utilised for long-term purposes. When consolidating the financial statements,
CA. F decided to include the aforementioned qualification in the audit report of the
Consolidated Financial Statements for the financial year 2022 -23. The management of XYZ
Limited argued that CA. F is not obligated to take into account and report the qualification
given by CA. B in the audit report of the subsidiary company in the consolidated financial
statements for the financial year 2022 -23.
Discuss the reporting requirement as per CARO, 2020. (Nov 2023 RTP)
Answer:
XYZ Limited is the parent company, and it has a subsidiary named AT Private Limited. CA F
is the appointed statutory auditor for XYZ Limited for the financial year 2022 -23. Another
auditor, CA B, has conducted the statutory audit for AT Private Limited and issued a CARO
2020 report, which includes a qualification regarding the short-term funds raised and utilised
for long-term purposes.
Provision of Paragraph 2 of CARO 2020: Paragraph 2 of CARO 2020 specifies that the
CARO provisions do not apply to the auditor's report on consolidated financial statements
except for clause (xxi) of Paragraph 3.
Clause (xxi) of Paragraph 3 of CARO 2020: Clause (xxi) of Paragraph 3 of CARO 2020
mandates the auditor to comment on whether there are any qualifications or adverse remarks
in the CARO reports of companies included in the consolidated financial statements. If such
qualifications or adverse remarks exist, the auditor is required to provide details of the
companies and the paragraph numbers of the CARO report containing those qualifications or
adverse remarks.
CA F's Responsibility: Considering the provisions stated above, CA F, as the auditor of XYZ
Limited's consolidated financial statements, is required to follow these steps:
a. Report under Clause (xxi) of Paragraph 3 of CARO 2020: CA F must include a
comment in the consolidated financial statement's audit report regarding whether there are any
qualifications or adverse remarks in the CARO reports of the companies included in the
consolidated financial statements.
b. Incorporate Qualification by CA B: CA F should incorporate the qualification made
by CA B (regarding short-term funds raised and utilized for long-term purposes in AT Private
Limited) into the auditor's report for XYZ Limited's consolidated financial statements.
c. Mention Paragraph Number: CA F must also provide the paragraph number of CA
B's CARO report where the qualification is stated.
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Management's Contention: The management of XYZ Limited's contention that CA F is not
required to consider and report CA B's qualification in the subsidiary's CARO report for the
consolidated financial statements is not valid. As per the provisions, CA F is indeed required
to report such qualifications as specified in Clause (xxi) of Paragraph 3 of CARO 2020.
In conclusion, based on the information provided and the provisions of CARO 2020, CA F is
obligated to incorporate the qualification from CA B's CARO report for AT Private Limited
into the auditor's report for XYZ Limited's consolidated financial statements for the financial
year 2022-23, as well as provide the necessary details as per the requirements of Clause (xxi)
of Paragraph 3 of CARO 2020.

Question 2
ABC & Associates are conducting audit of consolidated financial statements of “Crazy Paints
Limited” for year 2022-23. The consolidated financial statements consist of financial
statements of parent company and its five subsidiaries (audited by component auditors). While
drafting audit report in respect of consolidated financial statements under Companies Act,
2013, how firm should proceed to deal with issue of reporting under CARO, 2020?
(Nov 2023 MTP 2)
Answer:
CARO, 2020 specifically provides that it shall not apply to the auditor’s report on consolidated
financial statements except clause (xxi) of paragraph 3. This means that the auditor will need
to give a CARO report on the consolidated financial statements with respect to clause 3(xxi)
of the Order only. Thus, the auditor is not required to report on rest of the clauses of paragraph
3.
Clause 3(xxi) of CARO 2020 requires the auditor to state whether there have been any
qualifications or adverse remarks by the respective auditors in the Companies (Auditor’s
Report) Order (CARO) reports of the companies included in the consolidated financial
statements. If yes, indicate the details of the companies and the paragraph numbers of the
CARO report containing the qualifications or adverse remarks.
Therefore, it requires the auditor to provide details of the companies and the paragraph numbers
of the respective CARO report containing the qualifications or adverse remarks only. Reporting
under this is only required for those entities included in the consolidated financial statements
to whom CARO 2020 is applicable.

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Chapter 4- Professional Ethics
Question 1 Council Guidelines 2008
Comment on the following scenario with reference to the Chartered Accountants (Amendment)
Act, 2006 and Schedules thereto.
Statutory Audit of Arihant Limited for the year 2021-22 was done by CA Acharya. Arihant
Limited was in existence since 2010. The relevant extract from books of account of Arihant
Limited are as below:

Particulars As at 31.03.2023 As at 31.03.2022

(₹ in lakh) (₹ in lakh)
(Unaudited) (Audited)
Equity Share Capital 5.00 5.00
Reserve and Surplus (10.00) (8.00)
Provision for Audit Fees For FY 2021-22- 1.00 1.00
For FY 2022-23- 1.00
(Figures in bracket indicates negative values)
CA. Nemi accepted the Statutory Audit of Arihant Limited for the year 2022-23 in spite of the
fact that as on date of acceptance by CA Nemi, the audit fees of CA Acharya was unpaid.
(Nov 2023 RTP)
Answer:
As per Chapter VII of Central Council Guidelines 2008, a member of the Institute in practice
shall not accept the appointment as auditor of an entity in case the undisputed audit fee of
another Chartered Accountant for carrying out the statutory audit under the Companies Act,
2013 or various other statutes has not been paid:
Provided that in the case of sick unit, the above prohibition of acceptance shall not apply where
a sick unit is defined to mean “where the net worth is negative as at the end of any financial
year accumulated losses equal to or exceeding its entire net worth.
As Explanation 1 of the Chapter VII of Central Council Guidelines 2008 , for the purpose, the
provision for audit fee in accounts signed by both — the auditee and the auditor along with
other expenses, if any, incurred by the auditor in connection with the audit, shall be considered
as “undisputed audit fees”.
In the instant case, though the undisputed fees are unpaid, CA Nemi would still not be guilty
of professional misconduct since the Arihant Limited is a sick unit having negative net worth
for the year 2022-23.
Question 2 Clause (11) of Part I of Schedule I
CA Sumati is a practicing-chartered accountant having office in Mumbai. CA Sumati is owner
of domain cap.net. In order to generate additional revenue CA Sumati sold this domain name
to XYZ Limited for earning royalty of ₹ 2,25,000. One of the directors of XYZ Limited
contended that CA Sumati has violated the Code of Conduct. CA Sumati responded that there
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is no violation of Code of Conduct as selling of domain name is not related to any professional
assignment which requires approval of the Institute. (Nov 2023 RTP)
Answer:
As per Clause (11) of Part I of Schedule I to the Chartered Accountants Act, 1949, a
member in practice is deemed to be guilty if he engages in any business or occupation other
than the profession of chartered accountant unless permitted by the Council so to engage.
Provided that nothing contained herein shall disentitle a chartered accountant from being a
director of a company (not being a managing director or a whole-time director) unless he or
any of his partners is interested in such company as an auditor.
As per Regulation 190A, a chartered accountant in practice not to engage in any other business
or occupation other than the profession of accountancy except with the permission granted in
accordance with a resolution of the Council.
In the given case, CA Sumati is a practicing chartered accountant having office in Mumbai.
CA Sumati is owner of domain cap.net. In order to generate additional revenue, CA Sumati
sold this domain name for earning royalty of ₹ 2,50,000 to XYZ Limited. One of the directors
of XYZ Limited contended that CA Sumati has violated the Code of Conduct. CA Sumati
responded that there is no violation of Code of Conduct as selling of domain name is not related
to any professional assignment which requires approval of the Institute. As per Regulation
190A, the activity of selling domain name for earning Royalty would amount to “other
business/occupation” without approval is prohibited.
Hence, CA Sumati is guilty of professional misconduct under Clause 11 of Part I of Schedule
I to the Chartered Accountants Act, 1949 for selling domain name for a royalty.

Question 3 Clause (8 and 9) of Part I of Schedule I

Mr. Sunil was appointed statutory Auditor of M. Autotech Limited after Mr. Ram resigned
from the position of auditor on 31-07-2022 for the financial year 22-23. Mr. Sunil received the
appointment letter duly signed by the Board of Directors and a resolution of the Audit
Committee recommending the name of Mr. Sunil to the Board. Mr. Sunil received the letter of
appointment on 31 -07-2022, which he accepted on 01-08-2022. On 15-08-2022, Mr. Sunil
fixed a meeting with Mr. Ram to understand the reasons for his resignation and any concerns
he should be aware of about the company. Prior to this, Mr. Sunil had not communicated with
Mr. Ram. The Board of M Autotech Limited filed ADT-1 with the registrar on 31-08-2022.
Mr. Sunil, after performing the audit, issued his audit report on 31 -05-2023. The registrar, after
issuance of the audit report, suo moto initiated an inquiry regarding the appointment of Mr.
Sunil as the auditor of the company. After the inquiry, Registrar issued a report to ICAI wherein
it was mentioned that Mr Sunil should be held guilty of professional misconduct. You are
required to guide Mr. Sunil with respect to the recommendation of the registrar for him being
guilty of professional misconduct. (Nov 2023 MTP 1)
Answer:

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A member in practice shall be held guilty of professional misconduct as per clause 9 of Part I
of the First Schedule where he accepts an appointment as auditor of a company without first
ascertaining from it whether the requirements of Section 225 of the Companies Act, 1956 (1
of 1956), in respect of such appointment have been duly complied with (corresponding to
section 139 and 140 of Companies Act, 2013).
Clause (9) of Part I of the First Schedule to Chartered Accountants Act, 1949 provides
that a member in practice shall be deemed to be guilty of professional misconduct if he accepts
an appointment as auditor of a Company without first ascertaining from it whether the
requirements of Sections 139 and 140 of the Companies Act, 2013, in respect of such
appointment have been duly complied with. Under this clause, it is obligatory for the incoming
auditor to ascertain from the Company that the appropriate procedure in the matter of his
appointment has been duly complied with so that no shareholder or retiring auditor may, at a
later date, challenge the validity of such appointment.
As per section 139(8) of the Companies Act, 2013, 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 thirty days, but if such casual vacancy is as a result of the resignation
of an auditor, such appointment shall also be approved by the company at a general meeting
convened within three months of the recommendation of the Board and he shall hold the office
till the conclusion of the next annual general meeting.
Also, before such appointment is made, the written consent of the auditor to such appointment
and a certificate from him or it that the appointment, if made, shall be in accordance with the
conditions as may be prescribed shall be obtained from the auditor. Provided also that the
certificate shall also indicate whether the auditor satisfies the criteria provided in section 141.
Also, that the company shall inform the auditor concerned of his or his appointment and also
file a notice of such appointment with the Registrar within fifteen days of the meeting in which
the auditor is appointed.
Also, a member in practice shall be held guilty of professional misconduct as per clause 8 of
Part I of the First Schedule where he accepts a position as auditor previously held by another
Chartered Accountant without first communicating with him in writing.
In the current case, Mr. Sunil was appointed statutory Auditor of M. Autotech Limited after
Mr. Ram resigned from the position of auditor on 31-07-2022 for the financial year 2022-23.
Mr. Sunil received the appointment letter duly signed by the Board of Directors. Mr. Sunil
received the letter of appointment on 31-07-2022, which he accepted on 01-08-2022. On 15-
08-2022, Mr. Sunil fixed a meeting with Mr. Ram to understand the reasons for his resignation
and any concerns he should be aware of about the company. Prior to this, no communication
happened between Mr. Sunil and Mr. Ram. The Board of M. Autotech Limited filed ADT-1
with the registrar on 31-08-2022.
Hence, Mr. Sunil did not verify whether the requirement of section 139 of the Companies Act,
2013 has been complied with or not, as in the current case, there was no approval by the
company at a general meeting convened within three months of the recommendation of the
Board. Under Section 139(8), approval by a company at general meeting as discussed above is

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mandatory requirement. Therefore, he has not ascertained from company whether requirements
of section 139 and 140 of Companies Act, 2013 have been complied with. Moreover, Mr. Sunil
did not communicate with a retiring auditor in such a manner as to retain in their hands positive
evidence of the delivery of the communication to the outgoing/previous auditor.
Therefore, Mr. Sunil is guilty of professional misconduct both under clause 8 and 9 of
First Schedule to Chartered Accountants Act, 1949.

Question 4 Clause 6 of Part I of Schedule I

M/s. SR & Associates is one of the three firms shortlisted by ARG Cooperative Bank for the
assignment of Statutory Audit for the FY 2022-2023. Bank mailed the list of branches to the
audit firms along with the maximum fee per branch and asked them to submit the quotations.
SR & Associates responded to the bank and submitted their quotation. Comment with reference
to the provisions of the Chartered Accountants Act, 1949 and Schedules thereto.
(Nov 2023 MTP 1)
Answer:
Provisions of the Chartered Accountants Act, 1949 and Schedules thereto -
As per Clause (6) of Part I of First Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice will be deemed to be guilty of professional misconduct if he
solicits clients or professional work either directly or indirectly by circular, advertisement,
personal communication or interview or by any other means.
Provided that nothing herein contained shall be construed as preventing or prohibiting -
(i) Any Chartered Accountant from applying or requesting for or inviting or securing
professional work from another chartered accountant in practice; or
(ii) A member from responding to tenders or enquiries issued by various users of
professional services or organisations from time to time and securing professional work as a
consequence.
However, as per the guideline issued by the Council of the Institute of Chartered Accountants
of India, a member of the Institute in practice shall not respond to any tender issued by an
organisation or user of professional services in areas of services which are exclusively reserved
for chartered accountants, such as audit and attestation services.
However, such restriction shall not be applicable where minimum fee of the assignment is
prescribed in the tender document itself or where the areas are open to other professionals along
with the Chartered Accountants.
In the given case of ARG Cooperative Bank, Bank mailed the list of branches to the audit firms
along with maximum fees per branch, in response to which M/s. SR & Associates responded
and submitted their quotation.

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Keeping in view the facts, clause 6 and guideline issued by the council, it can be concluded
that M/s. SR & Associates is guilty of Professional misconduct.

Question 5 Clause 2 of Part II of First Schedule

CA D is serving as Vice-President (finance) of TM Industries, a firm. A huge claim lodged
by firm for ₹20 crores with an insurance company was just paid for ₹2 crores. Aggrieved by
it, management of TM Industries has decided to go in for arbitration proceedings under
Arbitration and Conciliation Act, 1996. Unaware of lawyers dealing in this field,
management requests CA D to help them find out a suitable lawyer. Being a smart person,
CA D has links with one such lawyer. His understanding with arbitration lawyer was to
receive 25% of fees agreed between lawyer and client by way of commission. Comment
whether CA D is guilty of professional conduct. (Nov 2023 MTP 2)
Answer:
Part II of First Schedule of Chartered Accountants Act, 1949 deals with professional
misconduct in relation to members of Institute in service. Clause 2 of Part II of First Schedule
to Chartered Accountants Act states that a member of the Institute (other than a member in
practice) shall be deemed to be guilty of professional misconduct, if he being an employee of
any company, firm or person accepts or agrees to accept any part of fees, profits or gains from
a lawyer, a chartered accountant or broker engaged by such Company, firm or person or agent
or customer of such Company, firm or person by way of commission or gratification.
Therefore, CA D is guilty of professional misconduct as discussed above.

Question 6
Mr. Raj, a practicing Chartered Accountant was ordered to surrender his certificate of practice
and he was suspended for two years for accepting the appointment as an auditor of a company
without ascertaining the requirements of section 139 and 140 read with section 141 of
Companies Act, 2013. During the period of suspension, Mr. Raj, designating himself as Data
Privacy consultant, did the work of filing Data Privacy related returns and made appearance as
a consultant before various related authorities in other capacity other than Chartered
Accountant in Practice. He contended that there is nothing wrong in it as he, like any other
consultant, could take such work and his engagement as such in no way violate the order of
suspension inflicted on him.
Kindly guide Mr. Raj whether can he appear before various Data Privacy related authorities
when he is under period of suspension in light of section 6 of the Chartered Accountants Act,
1949.
(Nov 2023 MTP 2)
Answer:
Section 6 of the Chartered Accountants Act, 1949 provides that: -

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i. No member of the Institute shall be entitled to practise whether in India or elsewhere
unless he has obtained from the Council a certificate of practice:
It may be noted that this provision is not applicable to any person who, immediately before the
commencement of this Act, has been in practice as a registered accountant or a holder of a
restricted certificate until one month has elapsed from the date of the first meeting of the
Council.
ii. Every such member shall pay such annual fee for his certificate as may be determined,
by notification, by the Council.
iii. The certificate of practice obtained under sub-section (1) may be cancelled by the
Council under such circumstances as may be prescribed.
Once the person concerned becomes a member of the Institute, he is bound by the provisions
of the Chartered Accountants Act and its Regulations. If and when he appears before the
Income -tax Tribunal as an Income-tax representative after having become a member of the
Institute, he could so appear only in his capacity as a Chartered Accountant and a member of
the Institute. Having, as it were, brought himself within the jurisdiction of the Chartered
Accountants Act and its Regulations, he could not set them at naught by contending that even
though he continues to be a member of the Institute and has been punished by suspension from
practice as a member, he would be entitled, in substance, to practice in some other capacity.
In the current case, Mr. Raj, designating himself as Data Privacy consultant, did the work of
filing Data Privacy related returns and made appearance as a consultant before various related
authorities in other capacity other than Chartered Accountant in Practice. As a result, h e is not
appearing in the capacity of Chartered Accountant in Practice and hence he is not violating the
suspension order.

Chapter 6-Materiality, Risk Assessment and Internal Control

Question 1
ZOB Limited is planning to be listed. The management of company has pulled up its socks and
decided to implement “Enterprise Risk Management Program” for identifying and assessing
various risks. Differentiating scope of such a program from internal control framework, discuss
what does “Risk Assessment Process” is likely to include in such a program. Also identify any
two such widely available ERM frameworks. (Nov 2023 MTP 2)
Answer:
The scope of an Enterprise Risk Management program is much broader than an internal control
framework and encompasses both internal and external factors that are relevant to business
strategy, governance, business process and transaction and activity level. The focus of an
internal control framework is primarily around financial reporting, operations and compliance

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risks associated with an account balance, business process, transaction and activity level, which
form a sub-set of the overall enterprise risks.
This Enterprise Risk Management – Integrated Framework expands on internal control
providing a more robust and extensive focus on the broader subject of enterprise risk
management. While it is not intended to and does not replace the internal control framework,
but rather incorporates the internal control framework within it, companies may decide to look
to this enterprise risk management framework both to satisfy their internal control needs and
to move toward a fuller risk management process.
One of the most critical components of Enterprise Risk Management is the risk assessment
process. The risk assessment process involves considerations for: -
• Risk identification
• Assessment criteria including qualitative and quantitative factors
• Definition of key performance and risk indicators;
• Risk appetite
• Risk scores, scales and maps
• Assess risks
• Use of data & metrics
• Prioritise risk
• Benchmarking
Two most widely used ERM frameworks are: -
➢ COSO Enterprise Risk Management – Integrated Framework developed by the Committee
of Sponsoring Organisations (COSO) to address the changes in business environment.
➢ ISO 31000 Risk Management standard published by the International Organization for
Standardization. It is a risk Management standard published by the International
Organization for Standardization and provides guidelines on managing risk faced by
organizations. The application of these guidelines can be customized to any organization
and its context.

Chapter 8- Audit of Banks

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Question 1
PQS & Associates are one of the joint auditors of KNO Bank for the year 2022 -23. While auditing KNO Bank, they are
analysing industry data relating to NPAs in select public sector banks as part of risk assessment procedures: -
Name of Bank Gross NPAs(in Net NPAs Ratio of Net NPAsto
₹ crore) (in ₹ crore) Net advances
BBI Bank 55,000 13,000 1.72%
DAB Bank 45,000 10,000 2.34%
CNI Bank 55,000 18,000 2.65%
KNO Bank 28,000 6,500 3.97%
BRB Bank 35,000 8,800 2.27%
In the above context, what do you understand by “Gross NPAs” and “Net NPAs” as on reporting date in the context of
financial statements of a Bank? As an auditor of KNO Bank, what inference would you draw by comparing the “Ratio of net
NPAs to net advances” with other public sector banks? (Nov 2023 RTP)
Answer:
Gross NPAs represent opening balances of NPAs as increased by fresh NPAs during the year and reduced by
upgradations, recoveries and write-offs during the year.
Net NPAs are arrived at after deducting amounts on account of the total provision held against NPAs/ balance
in the interest suspense account to park accrued interest on NPAs and certain other adjustments.
The Net NPAs to Net advances ratio is higher in the case of KNO Bank as compared to other public sector
banks. It shows that there is a risk that the bank could not have made the required provisions in accordance with
RBI guidelines. A higher net NPAs to Net advances ratio indicates the probability and risk of under-
provisioning. Keeping in view the above, audit procedures have to be tailored towards the examination and
verification of this crucial area.

Question 2
CA. Sundaram is an engagement partner conducting a statutory audit of a nationalised bank. The bank operates on the
CBS platform, and the identification of NPAs is system based in accordance with RBI guidelines on asset classification.
He wants to be assured of satisfactory operation of internal control in this respect. He wants to be sure that there exists
an internal control system in the bank which not only prevents and reduces the risk of loan assets becoming non-
performing at the initial stages but also sends out timely signals to the bank subsequently. He is putting considerable
importance on effective credit appraisals due to their role in preventing NPA slippages.
While carrying out a walk-through of internal control over advances of banks especially in areas of “credit appraisals” and
“credit monitoring”, identify any four specific controls which you may be looking for.
(Nov 2023 RTP)
Answer:
The following controls may be considered by auditor in areas of credit appraisals and credit monitoring for
ensuring that internal control over advances is effective and the system is capable of not only preventing and
reducing the risk of NPAs at the sanction stage itself but also sending out timely signals to the bank subsequently.
(i) Use of third-party data sources in the bank for comprehensive due diligence at the sanction stage itself
to mitigate risk on account of misrepresentation and fraud.
(ii) Classification of accounts as special mentioned accounts (SMA) for early recognition of signs of
incipient stress resulting in default in timely servicing of debt obligations. It can enable banks to initiate
timely remedial actions to prevent potential slippages into NPAs.
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(iii) Institution of comprehensive, automated Early Warning Systems (EWS) in banks with EWS triggers
to detect stress and reduce slippage into NPAs
(iv) Reporting of repayment behaviour of borrowers in their loan accounts to credit information companies
and inclusion of this information in the credit appraisal and decision-making process for further
sanctioning of loans to borrowers.

Question 3
Advances generally constitute the major part of the assets of the bank. There are substantial
number of borrowers to whom a variety of advances are granted. The audit of advances
requires major attention from the auditors. As an expert in bank audit, you are required to
briefly discuss the area of focus and suggested audit procedures regarding the evaluation of
internal controls over advances, substantive audit procedures and recoverability of advances.
(Nov 2023 MTP 1)
Answer:
Audit Procedures -In carrying out audit of advances, the auditor is primarily concerned with
obtaining evidence about the following:
Area of Focus Suggested Audit Procedure
Evaluation of Internal • Examine loan documentation.
Controls over Advances
• Examine the validity of the recorded amounts.
• Examine the existence, enforceability and valuation of the
security.
• Ensure compliance with the terms of sanction and end use of
funds.
• Ensure compliance with Loan Policy of Bank as well as RBI
norms including appropriate classification and provisioning
• Review the operation of the accounts.
Substantive Audit • Check that the advances represent amount due to the bank.
Procedures
• Verify that the advances are disclosed, classified anddescribed
in accordance with recognised accounting policies and practices
and relevant statutory and regulatory requirements.
• Check that appropriate provisions towards advances have been
made as per the RBI norms, Accounting Standards and generally
accepted accounting practices.
• Examine all large advances while other advances may be
examined on a sample basis.
• Verify completeness and accuracy of interest being charged.

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 • Ensure that there are no unrecorded advances.
• Check that the stated basis of valuation of advances is appropriate
and properly applied, and that the recoverability of advances is
recognised in their valuation.
• Check whether the amounts included in the balance sheet are
outstanding as on the date of balance sheet.
• Verify completeness and accuracy of interest being charged.

Recoverability of Advances • Review periodic statements submitted by the borrowers indicating

the extent of compliance with terms and conditions.
• Review latest financial statements of borrowers.
• Review reports on inspection of security.
• Review Auditors’ reports in the case of borrowers enjoying
aggregate credit limits of Rupees 10 lakh or above for working
capital from the banking system.

Question 4

CA X is conducting concurrent audit of a branch of MNB Bank (a nationalised bank) in

industrial hub of Pune. It is a CBS branch, and its advances are to the tune of about ₹ 500
crores. The branch has borrowers / customers with cash credit, term loans, and export credit
facilities, including pre - shipment and post-shipment credits. Some customers in the branch
are importers who regularly get letters of credit issued to foreign suppliers. During tenure of
Mr. X as concurrent auditor, fresh credit facilities under aforesaid segments are being
sanctioned every month to new customers. The branch is also considering requests of its
existing customers for enhancements / fresh requirements in line with established norms.

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As a result of the above, the staff of the advances department in the branch is always on its
toes. The previous regular inspection of the branch (not pertaining to CA X’s tenure) had
pointed out huge revenue leakage in advances of the branch, raising alarm bells in the Zonal
Office and Inspection Department. Keeping in view the above situation, CA X is taking steps
to ensure that there is no revenue leakage in advances of the branch and recoveries are made
on the spot in case such leakages are detected. Discuss any five areas in this regard where
concurrent auditor’s audit procedures should be focused. (Nov 2023 MTP 2)
Answer:
The major areas to plug revenue leakage where concurrent auditor should focus audit
procedures include: -
(i) Verifying rates of interest as per terms of sanction in sanction letter vis-à-vis those fed
in CBS as well as the calculation of interest through product rate sheets generated by
CBS t o satisfy that interest has been charged on all the performing accounts and interest
rates charged are in accordance with the bank’s internal regulations, directives of the
RBI and agreements with the respective borrowers.
(ii) Verification of renewal charges in respect of existing customers enjoying cash credit
and export credit facilities. Similarly, for fresh borrowers, proposal processing charges,
including upfront fees for term loan, needs to be verified in accordance with Bank’s
circulars to ensure that all charges are debited at time of release of facilities to new
customers. These charges also need to be levied proportionately in respect of customers
whose credit facilities have been enhanced.
(iii) Verification of penal charges for non-submission of stock statements on due dates in
case borrowers availing cash credit and export credit facilities consisting of pre-
shipment credit facilities.
(iv) Verification of commission /charges in case of letter of credit has been issued to
importers in accordance with the Bank’s circulars.
(v) As the branch has also granted export credit facilities in the nature of post -shipment
credit facilities, verification of commission/charges on export bills purchased is
required.

Chapter 9- Special Features of NBFCs Audit

Question 1
Super Non-Bank Limited, a “Systemically Important Non-Deposit Taking Non-Banking
Financial Company”, was operating appropriately till the start of COVID-19 Pandemic. Due
to unforeseen conditions during the Pandemic and after that, the operating revenue of the
NBFC started decreasing. Following were the position of Net Owned Funds of the company
during the last 4 financial years:
Financial Year Net Owned Funds
FY19-20 ₹ 15 Crore

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 FY20-21 ₹ 6 Crore
FY21-22 ₹ 4 Crore
FY22-23 ₹ 1.5 Crore

Super Non-Bank Limited appointed Mr Shyam as their statutory auditor for the FY 22-23. Mr
Shyam identified that the Net Owned Funds of the company have been less than ₹ 2 Crore
since June 2022. Kindly guide Mr Shyam with respect to his reporting requirements as per
relevant NBFC provisions.
(Nov 2023 MTP 1)
Answer:
In exercise of the powers conferred under clause (b) of sub-section (1) of section 45–IA of the
RBI Act and all the powers enabling it in that behalf, the Bank hereby specifies two hundred
lakh rupees as the Net Owned Fund (NOF) required for a non-banking financial company to
commence or carry on the business of non-banking financial institution, except wherever
otherwise a specific requirement as to NOF is prescribed by the Bank.
It will be incumbent upon such NBFCs, the NOF of which currently falls below ₹200 lakh, to
submit a statutory auditor's certificate certifying compliance with the prescribed levels by the
end of the period as given above.
NBFCs failing to achieve the prescribed level within the stipulated period shall not be eligible
to hold the CoR as NBFCs. Every non-banking financial company shall submit a certificate
from its Statutory Auditor that it is engaged in the business of a non-banking financial
institution requiring it to hold a Certificate of Registration under Section 45-IA of the RBI Act
and is eligible to hold it. A certificate from the Statutory Auditor in this regard with reference
to the position of the company as at end of the financial year ended March 31 may be submitted
to the Regional Office of the Department of Non-Banking Supervision under whose
jurisdiction the non-banking financial company is registered, within one month from the date
of finalization of the balance sheet and in any case not later than December 30th of that year.
The format of the Statutory Auditor’s Certificate (SAC) to be submitted by NBFCs has been
issued vide DNBS. PPD.02/66.15.001/2016 -17 Master Direction- Non-Banking Financial
Company Returns (Reserve Bank) Directions, 2016.

Hence, in the current case, it is the responsibility of the Statutory Auditor, i.e., Mr. Shyam, to
report where NOF has fallen below ₹ 200 Lakhs.

Question 2
Suhana, a CA final student, is part of engagement team conducting audit of CMM Finance
Limited, a listed NBFC. While going through THE audit programme, she notices that it
contains instructions for verification of following matters among other things in relation to
disclosure requirements of Schedule III of Companies Act, 2013:

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(i) Verification regarding disclosure of any of item of income or expenditure which
exceeds 1% of revenue from operations or ₹10 lakhs whichever is higher.
(ii) Verification of disclosure regarding Return on Capital Employed Ratio, return on
Equity Ratio and net profit ratio.
Discuss whether above instructions for similar matters need revision by engagement partner in
this situation. If so, elaborate on revision required along with reasons. (Nov 2023 MTP 2)
Answer:
The above instructions are not proper and these do not pertain to Division III of Schedule III
applicable to NBFCs. Rather, such requirements are applicable for companies for which
Division II of Schedule III is applicable. Hence, these should be revised in accordance with
similar requirements applicable to listed NBFCs for whom Division III of Schedule III is
applicable.
The similar disclosure requirements for a listed NBFC under Division III of Schedule III are
as follows: -
(i) Any item of other income or other expenditure which exceeds 1% of total income
(ii) Disclosure of the following ratios: -
• Capital to risks-weighted assets ratio (CRAR)
• Tier I CRAR
• Tier II CRAR
• Liquidity coverage ratio

Chapter 10- Overview of PSU Audit

Question 1
The Comptroller & Auditor General of India plays a key role in functioning of financial
committees of Parliament and state legislatures. Therefore, he has come to be recognized as a
friend, philosopher and guide of committees. Discuss how such a role is ensured in practice.
Also, briefly discuss the functions of “Estimates Committee” of Parliament.
(Nov 2023 MTP 2)
Answer:
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The Comptroller & Auditor General of India plays a key role in the functioning of the financial
committees of Parliament and the State Legislatures. He has come to be recognised as a 'friend,
philosopher and guide' of the Committees. It is ensured as follows: -
(i) His reports generally form the basis of the Committees' working, although they are not
precluded from examining issues not brought out in his reports
(ii) He scrutinises the notes which the Ministries submit to the Committees and helps the
Committees to check the correctness of submissions to the Committees and facts and figures
in their draft reports
(iii) The financial Committees present their report to the Parliament/ State Legislature with
their observations and recommendations.
The various Ministries / Department of the Government are required to inform the Committees
of the action taken by them on the recommendations of the Committees (which are generally
accepted) and the Committees present Action Taken Reports to Parliament / Legislature
(iv) In respect of those audit reports, which could not be discussed in detail by the
committees’, written answers are obtained from the Department / Ministry concerned and are
sometimes incorporated in the Reports presented to the Parliament / State Legislature.
This ensures that the audit reports are not taken lightly by the Government, even if the entire
report is not deliberated upon by the Committee.
The functions of “Estimates Committee” are: -
(i) to report what economies, improvements in organization, efficiency or administrative
reform, consistent with the policy underlying the estimates may be effected
(ii) to suggest alternative policies
(iii) to examine whether the money is well laid out within the limit and
(iv) to suggest the form in which the estimates shall be presented to Parliament.

Chapter-11 Internal Audit

Question 1
One of the independent directors sought information regarding the appointment of internal
auditors for following Group Companies in accordance with the Companies Act, 2013 of
which certain Financial Information are given below:
Figures are in ₹ crore and correspond to the previous year.
Name Nature Equity Share Turnover Loan from Public Deposits
Capital Bank and PFI
AADI Ltd. Listed 100 190 50 24
AJIT Ltd. Unlisted Public 60 190 50 24

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 NEMI Ltd. Unlisted Private 60 190 50 -

You are required to evaluate the requirements of the Companies Act, 2013 regarding the
appointment of internal Auditors for the Group Companies. Discuss. (Nov 2023 MTP 1)
Answer:
Applicability of Provisions of Internal Audit: As per section 138 of the Companies Act,
2013, following class of companies (prescribed in Rule 13 of Companies (Accounts) Rules,
2014) shall be required to appoint an internal auditor or a firm of internal auditors, namely:-
(A) every listed company;
(B) every unlisted public company having-
(1) paid up share capital of fifty crore rupees or more during the preceding financial year;
or
(2) turnover of two hundred crore rupees or more during the preceding financial year; or
(3) 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
(4) outstanding deposits of twenty five crore rupees or more at any point of time during the
preceding financial year; and
(C) every private company having-
(1) turnover of two hundred crore rupees or more during the preceding financial year; or
(2) 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.
In the given case, AADI Ltd. is a listed company. As per section 138 of the Companies Act,
2013, every listed company is required to appoint an internal auditor or a firm of internal
auditors. Thus, in view of the above, AADI Ltd. is required to appoint an internal auditor.
Further, AJIT Ltd. is unlisted public company. The company is having ₹ 60 crore as equity
share capital which is exceeding the prescribed limit of rupees fifty crore as per section 138.
Thus, AJIT Ltd. is required to appoint an internal auditor as per section 138 of the Companies
Act, 2013.
NEMI Ltd. is unlisted private company and having ₹ 60 crore as equity share capital, ₹ 190
crore as turnover and ₹ 50 crore loan from Bank and PFI. In view of provisions of section 138
of the Companies Act, 2013 discussed above, all the limits are below the prescribed limit for a
private company. Therefore, NEMI Ltd. is not required to appoint an internal auditor.

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It can be concluded that AADI Ltd. and AJIT Ltd. is required to appoint the internal auditor as
per the provisions of the Companies Act, 2013 whereas NEMI Ltd. is not required to do the
same.

Question 2
Consider the following statement:
“The internal auditor of a company shall be free from any undue influences which force him
to deviate from the truth. He shall be independent.”
Is above statement proper? If so, how independence of internal auditor can be established?
(Nov 2023 MTP 2)
Answer:
The Internal Auditor shall be free from any undue influences which force him to deviate from
the truth. This independence shall be not only in mind but also in appearance. Also, the internal
auditor shall resist any undue pressure or interference in establishing the scope of the
assignments or the manner in which these are conducted and reported, in case these deviate
from set objectives. The independence of the internal audit function and the Internal Auditor
within the organization is a vital aspect of maintaining effective corporate governance. It is
important to ensure that the internal audit function is free from any undue influence or pressure
that may affect its ability to provide impartial and objective assessments of the organization's
operations, risks, and controls.
Therefore, the given statement is proper.
To establish the independence of the Internal auditor, several factors need to be considered.
Firstly, the overall organizational structure of key personnel plays a crucial role. The Internal
auditor should be positioned in a way that allows them to operate independently and
objectively. This includes having direct access to the Audit Committee, Board of Directors,
and other senior executives. Secondly, the reporting line of the Chief Internal Auditor is an
important consideration. The Chief Internal Auditor should report to the highest level of
authority within the organization, such as the CEO or the Board of Directors. This ensures that
the Internal auditor has the necessary authority and support to carry out their responsibilities
effectively. Finally, the powers and authority derived from superiors further establish the
independence of the Internal auditor. The Internal auditor should have the necessary resources,
budget, and support to conduct their work without any undue influence or pressure from senior
executives or other stakeholders.

Chapter-12 Due diligence, Investigation and Forensic Audit

Question 1

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CA. Kushal has been appointed as an Investigator by M/s. XYZ and Associates. While
undertaking this assignment of investigation, the subordinate staff of CA. Kushal inqui red
about the following issues:
(i) Whether an investigator is required to undertake the cent per cent verification
approach or whether he can adopt selective verification?
(ii) Whether an investigator necessarily requires assistance of expert?
(iii) Whether an investigator can retain working papers or not?
Guide CA. Kushal in solving the queries raised by his sub-ordinate staff. (Nov 2023 RTP)
Answer:
Investigations broadly range between two extremes; on the one hand there are those in respect
of which complete accounts, documents, records and other information are available, and on
the other, those in respect of which little information, besides published accounts and statistical
data, is available. Then again, investigation may cover the whole of accounting or may relate
to only a part or parts of accounting as may be specified. Some more issues often arise in
investigation. They are stated below:
(a) Whether an investigator is required to undertake a cent per cent verification
approach or whether he can adopt selective verification - The answer to this question
depends on the exact circumstances of the case under investigation. If the investigator has to
establish the amount of cash defalcated by the cashier, he has probably no option but to
carefully examine all the cash vouchers and related records. On the other hand, if he is to arrive
at the profitability of a concern, he may verify constituent transactions on a selective basis
taking extreme care to see that no material transaction that affects profit has remained
concealed from his eyes. In investigation, it is always safer to go by statistically recognised
sampling methods than to depend on the so-called “test checks” where circumstances permit
selective verification.
(b) Whether an investigator necessarily requires assistance of expert - Often an
investigator may feel the necessity of obtaining views and opinions of experts in various fields
to properly conduct the investigation. It would be therefore, proper for the investigator to get
the written general consent of his client, to refer special matters for views of different experts
at the beginning of investigation and he should settle the question of costs for obtaining the
views and other related implications.
(c) Whether to retain working papers or not - Another important precaution is that the
investigating accountant should retain in his files full notes of the work carried out, copies of
schedules and all working papers, annexures, facts, figures, record of conversations and the
like. Also, the working papers should link up the figures as shown by the books of business
with the final figures produced by the investigating accountant. Wherever required the
investigator should take representation letter from the appointing authority. In the absence
thereof, he would not be able to explain the figures when he is called upon to give evidence in
a court of law to support his figures; for quite often the conclusions of the accountant are
challenged by parties whose interest is adversely affected by his findings, for example, when
the value of shares of a company taken over by the Government has been determined by him.
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This will also be of immense help to the investigator in correlating facts and events and later
in drafting the report.

Repetitive questions

Sr.no. Chapter Remarks

1. SA SA 250 Question 12 Add Nov 2023 RTP
Ques hint- PQ Limited, a listed entity, is in the business of
manufacturing of specialty chemicals. The company has
appointed CA Jazz as CFO of the company.
2. Audit of CFS (Chap 3- Question 13 Ques hint- H Limited is an Investment
Group Audit) Company preparing its Financial Statements in
accordance with Ind AS. The
Company obtains funds from various investors and
commits its performance for fair return and capital
appreciation to its investors.
Add Nov 2023 RTP

Question 19 – Ques hint You are appointed as an

auditor of NEMI Limited, a listed company which is a
company providing information technology service
across the globe.
Add Nov 2023 MTP 1

3. SA SA 500 Ques 4 Ques hint- Gap Ltd. possesses some

investment for which there is no ready market and to
assess its fair market value it hires an expert,
Add Nov 2023 MTP 1
4. Professional ethics Question 31 – ques hint Mr. Avi, a newly qualified Chartered
Accountant, started his practice and sought clients through
telephone calls from his family and friends, Add Nov 2023
MTP 1
5. SA Question 5 ques hint CA S has been appointed as
statutory Auditor of SRT ltd for the financial year 2020-
2021. The company while preparing financial statements
Add Nov 2023 MTP 1
6. Forensic Audit Question 1 Add Nov 2023 MTP 2 Ques hint- PQRLtd.is
a listed company having turnoverof₹50crores

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