SUPER 100 QUESTIONS

QUESTION NO 1
(MTP5MarksOct18)

PACE is proprietorship firm of Mr. Abhinav engaged in the manufacturing of textile and
handloom products. It sells its finished products both in the domestic as well as in the
international market. The company is making total turnover of Rs. 50 crores. It has also
availed cash credit limit of Rs. 5 crores from Axis Bank. In the year2017-18, proprietor of
the firm is worried about the financial position of the company and is under the
impression that’s nice he is out of India, therefore firm might run into losses. He
approaches CA Mahesh about advantages of getting his accounts audited throughout
the year so that he may not suffer due to accounting weaknesses. Advise regarding
advantages of getting accounts audited. (MTP5MarksOct18)
ANSWER
The chief utility of audit lies in reliable financial statements on the basis of which the state
of affairs may be easy to understand. Apart from this obvious utility, there are other
advantages of audit. Some or all of these are of considerable value even to those enterprises
and organizations where audit is not compulsory, these advantages are given below:
a. It safeguards the financial interest of persons who are not associated with the
management of the entity, whether they are partners or shareholders, bankers, FI’s, public
at large etc.
b. It acts as a moral check on the employees from committing defalcations or embezzlement.
c. Audited statements of account are helpful in settling liability for taxes, negotiating loans
and for determining the purchase consideration for a business.
d. These are also useful for settling trade disputes for higher wages or bonus as well as
claims in respect of damage suffered by property, by fire or some other calamity.
e. An audit can also help in the detection of wastages and losses to show the different ways
by which these might be checked, especially those that occur due to the absence or
inadequacy of internal checks or internal control measures.
f. kept and helps the client in making good deficiencies or inadequacies in this respect.
g. As an appraisal function, audit reviews the existence and operations of various controls in
the organisations and reports weaknesses, inadequacies, etc., in them.
h. Audited accounts are of great help in the settlement of accounts at the time of admission
or death of partner.

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i. Government may require audited and certified statement before it gives assistance or
issues a license for a particular trade.

QUESTION NO 2
(MTP4MarksOct’21)
The person conducting the audit should take care to ensure that financial statements
would not mislead anybody. Explain
ANSWER
The person conducting the audit should take care to ensure that financial statements would
not mislead anybody. This he can do honestly by satisfying himself that:
i. the accounts have been drawn up with reference to entries in the books of account;
ii. the entries in the books of account are adequately supported by sufficient and appropriate
evidence;
iii. none of the entries in the books of account has been omitted in the process of compilation
and nothing which is not in the books of account has found place in the statements;
iv. the information conveyed by the statements is clear and unambiguous;
v. the financial statement amounts are properly classified, described and disclosed in
conformity with accounting standards; and
vi. the statement of accounts present a true and fair picture of the operational results and
of the assets and liabilities.
QUESTION NO 3 (RTPNov’23)
(PYP3MarksMay ’22)
Mr.Z, auditor of the Company Different and Capable Limited for the financial year 2022-
23, explained to audit team members about the objectives of the Independent Auditor
in accordance with the relevant Standard on Auditing. Explain those objectives.
ANSWER
Overall Objectives of the Independent Auditor: As per SA-200 “Overall Objectives of the
Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing”,
in conducting an audit of financial statements, the overall objectives of the auditor are:
i. To obtain reasonable assurance about whether the financial statements as a whole are
free from material misstatement, whether due to fraud or error, thereby enabling the
auditor to express an opinion on whether the financial statement are prepared, in all
material respects, in accordance with an applicable financial reporting framework; and

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ii. To report on the financial statements, and communicate as required by the SAs, in
accordance with the auditor’s findings.
In the given case of JP Ltd, CA Jatin expressed his opinion on the financial statements of
JP Ltd without obtaining reasonable assurance about whether the financial statements as
a whole are free from material misstatement or not. Therefore, it can be concluded that CA
Jatin did not comply with the objective of audit as stated in SA 200.

QUESTION NO 4
(RTPNov’18,NewSM)
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore
obtain absolute assurance that the financial statements are free from material
misstatement due to fraud or error. This is because there are inherent limitations so fan
audit. Explain.
ANSWER
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore
obtain absolute assurance that the financial statements are free from material misstatement
due to fraud or error. This is because there are inherent limitations of an audit. The inherent
limitations of an audit arise from:
i. The Nature of Financial Reporting: The preparation of financial statements involves
judgment by management in applying the requirements of the entity’s applicable financial
reporting framework to the facts and circumstances of the entity. In addition, many financial
statement items involve subjective decisions or assessments or a degree of uncertainty, and
there may be a range of acceptable interpretations or judgments that may be made
ii. The Nature of Audit Procedures: There are practical and legal limitations on the auditor’s
ability to obtain audit evidence. For example:
1. There is the possibility that management or others may not provide, intentionally or
unintentionally, the complete information that is relevant to the preparation and
presentation of the financial statements or that has been requested by the auditor.
2. Fraud may involve sophisticated and carefully organized schemes designed to conceal
it. Therefore, audit procedures used to gather audit evidence may be ineffective for
detecting an intentional misstatement that involves, for example, collusion to falsify
documentation which may cause the auditor to believe that audit evidence is valid
when it is not. The auditor is neither trained as nor expected to be an expert in the
authentication of documents.

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3. An audit is not an official investigation into alleged wrongdoing. Accordingly, the

auditor is not given specific legal powers, such as the power of search, which may be
necessary for such an investigation.
iii. Timeliness of Financial Reporting and the Balance between Benefit and Cost: The
matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to
omit an audit procedure for which there is no alternative.
Appropriate planning assists in making sufficient time and resources available for the
conduct of the audit. Notwithstanding this, the relevance of information, and thereby its
value, tends to diminish over time, and there is a balance to be struck between the reliability
of information and its cost.
iv. Other Matters that Affect the Limitations of an Audit: In the case of certain subject
matters, limitations on the auditor’s ability to detect material misstatements are
particularly significant. Such assertions or subject matters include:
• Fraud, particularly fraud involving senior management or collusion.
• The existence and completeness of related party relationships and transactions.
• The occurrence of non-compliance with laws and regulations.
• Future events or conditions that may cause an entity to cease to continue as a going
concern.
QUESTION NO 5 (MTP 5 Marks March ’18,Oct‘18)
The engagement partner of AST AND ASSOCIATES, firm of Chartered Accountants
appointed as auditor of Fabric India Ltd is considering as to management of key
resources to be employed to conduct audit. Discuss how overall audit strategy would
assist the auditor.
ANSWER
The auditor shall establish an overall audit strategy that sets the scope, timing and direction
of the audit, and that guides the development of the audit plan.
The process of establishing the overall audit strategy assists the auditor to determine, subject
to the completion of the auditor’s risk assessment procedures, such matters as:
1. The resources to deploy for specific audit areas, such as the use of appropriately
experienced team members for high risk areas or the involvement of experts on
complex matters;
2. The amount of resources to allocate to specific audit areas, such as the number of
team members assigned to observe the inventory count at material locations, the

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extent of review of other auditors’ work in the case of group audits, or the audit budget
in hours to allocate to high risk areas;
3. When these resources are to be deployed, such as whether at an interim audit stage
or at key cut- off dates; and
4. How such resources are managed, directed and supervised, such as when team
briefing and debriefing meetings are expected to be held, how engagement partner and
manager reviews are expected to take place (for example, on-site or off-site), and
whether to complete engagement quality control reviews.
In establishing the overall audit strategy, the auditor shall
• Ascertain the nature, timing and extent of resources necessary to perform the
engagement. Example
• The selection of engagement team and the assignment of audit work to the team
members, including the assignment of appropriately experienced team members to
areas where there may be higher risks of material misstatement.
• Engagement budgeting, including considering the appropriate amount of time to set
aside for areas where there may be higher risks of material misstatement. (As per
Addition in May 21)
QUESTION NO 6 (MTP 5 Marks Aug ’18, RTP Nov ’20 & Nov ‘18)
The auditor shall document the overall audit strategy, the audit plan, and any significant
changes made during the audit engagement to the overall audit strategy or the audit
plan, and the reasons for such changes. Explain.
ANSWER
The auditor shall document:
(a) the overall audit strategy;
(b) the audit plan; and
(c) any significant changes made during the audit engagement to the overall audit strategy
or the audit plan, and the reasons for such changes.
The documentation of the overall audit strategy is a record of the key decisions considered
necessary to properly plan the audit and to communicate significant matters to the
engagement team.
For example, the auditor may summarize the overall audit strategy in the form of a
memorandum that contains key decisions regarding the overall scope, timing and conduct of
the audit.

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The documentation of the audit plan is a record of the planned nature, timing and extent of
risk assessment procedures and further audit procedures at the assertion level in response
to the assessed risks. It also serves as a record of the proper planning of the audit procedures
that can be reviewed and approved prior to their performance. The auditor may use standard
audit programs and/or audit completion checklists, tailored as needed to reflect the
particular engagement circumstances.
A record of the significant changes to the overall audit strategy and the audit plan, and
resulting changes to the planned nature, timing and extent of audit procedures, explains why
the significant changes were made, and the overall strategy and audit plan finally adopted
for the audit. It also reflects the appropriate response to the significant changes occurring
during the audit.
For instance-
The following things should form part of auditor’s documentation:
• A summary of discussions with the entity’s key decision makers
• Documentation of audit committee pre-approval of services, where required
• Audit documentation access letters
• Other communications or agreements with management or those charged with
governance regarding the scope, or changes in scope, of our services
• auditor’s report on the entity’s financial statements.
• Other reports as specified in the engagement agreement (e.g., debt covenant
compliance letter)
QUESTION NO 7 (MTP 3 Marks March ‘19)
The establishment of the overall audit strategy and the detailed audit plan are closely
inter-related. Explain

ANSWER
Once the overall audit strategy has been established, an audit plan can be developed to
address the various matters identified in the overall audit strategy, taking into account the
need to achieve the audit objectives through the efficient use of the auditor’s resources. The
establishment of the overall audit strategy and the detailed audit plan are not necessarily
discrete or sequential processes, but are closely inter-related since changes in one may
result in consequential changes to the other.
QUESTION NO 8 (MTP 4 Marks Nov ’21 & April ’23, RTP Nov’23)

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In establishing over all audit strategy, the auditor shall ascertain the reporting objectives
of the engagement to plan the timing of the audit and the nature of the communications
required. Elucidate those cases by which auditor can ascertain the reporting objectives
of the engagement.
ANSWER
In establishing the overall audit strategy, auditor shall ascertain the reporting objectives of
the engagement to plan the timing of the audit and the nature of the communications
required. The cases by which auditor can ascertain the reporting objectives of the
engagement are:
(i) The entity’s timetable for reporting, such as at interim and final stages.
(ii) The organization of meetings with management and those charged with governance to
discuss the nature, timing and extent of the audit work.
(iii) The discussion with management and those charged with governance regarding the
expected type and timing of reports to be issued and other communications, both written and
oral, including the auditor’s report, management letters and communications to those charged
with governance.
(iv) The discussion with management regarding the expected communications on the
status of audit work throughout the engagement.
QUESTION NO 9 (MTP 4 Marks March 22)
CA Vikas Jain discussed with his audit team about advantages and disadvantages of
audit program. He explained to his team that–“work may become mechanical” as
disadvantage of the audit program. Discuss explaining the disadvantages of an audit
program
ANSWER
Some disadvantages are there in the use of audit program. The disadvantages are:
(i) The work may become mechanical and particular parts of the program may be carried
out without any understanding of the object of such parts in the whole audit scheme.
(ii) The program often tends to become rigid and inflexible following set grooves; the
business may change in its operation of conduct, but the old program may still be carried on.
Changes in staff or internal control may render precaution necessary at points different from
those originally decided upon.
(iii) Inefficient assistants may take shelter behind the program i.e. defend deficiencies in
their work on the ground that no instruction in the matter is contained therein.

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(iv) A hard and fast audit program may kill the initiative of efficient and enterprising
assistants.
QUESTION NO 10 (RTPNov’19& Nov’18,PYP2MarksMay22)
As a result of unexpected events, changes in conditions, or the audit evidence obtained
from the results of audit procedures, the auditor may need to modify the overall audit
strategy and audit plan. Explain

ANSWER
The auditor shall update and change the overall audit strategy and the audit plan as necessary
during the course of the audit. As a result of unexpected events, changes in conditions, or the
audit evidence obtained from the results of audit procedures, the auditor may need to modify
the overall audit strategy and audit plan and thereby the resulting planned nature, timing and
extent of further audit procedures, based on the revised consideration of assessed risks. This
may be the case when information comes to the auditor’s attention that differs significantly
from the information available when the auditor planned the audit procedures. For example,
audit evidence obtained through the performance of substantive procedures may contradict
the audit evidence obtained through tests of controls.
QUESTION NO 11 (RTP Nov’22, Nov ’21, Old & New SM)
The nature, timing and extent of the direction and supervision of engagement team
members and review of their work vary depending on many factors. Discuss those
factors.
ANSWER
The nature, timing and extent of the direction and supervision of engagement team members
and review of their work vary depending on many factors, including:
 The size and complexity of the entity.
 The area of the audit.
 The assessed risks of material misstatement (for example, an increase in the assessed
risk of material misstatement for a given area of the audit ordinarily requires a corresponding
increase in the extent and timeliness of direction and supervision of engagement team
members, and a more detailed review of their work).
The capabilities and competence of the individual team members performing the audit work

QUESTION NO 12 (RTP Nov ‘19)

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The auditor of FAST CARS Ltd obtains an understanding of the control environment.
Apart of obtaining this understanding, the auditor evaluates whether management has
created and maintained a culture of honesty and ethical behavior and the strengths in
the control environment elements collectively provide an appropriate foundation for the
other components of internal control.
Advise what is included in control environment. Also explain the elements of control
environment.
ANSWER
Control Environment – Component of Internal Control: The auditor shall obtain an
understanding of the control environment. As part of obtaining this understanding, the auditor
shall evaluate whether:
(i) Management has created and maintained a culture of honesty and ethical behavior;
and
(ii) The strengths in the control environment elements collectively provide an appropriate
foundation for the other components of internal control.
What is included in Control Environment? The control environment includes:
(i) the governance and management functions and
(ii) the attitudes, awareness, and actions of those charged with governance and
management.
(iii) The control environment sets the tone of an organization, influencing the control
consciousness of its people.
(iv) Elements of the Control Environment: Elements of the control environment that may
be relevant when obtaining an understanding of the control environment include the
following:
(1) Communication and enforcement of integrity and ethical values – These are
essential elements that influence the effectiveness of the design, administration, and
monitoring of controls.
(2) Commitment to competence – Matters such as management’s consideration of the
competence levels for particular jobs and how those levels translate into requisite skills and
knowledge.
(3) Participation by those charged with governance –Attributes of those charged with
governance such as:
• Their independence from management.
• Their experience and stature.

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• The extent of their involvement and the information they receive, and the scrutiny of
activities.
• The appropriateness of their actions, including the degree to which difficult questions
are raised and pursued with management, and their interaction with internal and external
auditors.
(4) Management’s philosophy and operating style – Characteristics such as
management’s:
• Approach to taking and managing business risks.
• Attitudes and actions toward financial reporting.
• Attitudes toward information processing and accounting functions and personnel.
(5) Organizational structure – The framework within which an entity’s activities for
achieving its objectives are planned, executed, controlled, and reviewed.
(6) Assignment of authority and responsibility - Matters such as how authority and
responsibility for operating activities are assigned and how reporting relationships and
authorization hierarchies are established.
(7) Human resource policies and practices – Policies and practices that relate to, for
example, recruitment, orientation, training, evaluation, counselling, promotion, compensation,
and remedial actions.
QUESTION NO 13
The auditor of EFG Ltd., a company engaged in the Tours & Travel business, needs to
obtain an understanding of the company's control environment. To do this, the auditor
evaluates whether:
(i) Management has created and maintained a culture of honesty and ethical behavior;
and
(ii) The strengths in the control environment elements collectively provide an
appropriate foundation for the other components of internal control. What is
included in control environment? Also explain the elements of control environment.
ANSWER
The auditor shall obtain an understanding of the control environment. As part of obtaining
this understanding, the auditor shall evaluate whether:
(i) Management has created and maintained a culture of honesty and ethical behaviour
and
(ii) The strengths in the control environment elements collectively provide an appropriate
foundation for the other components of internal control.

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The control environment includes:

(i) the governance and management functions and
(ii) the attitudes, awareness, and actions of those charged with governance and
management.
(iii) the control environment sets the tone of an organization, influencing the control
consciousness of its people.
Elements of the Control Environment
a) Elements of the control environment that may be relevant when obtaining an
understanding of the control environment include the following:
Communication and enforcement of integrity and ethical values
The effectiveness of controls cannot rise above the integrity and ethical values of the people
who create, administer, and monitor them. Integrity and ethical behaviour are the product
of the entity’s ethical and behavioural standards, how they are communicated, and how they
are reinforced in practice. The enforcement of integrity and ethical values includes, for
example, management actions to eliminate or mitigate incentives or temptations that might
prompt personnel to engage in dishonest, illegal, or unethical acts. The communication of
entity policies on integrity and ethical values may include the communication of behavioural
standards to personnel through policy statements and codes of conduct and by example.
a) Commitment to competence: Matters such as management’s consideration of the
competence levels for particular jobs and how those levels translate into requisite
skills and knowledge.
b) Participation by those charged with governance: It includes attributes of those
charged with governance such as their independence from management, their
experience and stature, the extent of their involvement and the information they
receive and the scrutiny of activities.
c) Management’s philosophy and operating style: Management’s philosophy and
operating style encompass a broad range of characteristics. For example,
management’s attitudes and actions towards financial reporting- what approach is
taken by management in selecting accounting policies, approach in developing
accounting estimates etc. Matters such as approach of management to taking and
managing business risks, management’s attitude towards information processing and
accounting function and personnel reflects upon management’s philosophy and
operating style.

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d) Organisational structure: The framework within which an entity’s activities for

achieving its objectives are planned, executed, controlled, and reviewed. Establishing
a relevant organisational structure includes considering key areas of authority and
responsibility and appropriate lines of reporting. The appropriateness of an entity’s
organisational structure depends, in part, on its size and the nature of its activities.
e) Assignment of authority and responsibility: Matters such as how authority and
responsibility for operating activities are assigned and how reporting relationships
and authorisation hierarchies are established.
g)Human resource policies and practices
Policies and practices that relate to, for example, recruitment, orientation, training,
evaluation, counselling, promotion, compensation, and remedial actions. Human
resource policies and practices often demonstrate important matters in relation to the
control consciousness of an entity.

QUESTION NO 14 (PYP 6 Marks May ’18, RTP May ’23)

Briefly discuss the limitations of Internal Control.
ANSWER
Limitations of Internal Control:
(i) Internal control can provide only reasonable assurance: Internal control, no matter how
effective, can provide an entity with only reasonable assurance about achieving the entity’ s
financial reporting objectives. The likelihood of their achievement is affected by inherent
limitations of internal control.
(ii) Human judgment in decision-making: Realities that human judgment in decision-
making can be faulty and that breakdowns in internal control can occur because of human
error.
(iii) Lack of understanding the purpose: Equally, the operation of a control may not be
effective, such as where information produced for the purposes of internal control (for
example, an exception report) is not effectively used because the individual responsible for
reviewing the information does not understand its purpose or fails to take appropriate action.
(iv) Collusion among People: Additionally, controls can be circumvented by the collusion of
two or more people or inappropriate management override of internal control. For example,
management may enter into side agreements with customers that alter the terms and
conditions of the entity’s standard sales contracts, which may result in improper revenue

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recognition. Also, edit checks in a software program that are designed to identify and report
transactions that exceed specified credit limits may be overridden or disabled.
(v) Judgements by Management: Further, in designing and implementing controls,
management may make judgments on the nature and extent of the controls it chooses to
implement, and the nature and extent of the risks it chooses to assume.
(vi) Limitations in case of Small Entities: Smaller entities often have fewer employees due
to which segregation of duties is not practicable. However, in a small owner-managed entity,
the owner- manager may be able to exercise more effective oversight than in a larger entity.
This oversight may compensate for the generally more limited opportunities for segregation
of duties.
On the other hand, the owner-manager may be more able to override controls because the
system of internal control is less structured. This is taken into account by the auditor when
identifying the risks of material misstatement due to fraud.

QUESTION NO 15 (MTP 4 Marks Sep

’23, RTP Nov 21)
Significant risks often relate to significant non- routine transactions or judgmental
matters. Non- routine transactions are transactions that are unusual, due to either size
or nature, and that therefore occur infrequently. Judgmental matters may include the
development of accounting estimates for which there is significant measurement
uncertainty.
In context of significant risk, explain the factors to be considered by the auditor in
exercising judgment as to which risks are significant risks.
ANSWER
Identification of Significant Risks: SA 315 “Identifying and Assessing the Risk of Material
Misstatement through understanding the Entity and its Environment” defines ‘significant risk’
as an identified and assessed risk of material misstatement that, in the auditor’s judgment,
requires special audit consideration.
As part of the risk assessment, the auditor shall determine whether any of the risks identified
are, in the auditor’s judgment, a significant risk. In exercising this judgment, the auditor shall
exclude the effects of identified controls related to the risk.
In exercising judgment as to which risks are significant risks, the auditor shall consider
at least the following:
(a) Whether the risk is a risk of fraud;

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(b) Whether the risk is related to recent significant economic, accounting, or other
developments like changes in regulatory environment, etc., and, therefore, requires specific
attention;
(c) The complexity of transactions;
(d) Whether the risk involves significant transactions with related parties;
(e) The degree of subjectivity in the measurement of financial information related to the
risk, especially those measurements involving a wide range of measurement uncertainty; and
(f) Whether the risk involves significant transactions that are outside the normal course
of business for the entity, or that otherwise appear to be unusual.

QUESTION NO 16 (MTP 5 Marks Oct 18 &

March 18)
Generally, applying inquiry in combination with inspection gives the most effective and
efficient audit evidence. However, which audit test to use, when and in what
combination is a matter of professional judgement. Discuss stating the different ways
testing is performed in an automated environment.
ANSWER
The following are different ways testing is performed in an automated environment:
There are basically four types of audit tests that should be used. They are inquiry, observation,
inspection and reperformance. As shown in the illustration below, Inquiry is the most efficient
audit test but it is also gives the least audit evidence. Hence, inquiry should always be used
in combination with any one of the other audit testing methods. Inquiry alone is not sufficient.
Reperformance is most effective as an audit test and gives the best audit evidence. However,
testing by reperformance could be very time consuming and least efficient most of the time.
Generally, applying inquiry in combination with inspection gives the most effective and
efficient audit evidence. However, which audit test to use, when and in what combination is
a matter of professional judgement and will vary depending on several factors including risk
assessment, control environment, desired level of evidence required, history of
errors/misstatements, complexity of business, assertions being addressed, etc. The auditor
should document the nature of test (or combination of tests) applied along with the
judgements in the audit file as required by SA 230.
When testing in an automated environment, some of the more common methods are as
follows:

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• Obtain an understanding of how an automated transaction is processed by doing a

walkthrough of one end-to-end transaction using a combination of inquiry, observation, and
inspection.
• Observe how a user processes transactions under different scenarios.
• Inspect the configuration defined in an application

QUESTION NO 17 (MTP 4 Marks Oct 19, RTP May

’18)
Understanding the entity and its automated environment involves understanding how IT
department is organised, IT activities, the IT dependencies, relevant risks and controls.
Explain stating the points that an auditor should consider to obtain an understanding of
the company’s automated environment.
ANSWER
Understanding and Documenting Automated Environment: Understanding the entity and its
automated environment involves understanding how IT department is organised, IT activities,
the IT dependencies, relevant risks, and controls. Given below are some of the points that an
auditor should consider to obtain an understanding of the company’s automated environment
• Information systems being used (one or more application systems and what they are)
• their purpose (financial and non-financial)
• Location of IT systems - local vs global
• Architecture (desktop based, client-server, web application, cloud based)
• Version (functions and risks could vary in different versions of same application)
• Interfaces within systems (in case multiple systems exist)
• In-house vs Packaged
• Outsourced activities (IT maintenance and support)
• Key persons (CIO, CISO, Administrators)
QUESTION NO 18 (MTP 4 Marks May 20, RTP
May’23)
With respect to audit in an automated environment, explain the following: (any four
(i) CAATs
(ii) Data Analytics
(iii) Database
(iv) Information Systems
(v) Privileged access

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ANSWER :
(i) CAATs: Short form for Computer Assisted Audit Techniques, are a collection of
computer based tools and techniques that are used in an audit for analysing data in electronic
form to obtain audit evidence.
(ii) Data Analytics: A combination of processes, tools and techniques that are used to tap
vast amounts of electronic data to obtain meaningful information
(iii) Database: A logical subsystem within a larger information system where electronic
data is stored in a predefined form and retrieved for use.
(iv) Information Systems: Refers to a collection of electronic hardware, software,
networks, and processes that are used in a business to carry out operations and transactions.
(iv) Privileged access: A type of super user access to information systems that enforces
less or no limits on using that system.

QUESTION NO 19 (RTP
May ’18)
Discuss what is included in risk assessment procedures to obtain audit evidence about
the design and implementation of relevant controls.
ANSWER
Risk assessment procedures to obtain audit evidence about the design and implementation
of relevant controls may include-
• Inquiring of entity personnel.
• Observing the application of specific controls.
• Inspecting documents and reports.
• Tracing transactions through the information system relevant to financial reporting.

QUESTION NO 20 (RTP May

’22)
Saburi Textile Ltd is an established player in the textile manufacturing sector. It has
developed strong internal controls in almost every area. It has appointed you as an
Internal Audit team head. Internal audit has a very strong relation with internal control
of the company. Internal Audit analyses the effectiveness with which the internal control
of the company is operating and also makes suggestions for improvement in that
internal control. Explain stating clearly activities relating to Internal Control.
ANSWER

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The objectives and scope of internal audit functions typically include assurance and
consulting activities designed to evaluate and improve the effectiveness of the entity’s
governance processes, risk management and internal control such as the activities Relating
to Internal Control:
(i) Evaluation of internal control: The internal audit function may be assigned specific
responsibility for reviewing controls, evaluating their operation, and recommending
improvements thereto. In doing so, the internal audit function provides assurance on the
control. For example, the internal audit function might plan and perform tests or other
procedures to provide assurance to management and those charged with governance
regarding the design, implementation, and operating effectiveness of internal control,
including those controls that are relevant to the audit.
(ii) Examination of financial and operating information: The internal audit function may be
assigned to review the means used to identify, recognize, measure, classify and report
financial and operating information, and to make specific inquiry into individual items,
including detailed testing of transactions, balances, and procedures.
(iii) Review of operating activities: The internal audit function may be assigned to review
the economy, efficiency, and effectiveness of operating activities, including nonfinancial
activities of an entity.
(vi) Review of compliance with laws and regulations: The internal audit function may be
assigned to review compliance with laws, regulations, and other external requirements, and
with management policies and directives and other internal requirements.
Internal audit has a very strong relation with internal control of a company. Internal Audit
analyzes the effectiveness with which the internal control of a company is operating and also
makes suggestions for improvement in that internal control.
QUESTION NO 21 (MTP 3 Marks March
22)
The reliability of information to be used as audit evidence, and therefore of the audit
evidence itself, is influenced by its source, its nature, and the circumstances under
which it is obtained. Explain and elucidate the guiding principles which are useful in
assessing the reliability of audit evidence.
Answer
Reliability of Audit Evidence: As per SA 500 on “Audit Evidence”, the reliability of information
to be used as audit evidence, and therefore of the audit evidence itself, is influenced by its
source and its nature, and the circumstances under which it is obtained, including the controls

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over its preparation and maintenance where relevant. Therefore, generalisations about the
reliability of various kinds of audit evidence are subject to important exceptions. While
recognising that exceptions may exist, the following guiding principles about the reliability of
audit evidence may be useful:
(i) The reliability of audit evidence is increased when it is obtained from independent sources
outside the entity.
(ii) The reliability of audit evidence that is generated internally is increased when the related
controls, including those over its preparation and maintenance, imposed by the entity are
effective.
(iii) Audit evidence obtained directly by the auditor (for example, observation of the
application of a control) is more reliable than audit evidence obtained indirectly or by
inference (for example, inquiry about the application of a control).
(iv) Audit evidence in documentary form, whether paper, electronic, or other medium, is more
reliable than evidence obtained orally (for example, a contemporaneously written record of a
meeting is more reliable than a subsequent oral representation of the matters discussed).
(v) Audit evidence provided by original documents is more reliable than audit evidence
provided by photocopies or facsimiles, or documents that have been filmed, digitized, or
otherwise transformed into electronic form, the reliability of which may depend on the
controls over their preparation and maintenance.
QUESTION NO 22 (MTP 3 Marks
Oct’22)
CA Amar is the statutory auditor of XYZ Ltd. for the FY 2021-22. During the course of
audit, CA Amar found that a litigation is going against the company for which the
company has hired an external legal team (management expert). CA Amar wanted to use
the information as audit evidence which is prepared using the work of the management
expert. What should CA Amar consider before using the work of such management
expert?
Answer
When information to be used as audit evidence has been prepared using the work of a
management’s expert, the auditor shall, to the extent necessary, having regard to the
significance of that expert’s work for the auditor’s purposes:
1. Evaluate the competence, capabilities and objectivity of that expert;
2. Obtain an understanding of the work of that expert; and

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3. Evaluate the appropriateness of that expert’s work as audit evidence for the relevant
assertion.
4. CA Amar should consider the above before using the work of the management’s expert.
QUESTION NO 23 (Old & New
SM)
There was a Partnership Firm of Chartered Accountants WT and Associates. Mr. W, one
of the partners of WT and Associates, while explaining to his audit team members about
importance of audit evidence informed them about sufficiency and appropriateness of
audit evidence. Mr. H, one of the members of audit team of WT and Associates was of
the view that sufficiency of audit evidence means simplicity of audit evidence and
appropriateness of audit evidence means ease of obtaining audit evidence. Explain
whether sufficiency and appropriateness of audit evidence mean simplicity and ease of
obtaining audit evidence.
Answer
Sufficiency is the measure of the quantity of audit evidence. The quantity of audit evidence
needed is affected by the auditor’s assessment of the risks of misstatement (the higher the
assessed risks, the more evidence is likely to be required) and also by the quality of such
audit evidence (the higher the quality, the less may be required). Obtaining more audit
evidence, however, may not compensate for its poor quality. Following are the factors
affecting the auditor’s judgement as to the sufficiency of audit evidence:
(i) Materiality: It may be defined as the significance of classes of transactions, account
balances and presentation and disclosures to the users of the financial statements. Less
evidence would be required in case assertions are less material to users of the financial
statements. But on the other hand, if assertions are more material to the users of the financial
statements, more evidence would be required.
(ii) Risk of material misstatement: It may be defined as the risk that the financial statements
are materially misstated prior to audit. This consists of two components described as follows
at the assertion level: ¬ Inherent risk—The susceptibility of an assertion to a misstatement
that could be material before consideration of any related controls. ¬ Control risk—The risk
that a misstatement that could occur in an assertion that could be material will not be
prevented or detected and corrected on a timely basis by the entity’s internal control. Less
evidence would be required in case assertions that have a lower risk of material
misstatement. But on the other hand, if assertions have a higher risk of material
misstatement, more evidence would be required.

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(iii) Size of a population: It refers to the number of items included in the population. Less
evidence would be required in case of smaller, more homogeneous population but on the
other hand in case of larger, more heterogeneous populations, more evidence would be
required.

QUESTION NO 24 (RTP May

’22)
While conducting the audit of Pummy Limited, the statutory auditors collected written
representations from the Management. The audit was finalized in addition to other audit
procedures but, without making any inquiries, as the statutory auditors were short of
time. In the light of this information, state the importance of inquiry as one of the
methods of collecting Audit Evidence.
Answer
Inquiry: As per SA 500 Audit Evidence: -
(i) Inquiry consists of seeking information of knowledgeable persons, financial and non-
financial, within the entity or outside the entity. Inquiry is used extensively throughout the
audit in addition to other audit procedures. Inquiries may range from formal written inquiries
to informal oral inquiries. Evaluating responses to inquiries is an integral part of the inquiry
process.
(ii) Responses to inquiries may provide the auditor with information not previously possessed
or with corroborative audit evidence. Alternatively, responses might provide information that
differs significantly from other information that the auditor has obtained, for example,
information regarding the possibility of management override of controls. In some cases,
responses to inquiries provide a basis for the auditor to modify or perform additional audit
procedures.
(iii) Although corroboration of evidence obtained through inquiry is often of particular
importance, in the case of inquiries about management intent, the information available to
support management’s intent may be limited. In these cases, understanding management’s
past history of carrying out its stated intentions, management’s stated reasons for choosing
a particular course of action, and management’s ability to pursue a specific course of action
may provide relevant information to corroborate the evidence obtained through inquiry.

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(iv) In respect of some matters, the auditor may consider it necessary to obtain written
representations from management and, where appropriate, those charged with governance
to confirm responses to oral inquiries.
QUESTION NO 25 (MTP 5 Marks Oct
18)
The level of sampling risk that the auditor is willing to accept affects the sample size
required. The lower the risk the auditor is willing to accept, the greater the sample size
will need to be. Explain Stating the examples of factors that the auditor may consider
when determining the sample size for tests of controls.
Answer
The level of sampling risk that the auditor is willing to accept affects the sample size required.
The lower the risk the auditor is willing to accept, the greater the sample size will need to be.
The sample size can be determined by the application of a statistically-based formula or
through the exercise of professional judgment. When circumstances are similar, the effect on
sample size of factors will be similar regardless of whether a statistical or non-statistical
approach is chosen.
Examples of Factors Influencing Sample Size for Tests of Controls: The following are factors
that the auditor may consider when determining the sample size for tests of controls. These
factors, which need to be considered together, assume the auditor does not modify the nature
or timing of tests of controls or otherwise modify the approach to substantive procedures in
response to assessed risks.
♦ When there is an increase in the extent to which the auditor’s risk assessment takes into
account relevant controls. The more assurance the auditor intends to obtain from the
operating effectiveness of controls, the lower the auditor’s assessment of the risk of material
misstatement will be, and the larger the sample size will need to be. When the auditor’s
assessment of the risk of material misstatement at the assertion level includes an expectation
of the operating effectiveness of controls, the auditor is required to perform tests of controls.
Other things being equal, the greater the reliance the auditor places on the operating
effectiveness of controls in the risk assessment, the greater is the extent of the auditor’s
tests of controls (and therefore, the sample size is increased). Thus, sample size will
increase.
♦ If there is an increase in the tolerable rate of deviation. Then sample size will decrease, as
lower the tolerable rate of deviation, larger the sample size needs to be.

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♦ When there is an increase in the expected rate of deviation of the population to be tested
then sample size will increase, as higher the expected rate of deviation, larger the sample
size needs to be so that the auditor is in a position to make a reasonable estimate of the
actual rate of deviation. Factors relevant to the auditor’s consideration of the expected rate
of deviation include the auditor’s understanding of the business (in particular, risk
assessment procedures undertaken to obtain an understanding of internal control), changes
in personnel or in internal control, the results of audit procedures applied in prior periods and
the results of other audit procedures. High expected control deviation rates ordinarily warrant
little, if any, reduction of the assessed risk of material misstatement.
♦ An increase in the auditor’s desired level of assurance that the tolerable rate of deviation
is not exceeded by the actual rate of deviation in the population will increase the sample size.
Thus, the greater the level of assurance that the auditor desires that the results of the sample
are in fact indicative of the actual incidence of deviation in the population, the larger the
sample size needs to be.
♦ In case of large populations, the actual size of the population has little, if any, effect on
sample size. For small populations however, audit sampling may not be as efficient as
alternative means of obtaining sufficient appropriate audit evidence. Therefore, there will be
negligible effect on sample size due to increase in the number of sampling units in the
population.

QUESTION NO 26 (MTP 3 Marks Nov

‘21)
CA X is not sure about the kind of Sampling method to be used for audit of a company.
Advise him about the choice of methods (name of methods only) of Sampling to be used
in various circumstances. Also briefly explain the advantages of the Sampling to be used
by him in auditing.
Answer
Sample Selection: CA. X should obtain the knowledge before using the sampling methods.
The principal methods are as follows:
(1) Random selection.
(2) Systematic selection.
(3) Monetary Unit sampling.

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(4) Haphazard selection.

(5) Block selection.
Advantages of Statistical Sampling in Auditing:
(i) The amount of testing (sample size) does not increase in proportion to the increase in the
size of the area (universe) tested.
(ii) The sample selection is more objective and thereby more defensible.
(iii) The method provides a means of estimating the minimum sample size associated with a
specified risk and precision.
(iv) It provides a means for deriving a "calculated risk" and corresponding precision (sampling
error) i.e. the probable difference in result due to the use of a sample in lieu of examining all
the records in the group (universe), using the same audit procedures.
(v) It may provide a better description of a large mass of data than a complete examination
of all the data, since non-sampling errors such as processing and clerical mistakes are not as
large.
QUESTION NO 27 (MTP 3 Marks
Oct’23)
It is imperative for the auditor to project misstatements for the population while
performing audit procedures through sampling. Comment.
ANSWER
(i) The auditor is required to project misstatements for the population to obtain a broad view
of the scale of misstatement but this projection may not be sufficient to determine an amount
to be recorded.
(ii) When a misstatement has been established as an anomaly, it may be excluded when
projecting misstatements to the population. However, the effect of any such misstatement, if
uncorrected, still needs to be considered in addition to the projection of the non-anomalous
misstatements.
(iii) For tests of details, the auditor shall project misstatements found in the sample to the
population whereas for tests of controls, no explicit projection of deviations is necessary since
the sample deviation rate is also the projected deviation rate for the population as a whole.
QUESTION NO 28 (RTP May
’21
Explain the following terms with reference to Audit Sampling:
(i) Stratification
(ii) Tolerable misstatement

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(iii) Tolerable rate of deviation

Answer
(i) Stratification – The process of dividing a population into sub-populations, each of which is
a group of sampling units which have similar characteristics (often monetary value).
(ii) Tolerable misstatement – A monetary amount set by the auditor in respect of which the
auditor seeks to obtain an appropriate level of assurance that the monetary amount set by
the auditor is not exceeded by the actual misstatement in the population.
(iii) Tolerable rate of deviation – A rate of deviation from prescribed internal control
procedures set by the auditor in respect of which the auditor seeks to obtain an
appropriate level of assurance that the rate of deviation set by the auditor is not exceeded by
the actual rate of deviation in the population.
QUESTION NO 29 (RTP Nov
’23)
Chintamani Ltd appoints Chintan & Mani as statutory auditors for the financial year
2022- 2023. Chintan & Mani seem to have different opinion on audit approach to be
adopted for audit of Chintamani Ltd. Mani is of the opinion that 100% checking is not
required and they can rely on Audit Sampling techniques in order to provide them a
reasonable basis on which they can draw conclusions about the entire population.
Chintan is concerned whether the use of audit sampling has provided a reasonable basis
for conclusions about the population that has been tested. You are required to guide
Chintan about his role if audit sampling has not provided a reasonable basis for
conclusions about the population that has been tested in accordance with SA 530.
Answer
As per SA 530, “Audit Sampling”, the auditor shall evaluate:
(a) The results of the sample; and
(b) Whether the use of audit sampling has provided a reasonable basis for conclusions about
the population that has been tested.
If the auditor concludes that audit sampling has not provided a reasonable basis for
conclusions about the population that has been tested, the auditor may:
(I) Request management to investigate misstatements that have been identified and the
potential for further misstatements and to make any necessary adjustments; or
(II) Tailor the nature, timing and extent of those further audit procedures to best achieve the
required assurance. For example, in the case of tests of controls, the auditor might extend
the sample size, test an alternative control or modify related substantive procedures.

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QUESTION NO 30 (MTP 5 Marks Aug ’18

)
Krishna Cycles Ltd is engaged in manufacturing of different type of Bicycles. Ongoing
through its financial statements for the past years, it is observed that inventory is
material to the financial statements. You as an auditor of the company wanted to obtain
sufficient appropriate audit evidence regarding the existence and condition of the
inventory as appearing in the financial statements. Discuss, how would you proceed as
an auditor.
Answer
When inventory is material to the financial statements, the auditor shall obtain sufficient
appropriate audit evidence regarding the existence and condition of inventory by:
(a) Attendance at physical inventory counting, unless impracticable, to:
(i) Evaluate management’s instructions and procedures for recording and controlling the
results of the entity’s physical inventory counting;
(ii) Observe the performance of management’s count procedures;
(iii) Inspect the inventory; and
(iv) Perform test counts; and
(b) Performing audit procedures over the entity’s final inventory records to determine whether
they accurately reflect actual inventory count results.
QUESTION NO 31 (RTP May ’22, Old & New
SM)
Pachranga International Ltd is manufacturer of pickles, ginger garlic paste, jams etc.
having its plant at Jaipur. Being in food industry, the company is facing many litigations
in various courts across India. Auditors SPV & Co. wants to identify such litigations and
claims involving the company which may give rise to risk of material misstatement.
Guide the auditor as to how they should proceed for the purpose.
Answer
The auditor shall design and perform audit procedures in order to identify litigation and claims
involving the entity which may give rise to a risk of material misstatement, including:
(a) Inquiry of management and, where applicable, others within the entity, including in-house
legal counsel;
(b) Reviewing minutes of meetings of those charged with governance and correspondence
between the entity and its external legal counsel; and
(c) Reviewing legal expense accounts.

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If the auditor assesses a risk of material misstatement regarding litigation or claims that have
been identified, or when audit procedures performed indicate that other material litigation or
claims may exist, the auditor shall, in addition to the procedures required by other SAs, seek
direct communication with the entity’s external legal counsel. Further if:
(a) management refuses to give the auditor permission to communicate or meet with the
entity’s external legal counsel, or the entity’s external legal counsel refuses to respond
appropriately to the letter of inquiry, or is prohibited from responding; and
(b) the auditor is unable to obtain sufficient appropriate audit evidence by performing
alternative audit procedures, the auditor shall modify the opinion in the auditor’s report in
accordance with SA 705. SA 505- External Confirmations.
QUESTION NO 32 (PYP 4 Marks,
july’21)
CA Rohit is appointed as an auditor of Grace Ltd., he wants to design a suitable
confirmation request letter for a few debtors of Grace Ltd. As a senior auditor of the firm,
explain to him with reference to SA 505 "External Confirmation" all the conditions that
should be present to use Negative Confirmation requests as the sole substantive audit
procedure to address an assessed risk of material misstatement at the assertion level.
Answer
Negative confirmations are a request that the confirming party respond directly to the auditor
only if the confirming party disagrees with the information provided in the request. Negative
information provides less persuasive audit evidence than positive confirmations. Accordingly,
CA Rohit, Auditor of Grace Ltd, shall not use negative confirmation requests as the sole
substantive audit procedure to address an assessed risk of material misstatement at the
assertion level unless all of the following are present:
(a) The auditor has assessed the risk of material misstatement as low and has obtained
sufficient appropriate audit evidence regarding the operating effectiveness of controls
relevant to the assertion;
(b) The population of items subject to negative confirmation procedures comprises a large
number of small, homogeneous, account balances, transactions or conditions; (c) A very low
exception rate is expected; and
(d) The auditor is not aware of circumstances or conditions that would cause recipients of
negative confirmation requests to disregard such requests.

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QUESTION NO 33 (PYP 5
Marks)
M/s Pankaj & Associates, Chartered Accountants, have been appointed as an auditor of
ABC Limited. CA Pankaj did not apply any audit procedures regarding opening balances.
He argued that since financial statements were audited by the predecessor auditor
therefore he is not required to verify them. Is CA Pankaj correct in his approach?
Answer
Initial audit engagement is an engagement in which either
(i) The financial statements for the prior period were not audited; or
(ii) The financial statements for the prior period were audited by a predecessor auditor.
From the above, it is quite clear that CA Pankaj is not correct in his approach and therefore
would be required to follow the initial audit engagement and also apply audit procedures
regarding opening balances.
Audit Procedures regarding Opening Balances: The auditor shall read the most recent
financial statements, if any, and the predecessor auditor’s report thereon, if any, for
information relevant to opening balances, including disclosures. The auditor shall obtain
sufficient appropriate audit evidence about whether the opening balances contain
misstatements that materially affect the current period’s financial statements by:
(a) Determining whether the prior period’s closing balances have been correctly brought
forward to the current period or, when appropriate, any adjustments have been disclosed as
prior period items in the current year’s Statement of Profit and Loss;
(b) Determining whether the opening balances reflect the application of appropriate
accounting policies; and
(c) Performing one or more of the following:
(i) Where the prior year financial statements were audited, perusing the copies of the
audited financial statements including the other relevant documents relating to the prior
period financial statements;
(ii) Evaluating whether audit procedures performed in the current period provide evidence
relevant to the opening balances; or
(iii) Performing specific audit procedures to obtain evidence regarding the opening
balances.
QUESTION NO 34
(RTP May’20)

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The nature of related party relationships and transactions may, in some circumstances,
give rise to higher risks of material misstatement of the financial statements than
transactions with unrelated parties. Explain with the help of at least three examples.
Answer
Many related party transactions are in the normal course of business. In such circumstances,
they may carry no higher risk of material misstatement of the financial statements than
similar transactions with unrelated parties. However, the nature of related party relationships
and transactions may, in some circumstances, give rise to higher risks of material
misstatement of the financial statements than transactions with unrelated parties.
Example;
♦ Related parties may operate through an extensive and complex range of relationships and
structures, with a corresponding increase in the complexity of related party transactions.
♦ Information systems may be ineffective at identifying or summarizing transactions and
outstanding balances between an entity and its related parties.
♦ Related party transactions may not be conducted under normal market terms and
conditions; for example, some related party transactions may be conducted with no exchange
of consideration.
QUESTION NO 35 (
RTP May ’20)
Explain the commonly used technique in the comparison of current data with the prior
period balance or with a trend in two or more prior period balances.
Answer
Trend analysis – A commonly used technique is the comparison of current data with the prior
period balance or with a trend in two or more prior period balances. We evaluate whether the
current balance of an account moves in line with the trend established with previous balances
for that account, or based on an understanding of factors that may cause the account to
change.
QUESTION NO 36 (MTP 3 Marks Oct 19, RTP Nov ’19 &
May ’18)
The auditor A of ABC & Co.- firm of auditors is conducting the audit of XYZ Ltd and while
performing testing of additions wanted to verify that all PPE (Property Plant and
Equipment) purchase invoices are in the name of the entity he is auditing. For all
additions to land, building in particular, the auditor desires to have concrete evidence
about ownership. The auditor is worried about whether the entity has valid legal

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ownership rights over the PPE claimed to be held by the entity and recorded in the
financial statements. Advise the auditor.

ANSWER
In addition to the procedures undertaken for verifying completeness of additions to PPE
during the period under audit, the auditor while performing testing of additions should also
verify that all PPE purchase invoices are in the name of the entity that entitles legal title of
ownership to the respective entity. For all additions to land, building in particular, the auditor
should obtain copies of conveyance deed/ sale deed to establish whether the entity is
mentioned to be the legal and valid owner.
The auditor should insist and verify the original title deeds for all immoveable properties held
as at the balance sheet date. In case the entity has given such immoveable property as
security for any borrowings and the original title deeds are not available with the entity, the
auditor should request the entity’s management for obtaining a confirmation from the
respective lenders that they are holding the original title deeds of immoveable property as
security. In addition, the auditor should also verify the register of charges, available with the
entity to assess the PPE that has been given as security to any third parties.
QUESTION NO 37 (MTP 3 Marks March ’21,
Apr’21)
From the auditing point of view, the auditor should verify that a proper disclosure about
contingent liabilities is made in financial statements as required by AS 29. What type of
disclosures should be made for each class of contingent liability as at the balance sheet
date?
ANSWER
Disclosure for each class of Contingent Liability: From the auditing point of view, the auditor
should verify that a proper disclosure about contingent liabilities is made in financial
statement as required by AS 29. As per, AS 29 an enterprise should disclose for each class of
contingent liability at the balance sheet date.
(i) A brief description of the nature of the contingent liability and where practicable.
(ii) An estimate of the amount as per measurement principle as prescribed for provision
in AS 29.
(iii) Indication of the uncertainty relating to outflow.
(iv) The possibility of any reimbursement.

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Where any of the information as required above is not disclosed because it is not practicable
to do so, that fact should be stated.
QUESTION NO 38 (MTP 6
Marks April 22)
While auditing the accounts of ABC Ltd, a member of audit team is not clear about:
(i) the criteria regarding classification of liability into current liability and non-current
liability.
(ii) Classification of Reserves and Surplus
You being the senior member of audit team guide the member of the audit team about
such criteria and classification as per general instructions for preparation of balance
sheet as per Schedule III.
ANSWER
A liability shall be classified as current when it satisfies any of the following criteria:
(a) it is expected to be settled in the company’s normal operating cycle;
(b) it is held primarily for the purpose of being traded;
(c) it is due to be settled within twelve months after the reporting date; or
(d) the company does not have an unconditional right to defer settlement of the liability
for at least twelve months after the reporting date. Terms of a liability that could, at the option
of the counterparty, result in its settlement by the issue of equity instruments do not affect
its classification.
All other liabilities shall be classified as non-current.
Reserves and Surplus shall be classified as:
(a) Capital Reserves;
(b) Capital Redemption Reserve;
(c) Securities Premium;
(d) Debenture Redemption Reserve;
(e) Revaluation Reserve;
(f) Share Options Outstanding Account;
(g) Other Reserves – (specify the nature and purpose of each reserve and the amount in
respect thereof);
(h) Surplus i.e. balance in Statement of Profit & Loss disclosing allocations and
appropriations such as dividend, bonus shares and transfer to/from reserves etc.

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(Additions and deductions since last balance sheet to be shown under each of the specified
heads) Note: A reserve specifically represented by earmarked investments shall be termed
as a ‘fund’.
Note: Debit balance of statement of profit and loss shall be shown as a negative figure under
the head ‘Surplus’. Similarly, the balance of ‘Reserves and Surplus’, after adjusting negative
balance of surplus, if any, shall be shown under the head ‘Reserves and Surplus’ even if the
resulting figure is in the negative.

QUESTION NO 39

During the audit of Rapid Industries Private Limited, CA Akshat notices that
inventories of raw materials & consumables and work-in- progress amounting ` 2.50
crores and ` 0.25 crores appear in the financial statements of the company as on March
31st, 2024. He wants to verify that the above-mentioned inventories have been valued
appropriately and as per generally accepted accounting policies and practices. How
should he proceed to verify the above?
ANSWER
To verify that inventories of raw material & consumables and work-in- progress have been
valued appropriately and as per generally accepted accounting policies and practices, the
following procedures should be performed by CA Akshat:
For Raw materials and consumables:
• Ascertain what elements of cost are included e.g. carriage inward, non-refundable
duties etc.
• If standard costs are used, enquire into basis of standards; how these are compared
with actual costs and how variances are analysed and accounted for/ treated in
accounting records.
• Test check cost prices used with purchase invoices received in the month(s) prior to
counting.
• Follow up valuation of all damaged or obsolete inventories noted during observance of
physical counting with a view to establishing a realistic net realizable value.
For Work in Progress:
• Ascertain how the various stages of production/ value additions are measured and in
case estimates are made, understand the basis for such estimates.

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• Ascertain what elements of cost are included. If overheads are included, ascertain the
basis on which they are included and compare such basis with the available costing
and financial data/ information maintained by the entity.
• Ensure that material costs exclude any abnormal wastage factors.

QUESTION NO 40 (MTP 3 Marks

March ’23)
While verifying the legal and professional expenses of the client company, what audit
procedures should the auditor perform?
ANSWER
While verifying the legal and professional expenses of the client company, the auditor should
perform the following audit procedures
• Obtain a month-wise and consultant-wise summary.
• In case of monthly retainership agreements, verify whether the expenditure for all 12
months has been recorded correctly.
• For non- recurring expenses, select a sample and vouch for the attributes discussed
above.
• The auditor should be cautious while vouching for legal expenses as the same may
highlight a dispute for which the entity may not have made any provision and the matter may
also not have been discussed/ highlighted to the auditor for his specific consideration.
QUESTION NO 41
(RTP Nov ‘19)
State with reason (in short) whether the following statements are true or false: An
intangible asset is an identifiable monetary asset.
ANSWER
Incorrect: An intangible asset is an identifiable non-monetary asset, without physical
substance, held for use in the production or supply of goods or services, for rental to others,
or for administrative purposes.

QUESTION NO 42 (PYP 3
Marks, July’21)
The value of intangible assets may diminish due to efflux of time, use and/or
obsolescence. The diminution of the value represents cost to the entity for earning
revenue during a given period. Discuss the audit procedures to be applied by the auditor

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to ensure that Intangible assets have been valued appropriately and as per generally
accepted accounting policies and practices.
ANSWER
The value of intangible assets may diminish due to efflux of time, use and/ or obsolescence.
The diminution of the value represents cost to the entity for earning revenue during a given
period. Unless this cost in the form of amortization is charged to the accounts, the profit or
loss would not be correctly ascertained and the values of intangible asset would be shown at
higher amounts. The auditor should:
• Verify that the entity has charged amortization on all intangible assets;
• Verify that the amortization method used reflects the pattern in which the asset’s
future economic benefits are expected to be consumed by the entity.
The auditor should also verify whether the management has done an impairment assessment
to determine whether an intangible asset is impaired. For this purpose, the auditor needs to
verify whether the entity has applied AS 28 - Impairment of Assets for determining the manner
of reviewing the carrying amount of its intangible asset, determining the recoverable amount
of the asset to determine impairment loss, if any

QUESTION NO 43
(PYP 3 Marks Nov 22)
A Ltd. has traded for 50.00 Lacs in "TETRA", a virtual currency, during the F.Y. 2021 -
2022 and earned a profit of 20.00 Lacs on it. What disclosure requirements are prescribed
for such type of transactions done by the company?
ANSWER
Disclosure of Crypto Currency or Virtual Currency:
Where the Company has traded or invested in Crypto currency or Virtual Currency during the
financial year, the following shall be disclosed:
(a) profit or loss on transactions involving Crypto currency or Virtual Currency
(b) amount of currency held as at the reporting date,
(c) deposits or advances from any person for the purpose of trading or investing in Crypto
Currency/ virtual currency.

QUESTION NO 44
CA Ripun completed the audit of a listed company, and the audit report was issued on
July 17th, 2024. However, he had not properly organized the audit working papers,

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including records of discussions with management, audit procedures performed, and

conclusions reached. More than six months after issuing the report, he received a
letter from the regulator in connection with audit of the company requesting him to
share copy of audit file. In a hurry, CA Ripun quickly assembled the audit file, adding
some papers he thought were necessary, but he used the current date on these
newly added documents. He then sent the audit file to the regulator. Discuss the
issues involved related to “audit documentation” and assembling of the final audit file
in this case.

ANSWER
The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit file on a timely basis after the date of
the auditor’s report.
• SQC 1, “Quality Control for Firms that perform Audits and Review of Historical
Financial Information, and other Assurance and related services”, requires firms to
establish policies and procedures for the timely completion of the assembly of audit
files.
• An appropriate time limit within which to complete the assembly of the final audit
file is ordinarily not more than 60 days after the date of the auditor’s report. The
completion of the assembly of the final audit file after the date of the auditor’s report
is an administrative process that does not involve the performance of new audit
procedures or the drawing of new conclusions.
• Changes may, however, be made to the audit documentation during the final
assembly process, if they are administrative in nature.
Further, preparing sufficient and appropriate audit documentation on a timely basis helps to
enhance the quality of the audit and facilitates the effective review and evaluation of the
audit evidence obtained and conclusions reached before the auditor’s report is finalized.
Documentation prepared after the audit work has been performed is likely to be less
accurate than documentation prepared at the time such work is performed.
In the given case, even after passage of more than six months, CA Ripun has not assembled
an audit file. Besides, he has put in some papers with the current date which is not
permissible at all. It shows that part of the audit documentation has been prepared
afterwards putting a question mark on the quality of audit.

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QUESTION NO 45 (PYP
3 Marks Nov 22)
CAM is the engagement partner of S Ltd. He has instructed his audit team to maintain
proper audit documentation. The audit team members are not sure about the purpose
for which the documentation should be made. Explain the various purposes of audit
documentation with reference to SA 230.
ANSWER
Audit documentation: SA 230 on “Audit Documentation”, audit documentation refers to the
record of audit procedures performed, relevant audit evidence obtained, and conclusions the
auditor reached. (terms such as “working papers” or “work papers” are also sometimes used.)
Nature of Audit Documentation
Audit documentation provides:
(a) evidence of the auditor’s basis for a conclusion about the achievement of the overall
objectives of the auditor; and
(b) evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements.
Purpose of Audit Documentation
The following are the purpose of Audit documentation:
1. Assisting the engagement team to plan and perform the audit.
2. Assisting members of the engagement team to direct and supervise the audit work, and to
discharge their review responsibilities.
3. Enabling the engagement team to be accountable for its work.
4. Retaining a record of matters of continuing significance to future audits.
5. Enabling the conduct of quality control reviews and inspections.
6. Enabling the conduct of external inspections in accordance with applicable legal, regulatory
or other requirements.
From the above, it can be concluded that Audit documentation serves a number of purposes
and hence it would be incorrect to say that audit documentation would not serve any purpose
at any stage of audit

QUESTION NO 46 (MTP 4 Marks Nov

‘21)
Audit documentation provides evidence that the audit complies with SAs. However, it is
neither necessary nor practicable for the auditor to document every matter considered.

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Further, it is unnecessary for the auditor to document separately compliance with

matters for which compliance is demonstrated by documents included within the audit
file. Explain giving examples.
ANSWER
Audit documentation provides evidence that the audit complies with SAs. However, it is
neither necessary nor practicable for the auditor to document every matter considered, or
professional judgment made, in an audit. Further, it is unnecessary for the auditor to
document separately (as in a checklist, for example) compliance with matters for which
compliance is demonstrated by documents included within the audit file. For example:
• The existence of an adequately documented audit plan demonstrates that the auditor
has planned the audit.
• The existence of a signed engagement letter in the audit file demonstrates that the
auditor has agreed the terms of the audit engagement with management, or where
appropriate, those charged with governance.
• An auditor’s report containing an appropriately qualified opinion demonstrates that the
auditor has complied with the requirement to express a qualified opinion under the
circumstances specified in the SAs.
• In relation to requirements that apply generally throughout the audit, there may be a
number of ways in which compliance with them may be demonstrated within the audit
file:
• For example, there may be no single way in which the auditor’s professional skepticism
is documented. But the audit documentation may nevertheless provide evidence of the
auditor’s exercise of professional skepticism in accordance with SAs. Such evidence
may include specific procedures performed to corroborate management’s responses
to the auditor’s inquiries.
• Similarly, that the engagement partner has taken responsibility for the direction,
supervision and performance of the audit in compliance with the SAs may be evidenced
in a number of ways within the audit documentation. This may include documentation
of the engagement partner’s timely involvement in aspects of the audit, such as
participation in the team discussion required by SA 315.

QUESTION NO 47 (MTP 3 Marks May ’21 & May

20)

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Newton Ltd. has made loans and advances on the basis of following securities to various
borrowers. As an auditor what type of documents can be verified to ensure that the
company holds a legally enforceable security?
(i) Shares and Debentures
(ii) Life Insurance Policy
(iii) Hypothecation of goods.
ANSWER
Documents to be seen in case of Securities:
Types of Security Documents etc. to be seen
Shares and debentures The scrip and the endorsement thereon of the name of the
transferee, in the case of transfer.
Life Insurance Policy. Assignment of policy in favor of the lender, duly registered with
the insurer
Hypothecation of goods Deed of hypothecation or other document creating the
charge, together with a statement of inventories held at the
Balance Sheet date

QUESTION NO 48 (RTP Nov’22)

CA R comes to know some very critical information with regards to the business cycle
of an entity for which he has issued the audit report, which become known
to him as an auditor after the date of the auditor’s report but which existed at that date
and which, if known at that date, might have caused the financial statements to be
amended or the auditor to modify the opinion in the auditor’s report. He wants to
perform additional audit procedures to satisfy himself. As an auditor what he shall
document, on the matters arising after the date of audit report?
ANSWER
As per SA 230, “Audit Documentation”, if, in exceptional circumstances, the auditor performs
new or additional audit procedures or draws new conclusions after the date of the auditor’s
report, the auditor shall document:
(i) The circumstances encountered;
(ii) The new or additional audit procedures performed, audit evidence obtained, and
conclusions reached, and their effect on the auditor’s report; and
(iii) When and by whom the resulting changes to audit documentation were made and
reviewed.

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QUESTION NO 49 (RTP
Nov ’23)
The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit file on a timely basis. Explain in
detail.
ANSWER:
The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit file on a timely basis after the date of
the auditor’s report.
• SQC 1 “Quality Control for Firms that perform Audits and Review of Historical
• Financial Information, and other Assurance and related services”, requires firms to
establish policies and procedures for the timely completion of the assembly of audit
files.
• An appropriate time limit within which to complete the assembly of the final audit file
is ordinarily not more than 60 days after the date of the auditor’s report. The completion
of the assembly of the final audit file after the date of the auditor’s report is an
administrative process that does not involve the
performance of new audit procedures or the drawing of new conclusions.
• Changes may, however, be made to the audit documentation during the final assembly
process, if they are administrative in nature.
Examples of such changes include:
• Deleting or discarding superseded documentation.
• Sorting, collating and cross-referencing working papers.
• Signing off on completion checklists relating to the file assembly process.
• Documenting audit evidence that the auditor has obtained, discussed and agreed
with the relevant members of the engagement team before the date of the
auditor’s report.
• After the assembly of the final audit file has been completed, the auditor shall not
delete or discard audit documentation of any nature before the end of its
retention period.
• SQC 1 requires firms to establish policies and procedures for the retention of
engagement documentation. The retention period for audit engagements ordinarily is no
shorter than seven years from the date of the auditor’s report, or, if later, the date of the
group auditor’s report.

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QUESTION NO 50
(PYP)
M/s ANS & Associates has been appointed as the statutory auditors of MNO Ltd. The
company has been suffering losses due to the emergence of highly successful
competitor, thereby leading to negative net worth. Also, the sales head, key
management personnel, of the company left the company due to health issues. When
CA Amar, the engagement partner discussed the scenario with the management of the
company, he did not get any satisfactory reply from the management. What is the
responsibility of M/s ANS & Associates with regard to SA 570?
ANSWER
As per SA 570, one of the objectives of the auditor regarding going concern is to obtain
sufficient and appropriate audit evidence regarding the same and to conclude on the
appropriateness of the management’s use of the going concern basis of accounting in the
preparation of the financial statements.
∙ Further it also contains the list of events or conditions that may cast significant doubt on
the entity’s ability to continue as a going concern which are:
• Financial indicator- Negative net worth ¬
• Operating indicator- Loss of key management and emergence of highly successful
competitor.
∙ In the present case, MNO Ltd. has negative net worth on account of emergence of highly
successful competitor and the sales head of the company has also left the company.
∙ Also, CA Amar did not get any satisfactory reply when he discussed the going concern matter
with the management.
∙ Thus, from the above facts, it appears that MNO Ltd. is not going concern.
∙ If the management of MNO Ltd. has used the going concern basis of accounting, the auditor
should first ask the management to adjust the financial statements.
∙ If the management of MNO Ltd. does not agree with the same, CA Amar shall consider the
impact on his audit report.
QUESTION NO 51 (MTP 3 Marks March ’23,
RTP May’23)
Akash & Associates are the statutory auditors of Deluxe Ltd. for the FY 2020 -21. During
the course of audit, CA Akash, the engagement partner requested the management of
the company to provide written representation with respect to valuation of a transaction.

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The management, however does not provide the same to CA Akash. What course of
action should CA Akash follow in such situation?

ANSWER
If management of Deluxe Ltd. does not provide one or more of the requested written
representations, CA Akash should:
(a) Discuss the matter with management;
(b) Re-evaluate the integrity of management and evaluate the effect that this may have on
the reliability of representations (oral or written) and audit evidence in general; and
(c) Take appropriate actions, including determining the possible effect on the opinion in the
auditor’s report in accordance with SA 705.

QUESTION NO 52 (RTP May

’18, Old SM)
The auditor P of PAR and Co., a firm of Chartered Accountants is conducting audit of AB
Industries Ltd. The auditor requests management to provide Banker’s certificate in
support of Fixed deposits whereas management provides only written representation on
the matter.
Analyse how would you deal as an auditor
ANSWER
Although written representations provide necessary audit evidence, they do not provide
sufficient appropriate audit evidence on their own about any of the matters with which they
deal. Furthermore, the fact that management has provided reliable written representations
does not affect the nature or extent of other audit evidence that the auditor obtains about
the fulfillment of management’s responsibilities, or about specific assertions.
Applying the above to the given problem, the auditor would further request the management
to provide him with the Banker’s certificate in support of fixed deposits held by the company.

QUESTION NO 53 (PYP 4 Marks

Dec ‘21)
CA K is re-appointed as the auditor of B Ltd. He wants to re-confirm certain matters and
has asked the management to give written representations for the same. Under what

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circumstances can an auditor ask the management to reconfirm its acknowledgement

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

QUESTION NO 54 (RTP
May ’18)
State the significant difficulties encountered during audit with reference to SA-260
(communication with those charged with governance).
ANSWER
Significant Difficulties Encountered During the Audit: As per SA 260 “Communication with
Those Charged with Governance”, significant difficulties encountered during the audit may
include such matters as:
♦ Significant delays in management providing required information.
♦ An unnecessarily brief time within which to complete the audit.
♦ Extensive unexpected effort required to obtain sufficient appropriate audit evidence.
♦ The unavailability of expected information.
♦ Restrictions imposed on the auditor by management.
♦ Management’s unwillingness to make or extend its assessment of the entity’s ability to
continue as a going concern when requested

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QUESTION NO 55
During the audit of a company, CA Kartik has noticed that company’s turnover has fallen
drastically as compared to last three years due to loss of its major markets and key
customers. The company is in need of funds for new product development, but bankers
are not willing to lend financial support. Which additional audit procedures need to be
performed by CA Kartik in accordance with SA 570 when such events or conditions are
identified?

ANSWER
Loss of major markets, key customers and inability to obtain financing for new product
development are examples of events or conditions that may cast a significant doubt on the
entity’s ability to continue as going concern.
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. These procedures shall include:
a) Where management has not yet performed an assessment of the entity’s ability to
continue as a going concern, requesting management to make its assessment.
b) Evaluating management’s plans for future actions in relation to its going concern
assessment, whether the outcome of these plans is likely to improve the situation and
whether management’s plans are feasible in the circumstances.
c) Where the entity has prepared a cash flow forecast, and analysis of the forecast is a
significant factor in considering the future outcome of events or conditions in the
evaluation of management’s plans for future actions: -
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.
d) Considering whether any additional facts or information have become available since
the date on which management made its assessment.

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e) Requesting written representations from management and, where appropriate, those

charged with governance, regarding their plans for future actions and the feasibility
of these plans.

QUESTION NO 56 (MTP 4 Marks May 19, May’21, May’20 &May ’23, RTP Nov’18)
The auditor’s report shall include a section with a heading “Responsibilities of
Management for the Financial Statements.” SA 200 explains the premise, relating to the
responsibilities of management and, where appropriate, those charged with
governance, on which an audit in accordance with SAs is conducted. Explain.
ANSWER
Responsibilities for the Financial Statements: The auditor’s report shall include a section with
a heading “Responsibilities of Management for the Financial Statements.”
SA 200 explains the premise, relating to the responsibilities of management and, where
appropriate, those charged with governance, on which an audit in accordance with SAs is
conducted. Management and, where appropriate, those charged with governance accept
responsibility for the preparation of the financial statements. Management also accepts
responsibility for such internal control as it determines is necessary to enable the preparation
of financial statements that are free from material misstatement, whether due to fraud or
error. The description of management’s responsibilities in the auditor’s report includes
reference to both responsibilities as it helps to explain to users the premise on which an audit
is conducted.
This section of the auditor’s report shall describe management’s responsibility for:
(a) Preparing the financial statements in accordance with the applicable financial reporting
framework, and for such internal control as management determines is necessary to enable
the preparation of financial statements that are free from material misstatement, whether
due to fraud or error;[because of the possible effects of fraud on other aspects of the audit,
materiality does not apply to management’s acknowledgement regarding its responsibility for
the design, implementation, and maintenance of internal control (or for establishing and
maintaining effective internal control over financial reporting) to prevent and detect
fraud.] and
(b) Assessing the entity’s ability to continue as a going concern and whether the use of the
going concern basis of accounting is appropriate as well as disclosing, if applicable, matters
relating to going concern. The explanation of management’s responsibility for this

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assessment shall include a description of when the use of the going concern basis of
accounting is appropriate.
QUESTION NO 57
(RTP May ’20)
The first section of the auditor’s report shall include the auditor’s opinion, and shall have
the heading “Opinion.” The Opinion section of the auditor’s report shall also Identify the
entity whose financial statements have been audited. Apart from the above, explain the
other relevant points to be included in opinion section.
ANSWER
The first section of the auditor’s report shall include the auditor’s opinion, and shall have the
heading “Opinion.”
The Opinion section of the auditor’s report shall also:
(a) Identify the entity whose financial statements have been audited;
(b) State that the financial statements have been audited;
(c) Identify the title of each statement comprising the financial statements;
(d) Refer to the notes, including the summary of significant accounting policies; and
(e) Specify the date of, or period covered by, each financial statement comprising the
financial statements.
QUESTION NO 58 (RTP Nov ’23 , Nov ’19)
What an auditor should state in the "Basis for opinion" section of auditor's report? When
the auditor modifies the opinion on the financial statements, explain the amendments
he should make in this section?
ANSWER
An auditor should state in “Basis for Opinion” section of Auditor’s Report as under:
Basis for Opinion:
The auditor’s report shall include a section, directly following the Opinion section, with the
heading “Basis for Opinion”, that:
(i) States that the audit was conducted in accordance with Standards on Auditing;
(ii) Refers to the section of the auditor’s report that describes the auditor’s responsibilities
under the SAs;
(iii) Includes a statement that the auditor is independent of the entity in accordance with the
relevant ethical requirements relating to the audit and has fulfilled the auditor’s other ethical
responsibilities in accordance with these requirements.

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(iv) States whether the auditor believes that the audit evidence the auditor has obtained is
sufficient and appropriate to provide a basis for the auditor’s opinion.
Amendments an Auditor should make:
When the auditor modifies the opinion on the financial statements, the auditor shall, in
addition to the specific elements required by SA 700 (Revised):
(i) Amend the heading “Basis for Opinion” required by para of SA 700 (Revised) to “Basis for
Qualified Opinion,” “Basis for Adverse Opinion,” or “Basis for Disclaimer of Opinion,” as
appropriate; and
(ii) Within this section, include a description of the matter giving rise to the modification.

QUESTION NO 59 (MTP 4 Marks March 22)

While conducting audit of VED Ltd., you as an auditor are not only prevented in
completing certain audit procedures but also are not able to obtain audit evidence even
by performing alternative procedures. How you will deal with this situation?
ANSWER
As per SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”, if, after
accepting the engagement, the auditor becomes aware that management has imposed a
limitation on the scope of the audit that the auditor considers likely to result in the need to
express a qualified opinion or to disclaim an opinion on the financial statements, the auditor
shall request that management remove the limitation.
If management refuses to remove the limitation, the auditor shall communicate the matter to
those charged with governance, unless all of those charged with governance are involved in
managing the entity and determine whether it is possible to perform alternative procedures
to obtain sufficient appropriate audit evidence.
If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall
determine the implications as follows:
(1) If the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be material but not pervasive, the auditor shall
qualify the opinion; or
(2) 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 qualification
of the opinion would be inadequate to communicate the gravity of the situation, the auditor
shall:
(i) Withdraw from the audit, where practicable and possible under applicable law or

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regulation; or
(ii) If withdrawal from the audit before issuing the auditor’s report is not practicable or
possible, disclaim an opinion on the financial statements.
If the auditor withdraws, before withdrawing, the auditor shall communicate to those charged
with governance any matters regarding misstatements identified during the audit that would
have given rise to a modification of the opinion.

QUESTION NO 60 (RTP Nov ’21)

Delightful Ltd. is a company engaged in the production of smiley balls. During the FY
2020 - 21 the company transferred its accounts to computerised system (SAP) from
manual system of accounts. Since the employees of the company were not well versed
with the SAP system, there were many errors in the accounting during the transition
period. As such the statutory auditors of the company were not able to extract correct
data and reports from the system. Such data was not available manually also. Further,
the employees and the management of the company were not supportive in providing
the requisite information to the audit team. The auditor believes that the possible
effects on the financial statements of undetected misstatements could be both material
and pervasive.
Explain the kind of audit report that the statutory auditor of the company should issue
in this case.
ANSWER
The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient
appropriate audit evidence on which to base the opinion, and the auditor concludes that the
possible effects on the financial statements of undetected misstatements, if any, could be
both material and pervasive. The auditor shall disclaim an opinion when, in extremely rare
circumstances involving multiple uncertainties, the auditor concludes that, notwithstanding
having obtained sufficient appropriate audit evidence regarding each of the individual
uncertainties, it is not possible to form an opinion on the financial statements due to the
potential interaction of the uncertainties and their possible cumulative effect on the financial
statements. In the present case Delightful Ltd, the statutory auditor of the company is unable
to extract correct data and reports from the SAP system for conduct of audit. Also, such data
and reports are not available manually. Moreover, the auditor believes that

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the possible effects on the financial statements of undetected misstatements could be both
material and pervasive. As such, the statutory auditor of Delightful Ltd. should give a
disclaimer of opinion.

QUESTION NO 61 (MTP 4
Marks Nov 20)
State clearly the objective of the Auditor as per SA 706. Also define emphasis of matter
paragraph and other matter paragraph.
ANSWER
As per SA 706 (Revised) on “Emphasis of Matter Paragraphs and Other Matter Paragraphs
In The Independent Auditor’s Report”, the objective of the auditor, having formed an opinion
on the financial statements, is to draw users’ attention, when in the auditor’s judgment it is
necessary to do so, by way of clear additional communication in the auditor’s report, to:
(a) A matter, although appropriately presented or disclosed in the financial statements, that
is of such importance that it is fundamental to users’ understanding of the financial
statements; or
(b) As appropriate, any other matter that is relevant to users’ understanding of the audit, the
auditor’s responsibilities or the auditor’s report.
Emphasis of Matter paragraph – A paragraph included in the auditor’s report that refers to a
matter appropriately presented or disclosed in the financial statements that, in the auditor’s
judgment, is of such importance that it is fundamental to users’ understanding of the financial
statements.
Other Matter paragraph – A paragraph included in the auditor’s report that refers to a matter
other than those presented or disclosed in the financial statements that, in the auditor’s
judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or
the auditor’s report.
QUESTION NO 62 (MTP 3 Marks Nov ’21, RTP
Nov’22)
Mention the examples of circumstances where the auditor may consider it necessary to
include an Emphasis of Matter paragraph.
ANSWER
Examples of circumstances to include Emphasis of Matter Paragraph: As per SA 706

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(Revised) on “Emphasis of Matter Paragraphs and Other Matter Paragraphs In The

Independent Auditor’s Report”, the examples of circumstances where the auditor may
consider it necessary to include an Emphasis of Matter paragraph are;
(a) An uncertainty relating to the future outcome of an exceptional litigation or regulatory
action.
(b) A significant subsequent event that occurs between the date of the financial statements
and the date of the auditor’s report.
(c) Early application (where permitted) of a new accounting standard that has a material
effect on the financial statements.
(d) A major catastrophe that has had, or continues to have, a significant effect on the entity's
financial position.
QUESTION NO 63 (PYP 4 Marks Nov
22)
NG Ltd. appointed CA N as the statutory auditor for the F.Y. 2021 -2022. Previous year's
auditor gave a qualified opinion on the Comparative Financial Statements for the year
ended 31.03.2021. What will be the reporting responsibility casted on CA N when he
forms an opinion and prepares audit report on the Comparative Financial Statements
for the F.Y. 2021-2022?
ANSWER
Prior Period Financial Statements Audited by a Predecessor Auditor: As per SA 710, if the
financial statements of the prior period were audited by a predecessor auditor, in addition to
expressing an opinion on the current period’s financial statements, CA. N, the auditor of NG
Limited shall state in an Other Matter paragraph:
(a) That the financial statements of the prior period were audited by a predecessor auditor;
(b) The type of opinion expressed by the predecessor auditor and, if the opinion was
modified, the reasons therefor; and
(c) The date of that report, unless the predecessor auditor’s report on the prior period’s
financial statements is revised with the financial statements.

QUESTION NO 64 (RTP May’20)

ABC Ltd is a company incorporated in India. It has branches within and outside India.
Explain who can be appointed as an auditor of these branches within and outside India.
Also explain to whom branch auditor is required to report.

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ANSWER
Sub-section (8) of section 143 of the Companies Act, 2013, prescribes the duties and powers
of the company’s auditor with reference to the audit of the branch and the branch auditor.
Where a company has a branch office, the accounts of that office shall be audited either by
the auditor appointed for the company (herein referred to as the company's auditor) under
this Act or by any other person qualified for appointment as an auditor of the company under
this Act and appointed as such under section 139, or where the branch office is situated in a
country outside India, the accounts of the branch office shall be audited either by the
company's auditor or by an accountant or by any other person duly qualified to act as an
auditor of the accounts of the branch office in accordance with the laws of that country and
the duties and powers of the company' s auditor with reference to the audit of the branch
and the branch auditor, if any, shall be such as may be prescribed:
It may be noted that the branch auditor shall prepare a report on the accounts of the branch
examined by him and send it to the auditor of the company who shall deal with it in his report
in such manner as he considers necessary.
Further as per rule 12 of the Companies (Audit and Auditors) Rules, 2014, the branch auditor
shall submit his report to the company’s auditor and reporting of fraud by the auditor shall
also extend to such branch auditor to the extent it relates to the concerned branch.
QUESTION NO 65 (MTP 4 Marks May ’23, RTP Nov
’19)
The practice of appointing Chartered Accountants as joint auditors is quite widespread
in big companies and corporations. Explain stating the advantages of the joint audit.
ANSWER
Joint Audit: The practice of appointing Chartered Accountants as joint auditors is quite
widespread in big companies and corporations. Joint audit basically implies pooling together
the resources and expertise of more than one firm of auditors to
render an expert job in a given time period which may be difficult to accomplish acting
individually. It essentially involves sharing of the total work. This is by itself a great
advantage.
In specific terms the advantages that flow may be the following:
(i) Sharing of expertise.
(ii) Advantage of mutual consultation.
(iii) Lower workload.
(iv) Better quality of performance.

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(v) Improved service to the client.

(vi) Displacement of the auditor of the company taken over in a takeover often obviated.
(vii) In respect of multi-national companies, the work can be spread using the expertise of
the local firms which are in a better position to deal with detailed work and the local laws
and regulations.
(viii) Lower staff development costs.
(ix) Lower costs to carry out the work.
(x) A sense of healthy competition towards a better performance
QUESTION NO 66 (MTP 6 Marks Nov 20, RTP
Nov’18)
The auditor has to make inquires on certain matters under section 143(1) of Companies
Act, 2013. Discuss those matters.
ANSWER
The auditor has to make inquires on following matters under section 143(1) of Companies
Act, 2013:-
(a) whether loans and advances made by the company on the basis of security have been
properly secured and whether the terms on which they have been made are
prejudicial to the interests of the company or its members;
(b) whether transactions of the company which are represented merely by book entries are
prejudicial to the interests of the company;
(c) where the company not being an investment company or a banking company, whether so
much of the assets of the company as consist of shares, debentures and other securities
have been sold at a price less than that at which they were purchased by the company;
(d) whether loans and advances made by the company have been shown as deposits;
(e) whether personal expenses have been charged to revenue account;
(f) where it is stated in the books and documents of the company that any shares have been
allotted for cash, whether cash has actually been received in respect of such allotment, and
if no cash has actually been so received, whether the position as stated in the account books
and the balance sheet is correct, regular and not misleading.
QUESTION NO 67 (MTP 3 Marks Nov’23)
CA E was appointed statutory auditor of XYZ Private Limited in AGM held in the month
of August, 2023 for the first time for audit of financial statements of the company from
year 2023-24 onwards. Since he is new to the company, he wants to be sure about
integrity of accounting records. In this regard, he wants to ensure that software used by

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company for maintenance of its books of accounts is capable of tracking user activities
and changes made to entries in books of accounts, if any, during the course of year.
What CA E is looking for in the given situation? Discuss the reporting requirements for
CA E in this matter to be included in audit report to be issued under the Companies Act,
2013.
ANSWER
In the given situation, the auditor is looking for a feature of “audit trail” in software used by
company for maintenance of books of accounts. Under section 143(3) of Companies Act,
2013, it has to be reported by the auditor as under: -
Whether the company has used such accounting software for maintaining its books of
account which has a feature of recording audit trail (edit log) facility and the same has been
operated throughout the year for all transactions recorded in the
software and the audit trail feature has not been tampered with and the audit trail has been
preserved by the company as per the statutory requirements for record retention.

QUESTION NO 68 (PYP 4 Marks May ‘23)

During the course of audit of PQR Ltd, the statutory auditor CA G came across payments
made to various creditors aggregating to ` 75 lakhs. On verifying the same it is found
that the accounts manager had accounted for fake invoices of credit purchases for ` 25
lakhs in the books of account in the name of one bogus creditor Mr. X.
Discuss the duties of auditor with reference to the provisions of Companies Act, 2013
and also the disclosure requirements in the Board's Report.
ANSWER
The auditor shall report under clause (xi) of the CARO, 2020 that:
Whether any fraud by the company or any fraud on the company has been noticed or reported
during the year, if yes, the nature and the amount involved is to be indicated;
Reporting to the Audit Committee or Board: Sub-section (12) of section 143 of the Companies
Act, 2013 further prescribes that in case of a fraud involving lesser than the specified amount
[i.e. less than ` 1 crore], the auditor shall report the matter to the audit committee constituted
under section 177 or to the Board in other cases within such time and in such manner as may
be prescribed.
In this regard, sub-rule (3) of Rule 13 of the Companies (Audit and Auditors) Rules, 2014
states that in case of a fraud involving lesser than the amount specified in sub- rule (1) [i.e.
less than ` 1 crore], the auditor shall report the matter to Audit Committee constituted under

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section 177 or to the Board immediately but not later than 2 days of his knowledge of the
fraud and he shall report the matter specifying the following:
(i) Nature of Fraud with description;
(ii) Approximate amount involved; and
(iii) Parties involved.
Disclosure in the Board’s Report: Sub-section (12) of section 143 of the Companies Act, 2013
furthermore prescribes that the companies, whose auditors have reported frauds under this
sub-section
(12) to the audit committee or the Board, but not reported to the Central Government, shall
disclose the details about such frauds in the Board’s report in such manner as may be
prescribed.
In this regard, sub-rule (4) of Rule 13 of the Companies (Audit and Auditors) Rules, 2014
states that in the Board’s Report the following details of each of the fraud reported to the
Audit Committee or the Board under sub- rule (3) during the year:
(i) Nature of Fraud with description;
(ii) Approximate Amount involved;
(iii) Parties involved, if remedial action not taken; and
(iv) Remedial actions taken.
QUESTION NO 69 (MTP 3 Marks May ’21)
Provision of CARO, 2016 (CARO 2020) is not applicable to ABC Pvt. Ltd., a subsidiary of
XYZ Ltd. (a public company) having fully paid up Capital and Reserves & Surplus of Rs.
50 lakhs, Secured loan from bank of Rs. 90 Lakhs and Turnover of Rs. 5 Crore, for the
financial year 2018-19.
ANSWER
The CARO specifically exempts a private limited company, not being a subsidiary or holding
company of a public company, having a paid up capital and reserves and surplus not more
than rupees 1 crore as on the balance sheet date and which does not have total borrowings
exceeding rupees 1 crore from any bank or financial institution at any point of time during
the financial year and which does not have a total revenue as disclosed in Scheduled III to
the Companies Act, 2013 (including revenue from discontinuing operations) exceeding
rupees 10 crore during the financial year as per the financial statements. From the above, it
is clear that ABC Pvt. Ltd. is a subsidiary of XYZ Ltd. and hence not exempt from CARO, 2016
(CARO 2020) although it is satisfying the conditions that allow exemption to private limited
company which is not a subsidiary or holding company of a public company.

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QUESTION NO 70 (MTP 3 Marks March 22)

ABC Ltd. is a public company, which has availed various loans and cash credit facilities
from Banks and other financial institutions. The company has defaulted in repayments
of such borrowings during the year under audit. What are the reporting requirements in
this regard under the Companies (Auditor's Report) Order, 2020? (PYP 4 Marks May
‘23)
ANSWER
The auditor is required to report as per clause (ix) of paragraph 3 of CARO 2020
(a) whether the company has defaulted in repayment of loans or other borrowings or in the
payment of interest thereon to any lender, if yes, the period and the amount of default to be
reported as per the format below:-

Amount No. of
Nature of borrowing, Whether principal
not paid days Remarks,
including Name of lender Or
On due delay or If any
Debt securities interest
date unpaid

Lender wise details

To be provided in
case of defaults
to banks,
financial institutions
and
Government.

(a) whether the company is a declared willful defaulter by any bank or financial institution or
other lender;
(b) whether term loans were applied for the purpose for which the loans were obtained; if
not, the amount of loan so diverted and the purpose for which it is used may be reported;
(c) whether funds raised on short term basis have been utilized for long term purposes, if
yes, the nature and amount to be indicated;
(d) whether the company has taken any funds from any entity or person on account of or to
meet the obligations of its subsidiaries, associates or joint ventures, if so, details thereof with
nature of such transactions and the amount in each case;

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(e) whether the company has raised loans during the year on the pledge of securities
held in its subsidiaries, joint ventures or associate companies, if so, give details thereof and
also report if the company has defaulted in repayment of such loans raised;
QUESTION NO 71
Discuss the reporting requirements as per CARO, 2020, regarding:
(i) disputed and undisputed statutory due (MTP 2 Marks March ’23, Sep’22,May
20, RTP May’18)
and
(ii) internal audit system of the company (MTP 2 Marks March ’23, MTP 2 Marks
Sep’22)
ANSWER
Matters to be included as per CARO, 2020:
Undisputed and Disputed Statutory dues Clause (vii)
(a) whether the company is regular in depositing undisputed statutory dues including Goods
and Services Tax, provident fund, employees' state insurance, income tax, sales- tax, service
tax, duty of customs, duty of excise, value added tax, cess and any other statutory dues to
the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues
as on the last day of the financial year concerned for a period of more than six months from
the date they became payable, shall be indicated;
(b) where statutory dues referred to in sub-clause (a) have not been deposited on account
of any dispute, then the amounts involved and the forum where dispute is pending shall be
mentioned (a mere representation to the concerned Department shall not be treated as a
dispute).
Internal audit system
Clause (xiv)
(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.
QUESTION NO 72 (RTP May ’20)
The head accountant of a company entered fake invoices of credit purchases in the
books of account aggregate of ` 50 lakh and cleared all the payments to such bogus
creditor. How will you deal as an auditor?
ANSWER

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Here, the auditor of the company is required to report the fraudulent activity to the Board or
Audit Committee (as the case may be) within 2 days of his knowledge of fraud. Further, the
company is also required to disclose the same in Board’s Report. It may be noted that the
auditor need not to report the central government as the amount of fraud involved is less
than ` 1 crore, however, reporting under CARO, 2016 (CARO 2020) is required.

QUESTION NO 73 (MTP 5 Marks March ’18 March

’19)
An NGO operating in Delhi had collected large scale donations for Tsunami victims. The
donations so collected were sent to different NGOs operating in Tamil Nadu for relief
operations. This NGO operating in Delhi has appointed you to audit its accounts for the
year in which it collected and remitted donations for Tsunami victims. Draft audit
program for audit of receipts of donations and remittance of the collected amount to
different NGOs. Mention six points each, peculiar to the situation, which you will like to
incorporate in your audit program for audit of said receipts and remittances of
donations.
ANSWER
Receipt of Donations:
(i) Internal Control System: Existence of internal control system particularly with reference to
division of responsibilities in respect of authorised collection of donations, custody of receipt
books and safe custody of money.
(ii) Custody of Receipt Books: Existence of system regarding issue of receipt books, whether
unused receipt books are returned and the same are verified physically including checking of
number of receipt books and sequence of numbering therein.
(iii) Receipt of Cheques: Receipt Book should have carbon copy for duplicate receipt and
signed by a responsible official. All details relating to date of cheque, bank’s name, date,
amount, etc. should be clearly stated.
(iv) Bank Reconciliation: Reconciliation of bank statements with reference to all cash
deposits not only with reference to date and amount but also with reference to
receipt book.
(v) Cash Receipts: Register of cash donations to be vouched more extensively. If addresses
are available of donors who had given cash, the same may be cross-checked by asking entity
to post thank you letters mentioning amount, date and receipt number.

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(vi) Foreign Contributions, if any, to receive special attention to compliance with applicable
laws and regulations.
Remittance of Donations to Different NGOs:
(i) Mode of Sending Remittance: All remittances are through account payee cheques.
Remittances through Demand Draft would also need to be scrutinized thoroughly with
reference to recipient.
(ii) Confirming Receipt of Remittance: All remittances are supported by receipts and
acknowledgements.
(iii) Identity: Recipient NGO is a genuine entity. Verify address, 80G Registration Number,
etc.
(iv) Direct Confirmation Procedure: Send confirmation letters to entities to whom donations
have been paid.
(v) Donation Utilisation: Utilisation of donations for providing relief to Tsunami victims and
not for any other purpose.
(vi) System of NGOs’ Selection: System for selecting NGO to whom donations have been
sent.

QUESTION NO 74 (MTP 4 Marks

Nov ‘21)
You have been appointed auditor of Dr. Prem Ratan Hospital. Discuss any eight
important points that would attract your attention
ANSWER
Audit of Hospital: The special steps involved in such an audit are stated below-
(1) Register of Patients: Vouch the Register of patients with copies of bills issued to them.
Verify bills for a selected period with the patients’ attendance record to see that the bills
have been correctly prepared. Also see that bills have been issued to all patients from whom
an amount was recoverable according to the rules of the hospital.
(2) Collection of Cash: Check cash collections as entered in the Cash Book with the receipts,
counterfoils and other evidence for example, copies of patients bills, counterfoils of dividend
and other interest warrants, copies of rent bills, etc.
(3) Income from Investments, Rent etc.: See by reference to the property and Investment
Register that all income that should have been received by way of rent on properties,
dividends, and interest on securities have been collected.

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(4) Legacies and Donations: Ascertain that legacies and donations received for a specific
purpose have been applied in the manner agreed upon.
(5) Reconciliation of Subscriptions: Trace all collections of subscription and donations from
the Cash Book to the respective Registers. Reconcile the total subscriptions due (as shown
by the Subscription Register and the amount collected and that still outstanding).
(6) Authorisation and Sanctions: Vouch all purchases and expenses and verify that the capital
expenditure was incurred only with the prior sanction of the Trustees or the Managing
Committee and that appointments and increments to staff have been duly authorised.
(7) Grants and TDS: Verify that grants, if any, received from Government or local authority
has been duly accounted for. Also, that refund in respect of taxes deducted at source has
been claimed.
(8) Budgets: Compare the totals of various items of expenditure and income with the amount
budgeted for them and report to the Trustees or the Managing Committee, significant
variations which have taken place.
(9) Internal Check: Examine the internal check as regards the receipt and issue of stores;
medicines, linen, apparatus, clothing, instruments, etc. so as to insure that purchases have
been properly recorded in the Inventory Register and that issues have been made only against
proper authorization.
(10) Depreciation: See that depreciation has been written off against all the assets at the
appropriate rates.
(11) Registers: Inspect the bonds, share scrips, title deeds of properties and compare their
particulars with those entered in the property and Investment Registers.
(12) Inventories: Obtain inventories, especially of stocks and stores as at the end of the year
and check a percentage of the items physically; also compare their total values with
respective ledger balances.
(13) Management Representation and Certificate: Get proper Management Representation
and Certificate with respect to various aspects covered during the course of audit.

QUESTIONNO 75
You are auditing the Books of accounts of Karla Multiplex which runs 15 Film shows
everyday. One of the major issues which are of concern to you as an auditor is the
Agreement entered into the Multiplex owners with the Film Distributors. State what
points would you check as an auditor in this respect.
ANSWER

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The special steps involved in the audit of Cinema are stated below-
(1) Verify the internal control mechanism-
(a) that entrance to the cinema-hall during show is only through printed tickets;
(b) that they are serially numbered and bound into books;
(c) that the number of tickets issued for each show and class, are different though the
numbers of the same class for the show on the same day, each week, run serially;
(d) that for advance booking a separate series of tickets is issued; and
(e) that the inventory of tickets is kept in the custody of a responsible official.
(2) Confirm that at the end of show, a statement of tickets sold is prepared and cash collected
is agreed with it.
(3) Verify that a record is kept of the ‘free passes’ and that these are issued under proper
authority.
(4) Reconcile the amount of Entertainment Tax collected with the total number of tickets
issued for each class and vouch and verify the entertainment tax returns filed each month.
(5) Vouch the entries in the Cash Book in respect of cash collected on sale of tickets for
different shows on a reference to Daily Statements which have been test checked as
aforementioned with record of tickets issued for the different shows held.
(6) Verify the charges collected for advertisement slides and shorts by reference to the
Register of Slides and Shorts Exhibited kept at the cinema as well with the agreements,
entered into with advertisers in this regard.
(7) Vouch the expenditure incurred on advertisement, repairs and maintenance. No part of
such expenditure should be capitalized.
(8) Confirm that depreciation on machinery and furniture has been charged at an appropriate
rate.
(9) Vouch payments on account of film hire with bills of distributors and in the process, the
agreements concerned should be referred to.
(10) Examine unadjusted balance out of advance paid to the distributors against film
hire contracts to see that they are good and recoverable. If any film in respect of which an
advance was paid has already run, it should be enquired as to why the advance has not been
adjusted. The management should be asked to make a provision in respect of advances that
are considered irrecoverable.
(11) The arrangement for collection of the share in the restaurant income should be enquired
into either a fixed sum or a fixed percentage of the taking may be receivable annually. In case
the restaurant is run by the Cinema, its accounts should be checked. The audit should cover

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sale of various items of foodstuffs, purchase of foodstuffs, cold drink, etc. as in the case of
club.

QUESTIONNO 76 (MTP 3
Marks March ‘21)
GSR & Co. has been appointed as an auditor of Tagore School. Engagement team wants
to verify Fees from students in detail. Advise the audit procedure to be followed by the
engagement team.
ANSWER
Fee from Students :-
1. Check names entered in the Students Fee Register for each month or term, with the
respective Class Registers, showing names of students on rolls and test amount of fees
charged; and verify that there operates a system of internal check 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 collections 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 written off under the sanction of an appropriate authority.
4. Check admission fees with admission slips signed by the head of the institution and
confirm that the amount has been credited to a Capital fund, unless the Managing Committee
has taken a decision to the contrary.
5. See that free studentship and concessions have been granted by a person authorised to
do so,
having regard to the Rules prepared by the Managing Committee.
6. Confirm that fines for late payment or absence, etc. have been either collected or remitted
under proper authority.
7. Confirm that hostel dues were recovered before student’s accounts were closed and their
deposits of caution money refunded.
QUESTION NO 77 (PYP 4
Marks May ‘23)
CA. Z. a Chartered Accountant is the Senior manager of a Multi-State Co-operative
Society in Mumbai. He is proposed to be appointed as an auditor of the said Multi-State

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Cooperative Society. Analyse the provisions of the Multi-State Co-operative Societies

Act, 2002 and comment on validity of proposed appointment.
ANSWER
Qualification of Auditors -Section 72 of the Multi-State Co-operative Societies Act, 2002
states that a person who is a Chartered Accountant within the meaning of the Chartered
Accountants Act, 1949 can only be appointed as auditor of Multi-State co-operative society.
However, the following persons are not eligible for appointment as auditors of a Multi-State
co- operative society-
(i) A body corporate.
(ii) An officer or employee of the Multi-State co-operative society.
(iii) A person who is a member or who is in the employment, of an officer or employee of the
Multi- State co-operative society.
(iv) A person who is indebted to the Multi-State co-operative society or who has given any
guarantee or provided any security in connection with the indebtedness of any third person
to the Multi- State co-operative society for an amount exceeding
one thousand rupees.
If an auditor becomes subject, after his appointment, to any, of the disqualifications specified
above, he shall be deemed to have vacated his office as such.
Appointment of Auditors - Section 70 of the Multi-State Co-operative Societies Act, 2002
provides that the first auditor or auditors of a Multi-State co-operative society shall be
appointed by the board within one month of the date of registration of such society and the
auditor or auditors so appointed shall hold office until the conclusion of the first annual
general meeting. If the board fails to exercise its powers under this sub-section, the Multi-
State co-operative society in the general meeting may appoint the first auditor or auditors.
The subsequent auditor or auditors are appointed by Multi-State co-operative society, at
each annual general meeting. The auditor or auditors so appointed shall hold office from the
conclusion of that meeting until the conclusion of the next annual general meeting.

QUESTION NO 78
An NGO based in Kolkata collected significant donations for flood victims in Bihar.
The funds were distributed to various NGOs operating in Bihar to support relief
efforts. You have been appointed as the auditor for this NGO’s accounts for the year in
which it collected and disbursed these donations. Draft an audit program to audit the
receipts of donations and the remittance of the collected funds to different NGOs

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ANSWER
Receipt of Donations:
I. Internal Control System: Existence of internal control system particularly with
reference to division of responsibilities in respect of authorised collection of
donations, custody of receipt books and safe custody of money.
II. Custody of Receipt Books: Existence of system regarding issue of receipt books,
whether unused receipt books are returned and the same are verified physically
including checking of number of receipt books and sequence of numbering therein.
III. Receipt of Cheques: Receipt Book should have carbon copy for duplicate receipt and
signed by a responsible official. All details relating to date of cheque, bank’s name,
date, amount, etc. should be clearly stated.
IV. Bank Reconciliation: Reconciliation of bank statements with reference to all cash
deposits not only with reference to date and amount but also with reference to receipt
book.
V. Cash Receipts: Register of cash donations to be vouched more extensively. If
addresses are available of donors who had given cash, the same may be cross-
checked by asking entity to post thank you letters mentioning amount, date and
receipt number.
VI. Foreign Contributions, if any, to receive special attention to compliance with applicable
laws and regulations.
Remittance of Donations to Different NGOs:
I. Mode of Sending Remittance: All remittances are through account payee cheques.
Remittances through Demand Draft would also need to be scrutinised thoroughly
with reference to recipient.
II. Confirming Receipt of Remittance: All remittances are supported
by receipts and acknowledgements.
III. Identity: Recipient NGO is a genuine entity. Verify address, 80G Registration Number,
etc.
Direct Confirmation Procedure: Send confirmation letters to
IV. entities to whom donations have been paid.
V. Donation Utilisation: Utilisation of donations for providing relief to Tsunami victims
and not for any other purpose.
VI. System of NGOs’ Selection: System for selecting NGO to whom donations have been
sent.

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QUESTION NO 79 (MTP 3 Marks Nov ’21, RTP

Nov ’23)
"Public moneys should not be utilized for the benefit of a particular person or section of
the community". List out the exceptions to this rule while audit against propriety.
ANSWER
Exceptions to the rule – Audit Against Propriety: Public moneys should not be utilised for the
benefit of a particular person or section of the community unless:
(i) the amount of expenditure involved is insignificant; or
(ii) a claim for the amount could be enforced in a Court of law; or
(iii) the expenditure is in pursuance of a recognised policy or custom; and
(iv) the amount of allowances, such as travelling allowances, granted to meet expenditure of
a particular type should be so regulated that the allowances are not, on the whole, sources
of profit to the recipients.

QUESTION NO 80 (MTP 4 Marks March 22, RTP Nov’19)

Audit of government expenditure is one of the major components of government audit
conducted by the office of C & AG. The basic standards set for audit of expenditure are
to ensure that there is provision of funds authorised by competent authority fixing the
limits within which expenditure can be incurred. Explain those standards.

ANSWER
Government Expenditure Audit: Audit of government expenditure is one of the major
components of government audit conducted by the office of C&AG. The basic standards set
for audit of expenditure are to ensure that there is provision of funds authorized by competent
authority fixing the limits within which expenditure can be incurred. Briefly, these standards
are explained below:
(i) Audit against Rules & Orders: The auditor has to see that the expenditure incurred
conforms to the relevant provisions of the statutory enactment and is in accordance with the
financial rules and regulations framed by the competent authority.
(ii) Audit of Sanctions: The auditor has to ensure that each item of expenditure is covered by
a sanction, either general or special, accorded by the competent authority, authorizing such
expenditure.

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(iii) Audit against Provision of Funds: It contemplates that there is a provision of funds out of
which expenditure can be incurred and the amount of such expenditure does not exceed the
appropriations made.
(iv) Propriety Audit: It is required to be seen that the expenditure is incurred with due regard
to broad and general principles of financial propriety. The auditor aims to bring out cases of
improper, avoidable, or in fructuous expenditure even though the expenditure has been
incurred in conformity with the existing rules and regulations. Audit aims to secure a
reasonably high standard of public financial morality by looking into the wisdom, faithfulness
and economy of transactions.
(v) Performance Audit: This involves that the various programmers, schemes and projects
where large financial expenditure has been incurred are being run economically and are
yielding results expected of them. Efficiency-cum- performance audit, wherever used, is an
objective examination of the financial and operational performance of an organization,
programmer, authority or function and is oriented towards identifying opportunities for
greater economy, and effectiveness.

QUESTION NO 81 (PYP 4
Marks, Jan21)
You have been appointed as internal auditor of 'City Club' in Delhi. The receipts of the
club were 50 lakhs during the previous year ending 2019-20. You are required to mention
special points of consideration while auditing such receipts of the club.
ANSWER
The points which merit consideration in the audit of a CLUB w.r.t its members:
(1) Entrance Fee: Vouch the receipt on account of entrance fees with –
members’ applications and counterfoils issued to them,
on a reference to minutes of the Managing Committee.
(2) Member Subscriptions: Vouch members’ subscriptions with –
the counterfoils of receipt issued to them,
trace receipts for a selected period to the Register of Members;
also reconcile the amount of total subscriptions due with the amount collected and that
outstanding.
(3) Subscription Arrears/in Advance: Ensure that –
arrears of subscriptions for the previous year have been correctly brought over,

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arrears for the year under audit and subscriptions received in advance have been correctly
adjusted.
Subscriptions received in advance should have been properly accounted for.
(4) Arithmetical accuracy: Check totals of various columns of the Register of members and
tally them across.
(5) Register of Members: See the Register of Members to ascertain –
the Member’s dues which are in arrear and
enquire whether necessary steps have been taken for their recovery;
the amount considered irrecoverable should be mentioned in the Audit Report.
(6) Member Accounts :- Trace debits for a selected period from subsidiary registers
maintained in respect of supplies and services to members to confirm that the
account of every member has been debited with amounts recoverable from him.

QUESTION NO 82 (MTP 4 Marks May ’23)

As an auditor, explain the areas of consideration while auditing the element of ROOM
SALES during the audit of a 5-Star Hotel.
ANSWER
Following points merit consideration while auditing the element of ROOM SALES during the
audit of a Hotel:-
(1) The charge for room sales is normally posted to guest bills by the receptionist/ front office
or in the case of large hotels by the night auditor.
(2) The source of these entries is the guest register and audit tests should be carried out to
ensure that the correct numbers of guests are charged for the correct period.
(3) Any difference between the charged rates used on the guests’ bills and the standard room
rate should be investigated to ensure that they have been properly authorised.
(4) In many hotels, the housekeeper prepares a daily report of the rooms which were occupied
the previous night and the number of beds kept in each room. This report tends not to be
permanently retained and the auditor should ensure that a sufficient number of reports are
available for him to test both with the guest register and with the individual guest’s bill.
(5) Ensure compliance with the provisions of FEMA and RBI if receipts are in foreign currency.
Ensure application of proper Conversion rate.
(6) Special emphasis to be laid on receipts through Credit Cards.
(7) The auditor should ensure that proper valuation of occupancy-in-progress at the balance
sheet date is made and included in the accounts.

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QUESTION NO 83 (PYP 5 Marks,

May 18)
Mr. M, has served as an auditor in the Co-Operative Department of a Government, is
appointed as a statutory auditor by a Co-Operative Society that has receipts over ` 3
crores during the financial year. He is not a Chartered Accountant. Mr. D, Chartered
Accountant is appointed to conduct tax audit of the society under section 44AB of the
Income Tax Act, 1961. Comment.
ANSWER
Qualifications and Appointment of Auditors - Apart from a chartered accountant within the
meaning of the Chartered Accountants Act, 1949, some of the State Co-operative Acts have
permitted persons holding a government diploma in co-operative accounts or in co- operation
and accountancy and also a person who has served as an auditor in the co- operative
department of a government to act as an auditor.
An auditor of a co-operative society is appointed by the Registrar of Co-operative Societies
and the auditor so appointed conducts the audit on behalf of the Registrar and submits his
report to him as also to the society.
Thus, in view of above provisions, appointment of Mr. M as statutory auditor and Mr. D as
tax auditor under Section 44 AB is in order.

QUESTION NO 84 MTP 4 Marks Oct 19, RTP

May ’18)
Your firm of Chartered Accountants has been appointed as the Auditor of two branches
of OBC which are located in the Industrial area. Considering that the location of the
branches of bank in industrial area, these would be “advances oriented branches and
audit of advances would require the major attention of the auditors. Advise how would
you proceed to obtain evidence in respect of audit of advances.
ANSWER
(a) Audit of Advances: Advances generally constitute the major part of the assets of the bank.
There are large number of borrowers to whom variety of advances are granted. The audit of
advances requires the major attention from the auditors. In carrying out audit of advances,
the auditor is primarily concerned with obtaining evidence about the following:
a. Amounts included in balance sheet in respect of advances are outstanding at the date of
the balance sheet.
b. Advances represent amount due to the bank.

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c. Amounts due to the bank are appropriately supported by Loan documents and other
documents as applicable to the nature of advances.
d. There are no unrecorded advances.
e. The stated basis of valuation of advances is appropriate and properly applied, and that the
recoverability of advances is recognised in their valuation.
f. The advances are disclosed, classified and described in accordance with recognised
accounting policies and practices and relevant statutory and regulatory requirements.
g. Appropriate provisions towards advances have been made as per the RBI norms,
Accounting Standards and generally accepted accounting practices.
(b) The auditor can obtain sufficient appropriate audit evidence about advances by study and
evaluation of internal controls relating to advances, and by:
• examining the validity of the recorded amounts;
• examining loan documentation;
• reviewing the operation of the accounts;
• examining the existence, enforceability and valuation of the security;
• checking compliance with RBI norms including appropriate classification and
provisioning; and
• carrying out appropriate analytical procedures.
In carrying out his substantive procedures, the auditor should examine all large advances
while other advances may be examined on a sampling basis. The accounts identified to be
problem accounts however need to be examined in detail unless the amount involved is
insignificant.
Advances which are sanctioned during the year or which are adversely commented by RBI
inspection team, concurrent auditors, bank’s internal inspection, etc. should generally be
included in the auditor’s review.
QUESTION NO 85 (MTP 4 Marks Oct 20, RTP May’22,
Old & New SM)
Your firm of Chartered Accountants has been appointed as auditor of a Nationalized
bank. Explain how will you proceed to carry out audit of provisions and contingencies.
ANSWER
For audit of Provisions and contingencies, the auditor should ensure that the compliances for
various regulatory requirements for provisioning as contained in the various circulars have
been fulfilled. The auditor should obtain an understanding as to how the bank computes
provision on standard assets and non-performing assets. It will primarily include checking

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the basis of classification of loans and receivables into standard, sub-standard, doubtful, loss
and non- performing assets. The auditor may verify the loan classification on a sample basis.
The auditor should obtain the detailed break-up of standard loans, non-performing loans and
agree the outstanding balances with the general ledger. The auditor should obtain the tax
provision computation from the bank’s management and verify the nature of items debited
and credited to profit and loss account to
ascertain that the same are appropriately considered in the tax provision computation. The
other provisions for expenses should be examined vis-a-vis the circumstances warranting
the provisioning and the adequacy of the same by discussing and obtaining the explanations
from the bank’s management.
QUESTION NO 86 (MTP 4 Marks Oct ’21, RTP
May ’22)
“There is no difference in provisioning of NPA as regards to categories of NPA, whether
the debt is secured or unsecured." Critically evaluate the statement on the basis of
provisioning norms of NPA of nationalised bank stating clearly the provision percent
required.
ANSWER
Classification as NPA should be based on the record of recovery. Availability of security or
net worth of borrower/guarantor is not to be taken into account for purpose of treating an
advance as NPA or otherwise. Further, asset classification would be borrower-wise and not
facility-wise. All facilities including investments in
securities would be termed as NPA.
There are different provisioning requirements as regards to categories of NPA such as Sub-
standards assets, Doubtful assets and loss assets which are given below:

Categories of Non-Performing Assets Provision required

Substandard Assets: 15%
Would be one, which has remained NPA for
period less than or equal to 12 months.
Doubtful Assets:
Would be one, which has remained in the Secured+ Unsecured
Sub-standard category for a period of 12 months.

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Sub-categories:
Doubtful up to 1 Year (D1) Doubtful 1 to 3 Years 25% + 100%
(D2) Doubtful more than 3 Years (D3) 40% + 100%
100% + 100%
Loss Assets: 100%
Would be one where loss has been identified by the
bank or internal or external auditors or the RBI.
inspection but the amount has not been written
off.
wholly.

QUESTION NO 87 (MTP 4 Marks April ’23 & PYP Dec

’21)
In a bank, all accounts should be kept within the drawing power and the
sanctioned limit. The accounts which exceed the sanctioned limit or drawing power
should be brought to the notice of the management regularly. Analyse the following
points to be considered in the computation of drawing power in case of bank audit.
(i) Bank’s Duties
(ii) Auditor’s concern
(iii) Computation of DP
(iii) Stock audit

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

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statement of the month for which the audited accounts are prepared and submitted should
be compared and the reasons for deviations, if there are any, should be ascertained.
(iii)Computation of DP:It needs to be ensured that the drawing power is.
calculated as per the extant guidelines formulated by the Board of Directors of the respective
bank and agreed upon by the concerned statutory auditors. Special consideration should be
given to proper reporting of sundry creditors for the purposes of calculating drawing power.
(iv) Stock Audit: The stock audit should be carried out by the bank for all accounts having
funded exposure of more than 15 crores. Auditors can also advise for stock audit in other
cases if the situation warrants the same. Branches should obtain stock audit reports from
lead bank in the cases where the Bank is not leader of the consortium of working capital. The
report submitted by the stock auditors should be reviewed during the course of the audit and
special focus should be given on the comments made by the stock auditors on valuation of
security and calculation of drawing power.

QUESTION NO 88 (MTP 3 Marks

Oct’23)
CA X is acting as concurrent auditor of a branch of KLT Bank (a nationalized bank)
located in Delhi during the year 2022-23. The assignment started on 1st October 2022
and is for a period of one year. By virtue of this assignment, he is required to issue
monthly reports on different aspects of the functioning of branches including deposits,
advances and housekeeping to controlling authorities of Bank.
At the end of March, 2023, he has got an offer to conduct a statutory audit of two
branches of KLT Bank located in the State of Rajasthan for the year 2022-23. Can he
accept the above offer? Discuss.
ANSWER
In the given situation, CA X has undertaken a concurrent audit assignment of KLT Bank which
is in the nature of internal assignments.
In accordance with RBI guidelines, statutory audit assignments should not be undertaken by
auditors while being associated with internal assignments in bank during the same year as
concurrent audits (Internal audits of banks conducted monthly during the year).
As CA X is associated with KLT Bank as concurrent auditor, he should not accept statutory
audit assignment of same bank even though it relates to different branches of the bank.

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QUESTION NO 89 (RTP Nov

’23)
TEP Industries Private Limited, a company engaged in obtaining rice from paddy, is
enjoying a cash credit facility against hypothecation of paid stocks and book debts
(eligible up to 90 days only) from LMV Bank for ₹ 4.00 crore. The letter sanctioning the
above credit facility stipulates margin @ 25% on stocks and @ 40% on eligible book debts
up to 90 days.
While preparing stock statement as on 30.6.23, accountant of the company calculates
value of stocks for ₹ 5 crore (including ₹ 1 crore of rice which was lying in a low lying
godown and was completely damaged during recent floods caused by river Yamuna).
Debtors outstanding as on 30.6.23 are ₹ 3 crore (including ₹ 50 lacs outstanding for last
6 months). Trade creditors outstanding as on date are ₹ 2 crore. He calculates DP as on
30.6.23 for ₹ 3.30 crore. Is he correct? Justify with your workings. What does drawing
power calculated by you signify to the borrower company?
ANSWER
The calculation of DP is as under:
Value of stocks as on 30.6.23 Rs.5.00 crore
Less: value of damaged stocks Rs.1.00 crore
Value of stocks considered as on 30.6.23 Rs.4.00 crore
Less: Trade creditors Rs.2.00 crore
Paid stocks Rs.2.00 crore
Less: Margin @ 25% Rs.0.50crore
Drawing power for stocks [A] Rs.1.50crore
Value of Trade debtors Rs.3.00 crore
Less: Debtors outstanding for more than 90 Rs.0.50crore
days
Rs.2.50crore
Less: Margin @ 40% Rs.1.00 crore
Drawing power for Book debts [B] Rs.1.50 crore
Total drawing power [A+ B] Rs.3.00 crore

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Accountant’s DP calculation is not correct. The drawing power of Rs.3.00 crore signifies that
company can utilize funds to the tune of Rs.3.00 crore only against sanctioned cash credit
limit of Rs.4.00 crore.
QUESTION NO 90 (PYP 3 Marks May’22)
After becoming Chartered Accountant, you have got your first assignment as an auditor
of a bank branch dealing in various types of advances. What are the areas which you will
be looking for obtaining sufficient appropriate evidence (for advances) besides studying
and evaluating internal controls?
ANSWER
Audit Procedure in Audit of Advances in case of Bank Audit: The auditor can obtain sufficient
appropriate audit evidence about advances by study and evaluation of internal controls
relating to advances, and by:
(i) examining the validity of the recorded amounts.
(ii) examining loan documentation.
(iii) reviewing the operation of the accounts.
(iv) examining the existence, enforceability and valuation of the security.
(v) checking compliance with RBI norms including appropriate classification and provisioning;
and
(vi) carrying out appropriate analytical procedures.

QUESTION NO 91 (PYP 3 Marks

May ‘23)
A Ltd. has availed Cash Credit facilities against Stock and Book Debt, Term Loan for
machinery and Bank Guarantee from Big Bank Ltd. A Ltd. furnishes stock statements
and age wise list of debtors to Big Bank Ltd. on regular basis. Concurrent Auditors of
Big Bank Ltd. mentioned about wrong calculation of Drawing Power by the Bank Branch
along with sanctioned limit, and balances overdrawn due to wrong calculation of
Drawing Power (DP) in the monthly report. Explain the meaning of drawing power and
how it differs from sanctioned limit? What is to be ensured while computing Drawing
Power (DP)?
ANSWER
Meaning of Drawing Power generally addressed as “DP” is an important concept for Cash
Credit (CC) facility availed from banks and financial institutions. Drawing power is the limit
up to which a firm or company can withdraw from the working capital limit sanctioned.

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Different from Sanctioned Limit: The Sanctioned limit is the total exposure that a bank can
take on a particular client for facilities like cash credit, overdraft, export packing credit, non-
funded exposures etc. On the other hand, Drawing Power refers to the amount calculated
based on primary security, less margin as on
a particular date.
Computation of DP:It needs to be ensured that the drawing power is calculated as per the
extant guidelines formulated by the Board of Directors of the
respective bank and agreed upon by the concerned statutory auditors. Special
consideration should be given to proper reporting of sundry creditors for the purposes of
calculating drawing power.

QUESTION NO 92 (RTP May

’22)
The IESBA Code establishes the fundamental principles of professional ethics relevant
to the auditor when conducting an audit of financial statements. Discuss and also
explain the meaning of ethics.
ANSWER
The auditor shall comply with relevant ethical requirements, including those pertaining to
independence, relating to financial statement audit engagements. Relevant ethical
requirements ordinarily comprise the Code of Ethics for Professional Accountants (IESBA
Code) related to an audit of financial statements.
First, broadly understand what are ethics. “Ethics” are the principles of conduct governing an
individual or group. Professions like law and medicine have their code of ethics. Auditing
profession is no exception. Rather, in profession of auditing, importance of ethics is manifold.
The IESBA Code establishes the following as the fundamental principles of professional
ethics relevant to the auditor when conducting an audit of financial statements. We shall
understand broad meaning and intent of these fundamental principles as below:-
(a) Integrity
Integrity requires auditor to be straight forward and honest in all professional and business
relationships. It implies fair dealing and truthfulness. It effectively means that he shall not be
associated with reports, returns, communications or other information which he believes
contains a materially false or misleading statement; contains statements or information
provided recklessly or omits required information where such omission could be misleading.

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(b) Objectivity
The principle of objectivity requires an auditor not to compromise professional judgment
because of bias, conflict of interest or undue influence of others.
(c) Professional competence and due care
It requires that auditors attain and maintains professional knowledge and skill at the level
required to render competent professional service based on current technical and
professional standards and legislation and also to act diligently and in accordance with
technical and professional standards. Diligence includes responsibility to act carefully,
thoroughly and on a timely basis in accordance with requirements of an assignment.
(d) Confidentiality
Confidentiality principle requires an auditor to respect the confidentiality of information
acquired as a result of professional or business relationships.
(e) Professional behavior
It requires an auditor to comply with relevant laws and regulations and avoid any conduct
that he knows or should know might discredit the profession.
QUESTION NO 93 (MTP 4 Marks April
19)
Familiarity threats are self-evident, and occur when auditors form relationships with the
client where they end up being too sympathetic to the client’s interests. Explain.
ANSWER
Familiarity threats are self-evident, and occur when auditors form relationships with the
client where they end up being too sympathetic to the client’s interests. This can occur in
many ways:
(i) close relative of the audit team working in a senior position in the client company,
(ii) former partner of the audit firm being a director or senior employee of the client,
(iii) long association between specific auditors and their specific client counterparts, and
(iv) acceptance of significant gifts or hospitality from the client company, its directors or
employees.

QUESTION NO 94 (4 Marks Oct

20)
There are two interlinked perspectives of independence of auditors,
one, independence of mind; and two, independence in appearance. Explain.
ANSWER

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There are two interlinked perspectives of independence of auditors, one, independence of

mind; and two, independence in appearance. The Code of Ethics for Professional
Accountants issued by International Federation of Accountants (IFAC) defines the term
‘Independence’ as follows:
“Independence is: (i) Independence of mind – the state of mind that permits the provision of
an opinion without being affected by influences allowing an individual to act with integrity,
and exercise objectivity and professional skepticism; and
(ii)Independence in appearance – the avoidance of facts and circumstances that are so
significant that a third party would reasonably conclude an auditor’s integrity, objectivity or
professional skepticism had been compromised.”

QUESTION NO 95 (RTP May ’21, MTP

Sep’22)
Discuss preconditions for an audit as per SA 210. Explain how would an auditor proceed
to establish the presence of pre-conditions for an audit.
ANSWER
As per SA 210 “Agreeing the Terms of Audit Engagements”, preconditions for an audit may
be defined as the use by management of an acceptable financial reporting framework in the
preparation of the financial statements and the agreement of management and, where
appropriate, those charged with governance to the premise on which an audit is conducted.
In order to establish whether the preconditions for an audit are present, the auditor shall:
(a) Determine whether the financial reporting framework is acceptable; and
(b) Obtain the agreement of management that it acknowledges and understands its
responsibility:
(i) For the preparation of the financial statements in accordance with the applicable
financial reporting framework;
(ii) For the internal control as management considers necessary; and
•To provide the auditor with: Access to all information such as records, documentation and
other matters;
•Additional information that the auditor may request from management for the purpose of
the audit; and
•Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence.

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QUESTION NO 96 (PYP Nov

22)
CA P is appointed as an auditor of XYZ Limited for the F.Y. 2021 -22. The management
of XYZ Limited has requested the auditor to change the terms of original engagement
as the company has diversified its business and few new products have been introduced
by the company. Can CA P agree to the request made by the management? Under which
circumstances can the client make a request to the auditor for a change in the terms of
engagement?

ANSWER
Acceptance of a Change in Engagement:
The auditor may decide not to send a new audit engagement letter or other written agreement
each period. However, a significant change in nature or size of the entity’s business is one of
the factors which may make it appropriate to revise the terms of the audit engagement.
In the given situation, XYZ Limited has diversified its business and few new products have
also been introduced by the Company which is indicative of significant change in nature or
size of the entity’s business. In view of above, CA. P can agree to the request made by the
management to change the terms of the audit engagement. Therefore, request of
Management to change the terms of audit engagement is appropriate.
A request from the client for the auditor to change the engagement may result from-
1. a change in circumstances affecting the need for the service,
2. a misunderstanding as to the nature of an audit or related service originally requested.
3. a restriction on the scope of the engagement, whether imposed by management or
caused by circumstances.

QUESTION NO 97
CA Sudhakar has been appointed as the auditor of AMRO Ltd. Before accepting the
appointment, he learns that his cousin, who held shares in the company and recently
passed away without children, named him as the nominee for these shares, which have
substantial value. Although holding such shares through a distant relative does not
violate legal provisions or affect his independence, this unexpected inheritance
places him in a dilemma. Advise CA Sudhakar on how he should deal with this
situation and safeguard his independence.
ANSWER

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In the given situation, holding shares by CA Sudhakar involves financial interest in the
company and is in nature of self-interest threat. Though he has come to hold shares due
to nomination made by his distant relative before accepting the appointment.
Chartered Accountants have a responsibility to remain independent by taking into account
the context in which they practice, the threats to independence and the safeguards available
to address the threats.
Safeguards are actions, individually or in combination, that the professional accountant
takes that effectively reduce threats to comply with the fundamental principles to an
acceptable level.
To address the issue, the following guiding principles are to be applied: -
• For the public to have confidence in the quality of audit, it is essential that auditors
should always be and appear to be independent of the entities that they are auditing.
• Before taking on any work, an auditor must conscientiously consider whether it
involves threats to his independence.
• When such threats exist, the auditor should either desist from the task or eliminate
the threat or at the very least, put in place safeguards which reduce the threats to an
acceptable level. All such safeguard measures need to be recorded in a form that can
serve as evidence of compliance with due process.
• If the auditor is unable to fully implement credible and adequate safeguards, then he
must not accept the work.

QUESTION NO 98 (MTP May 20)

SQC1 requires engagement partner to establish policies and procedures for the timely
completion of the assembly of audit files. An appropriate time limit within which to
complete the assembly of the final audit file is ordinarily not more than 30 days after the
date of the auditor’s report.

ANSWER
Incorrect: SQC1“ Quality Control for Firms that perform Audits and Review of Historical
Financial Information, and other Assurance and related services”, requires firms to establish
policies and procedures for the timely completion of the assembly of audit files. An
appropriate time limit within which to complete the assembly of the final audit file is ordinarily
not more than 60 days after the date of the auditor’s report.

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QUESTION NO 99 (MTP March’19, RTP Nov

’19)
The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit file on a timely basis after the date
of the auditor’s report. Discuss.
ANSWER
The auditor shall assemble the audit documentation in an audit file and complete the
administrative process of assembling the final audit file on a timely basis after the date of
the auditor’s report. SQC 1 “Quality Control for Firms that perform Audits and Review of
Historical Financial Information, and other Assurance and related services”, requires firms to
establish policies and procedures for the timely completion of the assembly of audit files. An
appropriate time limit within which to complete the assembly of the final audit file is ordinarily
not more than 60 days after the date of the auditor’s report.
The completion of the assembly of the final audit file after the date of the auditor’s report is
an administrative process that does not involve the performance of new audit procedures or
the drawing of new conclusions. Changes may, however, be made to the audit documentation
during the final assembly process, if they are administrative in nature.
Examples of such changes include:
• Deleting or discarding superseded documentation.
• Sorting, collating and cross-referencing working papers.
• Signing off on completion checklists relating to the file assembly process.
• Documenting audit evidence that the auditor has obtained, discussed and agreed with
the relevant members of the engagement team before the date of the auditor’s report.
After the assembly of the final audit file has been completed, the auditor shall not delete or
discard audit documentation of any nature before the end of its retention period.
SQC 1 requires firms to establish policies and procedures for the retention of engagement
documentation. The retention period for audit engagements ordinarily is no shorter than
seven years from the date of the auditor’s report, or, if later, the date of the group auditor’s
report.

QUESTION NO 100 (MTPNov’21, RTP

May’18)
As per SA 220, “Quality Control for an Audit of Financial Statements” the auditor should
obtain information considered necessary in the circumstances before accepting an

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engagement with a new client. Explain clearly stating the information that would assist
the auditor in accepting and continuing of relationship with the client.
ANSWER
Information which assists the Auditor in accepting and continuing of relationship with Client:
As per SA 220, “Quality Control for an Audit of Financial Statements” the auditor should
obtain information considered necessary in the circumstances before accepting an
engagement with a new client, when deciding whether to continue an existing engagement
and when considering acceptance of a new engagement with an existing client. The following
information would assist the auditor in accepting and continuing of relationship with the
client:
(i) The integrity of the principal owners, key management and those charged with
governance of the entity;
(ii) Whether the engagement team is competent to perform the audit engagement and has
the necessary capabilities, including time and resources;
(iii) Whether the firm and the engagement team can comply with relevant ethical
requirements; and
(iv) Significant matters that have arisen during the current or previous audit engagement,
and their implications for continuing the relationship.

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