CA SHANKAR LAKHWANI # Audit Made Easy

120 PAGES QUESTION CHARTS

CA FINAL AUDIT
By CA SHANKAR LAKHWANI

HELLO CHAMPIONS!!!!!
Important Points to Keep in Mind before Referring
Question Charts
• Coverage –
o All Module Questions
o All Past Exam Questions from May 2018 to Nov 2024
o All RTP/MTP Questions from May 2018 to May 2025
o Latest Model Test Paper Questions (May 2025 Edition)

• No need to refer any Question Bank

• Suitable for 1st Reading as well as subsequent Revisions

• ICAI Keywords are highlighted in each answer

Yes, you can & you will definitely clear your CA

Exams in May 2025
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Magic Charts (100% Concepts) 190 Pages

Question Charts (100% Questions) 120 Pages
Magic Charts + Question Charts = Perfect Recipe to score 80+

Get Ready for 80+ in CA Final Audit

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CA SHANKAR LAKHWANI # Audit Made Easy

Some of our Top Scorers of Nov 24 Exams

Marks scored in Marks scored in Audit (Last attempt), if
Full Name Audit applicable
Aayush Agarwal 82 45
Naman Trivedi 81 39
Jamuna Kiran 78 38
Aarav Ahuja 78
Neha Singh 77
Arjun Nair 77 40
Rahul Kumar 77
Jay 75 52
Naman Roy 75
Ananya Sharma 74 49
Aayush Bajaj 74
Vani 74
Shivani Verma 74 20
Devansh Agarwal 74
Aditya Singh 73 50
Ritika Agarwal 73
Jay P Patel 73
Harman Singh 73 37
Shreya Daruri 73
Param 72
Tapendra sharma 72 32
Vaishali V Pai 67 Not applicable
Nandini Verma 64
Vishma Hegde 63 34
Milan Ahuja 63
Joy 63
Maya Kumari 63
Aniket Chaudhari 63
Sid 63
Suhana Sharma 63 24
Vishal 63
Ranjani 63 34
Manuvanthra R 62
Ishika Agrawal 62 30
Meera Bhardwaj 61 26
Ayesha 61
Mousam Asati 61
Nandini Garg 61 25
Kavyanjali 60 17
Jaya Rathi 60
Krushita Dudhat 60 28

& Many More

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CA SHANKAR LAKHWANI # Audit Made Easy

INDEX
Chapter Pg No.
SQC-1 1
SA 220 4
SA 240 6
SA 250 8
SA 260 10
SA 299 11
SA 300 13
SA 320 14
SA 330 14
Risk Assessment & Internal Control 15
SA 402 19
SA 450 20
SA 500 21
SA 501 23
SA 505 25
SA 510 27
SA 530 29
SA 540 29
SA 550 31
SA 560 34
SA 570 35
SA 580 37
SA 600 38
SA 610 39
SA 620 40
SA 700, 705 & 706 41
SA 701 47
SA 710 48
SA 720 49
Reporting Miscellaneous & Section 143 of Companies Act, 2013 50
CARO 50
SA 800 53
SA 805 54
SA 810 55
SRS 4400 56
SRS 4410 57
SRE 2400 59
SRE 2410 60
SAE 3400 61
SAE 3402 62
SAE 3420 63

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CA SHANKAR LAKHWANI # Audit Made Easy
Digital Audit 64
Group Audit 66
Bank Audit 69
NBFC Audit 73
PSU Audit 77
Internal Audit 80
Due Diligence 84
Investigation 84
Forensic Accounting 85
Emerging Areas (ESG & SDG Assurance) 86
Professional Ethics 89

Yes, I will definitely clear my CA Exams

CA SHANKAR LAKHWANI # Audit Made Easy
SQC 1 - Quality Control for Firms that perform Audits & Reviews of Historical Financial
Information & other Assurance and Related Services Engagements

Q1) Auditor of Reliance resigned. Reliance is in news for regulator’s inquiries. Reliance is
ready to offer high fees to CA Shankar. CA Shankar has strong recommendation to accept
Reliance’s audit. Promoter of Reliance is close associate & family friend of CA Shankar. What
is your understanding of functioning at top of CA firm? What are considerations one should
exercise to uphold quality of firm?

• Objective of SQC -1

Firms should establish quality control system to provide reasonable assurance that -

Firm and personnel comply with PSRLR (Professional Std. & Regulatory & Legal Reqt.)
Reports are appropriate

Poor functioning Commercial considerations Independence Client lacks integrity

have become overriding factor issue
• Considerations – Paisa, Log, Paisa

Firm assigns mgt responsibilities so Firm’s policies for personnel Firm devotes sufficient
that commercial considerations do demonstrate overriding resources for
not override quality of work commitment to quality development of QCPP
• Firm acquires vital info about client before accepting engagement to decide about ICC.
• Integrity of client
• Competence to perform engagement
• Compliance with ethical requirements

Q2) CA Shankar (auditor) assures client of clean report as quid pro quo if audit is offered to
CA Shankar. Is approach of auditor proper? How is quality control system of firm?

Improper approach Poor quality control system Code of ethics & SQC 1 not followed

Q3) ED search on client. Huge cash recovered. IT department searches for bogus capital
gains. Client offers CA Shankar tax audit of 5 business in lieu of handsome fees. Discuss
factors CA Shankar should evaluate if he wants to accept engagement?

Firm acquires vital info about client, before accepting engagement to decide about ICC.

Integrity of client
Matters considered wrt integrity of client

Indications of money laundering and criminal activities

• Therefore, offer shouldn’t be accepted.

Q4) Auditor confused about Ind AS applicability & took expert opinion from ICAI & was of
the view that EQCRr is not to be appointed.

EQCR – Mandatory for audit of listed entity irrespective of facts of the case.

Yes, I will definitely clear my CA Exams 1

CA SHANKAR LAKHWANI # Audit Made Easy
Q5) Mr X feels that engagement file in audit should be ready prior to issue of audit report.
Is he correct?

No. Engagement files to be completed in not more than (max) 60 days after audit report date.

Q6) Factors to consider in determining whether conclusion as to acceptance and continuance

of client relation appropriate?

SQC 1: Firm acquires vital info about client, before accepting engagement to decide about
ICC.
• Integrity of client
• Competence to perform engagement
• Compliance with ethical requirements
(SA 220 – ICC + SM = Significant matters during current or previous engagement)

Q7) Audit firm does not possess expertise to carry out audit of diversified business activities
and wishes to withdraw from engagement and client relation. Discuss issues that need to be
addressed before deciding to withdraw.

Policies on withdrawal from eng. / both eng. & client relation address issues –

• Discussing with mgt and TCWG action firm might take.

• If appropriate to withdraw, discuss with mgt & TCWG, withdrawal & reasons.
• Consider PRL reqt. to remain in place or discuss with regulatory authorities, withdrawal &
reasons.
• Documenting significant -
o Issues
o Consultations
o Conclusions & its basis

Q8) Aspects looked into by Engagement Quality Control Reviewer for audit of listed entity.

• EQCR for audit of listed entities includes considering-

o Significance and disposition of corrected / uncorrected MST.
o Significant risks and responses.
o ET’s evaluation of independence.
o Whether WP reflect work performed & support conclusions.
o Appropriateness of report.
o Judgements made wrt materiality & significant risks.

Q9) CA firm maintains audit documentation. Physical files are neither scanned, nor cross
referenced to e- files. Work papers do not contain details of whether information obtained
from client or prepared by engagement team. How do you view this from viewpoint of quality
control system of audit firm?

• SQC 1 : Firm should establish policies to maintain

Yes, I will definitely clear my CA Exams 2

CA SHANKAR LAKHWANI # Audit Made Easy
Safe custody Integrity Confidentiality Accessibility Retrievability
of engagement documentation
• Here, physical files are neither scanned, nor cross referenced. Inability to do so shows that
firm hasn’t established policies to maintain integrity of audit documentation.
• It becomes difficult to demonstrate completeness of audit files and whether these were
assembled within 60 days.
• Appropriate procedures –
o Generate scanned copies that reflect entire content of documentation.
o Integrate scanned copies into engagement files, with indexing & signing off.
o Enable scanned copies to be retrieved and printed.
• Here, work papers do not contain details of whether info obtained from client or prepared
by engagement team. Its important to identify source of document to ensure its
retrievability.
• Conclusion – Quality control is poor.

Q10) There was search by income tax Authorities on Company & records were seized. Auditor
noted that promoter’s brother is contesting upcoming elections. One of the current senior
engagement team manager, who has been doing audit till last year, has left audit firm & is
planning to provide accounting services to one of the associate companies (group company of
client).Audit firm is yet to recruit another senior manager having experience. Elaborate
matters to be considered by CA firm wrt acceptance & continuance of client relations.

SQC 1:Acceptance & continuance of client relations and specific engagements

Firm acquires vital info about client, before accepting engagement to decide about ICC.

• Integrity of client
• Competence to perform engagement
• Compliance with ethical requirements
Matters considered wrt integrity of client

• Indications of money laundering and criminal activities.

SA 220 –

Firm Independence requirements Personnel (SQC 1/SA 220)

If threats,

Threat eliminate Khud hi eliminate (withdrawal from engagement)

Personnel Firm

written confirmation of compliance with independence

At least annually

• Since senior manager who was on this engagement is providing accounting services to group
company, engagement partner should assess whether it would have any impact on audit &
examine ethical requirements like independence and objectivity.
• Since there was income tax raid, engagement partner should evaluate ROMM.
• Since senior member has left firm, engagement partner should assess whether he would be
in a position to devote adequate time/whether to recruit another member.

Yes, I will definitely clear my CA Exams 3

CA SHANKAR LAKHWANI # Audit Made Easy
SA 220 – Quality Control for Audit of Financial Statements

Q1) CARO - Auditor comments that company is “generally regular” in depositing statutory
dues. Is reporting qualitative and in line with SA 220?

Not qualitative Not in line with SA 220

• Objective of SA 220 –

Firms should establish quality control system to provide reasonable assurance that -

Firm and personnel comply with PSRLR (Professional Std. & Regulatory & Legal Reqt.)
Reports are appropriate

Reporting under CARO, 2020 is not proper Audit does not comply with PSRLR

Q2) Engagement partner’s (EP) view – matters related to independence assessment are EP’s
responsibility & not of EQCRr. EQCRr refused to sign documentation and objected to EP’s
view. Comment as per SA 220. Company is listed entity.

• SA 220 – EP form conclusion on compliance with independence requirement.

• EP –
Obtain information of Evaluate info Threat eliminate/khud eliminate (Action
threats to independence to eliminate or reduce threat/withdraw)
• For audit of listed entity – EQCRr consider engagement team’s evaluation of firm’s
independence. Therefore, EP not right.
• Independence assessment documentation should also be given to EQCRr for review.

Q3) AB Associates are appointed as auditor of SL Limited. CA A, one of the partners of AB

Associates completed audit by 19/06/24 and died. CA B, another partner of AB Associates
signed audit report of SL Ltd, without reviewing work of CA A. State with reasons whether
CA B is right in expressing opinion on FS, audit of which is performed by another auditor.

• SA 220 - Engagement Partner applies review procedures:

Work performed as per PSRLR Consultations taken place Conclusions documented

Revise NTE of work Obtained SAAE
• Code of Ethics –
1. When auditor uses work of another auditor, he will continue to be responsible for opinion.
2. He will rely on work of others, provided he exercises skill and care and is unaware of
reason to believe that he should not have relied.
3. He should review work & obtain reasonable assurance that work of other auditor is
adequate.
• CA B signed report, relying on work of CA A. Here, CA B is allowed to sign audit report & he
will be responsible for expressing opinion. He may rely on work of CA A, provided he
exercises skill & care & review work performed by CA A.

Yes, I will definitely clear my CA Exams 4

CA SHANKAR LAKHWANI # Audit Made Easy
Q4) Field work completed on 01/05/23, audit report date 15/05/23, EQCR completion
18/05/23, Engagement partner review 12/05/23.Comment

• SA 220 -Engagement partner should take responsibility for review being performed as per
firm’s review policies.
• For audit of FS of listed entities, engagement partner shall –

Determine – EQCRr appointed Discuss significant matters Not date AR until completion
with EQCRr of EQCR
• SA 700 – Audit report to be dated not earlier than SAAE. EQCR helps to determine
whether SAAE obtained.
• Here, EQCR 18/05/23 (later than AR date 15/05/23).
• Date of audit report before completion of EQCR is incorrect.

Yes, I will definitely clear my CA Exams 5

CA SHANKAR LAKHWANI # Audit Made Easy
SA 240 – The Auditor’s Responsibilities Relating to Fraud in Audit of Financial Statements

Q1) Company wants to set up plant for new product, needing huge capital to stay competitive.
Revenue increased from 750 crore (last year) to 1000 crore (this year). No change in plant
capacity. How auditor should deal paying attention to ROMM due to fraudulent FR?

• Fraud risk factor wrt MST arising from fraudulent FR

o Incentive/pressure
▪ Need to obtain additional finance to stay competitive
• Auditor assess ROMM due to fraud. Audit procedures on revenue–
Analytical procedures Computer assisted auditing techniques Test of controls

Q2) Statutory auditor finds that no action taken by company on deficiencies in internal
control, pointed out in report of internal auditor. Following are the deficiencies –

a) Receivables not reconciled, b) No review of customer credit limits

• Fraud risk factor wrt MST arising from fraudulent FR

o Attitude/character/ethical values
▪ Management failing to remedy internal control deficiency
• Auditor assess ROMM due to fraud. Intentional misstatement.
Q3) Govt brought regulatory legislations on social media company. How auditor should verify
that company is complying with new requirements?

There should be system to Check policies like Fraud risk factor –

comply regulatory requirement • Internal control Incentive/pressure
• Informed employees
• Legal advisors
Q4) AB Limited was engaged in business of hotel,tourism,airline. Auditor decided that risk of
improper revenue recognition from hotel business shouldn’t be treated as fraud risk. It is
based on earlier years’ assessment where no fraud was identified in revenue. While testing
internal financial controls, it was identified that controls are not properly designed to
mitigate risk of fraud and risk of improper revenue recognition. As a result, auditor decided
to perform additional testing. Auditor still were to the conclusion that there is no risk of
fraud in revenue recognition. During additional testing, it was identified that management
didn’t account for revenue received from Hotel booking amounting to 43 crore. These amounts
were partially received in company’s bank a/c & partially received in CFO’s personal account.
Amount received in bank account was disclosed as advance received against future bookings.
Kindly guide statutory auditors with respect to responsibility relating to fraud.

• SA 240 & 315:

o Auditor shall identify and assess ROMM due to fraud.
o Auditor shall presume that there are risk of fraud in revenue recognition & evaluate
which types of revenue give rise to risks.
• SA 240 & 330: Auditor shall determine responses to ROMM.
• Presumption that there are risk of fraud in revenue recognition may be rebutted. Eg,
auditor may conclude that there is no risk of fraud in revenue recognition, if there is single
type of revenue transaction. But in complex revenue structure, there is probability of risk.

Yes, I will definitely clear my CA Exams 6

CA SHANKAR LAKHWANI # Audit Made Easy
Here, company is earning revenue from multiple streams. Also, controls are not properly
•
designed to mitigate risk of fraud and risk of improper revenue recognition. Write facts of
the case.
• Auditor while performing risk assessment procedures will consider complexity & nature of
revenue to determine fraud risk in revenue recognition.
o Also, there are no controls addressing risk & auditor rebutted fraud risk.
o Treat the risk of improper revenue recognition as significant risk.
o Sec 143(12) of COA 2013 - Report to CG as fraud is > 1 crore.
Q5) How Fraudulent Financial reporting is accomplished & techniques of committing fraud by
mgt override of controls?

1. Involves intentional MST including omission of amount/disclosures in FS to deceive FS

users.
2. Fraudulent FR accomplished by –

Manipulation, falsification, Misrepresentation/Intentional Intentional misapplication of

alteration of accounting omission of significant info in accounting principles wrt amt,
records FS classification & disclosures
3. Fraud by mgt overriding controls using techniques like –

Recording fictitious journal Inappropriately adjusting Omitting, advancing, delayed

entries (particularly period end) assumptions and changing recognition of transactions in
judgements FS
Concealing facts affecting FS Engaging in complex transactions to misrepresent financial
amount position
Q6) You are auditor of S Limited. You came across entry of purchases of 1.5 crore.Upon
further enquiry, you discovered that purchases have been booked at instance of one of
directors. Further, despite this entry in books, no payment was made, and there is lack of
evidence of these purchases. OR

M/s Innocent Limited has entered into a transaction on 25th February, 2018, near year-end,
whereby it has agreed to pay Rs.5 lakhs per month to Mr. Yuvraj as annual retainership fee
for "engineering consultation". No amount was actually paid, but Rs.60 lakhs is provided in
books of account as on March 31, 2018. Your inquiry elicits a response that need-based
consultation was obtained round the year, but there is no documentary evidence of receipt of
the service. As the auditor of M/s Innocent Limited, what would be your approach?

• SA 240 - Fraudulent FR - Fraud by mgt overriding controls using techniques like –

Recording fictitious journal entries (particularly period end)

• Impossibility to continue audit/auditor unable to continue engagement

Determine professional/legal Consider whether appropriate to withdraw from engagement, if

responsibilities + Whether legally permitted
requirement to report to –
• Person who made
appointment or
• Regulatory authorities
• Sec 143(12) of COA 2013 – Fraud 1 crore or more – Report to Central Govt
• Report under Clause (xi) of Para 3 of CARO 2020

Yes, I will definitely clear my CA Exams 7

CA SHANKAR LAKHWANI # Audit Made Easy
SA 250 – Consideration of Laws & Regulations in an Audit of Financial Statements

Q1) DGGI (GST) issued notice to online insurance company for creating fictitious invoice.
Premises of insurance company were searched. Matter informed to IRDA. State auditor’s
responsibilities.

• Investigation by regulatory organisation is indication of non-compliance.

• Issuing invoice without supply – offence under GST law.
• Non-compliance of GST law has direct effect on FS.
• Violation of IRDA guidelines may result in fines & litigation having material effect on FS.
• Audit procedures when non-compliance identified/suspected –
1. Auditor to obtain –
Understanding of nature of act and Further information to evaluate possible effect on FS
circumstances in which it occurred
2. If auditor suspects non-compliance, he shall discuss with mgt/TCWG.
If mgt/TCWG don’t provide sufficient info and effect of non-compliance is material to FS, auditor
shall obtain legal advice.
3. If sufficient info can’t be obtained wrt suspected non-compliance – auditor shall evaluate
effect of lack of SAAE on opinion.
4. Auditor takes action.

Q2) CA found that company employed child labour. Management replied to CA that looking
into compliance of law is not in his scope.

1. Auditor is not responsible for preventing non-compliance and can’t be expected to detect
non-compliance with all L/R.
2. Auditor – obtain reasonable assurance that FS free from MM – fraud/error.
3. Auditor considers legal & regulatory framework.
• For laws having direct effect -

Auditor’s responsibility to obtain SAAE for compliance with L/R.

• For laws not having direct effect -

Auditor’s responsibility is limited to specified audit procedures to identify non compliance with L/R
having material effect on FS
• Management’s reply – not acceptable since non-compliance with child labour law has
material effect on FS.
• CA should ensure as to whether any penal provisions will be there for non-compliance &
whether non-compliance is disclosed by company.
• Non-compliance having material effect and not reflected in FS – qualified/adverse opinion.

Q3) A & Co. are auditors of X Limited. Year 2023–24. X Limited received show cause notice
from National Green Tribunal since it was dumping waste without treating it and lot of
damage is done to environment. Penalty imposed on X Ltd is 700 crore. X Limited disclosed in
FS in notes –

“Company received show cause notice for violation of environmental laws and company’s legal
team found that judgement would be in favour of company and so no provision is created.”

Yes, I will definitely clear my CA Exams 8

CA SHANKAR LAKHWANI # Audit Made Easy
Profit of X Limited is 49 crore and turnover is 120 crore for 2022-23. How to report as
auditor?

SA 250 -

L/R not having direct effect on determination of amt & disclosures in FS but compliance is
fundamental to –

• Operations
• Going concern
• Avoid material penalties

Non- compliance: material effect on FS

Auditor’s responsibility is limited to specified audit procedures to identify non-compliance with

L/R having material effect on FS -

Inquiry of management/TCWG as to Inspecting correspondence with regulatory authorities

whether entity is complying with L/R
COA 2013 -Auditor has to report whether company disclosed impact of pending litigation on
financial position in FS.

SA 570 –

If auditor concludes that mgt’s use of going concern basis is appropriate, but material
uncertainty exists, auditor to determine whether FS disclose –

o Events that cast significant doubt on going concern and mgt’s plans to deal with
those events.
o That there is material uncertainty related to events that cast significant doubt on
going concern.

If no disclosure of material uncertainty,

o Qualified/adverse opinion (SA 705)

o In basis for opinion - State that there is material uncertainty.
• Here, penalty > turnover & net profit
• Unfavourable order has impact on going concern.
• Thus, appropriate disclosure should be provided by management for events casting
significant doubt on going concern.
• Here, no appropriate disclosure made.
• Auditor –

Report under ‘Going Concern Report as per Companies Act Adverse opinion (SA 705)
Para’ (SA 570) 2013

Q4) Company paid significant legal and retainership fees related to litigation, pertaining to
plant, situated on land, declared illegal. Company got notice to decommission plant by
31/05/22. But it challenged order in High Court and matter is pending there. Company not
disclosed this in FS of 2022–23.Above plant accounted for 75% of production and if
decommissioned could disrupt operations and lead to bankruptcy. There were two auditors – X
Yes, I will definitely clear my CA Exams 9
CA SHANKAR LAKHWANI # Audit Made Easy
& Y. Y told that no action needed from auditors as matter is pending in court. But X feels
that action from auditors is required. Who is correct?

SA 250 - Non-compliance –
• material effect on FS
• not reflected in FS
Qualified/adverse opinion as per SA 705
• Impact of non-disclosure is material & pervasive as decommission can lead to bankruptcy.
• SA 250 & 705 – Qualified/adverse opinion based on impact.
SA 570 -Event casting significant doubt on going concern. Pending legal proceedings, which may
result in claim that entity is unable to satisfy is other indicator (SA 570)
If no disclosure in FS of material uncertainty - qualified/adverse opinion. Here, no disclosure is
given. Impact of non-disclosure is material and pervasive. Hence, adverse opinion is appropriate.
Contention of X is correct.

Q5) P Limited, a listed entity, has appointed CA J as CFO. CA J is worried about compliance
with the provisions of laws & regulations that determine reported amounts & disclosure in FS.
CA J wants to implement policies & procedures that can assist him in prevention & detection
of non-compliance with laws & regulations. Help CA J by citing examples of such policies &
procedures.

Monitoring legal requirement & ensuring Monitoring compliance with Developing, publicizing
that operating procedures are as per reqt. Code of Conduct (CoC) & following CoC
Maintain register of significant L/R & Ensuring employees – properly trained & understand
complaints CoC

SA 260 -Communication with TCWG

Q1) Auditor’s responsibility is to communicate following with TCWG –

• Auditor’s responsibilities wrt audit

• Planned scope and timing of audit
• Auditor’s independence

Find missing one and explain

Significant findings from audit

Auditor’s views wrt significant qualitative aspects Significant Circumstances

of entity’s a/cing practices, policies & estimates difficulties affecting form and
+ encountered during content of audit
Why he considers a/cing practice audit report
• Acceptable – AFRF
• But not appropriate for entity
Other significant matters relevant to oversight of Unless all TCWG = mgt
FR process • Significant matters of audit
discussed with management
• Written representation auditor is
requesting

Yes, I will definitely clear my CA Exams 10

CA SHANKAR LAKHWANI # Audit Made Easy
Q2) You are auditor of listed company. Audit committee wants you to justify independence by
communication. You are feeling that requirement of audit committee is out of their scope.

Communication of Auditor’s independence for listed entities

Auditor TCWG

Statement that engagement team • All relations & other matters between firm & entity
and others complied with ethical that has bear on independence, including total fees
requirements of independence for audit & non-audit services.
• Safeguards to reduce/eliminate threats to
independence.
• Audit committee’s requirement is within purview.

Q3) At what time to communicate KAM? Discuss key considerations and its usefulness.

• SA 260 - Communicate KAM on timely basis with TCWG.

• SA 701 - Depends on circumstances of engagement.
• Communicate KAM when discussing planned scope and timing of audit and further discuss
when communicating audit findings.
• Helps to alleviate practical challenges of attempting to have two-way dialogue about KAM
at the time when FS are being finalised for issuance.
• Enables TCWG to be made aware of KAM. Auditor provides draft audit report.
• Helps TCWG to understand basis for auditor’s decision wrt KAM.

SA 299 – Joint Audit of Financial Statements

Q1) 4 audit firms divided work, except IT work which has 3 areas – backup, batch processing
& data security. 4 audit firms are A,B,C,D. Batch processing is performed by D. If work not
done professionally by D, who is responsible?

All joint auditors are jointly & severally responsible for –

Decision by all joint auditors wrt common areas concerning NTE of audit procedures to be
performed by each joint auditor

All joint auditors responsible only for decisions Execution of audit procedures – individual
wrt NTE of audit procedures responsibility of joint auditor
• Planning done jointly since common area, but audit procedures of batch processing
performed by D.
• If lapses - D responsible.

Q2) A, B, C - joint auditors. A and C agree to an opinion but B has different opinion. Is B
required to go by majority of 2–1?

No. Not bound by views of majority.

1. Normal case – common audit report

2. Disagreement by joint auditors – separate audit report by joint auditor who disagreed.

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CA SHANKAR LAKHWANI # Audit Made Easy
3.

Audit report of joint auditor makes reference Separate audit report of other joint auditor
to separate audit report of other joint auditor makes reference to audit report of joint auditor
Reference – OM para (SA 706)

Q3) Responsibilities of joint auditors

1. Each joint auditor is responsible only for work allocated to him.

2. All joint auditors are jointly & severally responsible for –

Audit work not divided & Decision by all joint auditors wrt Matters brought to notice of
done by all joint auditorscommon areas concerning NTE of joint auditors by any one of
audit procedures to be performed them & on which there is
by each joint auditor agreement among joint auditors
Ensuring FS is as per Ensuring presentation & disclosure Ensuring audit report is as per
statutes of FS is as per AFRF statutes, SAs & pronouncements
3. If joint auditor comes across matters wrt responsibility of other joint auditor & which
deserve their attention
Said joint auditor communicate other joint auditor in writing
4. Responsibility of each joint auditor to determine NTE of audit procedures/study internal
controls & risks – for work allocated to him.
5. For pt. 2 – subpoint 2 above

All joint auditors responsible only for decisions Execution of audit procedures – individual
wrt NTE of audit procedures responsibility of joint auditor
Q4) Studio Ltd appointed RST and XYZ as joint auditors. It was observed that there is
understatement in trade receivables. Trade receivables work was done by RST. But there
was no documentation for division of work. Comment wrt allocation of responsibilities among
joint auditors.

1. Work is divided (units/assets/liabilities) among joint auditors by mutual discussion. Work

allocation document - signed by all joint auditors and communicated to TCWG.
2. Joint auditor documents

NTE of audit procedures Division of work

3. Each joint auditor is responsible only for work allocated to him.
4. All joint auditors are jointly & severally responsible for –

Audit work not divided & Decision by all joint auditors wrt Matters brought to notice of
done by all joint auditors common areas concerning NTE of joint auditors by any one of
audit procedures to be performed them & on which there is
by each joint auditor agreement among joint auditors
Ensuring FS is as per Ensuring presentation & disclosure Ensuring audit report is as per
statutes of FS is as per AFRF statutes, SAs & pronouncements
5. Responsibility of each joint auditor to determine NTE of audit procedures/study internal
controls & risks – for work allocated to him.
6. RST will be responsible for trade receivable understatement.
7. There is violation of SA 299 as division of work hasn’t been documented.

Yes, I will definitely clear my CA Exams 12

CA SHANKAR LAKHWANI # Audit Made Easy
SA 300 – Planning an Audit of Financial Statements

Q1) Auditor didn’t visit client & failed to understand nature of business. Client was in
commodity futures trading. Auditor’s working paper had checklist of cost of raw material &
spares. How is auditor’s planning?

• SA 300 – Plan audit in manner that it is performed effectively.

• Establish audit strategy and audit plan.
• Document – audit strategy, audit plan & significant changes.
• Planning as per nature and complexity of business and identify ROMM.
• Poor planning. Working papers do not show understanding of nature of business – violation
of reqt. of SA 300 – document audit strategy, audit plan & significant changes.
• General checklist (cost of raw materials), didn’t understood business & not planned as per
SA 300.

Q2) Auditor decides sample size at the time of performing audit procedures. Is he correct?

• SA 300 – Audit plan includes NTE of audit procedures.

• Auditor’s approach is not proper.
• Sample size to be decided at time of planning audit.
• Extent of audit procedures includes deciding sample.

Q3) CA S, during audit is doing procedures to verify receipt of foreign contribution. She is
documenting procedures and findings. But she doesn’t feel need to put in writing how she
planned the whole exercise. Does she require refreshening of knowledge?

• SA 300 – Document audit plan & significant changes with reasons.

• Audit plan – Record of NTE of RAP (risk assessment procedures) & FAP (further audit
procedures).
• Yes, refreshening needed as failure to document audit plan indicates risk of not conducting
audit as per professional standards.

Q4) Audit programme of movie theatre.

Peruse MOA/AOA Verify object clause (whether Verify system of parking

(Memorandum/Articles of nature of activity is permitted) collection
Association)
Verify system of salary Verify internal control and Verify online booking &
payment effectiveness realisation of money

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CA SHANKAR LAKHWANI # Audit Made Easy
SA 320 – Materiality in Planning & Performing Audit

Q1) What benchmark to use if entity is in AC (air conditioner) business with regular profit?

• Profit before tax

Q2) What benchmark to use if construction business & loss in last two years?

• Revenue/gross profit. If public utility program – total cost.

SA 330 – The Auditor’s Responses to Assessed Risks

Q1) While formulating the audit plan and responding to ROMM identified and assessed in
related party transaction and relationships, Ms. K the engagement manager of the audit team
of ABC Limited, decided to rely upon the internal controls placed for identification and
disclosure of related party relationships and transactions in accordance with the applicable
financial reporting framework. You are requested to guide Ms. K regarding the necessity to
test the controls to obtain sufficient and appropriate audit evidence.

• SA 550 - Auditor should design and performs further audit procedures to obtain SAAE
about assessed ROMM associated with related party relationships and transactions.
• SA 330 - Auditor shall design & perform tests of controls to obtain SAAE as to operating
effectiveness of relevant controls when:

ROMM assessment at assertion level includes Substantive procedures alone can’t provide
expectation - controls operating effectively SAAE at assertion level
• In performing Test of controls, auditor should obtain more persuasive audit evidence –
greater the reliance on operating effectiveness of controls
• Ms. K shall design and perform tests of controls to obtain SAAE as to operating
effectiveness of controls as she intends to rely on operating effectiveness of controls in
determining the NTE of substantive procedures.

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CA SHANKAR LAKHWANI # Audit Made Easy
Risk Assessment & Internal Control

Q1) Auditor while studying delegation of powers, noticed that surveyors that are to be
appointed by Divisional Claims Committee (DCC) were appointed by Divisional Manager (DM).
In beginning, auditor assessed ROMM to be low. Will auditor’s assessment change?

• Evaluation of internal control influences auditor’s assessment of ROMM. ROMM consists

of control risk.
• Controls not operating effectively. Control risk needs to be revised. Thus, ROMM to be
revised. Therefore, NTE of audit procedures modified.

Q2) You are auditor of NGO that is working for upholding democracy for first time. Last
year NGO was unaudited and activities were at small scale. This year NGO received many
donations & foreign funds. Its also crowdfunding. Government has power to cancel FCRA
certificate. Accusations are being faced by NGO. What factors to consider to assess audit
risk?

• Inherent risk – political/social field, crowdfunding, receipt of foreign funds, last year no
audit, non-compliance with laws.
• Control risk –
o Substantial donation this year and small scale activities last year – formal controls
may not be there.
o Lack of formal controls may lead to non-compliance with laws.
o Non-compliance with FCRA may lead to cancellation of certificate.
o Control risk high
• Detection risk - First time accepted audit of NGO. So lack of understanding of activities.
o Inappropriate sampling procedures/ Faulty application of audit procedures.
o Detection risk is high.

Q3) Company revamped internal control. You are internal auditor. Information system books
purchase in purchase ledger and stock records on date of invoice. How to deal as internal
auditor?

• Internal audit provides independent assurance on effectiveness of internal control &

risk mgt process to enhance governance & achieve organizational objectives.
• Distorted picture of stocks. It shows stock received while they are in transit.
• Faulty design of control + GST implication.
• Internal auditor should report above matter, asking mgt for corrective action.

Q4) Internal control - quarterly budgeted targets analysed wrt actual. If department not
achieving target, they have to give justification. Explain component of internal control.

• Control activities – Performance reviews

• Actual performance v/s
o Budget
o Prior period
o External data
• Corrective action if deviation

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CA SHANKAR LAKHWANI # Audit Made Easy
Q5) On reviewing internal control, statutory auditor found there can be situations when
insurance premium may be due and payable, but internal control system may not be able to
capture.

• Deficiency in internal control

Control unable to prevent/detect/correct misstatement Control missing

• Deficiency of internal control. Uninsured assets may lead to loss.
• SA 265 – Misstatement actually occurred + likelihood of misstatement
• Auditor communicate significant deficiencies in internal control in writing to TCWG &
include –

Description of deficiencies and Sufficient info to enable mgt/TCWG to understand

explanation of potential effects context of communication

Q6) Control objectives accounting control system should achieve.

Ensure all transactions are

Recorded Real Properly Recorded Properly Properly classified Properly

valued timely posted and disclosed summarised

Q7) In charge of inventory inflow - outflow is also responsible for purchases & maintaining
inventory records. Which basic system of internal control violated? List general conditions of
system.

• Internal check (segregation of duties/maker – checker)

• Meaning –
o It implies organisation of overall system of book-keeping and arrangement of staff
duties in such a way that no one person can carry through a transaction and record
every aspect thereof.
• General conditions pertaining to internal check system
1. Staff duties – rotated from time to time.
2. No single person should have complete control over important aspect of business operation.
3. Every member of staff encouraged to go on leave at least once a year.
4. Persons – physical custody of assets – not permitted to have access to BoA.
5. Budgetary control exercised. Wide deviations – reconciled.

Q8) Compute audit risk – Chances are that 40% bills defalcated. Internal control can prevent
defalcation to 75%. Audit gives satisfaction of detection of fraud to 60%. Analyse ROMM
and audit risk.

• SA 200 – Audit risk – Risk : auditor issue inappropriate opinion while FS are materially
misstated.
A. Inherent Risk –

Susceptibility of assertion to MST that could be material, assuming no controls.

B. Control Risk –

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CA SHANKAR LAKHWANI # Audit Made Easy
Risk that internal control system will not prevent/detect/correct material MST.
Internal control is missing.
C. Detection Risk –

Risk that auditor will not detect MM even if all audit procedures applied.
AUDIT RISK = ROMM x Detection Risk

ROMM = Inherent Risk x Control Risk

• ROMM = Risk that MM may exist in FS before start of audit.

• Inherent risk = 40%, Control risk = 25%, Detection risk = 40%

• ROMM = Inherent risk x Control risk = 40% x 25% =10%
Audit Risk = ROMM x Detection risk = 10% x 40% =4%

Q9) Money collection system for entertainment centre.

• Printing of tickets – Serially numbered & numbers don’t repeat.

• Ticket sales –Central ticket office by machine.
• Entrance ticket - Cancelled at gate.
• Daily cash reconciliation – with tickets sold.
• Daily banking – deposit in bank on next day.

Q10) Controls can’t rise above integrity & ethics of people who create and monitor them.
Explain.

•Components of Internal control

o Control Environment
▪ Communication and enforcement of integrity and ethical values
• Effectiveness of controls can’t rise above integrity & ethics of
people who create and monitor them.
• Integrity & ethics are product of
o Entity’s ethical & behavioural std.
o How communicated and reinforced
Enforcement - Mgt actions to Communication of behavioural standard to personnel by –
eliminate unethical acts • Policy statements
• Code of conduct

Q11) Work division

• Officer handling sales ledger & cash receipts.

• Another handling dispatch of goods and issuance of delivery challans.
• Another handling debtor accounts and issue of receipts.

Is it proper?

• Company hasn’t done proper division of work. Internal check violated

• Different officer
Sales ledger Cash receipts

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CA SHANKAR LAKHWANI # Audit Made Easy
Dispatch of goods Delivery challans
Debtor accounts Issue of receipts

Q12) Are general conditions pertaining to internal check violated?

A] Procurement head has complete control on purchase/receiving goods/approving payment

without oversight

• Violates principle that no single person should control.

B] Staff working in same role for 5 years without rotation.

• Violates principle that staff duties should be rotated periodically.

C] Manager responsible for maintaining inventory is also keeping inventory records.

• Violates principle that Those with physical custody of assets shouldn’t have access to
records

Q13) ST Ltd is a growing company and currently engaged in the business of manufacturing of
tiles. The company is planning to expand and diversify its operations. The management has
increased the focus on the internal controls to ensure better governance. The management
had a discussion with the statutory auditors to ensure the steps required to be taken so that
the statutory audit is risk based and focused on areas of greatest risk to the achievement of
the company’s objectives. Please advise the management and the auditor on the steps that
should be taken for the same.

3 key steps:
• Assessing the risks of material misstatement in the financial statements
• Designing and performing further audit procedures that respond to assessed risks and
reduce the ROMM in the financial statements to an acceptably low level; and
• Issuing an appropriate audit report based on the audit findings.
The risk-based audit process is presented in three distinct phases:
• Risk assessment
• Risk response
• Reporting.

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CA SHANKAR LAKHWANI # Audit Made Easy
SA 402 – Audit Considerations relating to Entity using Service Organisation

Q1) What factors to be considered by user auditor regarding nature and extent of activities
undertaken by service organisation so as to determine whether those activities are relevant
to audit and, if so, to assess their effect on audit risk?

SA 402 & 315

Understanding

Nature & significance Nature and materiality Degree of interaction Nature of relation
of services & its effect of transactions between activities of between service
on user entity’s internal service organisation and organisation and
control user entity user entity

Q2) Question will contain the term, “operating effectiveness”. Which is the type of report?
Aspects to be considered by user auditor in using assurance report as audit evidence that
controls at service organisation are operating effectively.

• Type of report – Type 2

• If type 2 report, user auditor to determine whether it provides SAAE of operating
effectiveness by –

Checking whether description, Checking adequacy of – Checking whether

design & operating • Time period of TOC complementary user entity
effectiveness of controls at • Time elapsed since TOC controls are relevant to user
SO is at date or for period entity & if yes, whether user
entity implemented them & if
yes, testing operating
effectiveness
Checking whether TOC by service auditor are relevant to assertions in user entity’s FS

Q3) A is user entity, B is service organisation, C is sub-service organisation. CA while

reviewing unmodified report drafted by assistant found that reference is made to work of
service auditor. CA asked assistant to remove reference and modify report. Is CA correct?

SA 402 & 705

1. User auditor – modifies opinion in user auditor’s report (SA 705), if user auditor unable to
obtain SAAE of SO’s services.
2. User auditor not to refer service auditor’s work in user auditor’s report containing
unmodified opinion, unless law/regulation says.
3.
If Law/regulation says (unmodified opinion)
Reference will come but state that it doesn’t diminish user auditor’s responsibility
4. Yes, CA is correct as in case of unmodified auditor report, user auditor can’t refer to work
of service auditor.

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CA SHANKAR LAKHWANI # Audit Made Easy
SA 450 – Evaluation of Misstatements Identified During the Audit

Q1) While assessing impact of uncorrected misstatement, X saw issue related to calculation
of materiality on revenue. Initial materiality was on estimated revenue. Mgt estimated
revenue, extrapolated for sales of 11 months to arrive at 12 months value. But actual sales
for last month was only 30% of estimated sales. X is in dilemma as to correct approach to
evaluate uncorrected misstatement using previous materiality.

• SA 450 – Before evaluating impact of uncorrected misstatement,

o Auditor shall reassess materiality (SA 320) to confirm whether it remains
appropriate in context of entity’s actual financial results.
• Materiality (SA 320) is based on estimates as actual results – not known at early audit stage.

• SA 320 – As audit progresses, materiality revised for

FS as a whole Class of transaction, account balance, disclosure
Revision is due to info that would have led to different initial determination
If auditor concludes lower materiality for FS as a whole, auditor shall determine whether
necessary to revise performance materiality & whether nature, timing & extent of audit
procedures are appropriate
• Conclusion –
o X must review & reassess materiality (SA 320) as per actual results.
o This is crucial to obtain SAAE on which to base audit opinion.

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CA SHANKAR LAKHWANI # Audit Made Easy
SA 500 – Audit Evidence

Q1) Company prepared inventory details by involving management’s expert. What is auditor’s
responsibility?

SA 500
• Evaluate competence, capability, objectivity of expert.
• Understand his work.
• Evaluate appropriateness of work.

Q2) Auditor accepted gratuity liability valuation based on certificate of actuary. But auditor
noticed that retirement age adopted is 65 years instead of existing retirement age of 60
years. Company is considering proposal to increase retirement age to 65 years. Comment.

• SA 500 – When information prepared using work of mgt’s expert, auditor shall –

Evaluate competence, capability, Understand his work Evaluate his appropriateness of

objectivity of expert work
How? How? How?
Personal experience with past See methods of work Relevance of work, assumptions,
work/discussion/books by expert source data

• Evaluating appropriateness of mgt expert’s work -

Relevance & reasonableness of If expert’s work involves use of If expert’s work involves use of
expert’s findings/conclusions & significant source data, relevance,
their consistency with other assumptions/methods, completeness & accuracy of
audit evidence relevance & reasonableness of source data
assumptions and methods
• Facts of the case – Basis of valuation taken by actuary as 65 years is incorrect as company
is considering proposal to increase retirement age to 65 years. Thus, assumptions and
methods used by mgt expert are not appropriate. Auditor may qualify the report.

Q3) Atharva is auditor of SL Limited. He decided to engage auditor’s expert. SL Limited,

reappointed Mr Aman as independent expert. For past 5 years, management has consistently
reappointed Mr Aman. Atharv was of the opinion that objectivity of independent expert
cannot be questioned just because he was appointed by management as their expert. Hence,
there is no need to raise question on objectivity of Mr Aman. But audit partner was of
opinion that auditor needs to evaluate objectivity of expert irrespective of the fact that he
was appointed as independent expert. Comment wrt requirements of evaluating objectivity of
management expert.

• SA 500 – When information prepared using work of mgt’s expert, auditor shall –

Evaluate competence, capability, Understand his work Evaluate his appropriateness of

objectivity of expert work
• Threats & safeguards

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CA SHANKAR LAKHWANI # Audit Made Easy
Self interest threats, advocacy threats, familiarity Safeguards may reduce such threats
threats, self review threats, intimidation threats
Evaluating objectivity of expert

Inquire entity of interests and Discuss with experts about safeguards – Interest & relations –
relations with experts • Financial interest
• Business and personal relation
• Provision of other services by expert
• Auditor obtain WR from expert of interest/relation with
entity
• Auditor shall evaluate objectivity of expert as threat to objectivity, created by being
employee of entity, will always be present.
• Audit partner is correct in his view.

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CA SHANKAR LAKHWANI # Audit Made Easy
SA 501 – Audit Evidence – Specific Considerations for Selected Items

Q1) Protest broke out on inventory counting date. So unable to observe counting.

Impracticability case ❌ Unforeseen circumstances ✅

Inventory count at alternative date Audit procedures on intervening transactions

Attend inventory count after protest lifted

Q2) CA Sunita corresponds directly with lawyer by obtaining email ID. She shoots of enquiry
letter asking lawyer about nature and status of claims against company on her letterhead. Is
her approach proper? What is she trying to achieve, irrespective of approach?

When AP indicate Through letter of inquiry prepared by mgt & sent by auditor
• Material litigation requesting external legal counsel to communicate directly with
• ROMM auditor
Auditor directly communicates
with external legal counsel
• Improper approach. She has to make management aware.
• Purpose – Identify litigation and claims – When ROMM high & material effect on FS and
thus may be required to disclose in FS.

Q3) CA found that inventories of company lying with S Ltd for finishing. He planned to seek
confirmation from S Ltd. But S Ltd raided for GST scam & proprietor arrested OR stocks
lying with consignees.

Perform these procedures

Confirmation from 3rd party – Inspection/other audit procedures (eg, if doubt about
quantity and condition integrity of 3rd party)

• Attending/arranging another auditor to attend, 3rd

party’s physical counting of inventory
• Obtaining another auditor’s report/service auditor’s
report, on adequacy of 3rd party’s internal control to
ensure that inventory is properly counted &
safeguarded
• Inspecting documentation eg, warehouse receipts
• Integrity of 3 party is doubtful. Besides obtaining confirmation from 3rd party, perform
rd

other audit procedures.

Q4) Auditor couldn’t attend physical counting at border due to unavoidable reasons. How
SAAE as to existence and condition of inventory may be obtained? Which audit procedures
needed to verify existence and condition of inventory? How auditor will deal if inventory
count is impracticable?

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CA SHANKAR LAKHWANI # Audit Made Easy
Evaluate management Inspect inventory Perform test count Observe
instructions for performance of
recording results of management count
physical inventory count procedures
Audit procedures on final inventory records to determine whether reflect actual
1. Why impractical? – Nature and location of inventory.
2. Safety threat to auditor

3. But

General inconvenience to auditor SA 200 - If difficulty/time/cost, it doesn’t

Impracticable mean that auditor will omit audit procedures.
4. Alternative audit procedures performed eg, inspection of documents of subsequent sale.
5. If alternative audit procedures impossible – modify (SA 705) due to scope limitation.

Q5) Audit procedures in case of litigation

Inquiry from Reviewing minutes of meeting Reviewing legal expense account

• Mgt of TCWG
• In-house legal counsel
Letter of specific inquiry

LoL (List of litigation) Mgt’s assessment of outcome Request to confirm

of litigation and estimate of reasonableness of mgt
financial implication assessment & provide further
info if incomplete
1. Auditor meets external legal counsel (ELC)

Significant risk wala matter Complex matter Disagreement between mgt &
ELC
2. Obtain WR – Litigation & claims – accounted & disclosed
3. Modify –

Mgt refuses auditor to ELC refuses to respond No SAAE

communicate with ELC
Q6) Company’s instructions for inventory count. Evaluate management’s instructions -

• Supervised by officer of Company responsible for storage.

• No disturbance to routine process of receiving goods and dispatch.
• Different team of 3 members, each for counting raw materials, work in progress,
finished goods.
• Paddy in steel Silos is to be estimated using capacity.
• Work in progress is estimated considering plant capacity as a whole.
• Officer ensures that stock is counted in all areas.
1. Supervised by officer, preferably from finance department.
2. Inward - Outward movement of goods is not allowed.
3. Team – Not from storage function. It may be from finance department.
4. Paddy in steel silos is determined using measuring strain gauges & not on basis of
capacity.
5. Work in progress is estimated at each stage of production and not for plant as a whole.
6. Officer should ensure that stock is counted in all areas and distinctive marks are put.
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CA SHANKAR LAKHWANI # Audit Made Easy
SA 505 – External Confirmations

Q1) Auditor sent positive confirmation request to 30 creditors in March 2023. All creditors
are in informal sector & small concerns. CFO is cooperative in sending request. Response
received in a week. Out of 30 creditors, GST registration of 25 cancelled in 2022-23 & no
fresh registration taken.

• SA 505 – Unreliable response – Auditor evaluate implications on ROMM, risk of fraud &
NTE of audit procedures.
• SA 500 – Even when external evidence is obtained, circumstances may exist affecting
reliability - Risk of fraud.
• Factors indicating doubt about reliability of response –

Received by auditor indirectly Not to come from original confirming party – this case
• Fraud risk factor due to unreliable response.

Q2) Confirmed trade payable by negative confirmation request. No confirmation received

from creditor for old outstanding of 20 lacs. What is confirmation process and how to deal
with non-receipt of confirmation?

1. SA 505 – Negative confirmation request –

Confirming party Direct response only if disagrees Auditor

2. Provide less persuasive audit evidence than positive confirmation request.

3. Failure to receive response doesn’t explicitly indicate –

Receipt of request by confirming party Verification of accuracy of request

4. More likely to respond when disagreement
5. If non response – Auditor examines subsequent cash disbursements/goods received note.
6. Non-response doesn’t mean misstatement since respond only when disagree in case of
negative confirmation request.

Q3) (I) CA Ram sent confirmation request to debtor for 15 lakhs, which was outstanding for
more than 6 months, insisting him to respond directly to auditor, confirming whether they
agree or disagree with balance. Debtor confirmed that they owed 14,90,000 instead of
15,00,000.

(II) CA Ram sent confirmation request to creditor with outstanding balance of 13,25,000
requesting response only if he disagrees. Creditor didn’t respond to request.

What is type of confirmation request? Discuss action auditor should take for discrepancy in
confirmation received from debtor and non-receipt of confirmation from creditor.

CASE 1 - DEBTOR

Positive confirmation request –

Confirming party Direct response whether agrees/disagrees Auditor

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CA SHANKAR LAKHWANI # Audit Made Easy
Exception – Difference between

Info requested to be confirmed Info provided by confirming party

• Type of confirmation request – Positive confirmation request
• Difference between info contained (15 lacs) & info provided (14,90,000) – Exception
• Auditor to evaluate whether SAAE obtained or further audit procedures necessary as per
SA 330 as response is indicating exception. Company should be asked to investigate and
reconcile discrepancy.

CASE 2 - CREDITOR

Negative confirmation request –

Confirming party Direct response only if disagrees Auditor

• Type of confirmation – negative confirmation request

• Non response implies that creditor agrees. Audit is not required to take any action.

Q4) Neverpermit Limited refuses to allow you to get direct confirmation of the outstanding
balances of trade receivables. You want to ensure on grounds of materiality that at least
outstanding above a threshold limit needs to be confirmed and reconciliation is to be carried
out before finalising the audit. If the Company does not relent, how will you respond?

Mgt’s refusal to allow auditor to send confirmation request.

1. Auditor shall

Inquire reasons Evaluate implications on ROMM Alternative audit procedures

2. Auditor communicate TCWG

If refusal unreasonable Unable to obtain relevant/reliable audit evidence from

alternative audit procedures
3. Auditor determines impact on audit opinion (SA 705).

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CA SHANKAR LAKHWANI # Audit Made Easy
SA 510 – Initial Audit Engagements – Opening Balances

Q1) CA “M” is auditor for 2022–23. Accounts unaudited in 2021–22. Company had material
inventory on 31/03/22. He is attending physical counting on 31/03/23, but has doubt as to
opening inventory. What is his responsibility?

• Auditor’s objective – To obtain SAAE

Whether opening balance has misstatements that materially affect current period FS.
• In case of inventory, current period’s audit procedures on closing inventory provide little
audit evidence regarding opening inventory. Thus, additional audit procedures may provide
SAAE -

Observing current physical Performing audit procedures on Performing audit procedures on

inventory count and reconciling valuation of opening inventory gross profit and cut-off
to opening quantities

Q2) Mr. X has been appointed as an auditor of M/s ABC Ltd., Mr. X wants to be satisfied
about the sufficiency and appropriateness of 'Opening Balances' to ensure that they are free
from misstatements. Lay down the audit procedure, Mr. X should follow, in the initial audit
engagement of M/s ABC Ltd. Also suggest the approach to be followed regarding mention in
the audit report if Mr. X is not satisfied about the correctness of 'Opening Balances'?

Determine whether prior Determine whether opening Specific audit procedures

period closing balance balance reflect application of
correctly b/f appropriate accounting policies

Auditor communicate TCWG

If opening balance has MST which exist in current period FS

If auditor is unable to obtain SAAE for opening If objective 1, 2 not met -express
balance – express qualified opinion/disclaimer qualified/adverse opinion
of opinion.

Q3)

I. In an initial audit engagement, the auditor will have to satisfy about the sufficiency and
appropriateness of ‘Opening Balances’ to ensure that they are free from misstatements,
which may materially affect the current financial statements. Lay down the audit procedure,
you will follow in cases:

a. When the financial statements are audited for the preceding period by another auditor
and

b. When financial statements are audited for the first time.

II. If, after performing the procedure, you are not satisfied about the correctness of
‘Opening Balances’, what approach you will adopt in drafting your audit report in two
situations mentioned in (I) above?

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CA SHANKAR LAKHWANI # Audit Made Easy
I. Audit Procedures
a. Procedures to follow when FS are audited for preceding period by another auditor.

To obtain SAAE for opg bal – Auditor will peruse

Current auditor can place reliance on closing
copies of audited FS + other documents of balance of preceding period, except when
prior period FS like schedules of FS during performance of audit procedures for
current period, possibility of misstatements in
opening balance is indicated
b. Procedures to follow when FS are audited first time

Since opening balance represent effect of Auditor can obtain management representation
transactions of preceding period, auditor has to for opening balance
obtain evidence having regard to nature of
opening balance, materiality of opening balance
and accounting policy
II. Audit Report

If auditor is unable to obtain SAAE for opening If objective 1, 2 not met -express
balance – express qualified opinion/disclaimer qualified/adverse opinion
of opinion.

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CA SHANKAR LAKHWANI # Audit Made Easy
SA 530 – Audit Sampling

Q1) On basis of samples, Shankar reaches erroneous conclusion that access controls are less
effective. He concludes erroneously that inventory of 5 crores are materially misstated.

Sampling Risk - Conclusion based on sample may be different from conclusion had the same
audit procedures been applied to population
Risk factors/types of erroneous conclusions –

TOC – Controls less effective than actual.

TOD - MM exist when it doesn’t

Concerned with audit efficiency Leads to additional work to establish that initial
conclusions were incorrect

SA 540 – Auditing Accounting Estimates, including Fair Value Accounting Estimates & Related
Disclosures

Q1) Auditor observes FS assertions are based on estimates of mgt. how to minimise ROMM?

I. RISK ASSESSMENT PROCEDURES

SA 315 - While performing RAP – Auditor to understand 2 things :

Requirement of AFRF wrt AE, How management identifies transactions that need AE by
including disclosures making inquiries
II. HOW MANAGEMENT MAKES AE

Estimation making process of management –

Method, model used in making Relevant controls Whether mgt used expert?
AE
Assumptions underlying AE Whether change from prior period in methods for making AE &
if yes, why?

Q2) Substantial amount is recognised for inventory obsolescence and warranty obligation in
FS. Auditor wants to obtain written representation from mgt to determine whether
assumptions and estimates are reasonable. Guide auditor.

• SA 540 - Auditor to obtain WR from management/TCWG, whether they believe

assumptions in making accounting estimates are reasonable.
• SA 580 – WR includes –

Appropriateness of Assumptions appropriately Disclosures are appropriate as

measurement process, reflect mgt’s intent & ability per AFRF
including assumptions and to carry out specific course of
models action
No subsequent event requires
adjustment

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CA SHANKAR LAKHWANI # Audit Made Easy
Q3) M/s. HK & Co. was appointed as auditor of GSB Limited, a company operating business in
telecom sector. As per spectrum allocation agreement with Government, GSB Limited is
required to pay certain percentage of its annual revenue as license fee. GSB Limited paid the
license fee on its core business for last two years. At the end of third year, the
communication was received from Government that it needs to pay agreed percentage on its
total revenues & not only on core business revenues. Matter was disputed & went to court of
law. On prudence basis, GSB Limited made a provision on estimated business in its books of
accounts of agreed percentage on non-core business receipts also. The amount of provision
was of such huge amount that the GSB Limited's profit & loss account for that quarter
reflected loss due to that provision. How you as an auditor can evaluate this accounting
estimate which involves significant risk & what if Management has not addressed the effects
of estimation uncertainty on provision made?

For AE with significant risks, in addition to other substantive procedures as per SA 330, auditor
shall evaluate following –

How management considered Whether significant Management’s intent and

alternative assumptions and assumptions by management ability to carry out specific
why it rejected them are reasonable course of action
- If mgt has not addressed effects of estimation uncertainty, auditor shall develop range to
evaluate reasonableness of AE.

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CA SHANKAR LAKHWANI # Audit Made Easy
SA 550 – Related Parties

Q1) X Ltd. manufactures floor coverings, which is labour intensive product. Company has no
plan to diversify products. Its directors are holding interest in Y Ltd. which manufactures
blankets which is capital intensive product. During audit of Y Ltd, you found that co. sold
machine of 1 crore to X Ltd. Transaction is at normal market rate. What is your view?

• Related party transaction outside normal course of business.

• SA 550 – Auditor’s responsibility to evaluate business rationale of transaction –
Fraudulent FR or misappropriation of assets.
• Auditor understand business rationale to understand why transaction carried out.
• Here, no primary rationale because X Ltd does not manufacture blankets.
• Fraud risk factor as business rationale inconsistent with nature of business.

Q2) Tell disclosure/reporting requirements

1. Long-term borrowings from parent company has no written terms and neither interest
nor principal is repaid.
2. Computers received from parent co. free of cost of 23,000 & no disclosure is made in
notes.
3. RPT of 325,000. But arm’s length price is only 300000. It is not disclosed in notes.
4. CFO refused to provide information of RPT of 47 lakhs since it is confidential.

Auditor significant matters about RP TCWG

For eg -

Non-disclosure by mgt Significant RPT Disagreement with mgt wrt Non-compliance with
of significant RPT not authorised a/cing of significant RPT as L/R
per AFRF
- CFO is wrong as denying for details is imposing limitation on scope of auditor (SA 705).
- Disclosure in FS as per Ind AS 24/AS 18.
- CARO 2020 - Whether Sec 177 & 188 of COA 2013 complied with.
- Reported to TCWG.

Q3) Mr. X, while conducting audit of PQR Ltd, comes across certain transactions which
according to him are significant transactions with related parties and identified to be outside
the entity's normal course of business. Guide Mr. X with examples of such transactions and
to understand the nature of significant transactions outside the entity's normal course of
business.

Complex equity transactions Transactions with offshore Transactions without

(corporate restructuring/ entities in jurisdictions with consideration (eg, leasing of
acquisition) weak corporate law premises)
Sales with large discount Sale & repurchase

Yes, I will definitely clear my CA Exams 31

CA SHANKAR LAKHWANI # Audit Made Easy
CASE STUDY

‘Trustworthy Real Estate Private Limited’ with Mr. Bharose Lal as MD along with his wife,
Maya, owned the company. Company had floated one SPV ‘Real Trust Developers Private
Limited’ in which foreign entity became joint venture partner with 50% stake. Venture was
formed to invest in SRA Projects (slum rehabilitation authority) and develop them into
commercial units for sale. Mr Bharoselal was going through rough patch in life. He was in
financial difficulty and had loans from banks and suppliers. Mrs Maya had expensive lifestyle.
Mr Bharose Lal sensed golden opportunity in new venture because foreign partner had no
knowledge of Indian regulations and was solely dependent on local partner.

CA Sceptic was appointed as auditor. He was instrumental in unearthing two major frauds.

Mr Bharose Lal has dominant personality and powerful influence. Governance structure was
very poor and Mr Bharose Lal used to dictate decisions. Representative of foreign partner
who shifted to India had grown friendly with Mr Bharose Lal and Mr Bharose Lal had helped
him to get good accommodation and Mercedes. They both went to club for drinking.

Dealings in SRA project are not transparent. CA sceptic wants to discuss with audit team,
areas and situations where ROMM is possible and there are chances of having undisclosed
related party relationship to misappropriate funds.

Qa) Please guide engagement team on further course of action as per SA 550.

Nature & extent of entity’s Emphasis on maintaining Records indicating RP

relations & transactions with professional skepticism transactions
RP
Circumstances indicating Consideration of how RP may involve in fraud. Eg –
existence of RP transactions • Fraudulent FR
that mgt hasn’t • Misappropriation of assets
identified/disclosed to auditor

Qb) What are fraud risk factors in given case?

• Incentive/pressure
o Financial difficulty & having loans from banks and creditors
o Expensive lifestyle
o Requirement to fund 5 crore as equity contribution in SPV
• Opportunity
o Dependency of foreign partner and no knowledge of him of local laws
o Risk due to SRA model
o Dominant personality of MD, leading to management override of controls.

Qc) Each partner in joint venture has to contribute 5 crore each and given the situation that
Mr Bharose Lal had appointed one agency, Useless and sons Private Ltd, to get consent from
slum dwellers, for which agency was paid 20 crore as kitty to get the job done. CA Sceptic
inclines that there is some connection between 20 crore & 5 crore. Please guide CA Sceptic in
establishing link based on guidance available in SA 550 and 240.

Yes, I will definitely clear my CA Exams 32

CA SHANKAR LAKHWANI # Audit Made Easy
Identification of previously unidentified/undisclosed RPT (Mgt didn’t identified/ disclosed to
auditor)

Auditor determine whether Communicate with Request mgt to identify all transactions
circumstances confirm team with newly identified RP
existence of transactions
Perform more substantive Reconsider risks wrt If non-disclosure by management
procedures other RP appears intentional, evaluate
implications for audit

Qd) CA Sceptic establishes that there is likelihood of misappropriation of funds and FS as a

whole may be materially misstated. How should he plan future course of action?

Impossibility to continue audit/auditor unable to continue engagement

Determine professional/legal Consider If auditor withdraws –

responsibilities + Whether whether • Discuss with mgt/TCWG, withdrawal &
requirement to report to – appropriate to reasons
• Person who made withdraw from • Determine professional/legal
appointment or engagement, if responsibilities + Requirement to report
• Regulatory authorities legally permitted to –
o Person who made appointment or
o Regulatory authorities
withdrawal & reasons

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CA SHANKAR LAKHWANI # Audit Made Easy
SA 560 – Subsequent Events

Q1) Rain in September 2022. Company lodges claim in insurance company for 1 crore and
shows it as claim receivable on 31/03/23. Claim settled for 45 lacs on 15/05/23. Auditor
finished procedures by May 2023 end. What is his responsibility?

• Evidence of conditions existing on FS date. Audit report not yet issued.

• FS as on 31/03/23 should be adjusted to reflect event.
• Management asked to take appropriate action so that event is reflected in FS as per AFRF.
Q2) FY 2022–23. Meeting on 17/04/23 where dividend proposed and it has good chance of
being approved in AGM after few months. Audit report date is 31/07/23. What is auditor’s
responsibility?

• Condition after FS date. No obligation/liability to pay at reporting date as per Ind AS 1.

• No recognition in FS. But should be disclosed in notes to accounts.
• Ensure management discloses as per SA 560.
Q3) CA Shobhit is doing audit of XYZ Limited. Audit is nearing completion in July 2024. But
it becomes known to CA Shobhit that one of overseas buyer has made legal claim against
company on 01/06/2024 for injury caused to customer of one European buyer due to
substandard dyes used in order shipped in August 2023. Management has decided to agree to
out of court settlement of 4 crore. FS of company are silent on this issue. How CA Shobhit
should deal?

• Adjusting event. Provide evidence of conditions that existed at FS date. Adjustment

required in FS.
• CA should ensure that adjustment is made by management.
Q4) You are auditor of PQR Ltd. which is in the business of supplying food products to airline
companies. Company needs to stock various non- perishable food items (average holding of
inventory to the tune of INR 75 Crores). Payment terms have been settled and company
receives payment in 45 days after supply of goods. Everything was going-on well till end of
March 2020 when pandemic Covid hit the world and everything came to standstill. Aviation
sector was hit hard and there were no flights from April 2020 onwards. Consequently, the
business of PQR Ltd. also got severely affected and the scheduled supplies of goods to
airlines also were not made. Also, the liquidity position of airline companies got hit and the
scheduled payments were also not received on due dates. As the auditor of PQR Ltd. what
audit procedures would you perform to ensure that all subsequent events are considered, so
that financial statements for the year ended 31.03.2020 represent true and fair view?

1. Auditor – audit procedures – to obtain SAAE – all subsequent events that require disclosure
in FS are identified.
2. Auditor not expected to perform additional procedures if previous one gives satisfactory
conclusions.
3. Following procedures by auditor –
Obtain understanding of Inquiring mgt & TCWG Reading entity’s latest
management procedures subsequent interim FS
Reading minutes of meetings of owners, management & TCWG
4. Auditor obtain WR from management and TCWG that all SE which requires disclosure are
disclosed/adjusted.

Yes, I will definitely clear my CA Exams 34

CA SHANKAR LAKHWANI # Audit Made Easy
SA 570 – Going Concern

Q1) Company engaged in rearing of poultry birds. Sales is growing. But since last 2 years,
fortune nosedived. Sales have dipped. Livestock wiped off in bird flu. Auditor doubts going
concern. Management wants to start with new birds. Loan restructured by bank. No fresh
credit facilities granted by bank. Company plans longer credits from suppliers. Company
ensures safety of livestock by vaccines & check up. Villagers accused company of air
pollution. Management prepared cash flow forecast. Discuss auditor’s approach to examine
going concern with specific reference to cash flow forecast.

• SA 570 – If events identified that cast significant doubt on going concern, auditor
to obtain SAAE to determine whether or not material uncertainty exists by
performing additional audit procedures.
• When entity prepares cash flow forecast, auditor should :
o Evaluate reliability of underlying data.
o Determine whether there is adequate support for assumptions underlying
forecast.
• Future plans (facts of the case) +
o How to arrange funds?
o Effect on cash flow forecast.
Q2) Ratios of company are in red and unable to pay creditors. Banks are not lending. Losses
to company as demand reduced. Unable to pay salary. So going concern inappropriate. What
is duty of auditor? CFO informed that management is ready to disclose inappropriateness of
going concern use. How should it impact auditor’s opinion?

• Adverse opinion, regardless of disclosure/not.

• No impact on opinion. Adverse opinion.
Q3) Material uncertainty exists, but entity is going concern. What is auditor’s approach and
reporting requirement?

• Start answer with SA 570-Financial/Operating/Other event.

• Auditor to determine whether FS disclose –
o Events that cast significant doubt on going concern and mgt’s plans to deal with
those events.
o That there is material uncertainty related to events that cast significant doubt on
going concern.
• Unmodified opinion as per SA 705 & separate section in AR - “Material Uncertainty
Related to Going Concern” to –
o Draw attention to note in FS that discloses events.
o State –
▪ Material uncertainty exists that cast significant doubt on going concern.
▪ Opinion not modified in respect of matter.
DRAFTING – Material Uncertainty related to Going Concern
We draw attention to Note 10 in FS, which indicates facts of the case.As stated in Note 11,
material uncertainty exists that cast significant doubt on going concern. Our opinion is not
modified in respect of this matter.
Q4) Written representation from mgt/TCWG in above question.

• Future plans and feasibility of plans

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CA SHANKAR LAKHWANI # Audit Made Easy
Q5) If entity not going concern but management not accepting it.

• Going concern inappropriate as per auditor – Adverse opinion.

Q6) Question contains financial, operating and other events. What audit procedures should be
followed?

When management not Evaluating management plans When entity prepared cash
performed GC assessment – for future actions for GC flow forecast, evaluate-
request management to make assessment • Reliability of data
assessment • Determine whether
adequate support for
assumptions
Consider whether additional Requesting WR from management/TCWG for future plans and
info available feasibility.
Q7) Toddle Limited had definite plan of its business being closed within a short period from
the close of the accounting year ended on 31st March, 2017. The Financial Statements for
the year ended 31/03/2017 had been prepared on the same basis as it had been in earlier
periods with an additional note that the business of the Company shall cease in near future
and the assets shall be disposed off in accordance with a plan of disposal as decided by the
Management. The Statutory Auditors of the Company indicated this aspect in Key Audit
Matters only by a reference as to a possible cessation of business and making of
adjustments, if any, thereto to be made at the time of cessation only. Comment on the
reporting by the Statutory Auditor as above.

SA 570 –
Mgt’s intentions to liquidate the entity or to cease operations is one of the event or condition
that cast significant doubt on going concern.
WHEN MATERIAL UNCERTAINTY EXIST:
• Auditor to determine whether FS disclose –
o Events that cast significant doubt on going concern and mgt’s plans to deal with
those events.
o That there is material uncertainty related to events that cast significant doubt on
going concern.
WHEN MATERIAL UNCERTAINTY DO NOT EXIST:
If events casting significant doubt on GC are there but no MU exists - make disclosure in FS
about events.
SA 701 –
When matters relating to going concern may be determined to be key audit matters, and
explains that a material uncertainty related to events or conditions that may cast significant
doubt on the entity’s ability to continue as a going concern is, by its nature, a key audit matter.
Intention of the Toddle Limited had definite plan of its business being closed down within short
period from 31 March, 2017. However, financial statements for the year ended 31.03.2017 had
been prepared on the same basis as it had been in earlier periods with an additional note.
Thus, management intentions to liquidate the entity or to cease operations is one of the event or
condition that may cast significant doubt on the entity’s ability to continue as going concern is a
key audit matter.
Therefore, the auditor is required to communicate Key Audit Matters in accordance with SA
570 in above stated manner. Simple reference as to a possible cessation of business and
making of adjustments, if any, be made at the time of cessation only by the auditor in his
report is not sufficient.

Yes, I will definitely clear my CA Exams 36

CA SHANKAR LAKHWANI # Audit Made Easy
SA 580 – Written Representation

Q1) Written representation (WR) for 2022–23. Audit report 31/07/23. WR date 15/04/23.
Point out anomaly.

• WR date– as near as practicable but not after AR date since auditor concerned with
events upto AR date that may need adjustment/disclosure.
• Here, considerable lag between WR & AR date.
• Subsequent events may not have been adjusted.

Q2) Company says that written representation isn’t required. Auditor explains that written
statement is mandatory.

a) Whether contention of auditor is justified?

• WR – Mgt has fulfilled its responsibility for -

Preparation of FS as per AFRF All info provided All transactions recorded

(completeness of transactions)
• Auditor’s contention is correct.
b) What should be form of written representation?
Representation letter.
•
If law requires mgt to make written public statement for its responsibilities, such
•
matters are not included in representation letter.
c) Management refuses to provide written representation.
• If mgt refuse to provide WR, auditor shall

Discuss matter with Re-evaluate integrity of mgt Take action including

management and evaluate effect on determining effect on audit
reliability of WR and audit opinion (SA 705)
evidence

Disclaimer of opinion
No WR WR not reliable (doubt about mgt’s integrity)

Q3) What are the circumstances where the auditor would ask the management to re confirm
its acknowledgement and understanding of those responsibilities in written representations?

Those who signed terms Terms – last year Changes in circumstances Management
– no longer responsible misunderstanding

Yes, I will definitely clear my CA Exams 37

CA SHANKAR LAKHWANI # Audit Made Easy
SA 600 – Using The Work of Another Auditor

Q1) In respect of bank branch audited by branch auditor, there were errors in NPA
classification which were not pointed by him. These errors were not noticed by statutory
auditor as well. Statutory auditor called many reports, but nothing found. What is
responsibility of statutory auditor?

1. PA is not responsible for OA’s work except if suspicion of reliability of work.

2. PA’s report – Division of responsibility & shows extent of OA’s work. Eg, no. of branches
audited by OA.
• Here,

No suspicion of reliability of work Statutory auditor not responsible for branch auditor’s work
• State in audit report that 1034 branches audited by branch auditors.

Q2) While accepting audit assignment as principal auditor, what will be points of consideration
for principal auditor?

Materiality of portion PA’s degree of ROMM in financial Performance of additional

of financial knowledge of info of components procedures as per SAs regarding
information which PA business of audited by other components audited by other
audits components auditors. auditors, resulting in PA’s
significant participation in audit
Q3) Principal auditor says that for audit of consolidated FS, either he needs to audit FS of
all components or he needs working papers of component auditors. Is he correct?

SA 600 – Principal auditor will

• Rely on work of component auditor
• Visit & examine books of accounts of component
• Discuss audit procedures with other auditor
• Review written summary of audit procedures of other auditor
Principal auditor can’t audit component’s FS. So principal auditor’s contention that he needs to
audit FS of components is incorrect.
SA 230 + SQC 1 -
• Audit documentation – Auditor’s property. He may at his discretion – available to client
provided it doesn’t undermine validity of work.
• It is discretion of component auditor as working papers of components are his property.
• So, contention of sharing working papers is incorrect.
Q4) Principal auditor asks branch auditor to share summary of audit procedures & findings
wrt accounts of branch. Is he correct?

SA 600 – Principal auditor (PA) will

• Rely on work of component auditor
• Visit & examine books of accounts of component
• Discuss audit procedures with other auditor
• Review written summary of audit procedures of other auditor
Here, PA is checking adequacy of other auditor’s work. So contention of PA is correct.
CRUX

• Audit of components of FS – Not allowed

• Sharing of working papers – Not allowed
• Sharing summary of audit procedures & findings - Allowed
Yes, I will definitely clear my CA Exams 38
CA SHANKAR LAKHWANI # Audit Made Easy
SA 610 – Using the Work of Internal Auditor

Q1) Statutory auditor finds that not only verification of inventory was attended by internal
auditor, but workings were also made & no adverse inferences were drawn by internal auditor.
But statutory auditor finds that inventory is held for long period before sale. Internal
auditor’s report do not consider this. Should statutory auditor rely upon internal auditor?

• SA 610 – Assessed ROMM ⬆️, Judgment ⬆️, external auditor – more procedures directly
and less use of IA function.
• SA 200 – Assessed ROMM ⬆️, more persuasive audit evidence required, external auditor –
more work directly.
• Risk – inventory obsolescence due to changes in customer preferences. ROMM ⬆️,
judgement ⬆️ in planning and performing procedures.
• Statutory auditor – procedures directly as per SA 610 –
o Comparing NRV with cost.
o Recomputing provisions.

Q2) Internal auditor conducted physical verification of inventory & gave report to statutory
auditor. Can statutory auditor rely?

• EA shall evaluate OCD –

Extent to which IAF’s Level of competence of IAF Whether IAF applies systematic
organisational status & policies & disciplined approach, including
support objectivity of IAs quality control
- EA not to use IAF’s work if no OCD.
• Statutory auditor ascertains scope of verification, area of coverage, method of
verification, conducts test check, observe procedures performed by internal auditor.

If satisfied about appropriateness of verification If not satisfied

Rely on report Don’t rely
• Final responsibility of opinion is of statutory auditor.

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CA SHANKAR LAKHWANI # Audit Made Easy
SA 620 – Using the Work of Auditor’s Expert

Q1) X, Y, Z are joint auditors. They consulted their own actuaries. Mr X agreed to Mr Y’s
actuary report, but Mr Z didn’t. Mr X contends that Mr Y’s actuary report to be considered
due to majority. Explain auditor’s responsibility if report of Y’s actuary later on found faulty.

• SA 620 – Expert is required for actuarial calculation of liabilities. Actuaries are auditor’s
expert. Auditor has sole responsibility of opinion and is not reduced by use of work of
expert.
• Auditor shall evaluate adequacy of expert’s work

Relevance & reasonableness of If expert’s work involves use of If expert’s work involves use of
expert’s findings/conclusions & significant source data, relevance,
their consistency with other assumptions/methods, completeness & accuracy of
audit evidence relevance & reasonableness of source data
assumptions and methods
• SA 299- Z gives separate AR as not agreed with X & Y.
• Duty of X, Y, Z – Ensure relevance & reasonableness of assumptions, methods, source
data before expressing opinion.
• X & Y – responsible for gross negligence & using faulty report without examining adequacy.
Z – not liable as separate opinion.

Q2) Auditor & expert are new to each other, but developed good bonding. No formal
agreement between them. Advice if expert is hired for derivative valuation.

• Written agreement required between auditor and expert when

o Sensitive maamla - sensitive information
o Complex maamla - complex matter
o Naya maamla - auditor hasn’t previously used expert’s work
o Bada maamla - greater extent of work
• Here, complex matter (derivative) + new to each other. Thus, sign formal agreement/
engagement letter.

Yes, I will definitely clear my CA Exams 40

CA SHANKAR LAKHWANI # Audit Made Easy
SA 700, 705 & 706

Q1) Difference between reporting to shareholders and reporting to TCWG.

Reporting to shareholders Reporting to TCWG

Sec 143 of COA 2013 SA 260
Statutory audit report is on true & fair view Reporting on scope of audit, audit procedures,
& as per prescribed format audit modifications
Statutory audit report – public domain Private report
Q2) Difference between audit qualification & EOM.

Audit qualification EOM

SA 705 SA 706
Material MST in FS. Thus, modification • Para in audit report
necessary. • Matter presented/disclosed
• Fundamental to users’ understanding of
FS
Material MST in FS or FS don’t confirm to FRF. Auditor feels it is necessary to invite attention
to particular matter presented in FS &
Depending on nature of MM, being pervasive or fundamental to users’ understanding of FS
not, appropriate type of modified opinion is
issued.
Q3) Auditor came across significant observations, leading to material MST. Mgt has
different view and doesn’t concur with auditor. What is impact on report?

• SA 705
• Circumstances of modification –

When MM is there When SAAE not there

• Types of modification –

Qualified opinion (Q) Adverse opinion (A) Disclaimer of opinion (DOO)

QO AO DOO
SAAE ✅ ❌ ✅ ❌
Material ✅ ✅ ✅ ✅
Pervasive ❌ ❌ ✅ ✅
Rare Case of disclaimer of opinion –

• Multiple uncertainties are there

• SAAE obtained
• But not possible to form opinion due to –

Interaction of uncertainties Cumulative effect on FS

• Inability to obtain SAAE due to management imposed limitation

Request mgt to remove limitation

Mgt removes limitation Mgt refuses

Proceed with audit procedures

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CA SHANKAR LAKHWANI # Audit Made Easy
Communicate with TCWG & perform alternative

procedures

Unable to obtain SAAE

Material ✅ Both material and pervasive

Pervasive ❌

Qualified opinion Withdraw from audit/DOO

Q4) Auditor obtained audit evidence, inconsistent with affirmation made in FS. What is

impact on report? OR

Auditor obtained audit evidence of incorrect disclosure of related party transactions &
finance deals, which was not considered with affirmation leading to misstatement in FS.

• SA 705
• Circumstances of modification –

When MM is there When SAAE not there

• Types of modification –

Qualified opinion (Q) Adverse opinion (A) Disclaimer of opinion (DOO)

QO AO DOO
SAAE ✅ ❌ ✅ ❌
Material ✅ ✅ ✅ ✅
Pervasive ❌ ❌ ✅ ✅
Decision as to which modified opinion is appropriate depends on –

Nature of matter giving rise to modification Auditor’s judgement about pervasiveness

• Conclusion – Qualified/adverse opinion because SAAE obtained.

Q5) Coal (raw materials) banned, operations closed, KMP left the company, delay in salary,
bank not to give further finance, no action plan to mitigate, circumstances is not reflected in
FS.

• Use of going concern basis is inappropriate (SA 570)

• Adverse opinion as per SA 705.
• Basis of opinion –
o Material uncertainty exists that cast significant doubt on going concern.
o FS do not adequately disclose this matter.

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CA SHANKAR LAKHWANI # Audit Made Easy
Q6) Auditor communicates to TCWG

• Auditor’s responsibilities
• Scope and timing of audit
• Significant findings, including significant deficiencies in internal control.

Where to present such communication in audit report?

• SA 700

Audit report – TAAB GKO RALOS PD

A – Auditor’s Responsibilities for audit of FS

Q7) Auditor communicates to CFO. Keywords in question – Ind AS 115, control transferred –
revenue recognition criteria, judgement and complexity. How to report in audit report?

TAAB GKO RALOS PD

1. KAM (SA 701)

Matters of most significance in audit of Selected from matters communicated with TCWG
current period
2. Significant auditor judgements related to areas involving significant mgt judgement.
3. Revenue recognition
Complexity & judgment
KAM para in audit report (SA 701)

Q8) Non-current receivables in company’s books. Mgt feels that it is fully recoverable.
Auditor relied only on mgt representation & included matter in EOM para. How is his
decision?

1. SA 706
2. EOM Para - Emphasis of Matter Paragraph

Para in audit report Refers to matter Fundamental to users’ understanding

presented/disclosed in FS of FS, in auditor’s judgment
3. EOM Para provided when no modification as a result of matter.
4. Only mgt representation doesn’t constitute SAAE. Necessary audit procedures are to be
applied.
5. If auditor concludes – modification not required as result of matter, matter is included in
EOM para.

Q9) Company’s financing arrangements about to expire and is unable to renegotiate/obtain

replacement financing. Company is unable to realise assets/discharge liabilities. FS do not
fully disclose this fact.

• Material uncertainty related to going concern (SA 570)

• Qualified opinion (SA 705) – Material ✅, Pervasive ❌
Qualified opinion
In our opinion & to the best of our information and explanation given to us, except for effects
of matter in Basis for Qualified opinion section, FS present fairly, in all material respects as per

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CA SHANKAR LAKHWANI # Audit Made Easy
AFRF & gives true & fair view as per accounting principles generally accepted in India, of state
of affairs as at 31 March ,2024 & profit/loss, for the year ended on that date.
Basis for Qualified Opinion
As discussed in Note 6, facts of the case & material uncertainty exists that cast significant
doubt on going concern. FS do not disclose this matter.
Q10) Same question as above except co. is considering filing for bankruptcy

• Material uncertainty related to going concern (SA 570)

• Adverse opinion (SA 705) – Material ✅, pervasive ✅
Adverse opinion
In our opinion & to the best of our information and explanation given to us, due to significance of
matter in Basis for adverse opinion section, FS do not present fairly, financial position of entity
as at 31st March, 2024 and its financial performance and cash flow for the year ended on 31st
March, 2024.
Basis for Adverse Opinion
As discussed in Note 6, facts of the case & material uncertainty exists that cast significant
doubt on going concern. FS do not disclose this matter.

Q11) Auditor unable to obtain SAAE of single element of consolidated FS (JV investment
representing 90% of net assets)

• Disclaimer of opinion (SA 705) – material ✅, pervasive ✅

Disclaimer of opinion
We do not express opinion on FS. Because of significance of matter in Basis for disclaimer of
opinion section, we have not been able to obtain SAAE.
Basis for Disclaimer of Opinion
Facts of the case

Q12) Company hasn’t furnished agreement to auditor for loan given to another company.
Auditor unable to verify terms of repayment & chargeability of interest.

• Qualified opinion (SA 705) - SAAE ❌, Material ✅, Pervasive ❌

Q13) Company faced extraordinary event (earthquake), destroying activities. Material
uncertainty related to going concern, FS do not disclose this fact.

• Adverse opinion (SA 705)– Material ✅ , Pervasive ✅

Q14)

• No balance confirmation for debtors of 150 crores. Default on payment obligation by

debtors on due dates. Provision for bad debts of 25 crore created is inadequate and
carrying value of debtors can’t be ascertained.
• Inventory (40% of total assets) – No physical verification by management. No records
maintained. Auditor unable to conduct physical verification & value can’t be verified.

Disclaimer of opinion (SA 705) - SAAE ❌, Material ✅, Pervasive ✅

Q15) Auditor wants to draw users’ attention to some matters. Opinion not modified.

1. Company wants to resume construction activity which was suspended in 2020–21.

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CA SHANKAR LAKHWANI # Audit Made Easy
• EOM Para (SA 706)
Emphasis of Matter
• We draw attention to Note X of FS
• Facts of case
• Our opinion is not modified in respect of this matter.
2. FS of 5 branches are included in standalone FS of X Ltd. FS of 5 branches are
audited by branch auditors.
• OM Para (SA 706)
Other Matter
• We did not audited FS of 5 branches included in FS
• Facts of case
• Our opinion is not modified in respect of this matter.

Q16) Mgt disclosed in financials that one of the warehouse of the company was affected due
to major flood. Company incurred losses. But management was of the view that it is not
material.

• Example of Emphasis of Matter paragraph (SA 706)

Q17) Due to flood, few records were completely destroyed, and there was no duplicate
record. However, those details were not pervasive, but material.

• Example of qualified opinion (SA 705) (SAAE ❌, Material ✅, Pervasive ❌)

Q18) ‘Fancy Limited’ is foreign company having branch office at Delhi. Fancy Limited
incorporated subsidiary ‘Nancy Private Limited’ in Gurgaon. Fancy Ltd entered into business
transfer agreement with Nancy Private Limited for transfer of all assets and liabilities along
with business of Delhi branch to Nancy Private Ltd on going concern basis. Necessary
approvals from regulators also received. Fancy Ltd promised that it shall provide continuing
financial and operational support to Delhi branch and further confirmed that any losses
incurred post the date of transfer shall be borne by Fancy Limited. Delhi branch of Fancy
Limited have prepared its financials on the basis that branch office does not continue to be
going concern and all its assets are carried in books at values likely to be recovered. Delhi
branch has incorporated above matter in notes to accounts.

You are auditor of Delhi branch of Fancy Limited. According to you, Delhi branch has
correctly disclosed about matter in Notes to accounts regarding mgt’s intention to close
operations of branch office. Also, you have obtained SAAE for audit and you are on verge of
finalisation of audit report.

Draft suitable opinion paragraph and basis along with disclosure of note.

INDEPENDENT AUDITOR’S REPORT

To the Members of Delhi Branch Office of Fancy Limited

Report on the Audit of the Standalone Financial Statements

Opinion

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CA SHANKAR LAKHWANI # Audit Made Easy
We have audited standalone FS of Delhi branch office of Fancy Limited, which comprise balance
sheet as at 31st March, 2024 and statement of profit and loss and statement of cash flows for
the year ended on 31 March, 2024 and notes to financial statements.

In our opinion, and to the best of our information, and according to the explanations given to us,
FS gives true and fair view, in conformity with accounting principles generally accepted in India, of
state of affairs as at 31st March, 2024 and profit and loss and cash flows for the year ended on
31st March, 2024.

Basis for Opinion

Write in paragraph form

Audit done as per SAs Refer to section of audit report State that auditor is
having auditor’s responsibilities independent
State whether auditor believes audit evidence to be sufficient and appropriate
Emphasis of Matter

We draw attention to note X regarding Delhi branch office mgt’s intention to close operations of
branch office. Accordingly, FS have been prepared on basis that Delhi branch office doesn’t
continue to be going concern and provisions have been made in books of accounts for losses on
realisability of current assets.

Our opinion is not modified in respect of this matter.

Q19) Company extinguished material liabilities unilaterally, and reported them as ‘other
income’. Auditor wants to send external confirmation, but mgt feels that it may be used by
creditors as proof of liability. Auditor wants to include it in key audit matters. Comment.

• Liability – present obligation from past events

Settle by negotiating Transfer to 3rd party Replace with other obligation

Here, treatment is questionable and against Ind AS.

SA 505 –

CA wants to send external confirmation, but management informed that sending such
•
requests may be used by creditors as proof of liability. CA should display professional
skepticism and be alert to possibility of misstatements, if refused by management to
obtain external confirmation.
• Reason of management is invalid. CA should perform alternative audit procedures and
consider implications on audit opinion.
SA 705 –

• Auditor should modify opinion as accounting policies are not as per AFRF.
• Auditor is unable to obtain SAAE due to limitation on scope imposed by mgt.
• Thus, modified opinion.
SA 701 –

• Including above matter in KAM is improper.

• Auditor shouldn’t include matter in KAM if required to modify opinion as result of
matter.
• Communicating KAM in audit report is not substitute for modified opinion (SA 705)

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CA SHANKAR LAKHWANI # Audit Made Easy
SA 701 – Communicating Key Audit Matters in the Independent Auditor’s Report

Q1) Arjun was appointed as engagement partner for audit of ‘X Limited’. Krishna was
appointed as EQCRr. During the year, X Limited implemented ERP system which had
substantial impact on audit strategy. Arjun discussed implementation of system with Krishna
and told him that such matter may be key audit matter. Krishna was of the opinion that ERP
implementation didn’t appear to link with FS and so there is no need to disclose it as key
audit matter. Whether contention of Mr. Krishna is appropriate?

Definition of KAM

• Matters, which in auditor’s professional judgement, are of most significance in audit of

current period.
• These are selected from matters communicated with TCWG.
• Factors to consider in determining KAM

SA 315 – ROMM/Significant Significant auditor judgement Effect on audit of significant

risk high wrt areas with significant events/transactions
management judgement,
including a/cing estimates with
high estimation uncertainty
• Matters not related to financials can be KAM if it requires significant attention of
auditor and it has impact on audit.
• Contention of Mr. Krishna is not appropriate.

Q2) What is the auditor’s responsibility to report a key audit matter for which there are no
disclosures in the financial statements?

• When communicating key audit matters, the fact that there are no disclosures in the
financial statements related to matter determined to be a key audit matter does not
relieve the auditor from the requirement to communicate it.
• An auditor may determine key audit matter related to the audit for which relevant
disclosure requirements do not exist in the applicable financial reporting framework. For
example, the implementation of a new IT system (or significant changes to an existing
IT system) during the period may be an area of significant auditor attention, in
particular, if such a change had a significant effect on the auditor’s overall audit strategy
or related to significant risk (e.g., changes to a system affecting revenue recognition).
• Also, if an auditor determines that it is necessary to include information about the entity
in order to effectively describe a key audit matter that has not been disclosed by
management and management does not agree to disclose that information, the auditor
should reconsider the adequacy of the disclosures in accordance with applicable
financial reporting framework.

Q3) M/s JPP & Associates have been appointed as auditors of ABC Ltd., an ISO certified
listed Indian multinational Jewellery Company. During the course of audit, from the matters
communicated with those charged with governance the auditors determined certain matters as
most significant in the audit of the financial statements of the current period which are
related to the company's offence of money laundering against which Enforcement Directorate
has enforced the stringent provisions of the Prevention of Money Laundering Act (PMLA).

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What would be the considerations of M/s JPP & Associates in determining the matter
requiring significant attention in performing the audit? State the introductory language that
JPP & Associates would use while communicating such matter in their audit report as per
relevant Standard on Auditing.

SA 701 –

• Matters, which in auditor’s professional judgement, are of most significance in audit of

current period.
• These are selected from matters communicated with TCWG.
• Factors to consider in determining KAM

SA 315 – ROMM/Significant Significant auditor judgement Effect on audit of significant

risk high wrt areas with significant events/transactions
management judgement,
including a/cing estimates with
high estimation uncertainty
Matter related to the company's offence of money laundering against which Enforcement
Directorate has enforced the stringent provisions of the Prevention of Money Laundering Act
(PMLA) is a key audit matter and the same shall be communicated in the auditor's report KAM.

The introductory language that M/s JPP & Associates would use while communicating matters in
this section of the auditor’s report shall state that:

(i) Key audit matters are those matters that, in the auditor’s professional judgment, were of most
significance in the audit of the financial statements [of the current period]; and.
(ii) These matters were addressed in the context of the audit of the financial statements as a
whole, and in forming the auditor’s opinion thereon, and the auditor does not provide a separate
opinion on these matters.

SA 710 – Comparative Information – Corresponding Figures & Comparative FS

Q1) Neptune Limited holds significant investments in equity. Due to decline in market value,
company’s investments suffered diminution in value. For FY 2022–23, audit report of Neptune
Limited included qualification for non-provision of ₹70,00,000 for diminution in value of
investments. As auditor for 2023–24, how would you report in following situations –

• If company doesn’t make provision for diminution in value in 2023–24?

• If company makes adequate provision for diminution in 2023–24?

OR ALTERNATIVE QUESTION -

It was observed from modified audit report of Param Ltd for 2023–24 that depreciation of 3
crore for 2023–24 had been charged to statement of P&L instead of including it in ‘carrying
value of asset under construction’. State in relation to audit of 2023-24, whether such
modification in previous year audit report would have audit implication for current year?

SA 710 -When audit report on prior period includes qualified/adverse/disclaimer of opinion and

Matter is resolved Matter is unresolved

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Auditor’s opinion on current period Auditor shall modify auditor’s opinion on current period.
not to refer previous modification In Basis for Modification Para, auditor shall either –
• Refer to both current period figures and
corresponding figures, or
• Explain that opinion has been modified because of
effect on comparability of current period and
corresponding figures
CONCLUSION FOR QUESTION 1

If doesn’t make provision – auditor will have to modify his report for both current and
•
previous year figures.
• If makes provision – auditor need not refer to previous year modification.
CONCLUSION FOR ALTERNATIVE QUESTION –

If doesn’t correct treatment of depreciation of 3 crore for previous year - auditor will
•
have to modify his report for both current and previous year figures.
• If figures corrected - auditor need not refer to previous year modification.
Q2) Write a short note on Auditor's responsibilities regarding comparatives.

1. To determine FS has appropriately classified comparative info, auditor should –

Ensure comparative info agrees Accounting policies are If change in application of

with amount/disclosure in prior consistent with current period a/cing policies, whether
period properly disclosed & presented
2. If Misstatement in comparative information,

Auditor perform audit procedures to obtain If auditor audited prior period FS, follow SA
SAAE 560
3. SA 580 - Auditor request WR for all periods in audit opinion + obtain specific WR for prior
period item disclosed in current year’s FS.

SA 720 – The Auditor’s Responsibilities Relating to Other Information

Q1) Audit manager while going through draft annual report, observed that company included
in annual report – downward trend in market price of raw materials. But profit has gone in
reverse direction. Partner of firm feels that this is not covered in auditor’s scope. Comment.

• SA 720 -Description of trends in market price of raw materials is example of other info.
• Auditor requests management to provide support for basis of other info.
• Auditor concludes whether FS or other info is materially misstated.
• If auditor concludes that there is MM in OI –

Auditor Request Mgt

to correct OI

If mgt

Agrees Refuses
Auditor determines that Auditor Request TCWG
correction made to correct OI
• Contention of partner of firm is incorrect.
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REPORTING MISCELLANEOUS

Q1) Fraud of 75 lakhs committed by employees. Is CA required to report matter to Central

Govt by filing prescribed form on MCA portal?

Sec 143(12) of COA 2013

1. Individual fraud amt. 1 crore or above against co. by officers/employees.

Auditor Report CG

2. No obligation to report to Central government by filing form ADT-4 on MCA Portal.

3. Fraud less than 1 crore

Auditor Report Board/AC

immediately but not later than 2 Days of knowledge of fraud

4. Report under clause (xi) of Para 3 of CARO 2020.

CARO 2020 - Companies (Auditor’s Report) Order, 2020

Q1) ‘A Limited’ has outstanding income tax dues of 15 lakhs since July 2023. Company filed
objection letter with income tax authorities. But no response received from department. You
are conducting audit for FY 2023–24.

Clause (vii) of Paragraph 3 of CARO, 2020

Co. – regular in depositing undisputed statutory dues (Eg, tax)

If no – outstanding > 6 months (Last day of FY) – Report
Disputed statutory dues – Amount & forum where dispute pending
(Mere representation to Department is not dispute)

This case - Undisputed statutory dues. Here, mgt filed objection letter, but no dispute raised and
dues unpaid for >6 months

Thus, auditor will report under clause (vii) of Para 3 of CARO, 2020.

Q2) Inventory data – ₹ in crores

Particulars As per physical verification As per books of accounts

Raw material 1160 1180
Work in progress 410 430
Finished goods 2500 2790
Stores & spares 220 180
Total 4290 4580
• As per clause (ii) of Para 3 of CARO 2020
o Discrepancy 10% or more aggregate – each class of inventory. If yes – dealt in BoA.

Particulars As per physical As per books of % change

verification accounts
Raw material 1160 1180 1.72%

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Work in progress 410 430 4.87%
Finished goods 2500 2790 11.6%
Stores & spares 220 180 18.18%
Total 4290 4580
o Discrepancy in finished goods and stores exceed 10% threshold.
o Report discrepancies under clause (ii) of Para 3 of CARO 2020.

Q3) Plant taken on lease (right of use asset) revalued & net carrying value changed from 3
crore to 3.35 crore.

As per clause (i) of Para 3 of CARO 2020-

• Revaluation of PPE/intangible assets ✅ / ❌

Revaluation by registered valuer ✅ / ❌
• If revaluation – specify change amount, if change is 10% or more in aggregate of net
carrying value of each class of PPE/intangible assets.
• Here, change is 35 lakh (10% or more)
• Report amount of change of 35 lakh under clause (i) of Para 3 of CARO 2020.

Q4) Cash credit limit of 5.10 crore was sanctioned by bank based on security of current
assets, which was reduced to 4.75 crore after 6 months. Quarterly returns have been filed
by company with bank, which are in agreement with books of accounts.

As per clause (ii) of Para 3 of CARO 2020

o At any point of year - company has been sanctioned working capital limit > 5 crore from
banks/FI in aggregate on security of current assets.
o Quarterly returns – Co. files with bank/FI are in agreement of BoA. If not – details.
o Here, company has been sanctioned cash credit limit of 5.1 crore by bank, which is
exceeding prescribed limit of 5 crore based on security of current assets. Quarterly
returns have also been filed by the company with bank, which is an agreement with BoA.
o Report under clause (ii) of Para 3 of CARO 2020.

Q5) X Ltd want to upgrade its office and want plot of Y (X Ltd’s director). Initially hesitant
to sell, Y persuaded to transfer his land to company in exchange of Big land owned by
company.

Report under clause (xv) of Para 3 of CARO 2020

• Non-cash transactions with directors/persons connected with him – Section 192 of COA.

Report under clause (xiii) of Para 3 of CARO 2020

• Related Party Transactions – Section 177/188 of COA

AS ke hisaab se details in FS.

Conclusion - Report under clause (xv) & clause (xiii) of Para 3 of CARO 2020

Q6) TDS survey on company and demand raised of 25 lakhs treating company as assessee in
default. Company not deposited demand and filed appeal under e-appeals with JCIT(Appeals)

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Report under clause (vii) of Para 3 of CARO 2020
• Disputed statutory dues – Amount & forum where dispute pending
Q7) You Are appointed as auditor of SL Limited for 2023–24, in place of CA T. During audit,
you found that under section 148 of Income Tax Act, where in tax of 50,00,000 were
demanded owing to undisclosed cash sales of 150 lakhs for FY 2020–21, which was accepted
by the company and applicable tax was paid by the company during 2023–24.Company has not
recorded such undisclosed income in books of accounts 2023–24. CA T resigned due to non-
recording of such transaction by company. Is there any reporting responsibility under CARO
for 2023–24?

Report under clause (viii) of Para 3 of CAR0 2020

• Transaction not recorded in BoA – disclosed as income during the year in tax assessment
under Income Tax Act, 1961
If yes - previously unrecorded income – properly record in BoA.

Report under clause (xviii) of Para 3 of CARO 2020

• Resignation of statutory auditors

If yes – auditor consider – objections, concerns & issues of outgoing auditors.

Q8) TEA Ltd is a public company. During 2023-24, it availed credit facilities from Kuber
Bank Ltd. The bank had sanctioned a working capital cash credit facility for Rs.4.50 crore
and Letter of Credit facility for a limit of Rs.2.50 crores aggregating to Rs. 7 crore on the
basis of the hypothecation of stocks and book debts of the company against which utilisation
of the limits by TEA Ltd. during the year in the case of cash credit facility was Rs.3.90
crore and of Letter of credit was Rs.1.05 crore aggregating to Rs.4.95 crore. Mgt decided
to peg up the values of the stock statements it submitted to bank by a hike of 15% during
the quarters ended June 2023, September 2023 and December 2023. It was noticed that
the stock figures declared were not in agreement with book figures and had been hiked as
above. The matter was taken up with CFO of the company who contended that auditors need
not examine and compare the quarterly statements with the books of accounts as the
utilisation of working capital limits is less than the specified sanctioned limit as on 31st
March 2024 and hence this case is beyond the scope of reporting under CARO, 2020. Is the
contention of CFO correct?

• As per clause (ii) of Para 3 of CARO, 2020, the auditor is required to report whether
o At any point of year - company has been sanctioned working capital limit > 5
crore from banks/FI in aggregate on security of current assets.
o Quarterly returns – Co. files with bank/FI are in agreement of BoA. If not –
details.
• Here, Rs.4.50 + Rs.2.50 = Rs.7 crores which is in excess of Rs.5 crores based on the
security of current assets i.e. Hypothecation of stocks and book debts.
• The auditor noticed that the stock figures declared by Tea Ltd. were not in agreement with
the book figures & were hiked.
• Thus, the contention of CFO is not correct regarding applicability of CARO, 2020 as the
working capital is more than specified sanctioned limit as on 31st March, 2024.
• Hence the auditor is required to report the same in accordance with Clause (ii) of Para 3 of
CARO, 2020.

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SA 800 SERIES

SA 800 – Special Considerations - Audits of Financial Statements prepared in accordance

with Special Purpose Frameworks

Q1) CA Lalita is auditor. She is also offered audit of FS prepared specifically for meeting
requirement of loan agreement. She accepts work and mentions in EOM Para. Is her approach
proper?

• Yes, proper. No bar upon accepting such engagement even though she is auditor of company.
• EOM Para ✅

Q2) CA Lakshmi prepared draft audit report for FS of X Ltd. prepared as per contract with
Y Ltd. She has drafted unmodified opinion. She has also drawn attention in draft audit
report to “Note A” describing basis of accounting. How to ensure report won’t be misused?
Draft para in report.

Auditor indicates that AR is for specific users

• By restricting distribution or use of Audit Report
• Para alerting readers is expanded and heading modified
DRAFTING – Basis of Accounting & Restriction on Distribution & Use/EOM Para

• We draw attention to Note A to FS, which describes basis of accounting.

• Facts of case
• FS is as per special purpose framework & not for other purpose.
• Intended solely for X Ltd & Y Ltd.
• Not to be distributed to/used by other parties.
• Our opinion is not modified in respect of this matter.

Q3) Explain with examples, meaning of special purpose framework.

FRF to Specific FIN (Financial information needs)

meet of Specific users

Cash basis of accounting & cash flow info for creditors

Examples FR provisions by regulator
FR provisions of contract (eg, bond indenture, loan agreement, project grant)

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SA 805 -Special Considerations - Audits of Single Financial Statements and Specific
Elements, Accounts or Items of financial statement

Q1) CA Surya is auditor of FS prepared as per contract. He is offered audit of trade

receivables in above FS. Can he accept engagement?

Special purpose framework – SA 800 + SA 805

Q2) CA Gagan is auditing trade payables but FS is audited by CA Jignesh. Why would it be
practically difficult for CA Gagan to perform audit?

1. Compliance with SAs for audit of single FS/specific element - Not practicable when
auditor not auditing complete FS
2. No same understanding of

Entity Environment Internal control

3. No audit evidence of quality of a/cing records. So further Audit evidence needed.
4. Some SAs require audit work, disproportionate to element being audited (SA 570)
5. If auditing as per SAs is impractical

Auditor discuss mgt

Other type of eng. more practicable

Q3) CA is auditing complete FS and gave adverse opinion. He is also auditing debtors. Can he
give unmodified opinion on debtors?

Complete FS Single FS / specific element

Adverse opinion/disclaimer of opinion Unmodified opinion not allowed
Exception - Specific element but if 3 conditions are met

Auditor not prohibited by L/R Opinion expressed in AR not Element doesn’t constitute
published together with AR major portion of complete FS
having adverse/DOO
Thus, unmodified opinion can be given on debtors provided all 3 conditions are met.

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SA 810 – Engagements to Report on Summary FS

Q1) Audit report date 15/06/23. Date of audit report on summary FS 15/07/23. Is there
any additional reporting responsibility?

Audit report on summary FS should state that SFS and audited FS do not reflect effect of
events occurred subsequent to date of audit report on audited FS.

Q2) Audit report on audited FS has qualified opinion. Can we give unmodified opinion on SFS?

Yes, unmodified opinion can be issued if -

SFS – consistent, in all material respects, with audited FS, as per AC

OR

SFS - fair summary of audited FS as per AC

AR on SFS -

a. State that AR on audited FS includes qualified opinion

b. Describe :

• Basis of qualified opinion on audited FS &

• Effect on SFS

Q3) CA is giving adverse opinion on audited FS. What additional points he has to keep in mind
while giving opinion on summary FS?

AR on audited FS – Adverse opinion/disclaimer of opinion

Then, AR on SFS
State that AR on audited FS – Describe basis of Since adverse/DOO on audited FS
adverse/DOO adverse/ DOO
It is inappropriate to express opinion on
SFS

Q4) SFS is not fair summary of audited FS & management doesn’t agree to make changes.
What are implications for audit opinion on SFS?

SFS

Not consistent, in all material respects, Not fair summary of audited FS as per AC
with audited FS, as per AC
& mgt not agrees to make changes – Auditor - Adverse opinion on SFS

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SRS SERIES

SRS 4400 - Engagements to perform Agreed upon Procedures regarding Financial Information

Q1) How do related services differ from assurance engagements?

Assurance engagement -

• Practitioner expresses conclusion to enhance confidence of users.

• Users are able to make confident decisions knowing that chance of information being
incorrect is diminished.
• Not all engagements performed by practitioners are assurance engagements.

These are related services –

Preparation of tax returns (no Consulting (advisory) SRS 4400 & 4410
assurance) engagement like mgt & tax
consulting

Q2) Company asks you to carry out process of confirmation of debtors. It involves preparing
& sending confirmation requests, analyse variations, and submission of report. What points
are to be kept in mind for inclusion in report?

OR

What precautions are to be taken by auditor so that readers report do not misunderstand its
scope?

Statement - Audit, review, assurance- ❌

Statement-had auditor performed additional procedures/audit/review, other matters might have
come to light that would have been reported.
Statement - report restricted to parties who have agreed to procedures.
Statement – only to elements/accounts/items/FI/NFI specified
FS as a whole ❌

Q3) Mgt wants to evaluate trade receivables. Accounts department provided list of debtors
to mgt containing 1000 names, their balance and contact details. Management requested CA
Ram to take this assignment and prepare report for mgt. Despite not being statutory auditor,
Ram decides to accept above engagement. Describe nature of engagement. Is it proper to
accept?

• Agreed upon procedures

• Auditor issues report of factual findings based on specified procedures on specified subject
matter of specified element.
• SRS 4400. Persons performing related services need not necessarily be auditor.
• Thus, proper to accept.

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SRS 4410 – Compilation Engagements

Q1) Compliance with ethical requirements.

• Practitioner complies with ethical requirements as per Code of Ethics, ICAI.

• Being non-assurance engagement, independence requirement doesn’t apply. But, L/R may
specify independence requirement.

Q2) Define characteristics of compilation engagement. What is approach for performing

engagement?

Practitioner applies a/cing & FR expertise to assist mgt in PPFS as per AFRF & report.
•
Assist in PPFS - professional accountant in public practice.
•
Non-assurance engagement.
•
Practitioner not reqd. to verify accuracy/completeness of FI/gather evidence to
•
express audit opinion or review.
Performing engagement

1. Prac. obtain understanding-

Entity’s business & operations, a/cing system, AFRF, including application in entity’s industry
a/cing records
2. Prac. compile FI using records, docs, OI provided by mgt.
3. Prac. discuss with mgt/TCWG significant judgements (SJ) - prac. provided assistance.
4. Prac. read CFI in light of understanding of (1).
5. Prac. - aware - records, docs, OI, SJ provided by mgt -
incomplete/inaccurate/unsatisfactory – Prac. – attention of mgt & request
additional/corrected info.
6. Prac. – unable to complete engagement – mgt failed to provide records, docs, OI, SJ

Practitioner

Withdraw from eng. Inform mgt & TCWG reasons of withdrawing

7. Prac. – aware –

CFI – AFRF ❌ Amendments to CFI required for financial information, CFI- misleading
not to be materially misstated
Prac. – propose – amendments to management

8. Mgt Declines Amendments to CFI

Doesn’t permit practitioner

Practitioner

Withdraw from eng. Inform mgt & TCWG reasons of withdrawing

9. Withdrawal not possible. Prac. – Professional and legal responsibilities.
10. Prac. obtain acknowledgement from mgt/TCWG-Responsibility for final version of CFI.

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Q3) Client suffered theft loss of 100 lakh of inventory. Claim lodged with insurance co. was
repudiated & client not preferred complaint/appeal against repudiation. Amount is reflected in
“current assets”. How to deal during performance of compilation engagement?

• It is not a current asset. It is a loss and should be dealt accordingly.

• Amendments are required for financial information not to be materially misstated.
• Prac. – aware –

Amendments to CFI required for financial information, not to be materially misstated

Prac. – propose – amendments to management

• Mgt Declines Amendments to CFI

Doesn’t permit practitioner

Practitioner

Withdraw from eng. Inform mgt & TCWG reasons of withdrawing

• Withdrawal not possible. Prac. – Professional and legal responsibilities.

Q4) You are compiling FS of company. Inventory is understated and company failed to apply
AS. On informing to company, company said the it is outside your scope since you are not
conducting audit. Comment.

1. Prac. – unable to complete engagement – mgt failed to provide records, docs, OI, SJ

Practitioner

Withdraw from eng. Inform mgt & TCWG reasons of withdrawing

2. Prac. – aware –

CFI – AFRF ❌ Amendments to CFI required for financial information, CFI- misleading
not to be materially misstated
Prac. – propose – amendments to management

3. Mgt Declines Amendments to CFI

Doesn’t permit practitioner

Practitioner

Withdraw from eng. Inform mgt & TCWG reasons of withdrawing

4. Withdrawal not possible. Prac. – Professional and legal responsibilities.
5. Prac. obtain acknowledgement from mgt/TCWG-Responsibility for final version of CFI.

Q5) Responsibilities of management to be agreed on for compilation engagement.

• Responsibilities of management
o PPFS as per AFRF.
o DIM of IC - Preparation of FS - Free of MM – Fraud/error.
o Accuracy & completeness of docs, other info provided by mgt.
o Judgements in PPFS, incl. those practitioner-provide assistance.

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SRE SERIES

SRE 2400 – Engagements to Review Historical FS

Q1) Roma Ltd has entered into contact with Dorma Ltd. There is condition in contact due to
which Roma Ltd is required to get FS reviewed on quarterly basis as per FR provisions of
contract. Can Roma Limited get it FS reviewed from professional accountant in practice?

• FS is as per special purpose framework (contract).

• FS prepared as per special purpose framework can also be reviewed by professional
accountant in practice as per SRE 2400.

Q2) While reviewing FS, you found that there is possibility of material misstatement in FS.
How to proceed further?

Perform additional procedures on becoming aware that FS may be MM

• Perform additional procedures to enable prac. to-

Conclude that matter is not likely to cause FS Determine that matter causes FS as a whole to
as a whole to be materially MM be MM
• Procedures may be –

Additional inquiry/AP (eg, greater Other types of procedures (eg,substantive

detail/focused on affected items) TOD/external confirmation)

Q3) Significance of date of report in review report.

Not earlier than sufficient appropriate evidence.

Q4) Practitioner’s report contains description of review of FS and limitations. Which

statements are to be included in report as per SRE 2400?

• Limited assurance engagement.

• Procedures-inquiry and analytical procedures.
• Procedures substantially less than audit. No opinion.

Q5) Review of FS includes consideration of going concern. If practitioner becomes aware of

events casting significant doubt on going concern, tell steps to be taken by practitioner.

• Going concern - Review includes GC assessment of entity. Prac – event – significant

doubt – GC, prac shall,
o Inquire Mgt plans for future actions
Whether above - improve situation
o Evaluate results of inquiries of mgt.
o Consider mgt responses in light of all relevant info of which prac aware.

Q6) In review, practitioner relies on certain procedures. Name such procedures.

• Inquiry and analytical procedures

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SRE 2410 – Review of Interim Financial Information Performed by Independent Auditor of
Entity

Q1) Fire occurred in plant & operations stopped, resulting in loss for company. Stock is
uninsured. Matter is disclosed in interim financial information (FI).

Uninsured assets – Material uncertainty relating to event that cast significant doubt on going
concern + disclosure in interim FI – Auditor modifies review report by adding EOM Para.

Q2) Necessary to make material adjustment. CA communicated to CFO & audit committee,
but no response received after waiting.

Auditor consider-

• Whether to modify report or

• Whether to withdraw from engagement and
• Whether to resign from appointment to audit of annual FS.

Q3) Review report date 28/07/22. Quarter end 30/06/22. Describe CA’s responsibility for
events from 01/07/22 till review report date.

Auditor to inquire whether mgt identified all events upto review report date that require
adjustment/disclosure in interim FI.

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SAE SERIES

SAE 3400 - The Examination of Prospective Financial Information

Q1) Depreciation in prospective financial information is as per Income Tax Act. No disclosure
made in this respect.

• Duty of professional accountant to see that prospective FI is based on consistent basis

with historical FI.
• Historical FS – Depreciation as per Companies act.
Prospective FI – Depreciation as per Income Tax Act. So, not proper.
• State the fact that prospective FI is not prepared on consistent basis with historical FS,
using appropriate accounting principles.
• Presentation/disclosure is inadequate – Qualified or adverse opinion/withdrawal from
engagement.

Q2) What steps to be taken to formalise terms of engagement?

Agree on terms with client by sending engagement letter.

Q3) How to differentiate forecast from projection? Explain with example. Explain nature of
assurance provided by practitioner regarding prospective FI.

1. PFI can be in form of forecast, projection, combination. Eg, 1 yr forecast + 5 yr projection.

2. Forecast-
• Assumptions as to future events mgt expects to take place
• Actions
• These are best estimate assumptions i.e. no provision for risk of adverse deviation.
• Eg, In present market conditions,CFO expects sales to increase by 5%
3. Projection-
• Assumptions as to future events not expected to take place
• Actions
• Hypothetical assumptions - Entity in startup phase/major change in nature of
operations.
• Mixture of best estimate and hypothetical assumptions.
Prospective FI relates to events that have not yet occurred & might not occur. While evidence may
be available to support assumptions on which prospective FI is based, it is future oriented and
thus, speculative in nature. Opinion as to whether results in PFI will be achieved can’t be
expressed.

Q4) Can professional accountants be associated with PFI? OR CA X certifies financial

forecast of his client, which was forwarded to client’s bank based on which bank sanctioned
loan to his client. OR CA X is asked to conduct a review of profit forecast prepared by
company in connection with application for a term loan from bank.

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Clause 3 – Part I - Second Schedule – CA Act, 1949

• Practicing CA-professional misconduct if permits his name to be used wrt estimate of

earnings contingent on future transactions in manner which may lead to belief that he
vouches for accuracy of forecast. But it doesn’t preclude CA from associating name with
PFI.
• CA can participate in preparation of financial forecasts & can review them, provided he
indicate in his report-
Source of info Basis of forecast Assumptions in arriving at
forecast
& doesn’t vouch for accuracy of forecast. Same applies to projections.
• CA is not guilty of professional misconduct if all the requirements are complied.

SAE 3402 – Assurance Reports on Controls at Service Organisation

Q1) ‘A Limited’ is software company. They want to engage you to provide assurance report
for one of its clients over the controls it operates as service organisation. Can you provide
assurance report?

• Assurance report can be provided under SAE 3402.

• SAE 3402 deals with assurance engagements by professional accountant in public practice to
provide report for use by user entities & user auditors on controls at service organisation
that is relevant to user entities’ internal control as it relates to FR.
• It complements SA 402 as reports prepared under SAE 3402 provide appropriate evidence
under SA 402.

Q2) Star Limited has outsourced payroll activities to Little solutions Private Limited. Auditors
of Star Limited want to be sure of description, design & operating effectiveness of controls.

A] Why auditors of Star Limited require assurance report from auditors of Little solutions
Private Limited? Which engagement and quality control standard cast such responsibility?

When user entity uses services of service organisation, objectives of user auditor are -
• To obtain understanding of nature & significance of services of service organisation &
their effect on user entity’s internal control.
• To design and perform audit procedures responsive to those risks.
SA 402 casts such responsibility on user auditors.

B] Which type of report should be provided?/what is nature of report?

As per SAE 3402, auditor of Little Solutions Private Limited should provide type 2 report to
auditors of Star Limited.

Type 1 Report - Report on description & design of controls at service organisation on specified
date.
Type 2 report – Report on description, design & operating effectiveness of controls at service
organisation throughout specified period.

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C] State matters on which opinion is provided by auditors of Little solutions.

• Service org’s description of system presents system as designed & implemented

throughout specified period.
• Controls wrt control objectives stated in service org’s description of system were
suitably designed throughout specified period.
• Controls operated effectively to provide reasonable assurance that control objectives
achieved throughout specified period.

SAE 3420-Assurance Engagements to Report on Compilation of Pro Forma Financial

Information Included in a Prospectus

Q1) What factors to consider about company acknowledging and understanding its
responsibility before accepting engagement as practitioner?

Obtain agreement of RP that it acknowledge & understand its responsibility for-

i. Adequately disclosing AC to intended users.

ii. Compiling pro forma FI on basis of AC.
iii. Providing practitioner with-

Access to all info to Additional Access to those Access to individuals within acquiree
evaluate whether pro forma info within entity in business combination
FI compiled as per AC

Q2) Discuss term “Pro Forma Adjustment”

Adj. to UFI illustrating impact of significant Adj. to UFI necessary for pro forma FI to be
trans. as if occurred earlier compiled as per AFRF

Q3) Discuss significance of pro forma financial information included in prospectus.

1. Reasonable assurance engagement.

2. Reporting required by securities law.
3. Pro forma FI – FI shown with adjustments to illustrate impact of trans., on unadjusted FI
as if transaction had been undertaken earlier.
4. Pro forma FI doesn’t show actual financial position.
5. Compilation of pro forma FI – Responsibility of responsible party (RP).
6. Report on whether pro forma FI – compiled as per applicable criteria (AC) – Responsibility of
practitioner.

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DIGITAL AUDIT

Q1) Mr X says cyber risks are IT issues & cause only information loss. Cyber attacks don’t
target financials and don’t pose ROMM to FS. Is he correct?

Cyber Risks

Not IT issue alone Business risk & impacts whole organisation

Impact of Cyber Risk-

o Ransomware
o Business interruptions causing operational challenge for organization
o Regulatory costs
o Data loss, reputational loss & litigation
o Fines & penalties
o Breach of privacy
• Many cyber attacks are not directly targeted at financials but attackers get access to
modify –

Financial records Business rules Automated controls

• Auditor has to consider –

ROMM to FS as part of Risk Understand & address cyber risk

Assessment Procedures (RAP)

Q2) Examples of tests performed using Computer Assisted Auditing Techniques (CAATs)

• Data completeness - Identify whether all fields have valid data.

• Data consistency - Identify data which are not consistent with regular format.
• Duplicate payments - Duplicate payment for same invoice.
• Existence of records - Identify fields which have null values.
• Identify errors - Identify data, which is inconsistent or erroneous.

Q3) How RPA is used to automate hiring & what are its benefits?

STEPS

• Place advertisement on social media

• Link redirected to career site
• Career site pulls candidate information
• Algorithm scans applicants for role
• Candidates play online games to assess skills
• Certain % of applicants go for interview
BENEFITS

• Efficiency ⬆️ Effort ⬇️
• Diversity ⬆️ Cost ⬇️
• Range ⬆️ Biasness ⬇️

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Q4) Why it is important to identify IT dependencies to develop effective & efficient audit
approach?

Helps to-

• Identify entity’s reliance upon IT

• Identify IT risks
• Identify IT General controls
• Understand how IT is integrated into entity’s business model
• Develop effective & efficient audit approach

Q5) Examples/benefits of IoT

• Refrigerator places order for eggs, if insufficient.

• Gather data of customer preference, but implications of privacy.
• Data from machines predict breakdown, giving warning to prevent stretch.

Q6) Example of Spear Phishing

• Mr. X, CEO of a company, has received email requesting him to update account details due
to security breach. Said email appears to be received from company’s bank, looks official
due to use of bank’s logo & branding. Such email also includes link to website that resembles
to bank’s login page. Concerned about security of company’s finances, Mr X click on the link
and enter his login credentials. Later IT dept. detects unauthorised access to company’s
financial accounts & identify that CEO’s credentials were compromised.

Q7) Example of Smishing

Message received on mobile, claiming to be from bank – “Dear customer, your account has been
temporarily suspended. To reactivate, please verify your details by clicking on following link.”

Q8) Wire fraud – Executive received insufficient funds notification for bills. CEO clicked on
link in email that he thought was from trusted source. He entered details & criminal captured
login info & gained access to business details.

• Type of attack – Phishing attack

• Lessons learned –

• Entity monitors whether unauthorized access to electronic assets & impact on FR

• Formal training to make teams aware of risks of cyber attacks
• Entity implements controls for data security.

Q9) Example of RPA (Robotic Process Automation)

AI bot for passenger ticket booking.

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GROUP AUDIT

• Group Audit = Consolidated FS

• Holding co. = Parent
• Subsidiary co. = Component

Q1) Parent Ltd acquired 51% of Child Ltd in 2020–21, but in 2021–22, 20% sold by Parent
Ltd. So Parent Ltd while preparing FS of 2020–21 & 2021–22, didn’t consolidate Child Ltd.
How to deal?

OR

M Ltd acquired 51% of S Ltd on 01/04/19 & sold 25% during 2019-20. M Ltd didn’t prepare
consolidated FS for 2019–20 on plea that control was temporary. What to do?

OR

R Ltd owns 51% voting power in S Limited but discloses all shares as ‘stock in trade’. Shares
are held with a view to subsequent disposal in near future. Can S Limited be excluded from
consolidation?

• As per Ind AS 110, no exemption for

Temporary control Operation under severe long-term funds transfer restrictions

• Consolidation is mandatory for Ind AS compliant FS.
• Ind AS 110 states – Consolidation begins from date investor obtains control and ceases
when investor loses control.
• As per COA 2013, if company has subsidiary, which is not required to prepare consolidated
FS as per AS, it is sufficient if company complies with Schedule III to Act.
• Facts of the Case – 1 line. Here, temporary control.
• Conclusion –

Consolidated FS mandatory as per Ind AS 110 No exemption for temporary control

Q2) Example of permanent consolidation adjustment

• XYZ Limited is parent company with 2 subsidiaries – A Ltd & B Ltd. XYZ Ltd. invested 70%
in A Limited and in next year, reduced it to 55%

Q3) Whether preparation of consolidated FS is mandatory?

Mandatory as per Companies Act, 2013

• Co. subsidiaries, AC, JV

Own FS + CFS
• CFS Approved by BoD
Laid before AGM
• Co. attach with FS - statement of salient features of FS of subsidiary in Form AOC 1.
• CFS as per Schedule III of COA & AS.
• Co. not required to prepare CFS as per AS – sufficient – comply with CFS provisions in
Schedule III.

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No CFS

• WOS/POS of another company & all members (vote ) – written intimation + proof
of delivery - do not object.
• Co. - securities not listed / not in process of listing on stock exchange in India or outside
India.
• Ultimate / intermediate holding company files CFS with ROC.

Q4) A Limited holds 10% voting power and controls composition of board of directors of B
Limited. What factors to be considered for audit of consolidated FS?

• Here, A Ltd holds only 10% but controls composition of Board of Directors of B Limited.
Thus, A Limited is parent and it will consolidate B Ltd as subsidiary.
• Check –
o Auditor verifies how A Ltd controls board of directors.
o There can be various means by which control can be established. Auditor verifies

Minutes of board meeting Shareholder agreement

• Auditor verifies that adjustments (PCA & CPCA) have been made, when required.
• Auditor checks compliance with SA 550, “Related Parties”.
• Auditor verifies whether related party transactions - properly accounted and disclosed.

Q5) H Ltd. is investment company. H Limited invested 25% in S1 Limited, 50% in S2 Limited,
60% in S3 Limited. Is there need to consolidate as per COA 2013 which contains no exclusion
from consolidation?

OR

‘A Investments Ltd’ has paid up share capital of 1 crore. It has subsidiary, B Ltd. Major
business of ‘A investments Ltd’ is to pool money from investors & invest in various funds.
They pooled 10 crore from clients, which represent company’s shareholders. 12 crore pooled
has been invested in shares and debentures of various companies & profit earned due to
appreciation of prices of shares has been distributed to shareholders. Performance of all
investments is measured on fair value basis. Whether consolidated FS are required?

• As per COA 2013, if company has subsidiary, associate company, joint venture, it shall, in
addition to own FS, prepare consolidated FS.
• Consolidated FS is made as per Schedule III of COA and AS.
• If company is not required to prepare CFS as per AS, it is sufficient if it complies with
Schedule III to the Act.
• However, investment entity need not present CFS if it is required to measure all
subsidiaries at fair value through profit or loss as per Ind AS 110.
• Definition of Investment Entity –
• IE Investors

• Commits to investors - business purpose - invest funds - returns from capital appreciation or
investment income or both.

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• Measures performance of substantially all investments on FV basis.
• Facts of the Case – 1 line
• As per Ind AS 110, company is not required to prepare CFS. However, it is sufficient if it
complies with Schedule III.
• Conclusion – Ultimate Authority on consolidation is AS/Ind AS as prescribed by law, and if
they give some exemption, it should be followed.
• If due to exemption – no consolidation, then list should be disclosed in notes to accounts
with reason.

Q6) Information of 8 subsidiaries –

Total assets – 1500 crore, total revenue - 1000 crore, net cash outflow - 10 crore. 8
subsidiaries are audited by other auditors. 2 subsidiaries – outside India whose accounting
and auditing is done as per their countries. How to report in audit report? Draft paragraph.

• SA 706 – Auditor consider necessary to make reference to audit of other auditors – AR on

CFS – disclose magnitude of portion of FS audited by other auditor by stating ₹/% of total
asset/revenue/cash flow of compo not audited by PA.
• OM Para –
o We didn’t audit 8 subsidiaries, whose assets are 1500 crore, revenue is 1000 crore
and outflow is 10 crore. These are audited by other auditors.
o Facts of the case – 2 subsidiaries outside India –

Parent’s mgt converts component FS to We audited conversion adjustments

parent’s framework
o Our opinion is based on -

Report of other auditors Conversion adjustments

o Our opinion is not modified in respect of this matter.

Q7) R Limited is having investment in following components - 2 subsidiary companies, 1 joint

venture company, 2 associate companies, 3 business entities under common control, joint
operation with 1 company. R Limited and its components are required to present their
accounts as per Ind AS. While preparing CFS, R Limited consolidated its components on line
by line basis by adding together assets, liabilities, income, expenses, and cash flows. R Ltd
seek your advice on accounting treatment.

• Conso of Subsidiaries as per Companies (Ind AS) Rules, 2015 – Accounting Treatment
1) FS of parent & subsidiaries combined on line by line basis by adding assets, liabilities,
income, expense, cash flows – Ind AS 110.
2) Goodwill/CR & NCI determined - Ind AS 103.
3) Business under common control – Pooling of interest method – Ind AS 103.
4) Elimination of intragroup transactions – Ind AS 110.
5) Investment in associates & JVs - equity method – Ind AS 28. Interest in assets, liabilities,
revenue, expense in joint operation accounted as part of separate FS – Ind AS 111.
• Accounting treatment – Correct for subsidiaries, but incorrect for other components as
per Companies (Ind AS) Rules, 2015.

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BANK AUDIT

Q1) Loan applications filled up scantily with important details left out. Cash credit limits
enhanced but bank is unable to show workings. But all accounts are operating satisfactorily.
Assets are classified as standard. Is there need to change classification?

• Account becomes NPA when it ceases to generate income for bank. Here, operating
satisfactorily. So no reason for change.
• Internal controls improper –
o Applications scantily filled
o Lack of record
• Deficiency in “credit appraisal” – Highlight in LFAR

Q2) CA Seema – stock auditor of Rice Mill. She tests check quantity of paddy & rice of
20,000 quintals and 8000 bags respectively. Drawing power is 12 crore. After a week,
inspection department of bank found that rice in 5000 bags are fungus ridden. What to do?

• Professional work not performed diligently.

• Auditor’s responsibility to verify quantity and condition.
• She should have open rice bags on test check basis to know about condition.
• Value of fungus ridden rice should have been excluded to compute drawing power.
• Conclusion – No due diligence and drawing power is improper.

Q3) Bank recognised on accrual basis, income from dividend and mutual fund. Dividend on
securities and units of mutual fund were declared after the end of financial year.

• Dividend income – Recognised on accrual basis provided it is declared in AGM and owner has
right to receive as per AS 9. Here, dividend is declared after year end. So recognition on
accrual basis is not in order.

Q4) In particular account, there was no recovery in past 18 months. Bank hasn’t applied NPA
and income recognition norms. Bank management says that this account was guaranteed by
Central government and hence norms are not applicable. Bank hasn’t invoked guarantee. Please
respond. Will your answer be different if advance is guaranteed by state government?

1. If government guaranteed advance becomes NPA, then for income recognition purpose,
interest on such advance should not be taken to income unless interest is realised.
2. For asset classification purpose, credit facility backed by CG guarantee, though overdue,
can be treated as NPA only when CG repudiates guarantee, when invoked.
• Since Bank has not invoked guarantee, question of reputation does not arise.
• Hence, bank is correct in not applying NPA norms for provisioning purpose. This exemption
is not applicable for income recognition norms. Thus, income not recovered should be
reversed.

This exception is NA for SG guaranteed advance, where advance is to be considered as NPA if it

remains overdue for > 90 days.
In case bank has not invoked CG guarantee, though amount is overdue for long, reasoning for the
same should be taken and reported in LFAR.

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Q5) How to verify loans taken against life insurance policies?

• Auditor should inspect policies.

• Auditor should examine whether premium has been paid on policies.

Q6) SBI is consortium member of cash credit facility of 50 crore to X Limited. SBI’s share
= 10 crore. Debit – 1.75 crore, credit – 1.25 crore . Lead bank has classified loan as
performing.

• Several banks form consortium under leadership of lead bank to give advance on same
conditions and security with proportionate rights.
• Each bank classifies advance as per own experience of recovery.
• Facts of case – 1 line
• Since amount is outstanding, interest should be reversed.
• Although lead Bank – performing, SBI will classify the advance as NPA.
Q7) Areas to cover with respect to forex in concurrent audit.

• Auditor shall verify Nostro/ Vostro account.

• Auditor shall verify inward/ outward remittance.
• Auditor shall verify foreign bills.
• Auditor shall verify forward contract.

Q8) Disclosure requirement of contingent liability.

Claims against bank, not Liability for partly Liability for o/s forward exchange &
acknowledged as debt paid investments derivative contracts
Guarantee given on Acceptance, endorsements & other obligations
behalf of constituents

Q9) SBI gave cash credit limit of 100 lakhs to X Limited on 1/9/2021. Renewal of limits was
due on 1/9/2022. While doing audit for 2022–23, you found that renewal is not done even
though 180 days are over. Bank says that renewal process is initiated on time and most of
the document are received. Account is operating regularly and balance maintained within
drawing power. Auditor of X Limited died suddenly and new auditor was appointed. It took
time since new auditor was doing audit again. Limits not renewed till 31/3/2023. But audited
financials are received on 10/04/2023 and renewal letter was issued immediately. Should
account be classified as NPA as limit was not renewed till 31/3/2023?

• Account is classified as NPA if renewal is not done in 180 days.

• Here,
o Operations are excellent
o Valid reason for delay in FS (auditor died).
o Limits renewed before signing audit report.
• Adjusting event (AS 4) since even if sanction issued after balance sheet date, it relates to
balance sheet date. It is a matter of substance over form.
• Classification – standard asset

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Q10) Bank has manager, cashier, S1, S2, S3. S1 (peon) opens mails and forward it to
concerned person. He doesn’t have sign book to check sign. S2 has possession of all bank
forms. He maintains record which auditor has checked, but no staff regularly checks it. Bank
says that being small branch with low manpower, it’s not possible to always check work and
records. Comment.

• Internal controls are improper.

• S1 – Internal control improper. Mail should be opened by responsible officer. Signature
should be checked with sign book.
• S2 – Another officer should check stationery. Here, no staff checks.
• Bank’s contention that it is impossible to check work is not tenable.

Internal control lapse Risk of fraud

• Auditor should report in audit report.

Q11) NPA sold following NPAs in April 2023 -

Name NPA since FY

A 2019–20
B 2021–22
C 2018–19
D 2017–18
E 2020-21
Audit approach for NPA -

Both for sale/purchase of NPA

Policy by BoD Only such NPA sold which remained NPA in NPA sold on Asset sold/purchased
books of bank for atleast 2 years cash basis “w/o recourse” only
Bank hasn’t purchased NPA which it originally sold
Things to be ensured for sale of NPA-

On sale, NPA has been If sale price < Net book If sale price > NBV, excess provision - not
removed from books of a/c value (NBV), shortfall – reversed, but utilised to meet shortfall
of selling bank. Dr to P/L A/c. on a/c of sale of other NPA.

• Only such NPA sold which remained NPA in books of bank for atleast 2 years.
• All NPAs (except B) are prior to April 2021. Sell all NPAs, except B as it has remained NPA
in books of bank for less than 2 years.

Q12) Classification of loan into SMA and NPA noticed while evaluating internal control over
advances.

• Due date 31/03/23 & dues not received on 31/03/23. Account overdue on 01/04/23
(next day)
• If overdue, SMA 1 on 01/05/23
• If overdue, SMA 2 on 31/05/23
• If overdue, NPA on 30/06/23

Evaluate internal control over advances in compliance to regulatory guidelines.

• Internal control by Bank – Not as per regulatory guidelines.

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• Classification of overdue/SMA/NPA is done as part of day end process.
• Due date – 31/03/23, date of overdue – 31/03/23.
• SMA 1 : On completion of 30 days of overdue – 30/04/23
• SMA 2 : Next 30 days - 30/05/23
• NPA : Next 30 days - 29/06/23
Q13) Ratio of Net NPAs to Net Advances is higher for SBI as compared to other banks.
What is gross NPA, net NPA and what inference to draw while comparing ratio of net NPA to
net advances with other banks?

• Gross NPAs – Opening balances of NPAs as increased by fresh NPAs during year & reduced
by upgradations, recoveries & write offs.
• Net NPAs – After deducting total provision held against NPAs, balance in interest suspense
account.
• Net NPAs to Net Advances Ratio is higher for SBI. This indicates risk that bank has not
made provisions as per RBI guidelines. Risk of under provision. Auditor needs to verify this
area.
Q14) Audit procedures for CASA (Current accounts & Saving accounts)

• Verify on sample basis CASA for adherence to KYC norms.

• Verify balances in individual accounts on sample basis.
• Verify interest calculation on test check basis. No interest is paid on current account.
• CASA treated as inoperative/dormant if there are no transactions for over a period of
2 years.
Q15)

Audit queries Reason of queries Action taken

NPA sold for higher than net If sale price > NBV, excess Entry for reversal of excess
book value(NBV). Profit wasn’t provision - not reversed, but provision is cancelled and it
recognised, but excess utilised to meet shortfall on would be utilised to meet
provision reversed. a/c of sale of other shortfall on a/c of sale of
NPA.Profit isn’t recognised. other NPA
Interest in state government SG guaranteed advance – NPA Interest income recognised is
(SG) guaranteed advance if it remains overdue for >90 reversed & would be taken to
taken to income, even though days & for income recognition, income only when it is realised
advance overdue for >90 days interest shouldn’t be taken to
income, unless it is realised
Ad hoc limit hasn’t been Accounts where ad hoc limits Classification changed from
reviewed for 180 days from are not reviewed within 180 performing asset to non-
date of ad hoc sanction & days from sanction are NPA. performing asset
account is treated as
performing asset
On verification of outstanding Net position for foreign Net position is squared off &
forex contracts, net position currency is squared and get covered by substantial
for foreign currency wasn’t shouldn’t be uncovered by amount
squared & was uncovered by substantial amount.
substantial amount

Additional temporary limit Additional temporary limit Terms revised to 20% of

sanctioned for 25% of sanctioned for max 20% of existing limit & 90 days.
existing limit & 120 days existing limit and 90 days.

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NBFC AUDIT

Q1) Audit procedures for NBFC P2P.

Verify certificate of Compliance with reporting Verify board policy

registration from RBI requirement of RBI • Pricing of services
• Grievance redressal
• Eligibility criteria

Q2) CARO requirement for housing finance company

• Clause xvi of Para 3 of CARO 2020 – whether co. conducted non banking financial/housing
finance activities without certificate of registration from RBI as per RBI Act, 1934.

Q3) Question will confuse you by stating that it is deposit taking NBFC and in upper layer.
These details are irrelevant. Whenever you see Division III Schedule III in question along
with P/L account, the answer will be from difference between Division II and Division III.

Total income – 10000 crore. All other figures given in question are irrelevant.

“Other expenditure” includes manpower cost of 99.50 crores. Does it meet requirements of
Division III Schedule III?

• Separate disclosure in note of any item of “other income/expenditure” which exceeds 1%

of total income.
• 1% of 10000 crore – 100 crore
• 99.5<100. This exp. doesn’t exceed 1% of total income. Yes, it meets requirement of
Division III Schedule III.

Q4) Registration and regulation of NBFC.

• Registration & regulation of NBFC - No NBFC is allowed to commence/carry on

business without
o Obtaining certificate of registration by RBI.
o Net owned fund of …… crore
• Co. exempted from registration.

Housing finance institutions Merchant banking company Stock exchange

Stock broking/sub broking Venture capital fund company Nidhi company
company
• RBI has issued directions for acceptance of public deposit, prudential norms & reporting of
non compliance.

Q5) Satyam Ltd is in trading business. It has made investments in shares of other companies
& gave loans to group companies amounting to more than 50% of total assets. But trading
income constitutes majority of total income. Is it NBFC?

Principal Business Criteria (50% criteria or 50-50 test)

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• Co. is treated as NBFC when company’s financial assets constitute >50% of total assets
(net off by intangible assets) & income from financial assets is >50% of gross income.
o See figures of last audited balance sheet
o Co. fulfilling both criteria is NBFC & requires to be registered as NBFC by RBI.
• Asset criteria ✅
• Income criteria ❌
• Thus, NBFC ❌

Q6) A Pvt. Ltd. is selling computer parts. But it is fulfilling principal business criteria. What
is the obligation of statutory auditor?

Obligation of auditor to submit exception report to RBI.

o In case of NBFC, statement as to any items above is unfavourable/qualified/non-compliant

with

RBI Act, 1934. NBFC Acceptance of Public Deposits (RBI) Directions, 2016
Master Direction – Reserve Bank of India (NBFC-Scale Based Regulation) Directions, 2023
o It shall be obligation of auditor to make report containing details of unfavourable/qualified
statements to Regional office of Dept of Non-Banking Supervision of RBI.
o It shall be duty of auditor to report only contraventions of RBI Act, 1934 & directions &
such report shall not contain any statement of compliance with any provisions.

Q7) Special point –

If question is for audit report to board of directors (Q11 of magic charts), in case of deposit
accepting/non deposit accepting NBFCs, follow this sequence of answer-

Part 1 – For All NBFCs

Part 2- For NBFCs accepting public deposit/For NBFCs not accepting public deposit
Part 3 – If Audit report has unfavourable/qualified statement or if auditor is unable to express
opinion, his report shall state reason.

Q8) A Limited is NBFC and is in the business of accepting public deposits and giving loans
since 2015. The company has net owned funds of 1.5 crore and was not having registration
certificate from RBI and applied for it on 30/03/2024. Shankar is statutory auditor for
2023–24. Advise him wrt audit procedures and reporting requirements as per CARO 2020?

• Clause xvi of Para 3 of CARO 202O - Auditor to report –

Whether company required to & if yes, whether registration obtained
register under RBI Act, 1934

• Audit procedures –
• Whether company’s financial assets constitute more than 50% of total assets and
income from financial assets constitute more than 50% of gross income.
• Whether company has net owned funds as required for registration as NBFC.
• Whether company has obtained certificate of registration from RBI, and if not, the
reasons.

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CA SHANKAR LAKHWANI # Audit Made Easy
• Auditor should report following –
▪ Whether registration required under section 45-IA of RBI Act, 1934.
▪ If so, whether it has obtained registration.
▪ If registration not obtained, reason.
• Here, no certificate of registration. NOF = 1.5 crore (less than limit of 2 crore)
• Auditor should report as per clause xvi of Para 3 of CAR0 2020.

Q9) Audit procedures to verify whether NBFC has followed Prudential norms.

• Check compliance with prudential norms of income recognition, income from investment, AS,
asset classification, etc.
• Auditor should assess whether NBFC is complying with Prudential norms. Verify that
advances are classified as standard/sub standard/doubtful/loss & proper provision is made.

• For NPA, auditor has to check whether unrealised income hasn’t been taken to P/L account
on accrual basis. Income from NPA has to be accounted on realisation basis.
• Check whether all accounts classified as NPA in PY, continue to be shown as NPA in CY. If
not, examine whether it is regular and can be treated as performing.

Q10) Can company apply for registration as NBFC under section 45-IA of RBI Act?

• Paid up share capital – 50 crore

• Non-current assets – loans and advances – 61.75 crore
• Current assets – loans and advances – 312.25 crore
• Total assets – 620 crore
• Intangible assets – 12 crore
• Profit – 7.25 crore
• Interest/dividend income – 68 crore
• Gross income – 118.75 crore

Co. is treated as NBFC when company’s financial assets constitute >50% of total assets (net off
by intangible assets) & income from financial assets is >50% of gross income.
o See figures of last audited balance sheet
o Co. fulfilling both criteria is NBFC & requires to be registered as NBFC by RBI.
• Financial assets = 61.75 + 312.25 = 374 crore
Total assets (excluding intangible assets) = 620 -12 = 608 crore
Financial assets are >50% of total assets (excluding intangible assets)

•Financial income = 68 crore

Gross income = 118.75 crore
Financial income is >50% of gross income.
• Yes, company can apply for registration as NBFC under section 45-IA of RBI Act.

Q11) CA M is appointed as the Statutory auditor of Fincorp Limited for the financial year
2023-24. This company is an NBFC covered under Non-Banking Financial Company -
Systemically Important Non Deposit-taking company. To comply with the RBI Prudential
Norms for asset classification, Fincorp Limited has made the following provisioning in respect
of loans, advances and other credit facilities as on 31st March, 2024:
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CA SHANKAR LAKHWANI # Audit Made Easy
Particulars Balance outstanding on Provision for FY 2023-24
31/03/24 (Rs.) (Rs.)
Standard assets 200 crores NIL
Sub-standard assets 15 crores (Fully secured) 1.50 crores
Doubtful assets (1 to 3 8 crores (Fully secured) 2 crores
years)
Loss assets 2 crores 2 crores
Total Provision for NPA 5.50 crores
CA M is of the opinion that the company has not done the provisioning correctly. Is the
opinion of CA M correct? In this context, explain the provisioning requirements applicable to
this NBFC and comment on the provision for NPA made by the company.

Provisioning requirement-

Categories of NPA Provision required in %

Standard assets 0.40%
Sub standard assets 10%
Doubtful assets (up to 1 to 3 years) 30%
Loss assets 100%

Categories of Balance Provision Provision Provision made

NPA outstanding on required in % required in ₹ by company in ₹
31/03/24 (Rs.)
Standard assets 200 crores 0.40% 80 lacs NIL
Sub standard 15 crores (Fully 10% 1.5 crore 1.50 crores
assets secured)
Doubtful assets 8 crores (Fully 30% 2.4 crore 2 crores
(up to 1 to 3 secured)
years)
Loss assets 2 crores 100% 2 crore 2 crores
Total provision for NPA 6.7 crore 5.5 crore
Provisioning for Substandard Assets and Loss Assets is in accordance with the prescribed RBI
Prudential Norms whereas in case of Standard Assets and Doubtful Assets it is not as per
provisioning norms. Thus, CA M is correct in his opinion that the company has not done the
provisioning correctly.

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CA SHANKAR LAKHWANI # Audit Made Easy
PSU AUDIT

Q1) One of the financial committees of Parliament examines physical & financial performance
of PSU. It also examines audit findings of CAG in respect of which action is to be taken by
PSU. It also includes in its report performance of company. Identify the committee.

• Committee on Public Undertakings (COPU)

Q2) Statutory auditors of central government co. examines some areas, provide replies and
also impact on FS in their audit report.

• CAG Directions Auditor

(COA 2013)

Manner in which accounts are required to be audited

• CAG Audit Report Auditor

Directions of CAG Action taken Impact on FS

Q3) Audit of State electricity distribution Company to ascertain whether -

Total cost is Tariff orders are Internal control is Metering and

recovered implemented efficient billing is proper
What kind of audit is this and state 2 observations and steps to plan the audit.

• Performance audit
• 2 observations –

Non-replacement of defective metres Under charging meter rent

Defective meters > Permissible limit (1%) Normal = ₹30/month (Single phase) &
₹40/month (Three phase)
Replacement took > 1 month Under charging ₹60 lakhs from 3 lakh customers
Loss & consumer disputes
Planning for performance audit/factors considered/steps.

1) Understanding entity/programme.
2) Defining objectives and scope of audit.
3) Determining audit criteria.
4) Deciding audit approach.
5) Developing audit questions.
6) Assessing audit team skills and whether outside expertise required.
7) Preparing audit design matrix.
8) Establishing time table and resources.
9) Intimation of audit programme to audit entities.

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Q4) Issues addressed by performance audit

Economy Efficiency Effectiveness

Q5) B Limited, company wholly owned by central government was disinvested, resulting in 40%
shares held by public. Shares are listed on BSE and all listing requirements are applicable.
Sam, finance manager says that since company is listed, so private company rules will be
applicable and CAG will not have any role to play. Comment.

• As per COA 2013, Govt company: Co. in which minimum 51% paid up share capital is held by –

o Central Government
o State government
o Partly by Central government/state government
o & includes subsidiary company of government company
• Auditors of government company are chartered accountants appointed by CAG.
• CAG gives directions to them as to manner in which accounts are required to be audited.
• Listing irrelevant. Here, 60% shares are still with CG. Since 60% > 51%, B Ltd. is a govt co.

• CAG will be there. Finance manager is incorrect.

Q6) CA was appointed to do performance audit. He checked whether expenditure are as per
public interest and publicly accepted customs. Audit report was rejected by CAG. Comment.

Performance audit.

•Objective and systematic examination of evidence

•To provide independent assessment of performance of govt org/program /activity
•To provide info to improve public accountability & facilitate DM by parties with
responsibility to oversee corrective action.
• Performance audit addresses issues of economy, efficiency, & effectiveness
• Performance audit is done by CAG through IAAD (Indian Audit & Accounts Department).
Propriety audit.

1) Verification of trans. on tests of public interest, commonly accepted customs & std of
conduct.
2) Auditor bring out cases of improper, avoidable, infructuous exp., even if exp. is as per
rules.
• CAG is correct in rejecting audit report as this is not performance audit.

Q7) During audit of State Government department, CAG observed that law defined flat based
on some criteria. But database did not include column to enter area of building and hence,
certain buildings were identified as flats, even though criteria was not fulfilled. In absence
of data of area, auditors went for physical verification and they confirmed that buildings
were incorrectly classified as flats, resulting in department under collecting water charges.
What is this type of audit and to whom report is submitted?

Compliance audit Independent assessment of whether given SM is in compliance with

applicable criteria.
Compliance audit is concerned with –
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CA SHANKAR LAKHWANI # Audit Made Easy
A. Regularity – adherence of SM to formal criteria emanating from Laws/Reg./Agreements
B. Propriety – observance of general principles of sound FM & ethical conduct of public
officials.
Article 151 –

i. Audit report of C&AG.

ii. CG submit President laid Parliament
iii. SG submit Governor laid Legislative Assembly

Here, SG submit Governor laid Legislative Assembly

Q8) Objectives of performance audit of social security pension schemes and scholarship
schemes. What is audit criteria and how can it be determined?

Whether proper planning is done to Whether steps were Whether management was
capture data of beneficiaries taken for implementation effective
Audit criteria –

• Standards to determine whether programme meets expectations.

• Standards against which economy, efficiency & effectiveness of programme is assessed.
Determining audit criteria - Sources

a) Procedure manuals of entity.

b) Policies, standards, directives, guidelines.
c) Criteria used by same/other entity in similar activity.
d) Independent expert opinion and know how.
e) New/established scientific knowledge/other info.
f) General management and SM literature and research papers.

Q9) CAG pointed out delay in completion of work. What kind of audit is this? Describe
methods used in conducting such audit.

Performance audit.

• Objective and systematic examination of evidence

• To provide independent assessment of performance of govt org/program /activity
• To provide info to improve public accountability & facilitate DM by parties with
responsibility to oversee corrective action.
Methods to conduct performance audit -

a) Analysis of procedures – Review of systems for planning, conducting, checking, monitoring

activity.
b) Analysis of results – Auditor – output input analysis to determine efficiency of program.
c) Quantitative analysis – Examination of available data of financials like earning, revenue or
data of program implementation like details of beneficiary.
d) Case studies – Descriptive analysis of entity, scheme, program. Analysis of particular issue
within context of whole area.
e) Use of existing data – Audit staff investigates data held by entity mgt + other sources.
f) Surveys – Collecting info from members of population to assess interrelation of events &
conditions.

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CA SHANKAR LAKHWANI # Audit Made Easy
INTERNAL AUDIT

Q1) Private Limited Company – Turnover of last 3 consecutive FYs, immediately preceding FY
under audit is 49 crore, 145 crore & 260 crore. No internal audit is conducted.

• Applicability of internal audit in case of private ltd. company

o Turnover 200cr or more in last FY

• Here, internal audit is mandatory as 260 crore > 200 crore

Q2) Mr X has served in Indian Audit & Accounts Department for 25 years and has law
degree. He wants to be appointed as chief internal auditor in Private Company. Board is keen
on appointing him.

Eligibility of Internal Auditor-

Individual/firm/body corporate
•
• CA/CMA(whether in practice or not)/Decided by Board
Can be appointed as internal auditor since board can appoint any professional as may be decided
by it.

Q3) Company asks internal auditor to manage compliance tracking system and directly
correspond with regulator since scope of internal audit includes “compliance with laws and
regulations”. Comment.

• No responsibility of internal auditor to –

Manage compliance framework Take compliance decisions Resolve compliance risks

(Directly engage with regulator)
• Responsibility of management is to manage compliance framework.
• Internal auditor is responsible for auditing compliance framework & not managing it.

Q4) Factors responsible for high employee attrition rate.

Low monetary benefits Lack of labour welfare Limited promotion Job stress and work
schemes opportunities life imbalance

Q5) Demand of company’s product has fallen. This has put into question going concern
assumption. Internal auditor helped to devise new strategy. Can statutory auditor place
Reliance on internal auditor?

• Judgment ⬆️ (SA 610)

• External auditor to perform more procedures directly.
• Evaluating appropriateness of mgt’s use of GC assumption requires significant judgement.
• Statutory auditor cannot place total reliance and has to perform more procedures directly.

Q6) Important aspects considered by external auditor in evaluation of internal audit function.

Organisational status Scope of function Technical competence Due professional care

Q7) Who can be appointed as internal auditor and what work would be reviewed by him?

Eligibility of Internal Auditor-

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Individual/firm/body corporate
•
• CA/CMA(whether in practice or not)/Decided by Board
• May/may not employee of co.
Scope of Internal Auditor’s work-

Review of Internal Control System & Procedures-

•
o Assessing design,operational efficiency & effectiveness of IC System
o Consider limitations of IC-cost benefit comparison,human error,collusion
• Review of Custodianship & safeguarding of Assets-
o Verify existence of asset
o Review segregation of duties is in place
o Ensure all assets accounted fully
o Review control system for intangible assets.Eg procedures related to credit control
• Review of Compliance with Policies,Plans,Procedures & Regulations-
o Examine system of periodical review of existing policies in case of change in method
& nature of operations.
o Point out specific weakness & suggest remedial action
• Review of Relevance & Reliability of Information-
o Review information system
o Examine if reporting by exception i.e.report highlight significant & distinctive
features
• Review of Organisation Structure-
o Review manner in which activities of enterprise grouped for managerial control
o Examine reasonableness of span of control(no. of subordinates) of each executive
o Review SoD considered in org. structure
• Review of Utilisation of Resources-
o Check if proper operating std & norms established
o If wide divergence b/w actual & std performance, consider reason
• Review of Accomplishment of Goals & Objectives-
o Review objectives of enterprise to see if clearly stated & attainable
o Examine if objectives in precise quantifiable terms
Q8) Can statutory auditor ask direct assistance from internal auditor for evaluating
significant accounting estimates and assessing ROMM?

• SA 610
• Significant judgements

Assessing ROMM Evaluating sufficiency of test Evaluating appropriateness of

performed mgt’s use of GC assumption
Evaluating adequacy of Evaluating significant accounting estimates
disclosures in FS
• External auditor needs to make significant judgement. He can’t use internal auditor to
provide direct assistance.

Q9) Can statutory auditor ask direct assistance from internal auditor for external
confirmation requests & evaluation of its results?

• SA 610
• SA 505 - External auditor maintains control over external confirmation request and
evaluation of results. Not appropriate to assign responsibility to Internal auditor (IA).
• But IA may assist in assembling information to resolve exceptions.

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Q10) Reporting structure of chief internal auditor.

BoD/Audit Committee Managing Director CEO/CFO

Meaning of Internal Audit (IA)

IA provides independent assurance on effectiveness of internal control & risk mgt process to
enhance governance & achieve organizational objectives.
Eligibility of Internal Auditor-

Individual/firm/body corporate
CA/CMA(whether in practice or not)/Decided by Board
• Internal auditor is independent and free from undue influence.
• Report to -

BoD/Audit Committee Managing Director CEO/CFO

Q11) Approach to prepare internal audit plan for next year.

Developed & documented by internal auditor, in consultation with TCWG, including AC.
Developed in way that all business processes of financial & operational activities are reviewed by
internal audit function within defined time & ensuring appropriate consideration made & balance
ensured to following-
• Risk underlying business process
• Risk appetite of organization
• Value that IA can provide to org.
• Effort involved to conduct IA for particular business process
• Coverage of all auditable areas within defined time range
Q12) Steps internal auditor should take to identify gaps in expenses.

STEP 1-Obtain knowledge of business & Environment

• Meeting with stakeholders,BoD,KMP
• Understanding docs-SOPs,FS
STEP 2-Perform Audit Planning
• Plan audit engagement-SIA 310-Planning IA Assignment.Scope approved by AC/BoD
STEP 3-Gather required information
• Obtain info directly from source & check correctness & integrity
STEP 4-Perform audit checks
• Collate data & perform analytical procedures(AP) for key trends.AP as per SIA 6
• SIA 5-Sampling (to select samples)
• SIA 330-IA Documentation (for IA work papers)
STEP 5-Reporting of Internal Audit Issues
• Draft report of IA issues covering business process reviewed as per scope,audit coverage,
exclusions,gaps,etc
• Review mgt action against those agreed in previous audit & report follow up in report
• IA circulate Final report & findings to AC.
Q13) Internal auditor (IA) to present detailed report on findings & areas where immediate
action is needed to mitigate risks. What should be content of IA report to address this
requirement?

• SIA 370-Reporting results,reporting of IA result in 2 stages-

o At end of assignment,IA Report covering area,function prepared by Internal auditor
highlighting key observation.Issued to auditee;copies shared to local/executive mgt

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CA SHANKAR LAKHWANI # Audit Made Easy
o Periodically,at close of plan period,comprehensive report of all IA activities covering
entity & plan period prepared by CIA (or EP in case of external service provider).
Reporting normally quarterly & submitted to generally AC.Some part of IA Reports
may form part of periodic(Eg,Quarterly) report shared with AC.

Typical IA report includes-

• Audit scope
• Audit period
• Executive summary
• Summary of critical findings
• Detailed audit finding with elaboration on business impact & root cause of issues
Q14) Internal auditor to analyse implementation of recommendation of previous audit report &
highlight areas needing immediate attention of audit committee. What steps should be
followed by internal auditor? OR Prior audit issues are highlighted in previous internal audit
report which are still open. What are responsibilities of internal auditor?

Follow up-

• SIA 390-Monitoring & Reporting of Prior Audit Issues, CIA responsible for monitoring
closure of such issues by action plan.
• Responsibility to implement action plan is of mgt
• Internal auditor review if follow up by mgt on basis of report.If no action taken in
reasonable time-draw mgt attention.If mgt not implemented recommendations, internal
auditor ascertain reasons
• If mgt accepted recommendation, internal auditor periodically review manner & extent of
implementation & report to mgt which recommendation not implemented fully/partly
Action Taken Report of previous audit is prepared by internal auditor. Contents of Action Taken
Report –

• Reference to previous audit report containing issues.

• Implementation action agreed by mgt & target implementation date.
• Status of action taken by management -implemented/not implemented.
• Residual risk for unimplemented action.
• Audit findings not implemented for long time.
Q15) CA Karan designed substantive procedures on selected assertions in response to ROMM.
These assertions were not examined in previous year. Can he engage internal auditor to
provide direct assistance in performing substantive procedures? Indicate activities that
statutory auditor will do prior to using internal auditor for direct assistance?

• SA 610 – No, he can’t engage IA (assertions not tested last year & tested this year for
unpredictability)
• Using internal auditor to provide direct assistance –
o Counter-productive
o Defeat purpose
• Activities that statutory auditor will do prior to using IA for direct assistance –

Obtain written agreement from authorised Obtain written agreement from internal
representative of entity that internal auditor is auditor that they will keep matters
allowed to follow external auditor’s instructions confidential & will inform threat to objectivity

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CA SHANKAR LAKHWANI # Audit Made Easy
DUE DILIGENCE

• SWOT Analysis is part of Due Diligence

o Strengths - Increase in sales, profit and timely service of debt
o Weaknesses – Lack of good staff
o Opportunities – Entering into export market
o Threats – Rise in competition and demand slump
INVESTIGATION

Q1) Management is suspicious over manpower expenditure. There is system where time cards
are punched by employees for attendance. Suggest procedures to perform as investigator.

Attendance analysed by Surprise visit to see actual Helps to ascertain

in & out time number of workers may reveal • Discrepancies in attendance
ghost workers • Actual work done
Q2) Bank received application seeking sanction of loan. Manager appoints you to do
investigation of company that wants loan. List out points you will cover.

1)Purpose of loan & manner in which borrower proposes to invest loan amt.
2)Financial standing & reputation for business integrity of directors /officers of co.
3)History of growth & development of co. & performance in past 5 years.
4)If loan application to other bank/FI was made & if yes, reason of rejection.
5)If company authorised by MoA/AoA to borrow money for purpose for which loan will be
used.
Q3) Mr. A who proposes to buy proprietary business of Mr. B, engages you as investigator.
What areas you will cover?

1) Unexpired period of patent owned by vendors.

2) Reason of sale of business and effect on turnover and profit.
3) Length of lease under which premises held.
4) Age of staff and prospects of continuing.
5) Valuation of goodwill.
Q4) Factors to assess future maintainable turnover.

1) Political & economic considerations - Are govt policies likely to promote extension of
market for goods to other countries?
2) Marketability – Is it possible to extend sales into new markets OR they have been fully
exploited?
3) Trend – Whether in past, sales have been increasing consistently OR fluctuating?
4) Competition – What is likely effect on business if other manufacturers enter same field OR
if products sell in competition are placed on market at cheaper price?
Q5) Mr. Aman is interested to invest money in company and appoints you as advisor. You have
to investigate audited financial statements and ensure that valuation of shares of the
company on the basis of FS is appropriate. What process will be used for checking and can
reliance be placed on the already audited statement of accounts?

• If investigation launched due to doubt in audited FS, no question of reliance arises.

• If investigator is requested to establish value of share, investigator is entitled to put
reliance on audited FS, unless he finds that audit done very casually.
• If accounts weren’t audited by qualified accountant - duty to get accounts properly verified
• If accounts prepared by professional accountant – investigator can accept them as correct.

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CA SHANKAR LAKHWANI # Audit Made Easy
• It is to be ensured that accounts are prepared with objectivity and without biasness.
Q6) Areas of verification & procedure for verification of inventory defalcation.

Write examples of inventory fraud + verification procedures (Ans. 21 of Magic Charts – Pg 49)
Q7) What steps investigator will keep in mind while verifying assets & liabilities in balance
sheet of borrower company which has been furnished to bank?

• Fixed assets -Description of item, gross value, depreciation rate & total depreciation
• Inventory – Types (raw material, WIP, Finished goods) & basis of valuation
• Trade receivables – Composition disclosed, whether collected or bad debts
o Total outstanding amount segregated as follows:
▪ Debts due in respect of which credit period not expired
▪ Debts due within 6 months
▪ Debts due but not recovered for over 6 months
• Investments – Schedule to be prepared. Disclose date of purchase, cost and market value.
• Secured loans – Debentures & other loans included together in separate schedule. Amount
outstanding for payment & due date of payment should be shown.
Investigating accountant should ascertain whether application for loan to other bank has been
made. If so, its result should be examined.

FORENSIC ACCOUNTING

Q1) Key content of Forensic Accounting & Investigation Report.

1) Title, addressee, distribution list (if any)

2) Scope & objectives of assignment
3) Approach & broad work procedures
4) Executive summary of results – important aspects & findings
5) Reference to use of expert, if applicable
6) Fact – assignment – FAIS/material departure
7) List of finding supported by key evidence & source of evidence
8) Assumptions, limitations & disclaimer of assignment
9) Conclusion
Q2) CA is performing forensic accounting engagement. His team failed to keep record of each
person gathering evidence, date and time of collection and storage of evidence.

• Professional undertakes scrutiny and detailed examination of all transactions so that

evidence is suitable in court of law.
• Team should keep chain of custody till evidence is presented in court.
• If gaps in chain of custody – evidence may be challenged in court/become inadmissible.
• Here, team failed to maintain chain of custody. Objective of forensic accounting defeated.
Evidence may be challenged in court/become inadmissible.
Q3) You are forensic professional appointed by insurance company. What points to keep in
mind while dealing with Product Liability Insurance (PLI) policy claims?

• Documents are required from 3rd parties & they are unwilling to provide it to forensic
accountant.
• Independence of forensic accountant.
• Company willing to negotiate to salvage reputation.
• Analysis of date of loss and whether it falls in policy.
• Policy terms and conditions to be checked for quantification of liability.

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CA SHANKAR LAKHWANI # Audit Made Easy
EMERGING AREAS

Q1) What is sustainability reporting? Explain its benefits.

• Practice of reporting publicly on economic, environmental & social impacts.

• Information that companies provide about performance to outside world.
• Benefits –
o Helps stakeholders to understand performance
o Helps entities to focus on long-term value creation
o Helps investors make investment decisions
o Better position with B2B customers and helps to acquire new customers

Q2) Identify capital of integrated reporting.

• Increase in customers using digital mobile app and increase in digital collection
o Intellectual capital because of use of technology and innovation
• Increase in beneficiaries under CSR programme, providing value for communities and
sustainable livelihood
o Social and relationship capital
• Company secured loan and invested to purchase raw materials and machinery
o Finance capital, not manufactured capital

Q3) What type of companies have to mandatory furnish BRSR?

-SEBI – Top 1000 listed co. by market capitalization.

-Reporting under BRSR is mandatory from FY 2022-23. It was voluntary in FY 2021-22. 3 Sections

Section A – General Disclosures -Details of listed companies, products, services,

operations, employees.
-Holding, subsidiary, associate companies.
Section B – Mgt Process & Disclosures -Policy & management processes.
-Governance, leadership, oversight.
Section C – Principle-wise Performance 2 categories of KPIs
Disclosures

Essential indicators (Mandatory disclosures) Leadership indicators (Optional disclosures)

Data on training programs, environmental data Life cycle assessments, conflict mgt policy,
on energy, emissions, water, waste mgt. additional data on biodiversity, energy
consumption, supply chain mgt.

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CA SHANKAR LAKHWANI # Audit Made Easy
Q4) X Ltd is member of industry chamber and trade association. Company submits inputs on
bill/others. How to disclose in “Principle-wise performance disclosures” in BRSR? Whether
information discussed above would be disclosed mandatorily?

Principle 7 – Influence on Public & Regulatory Policy

Trade groups & industry chambers utilised when moving ahead with policy advocacy & formulation.
Essential Indicators (Mandatory disclosures) Leadership Indicators (optional disclosures)
Membership of chamber/Association Inputs provided

Q5) Discuss nature of ESG reporting. How can corporates contribute to Sustainable
Development Goals (SDGs)?

• 3 pillars of sustainability – Environment(E), Social (S), Governance(G) – ESG Reporting:

Environment(E) Climate policies, energy, waste, pollution, natural resources like electricity, water
Social(S) Relations with people & institutions like labour relations & value chain.
Governance(G) Internal practices to govern, make investment decisions & comply with law.
• ESG reporting can be both quantitative and qualitative.

Qualitative report Quantitative report

Company’s Strategy/Policy Metrics & Key Performance Indicators (KPIs) to
measure progress against goals
Mixed approach adds maximum value to quality of disclosures.
• United Nations members states adopted sustainable development to provide blueprint which
mentioned Sustainable Development Goals (SDGs).
• Write name of 3-4 SDGs.
• Corporates contribute to SDGs due to their capacity to provide solutions necessary to meet
SDGs. Companies lead in innovation and contribute to achievement of SDGs.

Q6) One of the principles emphasise that business decisions in organisation should be open to
disclosure and accessible to interested parties. What are the essence of core elements?

Principle 1 – Ethics, Transparency & Accountability

-Business decisions - open to disclosure & accessible to interested parties.

1) Entities’ governing structure develop policies for offices ensuring-ethics not compromised.
2) Info wrt policies along with performance – made available to stakeholders.
3) In case of adverse effects, more care to be taken for transparent disclosures.
4) Entities in value chain – encouraged to adopt these principles.
5) Entities - proactively respond to outside entities that violate 9 principles of BRSR, Eg,
suppliers, distributors.

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ICAI CASE STUDY –

Agrochemical companies - A and B. Company A and B are part of top 1000 listed companies.

Focus of “A” is on complying with ESG while “B” focuses on profit. “A” decided to eliminate
red labelled product & increase R&D expense. It also eliminated yellow labelled product. “A”
is planning to incur expense to improve backend & provide unique labelling system that is
user-friendly.

Company B is focused on red and yellow labelled products. Company A’s revenue fell by 8%
but it won’t face potential downside. Company B has 9% revenue growth and planning to
increase production of DDT (Red labelled product). Company B is approached by regulatory
authorities for investigation and additional tests.

Qa) Reporting requirements for 2 companies

• Both - mandatorily provide BRSR reporting as they are part of top 1000 listed companies.

Qb) Which company absorbed impact of future changes?

Company A –
•
o Eliminate red labelled and yellow labelled products
o Increase in R&D expenditure
o Expenditure to improve labelling
• Principle 2 – R&D expenditure and eliminate red/yellow products.
• Principle 9 – Unique labelling system & inform consumers about safe & responsible usage.
• Principle 3 – Products needing toxic agrochemicals harmful for workers are discontinued.
• Principle 6 – Discontinuing products harmful to soil.
Qc) Points of consideration for auditors of A and B.

• A - Complies with regulatory norms.

• B - Plans to increase production of DDT (red labelled product)
• A and B’s auditor –
o Obtain SAAE for compliance with L/R
o Design audit procedures accordingly
• B’s auditor –
o SA 250: Non-compliance with L/R – fines & litigation - material effect on FS leading
to material misstatement.
o Investigation against company.
o SA 570: Non-compliance can result in claims company unable to satisfy.
• A’s auditor -
o Obtain assurance from compliance.
o Fall in revenue is not a matter of concern as it is transitory phase.

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PROFESSIONAL ETHICS

Miscellaneous

Q1) Practicing CA suspended from practice for 6 months and surrendered his COP. During
period of suspension, though he didn’t undertake audit assignment, he undertook
representation assignment for income tax, whereby he would appear before tax authorities in
his capacity as CA.

OR

Mr. Dice, a practising Chartered Accountant was ordered to surrender his Certificate of
Practice and he was suspended for one year on certain professional misconduct against him.
During the period of suspension, Mr. Dice, designating himself as GST Consultant, did the
work of filing GST returns and made appearance as a consultant before various related
authorities. He contended that there is nothing wrong in it as he, like any other GST
consultant, could take such work and his engagement as such in no way violates the order of
suspension inflicted on him. Is he right in his contention?

As per relevant provisions of Chartered Accountants Act, 1949

-If member is suspended and is not holding COP, he cannot take up such practice in other capacity.
-Once person becomes member of Institute, he is bound by CA Act. If he appears before income
tax tribunal, he could appear only in his capacity as CA. He couldn’t set them at naught by
contending that even though he continues to be member of Institute & has been punished by
suspension from practice, he would be entitled to practice in other capacity.
-Member of Institute can have no other capacity in which he can take up such practice.
Summary – CA’s name removed from membership – During period of removal, won’t appear before
tax authorities.
Conclusion - He is guilty of professional misconduct.

Q2) CA Shankar is auditor of Reliance. Audit fees of last year is pending. CA might be
tempted to issue favourable report so that Reliance is able to secure loan to settle
outstanding audit fees. Audit team is not complying fundamental principles of auditing. Explain
types of threats.

Self – interest threat Financial or other interest – influence accountant’s judgement.

Self – review threat Accountant not appropriately evaluate result of judgement made/activity
performed by accountant.
Advocacy threat Promote client’s position to the point that accountant’s objectivity
compromised.
Familiarity threat Long/close relation with client – accountant too sympathetic to their
interests.
Intimidation threat Accountant deterred from acting objectively due to pressure.
Q3) Mr A, practicing CA agreed to select and recruit personnel, conduct training programmes
on behalf of client where he is not providing assurance service. Is this professional
misconduct?

• Members deemed to be in practice -

Individually/partnership, for remuneration –

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Render other services
Sec 2(2)(iv) of CA Act, 1949 -permits practicing CA to render ‘management consultancy services’
(MCS)

MCS includes Personnel recruitment and selection. Personnel recruitment & selection includes
development of HR, training program, work study, job description, job evaluation, workload
evaluation.

• Thus, Mr. A is not guilty of professional misconduct.

Q4) Mr X & Y, partners of CA firm, one incharge of head office and another incharge of
branch at distance of 80 km from municipal limits, puts up name board of firm in both
premises and residence. Comment.

Name board: No bar on putting in residence of member with designation Chartered Accountant but
Name board of member & not firm.
Conclusion – CAs are guilty of misconduct. Distance given in question is irrelevant.
Q5) Mr K, practicing CA has office in suburbs of Chennai. He opens another office which is
within the city and at distance of 30 km from his office in suburb. For running new office,
he employed retired income tax Commissioner, who is not a CA. Comment.

CA Firm > 1 office in India – each office in separate charge Failure – professional misconduct
of member of ICAI.
• Exemption: 2nd office w/o separate charge of ICAI member – 2nd office in

same premises same city 50km from municipal limits of city in which 1st office
Declare main office.

• Here, within the city. So, no misconduct. But Mr K bound to declare which one is main office

Q6) Mr L, chartered accountant didn’t maintain books of account for his professional earnings
on the ground that his income is less than limits prescribed u/s 44AA of Income Tax Act.

Council General Guidelines, 2008

Chapter V - Maintenance of books of accounts

Practicing CA – keep proper BOA – Cash book & Ledger

• It doesn’t matter whether section 44AA of Income Tax Act applies or not.
• Professional misconduct

Q7) Mr G is a partner in XYZ & Co., CA Firm having six partners. Mr G alone had signed 290
tax audit reports consisting of both corporate and non-corporate assessees.

Council General Guidelines, 2008

Chapter VI – Tax audit assignments u/s 44AB of Income Tax Act, 1961

• Practicing CA shall not accept > than 60 tax audits in FY.

• CA Firm – 60 tax audits for each partner.
• 1 CA is partner of 2 firms/sole proprietor = Together shouldn’t exceed 60.
• Distribution in any manner.

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Total limit = 6 partners x 60 =360 tax audits. G has signed 290 tax audit reports. Remaining
partners can sign up to 70.

Conclusion – Mr G not guilty of professional misconduct, provided total number of tax audit
reports on behalf of firm doesn’t exceed 360.

Q8) Mr C accepted statutory audit of PSU Ltd, whose net worth is negative for 2022–23.
Audit was conducted for 2023–24. Accounts for 2023–24 showed liability for payment of tax
audit fees of ₹15,000 in favour of Mr E, the previous auditor. OR Statutory audit of A
limited for 2023–24 was done by CA Acharya. A Limited was in existence since 2010.Books
of accounts of A Ltd shows-

As at 31/03/25 As at 31/03/24
Equity Capital 5 5
Reserves & surplus (10) (8)
Provision for audit fees FY 2023-24 – 1 1
FY 2024-25 - 1
Mr C (CA) accepted statutory audit of A Limited for 2024–25, in spite of the fact that as
on the date of acceptance, audit fees of CA Acharya was unpaid.

Council General Guidelines, 2008

Chapter VII - Appointment of auditor in case of non-payment of undisputed fees

• Practicing CA not accept appointment as auditor of entity if undisputed audit fee of

another CA not paid.
• In case of sick unit, above prohibition doesn’t apply.
• Sick unit = unit regd for not less than 5 years, accumulated losses equal to or exceeding
net worth (negative net worth)
Conclusion – Though undisputed fees are unpaid, Mr C not guilty of professional misconduct as
PSU Limited is sick unit.

Q9) ‘A’ is auditor of Z Limited, which has turnover of 200 crore. Audit fee is ₹50 lakhs.
Company offers ‘A’ an assignment of management consultancy for ₹ 1 crore. ‘A’ seeks your
advice on accepting assignment.

Council General Guidelines, 2008

Chapter IX – Appointment as statutory auditor
• Practicing CA not to accept statutory audit of
o Public sector undertakings/government co./listed co.
o Public company with turnover of ₹ 50 crores or more in a year
Where he accepts other work for same undertaking/co. on remuneration exceeding statutory
audit fees.
• Other work means MCS but not includes CAR–
o Certification work done by statutory auditors,
o Audit under any other statute,
o Representation before Authority
• Misconduct by ‘A’ if he accepts management consultancy assignment.
Q10) D, who conducts tax audit has received audit fees of 2,50,000 on progressive basis for
tax audit for the year ended 31/3/2024. Audit report was signed on 25/05/2024 OR Mr R
has been appointed as a statutory auditor of F Limited. Whole audit fee shall be payable in 4

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instalments of ₹3 lacs each and shall be paid after every review done on quarterly basis. Full
and final payment shall be done after the yearly FS and auditor report are released. Firm
received first two payments on time but third payment, which was supposed to be received in
the month of January was received in March along with remaining part of the audit fees.

Council General Guidelines, 2008

Chapter X - Appointment of auditor when he is indebted to concern

•Practicing CA /partner/relative not to accept appointment while indebted/given guarantee

/provided security for limits fixed in statute & in other cases for > ₹1,00,000/-
• COA 2013 – Indebtedness >5 lac, Guarantee & security>1 lac.
• Progressive fees – No indebtedness
Conclusion – No misconduct

Q11) P, Practicing CA provides management consultancy services to his clients. During 2024,
looking to the growing needs of clients, he also advised them on portfolio management
services whereby he managed portfolio of his clients. Is P guilty of professional misconduct?
OR Mr. P, practicing CA provides guidance on post-issue activities (listing of instruments,
dispatch of certificate, refunds). During 2024, looking to the growing needs of clients, he
also advised them on portfolio management services whereby he managed portfolio of his
clients. Is P guilty of professional misconduct? OR CA P accepted assignment as advisor &
consultant to issue. Besides acting as advisor, he also underwrote issue of company to extent
of 25% at 1% commission. Remaining shares are underwritten by bank.

• Members deemed to be in practice -

Individually/partnership, for remuneration –

Render other services

Sec 2(2)(iv) of Act -permits practicing CA to render ‘management consultancy services’ (MCS)

• Acting as advisor/consultant to issue, including matters like-

o Drafting of prospectus, memorandum, listing agreement, completing formalities with
SEBI, ROC.
PUB (Portfolio mgt, Underwriting, Broking) not permitted.
P is guilty of misconduct under CA Act, 1949

Q12) Mr G, Practicing CA has office in Mumbai. Due to increase in professional work, he

opens another office in suburb of Mumbai, which is 80 km away from municipal limits of city.
For running new office, he employed 3 retired income tax officers. Is he guilty of
professional misconduct?

CA Firm > 1 office in India – each office in separate charge Failure – professional misconduct
of member of ICAI.
• Exemption: 2nd office w/o separate charge of ICAI member – 2nd office in

same premises same city 50km from municipal limits of city in which 1st office
Declare main office.

Conclusion – Mr. G is guilty of professional misconduct since 80km > 50km.

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Q13) CA Shankar gave advisory services, GST consultancy, compilation engagement, and ERP
services to PR Private Limited. Later, it was found that PR Private Limited was involved in
money laundering. CA Shankar was asked to provide details of company. CA Shankar refused
on grounds that he gave only consultancy services to company and wasn’t supposed to keep
information about company. Is CA Shankar right?

• Contention of CA Shankar is invalid.

KYC Norms for CA in Practice

Mandatory & all assignments & attestation functions.

Client – Corporate Entity

• General Info- Name & address of entity + business description + Name of parent co. in case
of subsidiary + copy of last audited FS
• Engagement Info- Type of engagement
• Regulatory Info- co. PAN, CIN,DIN, Directors’ Names & addresses
Q14) CA Vaayu is auditor of Viva Limited having turnover of more than 200 crores. Audit
fees is 80 lakhs. Company offers him assignment of representation before Income Tax
Tribunal for 1.75 crores. CA Vaayu accepted assignment.

Council General Guidelines, 2008

Chapter IX – Appointment as statutory auditor
• Practicing CA not to accept statutory audit of
o Public sector undertakings/government co./listed co.
o Public company with turnover of ₹ 50 crores or more in a year
Where he accepts other work for same undertaking/co. on remuneration exceeding statutory
audit fees.
• Other work means MCS but not includes CAR–
o Certification work done by statutory auditors,
o Audit under any other statute,
o Representation before Authority
• Here, representation work.
• Conclusion – No misconduct on Vaayu’s part if he accepts assignment of representation.
Q15) Siri Limited, listed Company has installed pollution control equipment for processing
pollutants so that before discharge, level of pollution is kept low. Company managed to get
pollution clearance certificate by unfair means. Amount of 18.75 lakhs has been incurred for
arranging clearance certificate and amount incurred unlawfully had been booked as pollution
recycling expenditure. The matter had not reached TCWG and director finance, who is a CA,
came to know of these matters on review of major expenditure incurred during period.
Comment on action/responses that is expected of director finance, keeping in mind NOCLAR.

• Applicability of NOCLAR in India:

Professional accountant Applicable to Senior professional accountants (KMP) in service, being

in service employees of listed entities.

1) NOCLAR takes into a/c NC that causes substantial harm resulting in serious consequences in
financial/non-financial terms.
2) NOCLAR is related to affect of NC on investors, creditors, employees, public.

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3) NOCLAR– imminent breach of L/R – disclose matter immediately to authority to prevent
consequences.
• Steps to be taken for responding to NOCLAR:

i)Obtaining understanding of matter ii)Addressing the matter iii)Seeking advice

iv)Determining whether further v)Imminent Breach vi)Determining whether to
action is needed disclose matter to
appropriate authority
vii) Documentation
Q16) Disclose circumstances where professional accountants are required to disclose
confidential information. In deciding whether to disclose confidential information, what are
the points that should be kept in mind?

Confidentiality – Respect confidentiality of info acquired as result of professional relations. But

following are circumstances where accountant reqd to disclose confidential info –

1) Disclosure required by law.

2) Disclosure permitted by law and authorised by client.
3) There is professional duty/right to disclose, when not prohibited by law :
a. To comply with requirement of Peer review or quality review of ICAI.
b. To respond to inquiry/investigation by professional body.
c. To protect professional interest of accountant in legal proceedings.
d. To comply with Technical & prof. std.
-In deciding whether to disclose confidential info, accountant should consider following –

• Whether interest of 3rd party – harmed.

• Whether all relevant info is known & substantiated.
• Type of communication and to whom it is addressed.
• Whether parties to whom communication is addressed are appropriate recipients.
Q17) CA Kumar runs proprietor firm. He maintains notes in his mobile where he records fee
received from various clients. Using these records, he prepares and files income tax return.

Council General Guidelines, 2008

Chapter V - Maintenance of books of accounts

Practicing CA – keep proper BOA – Cash book & Ledger

• Notes maintained in Mobile can’t be treated as books of accounts.
• Professional misconduct

Q18) CA Ram, practicing CA is well known for expertise in GST and he doesn’t provide
assurance services. He is approached by ‘X Limited’ to file appeal in tribunal against GST
demand of 6 crore, which was imposed by Commissioner (Appeals) and to represent X Limited
in this matter. CA Ram offers to accept fee of 3.5 lacs for filing the appeal and pleading at
GST Tribunal. Comment.

• Section 2(2)(iv) of CA Act, 1949

Members deemed to be in practice -

Individually/partnership, for remuneration –

Render other services

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• Member deemed in practice if he in professional capacity acts as representative for
costing/ financial/tax matters
• CA Ram is not guilty of professional misconduct

Q19) M & Co., a sole proprietary Chartered Accountant firm in practice with an office in a
busy belt of a city, had great difficulty in regularly attending to the consultancy needs of his
clients who are mostly located in an industrial cluster in a nearby outskirt which is situated
at a distance of 26 kms from the office of the firm. To mitigate the difficulty, a
facilitation centre was opened in the industrial cluster. The proprietor managed, both the
office and the facilitation centre, by himself. No intimation was made to the ICAI. Examine
whether there, is any professional misconduct in this respect.

CA Firm > 1 office in India – each office in separate charge Failure – professional misconduct
of member of ICAI.
• Exemption: 2nd office w/o separate charge of ICAI member – 2nd office in

same premises same city 50km from municipal limits of city in which 1st office
Declare main office.

• Though distance between his office and facilitation centre i.e. sort of second office is
within prescribed range i.e. 50 kilometres but M& Co., will be liable for misconduct as
prescribed intimation about facilitation centre and main office should be sent to the
Institute of Chartered Accountants of India.

Q20) CA is subject to threats in compliance with fundamental principles & is worried about
engagement specific threats. Tell engagement specific safeguards to ward off threats.

1) Assigning additional time & qualified personnel to tasks.

2) Having appropriate reviewer, who was not team member.
3) Using different partners & engagement teams for provision of non-assurance services to
assurance client.
4) Involving another firm to perform/reperform part of engagement.
5) Separating teams when dealing with confidential matters.
Q21) Z started practice in hill station at Kodaikanal. He then set up temporary office in
Madurai (100km away from main office). Madurai office was taken on rent for April, May,
June. His regular office was not closed in these 3 months & he was incharge of both offices.

CA Firm > 1 office in India – each office in separate charge Failure – professional misconduct
of member of ICAI.
• Exemption to members practicing in hill areas. 5 conditions:
1) Firm allowed to open temporary offices in city in plains for period upto 3 months in a yr.
2) Regular office not closed during this period & correspondence made there.
3) Name board in temporary office not displayed at other times.
4) Temporary office not mentioned in letterhead/visiting card as place of business.
5) Before commencement of every winter, inform Institute that it is opening temporary office
from particular date & after office closed, intimation sent to Institute by regd post.
• Here, temporary office was open in plains for only 3 months & regular office not closed.
• Z is not guilty of professional misconduct, assuming he informed Institute.

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Q22) P,Q,R are 3 partners. All partners are exclusively associated with firm in practice and
are not doing practice individually. They have signed following reports.

44AB 44AD
P 10 15
Q 60 5
R 100 5
Council General Guidelines, 2008

Chapter VI – Tax audit assignments u/s 44AB of Income Tax Act, 1961

• Practicing CA shall not accept > than 60 tax audits in FY.

• CA Firm – 60 tax audits for each partner.
• 1 CA is partner of 2 firms/sole proprietor = Together shouldn’t exceed 60.
• Audits under 44AD/44ADA/44AE not taken into a/c.
• Distribution in any manner.
• Here, 3 partners x 60 audits = 180 tax audits (max limit). Limit exhausted=170.
• 25 audits under section 44AD not to be taken to account
• Since P, Q, R have undertaken 170 audits which is within specified number, there is no
professional misconduct.

Q23) MNC Private Ltd appointed CA Piyush for ROC work & preparation of minutes. CA
Piyush charged his fees depending on complexity and time spent by him. Later on, MNC
Private Ltd filed a complaint against CA Piyush to ICAI that he has charged excessive fees
for assignment compared to scale of fees recommended by committee of ICAI.

• Prescribed scale of fees is recommendatory in nature.

• Charging excessive fees doesn’t constitute misconduct.
• This, contention of MNC Private Limited is not tenable.
Schedules

Q1) C, Chartered Accountant, in practice allowed his brother-in-law Mr. P, who is not a
Chartered Accountant, to practice in the name of CA C. He also allowed CA T, who is an
employee in his firm to practice in the name. Whether CA C is correct in allowing his
brother-in-law Mr. P and CA T employee of his firm to practice in his name.

• Clause (1) of Part I to the First Schedule to Chartered Accountants’ Act 1949
• Conclusion: CA C will be held guilty of professional misconduct for allowing Mr. P who is not a
Chartered Accountant to practice in his name as a chartered accountant as per Clause (1) of
Part I to the First Schedule. But he can allow CA T, who is employee, to practice in his name.

Q2) Mr. Qureshi, Chartered Accountant, in practice died. His widow proposes to sell the
practice of her husband to Mr. Pardeshi, Chartered Accountant, for Rs.5 lakhs. The price
also includes right to use the firm name - Qureshi and Associates. Can widow of Qureshi sell
the practice and can Mr. Pardeshi continue to practice in that name as a proprietor?

• With reference to Clause (2) of Part I to the First Schedule to Chartered Accountants
Act, 1949, the Council of the Institute of Chartered Accountants of India considered
whether the goodwill of a proprietary concern of chartered accountant can be sold to
another member who is otherwise eligible, after the death of the proprietor.

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It lays down that the sale is permitted subject to certain conditions. It further resolved
•
that the legal heir of the deceased member has to obtain the permission of the Council
within a year of the death of the proprietor concerned.
• Conclusion: Thus, in a given case, the widow of Mr. Qureshi, who has proposed to sell the
practice for Rs.5 lakhs is in effect proposing the sale of goodwill. Thus, the act of Mrs.
Qureshi is permissible and Mr. Pardeshi can continue to practice in that name as a
proprietor.
ALTERNATIVE QUESTION -Death of proprietor (CA Y) on 15/09/24. His wife sold practice
on 30/09/25.Can his wife sell her husband’s practice & can the purchaser of goodwill practice
in the name of CA Y?

Ans) No, his wife can’t sell & purchaser of goodwill can’t practice in name of CA Y since name of
firm is kept in abeyance upto 1 year from death of proprietor. Legal heir has to obtain permission
of Council within a year of death of proprietor.

Q3) Mr. S, a Chartered Accountant published a book and gave his personal details as the
author. These details also mentioned his professional experience & association with CA Firm.

• Clause (6) of Part I of the First Schedule to the Chartered Accountants Act 1949.
• Conclusion: Mr. S, being a chartered accountant in practice, has committed professional
misconduct by mentioning his professional experience & association with CA Firm.
Q4) M/s XYZ, a firm of Chartered Accountants created a website “www.xyzindia.com”. The
website besides containing details of the firm and bio-data of the partners also contains the
passport size photographs of all the partners of the firm.

• Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949, a
chartered accountant of the firm can create its own website using any format subject to
guidelines. But the website should be so designed that it does not solicit clients or
professional work and should not amount to direct or indirect advertisement.
• The guidelines of the ICAI to allow a firm to put up the details of the firm, bio-data of
partners and display of a passport size photograph.
• In the case of M/s XYZ all the guidelines seem to have been complied and there appears to
be no violation of the Chartered Accountants Act 1949 and its Regulations.
Q5) M/s LMN, a firm of Chartered Accountants responded to a tender from a State Government
for computerization of land revenue records. For this purpose, the firm also paid Rs.50,000
as earnest deposit as part of the terms of the tender.

Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949

• Tender Services -

CA with min. Fee (audit/attestation) All (land revenue computerization)

Responding to tenders, advertisement and circulars-

• Refer above chart.

• EMD/security deposit – allowed to pay.
• Cost sheet maintained.

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Conclusion: Since computerization of land revenue records does not fall within exclusive areas for
chartered accountants, M/s LMN can respond to tender as well as deposit Rs.50,000 as earnest
deposit and shall not have committed any professional misconduct.

Q6) Mr. Honest, a Chartered Accountant in practice, wrote two letters to M/s XY Chartered
Accountants a firm of CAs; requesting them to allot him some professional work. He also wrote
a letter to M/s ABC, a firm of Chartered Accountants for securing professional work. Mr.
Clever, another CA, informed ICAI regarding Mr. Honest's approach to secure the professional
work. Is Mr. Honest wrong in soliciting professional work? OR Mr. Honest started project
consultancy work & sent mail to all CAs in the country informing them of his services & for
securing professional work.

Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949

• Nothing construed as prohibiting-

CA from securing work from practicing CA

Conclusion: Mr. Honest has not committed any professional misconduct by soliciting professional
work.

Q7) A practising Chartered Accountant uses a visiting card in which he designates himself,
besides as Chartered Accountant, as a Tax Consultant.

• Clause (7) of Part I of the First Schedule to the CA Act, 1949

• Conclusion: It is improper to use designation "Tax Consultant" since neither it is a degree
of a University established by law in India or recognised by the Central Government nor it is
a recognised professional membership by the Central Government or the Council.
Q8) B, a Chartered Accountant in practice is a partner in 3 firms. While printing his personal
letter heads, B gave the names of all the firms in which he is a partner.

• Clause (7) of Part I of the First Schedule to the Chartered Accountants Act, 1949
• There is no prohibition for printing names of all the three firms on the personal letterheads
in which a member holding Certificate of Practice is a partner.
• Conclusion: Thus, B is not guilty of any misconduct under the Chartered Accountants Act,
1949.
Q9) The offer document of a listed company in which Mr. D, a practising Chartered Accountant
is a director mentions the name of Mr. D as a director along with his various professional
attainments and spheres of specialisation.

• Prospectus/public announcements with CA as directors- Clause 6 & 7 of Part I of First

Schedule to CA Act,1949. Don’t advertise professional attainments. Expression “Chartered
Accountant” is permissible. Expertise, specialisation, knowledge not published. Directorships
held in other companies can be given but name of CA firm shouldn’t be given.

• Conclusion: Mr. D would be held to be guilty of professional misconduct.

Q10) A Chartered Accountant in practice, empanelled as an Insolvency Professional (IP) has
mentioned the same on his visiting cards, letter heads and other communications also. A person
residing in his neighbourhood, has filed a complaint for professional misconduct against the said
member for such mention of IP.

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• Clause (7) of Part I of First Schedule to the Chartered Accountants Act, 1949
• Can mention ‘Insolvency professional’/‘Regd valuer’ on visiting card & letterhead.
• “Insolvency Professional” - Title recognised by the Central Government.
• Conclusion: Thus, complaint of neighbour is not valid.
Q11) Mr. X, a Chartered Accountant accepted his appointment as tax auditor of a firm under
Section 44AB, of the Income-tax Act,1961 and commenced the tax audit within two days of
his appointment since the client was in a hurry to file Return of Income before the due date.
After commencing the audit, Mr. X realised his mistake of accepting this tax audit without
sending communication to the previous tax auditor. In order to rectify his mistake, before
signing tax audit report, he sent a registered post to the previous auditor and obtained the
postal acknowledgement. Will Mr. X be held guilty under the Chartered Accountants Act?

• Clause (8) of Part I of First Schedule to the Chartered Accountants Act, 1949
• Mr. X will be held guilty since he has accepted the tax audit, without first communicating with
the previous auditor in writing.
• The object of the incoming auditor communicating in writing with the retiring auditor is to
ascertain whether there are any circumstances which warrant him not to accept the
appointment
• Conclusion: Therefore, Mr. X will be held guilty of professional misconduct.
Q12) W, a Chartered Accountant had sent letters under certificate of posting to the previous
auditor informing him his appointment as an auditor before the commencement of audit by him.

• Clause (8) of Part I of First Schedule to the Chartered Accountants Act, 1949
• Mere posting of letter “under certificate of posting” isn’t sufficient. Positive evidence of
delivery needed –
o Communication by letter sent through “Registered acknowledgement due “
o By hand against written acknowledgement.
o Acknowledgement of communication from retiring auditor’s email address, registered
with ICAI/last known official email address
o UDIN generated on UDIN Portal.
• Conclusion: Hence “W” was guilty of professional misconduct under Clause (8) of Part I of
First Schedule to the Chartered Accountants Act, 1949
Q13) CA Raja was appointed as the Auditor of Castle Ltd. for the year 2023-24. Since he
declined to accept the appointment, the Board of Directors appointed CA Rani as the auditor
in the place of CA Raja, which was also accepted by CA Rani.

o Board can appoint the auditor in the case of casual vacancy under section 139(8) of the
Companies Act, 2013. The non-acceptance of appointment by CA Raja does not constitute a
casual vacancy to be filled by the Board. In this case, it will be deemed that no auditor was
appointed in the AGM.
o As per Section 139(10) of the Companies Act, 2013 when at any annual general meeting, no
auditor is appointed or re-appointed, the existing auditor shall continue to be the auditor
of the company. The appointment of the auditor by the Board is defective in law.
o Clause (9) of Part I of First Schedule to the Chartered Accountants Act, 1949
o Conclusion: CA Rani is guilty of professional misconduct since she accepted the appointment
without verification of statutory requirements.

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Q14) Mr. P a practicing chartered accountant acting as liquidator of AB & Co. charged his
professional fees on percentage of the realization of assets.

• Clause (10) of Part I of First Schedule to the Chartered Accountants Act, 1949
• Exception: Reg 192 –

Receiver/liquidator – Fees on % of realisation/disbursement of assets.

Conclusion: Therefore, Mr. P shall not be held guilty of professional misconduct as he is allowed
to charge fees on percentage of the realisation of assets being a liquidator.

Q15) A chartered accountant holding certificate of practice and having four articled clerks
registered under him accepts appointment as a full-time lecturer in a college. Also, he
becomes a partner with his brother in a business.

Clause (11) of Part I of the First Schedule to the Chartered Accountants Act, 1949
•
Specific & prior approval of Council required.
•
Conclusion: Chartered accountant is liable for professional misconduct since he failed to
•
obtain specific and prior approval of the Council in each case.
Q16) Mr. A, a practicing Chartered Accountant, took over as the executive chairman of
Software Company on 01-04-2024. On 10-04-2024 he applied to the Council for permission.

Clause (11) of Part I of First Schedule to the Chartered Accountants Act, 1949.
•
He was engaged in other occupation between the period 01 04-2024 and 10-04-2024,
•
without the permission of the Council.
• Conclusion: Mr. A is guilty of professional misconduct in terms of Clause (11) of Part I of
First Schedule to the Chartered Accountants Act 1949.
Q17) CA Moksh, a leading income tax practitioner based in Mumbai with exceptional writing
skills, also serves as the editor of a non-chartered accountancy-related journal. He devotes
approximately 50% of his time to managing the journal's editorial responsibilities of this
journal. Is CA Moksh liable for professional misconduct?

Clause (11) of Part I of First Schedule of the Chartered Accountants Act, 1949,
•
Conclusion: Specific permission of the Institute has to be obtained otherwise he will be
•
deemed to be guilty of professional misconduct under Clause (11) of Part I of First
Schedule of the Chartered Accountants Act, 1949.
Q18) S, a practicing Chartered Accountant gives power of attorney to an employee Chartered
Accountant to sign reports and financial statements on his behalf.

Clause (12) of Part I of First Schedule to the Chartered Accountants Act, 1949.
•
Employee not allowed to sign.
•
Conclusion: S is guilty of professional misconduct under Clause (12) of Part I of First
•
Schedule.
Q19) CA Smart, a practicing Chartered Accountant was on Europe tour between 15-09-24
and 25-09-24. On 18-09-24 a message was received from one of his clients requesting a
stock certificate to be produced to the bank on or before 20-09-24. Due to urgency, CA
Smart directed his assistant, who is also a Chartered Accountant, to sign and issue the stock
certificate after due verification, on his behalf.

• Clause (12) of Part I of the First Schedule to the Chartered Accountants Act, 1949
• Assistant not allowed to sign.

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Conclusion: CA Smart is guilty of professional misconduct under Clause (12) of Part I of
•
First Schedule to the Chartered Accountants Act, 1949.
Q20) Mr. 'C', a Chartered Accountant holds a certificate of practice while in employment
also, recommends a particular lawyer to his employer in respect of a case. The lawyer, out
of the professional fee received from employer paid a particular sum as referral fee to Mr.
'C'.

Clause (2) of Part II of First Schedule of the Chartered Accountant Act, 1949
•
Mr. C, who beside holding a certificate of practice, is also an employee and by referring a
•
lawyer to the company in respect of a case, he receives a particular sum as referral fee
from the lawyer out of his professional fee.
• Conclusion: Mr. C is guilty of professional misconduct by virtue of Clause (2) of Part II of
First schedule.
Q21) Mr. 'G', while applying for a certificate of practice, did not fill in the columns which
solicit information about his engagement in other occupation or business, while he was indeed
engaged in a business.

Clause (2) of Part III of First Schedule to the Chartered Accountants Act 1949
•
Conclusion: Mr. G will be held guilty of professional misconduct under Clause (2) of Part III
•
of First Schedule of the Chartered Accountants Act 1949.
Q22) Mr. X, a Chartered Accountant, employed as a paid Assistant with a Chartered
Accountant firm, leaves the services of the firm on 31st December, 2024. Despite many
reminders from ICAI he fails to reply regarding the date of leaving the services of the firm.

Clause (2) of Part III of the First Schedule to the Chartered Accountants Act 1949
•
Conclusion: Mr. X is held guilty of professional misconduct as per Clause (2) of Part III of
•
the First Schedule to the Chartered Accountants Act 1949.
Q23) YKS & Co., a proprietary firm of Chartered Accountants, was appointed as a
concurrent auditor of a bank. YKS, the proprietor, used his influence to get a loan and
thereafter failed to repay the loan. OR Mr R, Practicing CA approached bank manager for
loan of 20 lakhs. He informed to manager that if loan is sanctioned, income tax return of
manager and staff will be filed without any fees as quid pro quo.OR CA X availed loan against
his shares held as investments from a bank. He issued two cheques towards repayment of
loan. Both cheques were returned back by bank with Remarks ‘refer to drawer’. OR CA X
failed to return books of accounts of client despite many reminders from client. Client had
settled entire fees also OR CA R is elected as treasurer of regional Council of ICAI. Regional
council organised International tour through a tour operator. It was found that CA R received
a personal benefit of ₹50,000 from tour operator OR CA R didn’t reply within reasonable
time and without any cause to letter received from police station, soliciting his suggestions as
regards some non-professional work.

Clause (2) of Part IV of First Schedule to the Chartered Accountants Act, 1949
•
Chartered Accountant is expected to maintain the highest standards of integrity even in his
•
personal affairs.
• Conclusion: YKS & Co will be held guilty of other misconduct under Clause (2) of Part IV of
First Schedule to the Chartered Accountants Act, 1949.
Q24) Mr. P, a Chartered Accountant was invited by the Chamber of Commerce to present a
paper in a symposium on the issues facing Indian Leather Industry. During his presentation,

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he shared some of the vital information of his client’s business under the impression that it
will help the Nation to compete with other countries at international level.

• Clause (1) of Part I of the Second Schedule to the Chartered Accountants Act 1949.
• Conclusion: Thus, it is a professional misconduct covered by Clause (1) of Part I of Second
Schedule to the Chartered Accountants Act 1949.
Q25) Mr. J, a Chartered Accountant during the course of audit of M/s XYZ Ltd. came to
know that the company has taken a loan of Rs.10 lakhs from Employees Provident Fund. The
said loan was not reflected in the books of account. However, the auditor ignored this
information in his report. OR CA D had signed balance sheet of QR Limited, which failed to
give disclosure of charge created for ₹4 crore against corporate guarantee given in favour of
group company. Balance sheet size of company filed with ROC was ₹26 crore.

• Clause (5) of Part I of Second Schedule to the Chartered Accountants Act 1949
• Conclusion: Mr. J will be liable of professional misconduct under Clause (5) of Part I of
Second Schedule to the Chartered Accountants Act 1949.
Q26) A practicing Chartered Accountant was appointed to represent a company before the
tax authorities. He submitted certain information and explanations to the authorities on
behalf of his clients, which were found to be false and misleading.

• Clause (5) of Part I of Second Schedule to the Chartered Accountant Act 1949
• Clause (6) of Part I of Second Schedule to the Chartered Accountant Act 1949
• In given case, the Chartered Accountant had submitted the statements before the taxation
authorities. These statements are based on the data provided by the management of the
company. Although the statements prepared were based on incorrect facts and misleading,
the Chartered Accountant had only submitted them acting on the instructions of his client
as his authorized representative.
• Conclusion: Hence, the Chartered Accountant would not be held liable for professional
misconduct.
Q27) CA C who conducted statutory audit of a Haryana daily ‘New Era’ certified the
circulation figures based on Management Information System Report (M.I.S Report) without
examining the books of Account.

• Clause (7) of Part I of Second Schedule of the Chartered Accountants Act 1949
• CA C did not exercise due diligence and is grossly negligent in the conduct of his
professional duties since he certified the circulation figures without examining the books of
accounts. To ascertain the number of paid copies verification of remittances from the
agents, credit allowed to the agents for unsold copies returned, examination of books of
account is essential.
• Conclusion: CA C is guilty of professional misconduct as per Clause (7) of Part I of Second
Schedule of the Chartered Accountants Act, 1949.
Q28) Mr. D, a practicing Chartered Accountant, did not complete his work relating to the
audit of the accounts of a company and had not submitted his audit report in due time to
enable the company to comply with the statutory requirements. OR ABC Associates (CA Firm)
conducted stock audit of DEF Limited. Instead of visiting the site where stock was lying,
they relied on management information system report along with inspection report and
photographs of stock taken by the employees of DEF Limited. Photographs were also carrying
date and time printed on them.

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• Clause (7) of Part I of Second Schedule of the Chartered Accountants Act 1949
• Conclusion: Therefore, the auditor is guilty of professional misconduct under Clause (7) of
Part I of the Second Schedule to the Chartered Accountants Act 1949.
Q29) Mr. A, a Chartered Accountant, was the auditor of 'A Limited'. During the financial
year 2023-24, the investment appeared in the Balance Sheet of the company of Rs.12 lakh
and was the same amount as in the last year. Later on, it was found that the company's
investments were only Rs.25,000, but the value of investments was inflated for the purpose
of obtaining higher amount of Bank loan.

• Clause (2), (7), (8) of Part I of Second Schedule to CA Act, 1949

• The primary duty of physical verification and valuation of investments is of the management.

• However, the auditor’s duty is also to verify the physical existence and valuation of
investments, at least on the last day of the accounting year.
• The auditor should verify the documentary evidence for the value and physical existence of
the investments at the end of the year. He should not blindly rely upon the Management’s
representation.
• Conclusion: Mr. A, will be held liable for professional misconduct under Clauses (2), (7) and
(8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.
Q30) A charitable institution entrusted Rs.10 lakhs with its auditors M/s R & Co., a
Chartered Accountant firm, to invest in a specified securities. The auditors deposited it in
their Savings bank account and no investment was made in the next three months.

• Clause (10) of Part I of Second Schedule to the Chartered Accountants Act, 1949
• Conclusion: M/s R & Co. will be held guilty of professional misconduct.
Q31) Mr. K, a practicing Chartered Accountant gave 50% of the audit fees received by him
to a non-Chartered Accountant, Mr. L, under the nomenclature of office allowance.

• Clause (2) of Part I of First Schedule to the Chartered Accountants Act 1949
• It is not the nomenclature to a transaction that is material but it is the substance of the
transaction, which has to be looked into.
• Chartered Accountant had shared his profits and, therefore, Mr. K will be held guilty of
professional misconduct under the Clause (2) of Part I of First Schedule to the Chartered
Accountants Act 1949.
Q32) Mr. X started his practice from. One female candidate approached him for articleship.
In addition to monthly stipend, Mr. X also offered her 1 % profits of his CA firm. She
agreed to take both 1 % profits of the CA firm and stipend. ICAI sent a letter to Mr. X
objecting the payment of 1 % profits. Mr. X replies to the ICAI stating that he is paying 1
% profits of his firm over and above the stipend to help the articled clerk as the financial
position of the articled clerk is very weak. Is Mr. X liable to professional misconduct?

• Clause (2) of Part I of First Schedule to the Chartered Accountants Act 1949.
• Mr. X is guilty of professional misconduct in terms of Clause (2) of Part I of First Schedule
to the Chartered Accountants Act 1949.
Q33) M/s XYZ, a firm in practice, develops a website “xyz.com”. The colour chosen for the
website was a very bright green and the web-site was to run on a “push” technology where
the names of the partners of the firm and the major clients were to be displayed on the
web-site without any disclosure obligation from any regulator. Is this website in compliance
with guidelines issued by ICAI in this regard?

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• Clause (6) of Part I of First Schedule to the Chartered Accountants Act, 1949 subject to
the website guidelines.
• The relevant guidelines in the context of the website hosted by M/s XYZ are:
1) No restriction on the colours used in the website
2) The websites are run on a “pull” technology and not a “push” technology
3) Names of clients and fees charged not to be given.
• However, disclosure of names of clients and fees charged, on the website is permissible only
where it is required by a regulator, provided that such disclosure is only to the extent of
requirement of the regulator. Where such disclosure is made on the website, it is mentioned
below such disclosure, that “This disclosure is in terms of the requirement of regulator
having jurisdiction in….”
• M/s XYZ would have no restriction on the colours used in the website but failed to satisfy
the other two guidelines.
• Firm liable for professional misconduct as it would amount to soliciting work by
advertisement.
Q34) A partner of a firm of chartered accountants during a T.V. interview handed over a
bio-data of his firm to the chairperson. Such bio-data detailed the standing of the
international firm with which the firm was associated. It also detailed the achievements of
the concerned partner and his recognition as an expert in the field of taxation in the
country. The chairperson read out the said bio-data during the interview. Discuss whether
this action by the Chartered Accountant would amount to misconduct or not.

• Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949
• Such an act would definitely lead to the promotion of the firm’s name and publicity thereof
as well as of the partner and as such the handing over of bio-data cannot be approved.

• Partner would be held guilty of professional misconduct under Clause (6) of Part I of the
First Schedule to the Chartered Accountants Act, 1949
Q35) An advertisement was published in a Newspaper containing the photograph of Mr. X, a
member of the institute wherein he was congratulated on the occasion of the opening
ceremony of his office.

• Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949
• Advertisement which had been put in by the member is quite prominent.
• The above therefore amounts to soliciting professional work by advertisement directly or
indirectly.
• Mr. X would be therefore held guilty under Clause (6) of Part I of the First Schedule to the
Chartered Accountants Act, 1949.
Q36) Mr. X, a Chartered Accountant and the proprietor of X & Co., wrote several letters to
the Assistant Registrar of Co-operative Societies stating that though his firm was on the
panel of auditors, no audit work was allotted to the firm and further requested him to look
into the matter.

• Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949
• The writing of continuous letter to ascertain the reasons for not getting the work is quite
alright but in case such either amount to request for allowing the work then Mr. X will be
liable for professional misconduct.
• Mr. X held guilty under Clause (6) of Part I of the First Schedule to the Chartered
Accountants Act, 1949.

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Q37) A practising Chartered Accountant uses a visiting card in which he designates himself,
besides as Chartered Accountant, Cost Accountant. Is this a misconduct?

• Clause (7) of Part I of the First Schedule to the Chartered Accountants Act, 1949
• A chartered accountant in practice cannot use any other designation than that of a
chartered accountant.
• It is improper for a chartered accountant to state in his documents that he is a “Cost
Accountant”.
• Members are permitted to use letters indicating membership of the Institute of Cost and
Works Accountants but not the designation "Cost Accountant".
Q38) Mr. Nigal, a Chartered Accountant in practice, delivered a speech in the national
conference organized by the Ministry of Textiles. While delivering the speech, he told to the
audience that he is a management expert and his firm provides services of taxation and audit
at reasonable rates. He also requested the audience to approach his firm of chartered
accountants for these services and at the request of audience he also distributed his business
cards and telephone number of his firm to those in the audience. Comment.

• Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949
• Clause (7) of Part I of the First Schedule to the Chartered Accountants Act, 1949
• Appearance on electronic media & Internet-Can give name & describe as CA. Special
qualifications/knowledge of subject matter can be given. Firm name can be mentioned but
exaggerated claim/comparison not permissible. Not promotional.
• It is improper to use designation "Management Expert" since neither it is a degree of a
University established by law in India or recognised by the Central Government nor it is a
recognised professional membership by the Central Government or the Council.
• He is deemed to be guilty of professional misconduct under both Clause (6) and Clause (7) as
he has used the designation “Management Expert” in his speech and also he has made
reference to the services provided by his firm of Chartered Accountants at reasonable
rates. Distribution of cards to audience is also a misconduct in terms of Clause (6).
Q39) Mr. A is a practicing Chartered Accountant working as proprietor of M/s A & Co. He
went abroad for 3 months. He delegated the authority to Mr. Y a Chartered Accountant his
employee for taking care of routine matters of his office. During his absence Mr. Y has
conducted the under mentioned jobs in the name of M/s A & Co.

1. He issued the audit queries to client which were raised during the course of audit.
2. He issued production certificate to a client under the GST Act.
3. He attended the Income Tax proceedings for a client as authorized representative
before Income Tax Authorities.

Comment on eligibility of Mr. Y for conducting such jobs in name of M/s A & Co. and liability
of Mr. A under the Chartered Accountants Act, 1949.

• Clause (12) of Part I of the First Schedule of the Chartered Accountants Act, 1949
• Employee not allowed but power to sign routine docs – delegated in these cases-
Issue of audit queries during audit & Attending to routine matters in tax practice (Income tax Act)

1. Issue of audit queries during audit - There is no misconduct in this case as per Clause (12)
of Part I of First schedule to the Act.
2. CA A is guilty of professional misconduct under Clause (12) of Part I of First Schedule of
the Chartered Accountants Act, 1949.

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3. Attending to routine matters in tax practice (Income tax Act) -There is no misconduct in
this case as per Clause (12) of Part I of First schedule to the Act.
Q40) XYZ Co. Ltd. has applied to a bank for loan facilities. The bank on studying the
financial statements of the company notices that you are the auditor and requests you to call
at the bank for a discussion. In the course of discussions, the bank asks for your opinion
regarding the company and also asks for detailed information regarding a few items in the
financial statements. The information is available in your working paper file. What should be
your response and why?

• Clause (1) of Part I of the Second Schedule of the Chartered Accountants Act, 1949
• SA 200 - Auditor should respect confidentiality of info and should not disclose any such
information to a third party
• Auditor cannot disclose the information in his possession without specific permission of the
client.
• Working papers are the property of the auditor. The auditor may at his discretion, make
portions of or extracts from his working papers available to his client.
• There is no requirement compelling the auditor to divulge information obtained in the
course of audit and included in the working papers to any outside agency except as and when
required by any law.
Q41) Mr. A, a newly qualified Chartered Accountant, started his practice and sought clients
through telephone calls from his family and friends, almost all of them employed in one or
the other retail trade business. One of his friends Mr. X gave him an idea to start online
services and give stock certifications to traders with Cash Credit Limits in Banks. Mr. A
started a website with colorful catchy designs and shared the website address on his all
social media posts and stories and tagged 30 traders of his local community with the caption
“Easy Online Stock Certification Services”. Discuss if the actions of Mr. A are valid in the
light of the Professional Ethics.

• Clause (6) of Part I of the First Schedule of the Chartered Accountants Act 1949
• Mr. A is wrong in seeking clients through family and friends. Creating a website is not a non-
compliance provided it is in line with the guidelines issued by the Institute. One of the
guidelines is that the website should not be in push mode. Further, mentioning of clients’
names is also prohibited as per the guidelines.
• Mr. A shared the website address on his all social media posts and stories and tagged 30
traders of his local community with the caption “Easy Online Stock Certification Services”
mentioning his current clients as well. This is in contravention of the guidelines on the
website issued by the ICAI.
• CA A would be held guilty of professional misconduct under clause 6 of Part 1 of First
Schedule of the Chartered Accountants Act 1949.
Q42) Mr. D, a practicing CA, is appointed as a Director Simplicitor in XYZ Pvt. Ltd. After
one year of appointment, Mr. D resigned as the Director and accepted the Statutory Auditor
position of the company. Is Mr. D right in accepting the auditor position?

• Clause (4) of Part I of the Second Schedule of the Chartered Accountants Act, 1949
• Member shouldn’t accept audit of co. for 2 yrs from completion of tenure/resignation as
director (Cooling period of 2 yrs)
• CA D would be held guilty of professional misconduct under clause 4 of Part 1 of Second
Schedule of the Chartered Accountants Act, 1949.

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Q43) Mr. S is a practising chartered accountant based out of Chennai. During the weekends,
he involved himself in equity research and used to advise his friends, relatives and other
known people who are not his clients. Apart from this, he was also involved as a paper-setter
for Accountancy subject in the school in which he studied. He also owned agricultural land
and was doing agriculture during his free time. During the year 20X1, heavy losses were
incurred in agricultural activity due to natural calamities and misfortune, and he lost almost
all of his wealth and became undischarged insolvent. After a few court hearings, finally, in
the year 20X3, he was declared discharged insolvent and obtained a certificate from the
court stating that his insolvency was caused by misfortune without any misconduct on his
part. You are required to comment on the above situation with reference to the Chartered
Accountants Act, 1949.

CASE A -

• As per the recent decisions taken by the Ethical Standards Board of ICAI, a Chartered
Accountant in practice may be an equity research adviser but he cannot publish a retail
report, as it would amount to other business or occupation.
• Mr. S is involved in doing equity research and in advising people. It is clear that he does not
publish any retail report of his research.
• Hence, this act of Mr. S shall not make him guilty of professional misconduct
CASE B -

• Clause 11 of Part I of First Schedule of the Chartered Accountants Act and regulation
190A of Chartered Accountants Regulations.
• Further, Regulation 190A mentions the 'Permissions granted Generally' to engage in a
certain category of occupations, for which no specific permission of Council is required.
Those cases include:
• Valuation of papers, acting as paper-setter, head examiner or a
moderator, for any examination.
• Owning agricultural land and carrying out agricultural activities.
• Mr. S is a paper-setter and involvement in agricultural activities do not make him guilty of
professional misconduct.
CASE - C

• Chartered Accountants Act, 1949

• Disabilities for purpose of membership.
Discharged insolvent, not obtained from court, certificate that insolvency caused by
misfortune without misconduct.
• Mr. S is not debarred from having his name entered in the Register of Members as he has
obtained certificate from court
Q44) CA Pankaj accepted professional work of acting as valuer under direct taxes. He
charges fees on a percentage of the property valued. Comment with reference to the
Chartered Accountants Act, 1949.

• Clause (10) of Part I of First Schedule to the Chartered Accountants Act, 1949.
Exception: Reg 192 –
Valuer for direct tax/duties – Fees on % of property valued.
Conclusion: CA Pankaj shall not be deemed to be guilty of professional misconduct
Q45) Mr. Johny, a chartered accountant, was invited to a seminar on bank audits to give a
presentation on the process of conducting such audits. During his presentation, he provided

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CA SHANKAR LAKHWANI # Audit Made Easy
examples from his clients’ experiences and shared the significant information about clients
with the intention of aid in understanding of audience on the topic. Does above situation have
implications in relation to the professional ethics?

• Clause (1) of Part I of the Second Schedule to the Chartered Accountants Act 1949
• Conclusion: This action of CA Johny constitutes professional misconduct under Clause (1) of
Part I of the Second Schedule to the Chartered Accountants Act 1949.
Q46) Sanjeev & Associates, a firm of Chartered Accountants responded to a tender from a
PF Office, Chembur for filing quarterly e-TDS returns. The terms of tender are as follows:

i. Earnest Money Deposit of Rs.7,500/-

ii. It is open for all categories
iii. Maximum fees of Rs.7,500/- per quarter

Discuss whether Sanjeev and Associates can respond to the said tender with reference to
provisions of the Chartered Accountants Act.

Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949
• Nothing construed as prohibiting-
CA from securing work from practicing CA Member from responding to tenders/enquiries
• Tender Services -
CA with min. Fee (audit/attestation) All (land revenue computerization)
• Conclusion: Sanjeev & Associates can respond to the said tender as the tender is open to
all the categories i.e. it is open to other professionals along with the Chartered Accountants.

Q47) CA Shubh, a Chartered Accountant in practice specializing in the field of Information

Systems Audit. He is considered to be one of the experts in this field because of his
command over the subject. ZX Limited, a company engaged in rendering management
consultancy offered him to appoint as its managing director. CA Shubh accepted the position
of managing director without obtaining prior permission from the Institute. One of his
friends, CA Varun informed him that now he cannot retain full time certificate of practice,
thus cannot do attestation function and train articled assistants.

• Clause (11) of Part I of First Schedule to the Chartered Accountants Act, 1949
• Council General Guidelines, 2008
Chapter XVII – Guidelines for Corporate Form of Practice –
• Practicing CA holds office of MD/WTD/Manager of body corporate provided body
corporate is engaged exclusively in rendering MCS.
• Member can retain full Time COP.
• No restriction on equity holding of members, either individually/along with relatives in
co.
• Can do attest function & train articled assistants.
• Name of mgt consultancy co. – approved by Institute & Co. regd with Institute.
• CA Shubh, a Chartered Accountant was offered the position of Managing Director by ZX
Limited, a management consultancy firm. He accepted the role without obtaining prior
permission from the Institute of Chartered Accountants of India.
• It can be concluded that the action of CA Shubh is valid.
Q48) Pitch Private Limited requested CA Angad, a practicing Chartered Accountant, to
digitally sign the form related to resignation of Mr. Ravi, one of the Director of Pitch
Private Limited, along with the copy of resignation letter to be uploaded on the website of

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CA SHANKAR LAKHWANI # Audit Made Easy
Registrar of Companies. The signature of Mr. Ravi was simply copied and pasted by another
Director of Pitch Private Limited. CA Angad, without verifying the genuineness of the
resignation letter, digitally signed the form and the said form was uploaded on the website of
Registrar of Companies.

• Clause (7) of Part I of the Second Schedule to the Chartered Accountants Act 1949
• CA Angad would be held liable for professional misconduct as per Clause (7) of Part I of the
Second Schedule to the Chartered Accountants Act 1949.
Q49) CA Kapila, in practice, is desirous of filling Multi-purpose Empanelment Form (MEF) for
inclusion of her name in panel for allotment of statutory audit of bank branches web hosted
by Professional Development Committee (PDC) of ICAI for financial year 2023-24. The form
requires applicants to upload XML files of their personal income tax returns along with
computation of income. During relevant year for which information is being sought by PDC, CA
Kapila has transacted in futures and options derivatives (equity) and has reflected income
from such transactions in her return of income as “Business Income”. Analyse the above
situation with reference to the provisions of the Chartered Accountants Act, 1949. Would it
make any difference if CA Kapila had earned income from transacting in currency derivatives
and commodity derivatives?

• Clause 11 of Part I of First Schedule to the Chartered Accountants Act, 1949

• Members are allowed to transact in equity and currency derivatives. There is no
requirement to take permission of Council in this matter.
• Thus, there is no difference if CA Kapila had earned income from currency derivatives.
• However, in accordance with the announcement of Ethical Standards Board of ICAI, it is
not permissible for members in practice to transact in commodity derivative transactions.
In such a case, CA Kapila would be held guilty of professional misconduct for engaging in
business other than profession of Chartered Accountancy.
Q50) CA Raj, a practicing chartered accountant, is offered to take up an appointment as a
"Secretary" in his professional capacity by the Central Government for a Metro Project for a
term of 2 years not on a salary-cum-full-time basis. After giving deep thought to the offer,
CA Raj accepted the appointment. Comment in terms of the Chartered Accountant Act,
1949.

As per Section 2(2)(iv) of the Chartered Accountant Act, 1949

Members deemed to be in practice -
Individually/partnership, for remuneration –
Render other services
• Clause (11) of Part I of First Schedule of Chartered Accountants Act, 1949
• As per Regulation 191 a Chartered Accountant in practice may take up an appointment that
may be made by the Central Government or a State Government or a court of law or any
other legal authority or may act as a secretary in his professional capacity, provided his
employment is not on a salary-cum-full-time basis.
• Conclusion: CA Raj will not be held liable for misconduct for acceptance of appointment as
Secretary in terms of compliance of Regulations 191 read with Clause (11) of Part I of First
Schedule of Chartered Accountants Act, 1949.
Q51) CA Kumar, a practicing-chartered accountant, is well known in the field of pleading of
Income-tax cases at Income-tax Tribunal and does not provide any assurance services.
Considering the long standing in the field, CA Kumar is approached by XYZ Limited to file an

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appeal in the Tribunal against the Income tax Demand of Rs.10 crore which was added by
the CIT(A) and to plead on behalf of XYZ Limited in the matter. CA Kumar offers to accept
the case with the following fee structure:

The fees for filing an appeal and to plead at the Income-tax Tribunal will be higher of –

➢ Rs. 5 lacs or
➢ 10% of Tax Demand Reduced.

Comment on the act of CA Kumar in terms of the Chartered Accountant Act, 1949.

• Clause (10) of Part I of First Schedule to the Chartered Accountants Act, 1949
• Exception: Reg 192 –
Non-assurance services to non-audit clients.
• In the given case, CA Kumar, a practicing Chartered Accountant, provides non-assurance
services. He is approached by XYZ Limited, a non-audit client, to file an appeal in Tribunal
against Income-tax Demand.
• Mr. Kumar will not be held guilty of professional misconduct as per Clause 10 of Part I of
First Schedule.
Q52) GeM (e-market place) is a public procurement portal which provides opportunities to
start-ups, entrepreneurs etc. to showcase their innovative products and services to
government buyers and engage in public procurement. The Government e Marketplace Special
Purpose Vehicle (GeM SPV), a 100% government owned and section 8 (Non-Profit) company
under the Ministry of Commerce, Government of India has been incorporated under the
Companies Act, 2013 to develop, manage and maintain GeM platform. Whether a firm of
Chartered Accountants can register on GeM portal for rendering professional services to
government departments?

• Council Guidelines for Advertisement, 2008 - It is not permissible for members to list
themselves with online application based service provider Aggregators
• Clause (6) of Part I of First Schedule to the Chartered Accountants Act, 1949
• Application for empanelment for allotment of work-
o Free to write to place name on panel. Not proper to do roving enquiries. Quote fees
on enquiries.
• Getting registered on GeM portal by members does not appear to amount either to
empanelment or listing on Aggregator.
• Firms of Chartered Accountants are permitted to register on GeM Portal for rendering
professional services as there is no violation of the ethical norms of the Institute in
registering on the GeM portal and such registration on the Portal is a pre-requirement for
providing services to the Government departments/ organisations.
• Firms should ensure compliance with the tender guidelines issued by the Institute while
participating in tender through GeM Portal.
Q53) CA Gyan is a Chartered Accountant in practice and also an engineer by qualification. He
wants to pursue a registered valuer course and work as a registered valuer for plant and
machinery under the Companies Act, 2013. Comment on above with reference to provisions of
the Chartered Accountants Act, 1949.

• Members deemed to be in practice -

Individually/partnership, for remuneration –

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Render other services
Sec 2(2)(iv) of CA Act, 1949 -permits practicing CA to render ‘management consultancy services’
(MCS)
• MCS includes Valuation of shares & business & advice regarding amalgamation, merger,
acquisition. Acting as regd valuer for securities/financial assets, not for plant & m/c.

• Therefore, valuation of plant and machinery does not form part of Management Consultancy
and other services permitted by the council.
• Regulation 190A of the Chartered Accountant Regulations, 1988, members in practice are
generally permitted for attending classes and appearing for any examination. There is no
need to take prior permission of ICAI in this regard. Doing the Registered valuer course
would be deemed as permissible.
• As per Chartered Accountants Act, 1949, it is not permissible for a Chartered Accountant
in practice to work as an Engineer/ valuer in plant & machinery simultaneously.

Q54) The manager of Miskin (P) Ltd. approached CA Rahul in need of a certificate in respect
of a consumption statement of raw material. Without having a certificate of practice (CoP),
CA Rahul issued the certificate to the manager of the company, acting as a CA in practice
and applied for the CoP to the Institute on very next day to avoid any dispute OR CA
digitally signed tax audit report without UDIN contending that there are no fields for
entering UDIN.

• Clause (1) of Part II of Second Schedule to the Chartered Accountants Act 1949
• CA Rahul will be held guilty of professional misconduct in terms of Clause (1) of Part II of
Second Schedule to the Chartered Accountants Act, 1949 for contravention of provisions of
this Act.
Q55) A special notice has been issued for a resolution at 4th annual general meeting of TRIM
Ltd., providing expressly that CA Lucky shall not be re-appointed as an auditor of the·
company. Consequently, CA Lucky submitted a representation in writing to the company with a
request to circulate to the members. In the detailed representation, CA Lucky included the
contributions made by him in strengthening the control procedures of the company during his
association with the company and also indicated his willingness to continue as an auditor if
reappointed by the shareholders of the company. Comment with reference to the Chartered
Accountants Act, 1949.

• Clause (6) of Part I of First Schedule to the Chartered Accountants Act, 1949
• COA 2013, provides a right to the retiring auditor, to make representation in writing to the
company. Representation letter should not be prepared in a manner to seek publicity.

• Scope of representation-COA 2013-Not soliciting for continuance. Letter-acting

independently & willingness to continue.
• Highlighting contributions in strengthening the control procedures, while submitting
representation would amount to soliciting for his continuance as auditor.
• CA Lucky held guilty of professional misconduct under Clause (6) of Part I of the First
Schedule to the Chartered Accountants Act, 1949
Q56) CA Anita joined as an audit executive in a CA firm on April 1, 2024. Despite receiving
multiple reminders from ICAI, she has failed to respond with her appointment date and
submit her membership certificate. Comment with reference to the Chartered Accountants
Act, 1949.

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• Clause (2) of Part III of the First Schedule to the Chartered Accountants Act 1949
• Conclusion: CA Anita is guilty of professional misconduct as given in Clause (2) of Part III
of the First Schedule to the Chartered Accountants Act 1949.
Q57) CA Rishi entered into agreement with Mr Krish, who is a registered valuer to share
18% professional fees for all cases of valuation referred to him by CA Rishi. CA Rishi
received ₹1,15,000 from Mr Krish. Comment.

• Clause (3) of Part I of First Schedule to the Chartered Accountants Act, 1949
• Regulation 53A allowed. Registered valuer is not covered in regulation 53A.
• Can’t accept from registered valuer. Thus, CA Rishi is guilty of professional misconduct.
Q58) CA Dev issued turnover certificate to SL traders to be forwarded to bank to avail loan.
Brother of CA Dev was proprietor of SL traders.

• Clause 4 of Part I of Second Schedule to CA Act, 1949

• Financial statements includes report and certificate.
• Relative includes brother.
• CA Dev is Guilty of professional misconduct.
Q59) CA firm was appointed by company to evaluate cost of various products manufactured
by it. One of the partners of the firm was non-executive director of company.

• Clause 4 of Part I of Second Schedule to CA Act, 1949

• Expressing opinion on FS (audit) not allowed, but mgt consultancy services allowed.
• Not guilty of professional misconduct.
Q60) CA firm kept refund voucher given by department in client’s name in firm’s bank
account.

• Clause 10 of Part 1 of Second Schedule to CA Act

• It is to be kept in separate Bank account. Hence, guilty of professional misconduct.
Q61) Client deposited 20 lakhs with CA Gagan, for payment of monthly GST when they were
due. Gagan remitted all but one instalment. He utilised that instalment to remit his own
advance income tax. But while filing GST return of client, he remitted on client’s behalf tax
payable with interest due for late payment of GST out of money lying with him. He also bore
himself interest due to shortfall in remittance of tax of client. Comment.

• Clause 10 of Part 1 of Second Schedule to CA Act

• CA Gagan is guilty of professional misconduct since he didn’t deposited client’s money in
separate bank account.
Q62) CA Firm received 2 lakhs in January on behalf of one of their clients, who has gone
abroad and deposited the amount in firm’s bank account so that they can return the money to
client in July, when he is due to return to India.

• Clause 10 of Part 1 of Second Schedule to CA Act

• Professional misconduct since he didn’t deposited client’s money in separate bank account.

Q63) CA Naman was appointed as auditor of X limited. He decided to visit 6 out of 10

branches of X Limited. Management decided to pay him advance of 2 lakhs against estimated
expenses of 2.5 lakhs on visit to be conducted as part of services rendered. 2 Lakh was
transferred to his bank account from which he met all the expenses. Comment.

• Clause 10 of Part 1 of Second Schedule to CA Act

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• Advance recd by CA = Fees = Clause 10 Not applicable
• CA Naman is not guilty of professional misconduct
Q64)

(a) KB and Associates are appointed as Statutory Auditors of the Iron Company Ltd. The
Central Government holds 72% of the paid-up share capital in this company. The appointment
letter of the company gave a very limited time to KB and Associates for accepting the audit.
CA Yash, the engagement partner, communicated with the previous auditor but due to lack of
time he had to give acceptance for the audit assignment before receiving a reply from the
previous auditor. Hence CA Yash gave a conditional acceptance of the appointment and
commenced the audit. Discuss with reference to the Chartered Accountants Act, 1949,
whether CA Yash has complied with same.

(b) If CA Yash is guilty of misconduct in the above situation given in part (a), then before
which authority, the matters of CA Yash would have been placed and what punishment could
have been imposed on him by the said authority in accordance with the Chartered
Accountants Act, 1949?

(a) Clause (8) of Part I of First Schedule to the Chartered Accountants Act, 1949
Lack of time in acceptance of audit of government co./bank-No time to wait for reply from
outgoing auditor. Conditional acceptance & commence work subject to objections from previous
auditor. Incoming auditor decides about final acceptance after taking into a/c info from previous
auditor.
CA Yash is not liable for misconduct and has complied with the provisions of the Chartered
Accountants Act, 1949.

(b) If CA Yash would have been found guilty of professional misconduct under Clause 8 of Part I of
the First Schedule of the Chartered Accountants Act, 1949:
The matter would have been placed before the Board of Discipline. The punishment that the Board
of Discipline could have imposed would be –
• Reprimand the member.
• Remove the name of the member upto a period of 3 months.
• Impose fine upto Rs. 1,00,000/-
Q65) CA T is statutory auditor of Race Limited (PSU). He did not detect any fraud. But CAG
found that chief cashier of Company committed fraud in debtor’s ledger and absconded with
amount. Investigation revealed that auditor didn’t exercise proper skill & care and performed
his work improperly.

• Clause 7 of Part I of Second Schedule to CA Act

• As per SA 240 - Auditor did not plan and perform the audit with professional skepticism.
• Guilty of professional misconduct
Q66) NIS Limited has created separate trust “NIS employees gratuity fund trust”. Both
company and trust are under same management. Mr Anuj is auditor of both entities. Mr Anuj
has observed that some part of expenditure was not applied towards objects of the trust. He
informed matter to board of trustees through separate report, but did not qualify audit
report of the trust.

• Clause 5 of Part I of Second Schedule to CA Act, 1949

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• Here, Mr Anuj was aware of expenses not applied towards object, but he issued audit report
without qualification.
• CA Anuj is guilty of professional misconduct.
Q67) The Director (Discipline) of the ICAI received information of alleged misconduct against
Mr. Nandkishore, the proprietor of NK & Associates, where an event relating to Corporate
Social Responsibility was sponsored by NK & Associates, whereby in the sponsorship banner,
name of Mr. Nandkishore as ‘CA Nandkishore, Proprietor, NK & Associates’ was mentioned.

Mr. Nandkishore was found guilty and so he was reprimanded and a fine of ₹ 1 lakh was
imposed by an order passed against him. Against the said order, Mr. Nandkishore preferred
an appeal with the Appellate Authority by submitting a statement of appeal along with the
application form of appeal. During such appellate proceedings, it was discovered that the said
statement of appeal contained some facts which were false to which Mr. Nandkishore
admitted it to be false and apologized for it.

Mr. Nandkishore has violated following provisions of the Chartered Accountants Act, 1949:

Clause (6) of Part I of the First Schedule

• Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949
• Members sponsoring activities related to CSR can mention their name with prefix CA but
firm name or CA logo not permitted.
• Firm’s name was mentioned which is not allowed and thus, Mr. Nandkishore has violated
Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949.
Clause (3) of Part II of the Second Schedule

• Clause (3) of Part II of the Second Schedule to the Chartered Accountants Act 1949
• Mr. Nandkishore in the statement of appeal submitted with the Appellate Authority
mentioned some facts knowing them to be false and thus, he has violated Clause (3) of Part
II of the Second Schedule to the Chartered Accountants Act 1949.
Q68) The Director (Discipline) of ICAI had received the matters in respect of cases of
alleged misconduct against CA H, the proprietor of M/s HA & Co, Chartered Accountants and
was found guilty of professional misconduct under Clause (4) of Part I of the Second
Schedule of the Chartered Accountants Act, 1949 and Clause (11) of Part I of the First
Schedule of the Chartered Accountants Act, and penalty was imposed by an order passed
against him dated 15th June, 2024. Against the said order, CA H preferred an appeal with
the Appellate Authority on 5th August, 2024 by submitting the statement of appeal along
with application form of appeal. During such appellate proceedings, it was discovered that the
said statement of appeal contained some facts which were false to which CA H admitted it to
be false and apologized for it.

Based on the above scenario of the matters placed before The Director (Discipline) of ICAI
against CA H, you are required to answer the following:

1. Comment on violation of provisions of the Chartered Accountants Act, 1949 by CA H.

2. Before which authority, the matters of CA H would have been placed and what
maximum punishment could have been imposed on him by the said authority in
accordance with the Chartered Accountants Act, 1949?

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3. Has CA H filed an appeal with the Appellate authority against the order within the
time limit prescribed under the said Act?

ANSWER TO QUESTION 1

• Clause (3) of Part II of the Second Schedule to the Chartered Accountants Act 1949
• CA H preferred an appeal with the Appellate Authority on 05th August,2024 by submitting
the statement of appeal along with application form for the same. But it was discovered that
the said statement of appeal contained some facts which were false and CA H admitted it to
be false.
•CA H would be held guilty of professional misconduct under Clause (3) of Part II of the
Second Schedule to the Chartered Accountants Act 1949.
ANSWER TO QUESTION 2

•In case where CA H was found guilty of professional misconduct under Clause (4) of Part
I of the Second Schedule and Clause 11 of Part I of the First Schedule of the
Chartered Accountants Act, 1949, the matter would have been placed before Disciplinary
Committee as it’s allied to both the Schedule because as per the Chartered Accountant Act,
1949 if the matter is allied to the Second Schedule or Both it is referred to the
Disciplinary Committee. The maximum punishment that the Disciplinary Committee could
have imposed would be:
o Reprimand the member
o Remove the name of the member from the Register permanently or for such period
as it may think fit.
o Impose such a fine which may extend to rupees 5 lakhs.
ANSWER TO QUESTION 3

• Member aggrieved by an order of the Board of Discipline or the Disciplinary Committee can
prefer an appeal within 90 days.
• CA. H has preferred an appeal with the appellate authority on 5th August,2024 against the
order passed on 15th June 2024. From 15th June to 5th August, 90 days’ timeline has not
been lapsed.
• CA H has filed an appeal within the time limit prescribed under the said Act.
Q69) CA F is CFO of ABC General Insurance Limited. Company gets majority of its clients
through agency contracts. CA F has practice of releasing commission payments on condition
that he gets 20% commission amount from agent.

• Clause (2) of Part II of First Schedule of the Chartered Accountant Act 1949
• CA F is guilty of professional misconduct by virtue of Clause (2) of Part II of First Schedule
of the Chartered Accountant Act 1949.
Q70) Comment on the following with reference to the Chartered Accountants Act, 1949

(a) CA. Srishti and CA. Mishti are two partners of the CA firm ‘Srishti Mishti & Associates’.
Being very pious, CA. Srishti organised a religious ceremony at her home for which she
instructed her printing agent to add her designation “Chartered Accountant” with her name in
the invitation cards. Later on, the invitations were distributed to all the relatives, close
friends and clients of both the partners.

(b) Ms. Preeto, a CA, had an account with a bank. The normal balance in this account
remained at a level below Rs. 5,000. The bank inadvertently credited this account with a
cheque of Rs. 2,70,000 belonging to another account holder. When CA. Preeto came to know

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about this she withdrew the amount of Rs. 2,75,000 and closed the bank account. After 1
year the bank noticed the mistake and claimed Rs. 2,75,000 with interest. CA. Preeto
contested this claim. Can the bank approach the Institute of Chartered Accountants of India
for disciplinary action against CA. Preeto?

(c) CA. Moni is practicing since 2009 in the field of company audit. Due to her good practical
knowledge, she was offered editorship of a ‘Company Audit’ Journal which she accepted.
However, she did not take any permission from the Council regarding such editorship.

(a) Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949

Issue of greeting cards/invitation –

• Not approve greeting cards/personal invitation, indicating professional designation, status,
qualification.
• Designation “Chartered accountant” & name of firm can be used in greeting cards,
Invitation for Marriage, religious ceremony, inauguration of office, change in premises,
change in no. provided it’s sent only to clients, relatives, friends.
Council has allowed using designation “Chartered Accountant” in invitations for religious ceremony,
provided these are sent to clients, relatives and close friends of the members concerned only.

Therefore, CA. Srishti would be held guilty of professional misconduct under the said clause for
sending such invitations to the relatives, close friends and clients of CA. Mishti as well.
(b) Clause 2 of Part IV of First Schedule of the Chartered Accountant Act, 1949

• Act of CA. Preeto to withdraw the money which does not belongs to her will bring disrepute
to the profession.
• Hence under this clause the bank can file a suitable complaint under Clause 2 of Part IV
of First Schedule of the Chartered Accountant Act, 1949 with the ICAI.
(c) Clause (11) of Part I of First Schedule to the Chartered Accountants Act, 1949

• Council has granted general permission to the members to engage in certain specific
occupation. In respect of all other occupations specific permission of the Institute is
necessary.
• CA. Moni accepted editorship of a journal for which she did not take any permission from
the Council. In this context, it may be noted that the editorship of professional journals is
covered under the general permission and specific permission is not required.
• CA. Moni shall not be held guilty of professional misconduct in terms of Clause (11) of Part
I of First Schedule to the Chartered Accountants Act, 1949.
Q71) Nam & Co., conducted Stock Audit of DEF Ltd. as per instructions issued by HEG Bank.
However instead of visiting the site where the stock was lying, the firm relied on the
Management Information Systems report along with inspections reports and photographs of
Stock taken by the employees of DEF Ltd. The photographs were also carrying the date and
time printed on them. Comment with reference to the Chartered Accountants Act, 1949.

• Clause (7) of Part I of Second Schedule to the Chartered Accountants Act 1949
• CA. Nam & Co. did not exercise due diligence and is grossly negligent in the conduct of his
professional duties since it did not visit the site where the stock was lying and instead the
firm relied on the MIS report along with inspection reports and photographs of stock taken
by the employees of DEF Ltd which is incorrect.
• To conduct stock audit, ascertainment of existence and physical condition of stocks, cross
tallying the stock with Stock statement submitted by bank borrower, correct classification

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of stocks for valuation purpose etc. is essential. Further submitting stock audit report
without physically verifying the stock amounts to gross negligence.
• Nam & Co. is guilty of professional misconduct under Clause (7) of Part I of Second
Schedule to the Chartered Accountants Act 1949.
Q72) Mr. M, a Chartered Accountant in practice, has printed visiting cards which besides
other details also carries a Quick Response (QR) code. The visiting curd as well the QR code
contains his name, office and residential address, contact details, e-mail id and name of the
firm's website.

• As per Clause (7) of Part I of First Schedule to the Chartered Accountants Act 1949 a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
advertises his professional attainments or services.
• Ethical Standards Board has also clarified that a member in practice is allowed to print
Quick Response Code (QR Code) on the visiting Card, provided that the Code does not
contain information that is not otherwise permissible to be printed on a visiting Card.
• Mr. M has printed visiting cards which carries Quick Response Code (QR Code) besides
other details. The visiting card as well as the QR Code contains his name, office and
residential address, contact details, e-mail id and name of the firm’s website which are
otherwise allowed to be printed on the visiting cards of a Chartered Accountant in practice.
• Mr. M is not guilty under Clause (7) of Part I of First Schedule to the Chartered
Accountants Act 1949.
Q73) CA Sant, a newly qualified professional with certificate of practice, approached CA
Pant, the auditor of his father's company M/s Max Ltd., to allow him to have some practical
and professional knowledge and experience in his firm before he can set up his own
professional practice. CA Pant allowed him to sit in his office for 6 month and allotted a
small chamber with other office infrastructure facility. In the course of his association with
CA Pant' s office, he used to provide tax consultancy independently to the client of the firm
and also filed few IT and GST return and represented himself before various tax authorities
on behalf of the firm although no documents were signed by him. During his association in CA
Pant's office, he did not get any salary or share of profit or commission but only re-
imbursement of usual expenses like conveyance, telephone etc. was made to him. After the
end of the agreed period, he was given a lump sum amount of Rs.3,00,000 by CA Pant for
his association out of gratitude. Examine the case in the light of code of professional
misconduct.

Clause (1) of Part I of the First Schedule to the Chartered Accountants Act 1949
CA. Pant will be held guilty of professional misconduct as per Clause (1) of Part I of First Schedule
to the Chartered Accountants Act 1949 as he allowed CA Sant to practice in his name as Chartered
accountant and CA Sant is neither in partnership nor in employment with CA. Pant.
Q74) CA K qualified as Chartered Accountant and started practice as proprietor in the name
of M/s K & Associates in the year 2015-16. LST Limited, a listed entity, appointed M/s K &
Associates as Statutory Auditor for the year ended 31st March, 2022. CA K signed the
balance sheet of LST Limited for the year ended 31st March, 2022 on 14th May, 2022. M/s
K & Associates never subjected themselves to the Peer Review process of the Institute since
its inception of practice. Comment with reference to the Chartered Accountants Act, 1949.

• Clause (1) of Part II of the Second Schedule to the Chartered Accountants Act, 1949

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The Statement on Peer Review shall be deemed to be a guideline of the Council & it is
•
obligatory for the Practice Unit to comply with the provisions contained in this Statement.
• As per SEBI Notification, Statutory Audit of Listed Companies under the Companies Act,
2013 shall be done by only those auditors who have subjected themselves to the Peer Review
process of the Institute, and hold a valid certificate issued by the Peer Review Board of the
ICAI.
• CA K would be held guilty of professional misconduct under clause (1) of Part II of Second
Schedule of the Chartered Accountants Act, 1949.
ALTERNATIVELY –

• CA K would be held guilty of professional misconduct under clause (9) of Part I of Second
Schedule of the Chartered Accountants Act, 1949.

1 LINER SUMMARIES –

1) CA & Advocate can share profits of professional work

• Regulation 53A – Clause 3 of Part I of First Schedule – No professional misconduct (No PM)
2) CA & advocate entered in partnership for sharing fees for work sent by one to other.
Later, partnership was dissolved without any sharing of fees
• Regulation 53B – Clause 4 of Part I of First Schedule – No PM
3) SR Associates (CA firm) is one of the 3 firms shortlisted by SBI for assignment of
statutory audit. SBI mailed the list of branches to all 3 firms along with maximum fees per
branch & asked them to submit quotations. SR Associates submitted the quotation
• PM under Clause 6 of Part I of First Schedule (Tender guidelines – Minimum fees
allowed, maximum fees not allowed)
4) CA P is engaged in practice + online teaching. He advertises his classes on social media
• Regulation 190A – General permission for private tutorship.CA can do private tutorship.
• PM under Clause 6 of Part I of First Schedule – Can’t advertise (indirect solicitation)
5) CA used designation ‘Chartered Accountant’ in marriage invitation. He distributed cards
to his relatives, friends, clients
• No PM under Clause 6 of Part I of First Schedule
6) Practicing CA sent letter to Ministry of Finance inquiring whether panel of auditors is being
maintained by Ministry & if so, to include his name in panel (CV enclosed)
• PM under Clause 6 of Part I of First Schedule (amounting to roving inquiry)
7) During opening ceremony of new branch office of CA Y, his friend CA J introduced to CA Y,
Mr. Rich, who is owner of export house whose accounts has been audited by CA J for more
than 15 years. After few days, Mr Rich approached CA Y & offered certification work,
which was earlier done by CA J. CA Y undertook the work for a fee which was not less than
the fee charged by CA J
• CA Y is guilty of PM under Clause 6 of Part I of First Schedule. He should have asked
the client to come through CA J.
8) It is permitted to mention website on letterhead but soliciting isn’t allowed
• CA can’t mention this on letterhead – ‘Visit our website – www.abc.com’
9) CA can’t circulate information contained in website through email to acknowledge public
at large about his expertise
• PM under Clause 6 of Part I of First Schedule

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10) CA has to intimate website address annually to Institute.
11) CA J, Practicing CA provides part-time tutorship under coaching organisation of ICAI. He
was awarded ‘best faculty of the year’ from Institute. Later on, CA J posted his framed
photograph on his website.
• Passport size photo permitted, but framed photo is not permitted – PM under clause 6 of
Part I of First Schedule.
12) CA firm with 5 partners have developed website. It contains link to ‘All India Chartered
Accountants Association’, voluntary association where CA X (one of the partners) is
currently vice president.
• May provide link to website of ICAI, govt department or other professional bodies.
• Link to ‘All India Chartered Accountants Association’ is not permitted
• PM under clause 6 of Part I of First Schedule.
13) CA designates himself under the caption ‘Merchant Banker’ in client offer documents and
‘Advisor to Issue’ in own letterhead, visiting cards and professional documents.
• Can’t use designation ‘Merchant Banker’ or ‘Advisor/Consultant to Issue’ in own
letterhead, visiting card, professional documents.
• PM under clause 7 of Part I of First Schedule.
14) CA T was appointed to carry out internal audit of stockbroker. He failed to intimate
appointment to statutory auditors of the company
• No PM under clause 8 of Part I of First Schedule as no communication needed for parallel
positions
15) Auditor of cooperative society can charge fees on % basis under Regulation 192 - clause
10 of Part I of First Schedule
16) CA Ajit is special executive magistrate. He is also executive chairman of software company.
He is also income tax practitioner and consultant for derivative products. He also does
trading in commodity derivatives. He invests nearly 40% of his time to settle commodity
transactions. He has not taken permission of ICAI for becoming special executive
magistrate. But he has got special permission of council of ICAI to become executive
chairman.
• Clause 11 of Part I of First Schedule. No permission is needed for special executive
magistrate. Specific permission is required for executive chairman and commodity
derivatives trading. CA Ajit is not guilty for acting as special executive magistrate as it is
covered under general permission. He is also not guilty for holding position of executive
chairman after getting specific permission of Institute. But he is guilty for getting engaged
in commodity derivative trading, which is covered under specific permission.
17) Receiving royalty from sale of domain name/website is covered under specific
permission – Clause 11 of Part I of First Schedule.
18) No specific permission is needed for private tutorship under Clause 11 of Part I of First
Schedule.
19) CA X is sleeping partner in his family business
• PM under clause 11 of Part I of First Schedule as specific permission required.
20) CA X, Practicing CA is promoter director of AB Private Limited.
• No PM under clause 11 of Part I of First Schedule as no specific permission required.

Yes, I will definitely clear my CA Exams 119

CA SHANKAR LAKHWANI # Audit Made Easy
21) S Limited is partly owned subsidiary of H Limited. B and Co.(chartered accountants) were
appointed as a statutory auditors of S Limited. B (partner of B & co.) has received offer to
become director of H Limited. He has also got another offer to act as recovery consultant
for bank.
• Clause 11 of Part I of First Schedule - Auditor of subsidiary company can’t be director of
holding company. B shouldn’t accept offer of director of H Limited. He can act as recovery
consultant for bank as it is covered under general permission.
22) ABC Associates (CA Firm) failed to provide information to ICAI about networking
relationship with multinational accounting firm
• Guilty of PM under clause 2 of Part III of First Schedule.
23) AB Ltd removed audit firm (SR Associates) due to dispute. SR Associates intimated to
ROC a letter highlighting points of dispute, including non-existence of fixed assets, bogus
creditors. AB Limited complained to ICAI against SR Associates for their above letter to
ROC.
• PM under clause 1 of Part I of Second Schedule since
i. Duty continues even after completion of assignment
ii. SR Associates made voluntary disclosure without consent of client and
without requirement of law.
24) Cashier of the company committed fraud and absconded with proceeds. Chief accountant
did not know how the fraud occurred. Auditor also failed to discover the fraud. Fraud was
later discovered by chief accountant. Investigation made indicates that auditor did not
exercise proper skill & care and he performed his work haphazardly. Directors of company
intend to file disciplinary proceedings against auditor.
• PM under clause 7 of Part I of Second Schedule
• SA 240 -No professional scepticism.
• Directors can file disciplinary proceedings against auditor.
25) Mr K, Practicing CA is auditor of F limited. He advised MD of company to include ‘orders
under negotiation’ in sales, to reflect higher profit and better financial position to obtain
bank loans. Mr K, thereafter gave clean reports on balance sheet prepared accordingly
without examining accounts.
• PM under clause 7 of Part I of Second Schedule
• Other misconduct under clause 2 of Part IV of First Schedule
26) CA paid stipend as well as interest to his article
• PM under clause 1 of Part II of Second Schedule
27) P & Q are running CA firm. They included name of R without his knowledge as partner while
submitting application for empanelment as auditor of public sector bank to ICAI. They
added Mr R as partner to their firm on next day.
• PM under clause 3 of Part II of Second Schedule
28) AB Associates and CD & Co. (CA firms) have been part of one network firm. If tenure of AB
associates gets over due to rotation under Companies Act, CD & Co. is also disqualified
for audit of the same company.

Yes, I will definitely clear my CA Exams 120