1 Quality Control (Additional Questions – 14th Edition)

1.1 - SQC 1 “Quality Control for Firms that perform Audits & Reviews of Historical Financial Information
and Other Assurance and Related Services Engagements”
Q.1 MNP & Co., a firm of auditors, is appointed by a bank to conduct stock audit of a borrower. It
deputes one of its paid Chartered accountant employees, Sudhanshu, to conduct above said stock
audit. He leverages it as an opportunity to prevail upon the client to get the accounts audited from
their firm. He also assures client of a clean stock audit report without adverse comments as a quid
pro quo. Is approach of Sudhanshu proper? How does it reflect upon quality control system of firm?

HINT: Approach of Sudhanshu is not proper. Such practices blatantly violate code of ethics and its spirit. It
reflects poorly upon quality control system of firm envisaged in SQC 1 which requires that quality
control policies and procedures should be documented and communicated to the firm’s personnel.
It shows that firm’s personnel are not properly sensitized regarding requirements of SQC 1.

Q.2 CA M is introduced to a prospective client in a social function. He assures to visit office of CA M very
soon in relation to professional work. During discussions over a cup of coffee next week, it
transpires that there was a search by Enforcement Directorate in his premises about a month back
resulting in recovery of huge sum of cash. The income tax department had also searched his
premises in relation to bogus capital gains on penny stocks. Lamenting poor quality of services
provided by his present auditor, he offers appointment as tax auditor of his five family-owned firms
to CA M in lieu of handsome fees. What are the factors to be evaluated by CA M if he wants to take up
the engagement?

HINT: As per SQC 1, before accepting a new engagement, integrity of client should be considered including
matters that indicate involvement in money laundering or criminal activities. There has been search
of ED on the said party leading to recovery of huge amount of cash. The above coupled with actions
of income tax department relating to bogus capital gains on penny stocks indicates that client might
be involved in money laundering activities. Therefore, offer should not be accepted.

Q.3 Beta Private Limited has approached a firm of Chartered accountants to assist them in preparation
of financial statements and issue a compilation report in this regard. Does CA firm have
responsibility in relation to quality control for above said engagement? Discuss with reasons.

HINT: Such kind of services fall in category of “related services”. SQC 1 is applicable to all type of
engagements including engagement pertaining to “related services”.

Q.4 STA and Associates, Chartered Accountants, is an upcoming firm and its good professional services
are hired by diverse clients for assurance services. With a standing of 7 years in practice, the firm
has clients in various industries like health care, education, hospitality, manufacturing and many
more. With the increasing assignments, changes in regulatory compliances and appointment of new
personnel, the senior partner CA T is concerned with the proper functioning of the system of
Quality control within the firm. He wants to ensure that policies and procedures relating to the
system of quality control of the firm are complied with properly. CA T suggests that a proper
monitoring of quality control will be the right approach. Discuss the factors that are to be
considered by CA T for monitoring the quality control of engagements to ensure that they comply
with SQC. [Nov. 24 (5 Marks)]

1.1
Quality Control Chapter 1
Ans.: Factors to be considered for monitoring the quality control of engagements:
(i) Deciding whether QC system of the firm has been appropriately designed and effectively
implemented.
(ii) Examining whether new developments in the professional standards, legal and regulatory
requirements have been reflected in the QC policies.
(iii) Conducting monitoring by entrusting responsibility of monitoring process to a partner or other
persons with sufficient and appropriate experience and authority in the firm.
(iv) Dealing with complaints and allegations against the firm or any employees of it of non-
compliance with professional standards or appropriate regulatory requirements by a person
within or outside the firm.
(v) Taking appropriate remedial actions against the personnel who did not conform to QC policies.
(vi) Taking action when deficiencies in the design or operation of the firm’s QC policies and
procedures, or non-compliance with the firm’s system of QC are identified.

1.2 - SA 220 “Quality Control for an Audit of Financial Statements”

Q.5 GVN & Associates are auditors of a listed company involved in “fin-tech” sector. The engagement
team is stuck up with some issue pertaining to a particular Ind-AS applicable to the company. They
have framed a query and sent to ICAI for expert opinion on the matter. The issue was resolved upon
receipt of expert opinion. Since expert opinion was provided by ICAI, engagement team was of the
view that appointment of engagement quality control reviewer has lost its relevance. Do you agree?

HINT: Engagement quality control review in listed entities is a mandatory requirement. Expert opinion of
ICAI pertains to issue of interpretation. The appointment of reviewer is a separate and mandatory
requirement in audits of listed companies.

Q.6 RST & Co., a firm of Chartered accountants, are auditors of a listed company engaged in
manufacturing of heavy machinery components. The audit report for year 2023-24 also included
report on matters listed in CARO,2020. While reporting under clause vii(a) of the said order
relating to regularity of undisputed statutory dues by the company, the auditors have commented
that company is “generally regular” in depositing statutory dues to appropriate authorities. Is
above reporting qualitative and in line with requirements of SA-220?

HINT: Such type of reporting is not qualitative. It is not in accordance with SA 220. One of the objectives of
the auditor, as per SA 220, is to implement quality control procedures at the engagement level that
provide the auditor with reasonable assurance that the audit complies with professional standards
and regulatory and legal requirements. The reporting under CARO, 2020 is not proper. Hence, the
audit does not comply with regulatory and legal requirements.

Q.7 PQR & Associates are statutory auditors of a listed company. There arose an issue during the course
of audit relating to related party transactions. The engagement partner wants to consult
engagement quality control reviewer on this matter during the course of audit process itself. Can he
consult with engagement quality control reviewer? Discuss.

HINT: It is necessary to maintain objectivity of reviewer. Therefore, participation in engagement or

making decisions for engagement team is to be avoided at all costs. However, engagement partner
may consult EQC Reviewer during the engagement so as not to compromise his objectivity and
eligibility to perform the role.

1.2
Chapter 1 Quality Control
Q.8 BNE & Co. are in midst of audit process of a listed company. During the course of audit, an issue
arose relating to revenues from contracts with customers in terms of Ind AS 115. The engagement
partner took a certain stand. However, engagement quality control reviewer recommended
otherwise after review. The engagement partner is not willing to accept recommendations of
reviewer. How can the stalemate be ended?

HINT: In case, recommendations of EQC Reviewer are not accepted by engagement partner and matter is
not resolved to reviewer’s satisfaction, the matter should be resolved by following established
procedures of firm like by consulting with another practitioner or firm, or a professional or
regulatory body. The audit report should be issued only after resolution of matter.

Q.9 PQR Associates are the statutory auditors of a large un-listed company, which is engaged in
manufacturing of auto components. Subsequent to re-appointment of auditors in AGM, Company
shared the appointment letter with PQR Associates, seeking acknowledgement and acceptance
letter. CA. R is the engagement partner and is planning to issue the acceptance letter. During the
current FY, there was a search by the Income-tax Authorities on the company, and certain
accounting records were seized for verification. Based on the information available on social
media, CA. R noted that the promoters’ brother, is contemplating to contest in the ensuing elections,
under the banner of a political party. One of the current senior engagement team manager, who has
been doing the audit engagement till last year, has left PQR Associates and is planning to provide
some accounting services to one of associate companies. PQR Associates are yet to recruit another
senior manager having adequate experience in the audits of clients engaged in automotive sector.
Elaborate the matters to be considered by PQR Associates with respect to acceptance & continuance
of client relationships considering the above issues. [May 24 (5 Marks)]

Ans.: Acceptance and Continuance of Client Relationships:

As per SQC 1, “Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements,” a firm before accepting an
engagement should acquire vital information about client. Such information help firm to decide:
• Integrity of Client, promoters and key managerial personnel.
• Competence (including capabilities, time, and resources) to perform engagement.
• Compliance with ethical requirements
Firm should obtain such information as it considers necessary in the circumstances before accepting
an engagement with a new client, when deciding whether to continue an existing engagement, and
when considering acceptance of a new engagement with an existing client. Where issues have been
identified, and the firm decides to accept or continue the client relationship or a specific engagement,
it should document how the issues were resolved.
Further, as per SA 220, “Quality Control for an Audit of F.S.”, EP shall form a conclusion on compliance
with independence requirements that apply to the audit engagement. In doing so, the engagement
partner shall obtain relevant information from the firm and, where applicable, network firms, to
identify and evaluate circumstances and relationships that create threats to independence.
Conclusion: In view of the above, PQR Associates should:
• Follow their firm's policies and procedures for client acceptance and continuance. This includes
evaluating integrity of client, assessing potential risks associated with engagement, and ensuring
that firm has necessary resources and expertise to perform the engagement effectively. The
engagement team, should assess, whether the company is involved in any funding activities, to the
political parties, and if so enquire and assess the risks related to such transactions.

1.3
Quality Control Chapter 1
• Communicate clearly with the client regarding the scope of the engagement, the responsibilities of
both parties, and any limitations on the services to be provided. This helps manage expectations
and ensures alignment between the firm and the client.
• Maintain independence and objectivity throughout the engagement. Any potential threats to
independence, such as relationships with the client's affiliates or involvement in political activities
by related parties, should be evaluated and mitigated appropriately.
• Continually monitor the client relationship for any changes or developments that may impact the
firm's ability to provide services effectively. This includes staying informed about significant
events such as income-tax search, changes in client management, or potential conflicts of interest.
• Ensure that engagement team possesses the necessary competence and capabilities to perform
the audit effectively. The departure of a senior manager and the need to recruit a replacement
with specific industry experience should be addressed promptly to maintain audit quality.

Q.10 CA Giri is a senior partner of M/s TSV Associates. M/s TSV Associates is a reputed firm of Chartered
Accountants which has been in practice for more than five decades. The firm undertakes statutory
audits of large listed companies across various industry sectors and has more than fifty qualified
experienced professionals. CA Giri has been assigned as an Engagement Quality Control Reviewer
for an audit engagement of a listed company. What are the aspects, which would be looked into by
CA Giri as an EQCR in relation to the engagement?
Upon completion of the review, CA Giri has identified certain issues, with respect to revenue
recognition and adequacy of provisions relating to onerous contracts. The views of CA Giri are not
accepted by the Engagement Partner. Suggest the ways of resolving the differences of opinion
between CA Giri and the engagement partner. [May 24 (5 Marks)]

Ans.: Aspects to be considered while performing EQCR for audit of F.S.:

As per SA 220, “Quality Control for an Audit of Financial Statements”, for audits of financial
statements of listed entities, CA. Giri, the engagement quality control reviewer, on performing an
engagement quality control review, shall also consider the following:
(i) Engagement team’s evaluation of the firm’s independence in relation to the audit engagement;
(ii) Whether appropriate consultation has taken place on matters involving differences of opinion or
other difficult or contentious matters, and the conclusions arising from those consultations;
(iii) Whether audit documentation selected for review reflects the work performed in relation to the
significant judgments made and supports the conclusions reached.
As per SQC 1, “Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements,”, there might be difference of
opinion within ET, with those consulted and between EP and EQC reviewer. The report should only
be issued after resolution of such differences. In case, recommendations of engagement quality
control reviewer are not accepted by engagement partner and matter is not resolved to reviewer’s
satisfaction, the matter should be resolved by following established procedures of firm like by
consulting with another practitioner or firm, or a professional or regulatory body.
Conclusion: In given situation, under completion of review, CA. Giri, Engagement Quality Control
Reviewer has identified certain issues. However, the view of CA Giri, the EQCR are not accepted by the
Engagement Partner. This difference of opinion among the CA Giri and Engagement Partner should be
resolved with abovementioned manner as per SQC 1.

1.4
 General Auditing Principles & Auditor
2 Responsibilities (Additional Questions – 14th Edition)
2.4 - SA 299 “Joint Audit of Financial Statements”

Q.1 Dice Ltd. appointed two CA firms MN & Associates and PQ & Co. as joint auditors for conducting
audit for the year ended on 31st March, 2025. In the course of audit, it has been observed that there
is a major understatement in the value of inventory. The inventory valuation work was looked after
by MN & Associates but there was no documentation for the division of the work between the joint
auditors. Comment on the above situation with regard to responsibilities among joint auditors.
[May 19 (5 Marks); MTP-Oct. 24]

Ans.: Responsibilities of Joint Auditor:

• As per SA 299 “Joint Audit of F.S.” where joint auditors are appointed, they should, by mutual
discussion, divide the work among themselves. Division of the work would usually be in terms of
audit identifiable units or specified area. In some cases, due to nature of business entity, such a
division may not be possible. In such situations, division of the work may be with reference to
items of assets or liabilities or income or expenditure or with reference to period of time. The
division of the work among joint auditors as well as the areas of work to be covered by all of them
should be adequately documented and preferably communicated to the entity.
• In respect of the audit work divided among the joint auditors, each joint auditor is responsible
only for the work allocated to him, whether or not he has prepared a separate audit of the work
performed by him. On the other hand, all the joint auditors are jointly and severally responsible:
(i) Audit work which is not divided among the joint auditors and is carried out by all joint
auditors;
(ii) Decisions taken by all the joint auditors under audit planning phase concerning NTE of the
audit procedure to be performed by each of the auditor;
(iii) Matters which are bought to notice of the joint auditors by any one of them and on which
there is an agreement among the joint auditors;
(iv) Examining that financial statements of entity comply with requirements of relevant statute;
(v) Presentation & disclosure of F.S. as required by the applicable FRF;
(vi) Ensuring that the audit report complies with requirements of relevant statutes, applicable
SAs and other relevant pronouncements issued by ICAI.
• Joint auditors shall also discuss and document NTE of audit procedures for common and specific
allotted areas of audit to be performed by each of the joint auditors and the same shall be
communicated to TCWG. After identification and allocation of work among the joint auditors, the
work allocation document shall be signed by all joint auditors and same shall be communicated to
TCWG.
• Hence, in respect of audit work divided among the joint auditors, each joint auditor shall be
responsible only for the work allocated to such joint auditor including proper execution of the
audit procedures.

2.1
General Auditing Principles & Auditor Responsibilities Chapter 2
• In the instant case, Dice Ltd. appointed two CA Firms MN & Associates and PQ & Co. as joint
auditors for conducting audit. As observed during the course of audit that there is a significant
understatement in the value of inventory and valuation of inventory work was looked after by MN
& Associates.
Conclusion: In view of SA 299, MN & Associate will be held responsible for the same as inventory
valuation work was looked after by MN & Associates only. Further, there is violation of SA 299 as the
division of work has not been documented.

2.5 - SA 402 “Audit Considerations in an Entity using Service Organisation”

Q.2 Happy Hospital is a very renowned hospital for Orthopaedic Surgeries in Mumbai having
sophisticated infrastructure. Happy Hospital has started using a novice system which includes
complete record of Indoor Patient i.e. their diagnosis, their treatment, their medications, their
billings, and receipts thereon which is developed and managed by CT Contractors. CA Z is a
statutory auditor of Happy Hospital. CA Z came to know about this system while auditing. CA Z is
concerned whether the controls at CT Contractors Associates are operating effectively or not. For
this purpose, CA Z demanded from CT Contractors, an assurance report from a practicing Chartered
Accountant about their opinion on the description of CT Contractor's system, and the effectiveness
of the control. Which type of report should be obtained by CA Z in terms of relevant Standard on
Auditing? What aspects are to be considered by CA Z in using such assurance report as audit
evidence that controls at CT Contractors are operating effectively? [May 24 (5 Marks)]

Ans.: Type of Assurance Report to be obtained from Auditor of Service Organisation:

In the given scenario, CA. Z, as statutory auditor of Happy Hospital, is concerned about effectiveness
of controls at the service organization, specifically the system managed by CT Contractors.
To address this concern, CT Contractors should provide a Type 2 assurance report from a practicing
Chartered Accountant as per SA 402, “Audit Considerations Relating to an Entity Using a Service
Organisation”. This report will offer an opinion on the description of the system in use at Happy
Hospital, as well as evaluate the effectiveness of the controls implemented by CT Contractors.
Aspects to be considered in using Type 2 report as audit evidence that controls at Service
Organisation are operating effectively:
If, the user auditor plans to use a Type 2 report as audit evidence that controls at the service
organisation are operating effectively, the user auditor shall determine whether the service auditor’s
report provides sufficient appropriate audit evidence about the effectiveness of the controls to
support the user auditor’s risk assessment by:
(a) Evaluating whether description, design, and operating effectiveness of controls at the service
organisation is at a date or for a period that is appropriate for the user auditor’s purposes;
(b) Determining whether complementary user entity controls identified by the service organisation
are relevant to the user entity and, if so, obtaining an understanding of whether the user entity
has designed and implemented such controls and, if so, testing their operating effectiveness;
(c) Evaluating the adequacy of the time period covered by the tests of controls and the time elapsed
since the performance of the tests of controls; and
(d) Evaluating whether the tests of controls performed by the service auditor and the results
thereof, as described in the service auditor’s report, are relevant to the assertions in the user
entity’s financial statements and provide sufficient appropriate audit evidence to support the
user auditor’s risk assessment.

2.2
 Auditing Planning, Strategy and Execution
3 (Additional Questions – 14th Edition)
3.1 - Audit Planning
Q.1 CA. Pradyuman is planning for audit of a listed company headquartered in NOIDA. While doing this
exercise, he has made a list of various procedures intended to be performed by him during the
course of audit. He has further made up his mind to decide about sample size at time of performing
various planned procedures. Is above approach proper?
HINT: SA 300 states that audit plan shall include description about NTE of audit procedures. The extent of
audit procedures also includes deciding about sample sizes to be tested for performing audit
procedures. Therefore, the said approach is not proper. Various procedures planned to be
undertaken should also include considerations relating to sample sizes to be tested.
Q.2 CA. Nikita is conducting audit of a leading society engaged in promoting awareness regarding
usefulness of internet among the disadvantaged sections of society through easily understandable
means and methods. The society is also registered under FCRA, 2010 for receipt of foreign
contributions. During the course of audit, she embarked upon extensive procedures relating to
verification of receipt of foreign contributions to rule out “round-tripping” in comparison to
procedures originally thought of. She is documenting various procedures performed by her
including relevant audit findings.
However, she doesn’t not feel need for putting into writing about how she planned the whole
exercise. Does she require refreshening of her knowledge?
HINT: SA 300 requires auditor to document audit plan and significant changes made during the audit
engagement to the audit plan. It also requires auditor to document reasons for such changes. The
documentation of the audit plan is a record of the planned NTE of risk assessment procedures and
further audit procedures at the assertion level in response. It also serves as a record of the proper
planning of the audit procedures that can be reviewed and approved prior to their performance.
Further, changes to audit plan along with reasons thereof due to embarking upon extensive
procedures related to verification of foreign contributions in comparison to what was originally
envisaged need to be documented. Failure to document audit plan could entail risk of not conducting
audit according to professional standards in a qualitative manner.

3.4 - SA 600 “Using the Work of Another Auditor”

Q.3 MK Electronics Limited is a listed company with 8 subsidiaries spread across various states. The
F.S. of MK Electronics Ltd. are audited by CA Amar, the principal auditor. CA Amar relies on the
work of other auditors for auditing the financial statements of subsidiaries. You are required to:
(i) Explain the procedures that CA Amar will perform to obtain sufficient appropriate audit
evidence to ensure that the work of other auditors is adequate for his purpose.
(ii) Explain how he will document the working papers with respect to the subsidiaries audited by
other auditors. What matters need to be documented if the other auditor's report is modified.
[Nov. 24 (5 Marks)]

3.1
Auditing Planning, Strategy and Execution Chapter 3
Ans.: Using the work of Another Auditors:
(i) Procedures to be performed to obtain SAAE to ensure that the work of other auditors is
adequate for Principal Auditor’s purposes:
As per SA 600 “Using the Work of Another Auditor”, principal auditor should ordinarily perform
the following procedures:
(a) Inform the other auditor of matters such as:
• areas requiring special consideration,
• procedures for the identification of inter component transactions that may require
disclosure, and
• the time-table for completion of audit.
(b) Advise other auditor of significant accounting, auditing and reporting requirements and
obtain representation as to compliance with them.
(ii) Documentation of Working papers:
• Principal Auditor to document in his working papers – the components whose financial
information audited by other auditors.
• Principal auditor should also document the procedures performed & conclusions reached.
• Principal auditor need not document reasons for limiting the procedures in circumstances
where SAAE previously obtained that acceptable QC policies and procedures are complied
with in the conduct of other auditor's practice. Where other auditor’s report is other than
unmodified, principal auditor should also document how he has dealt with qualifications
or adverse remarks contained in the other auditor’s report in framing his own report.

3.5 - SA 610 “Using the Work of Internal Auditor”

Q.4 UV Limited is a large multinational company with a global outreach. Due to voluminous business, it
has an in-house internal audit function to monitor the day-to-day operations of the company. LK
and associates, Chartered Accountants have been engaged to conduct the statutory audit for the
financial year 2023-24. Since the company has large scale operations and there is a limited time to
perform statutory audit, CA L, the engagement partner decides to take direct assistance from the
internal auditors for certain areas of audit. CA L assigns the audit documentation part to one of his
audit assistants and instructs him to do the requisite documentation of working papers. Further he
tells his audit assistant not to document the working papers prepared by the internal auditors who
directly assisted them, as it does not form part of statutory audit.
Is CA L right in excluding the working papers prepared by internal auditor from the audit
documentation? Guide him as to the matters to be included in the Audit Documentation in this
scenario. [Nov. 24 (5 Marks)]
Ans.: Documentation of Working Papers prepared by Internal Auditors:
As per SA 610 “Using the Work of Internal Auditor”, if the external auditor uses internal auditors to
provide direct assistance on the audit, external auditor shall include in audit documentation,
working papers prepared by internal auditors who provided direct assistance on audit engagement.
Hence, CA L is not right in excluding the working papers prepared by internal auditor from the audit
documentation.
Documentation: Refer Answer of Q. No. 17 (14th Edition).

3.2
 Materiality, Risk Assessment & Internal Control
4 (Additional Questions – 14th Edition)
4.4 - Components of Internal Control

Q.1 AMRO Ltd. is a manufacturing and trading Company of leather goods since last 10 years. You are the
internal auditor of the company for the year 2024-25. In order to review internal controls of the
company, you visited the departments and noticed:
(1) The head of procurement, Mr. Amit, has complete control over purchasing, receiving goods, and
approving payments to suppliers. His actions are not reviewed by any other person in the
company.
(2) The company's staff has been working in the same roles for over five years without any
rotation. The finance manager, Mr. Sachin, in particular, has never had his duties rotated since
joining the company.
(3) The store manager, Mr. Gupta, who is responsible for maintaining the inventory, also keeps the
inventory records.
Required:
(a) Briefly discuss the general conditions pertaining to the internal check system to be ensure by
you as an auditor.
(b) Do you think that general conditions pertaining to the internal check system are violated in the
given situation? [RTP-Nov. 24]

Ans.:(a) General conditions pertaining to internal check system:

Refer Answer of Q. No. 15 (14th / 15th Edition).
(b) Violation of general conditions pertaining to the internal check system:
(1) The head of procurement, Mr. Amit, having complete control over the procurement process
without oversight violates the principle that no single person should control any important
aspect of the business operation.
(2) Lack of staff rotation for over 5 years violates the principle that staff duties should be
rotated periodically to prevent any single person from performing same function for too
long.
(3) Allowing Mr. Gupta, the store manager, to maintain inventory records while also having
custody of the inventory violates the principle that those with physical custody of assets
should not have access to accounting records.

For academic updates and related contents: Join telegram channel: https://t.me/altclasses
Visit knowledge portal of www.altclasses.in
For books/class related queries: E-mail: [email protected]
Ph.: 9319805511, 7260941195
For Online purchase of books/classes: Visit our web portal: www.altclasses.in

4.1
 5 Audit Evidence (Additional Questions – 14th Edition)
5.6 - SA 550 “Related Parties”

Q.1 PQR Ltd.is engaged in the business of construction and real estate having various projects across the
states. M/s ST & Co., Chartered Accountants have been appointed as statutory auditors. CA T, an
engagement partner, who leads engagement team, during preliminary verification, identified a few
agreements entered by PQR Ltd. for the provision of services to some parties under terms and
conditions that are outside PQR Ltd.'s normal course of business, suggestive of the indications about
existence of related party transactions that management has not previously disclosed to the auditor.
Highlight the aspects that M/s ST & Co., shall consider on identification of previously undisclosed
related party transactions with reference to the relevant standard on auditing. [Nov. 24 (5 Marks)]

Ans.: Identification of Previously Undisclosed Significant Related Party Transactions:

As per SA 550 “Related Parties”, if the auditor identifies related parties or significant related party
transactions that management has not previously identified or disclosed to the auditor, the auditor
shall:
(a) Promptly communicate the relevant information to the other members of the engagement team;
(b) Where the applicable FRF establishes related party requirements:
(i) Request management to identify all transactions with the newly identified related parties for
the auditor’s further evaluation; and
(ii) Inquire as to why the entity’s controls over related party relationships and transactions
failed to enable the identification or disclosure of the related party relationships or
transactions;
(c) Perform appropriate substantive audit procedures relating to such newly identified related
parties or significant related party transactions;
(d) Reconsider the risk that other related parties or significant related party transactions may exist
that management has not previously identified or disclosed to the auditor, and perform
additional audit procedures as necessary; and
(e) If the non-disclosure by management appears intentional (and therefore indicative of a risk of
material misstatement due to fraud), evaluate the implications for the audit.

For academic updates and related contents: Join telegram channel: https://t.me/altclasses
Visit knowledge portal of www.altclasses.in
For books/class related queries: E-mail: [email protected]
Ph.: 9319805511, 7260941195
For Online purchase of books/classes: Visit our web portal: www.altclasses.in

5.1
 Completion and Review
6 (Additional Questions – 14th Edition)
6.1 - SA 560 “Subsequent Events”

Q.1 CA Shobit is conducting an audit of XYZ Ltd. for the year 2023-24. The company is engaged in the
export of handicraft items in Europe. The audit is nearing completion in the month of July 2024.
However, it becomes known to CA Shobit that one of overseas buyers has made a legal claim against
the company on 1st June 2024 for injury caused to a customer of one European buyer due to sub-
standard dyes used in rugs of one lot of order shipped in August 2023. The management of the
company has decided to agree to an out of court settlement of ₹ 4 crore to protect its reputation. The
financial statements of the company are silent on this issue. Discuss, how, CA Shobit should proceed
to deal with above issue. [MTP-Sep. 24]

Ans.: Subsequent Events:

• In the given case, the auditor has come to know the legal claim against the company before the
issuance of the audit report. It has also come to his knowledge that the management of the company
has agreed to an out of court settlement of ₹ 4 crore.
• This is an example of a subsequent event between the date of the financial statements and the date
of the auditor’s report. It provides evidence of conditions that existed at the date of the financial
statements and requires adjustment in financial statements.
• Further as per SA 560, “Subsequent Events”, the auditor shall request management and, where
appropriate, those charged with governance, to provide a written representation in accordance with
SA 580, “Written Representations” that all the events occurring subsequent to the date of the
financial statements and for which the applicable financial reporting framework requires
adjustment or disclosure have been adjusted or disclosed.
Conclusion: CA Shobit should ensure that appropriate adjustments and disclosures are made by the
management. In the absence of the same, he should consider the impact of the said event and report
accordingly.

6.2 - SA 570 “Going Concern”

Q.2 Mudit & Associates is appointed as Statutory Auditors of GRF Private Limited for the financial year
2023-24. The company is into the business of Health Club, Fitness Centre and gym costumes. CA M is
the Engagement Partner for the audit assignment. CA M observed the following points while
auditing:
(i) Customer's base is reducing continuously due to tough competition and discount war existing
in the market.
(ii) Payments of creditors are delayed and made with overdue interest.
(iii) Company has not been able to pay the salaries of staff and trainers on time.
(iv) Key financial ratios of the company, like current ratio, debt-service coverage ratio, are in the
red and have deteriorated considerably as compared to last year.

6.1
Completion and Review Chapter 6
(v) The company has requested its bankers to provide it with additional working capital credit
facilities of ₹ 1.5 Crores, but bankers are not considering the company's proposal favorably.
What audit procedures should be followed by CA M considering the above circumstances as per SA
570 "Going Concern"? How auditor should deal if the use of going concern basis of accounting is
appropriate, but a material uncertainty exists, and adequate disclosure of material uncertainty is
made in the financial statements? [RTP-Nov. 24]

Ans.: Audit Procedures as per SA 570:

As per SA 570, “Going Concern” if events or conditions have been identified that may cast significant
doubt on the entity’s ability to continue as a going concern, the auditor shall obtain sufficient
appropriate audit evidence to determine whether or not a material uncertainty exists related to events
or conditions that may cast significant doubt on the entity’s ability to continue as a going concern
through performing additional audit procedures, including consideration of mitigating factors. These
procedures shall include:
(a) Where management has not yet performed an assessment of the entity’s ability to continue as a
going concern, requesting management to make its assessment.
(b) Evaluating management’s plans for future actions in relation to its going concern assessment,
whether the outcome of these plans is likely to improve the situation and whether management’s
plans are feasible in the circumstances.
(c) Where the entity has prepared a cash flow forecast, and analysis of the forecast is a significant
factor in considering the future outcome of events or conditions in the evaluation of
management’s plans for future actions:
(i) Evaluating the reliability of the underlying data generated to prepare the forecast; and
(ii) Determining whether there is adequate support for the assumptions underlying the forecast.
(d) Considering whether any additional facts or information have become available since the date on
which management made its assessment.
(e) Requesting written representations from management and, where appropriate, those charged
with governance, regarding their plans for future actions and the feasibility of these plans.
In the given case, CA M has observed such points that may cast significant doubt on the entity’s ability
to continue as a going concern. Therefore, CA M should follow audit procedures such as:
• Review of management’s assessment of the company's ability to continue as a going concern.
• Examine and challenge the reasonableness of the company's cash flow forecasts and key
assumptions.
• Review events after the reporting period that might affect the going concern assumption, such as
further financial deterioration or inability to secure financing.
• Analysis of the company's key financial ratios and compliance with loan agreements to assess
liquidity and solvency.
• Review of the company’s challenges and efforts to secure additional financing and the reasons for
the bank's reluctance to provide further credit.
• Assess the impact of declining customer base, delayed payments, and other operational
challenges on the company’s ability to continue as a going concern.
Further, as per SA 570 if adequate disclosure about the material uncertainty is made in the financial
statements, the auditor shall express an unmodified opinion and the auditor’s report shall include a
separate section under the heading “Material Uncertainty Related to Going Concern” to:

6.2
Chapter 6 Completion and Review
(a) Draw attention to the note in the financial statements that discloses the matters; and
(b) State that these events or conditions indicate that a material uncertainty exists that may cast
significant doubt on the entity’s ability to continue as a going concern and that the auditor’s
opinion is not modified in respect of the matter.

6.3 - SA 580 “Written Representations”

Q.3 CA N is carrying out an audit of restated financial statements of BQR Limited for past 3 financial
years i.e. 2023-24, 2022-23 and 2021-22 for onward submission to SEBI pursuant to their upcoming
IPO (Initial Public Offer). CA N is planning to issue an Audit Report on 5th August, 2024 covering
these restated financial statements. Before issuing the audit report, CA N requested Management
Representation Letter from the management of the Company for this assignment.
The Management of the Company provided Management Representation Letter dated 1st April,
2024 covering the period of financial year 2023-24 only as they were not in position to provide for
the financial year 2022-23 and 2021-22 because they were not in place during that period.
How would CA N deal with the above situation as per relevant Standard on Auditing?
[May 24 (5 Marks)]

Ans.: Written representations:

• In the given situation, CA N is carrying out an audit of restated financial statements of BQR Limited
for past 3 financial years i.e., 2023-24, 2022-23 and 2021-22 so he requested Management
Representation Letter from the management of the Company for this assignment before issuance of
the report. The management of the Company provided the Management Representation Letter only
for the financial year 2023-24 as they were not in place during that period.
• As per SA 580, “Written Representations”, as written representations are necessary audit evidence,
the auditor’s opinion cannot be expressed, and the auditor’s report cannot be dated before the date
of the written representations.
• As per SA 560, “Subsequent Events”, the auditor is concerned with events occurring up to the date
of the auditor’s report that may require adjustment to or disclosure in the financial statements, the
written representations are dated as near as practicable to, but not after, the date of the auditor’s
report on the financial statements.
• In some circumstances it may be appropriate for the auditor to obtain a written representation
about a specific assertion in the financial statements during the course of the audit. Where this is
the case, it may be necessary to request an updated written representation.
• The written representations are for all periods referred to in the auditor’s report because
management needs to reaffirm that the written representations it previously made with respect to
the prior periods remain appropriate. The auditor and management may agree to a form of written
representation that updates written representations relating to the prior periods by addressing
whether there are any changes to such written representations and, if so, what they are.
• Situations may arise where current management were not present during all periods referred to in
the auditor’s report. Such persons may assert that they are not in a position to provide some or all
the written representations because they were not in place during the period. This fact, however,
does not diminish such persons’ responsibilities for the financial statements as a whole.

6.3
Completion and Review Chapter 6
Conclusion: Requirement for the auditor to request written representations that cover the whole of
the relevant period(s) still applies. Therefore, CA. N should take written representation letter from
management of BQR Limited for the financial year 2022-23 and 2021-22 also.
In case the management does not provide written representation as requested, the auditor shall
(a) discuss with the management,
(b) re-evaluate the integrity of management, and
(c) take appropriate actions including the impact on the audit report as per SA 705.

For academic updates and related contents: Join telegram channel: https://t.me/altclasses
Visit knowledge portal of www.altclasses.in
For books/class related queries: E-mail: [email protected]
Ph.: 9319805511, 7260941195
For Online purchase of books/classes: Visit our web portal: www.altclasses.in

6.4
 7 Reporting (Additional Questions – 14th Edition)
7.2 – SA 701 “Communicating Key Audit Matters in the Independent Auditor’s Report”

Q.1 M/s JPP & Associates have been appointed as auditors of ABC Ltd., an ISO certified listed Indian
multinational Jewellery Company having headquarters at Mumbai for F.Y. 2024-25. The company
has more than 100 showrooms in India and 60 showrooms across the globe. During the course of
audit, from the matters communicated with TCWG, 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).
Public disclosure of this specific matter by the auditor is not precluded by authorities under PMLA
since the same may not prejudice investigation which has already been officially completed and
settled on 30th September 2024. 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. [Nov. 24 (5 Marks)]

Ans.: Considerations in determining matters requiring significant attention in performing the audit:
As per SA 701 “Communicating Key Audit matters in the Independent Auditor’s Report”, auditor shall
determine, from the matters communicated with TCWG, those matters that required significant
auditor attention in performing the audit. In making this determination, the auditor shall consider the
following:
(a) Areas of higher assessed RMM, or significant risks identified in accordance with SA 315;
(b) Significant auditor judgments relating to areas in the F.S. that involved significant management
judgment, including accounting estimates that have been identified as having high estimation
uncertainty.
(c) The effect on the audit of significant events or transactions that occurred during the period.
The auditor shall determine which of the matters so determined above were of most significance in
the audit of the F.S. of the current period and therefore are the key audit matters.
Introductory language while communicating KAM in Audit Report:
The introductory language in KAM section of the auditor’s report shall state that:
(a) 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
(b) These matters were addressed in the context of the audit of the F.S. as a whole, and in forming the
auditor’s opinion thereon, and the auditor does not provide a separate opinion on these matters.

7.3 - SA 705 “Modifications to the Opinion in the Independent Auditor’s Report”

Q.2 ABC Ltd. is a company engaged in the manufacture of iron and steel bars. PP & Associates are the
statutory auditors of ABC Ltd. for the FY 2024-25. During the course of audit, CA Prakash, the

7.1
Reporting Chapter 7
engagement partner, found that the Company’s financing arrangements have expired and the
amount outstanding was payable on March 31, 2025. The Company has been unable to renegotiate
or obtain replacement financing and is considering filing for bankruptcy. These events indicate a
material uncertainty that may cast significant doubt on the Company’s ability to continue as a going
concern and therefore it may be unable to realize its assets and discharge its liabilities in the normal
course of business. The financial statements (and notes thereto) do not disclose this fact. What
opinion should CA Prakash express in case of ABC Ltd.? [MTP-Oct. 24]

Ans.: Type of Opinion to be expressed:

In the present case based on the audit evidence obtained, CA Prakash has concluded that a material
uncertainty exists related to events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern, and the entity is considering bankruptcy. The financial
statements of ABC Ltd. omit the required disclosures relating to the material uncertainty.
In such circumstances, CA Prakash should express an adverse opinion because the effects on the
financial statements of such omission are material and pervasive.
Relevant extract of Adverse Opinion Paragraph and Basis for Adverse Opinion paragraph is as under:
Adverse Opinion
In our opinion, because of the omission of the information mentioned in the Basis for Adverse
Opinion section of our report, the accompanying financial statements do not present fairly, the
financial position of the entity as on March 31, 2025, and of its financial performance and its cash
flows for the year then ended in accordance with the Accounting Standards issued by the ICAI.
Basis for Adverse Opinion
The financing arrangements of ABC Ltd. has expired and the amount outstanding was payable on
March 31, 2025. The entity has been unable to conclude renegotiations or obtain replacement
financing and is considering filing for bankruptcy. This situation indicates that a material uncertainty
exists that may cast significant doubt on the Company’s ability to continue as a going concern. The
financial statements do not adequately disclose this fact.

Q.3 The extract of the financial statements of Nex Limited for the financial year 2023-24 is as follows:

Particulars ₹ (in Crores)

Trade Receivable - Unsecured considered Good 225.00

Provision for Bad and Doubtful Debts 50.00

Stock of Raw Materials 180.00

Stock of Finished Goods 250.00

Total of Assets 950.00

CA Yash is statutory auditor of Nex Ltd. for FY 2023-24 & noticed the following:
(i) With respect to the debtors amounting to ₹ 175 crore, no balance confirmation was received by
the audit team. Further, there have been defaults on payment obligations by debtors on the due
dates during the year under audit. The company has created a provision for doubtful debts to the
tune of ₹ 50 crore during the year under audit. The company has stated that the provision is
based on receivables which are older than 36 months, which according to the audit team is
inadequate and as such the audit team is unable to ascertain carrying value of trade receivables.

7.2
Chapter 7 Reporting
(ii) Further, in respect of inventories (which constitutes 45% of the total assets of the company),
during the reporting period, the management has not undertaken physical verification of
inventories at periodic intervals. Also, the company has not maintained adequate inventory
records at the factory. The audit team was unable to undertake the physical inventory count as
such the value of inventory could not be verified.
What kind of opinion should be given by CA Yash in the given situation? Draft a suitable Opinion and
Basis of Opinion paragraph. [RTP-Nov. 24]

Ans.: Type of Opinion to be expressed:

In the present case, CA Yash is unable to obtain sufficient and appropriate audit evidence with respect
to the following:
(i) The balance confirmation with respect to debtors amounting to ₹ 175 crores are not available.
Further there has been default in payment by the debtors and the provision so made is not
adequate. The audit team is also unable to ascertain the carrying value of trade receivables.
(ii) With respect to 45% of the company’s inventory, neither the physical verification has been done
by the management nor adequate inventory records are maintained. Audit team is also unable to
undertake the physical inventory count as such the value of inventory could not be verified.
In the above two circumstances the auditor is unable to obtain sufficient appropriate audit evidence
on which to base the opinion, and the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive.
Thus, CA Yash should give a Disclaimer of Opinion.
The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of
Opinion paragraph is as under:
Disclaimer of Opinion
We do not express an opinion on the accompanying financial statements of Nex Ltd. Because of the
significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we
have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit
opinion on these financial statements.
Basis for Disclaimer of Opinion
We are unable to obtain balance confirmation with respect to the debtors amounting to ₹ 175 crore.
Further, there have been defaults on the payment obligations by debtors on the due dates during the
year under audit. The company has created a provision for doubtful debts of ₹ 50 crore during the year
under audit which is inadequate in the circumstances of the company. The carrying value of trade
receivables could not be ascertained.
Further, in respect of inventories (which constitute 45% of the total assets of the company), during the
reporting period, management has not undertaken physical verification of inventories at periodic
intervals. Also, company has not maintained adequate inventory records at the factory. We were
unable to undertake the physical inventory count and as such value of inventory could not be verified.

7.4 - SA 706 “Emphasis of Matter Paragraph & Other Paragraphs in the Independent Auditor’s Report”

Q.4 Fancy Limited is a foreign company providing software support services having its Branch Office at
Delhi. During the year 2024-25, Fancy Limited incorporated a subsidiary Nancy Private Limited in
Gurgaon. For furtherance of objectives, Fancy Limited entered into a Business Transfer Agreement
dated 5th October 2024 with Nancy Private Limited for transfer of all assets and liabilities along

7.3
Reporting Chapter 7
with the business of Delhi Branch to Nancy Private Limited on a going concern basis effective from
01st April, 2024. Further necessary approval from regulatory authorities is also received on 20th
December, 2024 for such transfer. Fancy Limited 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.
During the year 2024-25, Delhi Branch of Fancy Limited have prepared its financial statements on
the basis that the Branch Office does not continue to be a going concern and all its assets are carried
in the books of accounts at the values likely to be recovered at the time of closure of operations, to
the extent ascertainable at the time of preparation of the financial statements. Delhi Branch has
incorporated above matter in detailed form in Note XX to the financial statements.
You are statutory auditor of Delhi Branch of Fancy Limited for the financial year 2024-25. According
to you, Delhi Branch has correctly disclosed about the matter in Note XX to the F.S. regarding
management's intention to close the operations of branch office. Further you have obtained
sufficient appropriate audit evidence concerning audit and on verge of finalization of audit report.
Draft a suitable opinion paragraph and basis thereof in the given case along with disclosure of Note
XX with suitable place in audit report in terms of relevant auditing standard. [May 24 (5 Marks)]

Ans.: Drafting of Opinion Paragraph and basis thereof along with disclosure of Note XX:
INDEPENDENT AUDITOR’S REPORT
To the Members of Delhi Branch Office of Fancy Limited
Report on the Audit of the Standalone Financial Statements
Opinion
We have audited standalone F.S. of Delhi Branch Office of Fancy Limited (“the Company”), which
comprise the balance sheet as at March 31, 2025, and the statement of Profit & Loss, (statement of
changes in equity) and the statement of cash flows for the year then ended, and notes to the financial
statements, including a summary of significant accounting policies and other explanatory information.
In our opinion, and to the best of our information and according to the explanations given to us the
aforesaid financial statements, give a true and fair view, in conformity with the accounting principles
generally accepted in India, of the state of affairs of the Delhi Branch Office of the Company as at March
31, 2025 and profit/loss, (changes in equity) and its cash flows for the year ended on that date.
Basis for Opinion
We conducted our audit in accordance with Standards on Auditing (SAs). Our responsibilities under
those standards are further described in the Auditor’s Responsibilities for the Audit of the F.S. of our
report. We are independent of the Company in accordance with the ethical requirements that are
relevant to our audit of the F.S. as per the ICAI’s Code of Ethics and the provisions of the Companies
Act, 2013, and we have fulfilled our other ethical responsibilities in accordance with these
requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to
provide a basis for our opinion.
Emphasis of Matter
We draw attention to Note XX regarding Delhi Branch Office management’s intention to close the
operations of the Branch Office subject to regulatory approvals. Accordingly, the financial statements
have been prepared on the basis that the Delhi Branch Office does not continue to be a going concern
and provisions have been made in the books of account for the losses arising or likely to arise on
account of closure of operations including the losses on the realizability of current assets.
Our opinion is not modified in respect of this matter.

7.4
Chapter 7 Reporting
7.8 - Duties of Auditor

Q.5 During the course of audit of PEC Limited, CA Guru has reason to believe that a fraud involving Rs.75
lakhs has been committed in the company by its employees. Is CA Guru under statutory obligation to
report the above matter to Central government by filing prescribed form on MCA Portal? How
should he proceed to report above said matter? [MTP-Oct. 24]

Ans.: Reporting of Fraud:

• As per Sec. 143(12) of Companies Act, 2013 read with Rule 13 of Companies (Audit and Auditors)
Rules, 2014, if an auditor of a company in the course of the performance of his duties as auditor,
has reason to believe that an offence of fraud, which involves or is expected to involve individually
an amount of ₹ 1 crore or above, is being or has been committed in the company by its officers or
employees, the auditor shall report the matter to the Central Government within such time and in
such manner as prescribed.
• In the given case, CA Guru has reason to believe that a fraud involving ₹ 75 lakhs has been
committed in the company by its employees. Therefore, he is under no statutory obligation to
report this matter to Central Government by filing prescribed Form (ADT-4) on MCA portal.
• In case of a fraud involving lesser than the specified amount [i.e. less than ₹ 1 crore], the auditor
shall report the matter to the audit committee constituted under section 177 or to the Board in
other cases within such time and in such manner as prescribed.
• Besides, auditor has obligation to report matters pertaining to fraud under clause (xi) of
paragraph 3 of CARO, 2020

7.9 - Matters to be included in Auditor’s Report under CARO, 2020

Q.6 You are appointed as a Statutory Auditor of SDA Limited for the year 2024-25 in the place of CA T.
During audit you found an order dated 01.05.2024 under section 148 of the Income-tax Act, 1961
wherein tax of ₹ 50 lakhs was demanded owing to undisclosed cash sales of ₹ 150 lakhs for the
financial year 2021-22 which was accepted by the company and the applicable tax was paid by the
Company during the year 2024-25. The company has not recorded such undisclosed income in their
books of account during the year 2024-25. On further inquiring the matter with CA T, you came to
know that CA T resigned due to non-recording of such transaction by the company. Is there any
reporting responsibility casted on you regarding the above matters under CARO, 2020 for the year
2024-25? [May 24 (5 Marks)]

Ans.: Reporting under Paragraph 3 of CARO, 2020:

• Clause (viii) of Paragraph 3 of CARO, 2020 requires the auditor to report whether any transactions
not recorded in the books of account have been surrendered or disclosed as income during the year
in the tax assessments under the Income-tax Act, 1961, if so, whether the previously unrecorded
income has been properly recorded in the books of account during the year.
• In addition, Clause (xviii) of Paragraph 3 of CARO, 2020 requires the auditor to report whether
there has been any resignation of the statutory auditors during the year, if so, whether the auditor
has taken into consideration the issues, objections or concerns raised by the outgoing auditors.
• In the given situation, during audit an order dated 01.05.2024 u/s 148 of the Income-tax Act, 1961
was noticed wherein tax of ₹ 50 lakh were demanded owing to undisclosed cash sales of 150 lakh
for the financial year 2021-22 which was accepted by the company and the applicable tax was paid

7.5
Reporting Chapter 7
by the company during the year 2024-25. The company has not recorded such undisclosed income
in their books of account during the year 2024-25. The auditor would be required to report as per
Clause (viii) of Paragraph 3 of CARO, 2020.
• Further CA T, the auditor of SDA Limited resigned due to non-recording of such undisclosed income
in their books of account. The auditor would be required to report the same in CARO, 2020 as per
Clause (xviii) of Paragraph 3 of CARO, 2020.
Conclusion: Auditor would be required to report as per Clause (viii) & Clause (xviii) of Paragraph 3 of
CARO 2020 for the year 2024-25.

Q.7 Discuss the reporting responsibilities of statutory auditor in the following situations for year 2023-
24 under CARO, 2020:
(i) In the financial year 2023-2024, Candy Ltd. decided to upgrade its registered office, located at a
prime spot in Bangalore. As a part of this upgrade, the company sought to acquire an adjacent
plot of land owned by Mr. Sidhant, who is also a director of Candy Ltd. Initially hesitant to sell, Mr.
Sidhant was persuaded to transfer his property to the company in exchange for a larger plot
owned by Candy Ltd. This plot, located on a nearby street, is double the size of Mr. Sidhant’s land.
Satisfied with the exchange, Mr. Sidhant agreed to transfer the property, and the exchange was
formalised in a deed executed by the company's authorised representatives and Mr. Sidhant. The
registration of the properties was completed by December 31, 2023.
(ii) On 15th May, 2023, a TDS survey was carried out in premises of SSO Industries Limited in
accordance with the provisions of the Income Tax Act, 1961.The survey team pointed out certain
lapses regarding non-deduction of tax at source and subsequently Deputy Commissioner of
Income Tax (TDS) raised a demand of ₹ 25 lacs on the company treating it as “assessee in
default”. The company has not deposited demand raised and filed appeal against impugned order
on 1st March, 2024 under e-appeals scheme with JCIT (Appeals). [MTP-Sep. 24]

Ans.: Reporting responsibilities of statutory auditor under CARO 2020:

(i) Non-Cash Transaction with Related Parties:
The auditor is required to report the transaction as per Clause (xv) of Paragraph 3 of the CARO,
2020 which states that whether the company has entered into any non-cash transactions with
directors or persons connected with him and if so, whether the provisions of Sec. 192 of
Companies Act have been complied with.
Further, as per Clause (xiii) of Paragraph 3 of the CARO, 2020, auditor should report whether all
transactions with the related parties are in compliance with sections 177 and 188 of Companies
Act where applicable and the details have been disclosed in the financial statements, etc., as
required by the applicable accounting standards.
In the given situation, Candy Ltd. has entered into non-cash transactions with one of the directors,
Mr. Sidhant during the year, by transferring the property (by Mr. Sidhant) in favour of the
Company in a deed of exchange of a site owned by the company.
Conclusion: Auditor is required to report the matter as per Clause (xv) and Clause (xiii) of
Paragraph 3 of the CARO, 2020.
(ii) Disputed Statutory Dues:
As per clause (vii)(b) of Paragraph 3 of CARO,2020, the auditor is required to report where
statutory dues have not been deposited on account of any dispute, then the amounts involved and
the forum where dispute is pending shall be mentioned.

7.6
Chapter 7 Reporting
In the given situation, the survey team pointed out certain lapses regarding non-deduction of TDS
and demand raised by DCIT(TDS). TDS dues are in the nature of statutory dues and the company
has filed appeal against order of DCIT (TDS) raising a demand of ₹ 25 lacs with JCIT (Appeals).
Therefore, these are in the nature of disputed statutory dues.
Thus, it should be reported in accordance with Clause (vii) (b) of Paragraph 3 of CARO, 2020.

Q.8 TEA Ltd., a public company is exclusively dealing in blending, processing, packing and selling of
various brands of Tea. During the year 2023-24, it had availed credit facilities from Kuber Bank Ltd.
The bank had sanctioned a working capital cash credit facility on 21st April, 2023, for a limit of ₹
4.50 crore and Letter of Credit facility for a limit of ₹ 2.50 crore aggregating to ₹ 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 ₹ 3.90 crore and of Letter of credit
was ₹ 1.05 crore aggregating to ₹ 4.95 crore. During the year under review, the company had faced
sluggish market conditions for its various brands of teas due to its inability to cater to the
requirements of its customers' expectations. It faced severe cash crunch and found it difficult to
manage working capital stress. In order that the bank does not reduce its drawing power of working
capital limit, the management 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.
When an engagement partner leading the audit team happened to review the stock statements
submitted to the bank, 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? Analyse the issue and discuss the reporting responsibilities of the
auditor. [Nov. 24 (5 Marks)]

Ans.: Reporting requirements under CARO, 2020:

• As per Para 3(ii)(b) of CARO, 2020, the auditor is required to report whether during any point of
time of the year, the company has been sanctioned working capital limits in excess of ₹ 5 crores, in
aggregate, from banks or financial institutions on the basis of security of current assets; whether
the quarterly returns or statements filed by the company with such banks or financial institutions
are in agreement with the books of account of the Company, if not, give details.
• For the purpose of reporting under this clause, auditor is required to check the working capital
sanctioned limit and not its utilisation. The utilisation may be less than the sanctioned limit of five
crore rupees but such cases will also be covered for the purpose of reporting.
• In the given case, sanctioning working capital limit is ₹ 7 crore against which utilised amount is
₹ 4.95 crore. Quarterly stock statements filed by the company for June 2023, Sep. 2023 and Dec.
2023 shows inflated values of inventories and not in agreement with books of account of the
company. CFO of the company contends that auditors need not examine and compare 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.
Conclusion: Contention of CFI is not correct and the given situation is covered well within the scope
of reporting under CARO, 2020 and auditor should report the working limit sanctioned to TEA Ltd.
and disagreement of quarterly statements with the books of account as required under Para 3(ii)(b)
of CARO, 2020.

7.7
 8 Specialised Areas (Additional Questions – 14th Edition)
8.1 – SA 800 “Special Considerations – Audit of F.S. Prepared in accordance with Special Purpose
Frameworks”

Q.1 CA Lalita is auditor of a company. She is also offered professional work of audit of financial
statements prepared specifically for meeting requirements of a loan agreement for the same period.
She chooses to accept work and has made up her mind to disclose this fact in “Emphasis of Matter
Paragraph” in audit report to be issued by her for this specific engagement. Is her approach proper?

Ans.: Approach of CA Lalita is proper. There is no bar upon accepting such an engagement even though she
is the auditor of the company. Besides, she has intended to disclose this fact in “Emphasis of Matter
Paragraph” of the audit report to be issued by her for such specific engagement.

Q.2 CA Lakshmi has prepared a draft audit report for financial statements of X Ltd. prepared in
accordance with financial reporting provisions of a contract with Y Ltd. She has drafted an
unmodified opinion to be given in audit report. Besides, she has also drawn attention in draft audit
report to Note “A “to the financial statements which describes the basis of accounting (under the
heading “Basis of accounting”). How she should ensure that report would not be misused? Draft a
suitable para to be included in the report for this purpose.

Ans.: Lakshmi may consider it appropriate to indicate that the auditor’s report is intended solely for specific
users. Depending on the law or regulation applicable, this may be achieved by restricting the
distribution or use of the auditor’s report. In these circumstances, the paragraph alerting the readers
may be expanded to include these other matters and the heading modified accordingly. The draft para
should read as under: -
Basis of Accounting and Restriction on Distribution and Use
Without modifying our opinion, we draw attention to Note A to the F.S., which describes the basis of
accounting. The F.S. are prepared to assist the company to comply with the financial reporting
provisions of the contract referred to above. As a result, the F.S. may not be suitable for another
purpose. Our report is intended solely for X Ltd. and Y Ltd. and should not be distributed to or used by
parties other than X Ltd. and Y Ltd.

Q.3 SA 800 deals with special considerations applicable in respect of audit of financial statements
prepared in accordance with special purpose framework. Explain, by giving examples, meaning of
special purpose framework.

Ans.: Meaning of Special Purpose Framework:

SA 800 “Special Considerations – Audit of F.S. Prepared in accordance with Special Purpose
Frameworks” defines special purpose framework as a FRF designed to meet the financial information
needs of specific users. The FRF may be a fair presentation framework or a compliance framework. The
requirements of the applicable FRF determine the form and content of the financial statements and
what constitutes a complete set of financial statements.

8.1
Specialised Areas Chapter 8
Examples of Special purpose frameworks:
(i) The cash basis of accounting and also cash flow information that an entity may be required to
prepare for creditors.
(ii) The financial reporting provisions established by a regulator to meet the requirements of that
regulator.
(iii) The financial reporting provisions of a contract, such as a bond indenture, a loan agreement, or a
project grant.

Q.4 The financial statements of TC & Co. have been prepared by management of an entity in accordance
with the financial reporting provisions of a contract (that is, a special purpose framework) to comply
with provisions of the contract. Based on the contract, management does not have a choice of
financial reporting frameworks. As an auditor what considerations would be undertaken while
planning and performing audit?

Ans.: Consideration while planning and performing audit of Special purpose financial statements:
As per SA 800 “Special Considerations – Audit of Financial Statements prepared in accordance with
Special Purpose frameworks” auditor should consider the following while planning and performing
audit of financial statements prepared in accordance with special purpose framework:
• In planning and performing an audit of special purpose F.S., auditor shall determine whether
application of the SAs requires special consideration in the circumstances of the engagement.
While determining the application of SA, auditor is required to consider the requirement of SA 200
on applicability of SAs. SA 200 requires the auditor to comply with
(a) relevant ethical requirements, and
(b) all SAs relevant to the audit.
Auditor is required to comply with each requirement of an SA unless entire SA is not relevant or the
requirement is not relevant because it is conditional and the condition does not exist.
• Application of some of the requirements of SAs in an audit of special purpose F.S. may require
special consideration by the auditor. For example, in SA 320, judgments about matters that are
material to users of the F.S. are based on a consideration of the common financial information needs
of users as a group. In the case of an audit of special purpose F.S., however, those judgments are
based on a consideration of the financial information needs of the intended users.
• SA 315 requires the auditor to obtain an understanding of the entity’s selection and application of
accounting policies. In the case of F.S. prepared in accordance with the provisions of a contract,
auditor shall obtain understanding of any significant interpretations of contract that management
made in preparation of those F.S. An interpretation is significant when adoption of another
reasonable interpretation would have produced a material difference in the information presented
in the F.S.
• In the case of special purpose F.S., such as those prepared in accordance with the requirements of a
contract, management may agree with the intended users on a threshold below which
misstatements identified during the audit will not be corrected or otherwise adjusted. Existence of
such a threshold does not relieve the auditor from the requirement to determine materiality in
accordance with SA 320 for purposes of planning and performing the audit of the special purpose
F.S.
• In the case of special purpose F.S., persons responsible for the oversight of its preparation may not
be the same as TCWG responsible for the oversight of the preparation of general purpose F.S. In
such cases, requirements of SA 260 may not be relevant to the audit of the special purpose F.S.

8.2
Chapter 8 Specialised Areas
8.2 – SA 805 “Special Considerations – Audits of Single F.S. and Specific Elements, Accounts or Items of a
F.S.”

Q.5 CA M. Surya is auditor for F.S. of an entity prepared in accordance with financial reporting provisions
of a contract. He is also offered an audit of trade receivables appearing in above financial statements.
Can he accept such an engagement? Discuss brief outline of his audit approach in such a situation.

Ans.: Single F.S. or Specific element, account or item of a F.S. may be prepared in accordance with a general
or special purpose framework. If prepared in accordance with a special purpose framework, SA 800
also applies to the audit.
In the given case, F.S. are prepared in accordance with financial reporting provisions of a contract. It is
a special purpose framework. The auditor of F.S. prepared in accordance with the special purpose
framework is also offered to audit trade receivables appearing in the above F.S., which relate to the
audit of the elements of F.S. prepared in accordance with the special purpose framework. Hence, his
audit approach should include considering requirements of both SA 800 and SA 805.

Q.6 CA G is offered appointment for audit of trade payables of F.S. of a company. However, F.S. prepared
under Companies Act, 2013 are audited by CA Jignesh. Discuss why it would be practically difficult for
CA G to perform such an audit.

Ans.: Compliance with the requirements of SAs relevant to the audit of a Single F.S. or of a Specific element of
a F.S. may not be practicable when the auditor is not also engaged to audit the entity’s complete set of
F.S. In such cases, auditor often does not have the same understanding of the entity and its
environment, including its internal control, as an auditor who also audits the entity’s complete set of
F.S. Accordingly, auditor may need further evidence to corroborate audit evidence acquired from the
accounting records.
In the case of an audit of a Specific element of a F.S., certain SAs require audit work that may be
disproportionate to the element being audited. If the auditor concludes that an audit of a Single F.S. or
of a Specific Element of a F.S. in accordance with SAs may not be practicable, he may discuss with
management whether another type of engagement might be more practicable.

Q.7 CA Rajni is appointed as the statutory auditor of STS Ltd. for the financial year 2024-25 for auditing
complete set of financial statements. The company has also assigned the audit of Property, Plant and
Equipment to CA Rajni as a separate engagement for the financial year 2024-25. While drafting the
audit report of complete set of financial statements, CA Rajni decides to give an adverse opinion
based on the audit observations noted during the course of audit. At the same time, she is also
finalizing the audit report of the separate engagement where she wants to give an unmodified
opinion.
Comment with reference to the relevant Standard of Auditing regarding the opinion to be given by CA
Rajni in audit report of separate engagement of audit of Property, Plant and Equipment.
[Nov. 24 (5 Marks)]

Ans.: Circumstances in which unmodified opinion can be expressed on a Specific Element:

As per SA 805 “Special Considerations – Audits of Single F.S. and Specific Elements, Accounts or Items
of a F.S.”, if auditor concludes that it is necessary to express an adverse opinion or disclaim an opinion
on the entity’s complete set of F.S. as a whole, but, in the context of a separate audit of a Specific
Element that is included in those financial statements,, auditor nevertheless considers it appropriate to
express an unmodified opinion on that element, the auditor shall only do so if:
(a) Not prohibited by Law and Regulation;

8.3
Specialised Areas Chapter 8
(b) Audit report on Specific Element is not published together with audit report on complete F.S
containing the adverse opinion or disclaimer of opinion; and
(c) Specific element does not constitute a major portion of entity’s complete F.S.
In the given case, auditor may express unmodified opinion in respect of specific element, only when the
above stated conditions got satisfied.

8.3 – SA 810 “Engagements to Report on Summary Financial Statements (SFS)”

Q.8 CA Madhur is auditor of a company and has issued audit report dated 15th June of a particular year.
The audit report on Summary F.S. derived from such audited F.S. is dated 15th July of that particular
year.
(a) Discuss whether there exists any additional reporting responsibility for auditor in such a
situation in respect of audit report on summary financial statements.
(b) Consider that the audit report on F.S. issued by CA Madhur for above said company contains
qualified opinion. Can he issue an unmodified opinion on summary financial statements
derived from audited financial statements? Discuss.

Ans.: Engagements to Report on Summary Financial Statements

(a) Auditor’s report on Summary F.S. should state that the Summary F.S. and the audited F.S. do not
reflect the effects of events that occurred subsequent to the date of the auditor’s report on the
audited F.S.
(b) When auditor’s report on audited F.S. contains a qualified opinion, the auditor’s report on the
Summary F.S. shall also contain following:
(i) State that the auditor’s report on the audited F.S. contains a qualified opinion.
(ii) Describe:
• The basis for the qualified opinion on the audited F.S. and that qualified opinion in the
auditor’s report on the audited F.S.; and
• The effect thereof on the Summary F.S., if any.

Q.9 Mr. BK has been engaged by XYZ Ltd. to report on summary financial statements derived from the
financial statements audited by him in accordance with SAs. Mr. BK wants to determine whether the
applied criteria are acceptable before accepting such assignment. Guide him the factors affecting
auditor's determination of the acceptability of applied criteria as per relevant Standard on
Auditing. [May 24 (4 Marks)]

Ans.: Factors affecting the auditor’s determination of the acceptability of the applied criteria:
As per SA 810 “Engagements to Report on Summary Financial Statements”, before accepting an
engagement to report on summary financial statements, the auditor shall determine whether the
applied criteria are acceptable. Applied criteria refer to the criteria applied by management in the
preparation of the summary financial statements.
Factors that may affect auditor’s determination of the acceptability of the applied criteria includes the
following:
(a) Nature of the entity
(b) Purpose of the Summary F.S.

8.4
Chapter 8 Specialised Areas
(c) Information needs of the intended users of the Summary F.S.; and
(d) Whether the applied criteria will result in Summary F.S. that are not misleading in the
circumstances.

Q.10 CA Y is the auditor of Stekk Ltd., a company that recently faced material misstatements in its
financial records, leading to an adverse opinion for the financial year 2024-25. Now, the
management of the company has prepared summary financial statements derived from the audited
financial statements and requested CA Y to express his opinion on these summaries. What
additional points should CA Y consider when expressing an opinion on these summary F.S.?
[MTP-Sep. 24]

Ans.: Additional points to be kept in mind while expressing opinion on Summary F.S. derived from
audited financial statements on which adverse opinion was expressed:
As per SA 810, “Engagements to Report on Summary Financial Statements”, when the auditor’s report
on the audited financial statements contains an adverse opinion or a disclaimer of opinion, the
auditor’s report on the summary financial statements shall, additionally:
1. State that the auditor’s report on the audited financial statements contains an adverse opinion or
disclaimer of opinion;
2. Describe the basis for that adverse opinion or disclaimer of opinion; and
3. State that, as a result of the adverse opinion or disclaimer of opinion on the audited financial
statements, it is inappropriate to express an opinion on the summary financial statements.

For academic updates and related contents: Join telegram channel: https://t.me/altclasses
Visit knowledge portal of www.altclasses.in
For books/class related queries: E-mail: [email protected]
Ph.: 9319805511, 7260941195
For Online purchase of books/classes: Visit our web portal: www.altclasses.in

8.5
 9 Related Services (Additional Questions – 14th Edition)
9.2 – SRS 4400 “Engagements to perform Agreed Upon Procedures regarding Financial Information”

Q.1 ATP Limited, a large manufacturing company, is planning to invest funds in RS Ltd. with a future
vision of taking over the company at a later stage. On studying the financial statements of RS Ltd.,
the investing company wants to get detailed status regarding the Accounts receivable and
Inventory appearing in the Balance Sheet. ATP Limited approached you to perform agreed upon
procedures for the two elements of statement of RS Ltd. and submit a detailed report for the same.
As the engagement partner, you are responsible for drafting the engagement letter. Enumerate the
key matters that need to be agreed to form a clear understanding regarding agreed upon
procedures and the conditions of the engagement. What matters will you include in the engagement
letter addressed to the management of ATP Ltd.? [Nov. 24 (5 Marks)]

Ans.: Key matters to be agreed to form a clear understanding regarding agreed upon procedures:
As per SRS 4400 “Engagements to perform Agreed Upon Procedures regarding Financial
Information”, there should be a clear understanding among the auditor, the client and other specified
parties. The terms to be agreed include the following:
(a) Nature of the engagement including the fact that the procedures performed will not constitute
an audit or a review and that accordingly no assurance will be expressed.
(b) Stated purpose for the engagement.
(c) Identification of the financial information to which the agreed-upon procedures will be applied.
(d) Nature, timing and extent of the specific procedures.
(e) Limitation on distribution of the report of factual findings. If such limitation would be in conflict
with the legal requirements, the auditor would not accept the engagement.
Matters to be included in the engagement letter:
Engagement Letter shall include the following matters:
(a) List of the procedures to be performed as agreed-upon between the parties.
(b) A statement that the distribution of the report of factual findings would be restricted to the
specified parties who have agreed to the procedures to be performed.

9.3 – SRS 4410 “Compilation Engagement”

Q.2 During the course of performing a compilation engagement in accordance with SRS 4410, it
becomes known to you that client had suffered a theft loss of ₹ 100 lacs of its inventories over a
period of time at a storage location visited infrequently. A claim was lodged by the client with
insurance company which was repudiated due to certain technical reasons relating to coverage of
policy. The client has not preferred a complaint or an appeal against said repudiation. The amount
is reflected under the head “current assets” in trial balance of the client. Discuss, how you should
proceed to deal with the matter?

9.1
Related Services Chapter 9
HINT: Since client’s claim has been repudiated and no appeal has been preferred, it is a loss for the client
and should be dealt accordingly. As per SRS 4410, if the practitioner becomes aware during the
course of the engagement that amendments to the compiled financial information are required for
the financial information not to be materially misstated, he shall propose the appropriate
amendments to management.
If management declines, or does not permit the practitioner to make the proposed amendments to
the compiled financial information, he shall withdraw from the engagement and inform
management and TCWG of the reasons for withdrawing.

Q.3 MNC Limited has engaged CA Lalit to help the company in compilation of the financial information.
CA Lalit explained his team members, the scope of work and the responsibilities under this
engagement. The team members have done mostly audit engagements and do not have exposure to
compilation engagements. Discuss the key issues that CA Lalit should deliberate and guide his team
members with respect to this engagement and the manner it differs from assurance engagements.
Give your views on the applicability of SQC 1 to this engagement. [May 24 (5 Marks)]

Ans.: Concept of Compilation Engagement:

As per SRS 4410, Compilation engagement is an engagement in which a practitioner applies
accounting and financial reporting expertise to assist management in the preparation and
presentation of financial information of an entity in accordance with an applicable financial reporting
framework and issues a report.
Management may request a professional accountant in public practice to assist with the preparation
and presentation of financial information of an entity. Financial information that is the subject of a
compilation engagement may be required for various purposes including:
• To comply with mandatory periodic financial reporting requirements established in law or
regulation, if any or
• For purposes unrelated to mandatory financial reporting under relevant law or regulation,
including for example:
✓ For management or TCWG, prepared on a basis appropriate for their particular purposes (such
as preparation of financial information for internal use).
✓ For periodic financial reporting undertaken for external parties under a contract or other form
of agreement (such as financial information provided to a funding body to support provision or
continuation of a grant).
✓ For transactional purposes, for example to support a transaction involving changes to the
entity’s ownership or financing structure (such as for a merger or acquisition).
“Assurance engagement” means an engagement in which a practitioner expresses a conclusion
designed to enhance the degree of confidence of the intended users other than the responsible party
about the outcome of the evaluation or measurement of a subject matter against criteria. It means
that the practitioner gives an opinion about specific information due to which users of information
are able to make confident decisions knowing well that chance of information being incorrect is
diminished.
A compilation engagement is not an assurance engagement. A compilation engagement does not
require the practitioner to verify the accuracy or completeness of the information provided by
management for the compilation, or otherwise to gather evidence to express an audit opinion or a
review conclusion on the preparation of the financial information.

9.2
Chapter 9 Related Services
Applicability of SQC 1:
Further, SQC 1 is applicable to all Engagement and Quality Control Standards. Since SRS 4410 is also
one of Engagement and Quality Control Standards, SQC 1 applies to firms in respect of firm’s
compilation engagements too which is covered in Related Services.

Q.4 The practitioner shall not accept the compilation engagement unless the practitioner has agreed
the terms of engagement with management, and the engaging party if different. In view of the
above, mention the responsibilities of the management to be agreed on for the compilation
engagement in accordance with SRS 4410. [MTP-Oct. 24]

Ans.: Management Responsibilities for the compilation engagement:

The practitioner shall not accept the compilation engagement unless the practitioner has agreed the
terms of engagement with management, and the engaging party if different. In accordance with SRS
4410, “Compilation Engagement”, the responsibilities of the management to be agreed on for the
compilation engagement are that:
(i) The financial information, and for the preparation and presentation thereof, in accordance with
a financial reporting framework that is acceptable in view of the intended use of the financial
information and the intended users;
(ii) Design, implementation and maintenance of such internal control as management determines is
necessary to enable the preparation of financial statements that are free from material
misstatement, whether due to fraud or error;
(iii) The accuracy and completeness of the records, documents, explanations and other information
provided by management for the compilation engagement; and
(iv) Judgments needed in the preparation and presentation of the financial information, including
those for which the practitioner may provide assistance in the course of the compilation
engagement

For academic updates and related contents: Join telegram channel: https://t.me/altclasses
Visit knowledge portal of www.altclasses.in
For books/class related queries: E-mail: [email protected]
Ph.: 9319805511, 7260941195
For Online purchase of books/classes: Visit our web portal: www.altclasses.in

9.3
 Review of Financial Information
10 (Additional Questions – 14th Edition)
10.1 – SRE 2400 “Engagements to Review Historical Financial Statements”

Q.1 X Limited has entered into a contract with Y Limited. There is a condition in the contract by virtue of
which X Limited is required to get its F.S. reviewed for a year on a quarterly basis in accordance with
the financial reporting provisions of the contract. Can X Limited get its financial statements reviewed
from a professional accountant in practice?

HINT: In the given case, F.S. are prepared in accordance with special purpose framework in accordance with
requirements of a contract. F.S. prepared in accordance with special purpose framework can also be
reviewed by a professional accountant in practice and review report may be issued in accordance
with SRE 2400.

Q.2 A review of financial statements includes consideration of the entity’s ability to continue as a going
concern. If, during the performance of the review, the practitioner becomes aware of events or
conditions that may cast significant doubt about the entity’s ability to continue as a going concern.
Enumerate the steps to be taken by the practitioner for the same. [MTP-Oct. 24]

Ans.: Steps to be taken by Practitioner to address Going Concern:

As per SRE 2400, “Engagements to Review Historical F.S.”, a review of F.S. includes consideration of the
entity’s ability to continue as a going concern.
If, during performance of the review, practitioner becomes aware of events or conditions that may cast
significant doubt about entity’s ability to continue as a going concern, he shall:
(i) Inquire of management about plans for future actions affecting entity’s ability to continue as a
going concern & about the feasibility of those plans, and also whether management believes that
outcome of those plans will improve the situation regarding entity’s ability to continue as a going
concern.
(ii) Evaluate results of those inquiries, to consider whether management’s responses provide a
sufficient basis to:
(1) Continue to present the F.S. on the going concern basis if the applicable FRF includes the
assumption of an entity’s continuance as a going concern; or
(2) Conclude whether the F.S. are materially misstated or are otherwise misleading regarding the
entity’s ability to continue as a going concern.
(iii) Consider management’s responses in light of all relevant information of which the practitioner is
aware as a result of the review.

Q.3 Best Textiles Ltd. makes an investment in Prime Textiles Ltd. with a view to expand its business,
capture more market share and to earn higher returns. While forming an agreement for the same,
Best Textiles Ltd. puts a clause in the contract that Prime Textiles Ltd. will get its financial statements
reviewed on a quarterly basis for a period of 2 years from the commencement of the contract i.e.
01-04-2023. To comply with the provisions of the contract the management of Prime Textiles Ltd
appoints CA Sumit to conduct the quarterly review of financial statements for the first quarter of the

10.1
Review of Financial Information Chapter 10
financial year 2023-24. Discuss from the practitioner's point of view, the preconditions for accepting
a review engagement in accordance with the relevant SRE. [Nov. 24 (4 Marks)]

Ans.: Preconditions to be considered prior to accepting review engagement:

SRE 2400 “Engagements to Review Historical Financial Statements” deals with the practitioner’s
responsibilities when engaged to perform a review of historical financial statements, when the
practitioner is not the auditor of the entity’s F.S. Accordingly, Prior to accepting a review engagement,
the practitioner shall:
(a) Determine whether the FRF applied in the preparation of the F.S. is acceptable.
(b) Obtain the agreement of management that it acknowledges and understands its responsibilities:
(i) For preparation of the F.S. in accordance with the applicable FRF;
(ii) For such internal control as management determines is necessary to enable the preparation
of F.S. that are free from material misstatement, whether due to fraud or error; and
(iii) To provide the practitioner with:
a. Access to all information of which management is aware that is relevant to the
preparation of the financial statements, such as records, documentation and other
matters;
b. Additional information that the practitioner may request from management for the
purpose of the review; and
c. Unrestricted access to persons within the entity from whom the practitioner determines it
necessary to obtain evidence.
If the practitioner is not satisfied as to any of the matters set out above as preconditions for accepting a
review engagement, the practitioner shall discuss the matter with management or TCWG. If changes
cannot be made to satisfy the practitioner as to those matters, the practitioner shall not accept the
proposed engagement unless required by law or regulation to do so.

10.2 - SRE 2410 “Review of Interim Financial Information performed by Independent Auditor of the Entity”

Q.4 During review of quarterly results of a company of which you are auditor, it is gathered on inquiries
made that there has been a major fire in fabric processing plant of the company during the quarter. It
has resulted in massive disruption in operations of the company. Worse still, machinery and
inventories of plant were uninsured due to carelessness of concerned staff leading to substantial
losses. The matter has been disclosed in IFI appropriately. Discuss, how you would proceed to deal
with the same in review report?

HINT: Uninsured assets in a disaster are examples of events or conditions that may cast significant doubt
about the going concern assumption. In accordance with SRE 2410, if, as a result of inquiries or other
review procedures, a material uncertainty relating to an event or condition comes to the auditor’s
attention that may cast significant doubt on the entity’s ability to continue as a going concern, and
adequate disclosure is made in the IFI, auditor modifies review report by adding an EOM paragraph.
Therefore, EOM paragraph should be added in review report.

Q.5 CA. Hema is conducting review of the quarterly financial information of a company of which she is
also auditor. She believes that it is necessary to make a material adjustment to the quarterly
financial information for it to be prepared, in all material respects, in accordance with the applicable
FRF. She has communicated the matter to CFO and audit committee. However, no response was
received even after waiting for a reasonable time. What are the options available to her?

10.2
Chapter 10 Review of Financial Information
HINT: As required by SRE 2410, options available are:
(a) Whether to modify the report or
(b) The possibility of withdrawing from the engagement and
(c) The possibility of resigning from the appointment to audit the annual F.S.

Q.6 GAK Limited has compiled the interim financial information, as per the Listing agreement
requirements and submitted to the auditors for their review. CA Reena, has been assigned on the
engagement to review the interim financial information of GAK Limited. Based on the inquiries and
other review procedures carried out, CA Reena, assessed that GAK Limited, has been facing
continuous working capital shortages. No financial institutions or banks are ready to lend additional
funding limits to GAK Limited, since the company has been continuously incurring losses for over 3
years and the company has defaulted payment of loan instalments & interest over the last one year
and operations have been curtailed significantly.
Under such circumstances CA Reena, who is doing the review for the first time, noted that GAK
Limited has not disclosed any information in the interim financial information relating to material
uncertainties. Given the situation, please advise CA Reena, what kind of review report is required to
be issued? If, GAK Limited has disclosed information relating to material uncertainty, can CA Reena
give a clean report? Discuss. [May 24 (5 Marks)]

Ans.: Going Concern and Significant Uncertainties:

• As per SRE 2410, “Review of Interim Financial Information Performed by the Independent Auditor
of the Entity”, if, as a result of inquiries or other review procedures, a material uncertainty relating
to an event or condition comes to the auditor’s attention that may cast significant doubt on the
entity’s ability to continue as a going concern, and adequate disclosure is made in the interim
financial information the auditor modifies the review report by adding an emphasis of matter
paragraph.
• The auditor may have modified a prior audit or review report by adding an emphasis of matter
paragraph to highlight a material uncertainty relating to an event or condition that may cast
significant doubt on the entity’s ability to continue as a going concern.
• If a material uncertainty that casts significant doubt about the entity’s ability to continue as a going
concern is not adequately disclosed in the interim financial information, the auditor should express
a qualified or adverse conclusion, as appropriate. The report should include specific reference to the
fact that there is such a material uncertainty.
Conclusion: Based on the above stated requirements of SRE 2410, following conclusions may be
drawn:
(a) In case, GAK Limited has not disclosed any information in interim financial information relating to
material uncertainties, CA Reena, should express a qualified or adverse conclusion, as appropriate.
The report should include specific reference to the fact that there is such a material uncertainty.
(b) In case, GAK Limited has disclosed information relating to material uncertainty, CA Reena shall
modify the review report by adding an emphasis of matter paragraph.

10.3
 PFI and Other Assurance Services
11 (Additional Questions – 14th Edition)
11.1 – SAE 3400 “The Examination of Prospective Financial Information”

Q.1 X Ltd. approached CA. Sumit for an assurance report in respect of PFI of a project. On going through
the project details, it is noticed that depreciation reflected on proposed fixed assets to be acquired, in
PFI has been calculated in accordance with provisions of the Income-tax Act. No disclosure is made in
this respect too. How the matter should be proceeded with?

Ans.: As per SAE 3400, it is the duty of a professional accountant to see that PFI is prepared on a consistent
basis with historical F.S. using appropriate accounting principles. In case of a company, historical F.S.
are prepared considering the requirements of the Companies Act, and depreciation is calculated
accordingly. In the given situation, depreciation has been calculated in accordance with Income-tax Act
which is not consistent with historical F.S. Therefore, it is not proper.
The fact that the projection has not been prepared on a consistent basis with the historical F.S., using
appropriate accounting principles needs to be stated.
• Further, when presentation and disclosure are not adequate, a qualified or adverse opinion should
be given or withdrawal from engagement should be made as appropriate.

Q.2 You are engaged by M/s Viva Limited to examine and report on prospective financial information
which the management of the company has prepared for presentation at an Investor meet program
organized by a State Government to attract investment in their state.
The company in its vision document described various plans and proposals of the company with
projected financial goals and means to achieve the same and various benefits accruing to the
economic development of the State. What important matters will be considered by you while
determining the nature, timing, and extent of examination procedure to be applied in the review of
the same? [MTP-Sep. 24]

Ans.: Matters to be considered while determining NTE of examination procedure:

As per SAE 3400, “The Examination of Prospective Financial Information”, when determining the
nature, timing and extent of examination procedures, the auditor should consider matters such as:
(i) The knowledge obtained during any previous engagements;
(ii) Management’s competence regarding the preparation of prospective financial information;
(iii) The likelihood of material misstatement;
(iv) The extent to which prospective financial information is affected by the management’s judgment;
(v) The sources of information considered by the management for the purpose, their adequacy,
reliability of the underlying data, including data derived from third parties, such as industry
statistics, to support the assumptions;
(vi) The stability of entity’s business; and
(vii) The engagement team’s experience with the business and the industry in which the entity
operates and with reporting on prospective financial information.

11.1
Prospective Financial information and Other Assurance Services Chapter 11
Q.3 Mr. Vineet, an auditor, has been approached by Qub Ltd. to examine the prospective financial
information of the company. What factors should an auditor consider before accepting an
engagement to examine prospective financial information, and under what conditions should the
auditor decline or withdraw from such an engagement? Additionally, what steps should be taken to
formalize the terms of the engagement? [RTP-Nov. 24]

Ans.: Acceptance of Engagement:

Before accepting an engagement to examine prospective financial information, the auditor would
consider, amongst other things:
• The intended use of the information;
• Whether the information will be for general or limited distribution;
• The nature of the assumptions, that is, whether they are best estimates or hypothetical
assumptions;
• The elements to be included in the information; and
• The period covered by the information.
The auditor should not accept, or should withdraw from, an engagement when the assumptions are
clearly unrealistic or when the auditor believes that the prospective financial information will be
inappropriate for its intended use. The auditor should consider the extent to which reliance on the
entity’s historical financial information is justified.
To formalize the terms of the engagement, it is essential to agree on the terms with the client by
sending an engagement letter, like in other engagements.

Q.4 PQ Pharma Limited, a company dealing in research and development and manufacture of
pharmaceuticals is coming up with an Initial Public Offer (IPO). PQ Pharma Ltd has prepared the
prospective financial statements for the next 3 years and included the same in the prospectus as part
of its IPO. The prospective financial information includes projected balance sheets, statement of
profit and loss and cash flow statements, which are prepared on the basis of several key assumptions
like favourable government regulations, planned research and development of more effective
medicines at reasonable prices, etc.
The company approaches CA Z to provide assurance on the prospective financial information and to
assess the presentation and disclosure of the prospective financial information included in the IPO.
List out the aspects that must be considered for making such assessment. [Nov. 24 (5 Marks)]

Ans.: Considerations in assessing presentation and disclosure of PFI:

As per SAE 3400 “The Examination of Prospective Financial Information”, when assessing the
presentation and disclosure of the prospective financial information and the underlying assumptions,
in addition to the specific requirements of any relevant statutes, regulations as well as the relevant
professional pronouncements, the auditor will need to consider whether:
(1) the presentation of PFI is informative and not misleading;
(2) the accounting policies are clearly disclosed in the notes to the PFI;
(3) the assumptions are adequately disclosed in the notes to the PFI. It needs to be clear whether
assumptions represent management’s best-estimates or are hypothetical;
(4) the date as of which the PFI was prepared is disclosed. Management needs to confirm that the
assumptions are appropriate as of this date, even though the underlying information may have
been accumulated over a period of time;

11.2
Chapter 11 Prospective Financial information and Other Assurance Services
(5) the basis of establishing points in a range is clearly indicated and the range is not selected in a
biased or misleading manner when results shown in the PFI are expressed in terms of a range; and
(6) there is any change in the accounting policy of the entity from that disclosed in the most recent
historical financial statements and whether reason for the change and the effect of such change on
the PFI has been adequately disclosed.
(Note: Any 5 points may be mentioned).

11.2 – SAE 3402 “Assurance Reports on Controls at a Service Organization”

Q.5 Global Institute of Management (GIM) is a leading institution running prestigious post graduate
courses in the field of management. Its F.S. are audited by an independent auditor. Before the start
of this academic session, Board of the GIM had outsourced its entire process of inviting student
applications, submission of applications, and collection of application fees including late fees and
such matters to Smart Solutions Ltd.
Auditors of GIM want to be sure about the design and operating effectiveness of controls at Smart
Solutions Ltd. What should be the nature of the report to be provided by auditors of Smart Solutions
Ltd. specifically for use by GIM and its auditors in this regard in terms of SA 3402?

Ans.: Type 2 report is a report on the description, design and operating effectiveness of controls operating
at the service organization. Auditors of Smart Solutions Ltd. should provide such a report giving
assurance on these matters. It should also include details of tests of controls performed and details of
deviations, if any.

For academic updates and related contents: Join telegram channel: https://t.me/altclasses
Visit knowledge portal of www.altclasses.in
For books/class related queries: E-mail: [email protected]
Ph.: 9319805511, 7260941195
For Online purchase of books/classes: Visit our web portal: www.altclasses.in

11.3
 Digital Auditing and Assurance
12 (Additional Questions – 14th Edition)
12.2 – Understanding the IT Environment

Q.1 MNC Limited, is engaged in manufacture & sale of FMCG products. It has manufacturing locations
across various states in India and engages dealer channels to sell it products. One dealer is appointed
for each district within the state and products are dispatched from the nearest manufacturing
location to the dealer. Considering the voluminous transactions, MNC Limited has a robust ERP
network, for recording the transactions. As statutory auditors of MNC Ltd., your firm is about to
commence the current year audit. The audit team includes certain IT experts and discussions are
underway amongst the team members. As an IT manager of the engagement team, explain the key
areas for an auditor to understand IT environment. [May 24 (5 Marks)]

Ans.: Key areas for an auditor to understand IT environment:

(i) Understand the flow of transaction: The auditor's understanding of the IT environment may
focus on identifying and understanding the nature and number of the specific IT applications and
other aspects of the IT environment that are relevant to the flows of transactions and processing
of information in the information system. Changes in the flow of transactions, or information
within the information system may result from program changes to IT applications, or direct
changes to data in databases involved in processing or storing those transactions or information.
(ii) Identification of Significant Systems: The auditor may identify the IT applications and
supporting IT infrastructure concurrently with the auditor's understanding of how information
relating to significant classes of transactions, account balances and disclosures flows into, through
and out the entity's information system.
(iii) Identification of Manual and Automated Controls: An entity's system of internal control
contains manual elements and automated elements (i.e., manual and automated controls and
other resources used in the entity's system of internal control). An entity's mix of manual and
automated elements varies with the nature and complexity of the entity's use of IT. The
characteristics of manual or automated elements are relevant to the auditor's identification and
assessment of the risks of material misstatement.
(iv) Identification of the technologies used: The need to understand the emerging technologies
implemented and the role they play in the entity's information processing or other financial
reporting activities and consider whether there are risks arising from their use. Given the
potential complexities of these technologies, there is an increased likelihood that the engagement
team may decide to engage specialists and/or auditor's experts to help understand whether and
how their use impacts the entity's financial reporting processes and may give rise to risks from
the use of IT.
(v) Assessing the complexity of the IT environment: Not all applications of the IT environment
have the same level of complexity. The level of complexity for individual characteristics differs
across applications. Complexity is based on the following factors – automation used in the
organization, entity’s reliance on system generated reports, customization in IT applications,
business model of the entity, any significant changes done during the year and implementation of
emerging technologies.

12.1
Digital Auditing and Assurance Chapter 12
12.4 – Assessing Cyber Risks

Q.2 CA Kabir, an auditor assigned to conduct a remote audit of Beetal Limited. The audit will be
conducted virtually using online platforms, with the client sharing documents and participating in
video conferences. What key considerations should CA Kabir address to ensure the effectiveness
and security of the remote audit? [MTP-Sep. 24]

Ans.: Key considerations to be addressed to ensure effectiveness and security of remote audits:
(i) Feasibility and Planning:
• Planning should involve agreeing on audit timelines, meeting platform (Zoom calls/
Microsoft Teams/Google Meet) to be used for audit sessions, data exchange mechanisms, any
access authorization requests. Ensure feasibility of use of technology, if auditors and auditees
have competencies and that resources are available.
• The execution phases involve video/tele conferencing with auditees. The documentation for
audit evidence should be transferred through a document sharing platform.
(ii) Confidentiality, Security and Data Protection:
• To ensure data security and confidentiality, access to document sharing platform should be
sufficiently restricted and secured by encrypting the data that is sent across the network.
• Information, once reviewed and documented by auditor, is removed from the platform, and
stored according to applicable archiving standards and data protection requirements.
• Auditors should take into consideration legislation and regulations.
• Auditors should not take screenshots of auditees as audit evidence. Any screenshots of
documents or records should be previously authorized by the audited organization.
• In case of accessing the auditee’s IT system auditor should use VPN (Virtual private network).
(iii) Risk assessment:
• Risks for achieving the audit objectives are identified, assessed and managed.
• Assessment whether remote audit would be sufficient to achieve the audit objectives should
be done and documented.

Q.3 Remote audit is an audit where the auditor uses the online or electronic means to conduct the
same. It could be partially or completely virtual, auditor engages using technology to obtain the
audit evidence or to perform documentation review with the participation of the auditee. For
example, an auditor might use video conferencing and cloud-based file sharing to review financial
records remotely. What are the advantages and disadvantages of remote auditing? [MTP-Oct. 24]

Ans.: Advantages of Remote Audit:

(1) Cost and time effective: No travel time and travel costs involved.
(2) Comfort and flexibility to audit team.
(3) Time required to gather evidence can spread over several weeks, instead of concentrated into a
small period.
(4) Auditor can get first-hand evidence directly from the IT system.
(5) Widens the selection of auditors from global network of experts.
Disadvantages of Remote Audit:
(1) Due to network issues, interviews and meetings can be interrupted.

12.2
Chapter 12 Digital Auditing and Assurance
(2) Limited or no ability to visualize facility culture of organization, and body language of the
auditees.
(3) Opportunity to present doctored documents and to omit relevant information is increased.
(4) Remote access to sensitive IT systems may not be allowed.
(5) Cultural challenges for auditor. Lack of knowledge for local laws & regulations could impact
audit.
(6) Audit procedures like physical verification of assets and stock taking cannot be performed.

Q.4 TP Limited is a medium-sized company involved in manufacturing and retailing of home appliances
to cater to the daily needs of a wide range of consumers. The company has in place proper cyber
security policies, procedures and framework. Regular assessment of the same is also carried out by
the management. The company faced a cyber-attack incident of email phishing scam which resulted
in inappropriate disbursals to various individuals posing as vendors and caused a substantial
financial loss. This incident highlighted the need for strong and updated internal controls to
mitigate the cyber risks. As the statutory auditor of the company, how will you evaluate the controls
around the vendor setup and modifications. [Nov. 24 (4 Marks)]

Ans.: Evaluating controls around the vendor setup and modifications:

(a) Who is responsible for making changes to vendor master data? Is the process centralized or
decentralized?
(b) Are other communication channels, such as email, used to request changes to vendor master
data? (If yes, consider if multi-factor authentication is enabled for email).
(c) What systems and technologies are used to initiate, authorize and process requests related to
changes to vendor master data?
(d) Are authentication protocols defined to verify modifications to vendor master data (e.g., call
back procedures, multi-factor authentication)?

12.6 - Automated Tools in Audit

Q.5 Mr. Karan is a consultant tasked with helping a mid-sized manufacturing company modernize its
operations by integrating Internet of Things (IoT) technology. The company wants to connect
various devices such as manufacturing equipment, smart home security systems for their facility,
and inventory management systems. They aim to leverage IoT to improve operational efficiency,
predict equipment maintenance needs, and enhance overall security. However, they are concerned
about the potential risks and the impact on their audit processes.
Describe the key components and benefits of IoT, the risks associated with IoT implementation,
and the implications for the company's audit processes. How should the company address these
concerns to ensure a smooth transition? [RTP-Nov. 24]

Ans.: Internet of Things:

IoT is the concept of connecting any device (cell phones, coffee makers, washing machines, and so on)
to the internet.
Key components of IoT are data collection, analytics, connectivity, and people and process. IoT not
only changes the business model, but also affects the strategic objectives of the organisation. The risk
profile of the entity changes with exposure to new laws and regulations.

12.3
Digital Auditing and Assurance Chapter 12
Example
(i) Connected Cars, connected manufacturing equipment’s, smart home security, (The options for
home security from doorbell cameras or outdoor cameras - users can view video feeds when
they are away from home).
(ii) Data from machines can be used to predict whether equipment will break down, giving
manufacturers advance warning to prevent long stretches of downtime.
(iii) Refrigerator placing an order with a grocery store whenever supply of eggs falls below a certain
number.
(iv) Smart oven works by scanning QR or bar codes and connecting to Wi-Fi, which it then uses to
determine the best temperature and time to cook the food to avoid undercooking or burning.
(v) Researchers use IoT devices to gather data about customer preferences and behavior, though
that can have serious implications for privacy and security.
Common risks of IoT
The key risks associated with IoT including, device hijacking, data siphoning, denial of service attacks,
data breaches and device theft.
Audit Implications
A shift to connected devices and systems may result in auditors not being able to rely only on manual
controls. Instead, auditors may need to scope new systems into their audit. Audit firms may need to
train and upskill auditors to evaluate the design and operating effectiveness of automated controls.
Consumer-facing tools that connect to business environments in new ways can impact the flow of
transactions and introduce new risks for management and auditors to consider. Consider payment
processing tools that allow users to pay via credit card at a retail location through a mobile device.
This could create a new path for incoming payments that may rely, in part, on a new service provider
supplying and routing information correctly. Auditors would need to consider the volume of those
transactions, and the processes and controls related to it.

For academic updates and related contents: Join telegram channel: https://t.me/altclasses
Visit knowledge portal of www.altclasses.in
For books/class related queries: E-mail: [email protected]
Ph.: 9319805511, 7260941195
For Online purchase of books/classes: Visit our web portal: www.altclasses.in

12.4
 13 Group Audits (Additional Questions – 14th Edition)
13.1 – Concept of Consolidated Financial Statements

Q.1 Girdhar Ltd. owns 61% voting power in Meera Ltd. It however, holds and discloses all the shares as
"Stock-in-trade" in its accounts. The shares are held exclusively with a view to their subsequent
disposal in the near future. Girdhar Ltd. represents that while preparing Consolidated Financial
Statements, Meera Ltd. can be excluded from the consolidation. As a Statutory Auditor, how would
you deal? [MTP-Oct. 24]

Ans.: Consolidation of Financial Statement:

• As per Ind AS 110, there is no exemption for ‘temporary control’, or “for operation under severe
long-term funds transfer restrictions” and consolidation is mandatory for Ind AS compliant F.S.

• As per Sec. 129(3) of the Companies Act, 2013 read with Rule 6 of Companies (Accounts) Rules,
2014, a company having subsidiary which is not required to prepare CFS under the applicable
ASs, it shall be sufficient if the company complies with provisions on CFS provided in Schedule III.
• In the present case, H Ltd. intention is to dispose off the shares in the near future as shares are
being held as stock-in-trade and it is quite clear that the control is temporary.
Conclusion: H Ltd. is required to prepare CFS in accordance with Ind AS 110 as exemption for
‘temporary control’ is not available under Ind AS 110.
As per Para 20 of Ind AS 110, “Consolidation of an investee shall begin from the date the investor
obtains control of the investee and cease when the investor loses control of the investee”.

Q.2 R Limited is a listed company engaged in manufacture of round bars. The company is having
investment in the following components:

(i) 2 Subsidiary Companies

(ii) 1 Joint Venture Company

(iii) 2 Associate Companies

(iv) 3 Business entities under common control

(v) Interest in assets, liabilities, revenues, and expenses in a joint operation with 1 Company

R Limited and all its components are required to present their accounts as per Ind AS. While
preparing consolidated financial statements, R Limited consolidated its components on a line-by-
line basis by adding together like items of assets, liabilities, income, expenses, and cash flows.

R Limited seeks your advice on the accounting treatment in respect of the above components for
consolidation in accordance with the Companies (Indian Accounting Standards) Rules, 2015.

[May 24 (5 Marks)]

13.1
Group Audits Chapter 13
Ans.: Accounting treatment for consolidation in accordance with the Companies (Indian Accounting
Standards) Rules, 2015:
For consolidation of subsidiaries in accordance with the Companies (Indian Accounting Standards)
Rules, 2015, accounting treatment may be as follow:
• The financial statements of the parent and its subsidiaries are combined as per Ind AS 110,
“Consolidated Financial Statements” on a line-by-line basis by adding together like items of assets,
liabilities, income, expenses, and cash flows;
• Related goodwill/ capital reserve (or gain on bargain purchase) and non-controlling interest is
determined as per Ind AS 103;
• Business combinations involving entities or businesses under common control shall be accounted
for using the pooling of interest method in accordance with Ind AS 103;
• Adjustments like elimination of intra-group transactions, balances, unrealised profits and deferred
tax etc. are made in accordance with the requirements of Ind AS 110;
• Investments in associates and joint ventures are accounted for using the Equity Method as
prescribed in Indian Accounting Standard (Ind AS) 28, “Investments in Associates and Joint
Ventures”. Interests in assets, liabilities, revenues, and expenses in a joint operation are accounted
for as part of separate financial statements of the entity in accordance with Indian Accounting
Standard (Ind AS) 111, “Joint Arrangements”;
• In a business combination achieved in stages, the acquirer shall remeasure its previously held
equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or
loss, if any, in profit or loss or other comprehensive income, as appropriate in accordance with Ind
AS 103.
In the given case, R Limited consolidated its components on a line-by-line basis by adding together
like items of assets, liabilities, income, expenses, and cash flows while preparing its consolidated
financial statements which is correct for the subsidiaries, however the treatment is not correct for
other components as per abovementioned Companies (Indian Accounting Standards) Rules, 2015.

For academic updates and related contents: Join telegram channel: https://t.me/altclasses
Visit knowledge portal of www.altclasses.in
For books/class related queries: E-mail: [email protected]
Ph.: 9319805511, 7260941195
For Online purchase of books/classes: Visit our web portal: www.altclasses.in

13.2
 14A Audit of Banks (Additional Questions – 14th Edition)
14A.6 - Verification of Advances

Q.1 Your firm ABC Associates is appointed as Central Statutory Auditors of a Nationalised Bank for the
year 2023-24. The Bank follows the financial year as accounting year. During the audit, CA Aadi, the
Audit Manager has noticed following issues and placed the same before the team.

Particulars (₹)

Consortium Cash Credit Facilities to Prime Ltd. 75 crores

Bank's own Share in Cash Credit Facilities 15 crores

Debits towards Interest in the Last Two Quarters 2.25 crores

Credits in Prime Ltd.'s Account in the Last Two Quarters 1.75 crores

Classification of Prime Ltd.'s Account (Based on Lead Bank's Certificate) Performing Account

As an auditor, how will you deal with the above mentioned matter? [RTP-Nov. 24]

Ans.: Classification of Advances in Consortium Arrangements:

• The bank is a consortium member of cash credit facilities of ₹ 75 crores to Prime Ltd. Bank's own
share is ₹ 15 crores only. During the last two quarters against a debit of ₹ 2.25 crores towards
interest, the credits in X Ltd.’s account are to the tune of ₹ 1.75 crores only.

• Sometimes, several banks form a group (the 'consortium') under the leadership of a 'lead bank' to
make advance to a large customer on same conditions and security with proportionate rights. In
such cases, each bank may classify the advance given by it according to its own experience of
recovery and other factors.

• In the given case, in the last two quarters, the amount remains outstanding and, thus, interest
amount should be reversed. This is despite the certificate of lead bank to classify that the account as
performing.

Conclusion: Amount should be shown as non-performing asset (NPA).

14A.8 - Verification of Capital and Other Liabilities

Q.2 CA J is the statutory auditor of branch of a nationalized bank. During the audit, he is also focusing
upon verification of Current Accounts & Savings Accounts (CASA) maintained at the branch. Suggest a
few audit procedures he should follow. [MTP-Sep. 24]

14A.1
Audit of Banks Chapter 14A
Ans.: Audit procedure to verify Current Accounts and Saving Accounts:

• Verify on a sample basis current account and saving accounts opened during the year for adherence
to KYC norms. Verify that saving accounts are opened in name of individuals, HUF, some approved
institutions like trusts, educational institutes etc. Remember that saving accounts are not opened for
business or professional concern. The business transactions are carried in current accounts which
can be opened for all kind of customers like companies, individuals, partnership firms etc.
• Verify the balances in individual accounts on a sample basis.
• Check the calculations of interest on a test check basis. Remember that no interest is paid generally
on current accounts by banks.
• Examine whether the procedure for obtaining balance confirmation periodically has been followed
consistently. Examine, on a sampling basis, the confirmations received.
• Ensure that debit balances in current accounts are not netted out on the liabilities side but are
appropriately included under the head ‘advances’.
• Inoperative accounts (both current and saving) are a high-risk area of frauds in banks. As per RBI
guidelines, a savings/ current account should be treated as inoperative/dormant if there are no
transactions in the account for over a period of two years. Verify on a sample basis some of
inoperative accounts revived/closed during the year. Ensure that inoperative accounts are revived
only with proper authority. In this regard, cases where there is a significant reduction in balances of
such accounts as compared to previous year, examine authorisation for withdrawals.

For academic updates and related contents: Join telegram channel: https://t.me/altclasses
Visit knowledge portal of www.altclasses.in
For books/class related queries: E-mail: [email protected]
Ph.: 9319805511, 7260941195
For Online purchase of books/classes: Visit our web portal: www.altclasses.in

14A.2
 14B Audit of NBFC (Additional Questions – 14th Edition)
14B.1 – Meaning and Types of NBFC

Q.1 Shubham & Associates are going to start the audit of NBFCs. They have not performed much work for
the NBFCs in the past years. You are required to explain the requirements related to registration and
regulation of NBFCs which an auditor needs to keep in his mind while planning the audit of NBFC
which would help this firm.

Ans.: Registration and regulation of NBFC:

• Sec. 45-IA of RBI (Amendment) Act, 1997 provides that no NBFC is allowed to commence or carry
on the business of a NBFC without:
(a) obtaining a certificate of registration issued by the RBI; and
(b) having prescribed net owned fund (NOF).
• RBI may notify different amount of NOF for different categories of NBFCs.
(a) For NBFC-ICC, NBFC-MFI and NBFC-Factor, the NOF shall be ₹ 10 crore.
(b) For NBFC-P2P, NBFC-AA & NBFC not availing public funds and not having any customer
interface, the NOF shall be ₹ 2 crore.
(c) For NBFC-IFC and IDF-NBFC, the NOF shall be ₹ 300 crore.
All existing companies should meet prescribed NOF in a phased manner by 31 st March 2027.
• A company incorporated under the Companies Act and desirous of commencing business of non-
banking financial institution can apply to RBI in prescribed form along with necessary documents
for registration. RBI issues CoR after satisfying itself that the conditions as enumerated in Section
45-IA of the RBI Act, 1934 are satisfied.
• However, to obviate dual regulation, certain categories of NBFC which are regulated by other
regulators are exempted from requirement of registration with the RBI, for example: companies
registered with SEBI or IRDA.
• The RBI has issued directions to NBFC on acceptance of public deposits, prudential norms, risk
exposure norms & other measures to monitor financial solvency and reporting by NBFC.
• RBI also issued directions to auditors to report to the RBI, BOD and shareholders, any non-
compliance with the RBI Act and regulations made by the RBI.

Q.2 Singh Ltd. is a company registered under Companies Act, 2013. Company is engaged in business of
loans & advances, acquisition of shares/stocks/bonds/debentures/securities issued by government
or local authorities. For year ended 31st March 2024 following are some extracts from the F.S.:
(i) Paid-up share capital ₹ 50 Cr.
(ii) Non-Current Assets - Loans & Advances ₹ 61.75 Cr.
(iii) Current Assets - Loans and advances ₹ 312.25 Cr.
(iv) Total assets of the company ₹ 620 Cr.
(v) Intangible assets ₹ 12 Cr.

14B.1
Audit of Non-Banking Financial Companies Chapter 14B
(vi) Profit for the Year ₹ 7.25 Cr.
(vii) Income from interest and dividends ₹ 68 Cr.
(viii) Gross income ₹ 118.75 Cr.
Directors intend to apply for registration as Non-Banking Financial Company (NBFC) u/s 45-IA of the
Reserve Bank of India (Amendment) Act, 1997. Advise. [MTP-Sep. 24]

Ans.: Registration of NBFC:

• In order to identify a particular company as NBFC, it will consider both assets and income pattern
as evidenced from audited balance sheet of previous year to decide its principal business.
• The company will be treated as NBFC when:
(i) Financial assets of company constitute > 50% of total assets (netted off by intangible assets);
&
(ii) Income from financial assets of company constitutes > 50% of the gross income.
• A company which fulfils both these criteria shall qualify as an NBFC and would require to be
registered as NBFC by RBI.
• In the given case of Singh Ltd, its financial assets are ₹ 374 Crore i.e., (₹ 61.75 + ₹ 312.25)
Total Assets (netted off by intangible assets) = ₹ 608 Crore
Income from financial assets = ₹ 68 Crore
Gross Income = ₹ 118.75 Crore
• From the above, it can be concluded that financial assets of Singh Ltd. constitute > 50% of total
assets (netted off by intangible assets) and income from financial assets of Singh Ltd. constitutes >
50% of the gross income. Hence, Singh Ltd. fulfils both the criteria to qualify as an NBFC.
Conclusion: Singh Ltd. can apply for registration u/s 45-IA of Reserve Bank of India (Amendment)
Act, 1997 in prescribed form along with the necessary documents.

14B.2 – Audit Procedures

Q.3 HG & Co. is the statutory auditor of KFN NBFC Ltd. While planning the audit procedures to be done
during the audit of entity, there was a difference of opinion between Mr. H and his partner Mr. G. Mr. G
is of the opinion that evaluation of Internal control system and verification of registration with RBI
should not be the part of audit procedure, as it is the part of internal audits only. Is the contention of
Mr. G correct? Also state what broad areas should mandatorily become part of the audit procedure of
HG & Co. for conducting the audit of KFN NBFC Ltd.? [Dec. 21 (4 Marks), MTP-April 22, Oct. 22]

Ans.: Areas that should be mandatorily part of the audit procedure for conducting the audit of NBFC:
(i) Ascertaining Business of Company: Scan through MOA & AOA of company, so as to ascertain
type of business that company is engaged into & its classification. Based on classification, it will be
required to comply with the provisions relating to limits on acceptance of public deposits.
(ii) Evaluation of IC System: Gain understanding of accounting system and related ICs to determine
NTE of his audit procedures. Ascertain whether ICs put in place are adequate & effectively
followed. In particular, review effectiveness of system of recovery prevalent at the NBFC. Ascertain
whether NBFC has an effective system of periodical review of advances in place which would
facilitate effective monitoring and follow up.

14B.2
Chapter 14B Audit of Non-Banking Financial Companies
(iii) Registration with the RBI: Sec. 45-IA of RBI Act, 1934, requires all NBFCs to comply with
registration requirements and have minimum NOF. Obtain a copy of CoR granted by the RBI or in
case CoR has not been granted, a copy of application form filed with RBI for registration.
(iv) Classification of NBFC: Ascertain whether company is properly classified as per requirements of
various regulations. In case, NBFC has not been classified by RBI, classification will have to be
determined considering various factors such as particulars of earlier registration granted, if any,
particulars furnished in application form for registration, company’s MOA & its financial results.
(v) NBFC Prudential Norms Directions: Check compliance with prudential norms encompassing
income recognition, income from investments, ASs, accounting for investments, asset
classification, provisioning for bad and doubtful debts, capital adequacy norms, prohibition on
granting of loans by a NBFC against its own shares, prohibition on loans and investments for
failure to repay public deposits and norms for concentration of credit/investments.
In the given situation, HG & Co., is statutory auditor of KFN NBFC Ltd. While planning the audit
procedures to be done during the audit of entity, there was difference of opinion between Mr. H and his
partner Mr. G regarding evaluation of internal control and verification of registration with RBI.
As discussed above NBFCs are not entitled to commence business without first obtaining a registration
certificate from RBI. Auditor should, therefore, verify whether dual conditions relating to registration
with RBI & maintenance of minimum NOF have been duly complied with by concerned NBFC. Further,
auditor should gain an understanding of accounting system & related ICs to determine NTE of his audit
procedures. Auditor should also ascertain whether ICs are adequate & are being effectively followed.
Conclusion: Contention of Mr. G regarding evaluation of IC system and verification of registration with
RBI should not be part of the audit procedure as it is part of internal audits only, is not correct.

Q.4 Yo-Yo Finance Limited is a NBFC-ML as per revised categorisation of NBFC done by RBI. YAK &
Associates, firm of CAs, are appointed as Statutory Auditors of the Company for the year 2023-24.
The audit team consist of CA Y, 1 Audit Manager and 3 junior assistants. The Audit Manager is recently
appointed, who is not having much exposure in the field of Auditing of NBFCs. During the engagement
team meeting, the Audit Manager asked CA Y, regarding the audit procedures to be undertaken to
verify whether the aforesaid Company has followed Prudential Norms? As an Engagement partner
suggest any four procedures to the Audit Manager. [May 24 (4 Marks)]

Ans.: Audit procedures to verify compliance of NBFC Prudential Norms:

(i) Prudential Norms: Check compliance with prudential norms encompassing income recognition,
income from investments, accounting standards, accounting for investments, asset classification,
provisioning for bad and doubtful debts, capital adequacy norms, prohibition on granting of
loans by a NBFC against its own shares, prohibition on loans and investments for failure to repay
public deposits and norms for concentration of credit/investments.
(ii) Policy for Demand Loans: Ensure that Board of Directors of every NBFC granting/intending to
grant demand/call loans shall frame and implement a policy for the company.
(iii) Classification of Advances: Assess whether NBFC has complied with the prudential norms. In
particular, verify that advances & other credit facilities have been properly classified as
standard/substandard/ doubtful/loss and that proper provision has been made.

14B.3
Audit of Non-Banking Financial Companies Chapter 14B
(iv) Income from NPA: In respect of NPA, check whether unrealized income has not been taken to
Profit & Loss Account on an accrual basis. Income from NPAs should be accounted for on
realization basis only.
(v) Recovery in NPA Accounts: Check whether all accounts which have been classified as NPAs in
previous year also continue to be shown as such in the current year also. If the same is not
treated as an NPA in current year, specifically examine such accounts to ascertain whether the
account has become regular and the same can be treated as performing.

Q.5 CA M is appointed as the Statutory auditor of Fincorp Limited for the financial year 2023-24. This
company is an NBFC covered under NBFC - 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 31 March, 2024:

Particulars Balance outstanding as on 31 Provision for the

March, 2024 Financial year 2023-24

Standard Assets ₹ 200 crores NIL

Sub-standard Assets ₹ 15 crores (Fully Secured) ₹ 1.5 crores

Doubtful Assets (one to three years) ₹ 8 crores (Fully Secured) ₹ 2.00 crores

Loss Assets ₹ 2 crores ₹ 2.00 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. [Nov. 24 (5 Marks)]

Ans.: Provisioning requirements in case of NBFC-SI-ND Taking Company:

The provisioning requirement in respect of loans, advances and other credit facilities shall be as under:
(i) Loss Assets: Entire asset shall be written off. If assets are permitted to remain in the books for any
reason, 100% of the outstanding shall be provided for;
(ii) Doubtful Assets:
(a) 100% provision to the extent to which the advance is not covered by the realisable value of
the security shall be made;
(b) In addition, provision of 20% to 50% of secured portion shall be made on the following basis:

Period for which the asset has Percent of

been considered as doubtful provision

Up to one year 20%

One to three years 30%

More than three years 50%

(iii) Sub-standard assets: A general provision of 10% of total outstanding shall be made.
(iv) Standard asset: NBFC-BL shall make provision for standard assets at 0.25%* of outstanding,
which shall not be reckoned for arriving at net NPAs.
*0.40% in case of NBFC-ML & NBFC-UL (Subject to few exceptions).

14B.4
Chapter 14B Audit of Non-Banking Financial Companies
In case of Fincorp Limited, Provision to be made as follow:

Particulars Balance Provision Provision

outstanding required Made

Standard Assets ₹ 200 crores ₹ 0.8 crores NIL

Sub-standard Assets ₹ 15 crores ₹ 1.5 crores ₹ 1.5 crores

Doubtful Assets (one to three years) ₹ 8 crores ₹ 2.40 crores ₹ 2.00 crores

Loss Assets ₹ 2 crores ₹ 2.00 crores ₹ 2.00 crores

Total Provision ₹ 6.70 crores ₹ 5.50 crores

Conclusion: Provision made by Fincorp Limited is short by ₹ 1.20 crores.

Note: It is assumed here that NBFC falls under category of Middle Layer.

14B.5 - NBFC Auditor’s Report (Reserve Bank) Directions, 2016

Q.6 What are the specific matters to be included in Auditor’s Report in an audit of NBFC not accepting
public deposits.

Ans.: Matters to be included in Auditor’s Report in case of NBFC:

In addition to the Report made by the auditor u/s 143 of the Companies Act, 2013, the auditor shall
also make a separate report to the Board of Directors of the Company on the matters as specified in
paragraph 3 of the NBFCs Auditor’s Report (Reserve Bank) Directions, 2016:
Matters to be reported in case of all NBFC – Para 3
1. Whether the company has obtained a Certificate of Registration (CoR) from the Bank. (Conducting
Non-Banking Financial Activity without a valid CoR is an offence under the RBI Act, 1934)
2. In case of a company holding CoR issued by the Bank, whether that company is entitled to continue
to hold such CoR in terms of its Principal Business Criteria (Financial asset/income pattern) as on
March 31 of the applicable year.
3. Whether the NBFC is meeting the required net owned fund requirement as laid down in Directions
issued by RBI.
Matters to be reported in case of NBFC not accepting public deposits – Para 3
(i) Whether the Board of Directors has passed a resolution for non-acceptance of any public
deposits;
(ii) Whether the company has accepted any public deposits during the relevant period/year.
(iii) Whether the company has complied with the prudential norms relating to income recognition,
ASs, asset classification and provisioning for bad and doubtful debts as applicable to it;
(iv) In respect of Systemically Important Non-deposit taking NBFCs:
(a) Whether the capital adequacy ratio as disclosed in the return submitted to the Bank, has
been correctly arrived at and whether such ratio is in compliance with the minimum CRAR
prescribed by the Bank;
(b) Whether the company has furnished to the Bank the annual statement of capital funds, risk
assets/exposures and risk asset ratio within the stipulated period.
(v) Whether the NBFC has been correctly classified as NBFC Micro Finance Institutions (MFI).

14B.5
Audit of Non-Banking Financial Companies Chapter 14B
Q.7 Krishna Pvt. Ltd. is primarily into the business of selling computer parts. However, the company is
fulfilling the Principal Business Criteria as at the balance sheet date i.e. Financial Assets are more
than 50% of total assets and Financial Income is more than 50% of Gross Income. What shall be the
obligation of the Statutory Auditor in such a scenario?

Ans.: Obligations of Statutory Auditor of NBFC:

• A company will be treated as NBFC when a company's financial assets constitute more than 50%
of the total assets (netted off by intangible assets) and income from financial assets constitute
more than 50% of the gross income. In the given case, Krishna Pvt. Ltd. is fulfilling the Principal
Business Criteria i.e. Financial Assets are more than 50% of total assets and Financial Income is
more than 50% of Gross Income.
• In such a scenario, the statutory auditor has an obligation to submit exception report to the RBI.
As per Para 5 of NBFC Auditor’s Report (Reserve Bank) Directions, 2008 provides that where, in
the case of a NBFC, the statement regarding any of the items referred to in para 3, is unfavourable
or qualified, or in the opinion of the auditor the company has not complied with:
(a) the provisions of Chapter III-B of Reserve Bank of India Act, 1934; or
(b) the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016; or
(c) Master Direction – RBI (NBFC – Scale Based Regulation) Directions, 2023
it shall be the obligation of the auditor to make a report containing the details of such
unfavourable or qualified statements and/or about the non-compliance, as the case may be, in
respect of the company to the concerned Regional Office of the Department of Non-Banking
Supervision of the Bank under whose jurisdiction the registered office of the company is located.
Note: Duty of the Auditor to submit exception report shall be to report only the contraventions of
the provisions of RBI Act, 1934, and Directions, Guidelines, instructions and such report shall not
contain any statement with respect to compliance of any of those provisions.

Q.8 Sudhir and Associates, a firm of Chartered Accountants, was appointed as auditor of an NBFC. The
audit work has been completed. The audit team which was involved in the fieldwork came across
various observations during the course of audit of this NBFC and have also an limited understanding
about the exceptions which are required to be reported in the audit report. They would like to
understand in detail regarding the obligations on the part of an auditor in respect of exceptions in
his report so that they can conclude their work. Please explain. [MTP-May 20, Nov. 21, Sep. 22]
Or
R and Associates, a firm of chartered accountants, is appointed as auditor of NBFC. During the audit,
audit team comes across various observations/exceptions and Mr. A, a junior member of audit team,
due to his limited understanding about exceptions which are required to be reported in the audit
report, would like to understand in detail, the obligations on the part of an auditor in respect of
exceptions in the audit report so that he can conclude his work. Discuss. [July 21 (5 Marks)]

Ans.: Obligation of Auditor to submit exception report to RBI:

Para 5 of NBFC Auditor’s Report (Reserve Bank) Directions, 2008 provides that where, in the case of a
NBFC, the statement regarding any of the items referred to in para 3, is unfavourable or qualified, or
in the opinion of the auditor the company has not complied with:
(a) the provisions of Chapter III B of Reserve Bank of India Act, 1934; or
(b) the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016; or
(c) Master Direction – RBI (NBFC – Scale Based Regulation) Directions, 2023

14B.6
Chapter 14B Audit of Non-Banking Financial Companies
it shall be the obligation of the auditor to make a report containing the details of such unfavourable or
qualified statements and/or about the non-compliance, as the case may be, in respect of the company
to the concerned Regional Office of the Department of Non-Banking Supervision of the Bank under
whose jurisdiction the registered office of the company is located.
Note: Duty of the Auditor to submit exception report shall be to report only the contraventions of the
provisions of RBI Act, 1934, and Directions, Guidelines, instructions and such report shall not contain
any statement with respect to compliance of any of those provisions.

Q.9 Super Non-Bank Limited, a “Systemically Important Non-Deposit Taking NBFC”, was operating
appropriately till the start of COVID-19 Pandemic. Due to unforeseen conditions during the
Pandemic and after that, the operating revenue of the NBFC started decreasing. Following were the
position of Net Owned Funds of the company during the last 4 financial years:

Financial Year Net Owned Funds

FY 21-22 ₹ 15 Crore

FY 22-23 ₹ 6 Crore

FY 23-24 ₹ 4 Crore

FY 24-25 ₹ 1.5 Crore

Super Non-Bank Limited appointed Mr Shyam as their statutory auditor for the FY 24-25. Mr Shyam
identified that the Net Owned Funds of the company have been less than ₹ 2 Crore since June 2024.
Kindly guide Mr Shyam with respect to his reporting requirements as per relevant NBFC provisions.
[MTP-Sep. 23]

Ans: Reporting Requirements if NOF not maintained:

• In exercise of the powers conferred u/s 45 IA of the RBI Act, Bank hereby specifies ₹ 200 lakh as the
Net Owned Fund (NOF) required for a NBFC to commence or carry on the business of non-banking
financial institution, except wherever otherwise a specific requirement as to NOF is prescribed by
the Bank.
• It will be incumbent upon such NBFCs, the NOF of which currently falls below ₹ 200 lakh, to submit
a statutory auditor's certificate certifying compliance with the prescribed levels by the end of the
period as given above.
• NBFCs failing to achieve the prescribed level within the stipulated period shall not be eligible to
hold the CoR as NBFCs. Every NBFC shall submit a certificate from its Statutory Auditor that it is
engaged in the business of a non-banking financial institution requiring it to hold a CoR u/s 45 IA of
the RBI Act and is eligible to hold it. A certificate from the Statutory Auditor in this regard with
reference to the position of the company as at end of the financial year ended March 31 may be
submitted to the Regional Office of the Department of Non-Banking Supervision under whose
jurisdiction the non banking financial company is registered, within one month from the date of
finalization of the balance sheet and in any case not later than Dec. 30 th of that year.
Conclusion: It is the responsibility of the Statutory Auditor, i.e., Mr Shyam, to report where NOF has
fallen below ₹ 200 Lakhs.
Note: For all companies currently applying for registration as a NBFC, minimum NOF requirement
is ₹ 10 Crores (earlier it was ₹ 2 crores). All existing companies should meet NOF of ₹ 10 Crores in
a phased manner by 31st March 2027.

14B.7
 15 Audit of PSU (Additional Questions – 14th Edition)
15.6 - Propriety Audit

Q.1 The Government of India launched a rural development scheme to undertake projects aimed at
improving infrastructure, healthcare and education in the rural areas. To execute the projects the
Central Government provided funds to the state government. The Comptroller and Auditor General
of India wants to ensure that the funds provided to the State Governments have been utilized for
the identified purposes and that public interest has not been harmed. You are appointed by C & AG
to conduct the propriety audit and report on the funds utilized by the state government for building
hospitals, school buildings and roads and submit a report on the wastefulness in public
administration and cases of improper, avoidable and infructuous expenditures, if any, has been
done. What functions as an auditor will be performed by you? [Nov. 24 (4 Marks)]

Ans.: Functions of Auditor in context of Propriety Audit:

(a) To see that all expenditure incurred are properly planned.
(b) To see that size & channels of expenditure are rightful & expected to give maximum results.
(c) To appraise whether those expenditure are likely to give optimum result.
(d) To see that any substitute plan of action can bring about an improvement on current operation
and as well as return from capital expenditure.
(e) To examine the actions and decisions of the management to see that they are conductive to
public interests and that they meet the standards of conduct.

For academic updates and related contents: Join telegram channel: https://t.me/altclasses
Visit knowledge portal of www.altclasses.in
For books/class related queries: E-mail: [email protected]
Ph.: 9319805511, 7260941195
For Online purchase of books/classes: Visit our web portal: www.altclasses.in

15.1
 16 Internal Audit (Additional Questions – 14th Edition)
16.1 – Meaning, Objectives and Scope of Internal Audit

Q.1 After an illustrious career in Indian Audit & Accounts Service for about 25 years, Parteek, a post
graduate in law, has taken voluntary retirement from government service. Being in fine spirits, he
wants to take responsibilities in corporate sector as Chief internal auditor. On looking at attractive
compensation packages, he applied for such position in a leading listed company engaged in oil
refining business. The Board of company is keen on him due to his impressive credentials.
Can he be appointed in this leading position of said company?

HINT: As per Sec. 138 of Companies Act, 2013, internal auditor shall either be a Chartered Accountant or a
Cost Accountant (whether engaged in the practice or not) or such other professional as may be
decided by the Board.
Applicant in question is a law post graduate and he has spent 25 years of his career in Indian Audit
& Accounts Service. Hence, he has got necessary experience and skills required for the said position.
Board would be in a position to appoint such a competent and experienced person in the field of
auditing as its Chief Internal auditor.

16.2 – Management Function and Scope of Internal Auditing

Q.2 CA Dev is internal auditor of a listed company. Company wants to make sure that it is in compliance
with SEBI requirements at all times and it is never on the wrong side of law. It asks its internal
auditor to manage its compliance tracking system including directly corresponding with regulator
in this regard. The profile and scope of internal audit agreed at time of appointment included
“compliance with laws and regulations.” Can he perform such type of activities in capacity of
internal auditor of company?

HINT: Internal Auditor does not assume any responsibility to manage or operate the compliance
framework or to take compliance related decisions. It is not responsibility of the Internal Auditor to
execute or resolve compliance related risks (e.g., engaging directly with regulators, etc.).
Although internal audit function provides independent assurance to enhance governance (which
includes compliance with laws and regulations), it does not assume operational responsibility of its
compliance framework. It is the responsibility of the management. He is responsible for auditing the
compliance framework and not managing it. Similarly, he does not accept compliance related risks
like directly engaging with regulator.

16.6 – Internal Auditors and External Auditors

Q.3 Up Down Limited is in doldrums since last two years. The demand for its products has declined
drastically. Statutory auditor is of the view that situation has put into question going concern
assumption of the company. Its internal auditor has helped management in devising a strategy to
deal with such risks and come out of the situation. The plan includes venturing into different

16.1
Internal Audit Chapter 16
product lines using same plant with minor modifications. Further, internal auditor has also
prepared estimates of revenue generation along with cash flows. Can statutory auditor place total
reliance on work performed by internal auditor in this regard?

HINT: The greater the judgment needed to be exercised in planning and performing the audit procedures
and evaluating the audit evidence, external auditor will need to perform more procedures directly
because using the work of the internal audit function alone will not provide the external auditor
with SAAE.
Appropriate use of going concern assumption requires significant judgment on part of statutory
auditor. Hence, he cannot place total reliance on internal auditor’s work in this regard and he should
perform more procedures directly.

16.7 - Miscellaneous Question

Q.4 The management of High Limited is concerned with the reporting requirement cast through Rule
11 of the Companies (Audit and Auditors) Rules, 2014 for the financial year 2023-24 with regard to
the Audit Trail (edit log). Audit trails may be enabled at the accounting software level depending on
the features available in such software or same may be captured directly in the database
underlying such accounting software. Consequently, the management of the company approached
CA J and asked him to suggest them list of internal controls which may be required to be
implemented and operated to demonstrate that the Audit trail (or Edit Log) feature was functional,
operated and was not disabled. Help CA J. [May 24 (4 Marks)]

Ans.: Internal controls required to be implemented and operated to demonstrate that the Audit trail
(or Edit Log) feature was functional, operated and was not disabled:
In order to demonstrate that the audit trail feature was functional, operated and was not disabled, a
company would have to design and implement specific internal controls (predominantly IT controls)
which in turn, would be evaluated by the auditors, as appropriate. An illustrative list of internal
controls which may be required to be implemented and operated are given below:
• Controls to ensure that the audit trail feature has not been disabled or deactivated.
• Controls to ensure that User IDs are assigned to each individual and that User IDs are not shared.
• Controls to ensure that changes to the configurations of the audit trail are authorized and logs of
such changes are maintained.
• Controls to ensure that access to the audit trail (and backups) is disabled or restricted and access
logs, whenever the audit trails have been accessed, are maintained.
• Controls to ensure that periodic backups of the audit trails are taken and archived as per the
statutory period specified under the provisions of the Act.

Q.5 Rishi is appointed as internal auditor for a SPOM Limited, a medium-sized manufacturing company,
while CA Nitin is the statutory auditor of the SPOM Limited.
(a) During the review, Rishi notices several discrepancies in the disbursement records and
suspects there might be weaknesses in the internal control system. Additionally, there have
been recent changes in the company's business policies that he was not informed about. Rishi is
concerned about maintaining his independence and objectivity while ensuring that
management is aware of these issues. What are the responsibilities of Rishi as an Internal
Auditor with respect to the accounting function and financial records of the organisation?

16.2
Chapter 16 Internal Audit
(b) CA Nitin asked Rishi to provide direct assistance to him regarding evaluating the
appropriateness of management’s use of the going concern assumption. In view of Standards on
Auditing, whether Nitin can ask direct assistance from Rishi as stated above? [RTP-Nov. 24]

Ans.: (a) Responsibilities of Internal Auditor with respect to accounting function and financial
records: Refer Answer of Q. No. 4 (14th Edition).
(b) Using Direct Assistance of Internal Auditor:
As per SA 610 “Using the Work of Internal Auditor”, the external auditor shall not use internal
auditors to provide direct assistance to perform procedures that involve making significant
judgments in the audit.
Since the external auditor has sole responsibility for the audit opinion expressed, the external
auditor needs to make significant judgments in the audit engagement.
Significant judgments include the following:
• Assessing the risks of material misstatement;
• Evaluating the sufficiency of tests performed;
• Evaluating the appropriateness of management’s use of the going concern assumption;
• Evaluating significant accounting estimates; and
• Evaluating the adequacy of disclosures in the financial statements, and other matters
affecting the auditor’s report.
Conclusion: CA. Nitin cannot ask direct assistance from internal auditors regarding evaluating
the appropriateness of management’s use of the going concern assumption in accordance with
SA 610.

For academic updates and related contents: Join telegram channel: https://t.me/altclasses
Visit knowledge portal of www.altclasses.in
For books/class related queries: E-mail: [email protected]
Ph.: 9319805511, 7260941195
For Online purchase of books/classes: Visit our web portal: www.altclasses.in

16.3
 Due Diligence, Investigation & Forensic
17 Accounting (Additional Questions – 14th Edition)
17.1 - Due Diligence Review

Q.1 Vicky is a financial analyst working for a large corporation that is considering the acquisition of a
mid-sized manufacturing company. The initial financial statements provided by the target company
appear to be in order, showing profits and a solid asset base. However, his team is concerned about
potential risks that may not be immediately visible in the financial documents provided. Guide Vicky
on what specific aspects should be focused during due diligence to ensure that there are no hidden
liabilities in this deal? [MTP-Sep. 24]

Ans.: Investigation of Hidden Liabilities:

In order to investigate hidden liabilities, following areas need to be examined:
• Any show cause notice, which have not matured into demands but may be material and
important.
• Contingent liabilities not shown in books.
• Company may have sold some subsidiaries/businesses and may have agreed to take over and
indemnify all liabilities and contingent liabilities of the same prior to the date of transfer.
• Product and warranty liabilities, product returns & discounts, liquidated damages, etc.
• Tax liability under direct and indirect taxes.
• Long pending sales tax assessment.
• Cases of custom duty where only provisional assessment has been made and final assessment is
yet to completed.
• Agreement to buy back shares at a stated price.
• Future lease liabilities.
• Claims against the company including third party claims.
• Unfunded retirement benefit of employees.
• Labour claims under negotiations.

17.4 - Investigation on behalf of the Bank for Advances

Q.2 Core Limited submitted a credit proposal XYZ Bank Limited for the sanction of a Term Loan of
₹ 150.00 crore required for procuring and installing a latest Plant and machinery for their upcoming
project. Based on the application, XYZ Bank Limited approached CA P to investigate the profitability
of the business for judging the accuracy of the schedule of repayment furnished by Core Limited, as
well as the value of the security in the form of assets of the business already possessed and those
which will be created out of the loan. Elucidate the steps that should be undertaken by CA P?
[May 24 (5 Marks)]

Ans.: Steps to investigate the profitability of an entity:

17.1
Due Diligence, Investigation & Forensic Accounting Chapter 17
To investigate profitability of the business for judging accuracy of schedule of repayment furnished by
borrower, as well as value of security in the form of assets of the business already possessed and those
which will be created out of the loan, investigating accountant should take under-mentioned steps:
(1) Prepare a condensed income statement from the Statement of Profit and Loss for the previous
five years, showing separately therein various items of income and expenses, the amounts of
gross and net profits earned and taxes paid annually during each of the five years. The amount of
maintainable profits determined on the basis of foregoing statement should be increased by the
amount by which these would increase on the investment of borrowed funds.
(2) Compute the under-mentioned ratios separately and then include them in the statement to show
the trend as well as changes that have taken place in the financial position of the company:
(i) Sales to Average Inventories held.
(ii) Sales to Fixed Assets.
(iii) Equity to Fixed Assets.
(iv) Current Assets to Current Liabilities.
(v) Quick Assets (the current assets that are readily realisable) to Quick Liabilities.
(vi) Equity to Long Term Loans.
(vii) Sales to Book Debts.
(viii) Return on Capital Employed.
(3) Enter in a separate part of statement, break-up of annual sales product-wise to show their trend.

17.5 - Investigations of Frauds

Q.3 CEP Ltd., a manufacturing company, has a diverse range of suppliers for raw materials and
components. Several new suppliers have been added during the past year. It is the responsibility of
the Accounts payable department for managing the Suppliers' Ledger, processing invoices and
making payments. The management of CEP Ltd has experienced unexpected financial discrepancies
and they suspect fraudulent activities within the Suppliers' Ledger. The management assigns CA K to
conduct a detailed investigation to identify any potential fraud that might have occurred. Discuss the
ways in which frauds can be committed through Suppliers' Ledger. Explain the procedures that CA K
will adopt to investigate the potential fraud. [Nov. 24 (4 Marks)]

Ans.: Ways in which frauds can be committed through Suppliers' Ledger:

(i) Adjusting fictitious or duplicate invoices as purchases in the accounts of suppliers and
subsequently misappropriating the amounts when payments are made to the suppliers in respect
of these invoices.
(ii) Suppressing the Credit Notes issued by suppliers and withdrawing the corresponding amounts
not claimed by them.
(iii) Withdrawing amounts unclaimed by suppliers, for one reason or another by showing that the
same have been paid to them.
(iv) Accepting purchase invoices at prices considerably higher than their market prices and collecting
the excess amount, paid in cash, from the suppliers.
(Note: Any 2 points may be mentioned).

17.2
Chapter 17 Due Diligence, Investigation & Forensic Accounting
Procedures to investigate the potential fraud:
(i) Verify the bought journal with reference to entries in the Goods Inward Book and the suppliers’
invoices to confirm that amounts credited to the accounts of suppliers were in respect of goods,
which were duly received, and the suppliers’ accounts had been credited correctly.
(ii) Request all suppliers to furnish statements of their accounts to see whether or not any balance is
outstanding or due so as to confirm that allowances & rebates have been correctly adjusted.
(iii) Examine system of internal control in relation to purchase orders issued and identify possibilities
of collusion with suppliers.
(Note: Any 2 points may be mentioned).

For academic updates and related contents: Join telegram channel: https://t.me/altclasses
Visit knowledge portal of www.altclasses.in
For books/class related queries: E-mail: [email protected]
Ph.: 9319805511, 7260941195
For Online purchase of books/classes: Visit our web portal: www.altclasses.in

17.3
 SDG and ESG Assurance
18 (Additional Questions – 14th Edition)
18.2 – Integrated Reporting

Q.1 Consistent Enterprises Ltd., a listed company, has been voluntarily preparing and disclosing its
sustainability report based on the internationally accepted “Integrated Reporting” framework for
some years, even before BRSR reporting became mandatory. Even after BRSR reporting became
mandatory, it is cross-referencing disclosures made under such reporting to disclosures sought
under BRSR. The key focus of Integrated Reporting is how the company creates value over the short,
medium, and long term.
Following further information is provided in respect of the above company:
(i) It has secured a loan to expand its operations and invests the funds in purchasing raw materials
and machinery. The loan, along with revenue generated from existing sales, contributes to the
pool of resources available for production.
(ii) It has increased the number of beneficiaries under its flagship CSR programmes from previous
10000 to 75000. It has provided value for communities and provided sustainable livelihood to
them.
Discussing the above information, identify which of the capitals of “Integrated Reporting” are being
referred to at (i) and (ii) respectively? [MTP - Oct. 24]

Ans.: Capitals of “Integrated Reporting”:

• Information given in situation (i) states that company has secured a loan to expand its operations &
invests funds in purchasing raw materials and machinery. The loan, along with revenue generated
from existing sales, contributes to the pool of resources available for production. Therefore, it
involves pool of funds that is available to the organization for use in the production of goods or
provision of services. Further, it is obtained through financing, such as debt, equity, or grants, or
generated through operations or investments.
The capital referred to at (i) is “Finance Capital”.
• Further, situation [ii] describes increase in number of beneficiaries under flagship CSR programmes
providing value for communities and sustainable livelihood is an example of relationships
established within and between each community, group of stakeholders and other networks to
enhance individual and collective well-being.
The capital referred to at (ii) is “Social and Relationship Capital.”

18.4 - Business Responsibility & Sustainability Report (BRSR)

Q.2 SU Limited is amongst the top 1000 listed entities. With the introduction of new reporting
requirements by SEBI on ESG parameters called the Business Responsibility and Sustainability
Report (BRSR), it requires SU Limited to make disclosures on their performance against the various
principles of the "National Guidelines on Responsible Business Conduct". One of the principles
emphasizes that the business decisions in an organization should be open to disclosure and
accessible to the relevant interested parties. Elucidate the essence of core elements associated with
the aforesaid principle. [May 24 (4 Marks)]

18.1
SDG and ESG Assurance Chapter 18
Ans.: Core Elements associated with Principle 1 – Ethics, Transparency and Accountability:

The first principle emphasizes that the business decisions in an organisation should be open to
disclosure and accessible to the relevant interested parties.
The essence of the core elements associated with the first principle are:
(i) The entities’ governing structure should develop policies, procedures, and practices for their
offices, factories, and work areas, ensuring that ethics is not compromised.
(ii) The information relating to the policies, procedures, and practices along with the performance
should be made available to the stakeholders.
(iii) In case of adverse effects, more care has to be taken for transparent disclosures.
(iv) The entities in the value chain should be encouraged to adopt these principles by the governance
structure.

(v) The entities should proactively respond to the outside entities that violate the nine principles of
the BRSRs. This includes their suppliers, distributors, sub-contractors, or regulatory officers that
may engage with the business concern.

Q.3 Kapil is appointed as an external auditor to provide assurance on a company’s Business

Responsibility and Sustainability Report (BRSR). To ensure the report's accuracy and reliability, he
needs to follow a comprehensive methodology that includes several key steps. What methodology
should Kapil follow to provide assurance on the BRSR? [RTP-Nov. 24]

Ans.: Methodology to provide assurance on BRSR:

(1) Step 1: Preliminary Review of ESG report, parameters
(2) Step 2: On-site Assessment/Verification of ESG Report
(3) Step 3: Issuance of Assessment Report and Assessment Statement
(4) Step 4: Review of the responses and clarifications on the findings
(5) Step 5: Submission of findings of the onsite assessment and document review
(6) Step 6: Preparation of Assessment/Verification report including final results of Assessment.

18.5 - Role of Auditor – Consideration of Climate Related Risks in an Audit of F.S.

Q.4 ESG disclosure and reporting is mandatory for top 1000 listed companies in form of Business
Responsibility and Sustainability Reports (BRSR). As reporting of sustainability information
becomes the trend being observed globally, the demand for independent assurance of
sustainability information is anticipated to grow as entities around the globe look to enhance the
integrity of their sustainability reporting. In developing the understanding of an entity, the auditor
should include the consideration of climate-related risks and how these risks may be relevant to
the audits. Many investors and stakeholders are seeking information from auditor's report about
how climate-related risks are addressed in the audit.
In the context of the above, describe role of auditor in an audit of F.S. of the company.
[Nov. 24 (4 Marks)]

18.2
Chapter 18 SDG and ESG Assurance
Ans.: Auditor’s role on ESG aspects in an audit of financial statements of the Company:
(A) Consideration of Climate Related Risks in Understanding the Entity
• In developing understanding of an entity, auditor should include consideration of climate
related risks and how these risks may be relevant to the audits.
• Climate-related risks could be more relevant in certain sectors or industries, e.g., banks &
insurance, energy, transportation, materials and buildings, agriculture & food products.
• Stakeholders are seeking information from auditor’s reports about how climate-related risks
were addressed in the audit. Hence, auditor need to be aware of and may face, increasing
pressure for transparency about climate matters in auditor’s reports.
(B) Auditor’s Report:
• Auditor’s report is a key mechanism of communication to users about the audit that was
performed.
• In addition to audit opinion, it provides information about auditor’s responsibilities and
when required, an understanding of the matters of most significance in the audit and how
they were addressed.
• In some circumstances, it may warrant inclusion of an EOM paragraph to draw attention to
disclosures that are of fundamental importance to users’ understanding of F.S.
• Auditor should determine whether entity has appropriately disclosed relevant climate-
related information in F.S. in accordance with the applicable FRF e.g., Ind-AS or ASs, when
relevant before considering climate-related matters in the auditor’s report.
(C) Reading the Other Information
To comply with the requirements of SA 710, auditor should read other information for
consistency with information disclosed in F.S. & information that is publicly communicated to
stakeholders outside the F.S., such as management report narratives in the annual report.

For academic updates and related contents: Join telegram channel: https://t.me/altclasses
Visit knowledge portal of www.altclasses.in
For books/class related queries: E-mail: [email protected]
Ph.: 9319805511, 7260941195
For Online purchase of books/classes: Visit our web portal: www.altclasses.in

18.3
 Professional Ethics and Liabilities of Auditors
19 (Additional Questions – 14th Edition)
19.1 – Fundamental Principles, Threats and NOCLAR

Q.1 In terms of subsection 114 of Revised Code of Ethics, a professional accountant shall comply with the
principle of confidentiality, which requires an accountant to respect the confidentiality of
information acquired as result of professional and employment relationships. Confidentiality serves
the public interest because it facilitates the free flow of information from the professional
accountant's client or employing organization to the accountant in knowledge that the information
will not be disclosed to a third party. In this context, enumerate the circumstances where
professional accountants are or might be required to disclose confidential information or when such
disclosure might be appropriate. In deciding whether to disclose confidential information what are
the points that should be kept in the mind of professional accountants? [May 24 (5 Marks)]

Ans.: Principle of Confidentiality:

In terms of subsection 114 of Revised Code of Ethics, a professional accountant shall comply with the
principle of confidentiality, which requires an accountant to respect the confidentiality of information
acquired as a result of professional and employment relationships. Confidentiality serves the public
interest because it facilitates the free flow of information from the professional accountant’s client or
employing organization to the accountant in the knowledge that the information will not be disclosed to
a third party. Nevertheless, the following are circumstances where professional accountants are or
might be required to disclose confidential information or when such disclosure might be appropriate:
(1) Disclosure is required by law,
(2) Disclosure is permitted by law and is authorized by the client or the employing organisation;
(3) There is a professional duty or right to disclose, when not prohibited by law:
(i) To comply with the requirements of Peer Review or Quality Review of the Institute;
(ii) To respond to an inquiry or investigation by a professional or regulatory body;
(iii) To protect the professional interests of a professional accountant in legal proceedings; or
(iv) To comply with technical and professional standards, including ethics requirements.
In deciding whether to disclose confidential information, professional accountants should
consider the following points:
(1) Whether the interests of any party, including third parties whose interests might be affected, could
be harmed if the client or employing organization consents to the disclosure of information by the
professional accountant;
(2) Whether all the relevant information is known and substantiated, to the extent it is practicable;
and
(3) The proposed type of communication, and to whom it is addressed;
(4) Whether the parties to whom the communication is addressed are appropriate recipients.

19.1
Professional Ethics and Liabilities of Auditors Chapter 19
Q.2 TP Limited is a listed company engaged in the business of manufacturing of kids garments under the
brand name of MM. M/s R & Associates, firm of chartered accountants, are appointed as a Statutory
Auditor of the Company for the year 2023-24. CA R is looking after the audit of the Company. During
audit, CA R observed that there are number of notices received from GST Department and Income-tax
Department for various issues. Further during plant visit, CA R observed that few child labourers are
engaged in some of the activity. In response to the observation made, CA R followed the procedure as
envisaged in SA 250, "Consideration of Laws and Regulations in an Audit of Financial Statements".
According to CA R, the provisions of SA 250 and the provisions of NOCLAR (Non-Compliance with
Laws and Regulations) under Revised Code of Ethics are one and the same. Do you agree? If not, give
your comments. [May 24 (4 Marks)]

Ans.: SA 250 and NOCLAR:

Following points indicates that the provisions of SA 250 and NOCLAR (Non-Compliance with Laws and
Regulations) under the Revised Code of Ethics are not one and same:
(i) SA 250 is applicable only on Audit, and not on other Assurance engagements. However, NOCLAR is
applicable on professional accountants in service, and in practice.
(ii) SA 250 talks of auditor’s responsibilities for laws having direct effect on the determination of
material amounts and disclosures in the financial statements (such as tax and labour laws); and
other laws and regulations that do not have a direct effect on the determination of the amounts
and disclosures in the financial statements, but compliance with which may be fundamental to the
operating aspects of the business. NOCLAR, while being alike to SA 250 till this point, is further
ahead of it in that it takes into account non-compliance that causes substantial harm resulting in
serious consequences in financial or non-financial terms.
(iii) SA 250 does not define stakeholders. NOCLAR is related to affect of non-compliance on investors,
creditors, employees as also the general public.
(iv) As per NOCLAR, in exceptional circumstances, the professional accountant might become aware of
an imminent breach of a law or regulation that would cause substantial harm to investors,
creditors, employees or the general public. Having first considered whether it would be
appropriate to discuss the matter with management or those charged with governance of the
company, the accountant shall exercise professional judgment and determine whether to disclose
the matter immediately to an appropriate authority in order to prevent or mitigate the
consequences of such imminent breach. If disclosure is made, that disclosure is permitted. This
provision is not existent in SA 250.

Q.3 CA Gosh, newly qualified Chartered Accountant, joins a reputed CA firm as a partner. He is full of
confidence about his qualification and feels he possesses complete knowledge of his profession for
the future assignments. The senior partner of the firm calls a meeting to brief the new partner and
other newly appointed audit assistants in his firm regarding the ethics that need to be kept in mind
while carrying out assurance and non-assurance services. One of the areas he touches upon is the
professional competence and due care that a Chartered Accountant needs to possess all the time.
Enumerate the matters envisaged in subsection 113 of Revised Code of Ethics that needs to be
complied with by a professional accountant with respect to Professional Competence and Due Care.
[Nov. 24 (4 Marks)]

19.2
Chapter 19 Professional Ethics and Liabilities of Auditors
Ans.: Professional Competence and Due Care:
Matters envisaged in subsection 113 of Revised Code of Ethics that needs to be complied with by a
professional accountant with respect to Professional Competence and Due Care are as stated below:
(1) A professional accountant shall comply with the principle of professional competence and due
care, which requires an accountant to:
• attain and maintain professional knowledge and skill at the level required to ensure that a
client or employing organisation receives competent professional service, based on current
technical and professional standards and relevant legislation; and
• act diligently and in accordance with applicable technical and professional standards.
(2) Serving clients and employing organisations with professional competence requires the exercise of
sound judgment in applying professional knowledge and skill when undertaking professional
activities.
(3) Maintaining professional competence requires a continuing awareness and an understanding of
relevant technical, professional and business developments.
(4) Continuing professional development enables a professional accountant to develop and maintain
the capabilities to perform competently within the professional environment.
(5) Diligence encompasses the responsibility to act in accordance with the requirements of an
assignment, carefully, thoroughly and on a timely basis.
(6) In complying with the principle of professional competence and due care, a professional
accountant shall take reasonable steps to ensure that those working in a professional capacity
under the accountant’s authority have appropriate training and supervision.
(Note: Any 4 points may be mentioned).

19.2 – Membership of the Institute; CAs in Practice and KYC Norms

Q.4 CA Ram, a practicing chartered accountant, is well known for his expertise in handling Goods and
Services Tax (GST) cases at the GST Tribunal and he does not provide any assurance services. Given
his longstanding reputation in the field, CA Ram is approached by DEF Limited to file an appeal in
the Tribunal against a GST demand of ₹ 6 crore, which was imposed by the Commissioner (Appeals),
and to represent DEF Limited in the matter. CA Ram offers to accept a fee of ₹ 3,50,000 for filing the
appeal and pleading at the GST Tribunal.
Comment on act of CA Ram in terms of the CA Act, 1949 & Schedules thereon. [MTP-Oct. 24]

Ans.: Acting as Representative for Non-Audit Client:

• Under Section 2(2)(iv) of the CA Act, 1949, a member of the Institute shall be deemed “to be in
practice” when individually or in partnership with CAs in practice, he, in consideration of
remuneration received or to be received renders such other services as, in the opinion of the
Council, are or may be rendered by a CA in practice.
• Pursuant to Sec. 2(2)(iv) of CA Act, 1949, read with Regulation 191 of CA Regulations, 1988 a
member shall be deemed to be in practice if he, in his professional capacity and neither in his
personal capacity nor in his capacity as an employee, acts as representative for taxation matters.

19.3
Professional Ethics and Liabilities of Auditors Chapter 19
• In the given situation, CA Ram, a practicing Chartered Accountant, provides non-assurance services.
He is approached by DEF Limited, a non-audit client, to file an appeal in GST Tribunal against GST
Demand of ₹ 6 crore, which was imposed by the Commissioner (Appeals) and to plead on behalf of
DEF Limited in the matter. CA Ram offers to accept the case and agrees to charge fees of ₹ 3,50,000.
Conclusion: CA Ram is not guilty of professional misconduct.

19.3 - First Schedule Part I – Professional Misconduct in Relation to Members in Practice

Q.5 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 ₹ 7,500
(ii) It is open for all categories
(iii) Maximum fees of ₹ 7,500 per quarter
Discuss whether Sanjeev and Associates can respond to the said tender with reference to provisions
of the Chartered Accountants (Amendment) Act, 2006 and Schedules thereto. [RTP-Nov. 24]

Ans.: Responding to tenders:

• As per Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949, a Chartered
Accountant in practice shall be guilty of professional misconduct if he solicits clients or
professional work either directly or indirectly by circular, advertisement, personal communication
or interview or by any other means.
• Provided that nothing herein contained shall be construed as preventing or prohibiting -
(i) Any Chartered Accountant from applying or requesting for or inviting or securing professional
work from another chartered accountant in practice; or
(ii) A member from responding to tenders or enquiries issued by various users of professional
services or organisations from time to time and securing professional work as a consequence.
• However, as per Guidelines issued by the Council of the ICAI, a member in practice shall not
respond to any tender issued by an organisation or user of professional services in areas of
services which are exclusively reserved for CAs, such as audit and attestation services. However,
such a restriction shall not be applicable where minimum fee of the assignment is prescribed in the
tender document itself or where the areas are open to other professionals along with the CAs.
• In the given case, Sanjeev & Associates responded to a tender from a PF Office, Chembur for filing
quarterly e-TDS returns.
Conclusion: Sanjeev & Associates can respond to the said tender as the tender is open for all the
categories i.e. it is open to other professionals along with the Chartered Accountants.

Q.7 PN and Associates are appointed as the Statutory Auditors of The Iron Company Ltd. The Central
Government holds 65% of the paid-up share capital in this company. Appointment letter of company
gave a very limited time to PN and Associates for accepting the audit. CA N, 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 reply from the previous auditor. Hence CA N gave a conditional
acceptance of the appointment and commenced the audit. Discuss with reference to the CA Act, 1949
and the schedules thereunder, whether CA N has complied with the same. [Nov. 24 (5 Marks)]

19.4
Chapter 19 Professional Ethics and Liabilities of Auditors
Ans.: Prior communication with Predecessor Auditor & Lack of time in acceptance of Govt. Audits:
• As per Clause 8, Part I of First Schedule to the CA Act, 1949, a member in practice shall be deemed
to be guilty of professional misconduct if he accepts a position as Auditor previously held by
another chartered accountant or certified auditor without first communicating with him in
writing.
• In case of audit of Government Companies, banks or their branches, if appointment is made well in
time to enable the obligation cast under this clause to be fulfilled, such obligation must be
complied with before accepting the audit.
• However, in case the time schedule given for the assignment is such that there is no time to wait
for the reply from the outgoing auditor, incoming auditor may give a conditional acceptance of the
appointment and commence the work which needs to be attended to immediately after he has
sent the communication to the previous auditor in accordance with this clause.
• In his acceptance letter, he should make clear to the client that his acceptance is subject to
professional objections, if any, from the previous auditors and that he will decide about his final
acceptance after taking into account the information received from the previous auditor.
• In the given case, The Iron Company Ltd. is a Government Company as Central Government holds
65% of its paid-up share capital. PN & Associates are appointed as its Statutory Auditors and CA N,
the engagement partner communicated with the previous auditor but due to lack of time gave a
conditional acceptance of the appointment and commenced the audit.
Conclusion: CA N has complied with the requirements as stated under Clause 8, Part I of First
Schedule to the CA Act, 1949.

Q.8 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 appeal in the Tribunal
against the Income-tax Demand of ₹ 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:
Fees for filing an appeal & to plead at Income-tax Tribunal will be higher of the following (a) or (b):
(a) ₹ 5,00,000
(b) 10% of Tax Demand Reduced.
Comment on the act of CA Kumar in terms of CA Act, 1949 & Schedules thereon. [May 24 (4 Marks)]

Ans.: Restriction on Fees based on a Percentage:

• As per Clause (10) of Part I of First Schedule to the Chartered Accountants Act, 1949, a Chartered
Accountant in practice shall be deemed to be guilty of professional misconduct if he charges or
offers to charge, accepts or offers to accept in respect of any professional employment fees which
are based on a percentage of profits or which are contingent upon the findings, or results of such
employment, except as permitted under any regulations made under this Act.
• However, Regulation 192 allow the Chartered Accountant in practice to charge the fees in respect
of any professional work which are based on a percentage of profits, or which are contingent upon
the findings or results of such work, in the case of a non-assurance services to non-audit clients,
and the fees may be based on a percentage of Tax Demand Reduced.

19.5
Professional Ethics and Liabilities of Auditors Chapter 19
• 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 of ₹ 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 and agrees to charge fees either ₹ 5,00,000 or 10%
of Tax Demand reduced whichever is higher.
Conclusion: Mr. Kumar will not be held guilty of professional misconduct since he is not providing any
assurance services to non-audit client pursuant to Reg. 192 read with Cl. 10 of Part I of First Schedule.

Q.9 CA Raj, a Practicing CA, 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 and Schedules thereto. [May 24 (4 Marks)]

Ans.: Engagement into other Occupations:

• As per Sec. 2(2)(iv) of the CA Act, 1949, a member shall be deemed ‘to be in practice’ when
individually or in partnership with CAs in practice, or in partnership with members of such other
recognized professional as may be prescribed, he, in consideration of remuneration received or to
be received, renders such other services as, in the opinion of the Council, are or may be rendered
by a CA in practice.
• As per Clause (11) of Part I of First Schedule of CA Act, 1949, a Chartered Accountant in practice is
deemed to be guilty of professional misconduct if he engages in any business or occupation other
than the profession of Chartered Accountant unless permitted by the Council so to engage.
• However, Council is empowered to permit CAs in practice to engage in any other business or
occupation considered fit and proper. Accordingly, Council formulated Regulations 191 to the CA
Regulations, 1988 specifying the activities with which a member in practice can associate himself
with or without the permission of the Council. As per Regulation 191 a CA in practice may take up
an appointment that may be made by the C.G. or a S.G. 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”.
• In the instant case, CA Raj, a practicing CA has been appointed as a “Secretary” in his professional
capacity by the C.G. for a metro project for a term of 2 years 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 Reg. 191 read with Clause (11) of Part I of First Schedule of CA Act, 1949.

Q.10 Mr. Jay is a practicing Chartered Accountant working as proprietor of M/s Adhya & Co. He went
abroad for 4 months. He delegated the authority to Mr. Vijay a Chartered Accountant his employee
for taking care of routine matters of his office. During his absence, Mr. Vijay has conducted the
under mentioned jobs in the name of M/s Adhya & Co.
(i) Asking for information or issue of questionnaire.
(ii) Initiating and stamping of vouchers and of schedules prepared for the purpose of audit.
(iii) Acknowledging and carrying on routine correspondence with clients.
Comment on eligibility of Mr. Vijay for conducting such jobs in name of M/s Adhya & Co. and liability
of Mr. Jay under the Chartered Accountants Act, 1949. [MTP-Oct. 24]

19.6
Chapter 19 Professional Ethics and Liabilities of Auditors
Ans.: Delegation of Authority to the Employee:
• As per Clause (12) of Part I of the First Schedule of the CA Act, 1949, a CA in practice is deemed to
be guilty of professional misconduct “if he allows a person not being a member of the Institute in
practice or a member not being his partner to sign on his behalf or on behalf of his firm, any
balance sheet, profit and loss account, report or financial statements”.
• In this case CA Jay proprietor of M/s Adhya & Co., went to abroad and delegated the authority to
another Chartered Accountant Mr. Vijay, his employee, for taking care of routine matters of his
office who is not a partner but a member of the ICAI.
• The Council has clarified that the power to sign routine documents on which a professional
opinion or authentication is not required to be expressed may be delegated and such delegation
will not attract provisions of this clause.
• In the given case, Mr. Vijay, a Chartered Accountant being employee of M/s Adhya & Co. has asked
for information or issued questionnaire. He has also proceeded for initiating and stamping of
vouchers and of schedules prepared for the purpose of audit. Apart from the same, he
acknowledged and carried out routine correspondence with clients. Here Vijay is right in doing the
same, since the same falls under routine work which can be delegated by the auditor.
Conclusion: There is no misconduct in this case as per Cl. (12) of Part I of First Schedule to the Act.

19.4 - First Schedule, Part II–Professional Misconduct in relation to Members in Service

Q.11 CA F is the Chief Financial Officer of ABC General Insurance Limited. Being in insurance business, the
company gets majority of its clients through their agency contracts. CA F has the practice of releasing
the commission payments on the condition that he gets 20% of the commission amount from the
agent. Comment with reference to the CA Act, 1949 and schedules thereto. [Nov. 24 (4 Marks)]

Ans.: Professional Misconduct of a member in service:

• Part II of First Schedule of Chartered Accountants Act, 1949 deals with professional misconduct in
relation to members of Institute in service.
• Clause 2 of Part II of First Schedule to CA Act, 1949 states that a member of the Institute (other than
a member in practice) shall be deemed to be guilty of professional misconduct, if he being an
employee of any company, firm or person accepts or agrees to accept any part of fees, profits or
gains from a lawyer, a chartered accountant or broker engaged by such Company, firm or person or
agent or customer of such Company, firm or person by way of commission or gratification.
• In the given case, CA F is the CFO of ABC General Insurance Limited and has the practice of releasing
the commission payments of company agents on the condition that he gets 20% of the commission
amount from the agent. Such practice is not permitted considering the above stated provisions.
Conclusion: CA F is guilty of professional misconduct under Clause 2 of Part II of First Schedule.

19.8 - Second Schedule, Part II “Professional Misconduct in relation to Members of the Institute Generally”

Q.12 The Director (Discipline) of The Institute of Chartered Accountants of India 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

19.7
Professional Ethics and Liabilities of Auditors Chapter 19
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 stated scenario of the matters placed before The Director (Discipline) of ICAI
against CA H, you are required to answer the following:
(i) Comment on violation of provisions of the Chartered Accountants Act, 1949 and its schedules
thereto by CA H.
(ii) Before which authority, matters of CA H would have been placed & what maximum punish-
ment could have been imposed on him by the said authority in accordance with CA Act, 1949?
(iii) Has CA H filed an appeal with the Appellate authority against the order within the time limit
prescribed under the said Act? [Nov. 24 (5 Marks)]

Ans.: (i) Submitting False information to Appellate Authority:

• As per Clause 3 of Part II of Second Schedule to the CA Act, 1949, a member is deemed to be
guilty of professional misconduct if he includes in any information, statement, return or
form to be submitted to the Institute, Council or any of its Committees, Director
(Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or the
Appellate Authority any particulars knowing them to be false.
• In the given case, CA H submit a statement of appeal with the Appellate Authority and 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.
Conclusion: CA H has violated the requirements of Clause 3 of Part II of Second Schedule by
submitted false information in statement of appeal to Appellate Authority.
(ii) Authority before whom matter is to be placed:
As violation is related with Second Schedule to the CA Act, 1949, matter is to be placed with
Disciplinary Committee.
Maximum punishment that can be imposed on Mr. H:
Fine of ₹ 5,00,000 and/or Removal of name from the Register of Members permanently.
(iii) Time limit for filing the Appeal:
As per Sec. 22G of CA Act, 1949, any member of the Institute aggrieved by any order of the
Board of Discipline or the Disciplinary Committee, may within 90 days from the date on which
the order is communicated to him, prefer an appeal to the Appellate Authority.
In the given case, penalty was imposed on Mr. H by an order dated 15.06.2024. Against the
said order, CA H preferred an appeal with the Appellate Authority on 5th August, 2024.
Conclusion: Appeal is filed within prescribed time limit of 90 days.

19.8
Chapter 19 Professional Ethics and Liabilities of Auditors
19.9 – Council General Guidelines, 2008

Q.13 CA Vaayu is the auditor of Viva Limited having a turnover of more than ₹ 200 Crores. The audit fee
for the year is fixed at ₹ 80 Lakhs. During the year, the company offers CA Vaayu an assignment of
representation before Income Tax Appellate Tribunal for certain matter for remuneration of ₹
1.75 crores. CA Vaayu accepted the assignment. Discuss action of CA Vaayu with reference to the
provisions of the Chartered Accountants (Amendment) Act, 2006 and Schedules thereto.
[RTP-Nov. 24]

Ans.: Accepting Management Consultancy Services by Auditor:

• As per Chapter IX of Council General Guidelines 2008, a member of the Institute in practice shall
be deemed to be guilty of professional misconduct if he accepts the appointment as a statutory
auditor of a PSUs/Govt company/Listed company and other public company having a turnover of
₹ 50 crores or more in a year and where he accepts any other work(s) or assignment(s) or
service(s) in regard to same undertaking(s) on a remuneration which in total exceeds the fee
payable for carrying out the statutory audit of the same undertaking.
• For this purpose, the other work/services include Management Consultancy and all other
professional services permitted by Council excluding audit under any other statute, Certification
work required to be done by the statutory auditor and any representation before an authority.
• In the given case, the company offers CA Vaayu, the statutory auditor, an assignment of
representation before Income Tax Appellate Tribunal for remuneration of ₹ 1.75 Crores.
Conclusion: It would not be misconduct on Vaayu’s part if he accepts the assignment of
representation before Income Tax Appellate Tribunal for remuneration of ₹ 1.75 crore.

For academic updates and related contents: Join telegram channel: https://t.me/altclasses
Visit knowledge portal of www.altclasses.in
For books/class related queries: E-mail: [email protected]
Ph.: 9319805511, 7260941195
For Online purchase of books/classes: Visit our web portal: www.altclasses.in

19.9