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RTP MAY-24
QUESTION 1 CA X has been offered audit of financial statements of TDK Industries, a partnership firm.
Prior to accepting proposed offer, he insists upon obtaining an agreement of management regarding
acknowledgment of its responsibility of having a proper process in place to ensure that financial
statements prepared are free from material misstatements. However, management is of the view that
it is auditor’s duty to detect material misstatements in financial statements and such an insistence by
auditor is totally uncalled for. Whose view is proper? Also discuss reasons for arriving at your
conclusion. What should be likely proper course of action for CA X in above situation?

ANSWER SA 210 deals with the auditor’s responsibilities in agreeing the terms of the audit
engagement with management and, where appropriate, those charged with governance. This includes
establishing that certain preconditions for an audit, responsibility for which rests with management
and, where appropriate, those with governance, are present. The objective of the auditor is to accept
or continue an audit engagement only when the basis upon which it is to be performed has been
agreed, through:
(A) Establishing whether the preconditions for an audit are present and
(B) Confirming that there is a common understanding between the auditor and management and,
where appropriate, those charged with governance of the terms of the audit engagement.

One of the preconditions for an audit is to obtain the agreement of management that it acknowledges
and understands its responsibility for preparation of financial statements and for such internal
control as is necessary to enable preparation of financial statements that are free from material
misstatements.
In the given situation, CA X is insisting only upon obtaining agreement of management regarding
acknowledgment of its responsibility for internal control to enable preparation of financial statements
that are free from material misstatements in accordance with SA 210. Design, implementation and
maintenance of internal control to ensure preparation of reliable financial statements that are free
from material misstatements is management’s responsibility. He is insisting on obtaining agreement
of management regarding acknowledgment of its responsibility. Therefore, CA X’s view is proper.
In case management does not provide such agreement acknowledging its responsibility, the auditor
shall not accept proposed audit engagement unless required by law or regulation.

QUESTION 2 “SA 220 is premised on the basis that the firm is subject to SQC 1”. What do you
understand by given statement in context of audit quality?

ANSWER Audit quality is essential to maintain confidence in the independent assurance provided by
the auditors. It is responsibility of auditor to maintain high audit quality. SQC 1 and SA 220 both deal
with quality control. SQC 1 applies to entire firm. However, SA 220 applies to a particular audit
engagement.
Based upon quality control system of firm established in accordance with requirements of SQC 1,
quality control policies pertaining to audit engagements are decided by engagement teams.
Engagement partner of a team is responsible for quality control procedures of a particular audit
engagement in accordance with SA 220.
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Therefore, SA 220 is premised on the basis that the firm is subject to SQC 1. Within the context of the
firm’s system of quality control, engagement teams have a responsibility to implement quality control
procedures that are applicable to the audit engagement.

RTP SEP-24
QUESTION 1 ABC & Associates, an audit firm, has been approached by a prospective company client
that has been in business for about 10 years to conduct an audit of its financial statements. Before
accepting the audit engagement, the firm wants to assess the integrity of prospective client. With
regard to the assessment of integrity, which matters should be considered by the audit firm?

ANSWER With regard to the integrity of a client, matters that ABC & Associates should consider
include, for example:
- The identity and business reputation of the client’s principal owners, key management, related
parties and those charged with its governance.
- The nature of the client’s operations, including its business practices.
- Information concerning the attitude of the client’s principal owners, key management and those
charged with its governance towards such matters as aggressive interpretation of accounting
standards and the internal control environment.
- Whether the client is aggressively concerned with maintaining the firm’s fees as low as possible.
- Indications of an inappropriate limitation in the scope of work.
- Indications that the client might be involved in money laundering or other criminal activities.

RTP JAN-25
QUESTION 1 CA Sudhakar has been appointed as the auditor of AMRO Ltd. Before accepting the
appointment, he learns that his cousin, who held shares in the company and recently passed away
without children, named him as the nominee for these shares, which have substantial value. Although
holding such shares through a distant relative does not violate legal provisions or affect his
independence, this unexpected inheritance places him in a dilemma. Advise CA Sudhakar on how he
should deal with this situation and safeguard his independence.

ANSWER In the given situation, holding shares by CA Sudhakar involves financial interest in the
company and is in nature of self-interest threat. Though he has come to hold shares due to
nomination made by his distant relative before accepting the appointment. Chartered Accountants
have a responsibility to remain independent by taking into account the context in which they practice,
the threats to independence and the safeguards available to address the threats. Safeguards are
actions, individually or in combination, that the professional accountant takes that effectively reduce
threats to comply with the fundamental principles to an acceptable level.

To address the issue, the following guiding principles are to be applied:

• For the public to have confidence in the quality of audit, it is essential that auditors should always be
and appear to be independent of the entities that they are auditing.
• Before taking on any work, an auditor must conscientiously consider whether it involves threats to
his independence.
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• When such threats exist, the auditor should either desist from the task or eliminate the threat or at
the very least, put in place safeguards which reduce the threats to an acceptable level. All such
safeguard measures need to be recorded in a form that can serve as evidence of compliance with due
process.
• If the auditor is unable to fully implement credible and adequate safeguards, then he must not
accept the work.

Considering above, holding of shares of the same company for which he is offered appointment as
auditor constitutes threat to his independence. Therefore, CA Sudhakar should take steps to
eliminate the threat by selling shares immediately before accepting the appointment and in the
absence of same, he should not accept the appointment as an auditor.

RTP MAY-25
QUESTION 1 CA Puneet is appointed as an auditor of Kamla Limited for the F.Y. 2023-24. The
management of Kamla Limited has requested the auditor to change the terms of original engagement
as the company has diversified its business and a few new products have been introduced by the
company. Whether CA Puneet can agree to the request made by the management? Under which
circumstances can the client make a request to the auditor for a change in the terms of engagement?

ANSWER The auditor may decide not to send a new audit engagement letter or other written
agreement each period. However, a significant change in nature or size of the entity’s business is one
of the factors which may make it appropriate to revise the terms of the audit engagement. In the given
situation, Kamla Limited has diversified its business, and few new products have also been
introduced by the company which is indicative of significant change in nature or size of the entity’s
business. In view of the above, CA Puneet can agree to the request made by the management to
change the terms of the audit engagement. Therefore, the request of Management to change the
terms of audit engagement is appropriate.

A request from the client for the auditor to change the engagement may result from:
1. A change in circumstances affecting the need for the service.
2. A misunderstanding as to the nature of an audit or related service originally requested.
3. A restriction on the scope of the engagement, whether imposed by management or caused by
circumstances.

RTP SEP-25
QUESTION 1 CA Rohit is conducting the audit of Taste Ltd., a food production company, for the last
two years. Before commencing the audit for the year, he observed that the company has undergone a
major shift in its product line by expanding into pharmaceuticals. Besides this, the company is now
subject to new regulatory reporting requirements. These developments were not present at the time
of accepting the initial audit engagement. CA Rohit is of the view that there is no need to issue a new
audit engagement letter. Examine whether the viewpoint of CA Rohit is appropriate in accordance
with the relevant Standards on Auditing.

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ANSWER As per SA 210, “Agreeing the terms of audit engagements”, recurring audit is an audit which
is performed by an auditor over years. In case of recurring audits, the auditor shall assess whether
circumstances require the terms of the audit engagement to be revised and whether there is a need to
remind the entity of the existing terms of the audit engagement. The auditor may decide not to send a
new audit engagement letter or other written agreement each period. However, the following factors
may make it appropriate to revise the terms of the audit engagement or to remind the entity of existing
terms:
(i) Any indication that the entity misunderstands the objective and scope of the audit.
(ii) Any revised or special terms of the audit engagement.
(iii) A recent change of senior management.
(iv) A significant change in ownership.
(v) A significant change in nature or size of the entity’s business.
(vi) A change in legal or regulatory requirements.
(vii) A change in the financial reporting framework adopted in the preparation of the financial
statements.
(viii) A change in other reporting requirements.

In the given case, Taste Ltd., a food production company, has undergone a major shift in its product
line by expanding into Pharmaceuticals and the company is also subject to new regulatory reporting
requirements. In view of the abovementioned factors, it is appropriate to revise the terms of the audit
engagement in accordance with SA 210. Thus, the viewpoint of CA Rohit regarding no need for
issuance of a new engagement letter is not correct, CA Rohit is required to send the revised audit
engagement letter.

PYQ MAY-24

QUESTION 1 A professional accountant is expected to comply with the fundamental principles of

professional ethics at all times. Explain which fundamental principle governing professional ethics is
violated in the following situations?

(1) A chartered accountant in practice accepted the appointment as an auditor of a firm in which his
sister was a partner.

(2) A chartered accountant in practice was approached by his friend to seek some insider information
about a company, which was a client of the chartered accountant. He could not refuse his friend's
request.

(3) A chartered accountant in practice failed to inform his client about the change in laws applicable
to his client. (3 Marks)

ANSWER Fundamental Principles:

(1) Objectivity: The principle of objectivity requires that a professional accountant shall not undertake
a professional activity if a circumstance or relationship unduly influences the accountant’s
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professional judgment regarding that activity. Objectivity principle will be violated in the given
situation where a chartered accountant in practice accepted the appointment as an auditor of a firm
in which his sister was a partner.

(2) Confidentiality: Confidentiality principle requires a professional accountant to respect the

confidentiality of information acquired as a result of professional or business relationships.
Confidentiality principle will be violated in the given situation where a chartered accountant in
practice could not refuse his friends requested to seek some insider information about a client
company of the chartered accountant.

(3) Professional Competence and Due care: 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 organization
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. Professional Competence and Due Care principle will be violated in the situation where a
chartered accountant in practice failed to inform his client about the change in laws applicable to his
client.

QUESTION 2 CA M is the engagement partner of the firm M/s Y2Z LLP and he is auditing the financial
statements of a listed entity ABC Ltd. The audit firm has determined that an engagement quality
control review is required for this assignment. Discuss the responsibilities of CA M as an engagement
partner for engagement quality control review as per SA-220. (4 Marks)

ANSWER Engagement Performance: As per SA 220, for audits of financial statements of listed
entities, and those other audit engagements, if any, for which the firm has determined that an
engagement quality control review is required, the engagement partner shall:

(i) Determine that an engagement quality control reviewer has been appointed.
(ii) Discuss significant matters arising during the audit engagement, including those
identified during the engagement quality control review, with the engagement quality
control reviewer.
(iii) Not date the auditor’s report until the completion of the engagement quality control
review.
(iv) If differences of opinion arise within the engagement team, with those consulted or,
where applicable, between the engagement partner and the engagement quality control
reviewer, the engagement team shall follow the firm’s policies and procedures for
dealing with and resolving differences of opinion.

PYQ SEP-24 SIMILAR QUESTION MAY-24 MTP SERIES II& JAN-25 MTP SERIES-I

QUESTION 1 Mr. J is an articled clerk with a big Chartered Accountants' firm. He is a part of the
engagement team which is conducting the audit of a company for the first time. They are assigned
with the work of preparing the draft audit engagement letter. Mr. J is not sure how to go about with this
work. Explain what is Audit Engagement Letter and what are its contents? (3 Marks)

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ANSWER Audit Engagement Letter: The auditor shall agree the terms of the audit engagement with
management or those charged with governance, as appropriate. The agreed terms of the audit
engagement are recorded in a letter or other the suitable form of written agreement. Such an
agreement is known as Audit Engagement Letter. The audit engagement letter is sent by the auditor to
his client. It is in the interest of both the auditor and the client to issue an engagement letter so that
the possibility of misunderstanding is reduced to a great extent. Audit Engagement letter includes: -

(1) The objective and scope of the audit of the financial statements
(2) The responsibilities of the auditor
(3) The responsibilities of management
(4) Identification of the applicable financial reporting framework for the preparation of the
financial statements and
(5) Reference to the expected form and content of any reports to be issued by the auditor and a
statement that there may be circumstances in which a report may differ from its expected
form and content. If law or regulation prescribes in sufficient detail the terms of the audit
engagement, the auditor need not record them in a written agreement, except for the fact that
such law or regulation applies, and that management acknowledges and understands its
responsibilities.

QUESTION 2 CA P is a professional accountant in service. In terms of employment and professional

relationships with employer he has to be alert to the possibility of inadvertent disclosure of any
information outside the employing organization. However, in view of disclosure required by law, CAP
had to divulge the information and documents as evidence in course of legal proceedings. Whether
CA P has violated any fundamental principle governing professional ethics in this case? Explain. (4
Marks)

ANSWER Confidentiality principle requires a professional accountant to respect the confidentiality of

information acquired as a result of professional or business 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 with the understanding that the information will
not be disclosed to a third party.

However, such confidential information may be disclosed, for example, when it is required by law,
when it is permitted by law and is authorised by the client or employer or there is a professional duty
or right to disclose when not prohibited by law.

In the given situation, CA P, who is a professional accountant in service, and in terms of employment
and professional relationships with the employer he is alert to the possibility of inadvertent
disclosures of any information outside the employing organization. However, CA P had to divulge the
information and documents as evidence in the course of legal proceedings and same was required by
law. Therefore, CA. P will not be held responsible for violation of fundamental principle of
“Confidentiality” governing professional ethics.

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JAN-25

QUESTION 1 CA H is managing partner of HK & Co., a Chartered Accountant firm, having registered
office at Delhi. With the annual task of reviewing whether any threat to independence is observed in
the firm, CA H noted down the following observations received from the staff and partners of the firm
for the F.Y. 2023-24 :

(i) CA J, partner of the firm, performed statutory audit as well as non audit engagement for
M/s. Take Away Private Limited.
(ii) CA M, partner of the firm, who has done income tax audit for M/s. Happy Associates
where in CA M has material significant indirect financial interest.
(iii) The costs of air travel and stay accommodation of family members of audit team for audit
of Chennai was borne by the client stationed at Chennai.
(iv) One of the clients, M/s. Chalk Limited, threatened to replace them as auditors because
the audit team insisted to make provision for expected credit loss which the company
was not willing to provide.
(v) CA N, partner of the firm, who audited M/s. NM Private Limited became arbitrator for
dispute between M/s. NM Private Limited and one of its vendors.
(vi) CA N accepted the assignment of Tax audit (on behalf of firm) of TRF Industries.
Management agreed to pay him contingent fee for tax audit.

You are requested to help CA H in classifying the type of threats to independence in each of the above
observation received from the staff and partners of the firm. (3 Marks)

In case such threats exist, what should the auditor do? (3 Marks)

ANSWER

i. Self-review threats
ii. Self-interest threats
iii. Familiarity threats
iv. Intimidation threats
v. Advocacy threats
vi. Self-interest threats

When such threats exist, the auditor should –

(1) Either desist from the task or eliminate the threat or at the very least, put in place safeguards which
reduce the threats to an acceptable level. All such safeguards’ measures need to be recorded in a
form that can serve as evidence of compliance with due process.

(2) If the auditor is unable to fully implement credible and adequate safeguards, then he must not
accept the work.

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QUESTION 2 Identify and explain the fundamental principles being referred to in the following cases.

(i) Professional accountants should act diligently and in accordance with applicable
technical and professional standards while providing professional services. (2 Marks)
(ii) A professional accountant shall not knowingly be associated with reports where he
believes that the information contains a materially false or misleading statement. (2
Marks)

ANSWER Fundamental Principles:

(i) Act diligently and in accordance with applicable technical and professional standards: In
the given case, professional competence and due care fundamental principle is being
referred to since 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 organization 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.
(ii) A professional accountant shall not knowingly be associated with reports where he
believes that the information contains a materially false or misleading statement: In the
given case, integrity fundamental principle is being referred to, it prescribes that a
professional accountant shall comply with the principle of integrity, which requires an
accountant to be straightforward and honest in all professional and business
relationships. Integrity implies fair dealing and truthfulness.

PYQ MAY-25

QUESTION 1 Luck Ltd., a mid-sized manufacturing company, has approached CA S, a qualified

Chartered Accountant, to conduct the audit for the financial year ended March 31, 2025. The
company requests CA S to give acceptance for the audit so that audit can be commenced within time.
With reference to SA 210, how the auditor will establish that whether the preconditions for an audit
are present? (4 Marks)

ANSWER In order to establish whether the preconditions for an audit are present, CA S shall:

(I) Determine whether the financial reporting framework is acceptable and

(II) Obtain the agreement of management that it acknowledges and understands its
responsibility:

(i) For the preparation of the financial statements in accordance with the applicable
financial reporting framework including where relevant their fair representation;
(ii) For such internal control as management considers necessary to enable the
preparation of financial statements that are free from material misstatement,
whether due to fraud or error; and
(iii) To provide the auditor with:

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• 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;
• Additional information that the auditor may request from management for the
purpose of the audit; and
• Unrestricted access to persons within the entity from whom the auditor
determines it necessary to obtain audit evidence.

QUESTION 2 M/S ABC & Co., Chartered Accountants, have been appointed as the statutory auditors
of DEF Ltd., which is a listed company, for the Financial Year 2024-25. CA X, a seasoned Chartered
Accountant with over 15 years of experience has been assigned as the engagement partner for this
audit. CA X takes responsibility for maintaining overall quality on this audit engagement in accordance
with SA 220. What do the actions of engagement partner and appropriate messages to the other
members of the engagement team, in taking responsibility for the overall quality on audit engagement
emphasize? (5 Marks)

ANSWER As per SA 220, “Quality Control for an audit of Financial Statements”, leadership
responsibility of an engagement partner is to take responsibility for the overall quality on each audit
engagement. The actions of the engagement partner CA X and appropriate messages to the other
members of the engagement team, in taking responsibility for the overall quality on each audit
engagement, emphasise on:

(i) The importance to audit quality of:

(ii) Performing work that complies with professional standards and regulatory and legal
requirements;
(iii) Complying with the firm’s quality control policies and procedures as applicable;
(iv) Issuing auditor’s reports that are appropriate in the circumstances; and
(v) The engagement team’s ability to raise concerns without fear of reprisals.
(vi) The fact that quality is essential in performing audit engagements.

MTP MAY-24

QUESTION 1 SQC 1 dwells upon engagement quality control review (EQCR) as part of system of
quality control in a firm. Why is such a review required? For which type of engagements EQCR is
mandatory? What should be approach of firm for engagements for which EQCR is not mandatory? [3
Marks]

ANSWER Significant judgments made in an engagement should be reviewed by an engagement

quality control reviewer for taking an objective view before the report is issued. Engagement quality
control review is mandatory for all audits of financial statements of listed entities.

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

QUESTION 2 Professional Behaviour is one of the fundamental principles governing professional

ethics. Explain its meaning. Also, give example of a situation where a Chartered Accountant fails to
follow this principle.
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ANSWER The Principle of Professional Behaviour requires an accountant to comply with relevant laws
and regulations and avoid any conduct that the accountant knows or should know might discredit the
profession. A professional accountant shall not knowingly engage in any employment, occupation or
activity that impairs or might impair the integrity, objectivity or good reputation of the profession, and
as a result would be incompatible with the fundamental principles.

Example A Chartered Accountant has conducted audit of accounts of an entity for a particular year.
ICAI has issued a letter to him relating to certain matters concerning audit. He didn't even bother to
reply to the letter despite reminders. Failure to reply to professional body smacks of lack of courtesy
and professional responsibility. In the given case, Chartered accountant has not followed principle of
Professional Behaviour.

QUESTION 3 An engagement partner takes overall responsibility for maintaining audit quality in an
audit engagement in accordance with SA 220. What are his objectives in taking and emphasizing such
responsibility?

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

(a) The importance to audit quality of:

(I) Performing work that complies with professional regulatory and legal requirements
(II) Complying with the firm's quality control policies and procedures as applicable
(III) Issuing auditor's reports that are appropriate in the circumstances and
(IV) The engagement team's ability to raise concerns without fear of reprisals.

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

MTP SEP-24

QUESTION 1 CA H has been offered audit of financial statements of a society engaged in promoting
social causes, such as setting up of drug de-addiction centres for misguided youth and rehabilitating
such young people by helping them find avenues of gainful employment. However, CA H failed to
send audit engagement letter to the society's governing body and proceeded to conduct the audit. In
the absence of this letter, the governing body is of the view that purpose of such an audit is to provide
absolute assurance against probable errors and frauds in the financial statements. Does it constitute
violation of fundamental principles governing professional ethics? State reasons for the same.

ANSWER As per SA 210, "Agreeing the Terms of Audit Engagements", the auditor shall agree the terms
of the audit engagement with management or those charged with governance, as appropriate. The
agreed terms of the audit engagement shall be recorded in an audit engagement letter or other
suitable form of written agreement. Such a letter includes, inter alia, objective and scope of audit of
financial statements. The absence of such a letter leads to misunderstanding between auditor and
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management. As auditor has failed to send engagement letter, the governing body has formed an
improper view of objective and scope of audit of financial statements.

By not following requirements of SA 210, CA H is not acting ethically. He has violated principle of
professional competence and due care governing professional ethics. This principle requires an
accountant to attain and maintain professional knowledge and skill at the level required to ensure
that a client or employing organization 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. Maintaining professional competence requires
awareness of current technical and professional standards. Non sending of engagement letter shows
lack of such awareness on part of CA H. Therefore, he has violated said fundamental principle
governing professional ethics.

QUESTION 2 Truthful Products Private Limited is engaged in trading stationery items. During the year
2023-24, there was a huge fire in one storage location of the company resulting in loss of inventories
of ₹5 crores. As a result, the operations of the company were badly affected for about two months.
Unfortunately, the insurance claim of the company was rejected due to certain defects in the policy
issued and loss was booked by company in the year 2023-24 itself. There was no change in nature of
business of company in relation to the last year. The draft financial statements of the company reflect
following information

CA D who has been the statutory auditor for past three years, has decided to rely upon the same tests
of details as performed in previous years. In the given situation what is lacking on part of the auditor?
Discuss

ANSWER Maintaining professional skepticism throughout audit is necessary if auditor is to reduce

risks of overlooking unusual circumstances and using inappropriate assumptions in determining the
nature, time and extent of audit procedures and evaluating results thereof.

In the given situation, revenue from, operations of the company have increased from 80 crores to ₹
100 crores despite its operations being affected by fire for about two months. Further, despite loss of
inventories to the tune of ₹5 crores, financial statements reflect increase in net profit before tax from
7.5% in year 2022-23 to 10% in year 2023-24. Thus, approach of CA D lacks professional skepticism.

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In spite of these unusual circumstances, the auditor has decided to rely upon same tests of details as
performed in the previous years. The nature and extent of audit procedures need to be suitably altered
considering changed circumstances. He may include substantive analytical procedures to analyse
variations and seek necessary explanations from management. In case of doubt about the reliability
of information or indications of possible fraud, Standards on Auditing require auditor to determine
what modifications or additions to audit procedures are necessary to resolve the matter. CA D, the
auditor of a listed company, shall document the overall audit strategy, the audit plan and any
significant changes made during the audit engagement to the overall audit strategy or the audit plan,
and the reasons for such changes.

QUESTION 3 CA N, statutory auditor of QST Limited, appointed for a term of 5 years has completed
audit for the first financial year ending on 31st March 2024. In compliance with requirements of
professional standards, an audit file has been assembled. After about a period of six months from
date of issue of audit report, he gets a call from CFO of the company to share complete audit file so
that financial reporting of company can be improved upon in coming periods. Is it mandatory for
statutory auditors to share audit files with client? What are the requirements for making audit
documentation available to clients?

ANSWER Standard on Quality Control 1 (SQC 1), "Quality Control for Firms that Perform Audits and
Reviews of Historical Financial Information, and Other Assurance and Related Services
Engagements", provides that, unless otherwise specified by law or regulation, audit documentation is
the property of the auditor. Therefore, it is not mandatory for CAN to share audit file with client.

He may at his discretion, make portions of, or extracts from, audit documentation available to clients,
provided such disclosure does not undermine the validity of the work performed, or, in the case of
assurance engagements, the independence of the auditor or of his personnel.

MTP JAN-25

QUESTION 1 Deepa Ltd., initially requested an audit engagement for the financial year 2023-2024.
However, midway through the audit process, the management claims that they are unable to provide
complete supporting documentation for a significant portion of their receivables. As a result, the
management asks the auditor to change the audit engagement to a review engagement, arguing that it
would prevent the issuance of a qualified opinion.

The auditor is now facing challenge in determining whether this change is justified or not. Comment in
accordance with relevant SA.

ANSWER As per SA 210, "Agreeing the Terms of Audit Engagements", a request from the entity for the
auditor to change the terms of the audit engagement may result from a change in circumstances
affecting the need for the service, a misunderstanding as to the nature of an audit as originally
requested or a restriction on the scope of the audit engagement, whether imposed by management or
caused by other circumstances.

The auditor considers the justification given for the request, particularly the implications of a
restriction on the scope of the audit engagement.

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A change in circumstances that affects the entity's requirements or a misunderstanding concerning

the nature of the service originally requested may be considered a reasonable basis for requesting a
change in the audit engagement.

In contrast, a change may not be considered reasonable if it appears that the change relates to
information that is incorrect, incomplete or otherwise unsatisfactory. An example might be where the
auditor is unable to obtain sufficient appropriate audit evidence regarding receivables and the entity
asks for the audit engagement to be changed to a review engagement to avoid a qualified opinion or a
disclaimer of opinion.

Hence Deepa Ltd.'s request for the audit engagement to be changed to a review engagement to avoid
a qualified opinion or a disclaimer of opinion is not reasonable.

QUESTION 2 Familiarity threats are self-evident, and occur when auditors form relationships with the
client where they end up being too sympathetic to the client's interests. Explain.

ANSWER Familiarity threats: Familiarity threats are self-evident and occur when auditors form
relationships with the client where they end up being too sympathetic to the client's interests. This
can occur in many ways including:

(I) close relative of the audit team working in a senior position in the client company,
(II) former partner of the audit firm being a director or senior employee of the client,
(III) long association between specific auditors and their specific client counterparts, and
(IV) acceptance of significant gifts or hospitality from the client company, its directors or
employees.

Provisions in Companies Act, 2013 regarding rotation of auditors mainly address these very familiarity
threats. Such provisions prescribe that auditor is rotated after a certain number of years so that
auditors do not become too familiar with their clients.

MTP MAY-25

QUESTION 1 Sigma Ltd. has approached CJK & Associates to appoint them as their auditor for a
period of 5 years in accordance with provisions of the Companies Act, 2013. The prospective client
company is new to audit firm. SQC 1 requires that a firm before accepting engagement should inquire
vital information about the client which helps firm to decide about integrity of client. Apart from
integrity, obtaining such vital information about client is helpful to audit firm in deciding about which
other matters? Which matters would be considered by audit firm with regard to integrity of client?

ANSWER A firm before accepting an engagement should acquire vital information about the client.
Such an information should help firm to decide about:

• Integrity of Client
• Competence (including capabilities, time and resources) to perform engagement
• Compliance with ethical requirements

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With regard to the integrity of a client, matters that the firm considers include, for example:

• The identity and business reputation of the client's principal owners, key management,
related parties and those charged with its governance.
• The nature of the client's operations, including its business practices.
• Information concerning the attitude of the client's principal owners, key management and
those charged with its governance towards such matters as aggressive interpretation of
accounting standards and the internal control environment.
• Whether the client is aggressively concerned with maintaining the firm's fees as low as
possible.
• Indications of an inappropriate limitation in the scope of work.
• Indications that the client might be involved in money laundering or other criminal activities.
• The reasons for the proposed appointment of the firm and non-reappointment of the previous
firm.

QUESTION 2 The auditor shall plan and perform an audit with professional skepticism recognising
that circumstances may exist that cause the financial statements to be materially misstated. Discuss
any five examples of professional skepticism.

ANSWER Professional skepticism includes being alert to, for example:

(I) Audit evidence that contradicts other audit evidence obtained.

(II) Information that brings into question the reliability of documents and responses to
inquiries to be used as audit evidence.
(III) Conditions that may indicate possible fraud.
(IV) Circumstances that suggest the need for audit procedures in addition to those required
by the SAs.
(V) Maintaining professional skepticism throughout the audit is necessary if the auditor is to
reduce the risks of:

• Overlooking unusual circumstances.

• Over generalising when drawing conclusions from audit observations.
• Using inappropriate assumptions in determining the nature, timing, and extent of
the audit procedures and evaluating the results thereof.

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