CA Final Audit Test-8 CARO 2020, SA 700 Series, Co.

Audit

Time: 1 Hour Marks: 30 Marks

InstrucDons:

• Reading Dme: 5 mins

• Do underline key words while presenDng answer
• Leave proper spacing between 2 points/paras
• Do quote SA No. with Name wherever applicable

MCQs [10 Marks (5Q * 2 Marks each)]

Sun Chemicals Ltd., a prominent player in India's industrial landscape, has been etching its mark since its
inception in 2008, headquartered in the bustling city of Pune, Maharashtra. Listed on the Bombay Stock
Exchange (BSE) and the National Stock Exchange of India (NSE), the company has steadily grown into a multi-
faceted entity, catering to diverse industrial needs.

Sun Chemicals Ltd.'s core strength lies in its robust manufacturing capabilities. Spread across multiple state-
of-the-art facilities, the company produces a wide range of industrial chemicals, including specialty chemicals,
performance chemicals, and basic chemicals. These products find application in various sectors, from
pharmaceuticals and textiles to paints and coatings, construction, and agriculture.

RKM & Co., a Chartered Accountancy firm, was appointed as to conduct the statutory audit for F.Y. 2023-24 for
the company. Mr. Rahul Dubey was the engagement partner for the said assignment. In the organisational
structure, Mr. Rahul noticed that those charged with governance in the company are also involved in managing
the entity.

During the on-going engagement of the audit, at the end of the third quarter, during which tenure already two
limited review reports were issued by RKM & Co., the management of the company imposed a limitation on the
scope of the audit that Mr. Rahul considered likely to result in the need to express a qualified opinion or to
disclaim an opinion on the financial statements, and accordingly, he requested that management remove such
limitation. But the management refused to remove the said limitation.

After following the due procedures applicable in the circumstances, Finally, Mr. Rahul with his engagement
team, derived on a conclusion that the possible eWects on the financial statements of undetected
misstatements, could be material and pervasive so that a qualification of the opinion would be inadequate to
communicate the gravity of the situation and accordingly, he proposed to withdraw from the engagement after
consulting with the senior partners of the firm as on 15th November, 2023. In its resignation letter, the firm
mentioned professional pre-occupation as the reason for the resignation.

1. What was the responsibility of Mr. Rahul when the management refused to remove the said limitation?

a) To determine whether it is possible to perform alternative procedures to obtain suWicient appropriate audit
evidence.
b) To communicate the matter to those charged with governance and determine whether it is possible to
perform alternative procedures to obtain suWicient appropriate audit evidence.
c) To determine whether it is possible to perform additional procedures to obtain suWicient appropriate audit
evidence.
d) To request for written representation from the management for the matters on which limitation is imposed
and also communicate the matter to those charged with governance.

2. What was the responsibility of RKM & Co. with respect to the issue of limited review report at the time
of resignation?

a) Limited review report for third Quarter was required to be issued.

b) No further limited review report was required to be issued as already it was issued for the second Quarter
at the time of resignation.
c) Limited review report for third Quarter was required to be issued and consequently, after its issue, audit
report for the full year is also required to be issued
d) Limited review report for third Quarter was required to be issued subject to the terms of the audit
engagement.

3. Whether in the given circumstance withdrawal from engagement was mandatory and if so, what is the
responsibility of the auditor with respect to such withdrawal?

a) In the given circumstance withdrawal from engagement was not mandatory and in case of withdrawal, the
auditor was required to withdraw from the audit, where practicable and possible under applicable law or
regulation.
b) In the given circumstance withdrawal from engagement was mandatory and in case of withdrawal, as the
withdrawal from the audit before issuing the auditor’s report was not practicable or possible, he was
required to disclaim an opinion on the financial statements.
c) In the given circumstance withdrawal from engagement mandatory was and in case of withdrawal, the
auditor was required to withdraw from the audit, where practicable and possible under applicable law or
regulation.
d) In the given circumstance withdrawal from engagement was not mandatory and in case of withdrawal, as
the withdrawal from the audit before issuing the auditor’s report was not practicable or possible, he was
required to disclaim an opinion on the financial statements.

4. Assuming Sun Chemicals Ltd. to be an unlisted company, whether the reason for resignation by RKM &
Co. was proper?

a) No, the auditor should have clearly mentioned the reasons for the resignation in the resignation letter issued
to the Company.
b) Yes, as the requirement for clear mention of reasons is not applicable to unlisted company.
c) Yes, in the given case, the reason was resignation was due to the limitations imposed by the management
and refusal to provide reasons for the same and accordingly, though being an unlisted company, it was
totally upon the discretion of the auditor to provide clear reasons or not for resignation.
d) No, the reasons should have been a little lengthier and further the exact reason must be provided to the new
auditor to be appointed by the company.

5. Assuming that the auditor proposed to resign on 14th November before issue of LR for second Quarter,
then what was the responsibility of RKM &Co. with respect to withdrawal from engagement and issue of
limited review report at the time of resignation?

a) The auditor shall communicate to those charged with governance the matters regarding misstatements
identified during the audit that would have given rise to a modification of the opinion and the limited review
reports for second and third Quarter were required to be issued.
b) The auditor shall communicate to those charged with governance the matters regarding misstatements
identified during the audit that would have given rise to a modification of the opinion and the limited review
report for second Quarter was required to be issued.

c) The auditor shall communicate to management and those charged with governance the matters regarding
misstatements identified during the audit that would have given rise to a modification of the opinion and the
limited review report was not required to be issued.

d) The auditor shall communicate to those charged with governance that the possible eWects on the financial
statements of undetected misstatements, if any, could be both material and pervasive so that a
qualification of the opinion would be inadequate to communicate the gravity of the situation and the limited
review report for second Quarter was required to be issued.

Descrip8ve Ques8ons [20 Marks (4Q * 5 Marks each)]

1. KPI Ltd. Is a company on which InternaDonal Standards on AudiDng are applicable along with Standard on AudiDng
issued by the ICAI. The company appointed new auditors for the audit of the financial statements year ended 31 March
2019 aWer doing all appointment formaliDes. Therefore, the auditor’s report referred the InternaDonal Standard on
AudiDng in addiDon to the Standard on AudiDng issued by the ICAI. As an expert, you are required to advise the auditor
regarding auditor’s report for audits conducted in accordance with both the Standards.

2. Mr. Hemant Ramsey was appointed as the engagement partner for conducDng the audit of Kshetra Lap Ltd. for F.Y.
2020-21, on behalf of Ramsey & Associates. Mr. Vishay Tyagi was appointed as the engagement quality control
reviewer by the firm for the said audit. During F.Y. 2020-21, there was an implementaDon of ERP system in a phased
manner, in Kshetra Lap Ltd. due to which some of its business processes got automated. As a result of the
implementaDon of such a system, there was a significant effect on the auditor’s overall audit strategy.

Mr. Hemant discussed the implementaDon of such a system with Mr. Vishay and also told him that such a ma_er may
be a key audit ma_er to be reported in the audit report. Mr. Vishay considered the significance of such ma_er but
however he was of the opinion that such a ma_er did not appear to link with the ma_ers disclosed in the financial
statements and so there was no need to disclose such ma_er as a key audit ma_er. Whether the contenDon of Mr.
Vishay is proper with respect to the ma_ers to be communicated as a key audit ma_er?

3. It was observed from the modified audit report of the financial statements of ULFA Ltd. for the year ended 31st
March, 2019 that depreciaDon of ₹ 4.25 crore for the year 2018-2019 had been charged off to the Statement of Profit
and Loss instead of including it in "carrying value of asset under construcDon". State in relaDon to the audit for the
year ended 31st March 2020, whether such modificaDon in the previous year's audit report would have any audit
implicaDon for the current year i.e. FY 2019-20 and if yes, how the auditor is required to deal with the same in his
audit report for the current year?

4. GS & Co., Chartered Accountants, have been appointed Statutory Auditors of MAP Ltd. for the F.Y 2019-20. The audit
team has completed the audit and is in the process of preparing audit report Management of the company has also
prepared draW annual report. Audit in-charge was going through the draW annual report and observed that the
company has included an item in its Annual Report indicaDng downward trend in market prices of key
commodiDes/raw material as compared to previous year. However, the actual profit margin of the company as
reported in financial statements has gone in the reverse direcDon. Audit Manager discussed this issue with partner of
the firm who in reply said that auditors are not covered with such disclosures made by the management in its annual
report, it being the responsibility of the management.
Do you think that the partner is correct in his approach on this issue. Discuss with reference to relevant Standard on
AudiDng the Auditor's duDes with regard to reporDng.