CA INTERMEDIATE

Auditing & Ethics

Descriptive Question Bank
AS per New ICAI SyllAbuS

Second Edition Jan 2025

2024
Relevant For May 2025 and Onwards
Enroll in for Auditing and Law
Classes on [Link]

CA Deepika Rathi
 DEDICATED
To My Parents
for raising me to believe that anything was possible

First Edition 2024

Disclaimer

While every effort has been taken to avoid errors, the author, publishers, and their
agents/dealers are not responsible for the consequences of any action taken on the basis
of this book.

©Deepika Rathi

All rights reserved. No part of this book may be reproduced, stored in a retrieval system,
or transmitted, in any form, or by any mean, electronic, mechanical, photocopying, or
otherwise without prior permission, in writing from Deepika Rathi.
 S. Topic Name Page Nos.
No.
1. Nature, Objective and Scope of Audit 1 to 14

2. Audit Strategy, Audit Planning and Audit Program 15 to 36

3. Risk Assessment and Internal Control 37 to 62

4. Audit Evidence 63 to 101

5. Audit of Items of Financial Statements 102 to 146

6. Audit Documentation 147 to 158

7. Completion and Review 159 to 177

8. Audit Report 178 to 195

9. Special Features of Audit of Different Type of 196 to 238

Entities
10. Audit of Banks 239 to 267

11. Ethics and Terms of Audit Engagements 268 to 284

Valuable suggestions and constructive feedback form learners is welcome and

would be gratefully acknowledge please feel free to e-mail your feedback,
problems or suggestions to us on drathi31@[Link].

Happy Learning and all the best!!

 Auditing & Ethics Descriptive Question Bank | CA Deepika Rathi

Chapter- 1: Nature, Objective and Scope of Audit

Q-1: M Motors Ltd is a leading Indian automobile manufacturer with many

offerings across commercial, passenger and electric vehicles. The Company is
pioneering India’s electric vehicle transition and enjoys considerable advantage
in one of the fastest growing automotive markets. GR & Associates have been
appointed as its statutory auditors for financial year 2022-23. J and K are
newly appointed audit assistants in the firm and are part of engagement
team constituted for purpose of audit of M Motors Ltd. However, they are
confused about what such an audit tends to achieve. They perceive audit as a
guarantee against possible errors or frauds in financial statements. Do you
agree with perception of both the assistants? In this context, outline
objectives of an independent audit conducted in accordance with Standards on
Auditing. [RTP May 2024]

Ans-1: In conducting audit of financial statements, objectives of auditor in

accordance with SA-200 “Overall Objectives of the Independent auditor and the
conduct of an audit in accordance with Standards on Auditing” are:

a. To obtain reasonable assurance about whether the financial statements as a

whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the financial
statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework and
b. To report on the financial statements and communicate as required
by the SAs, in accordance with the auditor’s findings.
An analysis of above brings out following points clearly:-

1. Auditor’s objective is to obtain a reasonable assurance whether financial

statements as a whole are free from material misstatement whether due
to fraud or error.
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Reasonable assurance is to be distinguished from absolute assurance.

Absolute assurance is a complete assurance or a guarantee that financial
statements are free from material misstatements. However, reasonable
assurance is not a complete guarantee. Although it is a high-level of assurance
but it is not complete assurance.

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 Auditing & Ethics Descriptive Question Bank | CA Deepika Rathi

Audit of financial statements is carried out by the auditor with professional

competence and skills in accordance with Standards on Auditing. Audit
procedures are applied in accordance with SAs, audit evidence is obtained and
evaluated. On the basis of that, conclusions are drawn and opinion is formed.
It leads to high level of assurance which is called as reasonable assurance but
it is not absolute assurance.
2. Misstatements in financial statements can occur due to fraud or error or
both. The auditor seeks to obtain reasonable assurance whether financial
statements as a whole are free from material misstatements caused by fraud
or error. He has to see effect of misstatements on financial statements as a
whole, in totality.
3. Obtaining reasonable assurance that financial statements as a whole are
free from material misstatements enables the auditor to express an opinion
on whether the financial statements are prepared, in all material respects, in
accordance with an applicable financial reporting framework.
4. The opinion is reported and communicated in accordance with audit findings
through a written report as required by Standards on Auditing.
Therefore, perception of both assistants is not proper. Auditor of financial
statements does not seek to provide guarantee that financial statements are
free from material misstatements caused by frauds or errors. He obtains
reasonable assurance.

Q-2: Standards on Auditing (SAs) apply in “audit of historical financial

information” whereas Standards on Review Engagements (SREs) apply in “review
of historical financial information.” Explain in detail giving examples.

[RTP May 2024]

Ans-2: Standards on Auditing (SAs) apply in “audit of historical financial

information” whereas Standards on Review Engagements (SREs) apply in “review of
historical financial information”. Standards on auditing apply in “audit” of historical
financial information which is a reasonable assurance engagement whereas
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Standards on Review Engagements apply in “review” of historical financial

information which is a limited assurance engagement only.

“Historical financial information means” information expressed in financial terms

in relation to a particular entity, derived primarily from that entity’s accounting

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 Auditing & Ethics Descriptive Question Bank | CA Deepika Rathi

system, about economic events occurring in past time periods or about economic
conditions or circumstances at points in time in the past.

“Audit” and “review” are two different terms. Audit is a reasonable assurance
engagement, and its objective is reduction in assurance engagement risk to an
acceptably low level in the circumstances of the engagement. However, “review” is
a limited assurance engagement, and its objective is a reduction in assurance
engagement risk to a level that is acceptable in the circumstances of the
engagement.

Standards on Auditing have been issued on wide spectrum of issues in the field of
auditing including (but not limited to) overall objectives of independent auditor,
audit documentation, planning an audit of financial statements, identifying and
assessing risk of material misstatement, audit evidence, audit sampling, going
concern and forming an opinion and reporting on financial statements.
Some examples of Standards on Auditing are:
i. SA 200 Overall Objectives of the Independent Auditor and the Conduct of
an Audit in Accordance with Standards on Auditing
ii. SA 230 Audit Documentation
iii. SA 315 Identifying and Assessing the Risks of Material Misstatement
through Understanding the Entity and its Environment
iv. SA 500 Audit Evidence
v. Revised SA 700 Forming an Opinion and Reporting on Financial Statements
Examples of Standards on Review engagements are
i. SRE 2400 (Revised) Engagements to Review Historical Financial Statements
ii. SRE 2410 Review of Interim Financial Information Performed by the
Independent Auditor of the Entity

Q-3: “An audit is independent examination of financial information of any

entity, whether profit oriented or not, and irrespective of its size or legal
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form, when such an examination is conducted with a view to expressing an

opinion thereon.”
Ans-3: An Audit is independent examination of Financial Information of any entity,
whether profit oriented or not, and irrespective of its size or legal form, when such
an examination is conducted with a view to expressing an opinion thereon.

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 Auditing & Ethics Descriptive Question Bank | CA Deepika Rathi

This definition has the following implications:

a. Audit is independent examination.
b. Examination is of financial information when the objective is to express an
opinion.
c. Requirement of audit applies in case of every entity, whether profit oriented
or not (Commercial entities or NGOs), whatever is the business size of entity
(Small Size entity or large size entity), whatever is the legal form of the
entity (proprietor, partnership or company).

Q-4: The person conducting audit should take care to ensure that financial
statements would not mislead anybody. Explain stating clearly the meaning of
Auditing.
Ans-4: Auditor engaged to perform the task of performing audit need to ensure
the following:
• The accounts have been drawn up with reference to entries in the books of
account
• The entries in the books of account are adequately supported by
sufficient and appropriate evidence
• None of the entries in the books of account has been omitted in the
process of compilation
• The information conveyed by the statements is clear and unambiguous
• The financial statement amounts are properly classified, described and
disclosed in conformity with accounting standards and
• The statement of accounts presents a true and fair picture of the
operational results and of the assets and liabilities

Q-5: RAG is proprietorship firm engaged in the manufacturing of textile and

handloom products. It sells its finished products both in the domestic as well as
in the international market. The company is making total turnover of ₹ 30
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crores. It has also availed cash credit limit of ₹ 5 crores from Canara Bank. In
the year 2021-22, proprietor of the firm is worried about the financial position
of the company and is under the impression that since he is out of India,
therefore firm might run into losses. He approaches a CA about advantages of
getting his accounts audited throughout the year so that he may not suffer due
to accounting weaknesses. Advise regarding advantages of getting accounts

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 Auditing & Ethics Descriptive Question Bank | CA Deepika Rathi

audited.
Ans-5: Benefits of the Audit are
• Audited accounts provide high quality information. It gives confidence to
users that information on which they are relying is qualitative and it is the
outcome of an exercise carried out by following Auditing Standards
recognized globally
• In case of companies, shareholders may or may not be involved in daily affairs
of the company. The financial statements are prepared by management
consisting of directors. As shareholders are owners of the company, they
need an independent mechanism so that financial information is qualitative
and reliable. Hence, their interest is safeguarded by an audit.
• An audit acts as a moral check on employees from committing frauds for the
fear of being discovered by audit.
• Audited financial statements are helpful to government authorities for
determining tax liabilities.
• Audited financial statements can be relied upon by lenders, bankers for
making their credit decisions i.e. whether to lend or not to lend to a
particular entity.
• An audit may also detect fraud or error or both.
• An audit reviews existence and operations of various controls operating
in any entity. Hence, it is useful at pointing out deficiencies.

Q-6: The auditor is not expected to, and cannot, reduce audit risk to zero and
cannot therefore obtain absolute assurance that the financial statements are
free from material misstatement due to fraud or error. This is because there
are inherent limitations of an audit. Explain.
Ans-6: The process of audit suffers from certain inbuilt limitations due to which
an auditor cannot obtain an absolute assurance that financial statements are free
from misstatement due to fraud or error.
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These fundamental limitations arise due to the following factors: -

1. Nature of financial reporting: Preparation of financial statements involves
making many judgments by management. These judgments may involve subjective
decisions or a degree of uncertainty. Therefore, auditor may not be able to obtain
absolute assurance that financial statements are free from material
misstatements due to frauds or errors. One of the premises for conducting an

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audit is that management acknowledges its responsibility of preparation of

financial statements in accordance with applicable financial reporting framework
and for devising suitable internal controls. However, such controls may not have
operated to produce reliable financial information due to their own limitations.
Management of a company has devised a control that all purchase bills should
reflect stamp and signatures of an authorised person in “Goods Receiving
Section” of the company stating the date and time of receiving goods in premises.
It is an example of internal control devised by the company to ensure that only
those purchase bills are produced for payment for which goods have been actually
received.
2. Nature of Audit Procedures: The auditor carries out his work by obtaining audit
evidence through performance of audit procedures. However, there are practical
and legal limitations on ability of auditor to obtain audit evidence. Management
may not provide complete information as requested by auditor. There is no way
by which auditor can force management to provide complete information as may
be requested by auditor. In case he is not provided with required information, he
can only report. It is an example of legal limitation on auditor’s ability to obtain
audit evidence. The management may consist of dishonest and unscrupulous
people and may be, itself, involved in fraud. It may be engaged in concealing fraud
by designing sophisticated and carefully organized schemes which may be hard to
detect by the auditor. It may produce fabricated documents before auditor to
lead him to believe that audit evidence is valid. However, in reality, such
documents could be fake or non-genuine. An auditor is not an expert in
authentication of documents. Therefore, he may be led to accept invalid audit
evidence on the basis of unauthentic documents. It is quite possible that entity
may have entered into some transactions with related parties. Such transactions
may be only paper transactions and may not have actually occurred. The auditor
may not be aware of such related party relationships or audit procedures may not
be able to detect probable wrong doings in such transactions.
3. Not in nature of investigation: Audit is not an official investigation. Hence,
auditor cannot obtain absolute assurance that financial statements are free from
material misstatements due to frauds or errors.
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4. Timeliness of financial reporting and decrease in relevance of information

over time: The relevance of information decreases over time and auditor cannot
verify each and every matter. Therefore, a balance has to be struck between
reliability of information and cost of obtaining it.
5. Future Events: Future events or conditions may affect an entity adversely.
Adverse events may seriously affect ability of an entity to continue its business.

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The business may cease to exist in future due to change in market conditions,
emergence of new business models or products or due to onset of some adverse
events.

Q-7: Standards on Auditing (SAs) apply in “audit of historical financial

information” whereas Standards on Review Engagements (SREs) apply in “review
of historical financial information.” Explain in detail giving examples.
Ans-7: Standard on Auditing (SAs):
✓ Standards on Auditing apply in the context of an audit of financial statements by
an independent auditor. Standards on Auditing apply in audit of historical
information
✓ These establish high quality benchmarks and are followed by auditors in
conducting audit of financial statements.
✓ Standards on Auditing have been issued on wide spectrum of issues in the field
of auditing ranging from overall objectives of independent auditor, audit
documentation, planning an audit of financial statements, identifying and
assessing risk of material misstatement, audit sampling, audit evidence and
forming an opinion and reporting on financial statements.
✓ These cover all significant aspects of audit of financial statements.
✓ Examples of Standards on Auditing are:
• SA 200 Overall Objectives of the Independent Auditor and the Conduct of an
Audit in accordance with Standards on Auditing
• SA 230 Audit Documentation
Standard on Review Engagements (SREs)
✓ Standards on review engagements apply in the context of review of financial
statements.
✓ Review is a limited assurance engagement and it provides assurance which is lower
than that provided by audit.
✓ It is due to the fact that review involves fewer procedures as compared to audit.
✓ Since a review also provides assurance to users, it also involves obtaining
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sufficient appropriate evidence.

✓ Examples of Standards on Review engagements are :
▪ SRE 2400 (Revised) Engagements to Review Historical Financial Statements
▪ SRE 2410 Review of Interim Financial Information Performed by the
Independent Auditor of the Entity.

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Q-8: CA N is the auditor of SR Ltd. The auditor expressed his opinion on the
financial statements without ascertaining as to whether the financial statements
as a whole were free from material misstatements or not. In your opinion,
whether CA N has complied with objectives of audit considering the applicability
of relevant SA?
Ans-8: In conducting audit of financial statements, objectives of auditor in
accordance with SA 200 “Overall Objectives of the Independent auditor and
the conduct of an audit in accordance with Standards on Auditing” are :-
a. To obtain reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the financial
statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework; and
b. To report on the financial statements, and communicate as required by the
SAs, in accordance with the auditor’s findings.
Accordingly the CA N has not complied with objectives of the SA 200 “Overall
Objectives of the Independent auditor and the conduct of an audit in accordance
with Standards on Auditing”

Q-9: RST Ltd., a retail company, has set up internal controls requiring all
invoices to be stamped and signed by an authorised person in “Goods Receiving
Section” of the company stating the date and time of receiving goods in
premises to ensure that only those purchase bills are produced for payment for
which goods have been actually received.

During the audit, the auditor finds that two employees – a purchasing manager
and an accounts clerk – have worked together to bypass this control, submitting
fake invoices that resulted in payments for goods that were never received.
You are required to state the objectives of an audit, as per SA 200, when it
comes to ensuring the reliability of financial statements? Also explain, why
auditor can provide only reasonable, rather than absolute, assurance that the
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financial statements are free from material misstatement due to fraud or error
in the context of the given situation? [RTP Jan 2025]

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Ans-9: In conducting audit of financial statements, objectives of auditor in

accordance with SA 200, “Overall Objectives of the Independent auditor and the
conduct of an audit in accordance with Standards on Auditing” are: -

a. To obtain reasonable assurance about whether the financial statements as a

whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the financial
statements are prepared, in all material respects, in accordance with an
applicable financial reporting framework; and
b. To report on the financial statements, and communicate as required by the
SAs, in accordance with the auditor’s findings.

The process of audit suffers from certain inbuilt limitations due to which an
auditor cannot obtain an absolute assurance that financial statements are free from
misstatement due to fraud or error. These fundamental limitations arise due to the
factors such as nature of financial reporting nature of audit procedures, not in
the nature of investigation, timeliness of financial reporting and decrease in
relevance of information over time and future events.

Preparation of financial statements involves making many judgments by management.

These judgments may involve subjective decisions or a degree of uncertainty.
Therefore, the auditor may not be able to obtain absolute assurance that financial
statements are free from material misstatements due to frauds or errors. One
of the premises for conducting an audit is that management acknowledges its
responsibility of preparation of financial statements in accordance with applicable
financial reporting framework and for devising suitable internal controls. However,
such controls may not have operated to produce reliable financial information due
to their own limitations.

In the context of RST Ltd., the management designed a control requiring that all
invoices be stamped and signed by an authorized person in the Goods Receiving
Section to confirm receipt of goods. However, collusion between two employees—
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the purchasing manager and the accounts clerk—allowed them to bypass this
control by submitting fake invoices for payment. Collusion is a significant limitation
of internal controls, as it overrides controls designed to prevent such fraud.
Given these factors, the auditor cannot provide absolute assurance that the
financial statements are entirely free from material misstatements due to fraud

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or error.

Q-10: Kriti, a CA student, has joined articles in a reputed audit firm. She
considers audit engagement to be an “assurance engagement”. Her understanding
is that audit engagement is the only kind of assurance engagement in which
practitioner gives a written assurance report in appropriate form. However, her
friend Somaya, does not agree with her. She is of the view that assurance
engagements are not restricted to audit alone. Besides, Somaya also thinks
that assurance engagements can also relate to matters other than historical
financial information. Whose view appears to be correct? State with reasons.
(RTP SEP 2024)
Ans-10: Audit engagement is an assurance engagement. However, assurance
engagements are not restricted to auditing alone. There are other assurance
engagements too like review engagements, engagements providing assurance involving
prospective financial information, engagements providing assurance on internal
controls in an entity. Assurance engagements provide assurance to users. The
difference is of degree. Whereas an audit provides reasonable assurance which
is a high level of assurance, review provides lower level of assurance as compared to
audit.

There are also assurance engagements which relate to matters other than
historical financial information like providing assurance on matters involving
prospective financial information and providing assurance on internal controls in an
entity. In assurance reports involving prospective financial information, the
practitioner obtains sufficient appropriate evidence to the effect that
management’s assumptions on which the prospective financial information is based
are not unreasonable, the prospective financial information is properly prepared
on the basis of the assumptions, and it is properly presented, and all material
assumptions are adequately disclosed.
In the given case, Kriti is of the view that audit engagement is the only kind of
assurance engagement in which practitioner gives a written assurance report in
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appropriate form whereas is of the view that assurance engagements are not
restricted to audit alone. Thus, view of Somaya is correct.

Q-11: 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

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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? (PYQ SEP 2024)

Ans-11: 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.

Q-12: JK Ltd. was having a 'Pager' manufacturing plant and looking at the
demand it was of the view that the company will grow continuously in future.
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But, with the introduction of mobile phones in the market, the plant was shut
down completely. The shareholders of the company were of the view that auditor
failed to perform their duty and have not informed to them about the company's
inability to continue its business, otherwise they might not have suffered the
loss. List down the factors giving rise to the inherent limitations due to which

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auditor cannot provide a guarantee that the financial statements are free from
material misstatement due to fraud or error. (RTP SEP 2024)

Ans-12: Inherent limitations of audit: The process of audit suffers from certain
inbuilt limitations due to which an auditor cannot obtain an absolute assurance that
financial statements are free from misstatement due to fraud or error. These
fundamental limitations arise due to the following factors: -

I. Nature of financial reporting: Preparation of financial statements involves making

many judgments by management. These judgments may involve subjective
decisions or a degree of uncertainty. Therefore, auditor may not be able to obtain
absolute assurance that financial statements are free from material
misstatements due to frauds or errors.
II. Nature of Audit procedures: The auditor carries out his work by obtaining audit
evidence through performance of audit procedures. However, there are practical
and legal limitations on ability of auditor to obtain audit evidence. For example,
an auditor does not test all transactions and balances. He forms his opinion only
by testing samples. It is an example of practical limitation on auditor’s ability to
obtain audit evidence.
Management may not provide complete information as requested by auditor.
There is no way by which auditor can force management to provide complete
information as may be requested by auditor. In case he is not provided with
required information, he can only report. It is an example of legal limitation on
auditor’s ability to obtain audit evidence. Further, fraud may involve
sophisticated and carefully organized schemes.

III. Not in nature of investigation: Audit is not an official investigation. Hence,

auditor cannot obtain absolute assurance that financial statements are free from
material misstatements due to frauds or errors.

IV. Timeliness of financial reporting and decrease in relevance of information over

time: The relevance of information decreases over time and auditor cannot verify
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each and every matter. Therefore, a balance has to be struck between reliability of
information and cost of obtaining it.

V. Future events: Future events or conditions may affect an entity adversely.

Adverse events may seriously affect ability of an entity to continue its business.
The business may cease to exist in future due to change in market conditions,

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emergence of new business models or products or due to onset of some adverse

events.

Q-13: Rajul Ltd. engaged an external practitioner CA Rajul to provide

assurance on its prospective financial information for the upcoming year, which
includes projections for a new product line. The company projected a 15%
increase in revenue, estimating total sales of Rs.75 crore, driven by the
expected launch of this new product. Mention the applicable Engagement and
Quality Control Standard and the level of assurance that will be provided in the
given situation. Also explain how Prospective Financial Information is different
from Historical Financial Information. [MTP JAN 2025]

Ans-13: In the given situation, Standards on Assurance Engagements will be

applicable and such type of assurance engagement provides only a “moderate” level
of assurance.

In assurance reports involving prospective financial information, the practitioner

obtains sufficient appropriate evidence to the effect that management’s
assumptions on which the prospective financial information is based are not
unreasonable, the prospective financial information is properly prepared on the
basis of the assumptions and it is properly presented and all material assumptions
are adequately disclosed.
“Historical financial information” and “Prospective financial information.” The
former relates to information expressed in financial terms of an entity about
economic events, conditions or circumstances occurring in past periods. The latter
relates to financial information based on assumptions about occurrence of future
events and possible actions by an entity. Therefore, historical financial information
is rooted in past events which have already occurred whereas prospective financial
information is related to future events.
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Q-14: RST Ltd., a mid-sized trading company, recently faced challenges in

securing a bank loan due to doubts about the reliability of its financial
statements. The management realised the importance of having audited accounts
to build confidence among lenders and other stakeholders. Elucidate the benefits
and need of an audit. [MTP JAN 2025]
Ans-14: Benefits and need of Audit:

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 Auditing & Ethics Descriptive Question Bank | CA Deepika Rathi

• Audited accounts provide high quality information. It gives confidence to

users that information on which they are relying is qualitative and it is the
outcome of an exercise carried out by following Auditing Standards recognized
globally.
• In case of companies, shareholders may or may not be involved in daily affairs
of the company. The financial statements are prepared by management
consisting of directors. As shareholders are owners of the company, they need
an independent mechanism so that financial information is qualitative and
reliable. Hence, their interest is safeguarded by an audit.
• An audit acts as a moral check on employees from committing frauds for
the fear of being discovered by audit.
• Audited financial statements are helpful to government authorities for
determining tax liabilities.
• Audited financial statements can be relied upon by lenders, bankers for making
their credit decisions i.e. whether to lend or not to lend to a particular entity.

CA INTERMEDIATE

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 Auditing & Ethics Descriptive Question Bank | CA Deepika Rathi

Chapter-2: Audit Strategy, Audit Planning and Audit

Programme

Q-1: Preliminary engagement activities include certain activities to be

performed by an auditor while planning an audit. Discuss such activities briefly.
How performing such activities assists an auditor? [RTP May 2024]

Ans-1: Preliminary engagement activities

Preliminary engagement activities include following activities: -

A. Performing procedures regarding the continuance of the client relationship

B. Evaluating compliance with ethical requirements, including independence
C. Establishing an understanding of terms of engagement
Performing preliminary engagement activities assists auditor in identifying and
evaluating events or circumstances that may affect auditor’s ability to plan and
perform audit engagement.

Q-2: The assistant of CA K is assigned responsibility of drafting “audit

programme” relating to purchases appearing in financial statements of “Broad
Industries”, a partnership firm. The said firm is a GST registered tax payer
and is engaged in manufacturing of packing boxes from a special type of paper
taxable under GST. Help him by drafting a sample audit programme for
purchases. [RTP May 2024]

Ans-2: Sample audit programme pertaining to purchases

Name of Concern : Broad Industries

Financial Year : 20XX-XX
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Prepared by : Name of person with date

Reviewed by : Name of person with date
Approved by : Name of person with date

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 Auditing & Ethics Descriptive Question Bank | CA Deepika Rathi

[Link]. Nature of Procedure Extent of Basis of Done by

Check Sample
(a) Vouch few purchase
invoices of paper from
purchase records of
concern.
(b) Trace these invoices
into account books of
concern.
(c) Verify few purchase
invoices of paper on GST
portal.
(d) Trace few purchase
invoices of paper in
stock records to ensure
that these have been
added to stocks of raw
material.

Q-3: Overall audit strategy sets the scope, timing and direction of the audit,
and guides the development of the more detailed audit plan. The process of
establishing the overall. (RTP May 2020 & Nov 2018)

Or

The engagement partner of AST AND ASSOCIATES, firm of Chartered

Accountants appointed as auditor of Fabric India Ltd is considering as to
management of key resources to be employed to conduct audit. Discuss how
overall audit strategy would assist the auditor. (MTP March 2018, Oct 2018)

Ans-3: The auditor shall establish an overall audit strategy that sets the scope,
timing and direction of the audit, and that guides the development of the audit plan.
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The process of establishing the overall audit strategy assists the auditor to
determine, subject to the completion of the auditor’s risk assessment procedures,
such matters as :

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 Auditing & Ethics Descriptive Question Bank | CA Deepika Rathi

1. The resources to deploy for specific audit areas, such as the use of
appropriately experienced team members for high risk areas or the
involvement of experts on complex matters;

2. The amount of resources to allocate to specific audit areas, such as the

number of team members assigned to observe the inventory count at material
locations, the extent of review of other auditors’ work in the case of group
audits, or the audit budget in hours to allocate to high risk areas

3. When these resources are to be deployed, such as whether at an interim audit

stage or at key cut- off dates; and

4. How such resources are managed, directed and supervised, such as when team
briefing and debriefing meetings are expected to be held, how engagement
partner and manager reviews are expected to take place (for example, on-
site or off-site), and whether to complete engagement quality control
reviews.

In establishing the overall audit strategy, the auditor shall

• Ascertain the nature, timing and extent of resources necessary to perform

the engagement.

• The selection of engagement team and the assignment of audit work to the
team members, including the assignment of appropriately experienced team
members to areas where there may be higher risks of material misstatement.

• Engagement budgeting, including considering the appropriate amount of time

to set aside for areas where there may be higher risks of material
misstatement.

Q-4: The auditor shall document the overall audit strategy, the audit plan, and
any significant changes made during the audit engagement to the overall audit
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strategy or the audit plan, and the reasons for such changes. Explain. (MTP
2018, RTP Nov 2020 & Nov 2018)

Ans-4: The auditor shall document:

a. the overall audit strategy

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b. the audit plan and

c. any significant changes made during the audit engagement to the overall audit
strategy or the audit plan, and the reasons for such changes.
The documentation of the overall audit strategy is a record of the key decisions
considered necessary to properly plan the audit and to communicate significant
matters to the engagement team.

For example, the auditor may summarize the overall audit strategy in the form of
a memorandum that contains key decisions regarding the overall scope, timing and
conduct of the audit.

The documentation of the audit plan is a record of the planned nature, timing and
extent of risk assessment procedures and further audit procedures at the assertion
level in response to the assessed risks. It also serves as a record of the proper
planning of the audit procedures t hat can be reviewed and approved prior to their
performance. The auditor may use standard audit programs and/or audit completion
checklists, tailored as needed to reflect the particular engagement circumstances.

A record of the significant changes to the overall audit strategy and the audit plan,
and resulting changes to the planned nature, timing and extent of audit procedures,
explains why the significant changes were made, and the overall strategy and audit
plan finally adopted for the audit. It also reflects the appropriate response to the
significant changes occurring during the audit.

For instance-

The following things should form part of auditor’s documentation:

• A summary of discussions with the entity’s key decision makers

• Documentation of audit committee pre-approval of services, where required

• Audit documentation access letters

• Other communications or agreements with management or those charged with

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governance regarding the scope, or changes in scope, of our services

• auditor’s report on the entity’s financial statements.

• Other reports as specified in the engagement agreement (e.g., debt covenant

compliance letter)

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Q-5: Planning is not a discrete phase of an audit, but rather a continual and
iterative process that often begins shortly after (or in connection with) the
completion of the previous audit and continues until the completion of the current
audit engagement. (MTP Oct 2018)

Ans-5: “Planning is not a discrete phase of an audit, but rather a continual and
iterative process that often begins shortly after (or in connection with) the
completion of the previous audit and continues until the completion of the current
audit engagement. Planning, however, includes consideration of the timing of certain
activities and audit procedures that need to be completed prior to the performance
of further audit procedures. For example, planning includes the need to consider,
prior to the auditor’s identification and assessment of the risks of material
misstatement, such matters as: -

1. The analytical procedures to be applied as risk assessment procedures.

2. Obtaining a general understanding of the legal and regulatory framework

applicable to the entity and how the entity is complying with that framework.

3. The determination of materiality.

4. The involvement of experts.

5. The performance of other risk assessment procedures.

Therefore, planning includes consideration of matters such as obtaining knowledge

about legal framework in which entity is operating.

Planning also includes need to consider determination of material or significant

matters. It also involves considering whether experts need to be involved taking into
account complexity of business. Further, it also involves considering need to perform
risk assessment procedures for identifying and assessing risks of material
misstatement.
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Q-6: The establishment of the overall audit strategy and the detailed audit plan
are closely inter-related. Explain (MTP Marks March 2019)

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Ans-6: Once the overall audit strategy has been established, an audit plan can be
developed to address the various matters identified in the overall audit strategy,
taking into account the need to achieve the audit objectives through the efficient
use of the auditor’s resources. The establishment of the overall audit strategy and
the detailed audit plan are not necessarily discrete or sequential processes, but are
closely inter-related since changes in one may result in consequential changes to the
other.

Q-7: Planning is not a discrete phase of an audit, but rather a continual and
iterative process that often begins shortly after the completion of the previous
audit and continues until the completion of the current audit engagement.
Planning includes the need to consider certain matters prior to the auditor’s
identification and assessment of the risks of material misstatement. Explain
clearly stating those matters also. (RTP –MAY 2021)

Ans-7: In the context of recurring audits, as per SA-300, “Planning an Audit of

Financial Statements”, Planning is not a discrete phase of an audit, but rather a
continual and iterative process that often begins shortly after (or in connection
with) the completion of the previous audit and continues until the completion of the
current audit engagement. Planning, however, includes consideration of the timing of
certain activities and audit procedures that need to be completed prior to the
performance of further audit procedures. For example, planning includes the need
to consider, prior to the auditor’s identification and assessment of the risks of
material misstatement, such matters as:

i. The analytical procedures to be applied as risk assessment procedures.

ii. Obtaining a general understanding of the legal and regulatory framework
applicable to the entity and how the entity is complying with that framework.
iii. The determination of materiality.
iv. The involvement of experts.
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v. The performance of other risk assessment procedures.

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Q-8: The auditor shall plan the nature, timing and extent of direction and
supervision of engagement team members and the review of their work. Explain
the factors due to which above varies. (MTP May 2020, RTP Nov 2020)

Ans-8: The auditor shall plan the nature, timing and extent of direction and
supervision of engagement team members and the review of their work. The nature,
timing and extent of the direction and supervision of engagement team members and
review of their work vary depending on many factors, including:

1. The size and complexity of the entity.

2. The area of the audit.

3. The assessed risks of material misstatement

4. The capabilities and competence of the individual team members performing

the audit work.

Q-9: In establishing overall audit strategy, the auditor shall ascertain the
reporting objectives of the engagement to plan the timing of the audit and the
nature of the communications required. Elucidate those cases by which auditor
can ascertain the reporting objectives of the engagement. (MTP Nov 2021 &
April 2023, RTP Nov2023, Nov 2019)

Ans-9: In establishing the overall audit strategy, auditor shall ascertain the
reporting objectives of the engagement to plan the timing of the audit and the
nature of the communications required. The cases by which auditor can ascertain the
reporting objectives of the engagement are :

• The entity’s timetable for reporting

• Organization of meetings to discuss of nature, timing and extent of audit work

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with management

• Discussion with management regarding the expected type and timing of

reports to be issued including the auditor’s report

• Discussion with management regarding the expected communications on the

status of audit work throughout the engagement.

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• Expected nature and timing of communications among engagement team

members, including the nature and timing of team meetings and timing of the
review of work performed.

Q-10: Planning an audit involves establishing the overall audit strategy for the
engagement and developing an audit plan. Adequate planning benefits the audit
of financial statements in several ways. Explain clearly those ways. (RTP –NOV
2021)

Ans-10: Planning an audit involves establishing the overall audit strategy for the
engagement and developing an audit plan. Adequate planning benefits the audit of
financial statements in several ways, including the following:

• Helping the auditor to devote appropriate attention to important areas of the

audit.

• Helping the auditor identify and resolve potential problems on a timely basis.

• Helping the auditor properly organize and manage the audit engagement so
that it is performed in an effective and efficient manner.

• Assisting in the selection of engagement team members with appropriate

levels of capabilities and competence to respond to anticipated risks, and the
proper assignment of work to them.

• Facilitating the direction and supervision of engagement team members and

the review of their work.

• Assisting, where applicable, in coordination of work done by auditors of

components and experts.

Q-11: Engagement Partner CA Hitesh Kapur of Kapur and Associates wanted to

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develop an audit plan of Sampoorna Fabrics Ltd. Discuss the matters to be

described in such an audit plan. (RTP –MAY 2022)

Ans-11: The auditor shall develop an audit plan that shall include a description
of:

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i. The nature, timing and extent of planned risk assessment procedures, as

determined under SA 315 “Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and Its Environment”.

ii. The nature, timing and extent of planned further audit procedures at the
assertion level, as determined under SA 330 “The Auditor’s Responses to
Assessed Risks”.

iii. Other planned audit procedures that are required to be carried out so that
the engagement complies with SAs.

The audit plan is more detailed than the overall audit strategy that includes the
nature, timing and extent of audit procedures to be performed by engagement team
members. Planning for these audit procedures takes place over the course of the
audit as the audit plan for the engagement develops.

Planning of the auditor’s risk assessment procedures occurs early in the audit
process.

However, planning the nature, timing and extent of specific further audit procedures
depends on the outcome of those risk assessment procedures. In addition, the
auditor may begin the execution of further audit procedures for some classes of
transactions, account balances and disclosures before planning all remaining further
audit procedures.

Q-12: Explain what do you mean by documentation of audit plan. Discuss the
purpose served by it and also elaborate the tools used by the auditor to reflect
the particular engagement circumstances. (RTP –NOV 2022)

Ans-12: The documentation of the audit plan is a record of the planned nature,
timing and extent of risk assessment procedures and further audit procedures at
the assertion level in response to the assessed risks.
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It also serves as a record of the proper planning of the audit procedures that can
be reviewed and approved prior to their performance.

The auditor may use standard audit programs and/or audit completion checklists,
tailored as needed to reflect the particular engagement circumstances.

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Q-13: XYZ & associates are appointed as the statutory auditors of Fisco Ltd.
for the FY 2021 -22. While constructing the audit programme, the engagement
partner, CA X, should keep in mind various points. List such points. (MTP 4
Marks Oct2022)

Or

Arpan Hospitals Ltd having Gross Professional Charges of ` 50 crores are

engaged in providing healthcare services. STP & Co., a firm of auditors is
appointed as its auditors.

Advise what special points to be kept in mind for the purpose of construction of
an Audit programmer Explain. (RTP May 2018 & Nov 2022, May 2019)

Ans-13: For the purpose of audit programme construction, CA X should keep in

mind the following points:

1. Stay within the scope and limitation of the assignment.

2. Prepare a written audit programme setting forth the procedures that are
needed to implement the audit plan.

3. Determine the evidence reasonably available and identify the best evidence
for deriving the necessary satisfaction.

4. Apply only those steps and procedures which are useful in accomplishing the
verification purpose in the specific situation.

5. Include the audit objectives for each area and sufficient details which serve
as a set of instructions for the assistants involved in audit and help in
controlling the proper execution of the work.

6. Consider all possibilities of error.

7. Co-ordinate the procedures to be applied to related items.

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Q-14: As a result of unexpected events, changes in conditions, or the audit

evidence obtained from the results of audit procedures, the auditor may need
to modify the overall audit strategy and audit plan. Explain (RTP Nov 19 & Nov
18, PYQ 2 Marks May 22)

Ans-14: The auditor shall update and change the overall audit strategy and the audit
plan as necessary during the course of the audit. As a result of unexpected events,
changes in conditions, or the audit evidence obtained from the results of audit
procedures, the auditor may need to modify the overall audit strategy and audit plan
and thereby the resulting planned nature, timing and extent of further audit
procedures, based on the revised consideration of assessed risks. This may be the
case when information comes to the auditor’s attention that differs significantly
from the information available when the auditor planned the audit procedures. For
example, audit evidence obtained through the performance of substantive
procedures may contradict the audit evidence obtained through tests of controls.

Q-15: Plans should be further developed and revised as necessary during the
course of the audit. Explain. (RTP May 2020)

Ans-15: Plans should be further developed and revised as necessary during the
course of the audit.

SA-300, “Planning an Audit of Financial Statements” further expounds this principle.

According to it, planning is not a discrete phase of an audit, but rather a continual
and iterative process that often begins shortly after (or in connection with) the
completion of the previous audit and continues until the completion of the current
audit engagement. The auditor shall establish an overall audit strategy that sets the
scope, timing and direction of the audit, and that guides the development of the
audit plan.
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Q-16: Evolving one audit programme applicable to all business under all
circumstances is not practicable. Explain clearly stating in detail the meaning of
audit programmer. (RTP Nov 2020)

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Ans-16: suitable to others; efficiency and operation of internal controls and the
exact nature of the service to be rendered by the auditor are the other factors
that vary from assignment to assignment. On account of such variations, evolving one
audit programmer applicable to all business under all circumstances is not
practicable. However, it becomes a necessity to specify in detail in the audit
programmer the nature of work to be done so that no time will be wasted on matters
not pertinent to the engagement and any special matter or any specific situation can
be taken care of.

It is desirable that in respect of each audit and more particularly for bigger audits
an audit programmer should be drawn up. Audit programmer is a list of examination
and verification steps to be applied and set out in such a way that the inter-
relationship of one step to another is clearly shown and designed, keeping in view the
assertions discernible in the statements of account produced for audit or on the
basis of an appraisal of the accounting records of the client.

Definition: An audit programme consists of a series of verification procedures to be

applied to the financial statements and accounts of a given company for the purpose
of obtaining sufficient evidence to enable the auditor to express an informed opinion
on such statements.

In other words, an audit programmer is a detailed plan of applying the audit

procedures in the given circumstances with instructions for the appropriate
techniques to be adopted for accomplishing the audit objectives.

Q-17: Without adequate knowledge of client’s business, a proper audit is not

possible. It is one of the important principles in developing an overall audit plan.
Explain in context with relevant SA, knowledge to be obtained by the auditor in
establishing overall plan. Also explain how such an understanding would be helpful
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to the auditor. (RTP May 2021)

Ans-17: Without adequate knowledge of client’s business, a proper audit is not

possible. It is one of the important principles in developing an overall audit plan. As
per SA-315, “Identifying and Assessing the Risk of Material Misstatement through

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Understanding the Entity and Its Environment”, the auditor shall obtain an
understanding of the following:

a. Relevant industry, regulatory and other external factors including the

applicable financial reporting framework.

b. he nature of the entity, including:

i. its operations;

ii. its ownership and governance structures;

iii. the types of investments that the entity is making and plans to make,
including investments in special-purpose entities; and

iv. the way that the entity is structured and how it is financed; to enable
the auditor to understand the classes of transactions, account balances
and disclosures to be expected in the financial statements.

c. The entity’s selection and application of accounting policies, including the

reasons for changes thereto. The auditor shall evaluate whether the entity’s
accounting policies are appropriate for its business and consistent with the
applicable financial reporting framework and accounting policies used in the
relevant industry.

d. The entity’s objectives and strategies, and those related business risks that
may result in risks of material misstatement.

Q-18: During the audit of ABC Ltd., a medium-sized manufacturing company,

the engagement partner is responsible for directing and supervising the work of
the engagement team. The team includes both experienced members and several
new trainees. Additionally, certain areas of the audit have been identified as
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high-risk, such as revenue recognition and inventory valuation, due to recent

changes in ABC Ltd.'s accounting policies. What factors should the engagement
team members consider when determining the nature, timing, and extent of
direction, supervision, and review of the engagement team's work? (RTP JAN
2025)

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Ans-18: The auditor shall plan the nature, timing and extent of direction and
supervision of engagement team members and the review of their work. The nature,
timing and extent of the direction and supervision of engagement team members and
review of their work vary depending on many factors, including: -

1. The size and complexity of the entity.

2. The area of the audit.
3. The assessed risks of material misstatement
4. The capabilities and competence of the individual team members performing
the audit work.

Q-19: CA N, engagement partner of LPS & Associates, is planning for audit

of a large company. As part of preliminary engagement activities being
performed in this regard, he wants to ensure that compliance with
independence requirements is adhered. How shall he form a conclusion that audit
firm complies with independence requirements? (RTP SEP 2024)
Ans-19: The engagement partner, CA N shall form a conclusion on compliance
with independence requirements that apply to the audit engagement. In doing so, CA
N shall: -
i. Obtain relevant information from the firm to identify and evaluate
circumstances and relationships that create threats to independence
ii. Evaluate information on identified breaches, if any, of the firm’s
independence policies and procedures to determine whether they create a
threat to independence for the audit engagement and
iii. Take appropriate action to eliminate such threats or reduce them to an
acceptable level by applying safeguards, or, if considered appropriate, to
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withdraw from the audit engagement, where withdrawal is permitted by law

or regulation. The engagement partner shall promptly report to the firm
any inability to resolve the matter for appropriate action.

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Q-20: The engagement partner, of a firm of auditors, is explaining to his audit

team, undergoing practical training, the inter relationship between audit strategy
and audit plan. Discuss the points which the engagement partner will explain to
his team in this regard. (PYQ SEP 2024)

Ans-20: Relationship between audit strategy and audit plan

• Audit strategy sets the broad overall approach to the audit whereas audit plan
addresses the various matters identified in the overall audit strategy.
• Audit strategy determines scope, timing and direction of audit. Audit plan
describes how strategy is going to be implemented.
• The audit plan is more detailed than the overall audit strategy that includes the
nature, timing and extent of audit procedures to be performed by engagement
team members. Planning for these audit procedures takes place over the course
of the audit as the audit plan for the engagement develops.
• Once the overall audit strategy has been established, an audit plan can be
developed to address the various matters identified in the overall audit strategy,
taking into account the need to achieve the audit objectives through the efficient
use of the auditor’s resources.
• The establishment of the overall audit strategy and the detailed audit plan are
not necessarily discrete or sequential processes but are closely inter-related
since changes in one may result in consequential changes to the other.

Q-21: EFG Ltd. has appointed M/s. MN & Co., Chartered Accountants, as the
statutory auditors for the year 2024-25. CA N, the engagement partner,
completed his risk assessment procedure. However, he is concerned about the
management of human resources to be employed to conduct the audit. For this
purpose, he wants to establish an overall audit strategy for setting the scope,
timing and direction of the audit. Describe how the process of establishment of
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overall audit strategy will assist him in managing deployment of his human
resources for various audit areas. (PYQ SEP 2024)
Ans-21: Establishing the overall audit strategy- Assistance for the auditor : Overall
audit strategy sets the scope, timing and direction of the audit, and guides the
development of the more detailed audit plan. The auditor shall establish an overall
audit strategy that sets the scope, timing and direction of the audit, and that guides

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the development of the audit plan.

The process of establishing the overall audit strategy assists the auditor to
determine, subject to the completion of the auditor’s risk assessment procedures,
such matters as:
i. The resources to deploy for specific audit areas, such as the use of
appropriately experienced team members for high-risk areas or the involvement
of experts on complex matters.
ii. The amount of resources to allocate to specific audit areas, such as the number
of team members assigned to observe the inventory count at material locations,
the extent of review of other auditors’ work in the case of group audits, or the
audit budget in hours to allocate to high risk areas.
iii. When these resources are to be deployed, such as whether at an interim audit
stage or at key cut-off dates.
iv. How such resources are managed, directed and supervised, such as when team
briefing and debriefing meetings are expected to be held, how engagement
partner and manager reviews are expected to take place (for example, on-site
or off-site), and whether to complete engagement quality control reviews.

Q-22: M/s. PP & Co, a firm of Chartered Accountants, has been auditing the
books of accounts of KALI Ltd. for the past 3 years. The company has recently
made some major changes in its business policies. While planning to start the
audit for the 4th year i.e. for financial year 2024-25, the audit manager of
the firm, as per the routine practice, handed over the previous years' audit
programme as it is to the audit team with the instructions to adhere unfailingly
to the said audit programme. Evaluate the decision of the audit manager with
reference to the use of audit programme. (PYQ SEP 2024)

Ans-22: Review of the audit programme: There should be periodic review of the
audit programme to assess whether the same continues to be adequate for obtaining
requisite knowledge and evidence about the transactions. Unless this is done, any
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change in the business policy of the client may not be adequately known, and
consequently, audit work may be carried on, on the basis of an obsolete programme
and, for this negligence, the whole audit may be held as negligently conducted and
the auditor may have to face legal consequences.

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The utility of the audit programme can be retained and enhanced only by keeping the
programme as also the client’s operations and internal control under periodic review
so that inadequacies or redundancies of the programme may be removed.

Audit programme not only lists the tasks to be carried out but also contains a few
relevant instructions, like the extent of checking, the sampling plan, etc. So long as
the programme is not officially changed by the principal, every assistant deputed on
the job should unfailingly carry out the detailed work according to the instructions
governing the work. Many persons believe that this brings an element of rigidity in
the audit programme. This is not true provided the periodic review is undertaken to
keep the programme as up-to-date as possible and by encouraging the assistants on
the job to observe all salient features of the various accounting functions of the
client.

In the given situation, Ms. PP & Co., a firm of Chartered Accountants has been
auditing the books of accounts of KALI Ltd. for the past 3 years and the Company
has recently made major changes in its business policies, therefore, it is very
essential to review the audit programme. Thus, contention of the audit manager to
adhere with the instructions of following the same audit programme as per routine
practice is not correct.

Q-23: APR & Associates, a Chartered Accountant firm, are appointed as the
auditors of Time Ltd. and Bakes Ltd. The volume and nature of business of both
the companies are entirely different. CA R is the engagement partner for Bakes
Ltd. CA P is the engagement partner for Time Ltd. CA R formulates an Audit
Programme for conducting the audit of Bakes Ltd. He suggests CA P to use the
same audit programme for Time Ltd. But CA P is of the opinion that this audit
programme will not be useful for the audit of Time Ltd.

In light of the above, mention the matters that should generally be considered
while preparing an Audit Programme. Is CA P correct in emphasizing for a
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different Audit Programme for Time Ltd.? (PYQ SEP 2024)

Ans-23: Following matters should be considered generally while preparing an Audit

Programme:

(1) Stay within the scope and limitation of the assignment.

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(2) Prepare a written audit programme setting forth the procedures that are
needed to implement the audit plan.

(3) Determine the evidence reasonably available and identify the best evidence for
deriving the necessary satisfaction.

(4) Apply only those steps and procedures which are useful in accomplishing the
verification purpose in the specific situation.

(5) Include the audit objectives for each area and sufficient details which serve as
a set of instructions for the assistants involved in audit and help in controlling the
proper execution of the work.

(6) Consider all possibilities of error.

(7) Co-ordinate the procedures to be applied to related items.

Evolving one audit programme- Not Practicable for All businesses: Businesses vary
in nature, size and composition; work which is suitable to one business may not be
suitable to others; efficiency and operation of internal controls and the exact nature
of the service to be rendered by the auditor are the other factors that vary from
assignment to assignment. On account of such variations, evolving one audit
programme applicable to all business under all circumstances is not practicable.

In view of above mentioned provisions, CA. P is correct in emphasizing for a different

audit programme for Time Ltd.

Q-24: B Ltd. is a company manufacturing bed-sheets and pillow covers. They

have appointed M/s C & Co., Chartered Accountants, as their auditors. The
auditor is establishing audit strategy with his team members. As the work
progressed, they came to know that the company has diversified its business
and now they are also planning to manufacture wooden furniture. The auditor,
in his professional judgement, considers this to be a significant factor in
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directing the engagement team’s efforts. Give examples of factors that, in

auditor’s professional judgement, are significant in directing the engagement
team’s efforts. (PYQ MAY 2024)

Ans-24: Consider the factors that, in the auditor’s professional judgment, are
significant in directing the engagement team’s efforts: The auditor needs to direct

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efforts of engagement team towards matters that in his professional judgment are
significant. Preliminary identification of material classes of transactions, account
balances and disclosures help auditor in establishing overall audit strategy. More
energies need to be devoted to significant matters to obtain desired outcomes. Few
examples are listed as under: -

(i) Volume of transactions which may determine whether it is more efficient for the
auditor to rely on internal control.

(ii) Significant industry developments such as changes in industry regulations and

new reporting requirements.

(iii) Significant changes in the financial reporting framework, such as changes in

accounting standards.

(iv) Other significant relevant developments, such as changes in the legal

environment affecting the entity.

Q-25: CA E is auditor of LM Ltd. Before commencing with current year's audit,

he initiated planning for the audit. Planning includes the need to consider certain
matters, prior to the identification and assessment of the risk of material
misstatements. Enumerate such matters. (PYQ SEP 2024)

Ans-25: Nature of Audit Planning- A Continuous and iterative process: Planning

includes the need to consider, prior to the auditor’s identification and assessment
of the risks of material misstatement, such matters as: -

1. The analytical procedures to be applied as risk assessment procedures.

2. Obtaining a general understanding of the legal and regulatory framework

applicable to the entity and how the entity is complying with that framework.

3. The determination of materiality.

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4. The involvement of experts.

5. The performance of other risk assessment procedures.

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Q-26: Lotus Ltd., a rapidly growing manufacturing company, appointed Ridhi &
Co., as statutory auditor. The engagement team of Ridhi & Co. identified key
areas requiring scrutiny, such as revenue recognition, inventory valuation, and
related party transactions. Based on his professional judgment, CA Ravi, the
engagement partner, directed the engagement team to focus on these critical
areas, emphasising the need for detailed testing to ensure accuracy and
compliance. Give some examples of the factors need to be considered by CA
Ravi for establishing the audit strategy. (MTP JAN 2025)

Ans-26: Consider the factors that, in the auditor’s professional judgment, are
significant in directing the engagement team’s efforts.

The auditor needs to direct efforts of engagement team towards matters that in
his professional judgment are significant. Preliminary identification of material
classes of transactions, account balances and disclosures help auditor in establishing
overall audit strategy. More attention need to be devoted to significant matters to
obtain desired outcomes.
Examples of the factors that need to be considered by CA Ravi for establishing
audit strategy are: -
• Volume of transactions which may determine whether it is more efficient
for the auditor to rely on internal control.
• Significant industry developments such as changes in industry regulations
and new reporting requirements.
• Significant changes in the financial reporting framework, such as changes in
accounting standards.
• Other significant relevant developments, such as changes in the legal
environment affecting the entity.

Q-27: Audit programme is a list of examination and verification steps to be

CA INTERMEDIATE

applied and set out in such a way that the inter-relationship of one step to
another is clearly shown and designed, keeping in view the assertions apparent
in the statements of account produced for audit or based on an appraisal of the
accounting records of the client. For example, while auditing a company’s
inventory, the program may include steps to verify physical stock counts,

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ownership rights, and valuation. What are the advantages of an audit

programme? (MTP JAN 2025)

Ans-27: The advantages of an audit programme are:

• It provides the assistant carrying out the audit with total and clear set of
instructions of the work generally to be done.
• It is essential, particularly for major audits, to provide a total perspective of
the work to be performed.
• Selection of assistants for the jobs on the basis of capability becomes easier
when the work is rationally planned, defined and segregated.
• Without a written and pre-determined programme, work is necessarily to be
carried out on the basis of some ‘mental’ plan. In such a situation there is
always a risk of ignoring or overlooking certain books and records. Under a
properly framed programme, such risk is significantly less and the audit can
proceed systematically.
• The assistants, by putting their signature on programme, accept the
responsibility for the work carried out by them individually and, if necessary,
the work done may be traced back to the assistant.
• The principal can control the progress of the various audits in hand by
examination of audit programmes initiated by the assistants deputed to the
jobs for completed work.
• It serves as a guide for audits to be carried out in the succeeding year.
• A properly drawn up audit programme serves as evidence in the event of any
charge of negligence being brought against the auditor. It may be of
considerable value in establishing that he exercised reasonable skill and care
that was expected of professional auditor.

Q-28: “In establishing the overall audit strategy, the auditor shall, among other
considerations, ascertain the nature, timing and extent of resources necessary
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to perform the engagement”. Explain those considerations in detail. (MTP JAN

2025)

Ans-28: In establishing the overall audit strategy, the auditor shall:

(i) Identify the characteristics of the engagement that define its scope;
(ii) Ascertain the reporting objectives of the engagement to plan the timing of
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the audit and the nature of the communications required;

(iii) Consider the factors that, in the auditor’s professional judgment, are
significant in directing the engagement team’s efforts;
(iv) Consider the results of preliminary engagement activities and, where
applicable, whether knowledge gained on other engagements performed by
the engagement partner for the entity is relevant; and
(v) Ascertain the nature, timing and extent of resources necessary to perform
the engagement.

Q-29: The engagement partner, of a firm of auditors, is explaining to his audit

team, undergoing practical training, the inter relationship between audit strategy
and audit plan. Discuss the points which the engagement partner will explain
to his team in this regard. (MTP JAN 2025)

Ans-29: Relationship between audit strategy and audit plan:

• Audit strategy sets the broad overall approach to the audit whereas audit plan
addresses the various matters identified in the overall audit strategy.
• Audit strategy determines scope, timing and direction of audit. Audit plan
describes how strategy is going to be implemented.
• The audit plan is more detailed than the overall audit strategy that includes
the nature, timing and extent of audit procedures to be performed by
engagement team members. Planning for these audit procedures takes place
over the course of the audit as the audit plan for the engagement develops.
• Once the overall audit strategy has been established, an audit plan can be
developed to address the various matters identified in the overall audit
strategy, taking into account the need to achieve the audit objectives through
the efficient use of the auditor’s resources.
• The establishment of the overall audit strategy and the detailed audit plan
are not necessarily discrete or sequential processes but are closely inter-
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related since changes in one may result in consequential changes to the other.

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Chapter-3: Risk Assessment and Internal Control

Q-1: The auditor shall identify and assess the risks of material misstatement at
both levels to provide a basis for designing and performing further audit
procedures. For the purpose of Identifying and assessing the risks of material
misstatement the auditor shall Identify risks, assess the identified risks, relate
the identified risks and consider the likelihood of misstatement. Explain the
above in detail. (MTP Oct 2018)

Or

Discuss the steps to be taken by the auditor for the purpose of Identifying and
assessing the risks of material misstatement as per SA 315. (MTP Sep 2022)

Or

For the purpose of Identifying and assessing the risks of material misstatement,
the auditor shall identify risks throughout the process of obtaining an
understanding of the entity and its environment. Explain in detail along with other
relevant points. (RTP Nov 2020)

Ans-1: Identify and assess the risks of material misstatement

i. The auditor shall identify and assess the risks of material misstatement at:
a. The financial statement level
b. The assertion level for classes of transactions, account balances, and
disclosures to provide a basis for designing and performing further
audit procedures
ii. For the purpose of Identifying and assessing the risks of material
misstatement, the auditor shall:
a. Identify risks throughout the process of obtaining an understanding of
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the entity and its environment, including relevant controls that relate
to the risks, and by considering the classes of transactions, account
balances, and disclosures in the financial statements.
b. Assess the identified risks, and evaluate whether they relate more
pervasively to the financial statements as a whole and potentially affect
many assertions.
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c. Relate the identified risks to what can go wrong at the assertion level,
taking account of relevant controls that the auditor intends to test and
d. Consider the likelihood of misstatement, including the possibility of
multiple misstatements, and whether the potential misstatement is of
a magnitude that could result in a material misstatement.

Q-2: The division of internal control into five components provides a useful
framework for auditors to consider how different aspects of an entity's internal
control may affect the audit. Mention those components of internal control.
(MTP Oct 2020, Oct 2021, MTP 3 Marks Mar 2023, RTP May 2023)

Ans-2: Division of Internal Control into Components: The division of internal

control into the following five components provides a useful framework for auditors
to consider how different aspects of an entity’s internal control may affect the audit

i. The control environment

ii. The entity’s risk assessment process
iii. Monitoring of controls
iv. Control activities and
v. The information system, including the related business processes, relevant to
financial reporting, and communication

Q-3: The auditor shall obtain an understanding of the information system,

including the related business processes, relevant to financial reporting, including
the classes of transactions in the entity’s operations that are significant to the
financial statements, controls surrounding journal entries etc. Explain the other
considerations in this regard.

Ans-3: The auditor shall obtain an understanding of the information system,

including the related business processes, relevant to financial reporting, including
the following are as under:
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a. The classes of transactions in the entity’s operations that are significant to

the financial statements
b. The procedures by which those transactions are initiated, recorded,
processed, corrected as necessary, transferred to the general ledger and
reported in the financial statements

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c. The related accounting records, supporting information and specific

accounts in the financial statements that are used to initiate, record, process
and report transactions
d. How the information system captures events and conditions that are
significant to the financial statements
e. The financial reporting process used to prepare the entity’s financial
statements
f. Controls surrounding journal entries.

Q-4: Explain what understanding should an auditor obtain regarding an entity’s risk
assessment process (one of the components of the internal control of the entity).
(MTP Oct 2022)

Ans-4: The Entity’s Risk Assessment Process– Component of Control Environment.

The auditor shall obtain an understanding of whether the entity has a process for:

a. Identifying business risks relevant to financial reporting objectives

b. Estimating the significance of the risks
c. Assessing the likelihood of their occurrence; and (d) Deciding about actions
to address those risks. The entity’s risk assessment process forms the basis
for the risks to be managed. If that process is appropriate, it would assist
the auditor in identifying risks of material misstatement. Whether the entity’s
risk assessment process is appropriate to the circumstances is a matter of
judgment.

Q-5: Explain stating clearly what is not included in Audit Risk? (MTP Aug 2018)

Ans-5: Assessment of Risks - Matter of Professional Judgement

The assessment of risks is based on audit procedures to obtain information

necessary for that purpose and evidence obtained throughout the audit. The
assessment of risks is a matter of professional judgment, rather than a matter
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capable of precise measurement.

What is not included in Audit Risk?
i. Audit risk does not include the risk that the auditor might express an opinion that
the financial statements are materially misstated when they are not. This risk is
ordinarily insignificant.
ii. Further, audit risk is a technical term related to the process of auditing; it does

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not refer to the auditor’s business risks such as loss from litigation, adverse
publicity, or other events arising in connection with the audit of financial
statements.

Q-6: The auditor of MARUT Ltd, engaged in manufacturing of Smart Motor

Bikes, obtains an understanding of the control environment. As part of obtaining
this understanding, the auditor evaluates whether:

i. Management has created and maintained a culture of honesty and ethical

behavior; and
ii. The strengths in the control environment elements collectively provide an
appropriate foundation for the other components of internal control.
Advise what is included in control environment. Also explain the elements of
control environment.
Or
Advise what is included in control environment. Also explain the elements of
control environment.
Or
The auditor of FAST CARS Ltd obtains an understanding of the control
environment. As part of obtaining this understanding, the auditor evaluates
whether management has created and maintained a culture of honesty and
ethical behavior and the strengths in the control environment elements
collectively provide an appropriate foundation for the other components of
internal control.
Advise what is included in control environment. Also explain the elements of
control environment. (MTP May 2020, March 2019, Aug 2018, Mar 2018)
Ans-6: Control Environment – Component of Internal Control: The auditor shall
obtain an understanding of the control environment. As part of obtaining this
understanding, the auditor shall evaluate whether:
i. Management has created and maintained a culture of honesty and ethical
behavior; and
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ii. The strengths in the control environment elements collectively provide an

appropriate foundation for the other components of internal control.
What is included in Control Environment? The control environment includes:
i. The governance and management functions and
ii. The attitudes, awareness, and actions of those charged with governance and
management.
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 Auditing & Ethics Descriptive Question Bank | CA Deepika Rathi

iii. The control environment sets the tone of an organization, influencing the
control consciousness of its people.
iv. Elements of the Control Environment: Elements of the control environment
that may be relevant when obtaining an understanding of the control
environment include the following:
1. Communication and enforcement of integrity and ethical values – These
are essential elements that influence the effectiveness of the design,
administration and monitoring of controls.
2. Commitment to competence – Matters such as management’s
consideration of the competence levels for particular jobs and how those
levels translate into requisite skills and knowledge.
3. Participation by those charged with governance –Attributes of those charged
with governance such as:
• Their independence from management.
• Their experience and stature.
• The extent of their involvement and the information they receive, and
the scrutiny of activities.
• The appropriateness of their actions, including the degree to which
difficult questions are raised and pursued with management, and their
interaction with internal and external auditors.
4. Management’s philosophy and operating style –Characteristics such as
management’s:
• Approach to taking and managing business risks.
• Attitudes and actions toward financial reporting.
• Attitudes toward information processing and accounting functions and
personnel.
5. Organizational structure – The framework within which an entity’s activities
for achieving its objectives are planned, executed, controlled, and reviewed.
6. Assignment of authority and responsibility - Matters such as how authority
and responsibility for operating activities are assigned and how reporting
relationships and authorization hierarchies are established.
7. Human resource policies and practices – Policies and practices that relate
to, for example, recruitment, orientation, training, evaluation, counselling,
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promotion, compensation, and remedial actions.

Q-7: Risks of material misstatement may be greater for significant non-routine

transactions arising from matters such as complex calculations. Also, risks of
material misstatement may be greater for significant judgmental matters that
require the development of accounting estimates, arising from matters such as

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accounting principles for accounting estimates may be subject to differing

interpretation etc. Explain in detail. (MTP 3 Marks Oct 2023, RTP Nov 2021)

Ans-7: Risks of Material Misstatement– Greater for Significant Non-Routine

Transactions Risks of material misstatement may be greater for significant non-
routine transactions arising from matters such as the following:
▪ Greater management intervention to specify the accounting treatment.
▪ Greater manual intervention for data collection and processing.
▪ Complex calculations or accounting principles.
▪ The nature of non-routine transactions, which may make it difficult for the entity
to implement effective controls over the risks.

Risks of material misstatement– Greater for Significant Judgmental Matters

▪ Accounting principles for accounting estimates or revenue recognition may be
subject to differing interpretation.
▪ Required judgment may be subjective or complex, or require assumptions about
the effects of future events, for example, judgment about fair value.

Q-8: Materiality for the financial statements as a whole may need to be

revised as a result of a change in circumstances that occurred during the audit.
Explain with the help of example. (MTP Oct 2019)

Ans-8: Revision in Materiality level as the Audit Progresses: Materiality for the
financial statements as a whole (and, if applicable, the materiality level or levels for
particular classes of transactions, account balances or disclosures) may need to be
revised as a result of a change in circumstances that occurred during the audit (for
example, a decision to dispose of a major part of the entity’s business), new
information, or a change in the auditor’s understanding of the entity and its
operations as a result of performing further audit procedures.
Example

If during the audit it appears as though actual financial results are likely to be
substantially different from the anticipated period end financial results that were
used initially to determine materiality for the financial statements as a whole, the
auditor revises that materiality.
CA INTERMEDIATE

If the auditor concludes that a lower materiality for the financial statements as a
whole (and, if applicable, materiality level or levels for particular classes of
transactions, account balances or disclosures) than that initially determined is
appropriate, the auditor shall determine whether it is necessary to revise
performance materiality, and whether the nature, timing and extent of the further

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audit procedures remain appropriate.

Q-9: Briefly discuss the limitations of Internal Control. (RTP May 2023)
Ans-9: Limitations of Internal Control:
i. Internal control can provide only reasonable assurance: Internal control, no
matter how effective, can provide an entity with only reasonable assurance
about achieving the entity’ s financial reporting objectives. The likelihood of
their achievement is affected by inherent limitations of internal control.
ii. Human judgment in decision-making: Realities that human judgment in
decision-making can be faulty and that breakdowns in internal control can
occur because of human error.
iii. Lack of understanding the purpose: Equally, the operation of a control may not
be effective, such as where information produced for the purposes of internal
control (for example, an exception report) is not effectively used because the
individual responsible for reviewing the information does not understand its
purpose or fails to take appropriate action.
iv. Collusion among People: Additionally, controls can be circumvented by the
collusion of two or more people or inappropriate management override of internal
control. For example, management may enter into side agreements with
customers that alter the terms and conditions of the entity’s standard sales
contracts, which may result in improper revenue recognition. Also, edit checks
in a software program that are designed to identify and report transactions
that exceed specified credit limits may be overridden or disabled.
v. Judgements by Management: Further, in designing and implementing controls,
management may make judgments on the nature and extent of the controls it
chooses to implement, and the nature and extent of the risks it chooses to
assume.
vi. Limitations in case of Small Entities: Smaller entities often have fewer
employees due to which segregation of duties is not practicable. However, in a
small owner-managed entity, the owner- manager may be able to exercise more
effective oversight than in a larger entity. This oversight may compensate for
the generally more limited opportunities for segregation of duties.
On the other hand, the owner-manager may be more able to override controls
CA INTERMEDIATE

because the system of internal control is less structured. This is taken into account
by the auditor when identifying the risks of material misstatement due to fraud.

Q-10: XYZ & Associates, Chartered Accountants, while evaluating the operating
effectiveness of internal controls, detects deviation from controls. In such a

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situation, state the specific inquiries to be made by an auditor to understand

these matters and their potential consequences. (MTP March 2021, May 2018)
Ans-10: Evaluating the Operating Effectiveness of Controls: When evaluating the
operating effectiveness of relevant controls, the auditor shall evaluate whether
misstatements that have been detected by substantive procedures indicate that
controls are not operating effectively. The absence of misstatements detected by
substantive procedures, however, does not provide audit evidence that controls
related to the assertion being tested are effective.
When deviations from controls upon which the auditor intends to rely are detected,
the auditor shall make specific inquiries to understand these matters and their
potential consequences, and shall determine whether:
i. The tests of controls that have been performed provide an appropriate basis
for reliance on the controls;
ii. Additional tests of controls are necessary; or
iii. The potential risks of misstatement need to be addressed using substantive
procedures.
A material misstatement detected by the auditor’s procedures is a strong indicator
of the existence of a significant deficiency in internal control.

Q-11: Factors relevant to the auditor’s judgment about whether a control,

individually or in combination with others, is relevant to the audit may include
such matters as materiality, size of the entity etc. Explain the other relevant
considerations in the above context. (MTP March 2022, RTP May 2021, RTP Nov
2022)
Ans-11: Factors relevant to the auditor’s judgment about whether a control,
individually or in combination with others, is relevant to the audit may include such
matters as the following:
✓ Materiality.
✓ The significance of the related risk.
✓ The size of the entity.
✓ The nature of the entity’s business, including its organisation and ownership
characteristics
✓ The diversity and complexity of the entity’s operations.
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✓ Applicable legal and regulatory requirements.

✓ The circumstances and the applicable component of internal control.
✓ The nature and complexity of the systems that are part of the entity’s internal
control, including the use of service organisations.
✓ Whether, and how, a specific control, individually or in combination with

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others, prevents, or detects and corrects, material misstatement.

Q-12: As a part of Risk assessment, the auditor shall determine whether any
of the risks identified are in the auditor's judgement a significant risk. Mention
any three guiding factors to judge as to which risks are significant risks? (May
2023)

Ans-12: Identification of Significant Risks: SA 315 “Identifying and Assessing

the Risk of Material Misstatement through understanding the Entity and its
Environment” defines ‘significant risk’ as an identified and assessed risk of material
misstatement that, in the auditor’s judgment, requires special audit consideration.
As part of the risk assessment, the auditor shall determine whether any of the risks
identified are, in theauditor’s judgment, a significant risk. In exercising this
judgment, the auditor shall exclude the effects ofidentified controls related to the
risk.
In exercising judgment as to which risks are significant risks, the auditor shall
consider at least the following:
a) Whether the risk is a risk of fraud
b) Whether the risk is related to recent significant economic, accounting, or
other developments likechanges in regulatory environment, etc., and,
therefore, requires specific attention
c) The complexity of transactions;
d) Whether the risk involves significant transactions with related parties;
e) The degree of subjectivity in the measurement of financial information
related to the risk, especially those measurements involving a wide range of
measurement uncertainty; and
f) Whether the risk involves significant transactions that are outside the normal
course of business for the entity, or that otherwise appear to be unusual.

Q-13: Having obtained an understanding of the IT systems and the automated

environment of a company, the auditor should consider the risks that arise from
the use of IT systems. Explain. (MTP Aug 2018, RTP Nov 2019)
CA INTERMEDIATE

Ans-13: Having obtained an understanding of the IT systems and the automated

environment of a company, the auditor should now understand the risks that arise
from the use of IT systems.
Given below are some such risks that should be considered,
• To make necessary changes to systems or programs
• Loss of inaccurate processing of data, processing inaccurate data, or both

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• Unauthorized access to data

• Direct data changes (backend changes)
• Excessive access / privileged access (super users)
• Lack of adequate segregation of duties
• Unauthorized changes to systems or programs
• Failure data

Q-14: A company functions in an automated environment. Discuss in what areas

data analytics can be useful for auditor of the company. (Study Mat)

Ans-14: The combination of processes, tools and techniques that are used to tap
vast amounts of electronic data to obtain meaningful information is called data
analytics. While it is true that companies can benefit immensely from the use of data
analytics in terms of increased profitability, better customer service, gaining
competitive advantage, more efficient operations, etc., even auditors can make use
of similar tools and techniques in the audit process and obtain good results. The tools
and techniques that auditors use in applying the principles of data analytics are
known as Computer Assisted Auditing Techniques or CAATs in short.
Data analytics can be used in testing of electronic records and data residing in
IT systems using spreadsheets and specialised audit tools viz., IDEA and ACL to
perform the following,
• check completeness of data and population that is used in either test of
controls or substantive audit tests
• selection of audit samples – random sampling, systematic sampling
• re-computation of balances – reconstruction of trial balance from transaction
data
• reperformance of mathematical calculations – depreciation, bank interest
calculation.
• analysis of journal entries as required by SA 240
• fraud investigation
• evaluating impact of control deficiencies
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Q-15: List any five points that an auditor should consider to obtain an understanding
of the Company's automated environment. (MTP Oct 2021, Mar2022)
Ans-15: Understanding and Documenting Automated Environment: Understanding
the entity and its automated environment involves understanding how IT department
is organised, IT activities, the IT dependencies, relevant risks and controls. Given

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below are some of the points that an auditor should consider to obtain an
understanding of the company’s automated environment.

• Information systems being used (one or more application systems and what
they are)
• their purpose (financial and non-financial)
• Location of IT systems - local vs global
• Architecture (desktop based, client-server, web application, cloud based)
• Version (functions and risks could vary in different versions of same
application)
• Interfaces within systems (in case multiple systems exist)
• In-house vs Packaged
• Outsourced activities (IT maintenance and support)
• Key persons (CIO, CISO, Administrators)

Q-16: Explain the objective and enlist the activities involved in the General IT
Controls over “Program Change”. (MTP Oct 2022)
Ans-16: General IT Controls are IT controls generally implemented to mitigate the
IT specific risks and applied commonly across multiple IT systems, applications and
business processes. Hence, General IT controls are known as “pervasive” controls or
“indirect” controls.
Program Change
Objective: To ensure that modified systems continue to meet financial reporting
objectives.
Activities:
Change Management Process – definition, roles & responsibilities
• Change Requests – record, manage, track
• Making Changes – analyze, design, develop
• Test Changes – test plan, test cases, UAT
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• Apply Changes in Production

• Emergency & Minor Changes
• Documentation – user/technical manuals
• User Training

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Q-17: Discuss the various points which auditor needs to consider in determining
whether it is appropriate to use audit evidence about operating effectiveness of
controls obtained in previous audit, and if so, the length of the time period that
may elapse before retesting a control. (MTP April 2023, Nov 2019)
Ans-17: In determining whether it is appropriate to use audit evidence about the
operating effectiveness of controls obtained in previous audits, and, if so, the length
of the time period that may elapse before retesting a control, the auditor shall
consider the following:
i. The effectiveness of other elements of internal control, including the control
environment, the entity's monitoring of controls, and the entity's risk
assessment process
ii. The risks arising from the characteristics of the control, including whether it
is manual or automated
iii. The effectiveness of general IT-controls
iv. The effectiveness of the control and its application by the entity, including the
nature and extent of deviations in the application of the control noted in previous
audits, and whether there have been personnel changes that significantly
affects the application of the control
v. Whether the lack of a change in a particular control poses a risk due to changing
circumstances; and
vi. The risks of material misstatement and the extent of reliance on the control.

Q-18: The SAs do not ordinarily refer to inherent risk and control risk
separately, but rather to a combined assessment of the “risks of material
misstatement”. Explain. (RTP Nov 2019 Nov 2018, May 2019)
Ans-18: The SAs do not ordinarily refer to inherent risk and control risk
separately, but rather to a combined assessment of the “risks of material
misstatement”. However, the auditor may make separate or combined assessments
of inherent and control risk depending on preferred audit techniques or
methodologies and practical considerations. The assessment of the risks of material
misstatement may be expressed in quantitative terms, such as in percentages, or in
non-quantitative terms. In any case, the need for the auditor to make appropriate
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risk assessments is more important than the different approaches by which they may
be made.
It can be concluded from the above that- Risk of Material Misstatement=
Inherent Risk X Control Risk

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Q-19: Auditor GR and Associates have been appointed to conduct audit of PNG
Ltd, a manufacturing company engaged in manufacturing of various food items.
While planning an audit, the auditors do not think that it would be necessary to
understand internal controls. Advise the auditor in this regard explaining clearly
the benefits of understanding the internal control. (RTP May 2021)
Ans-19: The auditor shall obtain an understanding of internal control relevant to
the audit. Although most controls relevant to the audit are likely to relate to
financial reporting, not all controls that relate to financial reporting are relevant to
the audit. It is a matter of the auditor’s professional judgment whether a control,
individually or in combination with others, is relevant to the audit.
Benefits of Understanding the Internal Control
An understanding of internal control assists the auditor in:
(i) identifying types of potential misstatements;
(ii) identifying factors that affect the risks of material misstatement, and
(iii) designing the nature, timing, and extent of further audit procedures.

Q-20: A Flow Chart is a graphic presentation of each part of the company’s

system of internal control. Explain elaborating each and every aspect about flow
chart. (RTP Nov 18)

Ans-20: A Flow Chart: It is a graphic presentation of each part of the company’s

system of internal control. A flow chart is considered to be the most concise way of
recording the auditor’s review of the system. It minimizes the amount of narrative
explanation and thereby achieves a consideration or presentation not possible in any
other form. It gives bird’s eye view of the system and the flow of transactions and
integration and in documentation, can be easily spotted and improvements can be
suggested.
It is also necessary for the auditor to study the significant features of the business
carried on by the concern; the nature of its activities and various channels of goods
and materials as well as cash, both inward and outward; and also a comprehensive
study of the entire process of manufacturing, trading and administration. This will
help him to understand and evaluate the internal controls in the correct perspective.
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Q-21: Explain some of the commonly used methods for testing in an

automated environment. (RTP MAY 2020)
Ans -21: When testing in an automated environment, some of the more common
methods are as follows:
• Obtain an understanding of how an automated transaction is processed by doing

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a walkthrough of one end-to-end transaction using a combination of inquiry,

observation and inspection.
• Observe how a user processes transactions under different scenarios.
• Inspect the configuration defined in an application.

Q-22: Satranga Foods Private Limited is engaged in manufacturing of pickles.

The auditors of the company have planned audit procedures in respect of
recognition of revenues of the company. Despite that, there is a possibility that
misstatements in revenue recognition are not identified by planned audit
procedures. Identify and explain that particular risk in detail. [RTP May 2024]

Ans-22: There is a possibility that planned audit procedures may not achieve
desired result and fail to detect misstatements in revenue recognition. Such a risk
is referred to as “detection risk”.

SA 200 defines detection risk as the risk that the procedures performed by the
auditor to reduce audit risk to an acceptably low level will not detect a misstatement
that exists and that could be material, either individually or when aggregated with
other misstatements.
For example, auditor of a company uses certain audit procedures for the purpose of
obtaining audit evidence and reducing audit risk, but still there will remain a risk
that audit procedures used by the auditor may not be able to detect a
misstatement which by nature is material, then that risk is known as detection
Risk.
Detection risk comprises sampling and non-sampling risk.

a. Sampling risk is the risk that the auditor’s conclusion based on a sample may be
different from the conclusion if the entire population were subjected to the
same audit procedure. It simply means that the sample was not representative
of the population from which it was chosen.
b. Non-sampling risk is the risk that the auditor reaches an erroneous conclusion
for any reason not related to sampling risk. Like an auditor may reach an
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erroneous conclusion due to application to some inappropriate audit procedure.

Q-23: The auditor of EFG Ltd., a company engaged in the Tours & Travel
business, needs to obtain an understanding of the company's control environment.
To do this, the auditor evaluates whether

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(i) Management has created and maintained a culture of honesty and ethical
behaviour; and
(ii) The strengths in the control environment elements collectively provide an
appropriate foundation for the other components of internal control
What is included in control environment? Also explain the elements of
control environment. (RTP Jan 2025)
Ans-23: The auditor shall obtain an understanding of the control environment.
As part of obtaining this understanding, the auditor shall evaluate whether

(i) Management has created and maintained a culture of honesty and ethical
behaviour and
(ii) The strengths in the control environment elements collectively provide an
appropriate foundation for the other components of internal control.

The control environment includes:

(i) the governance and management functions and
(ii) the attitudes, awareness, and actions of those charged with governance and
management.
(iii) the control environment sets the tone of an organization, influencing the
control consciousness of its people.

Elements of Control Environment

Elements of the control environment that may be relevant when obtaining an

understanding of the control environment include the following:
a. Communication and enforcement of integrity and ethical values: The
effectiveness of controls cannot rise above the integrity and ethical values of
the people who create, administer, and monitor them. Integrity and ethical
behaviour are the product of the entity’s ethical and behavioural standards,
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how they are communicated, and how they are reinforced in practice. The
enforcement of integrity and ethical values includes, for example,
management actions to eliminate or mitigate incentives or temptations that
might prompt personnel to engage in dishonest, illegal, or unethical acts. The
communication of entity policies on integrity and ethical values may include
the communication of behavioural standards to personnel through policy

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statements and codes of conduct and by example.

b. Commitment to competence: Matters such as management’s consideration of
the competence levels for particular jobs and how those levels translate into
requisite skills and knowledge.
c. Participation by those charged with governance: It includes attributes of
those charged with governance such as their independence from management,
their experience and stature, the extent of their involvement and the
information they receive and the scrutiny of activities.
d. Management’s philosophy and operating style: Management’s philosophy and
operating style encompass a broad range of characteristics. For example,
management’s attitudes and actions towards financial reporting- what
approach is taken by management in selecting accounting policies, approach
in developing accounting estimates etc. Matters such as approach of
management to taking and managing business risks, management’s attitude
towards information processing and accounting function and personnel
reflects upon management’s philosophy and operating style.
e. Organisational structure: The framework within which an entity’s activities
for achieving its objectives are planned, executed, controlled, and reviewed.
Establishing a relevant organisational structure includes considering key areas
of authority and responsibility and appropriate lines of reporting. The
appropriateness of an entity’s organisational structure depends, in part, on its
size and the nature of its activities.
f. Assignment of authority and responsibility: Matters such as how
authority and responsibility for operating activities are assigned and how
reporting relationships and authorisation hierarchies are established.
g. Human resource policies and practices :Policies and practices that relate
to, for example, recruitment, orientation, training, evaluation, counselling,
promotion, compensation, and remedial actions. Human resource policies and
practices often demonstrate important matters in relation to the control
consciousness of an entity.
CA INTERMEDIATE

Q-24: Companies are increasingly using data analytics for managing their
operations. Auditors can also obtain good results by using data analytics.
What are the tools and techniques used by auditors in applying the principles

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of Data Analytics and in which areas data analytics can be used by auditors?
(RTP SEP 2024)

Ans-24: The tools and techniques that auditors use in applying principles of data
analytics are known as Computer Assisted Auditing Techniques (CAATs).

Data analytics can be used in testing of electronic records and data residing in IT
systems using spreadsheets and specialised audit tools viz., IDEA and ACL to
perform the following: -
• Check completeness of data and population that is used in either test of
controls or substantive audit tests.
• Selection of audit samples – random sampling, systematic
sampling.
• Re-computation of balances – reconstruction of trial balance from
transaction data.
• Reperformance of mathematical calculations – depreciation, bank interest
calculation.
• Analysis of journal entries of fraud investigation.
• Evaluating impact of control deficiencies.

Q-25: CA B, was the auditor of Star Limited. He wanted to ensure that the
company had correctly reconciled its bank accounts and also wanted to
understand whether and how far the internal control system was operating in
the company. What kind of test of control was CA B performing? What are the
other procedures that can be applied while undertaking test of controls?

(PYQ SEP 2024)

Ans-25: Inquiries of Management and Others Within the Entity: After assimilating
the internal control system, the auditor needs to examine whether and how far the
same is actually in operation. Test of controls are performed to obtain audit evidence
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about the effectiveness of the: -

i. Design of the accounting and internal control system

ii. Operation of the internal control throughout the period

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In the given case, CA B was performing Re-performance. It involves the auditor’s

independent execution of procedures or controls that were originally performed as
part of the entity’s internal control, for example, reconciliation of bank accounts, to
ensure they were correctly performed by the entity.

Other procedures that can be applied while undertaking test of controls are:

• Inspection of documents supporting transactions and other events to gain

audit evidence that internal controls have operated properly, for example, verifying
that a transaction has been authorised.
• Inquiries about, and observation of, internal controls which leave no audit
trail, for example, determining who actually performs each function and not merely
who is supposed to perform it.
• Testing of internal control operating on specific computerised applications or
over the overall information technology function, for example, access or program
change controls.

Q-26: CA Amit is the auditor of LMN Ltd. While conducting the audit, he
wanted to analyze the different components of internal control of the company.
Identify and explain which component of internal control he is trying to
understand in the following two cases: -

(i) Whether controls in LMN Ltd. are operating as intended and they are
modified as appropriate for change in conditions.

(ii) Whether there exists proper segregation of duties in the company and the
person responsible for recording a transaction is different from the person
authorizing it. (PYQ SEP 2024)

Ans-26:

i. In this case, CA. Amit is trying to understand that whether controls in the
LMN Ltd. are operating as intended and they are modified as appropriate for
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change in conditions: He is gaining the understanding of the Monitoring of

controls component of internal control. Monitoring of controls is a process to
assess the effectiveness of internal control performance over time. It helps
in assessing the effectiveness of controls on a timely basis and taking
necessary remedial actions. It includes considering whether controls are
operating as intended and that they are modified as appropriate for change

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in conditions.
ii. In the given situation, CA Amit is trying to understand that whether there
exists a proper system of segregation of duties in the company and the person
responsible for recording a transaction is different from the person
authorising it. He is gaining an understanding of internal control of the
company. In particular, he is understanding “control activities”. When a person
recording a transaction is different from one authorizing it, he gains
confidence that there exists a system for preventing misstatements. It helps
him in gaining insight into the internal control system of the company.

Q-27: Z and Associates are the auditors of Realton Ltd., an export oriented
unit, which specializes in manufacturing oil extraction plants. Since many complex
processes are involved, they are digitizing their operations. They are
restructuring their business models which are driven by technology. Since most
of the operations of the company are automated, Z and Associates are planning
to do Digital Audit. Explain the use of digital technology in the conduct of an
audit. (PYQ SEP 2024)

Ans-27: Use of Digital Technology in the conduct of an audit: Entities are embracing
digitization as part of their operations to keep pace with changing times. New
technologies are helping companies revamp their operations and rethink the way
business is conducted. Companies are restructuring their business models driven by
technology. Automation is key to digitization.

In such a business environment, use of digital technology is being made by auditors

right from planning to expression of final opinion.

• Auditors are making use of artificial intelligence, data analytics and other latest
technologies to help understand business processes in a better way.

• By using such tools, auditors can conduct audits in a better way and devote more
attention to areas requiring greater focus.
CA INTERMEDIATE

• Digital audit is helping auditors to better identify risks making use of technology.

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Q-28: You are appointed as the auditor of a company manufacturing paints. The
company has a robust system of internal control. Most of the controls in the
company are automated and they are working effectively. However, in certain
situations, manual elements in internal controls are more suitable. What are the
circumstances where manual elements in internal controls may be more suitable?
(PYQ MAY 2024)

Ans-28: Manual elements vs automated elements in entity’s internal control: Manual

elements in internal control may be more suitable in the following circumstances:

• Where judgment and discretion are required.

• Large, unusual or non-recurring transactions.
• Circumstances where errors are difficult to define, anticipate or predict.
• In changing circumstances that require a control response outside the scope of
an existing automated control.
• In monitoring the effectiveness of automated controls.

Q-29: Mr. D an auditor, while auditing ACE Ltd., identified certain

misstatements in relation to particular class of transactions and account
balances. He had communicated same to those charged with governance and also
taken written representation for the same. State the audit documentation
required by the auditor regarding misstatements identified during the audit.

(PYQ MAY 2024)

Ans-29: Documentation regarding misstatements identified during audit: The audit

documentation shall include:

(i) The amount below which misstatements would be regarded as clearly trivial;

(ii) All misstatements accumulated during the audit and whether they have been
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corrected; and

(iii) The auditor’s conclusion as to whether uncorrected misstatements are material,

individually or in aggregate, and the basis for that conclusion.

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Q-30: CA Srishti, while auditing KSM Private Limited for the first time, utilised
software to analyse financial data, comparing amounts recorded in the financial
statements for the current audit year with the preceding two years. Her
objective was to evaluate the risk of material misstatement.

Identify the type of audit procedure performed by CA Srishti in the given case,
discuss its relevance, and explain whether an auditor’s opinion can solely rely on
such procedures. (MTP JAN 2025)

Ans-30: In the given case, CA Srishti is performing analytical procedures as risk

assessment procedures.

Analytical procedures performed as risk assessment procedures may identify

aspects of the entity of which the auditor was unaware and may assist in assessing
the risks of material misstatement in order to provide a basis for designing and
implementing responses to the assessed risks. Analytical procedures performed as
risk assessment procedures may include both financial and non-financial information.

Analytical procedures may help identify the existence of unusual transactions or

events, and amounts, ratios, and trends that might indicate matters that have
audit implications. Unusual or unexpected relationships that are identified may
assist the auditor in identifying risks of material misstatement, especially risks
of material misstatement due to fraud.
Risk assessment procedures are a basis for the identification and assessment of
risks of material misstatement at the financial statement and assertion levels Risk
assessment procedures by themselves, however, do not provide sufficient
appropriate audit evidence on which to base the audit opinion.
Thus, it can be concluded that auditor’s opinion cannot be solely based upon such
procedures.
CA INTERMEDIATE

Q-31: SA 330 states that auditor shall design and perform tests of controls to
obtain sufficient appropriate audit evidence as to operating effectiveness of
relevant controls. Briefly discuss when such tests are to be designed and
performed in accordance with SA 330?

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If an auditor intends to place greater reliance on effectiveness of a control,

state its likely effect on audit evidence to be obtained as a result of such tests
of controls. Why a higher level of assurance may be sought by an auditor about
the operating effectiveness of controls? (MTP JAN 205)

Ans-31: The auditor shall design and perform tests of controls to obtain sufficient
appropriate audit evidence as to the operating effectiveness of relevant controls
when: -

(i) The auditor’s assessment of risks of material misstatement at the assertion

level includes an expectation that the controls are operating effectively (i.e.,
the auditor intends to rely on the operating effectiveness of controls in
determining the nature, timing and extent of substantive procedures) or
(ii) Substantive procedures alone cannot provide sufficient appropriate audit
evidence at the assertion level.
In designing and performing tests of controls, the auditor shall obtain more
persuasive audit evidence, the greater the reliance the auditor places on the
effectiveness of a control.
A higher level of assurance may be sought about the operating effectiveness of
controls when the approach adopted consists primarily of tests of controls, in
particular, where it is not possible or practicable to obtain sufficient appropriate
audit evidence only from substantive procedures.

Q-32: KR & Associates, an auditor of FDP Ltd., observed that the company has
implemented various internal controls addressing financial reporting, operational
efficiency, and compliances during their preliminary evaluation. CA Karan
suggests that all controls should be assessed to mitigate the risk of material
misstatement in the financial statements, while CA Rajat is of the view that
only those controls deemed relevant to the audit should be assessed based
on professional judgment.

Comment, whether the auditor should assess all the internal controls or limit
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the assessment to only those considered relevant by the auditor during the
audit. Also, discuss the factors influencing the auditor's judgment on the
relevance of controls. (MTP JAN 2025)
Ans-32: There is a direct relationship between an entity’s objectives and the
control it implements to provide reasonable assurance about their achievement.

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FDP Ltd. has implemented internal controls addressing financial reporting,

operational efficiency, and compliance. However, not all of these objectives and
controls are relevant to the auditor’s risk assessment.

Factors relevant to the auditor’s judgment about whether a control, individually or

in combination with others, is relevant to the audit may include such matters as
the following:
• Materiality.
• The significance of the related risk.
• The size of the entity.
• The nature of the entity’s business, including its organisation and ownership
characteristics.
• The diversity and complexity of the entity’s operations.
• Applicable legal and regulatory requirements.
• The circumstances and the applicable component of internal control.
• The nature and complexity of the systems that are part of the entity’s internal
control, including the use of service organisations.
• Whether, and how, a specific control, individually or in combination with others,
prevents, or detects and corrects, material misstatement.
In the given case, CA Karan suggests that all controls should be assessed to mitigate
the risk of material misstatement in the financial statements, while CA Rajat is of
the view that only those controls deemed relevant to the audit should be assessed
based on professional judgment.
Based on the factors mentioned above, it can be concluded that the auditors should
assess only those controls deemed relevant to mitigate the risk of material
misstatement in FDP Ltd.'s financial statements.

Q-33: Calen Retail Ltd. is preparing its annual financial statements, and the
CA INTERMEDIATE

auditors are tasked with determining materiality. The company has used revenue
as the benchmark, as it is a key indicator of performance. However, Calen Retail
has recently opened new stores and closed underperforming ones, which could
significantly affect both revenue and profitability. As per given case, what

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factors should the auditors consider when selecting the most appropriate
benchmark for materiality? (MTP JAN 2025)

Ans-33: Determining materiality involves the exercise of professional judgment.

A percentage is often applied to a chosen benchmark as a starting point in
determining materiality for the financial statements as a whole. Factors that may
affect the identification of an appropriate benchmark include the following:

• The elements of the financial statements like assets, liabilities, equity,

revenue, expenses.
• Whether there are items on which the attention of the users of the particular
entity’s financial statements tends to be focused. For example, for the purpose
of evaluating financial performance users may tend to focus on profit, revenue
or net assets.
• The nature of the entity, where the entity is at in its life cycle, and the
industry and economic environment in which the entity operates, the entity’s
ownership structure and the way it is financed. For example, If an entity is
financed solely by debt rather than equity, users may put more emphasis on
assets, and claims on them, than on the entity’s earnings.
• The relative volatility of the benchmark.

Q-34: When more persuasive audit evidence is needed regarding the

effectiveness of a control, it may be appropriate to increase the extent of
testing of the control as well as the degree of reliance on controls. Discuss the
matters the auditor may consider in determining the extent of test of controls.
(MTP JAN 2025)

Ans-34: Matters the auditor may consider in determining the extent of test
of controls include the following:

• The frequency of the performance of the control by the entity during the
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period.
• The length of time during the audit period that the auditor is relying on the
operating effectiveness of the control.
• The expected rate of deviation from a control.
• The relevance and reliability of the audit evidence to be obtained regarding the

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operating effectiveness of the control at the assertion level.

The extent to which audit evidence is obtained from tests of other controls related
to the assertion.

Q-35: Knowledge of the Client’s business play an important role in developing an

overall audit. In fact, without adequate knowledge of the client’s business, a
proper audit is not possible. As per SA 315, “Identifying and Assessing the Risk
of Material Misstatement through Understanding the Entity and its
Environment”, the auditor shall obtain an understanding of the relevant industry,
regulatory and other external factors including the applicable financial reporting
framework. Substantiate with the help of examples. (MTP JAN 2025)

Ans-35: As per SA 315, “Identifying and Assessing the Risk of Material

Misstatement through Understanding the Entity and its Environment”, the auditor
shall obtain an understanding of the relevant industry, regulatory and other external
factors including the applicable financial reporting framework. Relevant industry
factors include industry conditions such as the competitive environment, supplier
and customer relationships, and technological developments.

 Examples of matters the auditor may consider include market and competition,
whether entity is engaged in seasonal activities, product technology relating
to the entity’s products. The industry in which the entity operates may give
rise to specific risks of material misstatement arising from the nature of the
business or the degree of regulation.
 Relevant regulatory factors include the regulatory environment. The
regulatory environment includes, among other matters, the applicable financial
reporting framework and the legal and political environment.
 Examples of matters the auditor may consider include accounting principles
and industry specific practices, regulatory framework for a regulated
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industry, legislation and regulation that significantly affect the entity’s

operations, including direct supervisory activities, taxation, government
policies currently affecting the conduct of the entity’s business,
environmental requirements affecting the industry and the entity’s business.
 Examples of other external factors affecting the entity that the auditor may
consider include the general economic conditions, interest rates and

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availability of financing, and inflation etc.

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Chapter-4: Audit Evidence

Q-1: Auditing is a logical process. An auditor is called upon to assess the

actualities of the situation, review the statements of account and give an expert
opinion about the truth and fairness of such accounts. This he cannot do unless
he has examined the financial statements objectively. He needs evidence to
obtain information for arriving at his judgment. Discuss explaining clearly the
meaning of audit evidence in detail. (MTP 4 Marks Oct 2023, RTP Nov 2019)

Ans-1: Auditing is a logical process. An auditor is called upon to assess the

actualities of the situation, review the statements of account and give an expert
opinion about the truth and fairness of such accounts. This he cannot do unless he
has examined the financial statements objectively.
Objective examination connotes critical examination and scrutiny of the accounting
statements of the undertaking with a view to assessing how far the statements
present the actual state of affairs in the correct context and whether they give a
true and fair view about the financial results and state of affairs. An opinion founded
on a rather reckless and negligent examination and evaluation may expose the auditor
to legal action with consequential loss of professional standing and prestige.
He needs evidence to obtain information for arriving at his judgment.

Audit evidence may be defined as the information used by the auditor in arriving at
the conclusions on which the auditor’s opinion is based. Audit evidence includes both
information contained in the accounting records underlying the financial statements
and other information.
Explaining this further, audit evidence includes:-

1. Information contained in the accounting records: Accounting records include

the records of initial accounting entries and supporting records, such as
checks and records of electronic fund transfers; invoices; contracts; the
general and subsidiary ledgers, journal entries and other adjustments to the
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financial statements that are not reflected in journal entries; and records
such as work sheets and spreadsheets supporting cost allocations,
computations, reconciliations and disclosures.

2. Other information that authenticates the accounting records and also

supports the auditor’s rationale behind the true and fair presentation of the

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financial statements: Other information which the auditor may use as audit
evidence includes, for example minutes of the meetings, written
confirmations from trade receivables and trade payables, manuals containing
details of internal control etc. A combination of tests of accounting records
and other information is generally used by the auditor to support his opinion
on the financial statements.

Q-2: Audit evidence is necessary to support the auditor’s opinion and report. It
is cumulative in nature and is primarily obtained from audit procedures performed
during the course of the audit. Most of the auditor’s work in forming the
auditor’s opinion consists of obtaining and evaluating audit evidence. Explain

(RTP Nov 2019 & Nov 2018)

Ans-2: Audit evidence is necessary to support the auditor’s opinion and report. It is
cumulative in nature and is primarily obtained from audit procedures performed
during the course of the audit. It may, however, also include information obtained
from other sources such as previous audits. In addition to other sources inside and
outside the entity, the entity’s accounting records are an important source of audit
evidence. Also, information that may be used as audit evidence may have been
prepared using the work of a management’s expert. Audit evidence comprises both
information that supports and corroborates management’s assertions, and any
information that contradicts such assertions. In addition, in some cases the absence
of information (for example, management’s refusal to provide a requested
representation) is used by the auditor, and therefore, also constitutes audit
evidence.
Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and
evaluating audit evidence. Audit procedures to obtain audit evidence can include
inspection, observation, confirmation, recalculation, re-performance and analytical
procedures, often in some combination, in addition to inquiry. Although inquiry may
provide important audit evidence, and may even produce evidence of a misstatement,
inquiry alone ordinarily does not provide sufficient audit evidence of the absence of
a material misstatement at the assertion level, nor of the operating effectiveness
of controls.
CA INTERMEDIATE

As explained in SA 200, “Overall Objectives of the Independent Auditor and the

Conduct of an Audit in Accordance with Standards on Auditing”, reasonable
assurance is obtained when the auditor has obtained sufficient appropriate audit
evidence to reduce audit risk (i.e., the risk that the auditor expresses an
inappropriate opinion when the financial statements are materially misstated) to an
acceptably low level. The sufficiency and appropriateness of audit evidence are

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interrelated.

Q-3: When information to be used as audit evidence has been prepared using
the work of a management’s expert and having regard to the significance of
expert’s work for the auditor’s purposes, explain the considerations auditor would
consider for the purposes of his audit. (RTP May 2021)
Ans-3: When information to be used as audit evidence has been prepared using the
work of a management’s expert, the auditor shall, to the extent necessary, having
regard to the significance of that expert’s work for the auditor’s purposes:
i. Evaluate the competence, capabilities and objectivity of that expert
ii. Obtain an understanding of the work of that expert and
iii. Evaluate the appropriateness of that expert’s work as audit evidence for the
relevant assertion.

Q-4: Audit evidence includes both information contained in the accounting

records underlying the financial statements and other information. Discuss. (RTP
May 2018)

Ans-4: Audit evidence may be defined as the information used by the auditor in
arriving at the conclusions on which the auditor’s opinion is based. Audit evidence
includes both information contained in the accounting records underlying the
financial statements and other information.

Explaining this further, audit evidence includes: -

1. Information contained in the accounting records: Accounting records include
the records of initial accounting entries and supporting records, such as checks
and records of electronic fund transfers; invoices; contracts; the general and
subsidiary ledgers, journal entries and other adjustments to the financial
statements that are not reflected in journal entries; and records such as work
sheets and spreadsheets supporting cost allocations, computations,
reconciliations and disclosures.
2. Other information that authenticates the accounting records and also
supports the auditor’s rationale behind the true and fair presentation of the
CA INTERMEDIATE

financial statements: Other information which the auditor may use as audit
evidence includes, for example minutes of the meetings, written confirmations
from trade receivables and trade payables, manuals containing details of internal
control etc. A combination of tests of accounting records and other information
is generally used by the auditor to support his opinion on the financial
statements.
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Q-5: While conducting the audit of Pummy Limited, the statutory auditors
collected written representations from the Management. The audit was finalized
in addition to other audit procedures but, without making any inquiries, as the
statutory auditors were short of time. In the light of this information, state
the importance of inquiry as one of the methods of collecting Audit Evidence.
(RTP May 2022)
Or

Evaluating responses to inquiries is an integral part of the inquiry process. Explain.

(RTP May 2018)

Ans-5: Inquiry: As per SA 500 Audit Evidence

i. Inquiry consists of seeking information of knowledgeable persons, financial

and non- financial, within the entity or outside the entity. Inquiry is used
extensively throughout the audit in addition to other audit procedures.
ii. Inquiries may range from formal written inquiries to informal oral inquiries.
Evaluating responses to inquiries is an integral part of the inquiry process.
iii. Responses to inquiries may provide the auditor with information not previously
possessed or with corroborative audit evidence. Alternatively, responses
might provide information that differs significantly from other information
that the auditor has obtained.
iv. Although corroboration of evidence obtained through inquiry is often of
particular importance, in the case of inquiries about management intent, the
information available to support management’s intent may be limited. In these
cases, understanding management’s past history of carrying out its stated
intentions, management’s stated reasons for choosing a particular course of
action, and management’s ability to pursue a specific course of action may
provide relevant information to corroborate the evidence obtained through
inquiry.

Q-6: Manya Textiles is manufacturer of bed sheets, curtain cloths, other

handloom items etc. having its plant at Panipat. Auditors SJ & Co. is having
CA INTERMEDIATE

doubts over the reliability of information given to him as audit evidence. Also,
auditors observed inconsistent information while conducting audit. Guide the
auditor as to how they should proceed in the given situation. (RTP Nov 2022)

Ans -6: If:

a. audit evidence obtained from one source is inconsistent with that obtained

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from another; or
b. the auditor has doubts over the reliability of information to be used as audit
evidence, the auditor shall determine what modifications or additions to audit
procedures are necessary to resolve the matter, and shall consider the effect
of the matter, if any, on other aspects of the audit.

Q-7: CA K audited the books of accounts of E Ltd. for the financial year 2020
-2021. The auditor used an audit procedure according to which all the documents
and records maintained by the company were checked in detail to obtain audit
evidence. Explain the audit procedure used by the auditor and its reliability. (3
Marks, Dec 2021)
Ans-7: Audit Procedure:
Inspection involves examining records or documents, whether internal or external,
in paper form, electronic form, or other media, or a physical examination of an asset.
Inspection of records and documents provides audit evidence of varying degrees of
reliability, depending on their nature and source and, in the case of internal records
and documents, on the effectiveness of the controls over their production.
inspecting an executed contract may provide audit evidence relevant to the entity’s
application of accounting policies, such as revenue recognition. Inspection of tangible
assets may provide reliable audit evidence with respect to their existence, but not
necessarily about the entity’s rights and obligations or the valuation of the assets.
Inspection of individual inventory items may accompany the observation of inventory
counting.
In view of above, it can be concluded that CA K used Inspection as an audit procedure.

Q-8: SPR Ltd has been into the media business since 1990. During the F.Y
2021-2022 many notices were received by the company for hurting public
sentiments and financial claims were filed against the company. As an auditor
of the company, you requested the management for arranging the meeting with
company's external legal counsel. Management is of the view that such meetings
are necessary in some certain circumstances only. Can you list down those certain
circumstances? (3 Marks May 2022)
Ans-8: Circumstances when becoming necessary to meet with external legal counsel:
CA INTERMEDIATE

In the given case of SPR Ltd., Auditor requested the management for meeting with
SPR’s external legal counsel.
In certain circumstances, the auditor also may judge it necessary to meet with the
entity’s external legal counsel to discuss the likely outcome of the litigation or claims.

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This may be the case, for example, where:

(i) The auditor determines that the matter is a significant risk.
(ii) The matter is complex.
(iii) There is disagreement between management and the entity’s external legal
counsel.
Ordinarily, such meetings require management’s permission and are held with a
representative of management in attendance.

Q-9: The objective of auditing is to design and perform audit procedures in such
a way as to enable the auditor to obtain sufficient appropriate audit evidence
to be able to draw reasonable conclusions on which to base the auditor's opinion.
This can be obtained by performing which procedures? Name the types of audit
procedures the auditor can perform to obtain audit evidence? (4 Marks Nov 22)
Ans-9: Audit Procedures to Obtain Audit Evidence: Audit evidence to draw
reasonable conclusions on which to base the auditor’s opinion is obtained by
performing:
a. Risk assessment procedures; and
b. Further audit procedures, which comprise:
i. Test of controls, when required by the SAs or when the auditor has
chosen to do so; and
ii. Substantive procedures, including tests of details and substantive
analytical procedures.
Audit procedures to obtain audit evidence can include
a. Inspection

b. Observation
c. External Confirmation
d. Recalculation
e. Reperformance
f. Analytical Procedures

g. Inquiry
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Q-10: Explain the meaning, objectives and scope of internal audit functions as
per SA 610. Also discuss who can be appointed as Internal Auditor? (RTP May
2019)

Ans-10: Who can be appointed as Internal Auditor? As per section 138, the
internal auditor shall either be a chartered accountant or a cost accountant

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(whether engaged in practice or not), or such other professional as may be decided

by the Board to conduct internal audit of the functions and activities of the
companies. The internal auditor may or may not be an employee of the company.
Internal audit function: A function of an entity that performs assurance and
consulting activities designed to evaluate and improve the effectiveness of the
entity’s governance, risk management and internal control processes.
The objectives and scope of internal audit functions: As per SA-610, “Using the
Work of an Internal Auditor”, the objectives of internal audit functions vary widely
and depend on the size and structure of the entity and the requirements of
management and, where applicable, those charged with governance.
The objectives and scope of internal audit functions typically include assurance and
consulting activities designed to evaluate and improve the effectiveness of the
entity’s governance processes, risk management and internal control such as the
following:
1. Activities Relating to Governance: The internal audit function may assess the
governance process in its accomplishment of objectives on ethics and values,
performance management and accountability, communicating risk and control
information to appropriate areas of the organization and effectiveness of
communication among those charged with governance, external and internal
auditors, and management.
2. Activities Relating to Risk Management: The internal audit function may assist
the entity by identifying and evaluating significant exposures to risk and
contributing to the improvement of risk management and internal control
(including effectiveness of the financial reporting process). The internal audit
function may perform procedures to assist the entity in the detection of fraud.
3. Activities Relating to Internal Control
i. Evaluation of internal control. The internal audit function may be
assigned specific responsibility for reviewing controls, evaluating their
operation and recommending improvements thereto. In doing so, the
internal audit function provides assurance on the control. For example,
the internal audit function might plan and perform tests or other
procedures to provide assurance to management and those charged
with governance regarding the design, implementation and operating
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effectiveness of internal control, including those controls that are

relevant to the audit.
ii. Examination of financial and operating information. The internal
audit function may be assigned to review the means used to identify,
recognize, measure, classify and report financial and operating
information, and to make specific inquiry into individual items, including

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detailed testing of transactions, balances and procedures.

iii. Review of operating activities. The internal audit function may be
assigned to review the economy, efficiency and effectiveness of
operating activities, including nonfinancial activities of an entity.
iv. Review of compliance with laws and regulations. The internal audit
function may be assigned to review compliance with laws, regulations
and other external requirements, and with management policies and
directives and other internal requirements.

Q-11: The sample size can be determined by the application of a statistically -

based formula or through the exercise of professional judgment. When
circumstances are similar, the effect on sample size of factors will be similar
regardless of whether a statistical or non-statistical approach is chosen.
Explain Stating the examples of factors that the auditor may consider when
determining the sample size for tests of controls. (MTP 5 Marks Oct 2018, MTP
4 Marks March 2019, MTP 3 Marks May 2020)

Ans-11: The level of sampling risk that the auditor is willing to accept affects the
sample size required. The lower the risk the auditor is willing to accept, the greater
the sample size will need to be.
The sample size can be determined by the application of a statistically-based
formula or through the exercise of professional judgment. When circumstances are
similar, the effect on sample size of factors will be similar regardless of whether a
statistical or non-statistical approach is chosen.
Examples of Factors Influencing Sample Size for Tests of Controls: The following
are factors that the auditor may consider when determining the sample size for tests
of controls. These factors, which need to be considered together, assume the
auditor does not modify the nature or timing of tests of controls or otherwise modify
the approach to substantive procedures in response to assessed risks.
▪ When there is an increase in the extent to which the auditor’s risk assessment
takes into account relevant controls. The more assurance the auditor intends
to obtain from the operating effectiveness of controls, the lower the auditor’s
assessment of the risk of material misstatement will be, and the larger the
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sample size will need to be. When the auditor’s assessment of the risk of
material misstatement at the assertion level includes an expectation of the
operating effectiveness of controls, the auditor is required to perform tests
of controls. Other things being equal, the greater the reliance the auditor
places on the operating effectiveness of controls in the risk assessment, the
greater is the extent of the auditor’s tests of controls (and therefore, the

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sample size is increased). Thus, sample size will increase.

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

Q-12: XYZ Ltd is engaged in trading of electronic goods and having huge
accounts receivables. For analysing the whole accounts receivables, auditor
wanted to use sampling technique. In considering the characteristics of the
population from which the sample will be drawn, the auditor determines that
stratification or value-weighted selection technique is appropriate. SA 530
provides guidance to the auditor on the use of stratification and value- weighted
sampling techniques. Advise the auditor in accordance with SA 530. (MTP 4
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Marks Oct 19, RTP May 18)

Ans-12: Stratification and Value-Weighted Selection: In considering the
characteristics of the population from which the sample will be drawn, the auditor
may determine that stratification or value-weighted selection technique is
appropriate. SA 530 provides guidance to the auditor on the use of stratification
and value-weighted sampling techniques.

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Stratification: Audit efficiency may be improved if the auditor stratifies a

population by dividing it into discrete sub-populations which have an identifying
characteristic. The objective of stratification is to reduce the variability of items
within each stratum and therefore allow sample size to be reduced without
increasing sampling risk.
When performing tests of details, the population is often stratified by monetary
value. This allows greater audit effort to be directed to the larger value items, as
these items may contain the greatest potential misstatement in terms of
overstatement. Similarly, a population may be stratified according to a particular
characteristic that indicates a higher risk of misstatement, for example, when
testing the allowance for doubtful accounts in the valuation of accounts receivable,
balances may be stratified by age.
The results of audit procedures applied to a sample of items within a stratum can
only be projected to the items that make up that stratum. To draw a conclusion on
the entire population, the auditor will need to consider the risk of material
misstatement in relation to whatever other strata make up the entire population.

For example, 20% of the items in a population may make up 90% of the value of an
account balance. The auditor may decide to examine a sample of these items. The
auditor evaluates the results of this sample and reaches a conclusion on the 90% of
value separately from the remaining 10% (on which a further sample or other means
of gathering audit evidence will be used, or which may be considered immaterial).
If a class of transactions or account balance has been divided into strata, the
misstatement is projected for each stratum separately. Projected misstatements
for each stratum are then combined when considering the possible effect of
misstatements on the total class of transactions or account balance.

Value-Weighted Selection: When performing tests of details it may be efficient

to identify the sampling unit as the individual monetary units that make up the
population. Having selected specific monetary units from within the population, for
example, the accounts receivable balance, the auditor may then examine the
particular items, for example, individual balances, that contain those monetary
units. One benefit of this approach to defining the sampling unit is that audit effort
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is directed to the larger value items because they have a greater chance of selection,
and can result in smaller sample sizes.

This approach may be used in conjunction with the systematic method of sample
selection and is most efficient when selecting items using random selection.

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Q-13: Audit testing done through Statistical sampling is more scientific than
testing based entirely on the auditor’s own judgment because it involves use of
mathematical laws of probability in determining the appropriate sample size in
varying circumstances. Explain and also state advantages of Statistical sampling.
(MTP 4 Marks Oct 20)
Ans-13:
1. size of the area (universe) tested.
2. The sample selection is more objective and thereby more defensible.
3. The method provides a means of estimating the minimum sample size associated
with a specified risk and precision.
4. It provides a means for deriving a “calculated risk” and corresponding precision
(sampling error) i.e. the probable difference in result due to the use of a sample
in lieu of examining all the records in the group (universe), using the same audit
procedures.
5. It may provide a better description of a large mass of data than a complete
examination of all the data, since non-sampling errors such as processing and
clerical mistakes are not as large.
6. It is widely accepted way of sampling as it is more scientific, without personal
bias and the result of sample can be evaluated and projected in more reliable way.

Q-14: CA X is not sure about the kind of Sampling method to be used for audit
of a company. Advise him about the choice of methods (name of methods only)
of Sampling to be used in various circumstances. Also explain briefly the
advantages of the Sampling to be used by him in auditing. (MTP 3 Marks Nov
2021)
Ans-14: Sample Selection:
CA. X should obtain the knowledge before using the sampling methods. The principal
methods are as follows:
1. Random selection.
2. Systematic selection.
3. Monetary Unit sampling.
4. Haphazard selection.
Block selection.
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5.

Advantages of Statistical Sampling in Auditing:

i. The amount of testing (sample size) does not increase in proportion to the
increase in the size of the area (universe) tested.
ii. The sample selection is more objective and thereby more defensible.
iii. The method provides a means of estimating the minimum sample size

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associated with a specified risk and precision.

iv. It provides a means for deriving a "calculated risk" and corresponding precision
(sampling error) i.e. the probable difference in result due to the use of a
sample in lieu of examining all the records in the group (universe), using the
same audit procedures.
v. It may provide a better description of a large mass of data than a complete
examination of all the data, since non-sampling errors such as processing and
clerical mistakes are not as large.

Q-15: ABC Ltd is a Large Company with huge purchase and sales transactions.
Which sampling approach is recommended in such a company? Explain giving
features of such sampling approach along with example (MTP 3 Marks March
2022)
Ans-15: In larger organisations, with huge transactions, statistical sampling is
always recommended as it is unbiased, and the samples selected are not prejudged.
Features/Characteristics of Statistical Sampling:
1. Audit testing done through this approach is more scientific than testing based
entirely on the auditor’s own judgment because it involves use of mathematical
laws of probability in determining the appropriate sample size in varying
circumstances.
2. Statistical sampling has reasonably wide application where a population to be
tested consists of a large number of similar items and more in the case of
transactions involving compliance testing, trade receivables’ confirmation,
payroll checking, vouching of invoices and petty cash vouchers.
3. There Is no personal bias of the auditor in case of statistical sampling. Since
it is scientific, the results of sample can be evaluated and projected on the
whole population in a more reliable manner.
For Example: An auditor while verifying the Purchases during the year
realised that the purchase transactions in that year are more than 45000 in
number, then in such case, statistical sampling will be highly recommended in
the audit program. Random Sampling (discussed ahead in this topic) is the
method you decide to choose sample in such a situation.
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Q-16: There is a growing realisation that the traditional approach to audit is

economically wasteful because all efforts are directed to check all transactions
without exception. Explain. (MTP 4 Marks April 2022, RTP Nov 2019)
Ans-16: No conscious effort in human society is divested of economic
considerations and auditing is no exception. There is a growing realisation that the

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traditional approach to audit is economically wasteful because all efforts are

directed to check all transactions without exception. This invariably leads to more
emphasis on routine checking, which often is not necessary in view of the time and
the cost involved. With the shift in favour of formal internal controls in the
management of affairs of organisations, the possibilities of routine errors and
frauds have greatly diminished and auditors often find extensive routine checking
as nothing more than a ritual because it seldom reveals anything material. Now the
approach to audit and the extent of checking are undergoing a progressive change in
favour of more attention towards the questions of principles and controls with a
curtailment of non-consequential routine checking. By routine checking we
traditionally think of extensive checking and vouching of all entries.

Q-17: It is imperative for the auditor to project misstatements for the

population while performing audit procedures through sampling. Comment. (MTP
3 Marks Oct 2023, PYP 3 Marks, Nov 2020, RTP May 2020, May 2019 & Nov
2023)
Ans-17:
i. The auditor is required to project misstatements for the population to obtain a
broad view of the scale of misstatement but this projection may not be
sufficient to determine an amount to be recorded.
ii. When a misstatement has been established as an anomaly, it may be excluded
when projecting misstatements to the population. However, the effect of any
such misstatement, if uncorrected, still needs to be considered in addition to
the projection of the non-anomalous misstatements.
iii. For tests of details, the auditor shall project misstatements found in the sample
to the population whereas for tests of controls, no explicit projection of
deviations is necessary since the sample deviation rate is also the projected
deviation rate for the population as a whole.

Q-18: Explain the sampling method which involves selection of a block(s) of

contiguous items from within the population. Also give example (RTP May 2020)
Ans-18: Block Sampling: This method involves selection of a block(s) of contiguous
items from within the population. Block selection cannot ordinarily be used in audit
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sampling because most populations are structured such that items in a sequence can
be expected to have similar characteristics to each other, but different
characteristics from items elsewhere in the population. Although in some
circumstances it may be an appropriate audit procedure to examine a block of items,
it would rarely be an appropriate sample selection technique when the auditor intends
to draw valid inferences about the entire population based on the sample.

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Example
Take the first 200 sales invoices from the sales day book in the month of
September; alternatively take any four blocks of 50 sales invoices. Therefore, once
the first item in the block is selected, the rest of the block follows items to the
completion.

Q-19: Krishna Cycles Ltd is engaged in manufacturing of different type of

Bicycles. Ongoing through its financial statements for the past years, it is
observed that inventory is material to the financial statements. You as an auditor
of the company wanted to obtain sufficient appropriate audit evidence regarding
the existence and condition of the inventory as appearing in the financial
statements. Discuss, how would you proceed as an auditor. (MTP 5 Marks Aug
2018 & Oct 2018, March 2019, May2020)
Ans-19: When inventory is material to the financial statements, the auditor shall
obtain sufficient appropriate audit evidence regarding the existence and condition
of inventory by:
a. Attendance at physical inventory counting, unless impracticable, to
I. Evaluate management’s instructions and procedures for recording and
controlling the results of the entity’s physical inventory counting;
II. Observe the performance of management’s count procedures;
III. Inspect the inventory; and
IV. Perform test counts; and
b. Performing audit procedures over the entity’s final inventory records to
determine whether they accurately reflect actual inventory count results.

Q-20: While conducting audit of Vee Ltd, CA Aman, auditor of the company,
found that some goods are lying with third party for a long period. Advise Aman
how will he verify them. (MTP 4 Marks Oct 2021)

Ans-20: When inventory under the custody and control of a third party is:

1. Request confirmation from the third party as to the quantities and condition
of inventory held on behalf of the entity.
Perform inspection or other audit procedures appropriate in the
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2.
circumstances.

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Q-21: TRM Ltd. is a company engaged in manufacture of beauty products. It

has hair care segment, skin care segment and kids’ beauty products. The auditor
wants to obtain sufficient appropriate audit evidence regarding the presentation
and disclosure of segment information in accordance with the applicable financial
reporting framework. Suggest the audit procedures in the given case. (MTP 4
Marks March 2021)
Ans-21: The auditor shall obtain sufficient appropriate audit evidence regarding
the presentation and disclosure of segment information in accordance with the
applicable financial reporting framework by:
1. Obtaining an understanding of the methods used by management in
determining segment information. Further,
i. Evaluating whether such methods are likely to result in disclosure in
accordance with the applicable financial reporting framework; and
ii. Where appropriate, testing the application of such methods; and
2. Performing analytical procedures or other audit procedures appropriate in the
circumstances.

Q-22: GPS & Co, Chartered Accountants, conducting the audit of Pratibha
Ltd., a listed company for the year ended 31.03.2022 is concerned with the
presentation and disclosure of segment information included in Company's
Annual Report. GPS & Co wanted to ensure that methods adopted by
management for determining segment information have resulted in disclosure in
accordance with the applicable financial reporting framework. Guide GPS & Co
with 'Examples of Matters' that may be relevant when obtaining an
understanding of the methods used by the management with reference to the
relevant Standards on Auditing. (RTP May 2022)

Ans-22: The auditors, GPS & Co wanted to ensure and obtain sufficient
appropriate audit evidence regarding the presentation and disclosure of segment
information in accordance with the applicable financial reporting framework by
obtaining an understanding of the methods used by management in determining
segment information. SA 501 guides in this regard. As per SA 501- “Audit
Evidence— Specific Considerations for Selected Items”, example of matters that
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may be relevant when obtaining an understanding of the methods used by

management in determining segment information and whether such methods are
likely to result in disclosure in accordance with the applicable financial reporting
framework include:
i. Sales, transfers and charges between segments, and elimination of inter -
segment amounts.

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ii. Comparisons with budgets and other expected results, for example,
operating profits as a percentage of sales.
iii. The allocation of assets and costs among segments.
iv. Consistency with prior periods, and the adequacy of the disclosures
with respect to inconsistencies.

Q-23: When using external confirmation procedures, the auditor shall maintain
control over external confirmation requests including sending the requests,
including follow -up requests when applicable, to the confirming party. Explain
the other points as to when using external confirmation procedures, the auditor
would be required to maintain control over external confirmation requests. (RTP
May ’20, Old & New SM)

Ans-23: When using external confirmation procedures, the auditor shall maintain
control over external confirmation requests, including:
a. Determining the information to be confirmed or requested;
b. Selecting the appropriate confirming party;
c. Designing the confirmation requests, including determining that requests
are properly addressed and contain return information for responses to be sent
directly to the auditor; and
d. Sending the requests, including follow-up requests when applicable, to the
confirming party.

Q-24: CA Rohit is appointed as an auditor of Grace Ltd., he wants to design a

suitable confirmation request letter for a few debtors of Grace Ltd. As a senior
auditor of the firm, explain to him with reference to SA 505 "External
Confirmation" all the conditions that should be present to use Negative
Confirmation requests as the sole substantive audit procedure to address an
assessed risk of material misstatement at the assertion level. (PYP 4 Marks,
July 2021)
Ans-24: Negative confirmations are a request that the confirming party respond
directly to the auditor only if the confirming party disagrees with the information
provided in the request. Negative information provides less persuasive audit evidence
than positive confirmations. Accordingly, CA Rohit, Auditor of Grace Ltd, shall not
CA INTERMEDIATE

use negative confirmation requests as the sole substantive audit procedure to

address an assessed risk of material misstatement at the assertion level unless all of
the following are present:
a. The auditor has assessed the risk of material misstatement as low and has
obtained sufficient appropriate audit evidence regarding the operating
effectiveness of controls relevant to the assertion

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b. The population of items subject to negative confirmation procedures

comprises a large number of small, homogeneous, account balances,
transactions or conditions
c. A very low exception rate is expected; and
d. The auditor is not aware of circumstances or conditions that would cause
recipients of negative confirmation requests to disregard such requests.

Q-25: CA P is the auditor of MN Ltd. While scrutinising the accounts of MN

Ltd., he observed that the company had large volume of Trade payable
outstanding in the Balance sheet as on 31st March, 2023 for which external
confirmations are not available, CA P wants to send external confirmation
request to selected Trade payables but management of MN Ltd. refused for
the same. Discuss how CA P should deal in this regard as per relevant Standard
on Auditing. (PYP 4 Marks May2023, PYP 4 Marks, Nov 2020)
Ans-25: If management refuses to allow the auditor to send a confirmation request,
CA P should deal in this regard in the manner prescribed in SA 505 explained
hereunder:

a. Inquire as to management’s reasons for the refusal and seek audit evidence as
to their validity and reasonableness
b. Evaluate the implications of management’s refusal on the auditor’s assessment
of the relevant risks of material misstatement, including the risk of fraud, and
on the nature, timing and extent of other audit procedures and
c. Perform alternative audit procedures designed to obtain relevant and reliable
audit evidence.
If the auditor concludes that management’s refusal to allow the auditor to send
a confirmation request is unreasonable or the auditor is unable to obtain relevant
and reliable audit evidence from alternative audit procedures, the auditor shall
communicate with those charged with governance in accordance with SA 260.

The auditor shall also determine the implications for the audit and the auditor’s
opinion in accordance with SA 705.

Q-26: M/s PQR and associates are the statutory auditors of TUV Ltd. for the
FY 2020- 21-. They have been appointed as statutory auditors of TUV Ltd.
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for the first time. What is the objective of the engagement partner in terms
of SA 510? (Old & New SM)
Ans-26: In conducting an initial audit engagement, the objective of the auditor with
respect to opening balances is to obtain sufficient appropriate audit evidence about
whether:

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a. Opening balances contain misstatements that materially affect the current

period’s financial statements; and
b. Appropriate accounting policies reflected in the opening balances have been
consistently applied in the current period’s financial statements, or changes
thereto are properly accounted for and adequately presented and disclosed in
accordance with the applicable financial reporting framework.

Q-27: M/s Pankaj & Associates, Chartered Accountants, have been appointed
as an auditor of ABC Limited. CA Pankaj did not apply any audit procedures
regarding opening balances. He argued that since financial statements were
audited by the predecessor auditor therefore he is not required to verify them.
Is CA Pankaj correct in his approach? (5 Marks, Nov ’18, Old & New SM)

Ans-27: Initial audit engagement is an engagement in which either

i. The financial statements for the prior period were not audited; or
ii. The financial statements for the prior period were audited by a predecessor
auditor.
From the above, it is quite clear that CA Pankaj is not correct in his approach
and therefore would be required to follow the initial audit engagement and also
apply audit procedures regarding opening balances.
Audit Procedures regarding Opening Balances; The auditor shall read the most
recent financial statements, if any, and the predecessor auditor’s report thereon, if
any, for information relevant to opening balances, including disclosures. The auditor
shall obtain sufficient appropriate audit evidence about whether the opening
balances contain misstatements that materially affect the current period’s financial
statements by:
a. Determining whether the prior period’s closing balances have been correctly
brought forward to the current period or, when appropriate, any adjustments
have been disclosed as prior period items in the current year’s Statement of
Profit and Loss;
b. Determining whether the opening balances reflect the application of
appropriate accounting policies; and
c. Performing one or more of the following:
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I. Where the prior year financial statements were audited, perusing the
copies of the audited financial statements including the other relevant
documents relating to the prior period financial statements;
II. Evaluating whether audit procedures performed in the current period
provide evidence relevant to the opening balances; or
III. Performing specific audit procedures to obtain evidence regarding the

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opening balances.

Q-28: The auditor has a responsibility to perform audit procedures to identify,

assess and respond to the risks of material misstatement arising from the
entity’s failure to appropriately account for related party relationships,
transactions or balances.
During the audit, the auditor should maintain alertness for related party
information while reviewing records and documents. He may inspect the records
or documents that may provide information about related party relationships and
transactions. Explain in detail with examples. (RTP Nov 2021, MTP Oct 2023)

Ans-28: During the audit, the auditor should maintain alertness for related party
information while reviewing records and documents. He may inspect the following
records or documents that may provide information about related party
relationships and transactions, for example:
1. Entity income tax returns.
2. Information supplied by the entity to regulatory authorities.
3. Shareholder registers to identify the entity’s principal shareholders.
4. Statements of conflicts of interest from management and those charged with
governance.
5. Records of the entity’s investments and those of its pension plans.
6. Contracts and agreements with key management or those charged with
governance.
7. Significant contracts and agreements not in the entity’s ordinary course of
business.
8. Specific invoices and correspondence from the entity’s professional advisors.
9. Life insurance policies acquired by the entity.
10. Significant contracts re-negotiated by the entity during the period.
11. Internal auditors’ reports.
12. Documents associated with the entity’s filings with a securities regulator e.g.,
prospectuses)

Q-29: The nature of related party relationships and transactions may, in some
circumstances, give rise to higher risks of material misstatement of the financial
CA INTERMEDIATE

statements than transactions with unrelated parties. Explain with the help of at
least three examples. (RTP May 2020, Old & New SM)

Ans-29: Many related party transactions are in the normal course of business. In
such circumstances, they may carry no higher risk of material misstatement of the
financial statements than similar transactions with unrelated parties. However, the

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nature of related party relationships and transactions may, in some circumstances,

give rise to higher risks of material misstatement of the financial statements than
transactions with unrelated parties.
Example
▪ Related parties may operate through an extensive and complex range of
relationships and structures, with a corresponding increase in the complexity
of related party transactions.
▪ Information systems may be ineffective at identifying or summarizing
transactions and outstanding balances between an entity and its related
parties.
▪ Related party transactions may not be conducted under normal market terms
and conditions; for example, some related party transactions may be
conducted with no exchange of consideration.

Q-30: CA Amar wants to verify the payments made by XYZ Ltd. on account of
building rent during the FY 2020-21. The rent amounts to Rs.50,000/- per
month for the year. The monthly rent payments are consistent with the rent
agreement. However, the other companies in the similar industry are paying rent
of Rs. 10,000/- per month for a similar location. How will applying the analytical
procedures impact the verification process of such rental payments by XYZ Ltd.?
(MTP 3 Marks April 2021, Old & New SM)
Ans-30: If CA Amar checks in detail the monthly rent payments, he may find that
such payments are consistent with the rent agreement i.e. XYZ Ltd. paid Rs. 50,000/-
per month as rent and the same is getting reflected in the rent agreement. Here,
CA Amar may not be able to find out the inconsistency in the rent payment with
respect to rent payment prevalent in the similar industry for rent of the similar
location. If CA Amar applies analytical procedure i.e. compares the rent payment by
XYZ Ltd. with the similar payments made by companies in similar industry and
similar area, he will notice an inconsistency in such rent payments as the other
companies are paying a very less monthly rent in similar industry for similar area.
However, if CA Amar does not make such comparison and only checks the monthly
payments and rent agreement of XYZ Ltd., he would not have found such
inconsistency and as such the misstatement may remain undetected.
CA INTERMEDIATE

Q-31: Mention the Analytical Review procedures that may be useful as a means
of obtaining audit evidence regarding various assertions relating to Trade
receivables, loans and advances. (MTP 4 Marks Oct 2021)

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Ans-31: Analytical Review Procedures: The following analytical review procedures

may often be helpful as a means of obtaining audit evidence regarding the various
assertions relating to trade receivables, loans and advances-

i. comparison of closing balances of trade receivables, loans and advances with

the corresponding figures for the previous year
ii. comparison of the relationship between current year trade receivable
balances and the current year sales with the corresponding budgeted figures,
if available
iii. comparison of actual closing balances of trade receivables, loans and
advances with the corresponding budgeted figures, if available
iv. comparison of current year’s ageing schedule with the corresponding figures
for the previous year
v. comparison of significant ratios relating to trade receivables, loans and
advances with similar ratios for other firms in the same industry, if available
vi. comparison of significant ratios relating to trade receivables, loans and
advances with the industry norms, if available.

Q-32: For the purposes of the SAs, the term “analytical procedures” means
evaluations of financial information through analysis of plausible relationships
among both financial and non- financial data. Explain giving examples of both.
(RTP Nov 2021)
Ans-32: Analytical procedures include the consideration of comparisons of the
entity’s financial information with, for example:
➢ Comparable information for prior periods.
➢ Anticipated results of the entity, such as budgets or forecasts, or expectations
of the auditor, such as an estimation of depreciation.
➢ Similar industry information, such as a comparison of the entity’s ratio of
sales to accounts receivable with industry averages or with other entity is of
comparable size in the same industry.

Analytical procedures also include consideration of relationships, for example:

➢ Among elements of financial information that would be expected to conform
to a predictable pattern based on the entity’s experience, such as gross
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margin percentages.
➢ Between financial information and relevant non-financial information, such
as payroll costs to number of employees.

Q-33: CA Kanika audited books of accounts of Engineering Ltd. for the

financial year 2022-2023. The auditor used an audit procedure according to
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which all the documents and records maintained by the company were checked
in detail to obtain audit evidence. Explain the audit procedure used by the
auditor. Comment on reliability of audit evidence obtained by performing such
an audit procedure in some situations. (RTP May 2024)

Ans-33: Audit Procedure:

Inspection involves examining records or documents, whether internal or external,

in paper form, electronic form, or other media, or a physical examination of an asset.
In view of above, it can be concluded that CA Kanika used Inspection as an audit
procedure.

Inspection of records and documents provides audit evidence of varying degrees of

reliability, depending on their nature and source and, in the case of internal
records and documents, on the effectiveness of the controls over their production.

Example of inspection used as a test of controls is inspection of records for

evidence of authorization.

Some documents represent direct audit evidence of the existence of an asset, for
example, a document constituting a financial instrument such as a inventory or
bond. Inspection of such documents may not necessarily provide audit evidence
about ownership or value. In addition, inspecting an executed contract may provide
audit evidence relevant to the entity’s application of accounting policies, such as
revenue recognition. Inspection of tangible assets may provide reliable audit
evidence with respect to their existence, but not necessarily about the entity’s
rights and obligations or the valuation of the assets. Inspection of individual
inventory items may accompany the observation of inventory counting.

Q-34: CA J is conducting statutory audit of Gemini Ltd engaged in

manufacturing of pharma products. The company is fairly large one and has a
well-functioning internal audit department. While considering sending out
external confirmation requests to trade receivables outstanding as on date of
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financial statements, CA J has delegated the process of choosing trade

receivables, designing requests and receiving responses from customers to
internal audit department. The responses are also received on the mail id of
internal audit department. Is the approach of CA J proper? (May 2024)

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Ans-34: When using external confirmation procedures, the auditor shall maintain
control over external confirmation requests, including:

1. Determining the information to be confirmed or requested;

2. Selecting the appropriate confirming party;
3. Designing the confirmation requests, including determining that requests
are properly addressed and contain return information for responses to
be sent directly to the auditor; and
4. Sending the requests, including follow-up requests when applicable, to
the confirming party.
In the given case, it appears that external auditor has delegated entire work of
sending out external confirmation requests to internal audit department over which
he has no control. Further, responses to external confirmation requests are received
on mail id of internal audit department. All these acts are not in line with
requirements under SA 505.

Q-35: The newly appointed auditor of BTN Limited wants to obtain sufficient
appropriate audit evidence about whether the opening balances contain
misstatements that materially affect the current period's financial statements.
What audit procedures should he perform for this purpose? (May 2024)

Ans-35: Audit Procedure Regarding Opening Balances: The newly appointed

auditor of BTN Ltd shall read the most recent financial statements, if any, and the
predecessor auditor’s report thereon, if any, for information relevant to opening
balances, including disclosures.

The auditor of BTN Ltd shall obtain sufficient appropriate audit evidence about
whether the opening balances contain misstatements that materially affect the
current period’s financial statements by:
1. Determining whether the prior period’s closing balances have been correctly
brought forward to the current period or, when appropriate, any adjustments
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have been disclosed as prior period items in the current year’s Statement of
Profit and Loss.
2. Determining whether the opening balances reflect the application of
appropriate accounting policies; and
3. Performing one or more of the following:

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i. Where the prior year financial statements were audited, perusing the
copies of the audited financial statements including the other relevant
documents relating to the prior period financial statements.
ii. Evaluating whether audit procedures performed in the current period
provide evidence relevant to the opening balances; or
iii. Performing specific audit procedures to obtain evidence regarding
the opening balances.

Q-36: SPR Ltd has been into the media business since 2001. During the
F.Y 2022-2023, many notices were received by the company for hurting public
sentiments and financial claims were filed against the company. As an auditor
of the company, you requested the management for arranging the meeting with
company's external legal counsel. Management is of the view that such meetings
are necessary in certain circumstances only. Can you list down such
circumstances? (May 2024)

Ans-36: Circumstances when it becomes necessary to meet with company’s

external legal counsel:

In the given case of SPR Ltd., Auditor requested the management for meeting
with SPR’s external legal counsel.

In certain circumstances, the auditor also may judge it necessary to meet with the
entity’s external legal counsel to discuss the likely outcome of the litigation or
claims.

This may be the case, for example, where:

(i) The auditor determines that the matter is a significant risk.

(ii) The matter is complex.
(iii) There is disagreement between management and the entity’s external
legal counsel.
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Q-37: CA Mukul is the external auditor of Beige Ltd., a large company,

engaged in the manufacturing of fast-moving consumer (FMCG) goods. After
assessing the internal audit function of the company, CA Mukul decided to use
the internal auditor of the company to provide direct assistance. In this context,

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what is meant by direct assistance under relevant Standard on Auditing? Also

comment whether prior to using internal auditor for direct assistance for the
purpose of audit, CA Mukul is required to obtain any written agreements or
not. Give examples of procedures in which CA Mukul shall not use an internal
auditor to provide direct assistance. (JAN 2025)

Ans-37: As per SA 610, “Using the work of Internal Auditor”, direct assistance
refers to the use of internal auditors to perform audit procedures under the
direction, supervision and review of the external auditor.

Prior to using internal auditors to provide direct assistance for purposes of the
audit, CA Mukul, the external auditor shall: -
(a) Obtain written agreement from an authorized representative of the entity
that the internal auditors will be allowed to follow the external auditor’s
instructions, and that the entity will not intervene in the work the internal
auditor performs for the external auditor and
(b) Obtain written agreement from the internal auditors that they will keep
confidential specific matters as instructed by the external auditor and inform
the external auditor of any threat to their objectivity.
Examples of procedures in which CA Mukul shall not use internal auditor to provide
direct assistance to him are: -
(a) Procedures which involve making significant judgments in the audit;
(b) Procedures relating to higher assessed risks of material misstatement
where the judgment required in performing the relevant audit procedures or
evaluating the audit evidence gathered is more than limited.
(c) Procedures relating to work with which the internal auditors have been
involved and which has already been, or will be, reported to management or
those charged with governance by the internal audit function; or
(d) Procedures relating to decisions the external auditor makes in accordance
with this SA regarding the internal audit function and the use of its work
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or direct assistance.

Q-38: Quality Products Limited is engaged in manufacturing of bicycles. As

part of manufacturing activities, it sends raw material to some business entities
and procures finished components from them. As on 31st March 2024 inventories

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lying with such business entities are material. Being statutory auditor of Quality
Products Limited, how you will obtain sufficient appropriate audit evidence
regarding existence and condition of inventories lying with such business
entities? (RTP SEP 2024)

Ans-38: In accordance with requirements of SA 501 ”Audit Evidence- Specific

Considerations for Selected Items”, when inventory under the custody and control
of a third party is material to the financial statements, the auditor shall obtain
sufficient appropriate audit evidence regarding the existence and condition of that
inventory by performing one or both of the following:

(a) Request confirmation from the third party as to the quantities and condition
of inventory held on behalf of the entity.
(b) Perform inspection or other audit procedures appropriate in the circumstances.

Other audit procedure may include –

• Inspecting documentation regarding inventory held by third parties.
• Requesting confirmation from other parties when inventory has been pledged
as collateral.
• Attending, or arranging for another auditor to attend, the third party’s physical
counting of inventory, if practicable.
• Obtaining another auditor’s report, or a service auditor’s report, on the
adequacy of the third party’s internal control for ensuring that inventory is
properly counted and adequately safeguarded

Q-39: CA Rashmi is the auditor of ABC Ltd. for the financial year ending
31/03/2024. The audit report for the year was signed by her on 19/04/2024.

On 25/4/2024, the company received a communication from the Central

Government that an incentive amount of Rs. 5 crores pertaining to financial year
2023-24 was approved. It was paid to the company before the end of April
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2024. The financial statements of the company were not yet issued to the
shareholders.

The Board of Directors wished to include the incentive amount in the financial
statements and requested the auditor to issue a fresh audit report for the year
ended 31/03/2024.

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Analyze the issue involved and give an overview of the auditor's responsibility in
such a situation. (PYQ SEP 2024)

Ans-39: Facts Which Become Known to the Auditor After the Date of the Auditor’s
Report but Before the Date the Financial Statements are Issued: As per SA 560,
“Subsequent Events”, the auditor has no obligation to perform any audit procedures
regarding the financial statements after the date of the auditor’s report.

However, when, after the date of the auditor’s report but before the date the
financial statements are issued, a fact becomes known to the auditor that, had it
been known to the auditor at the date of the auditor’s report, may have caused the
auditor to amend the auditor’s report, the auditor shall

(i) Discuss the matter with management and, where appropriate, those charged with
governance.

(ii) Determine whether the financial statements need amendment and, if so,

(iii) Inquire how management intends to address the matter in the financial
statements.

If management amends the financial statements, the auditor shall carry out the
audit procedures necessary in the circumstances on the amendment.

Further, the auditor shall extend the audit procedures and provide a new auditor’s
report on the amended financial statements. However, the new auditor’s report shall
not be dated earlier than the date of approval of the amended financial statements.

In the instant case, ABC Ltd. received an amount of ` 5 crore on account of

incentives pertaining to year 2023-24 in the month of April 2024 i.e. after
finalisation of financial statements and signing of audit report but before the
issuance of Financial Statements to stakeholders. The Board of Directors of ABC
Ltd. wished to amend the financial statements and requested the CA. Rashmi
(auditor) to consider this event and issue a fresh audit report on the financial
statements for the year ended on 31.03.2024.
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After applying the conditions given in SA 560, CA. Rashmi can issue new audit report
subject to date of audit report which should not be earlier than the date of approval
of the amended financial statements.

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Q-40: Auditors cannot normally examine all the information available to them
as it would be impracticable to do so and using audit sampling will produce valid
conclusions. Samples should be selected in such a manner that it is
representative of the population from which the sample is being selected.

Which sample selection method is used in the following two cases? Identify and
explain them briefly.

1. Auditor divided the trade receivables in three groups: balances above Rs.20
lakhs, balances between Rs.10 lakhs to Rs.20 lakhs and balances below Rs.10
lakhs. He selected different percentages of items from each group.
2. Auditor uses the sample of 50 consecutive cheques to test whether the
cheques are signed by authorized signatories, rather than picking 50 single
cheques throughout the year.

Ans-40: Sample Selections Methods:

i. Stratified Sampling method involves dividing the whole population to be tested in

a few separate groups called strata and taking a sample from each of them. Each
stratum is treated as if it was a separate population and proportionate of items
are selected from each of these stratum. The number of groups into which the
whole population has to be divided is determined on the basis of auditor judgment.
In the given case, Auditor divided the trade receivables in three groups i.e.
balances above Rs.20 lakhs, balances between Rs.10 lakhs to Rs.20 lakhs and
balances below Rs. 10 lakhs and he selected different percentages of items from
each group will be considered as Stratified Sampling.
ii. Block Sampling: This method involves selection of a block(s) of contiguous items
from within the population. Usually, a range of continuous transaction shall
have similar characteristics, therefore, selection of a group at one time will not
give a reasonable basis for opinion on the overall population as different types of
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transactions and unusual transactions may not be covered in the group taken all
at once.
In the given case, the auditor uses the sample of 50 consecutive cheques to test
whether the cheques are signed by authorized signatories, rather than picking
50 single cheques throughout the year is Block Selection Method.

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Q-41: You are the statutory auditor of NP Ltd. Looking at the huge size of
similar transactions, you directed your team members to use statistical sampling.
One of the team members, Mr. Q, wants to select samples based upon his
personal experience & knowledge as he is not aware of statistical sampling. You
are required to explain to Mr. Q why the use of statistical sampling method is
more scientific and appropriate. (PYQ SEP 2024)
Ans-41: Statistical sampling: Statistical sampling is an approach to sampling that
has the random selection of the sample units and the use of probability theory to
evaluate sample results, including measurement of sampling risk characteristics.

Statistical Sampling is more scientific and appropriate as:

• Audit testing done through this approach is more scientific than testing based
entirely on the auditor’s own judgment because it involves use of
mathematical laws of probability in determining the appropriate sample size
in varying circumstances.
• Statistical sampling has reasonably wide application where a population to be tested
consists of a large number of similar items and more in the case of
transactions involving compliance testing, trade receivables’ confirmation,
payroll checking, vouching of invoices and petty cash vouchers.
• There is no personal bias of the auditor in case of statistical sampling. Since it is
scientific, the results of samples can be evaluated and projected on the whole
population in a more reliable manner.
In larger organisations, with huge transactions, statistical sampling is always
recommended as it is unbiased, and the samples selected are not prejudged.

Q-42: The management of D. Ltd. have engaged an actuary-expert to ascertain

actuarial valuation of gratuity for provision to be made in the accounts. As an
auditor of D. Ltd., you plan to use the report of the said expert as audit
evidence for ascertaining appropriate valuation of provisions. As an auditor, what
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will you do to evaluate the competence, capabilities, objectivity and an

understanding of the work of the actuary-expert who has carried out actuarial
valuation of gratuity? (PYQ SEP 2024)
Ans-42: As per SA 500, “Audit Evidence”, issued by ICAI, when using the work of
a management’s expert as audit evidence the auditor should evaluate the
competence, capabilities and objectivity of that expert that:

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• Whether the expert is employed by the entity or is an outside party.

• Whether the expert is independent in respect of the entity.
• Auditor’s previous experience of the work of the expert.
• Knowledge of the expert, his qualification, membership of a professional body
or industry association, etc.
The auditor should also obtain an understanding of the work of that expert that:

• Whether the auditor has expertise to evaluate the work of the expert.
• Evaluating the assumptions and methods used by the management.
• Evaluating the nature of internal or external data used by the expert.

Q-43: During the audit of accounts for the year ended 31.03.2024, the auditor
of FD Limited wanted confirmation from a Trade Receivable, which was
outstanding for more than six months, amounting to Rs. 4,25,000/-. The auditor
sent a Confirmation letter to the party requesting them to respond directly to
him, whether or not they agree with the amount outstanding from them.

That trade receivable confirmed to the auditor of FD Limited, that they were
required to pay an amount of Rs.4,20,000 to FD Limited as per their books of
accounts.

State and explain the type of Confirmation Request sent by the auditor and the
course of action that he should take on the confirmation received from the
trade receivable. (PYQ SEP 2024)

Ans-43: Positive confirmation request: A request that the confirming party respond
directly to the auditor indicating whether the confirming party agrees or disagrees
with the information in the request or providing the requested information.

Exception – A response that indicates a difference between information requested

to be confirmed, or contained in the entity’s records, and information provided by
the confirming party. The exception needs to be assessed to the entire population
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after analyzing the reason for difference.

In the given situation, the auditor has sent the positive confirmation request for the
amount of 4,25,000 to a trade receivable which was outstanding for more than 6
months, however, due to difference between information requested to be confirmed,

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or contained in the entity’s records (i.e. 4,25,000), and information provided by the
confirming party (i.e. 4,20,000) is forming situation of exception confirmation.

The auditor’s evaluation, when taken into account with other audit procedures the
auditor may have performed, may assist the auditor in concluding whether sufficient
appropriate audit evidence has been obtained or whether performing further audit
procedures is necessary, as required by SA 330 in case a response is indicating an
exception.

The company should be asked to investigate and reconcile the discrepancy indicated
by the confirming party.

Q-44: CA Q is the engagement partner for the audit of a Departmental store.

As a part of the risk assessment procedure, he wants to make inquiries of the
management and others within the entity. What kind of information can the
auditor get by inquiring from the following?

(i) Internal audit personnel

(ii) In-house legal counsel

(iii) Marketing or sales personnel

(iv) Information systems personnel

Ans-44: Inquiries of Management and Others Within the Entity:

I. Inquiries directed toward internal audit personnel may provide information

about internal audit procedures performed during the year relating to the
design and effectiveness of the entity’s internal control and whether
management has satisfactorily responded to findings from those procedures.
II. Inquiries directed toward in-house legal counsel may provide information about
such matters as litigation, compliance with laws and regulations, knowledge of
fraud or suspected fraud affecting the entity, warranties, post-sales
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obligations, arrangements (such as joint ventures) with business partners and

the meaning of contract.
III. Inquiries directed towards marketing or sales personnel may provide
information about changes in the entity’s marketing strategies, sales trends, or
contractual arrangements with its customers.

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IV. Inquiries directed to information systems personnel may provide information

about system changes, system or control failures, or other information system-
related risks.

Q-45: The management of PQ Ltd. changed during the period under audit. Mr.
G an auditor, at the time of receiving written representation on the management
responsibilities from the management, was in a dilemma related to the date of
and period(s) covered by the written representation. Further, new management
was of the view that they can give written representation from the date they
took over and not for the prior period when old management were managing
affairs of the company. Guide the auditor & the management in this respect.

Ans-45: As per SA 580, “Written Representations”, the date of the written

representations shall be as near as practicable to, but not after, the date of the
auditor’s report on the financial statements. The written representations shall be
for all financial statements and period(s) referred to in the auditor’s report.

Furthermore, because 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.

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.

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 of 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. Accordingly, the
requirement for the auditor to request from them written representations that
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cover the whole of the relevant period(s) still applies. In view of above, management
is required to provide the written representation for all the periods even when
current management were not present during all periods referred to in the auditor’s
report.

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Q-46: M/s PSR & Associates are the auditors of The Saturn Hotel, a chain of
five-star hotels. Since the nature of their business is prone to frauds, the
company has appointed internal auditors at various locations. The company has
also devised a system of effective and efficient internal controls. The auditors,
M/s PSR & Associates, want to use the work of the internal auditors. In order
to ensure effectiveness, what kind of coordination should be there between the
external auditor and the internal audit function? (MAY 2024)

Ans-46: As per SA 610, “Using the Work of Internal Auditors”, coordination

between the external auditor and the internal audit function is effective when, for
example

I. Discussions take place at appropriate intervals throughout the period.

ii. The external auditor informs the internal audit function of significant matters
that may affect the function.

iii. The external auditor is advised of and has access to relevant reports of the
internal audit function and is informed of any significant matters that come to the
attention of the function when such matters may affect the work of the external
auditor so that the external auditor is able to consider the implications of such
matters for the audit engagement.

Q-47: M/s KLM & Co. Chartered Accountants, a partnership firm, while
designing tests of controls and tests of details in MN Ltd. has to determine the
items for testing that can be effective in meeting the purpose of the audit
procedure. For this, they decided to select specific items from a population.
State the factors that can be considered by the audit firm for selecting specific
items from a population and also state the specific items that can be included
for such testing.

Ans-47: The auditor may decide to select specific items from a population. In
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making this decision, factors that may be relevant include:

a. the auditor’s understanding of the entity,

b. the assessed risks of material misstatement, and
c. the characteristics of the population being tested.

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Specific items selected may include

• High value or key items: The auditor may decide to select specific items within a
population because they are of high value, or exhibit some other characteristic.
• All items over a certain amount: The auditor may decide to examine items whose
recorded values exceed a certain amount so as to verify a large proportion of the
total amount of a class of transactions or account balance.
• Items to obtain information: The auditor may examine items to obtain
information about matters such as the nature of the entity or the nature of
transactions.

Q-48: XY and Associates are auditors of PQR Ltd., which provides electrical
components on project basis. The purchases are huge and the auditor wants to
make sure that all the purchases made during the period are recorded and there
is no understatement or overstatement. For this purpose the audit team have
performed procedures like cut-off tests, correct treatment of goods in transit,
obtaining written representations and performing analytical procedures. What
are the analytical procedures required to be performed to obtain audit evidence
as to overall reasonableness of purchase quantity and price?

Ans-48: The auditor should perform analytical procedures to obtain audit

evidence as to overall reasonableness of purchase quantity and price which may
include:

i. Consumption Analysis: Auditor should scrutinize raw material consumed as per

manufacturing account and compare the same with previous years with closing
stock and ask for the reasons from the management, if any significant variations
are found.
ii. Stock Composition Analysis: Auditor to collect the reports from management for
composition of stock i.e. raw materials as a percentage of total stock and compare
the same with previous year and ask for reasons from management in case of
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significant variations.
iii. Ratios: Auditor should compare the creditors turnover ratios and stock turnover
ratios of the current year with previous years.
iv. Quantitative Reconciliation: Auditor should review quantitative reconciliation of
closing stocks with opening stock, purchases and consumption.

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Q-49: During the audit of a company, CA Jack obtained written representations

from management regarding all known instances of non-compliance with laws and
regulations that should be considered in the preparation of the financial
statements. However, during the audit, he observed that the information
provided in this regard was incomplete, and the audit evidence indicating such
non-compliance contradicted the written representations, casting doubt on their
reliability. How should CA Jack proceed in this situation? (MTP JAN 2025)

Ans-49: In the given situation, company’s management has not provided complete
information regarding instances of non-compliance with laws & regulations. If the
auditor has concerns about the competence, integrity, ethical values or diligence of
management, or about its commitment to or enforcement of these, the auditor shall
determine the effect that such concerns may have on the reliability of
representations and audit evidence in general.

The above situation highlights that auditor has obtained audit evidence relating to
non-compliance with laws which is inconsistent with written representations in this
respect casting a doubt about reliability of written representations.
As per SA 580, “Written Representation”, if written representations are
inconsistent with other audit evidence, the auditor shall perform audit procedures
to attempt to resolve the matter. If the matter remains unresolved, the auditor
shall reconsider the assessment of the competence, integrity, ethical values or
diligence of management, or of its commitment to or enforcement of these, and
shall determine the effect that this may have on the reliability of representations
and audit evidence in general.
If the auditor concludes that the written representations are not reliable, the
auditor shall take appropriate actions, including determining the possible effect on
the opinion in the auditor’s report in accordance with SA 705, “Modifications to the
Opinion in the Independent Auditor’s Report” having regard to the requirement
of disclaimer of opinion.
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Q-50: CA Shubham, the auditor of Sigma Limited, is performing tests of

controls and tests of details using audit sampling. During these procedures, he
observed deviations in compliance with management's prescribed procedures for
sales transactions of small values of a product at one location during tests of
controls. Additionally, misstatements were identified in the sample related to
these small-value sales transactions during tests of details. How should he
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proceed to analyse the nature and cause of the deviations and misstatements
observed in the sample results? (MTP JAN 2025)
Ans-50: In the given case, while performing tests of details on a sample in respect
of sales, misstatements have been found by CA Shubham in selected sample
pertaining to the sales transactions of small values. This indicates observance of
deviations and misstatements while performing tests of controls and tests of
details respectively in selected samples.

As per SA 530, “Audit Sampling”, in analysing the deviations and misstatements

identified, the auditor may observe that many have a common feature, for example,
type of transaction, location, product line or period of time.
In such circumstances, the auditor may decide to identify all items in the population
that possess the common feature, and extend audit procedures to those items. In
addition, such deviations or misstatements may be intentional, and may indicate
the possibility of fraud.
Therefore, the auditor shall investigate the nature and causes of any deviations or
misstatements identified, and evaluate their possible effect on the purpose of the
audit procedure and on other areas of the audit.
In the extremely rare circumstances when the auditor considers a misstatement or
deviation discovered in a sample to be an anomaly, the auditor shall obtain a high
degree of certainty that such misstatement or deviation is not representative of
the population. The auditor shall obtain this degree of certainty by performing
additional audit procedures to obtain sufficient appropriate audit evidence that the
misstatement or deviation does not affect the remainder of the population.

Q-51: The reliability of audit evidence depends on its source, nature, and the
circumstances under which it is obtained, including the controls over its
preparation and maintenance. Although exceptions may exist, few generalisations
can be made about reliability of audit evidence. Considering above discuss such
generalisations that can be made about the reliability of audit evidence.
(MTP JAN 2025)
CA INTERMEDIATE

Ans-51: While recognising that exceptions may exist, the following

generalisations about the reliability of audit evidence may be useful:

• The reliability of audit evidence is increased when it is obtained from

independent sources outside the entity.

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• The reliability of audit evidence that is generated internally is increased when

the related controls, including those over its preparation and maintenance,
imposed by the entity are effective.
• Audit evidence obtained directly by the auditor is more reliable than audit
evidence obtained indirectly or by inference.
• Audit evidence in documentary form, whether paper, electronic, or other
medium, is more reliable than evidence obtained orally
• Audit evidence obtained as original documents is more reliable than audit
evidence obtained as photocopies or facsimiles, or documents that have been
filmed, digitised or otherwise transformed into electronic form because in these
cases the reliability of which may depend on the controls over their preparation
and maintenance.

Q-52: CA Rishi is appointed as an auditor of AIR Ltd. for the financial year
ending on March 31, 2024. During the audit, he observed that the company's
books of accounts reflect a significant number of trade payables and receivables
as on the balance sheet date. To verify the accuracy of the trade receivables,
CA Rishi decided to send confirmation requests to some of trade receivables.
However, the management refused to permit him to send these confirmation
requests to the selected parties. How should the auditor proceed in the given
situation? (MTP JAN 2025)

Ans-52: As per SA 505, “External Confirmation”, If management refuses to allow

the auditor to send a confirmation request, the auditor shall:

(i) Inquire as to management’s reasons for the refusal, and seek audit evidence
as to their validity and reasonableness;
(ii) Evaluate the implications of management’s refusal on the auditor’s assessment
of the relevant risks of material misstatement, including the risk of fraud,
and on the nature, timing and extent of other audit procedures; and
(iii) Perform alternative audit procedures designed to obtain relevant and reliable
CA INTERMEDIATE

audit evidence.
If the auditor concludes that management’s refusal to allow the auditor to send
a confirmation request is unreasonable, or the auditor is unable to obtain relevant
and reliable audit evidence from alternative audit procedures, the auditor shall
communicate with those charged with governance in accordance with SA 260

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“Communication with Those Charged with Governance”.

The auditor also shall determine the implications for the audit and the auditor’s
opinion in accordance with SA 705 “Modifications to the Opinion in the
Independent Auditor’s Report”.

Q-53: CA Kavita, auditor of Healthify Ltd., while assessing potential risks of

material misstatement related to litigations at Healthify Ltd., identified a
possible legal claim that could affect the financial statements. She sent a
general inquiry letter to the company’s external legal counsel, Mohit & Co.,
seeking clarification. However, Mohit & Co. informed her that their professional
rules prohibited them from responding to these general inquiries. Guide CA
Kavita that what other option is available to obtain the necessary information
for the audit? (MTP JAN 2025)

Ans-53: If the auditor assesses a risk of material misstatement regarding

litigation or claims that have been identified, or when audit procedures performed
indicate that other material litigation or claims may exist, the auditor shall, in
addition to the procedures required by other SAs, seek direct communication with
the entity’s external legal counsel. The auditor shall do so through a letter of inquiry
requesting the entity’s external legal counsel to communicate directly with the
auditor.

If law, regulation or the respective legal professional body prohibits the entity’s
external legal counsel from communicating directly with the auditor, the auditor
shall perform alternative audit procedures.
If it is considered unlikely that the entity’s external legal counsel will respond
appropriately to a letter of general inquiry, for example if the professional body to
which the external legal counsel belongs prohibits response to such a letter, the
auditor may seek direct communication through a letter of specific inquiry. For this
purpose, a letter of specific inquiry includes:
(i) A list of litigation and claims;
CA INTERMEDIATE

(ii) Where available, management’s assessment of the outcome of each of the

identified litigation and claims and its estimate of the financial implications,
including costs involved; and
(iii) A request that the entity’s external legal counsel confirm the reasonableness
of management’s assessments and provide the auditor with further

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information if the list is considered by the entity’s external legal counsel

to be incomplete or incorrect.

Q-54: The management of PQ Ltd. changed during the period under audit. Mr.
Govind, an auditor, at the time of receiving written representation on the
management responsibilities from the management, was in a dilemma related to
the date of and period(s) covered by the written representation. Further, new
management was of the view that they can give written representation from the
date they took over and not for the prior period when old management were
managing affairs of the company. Guide the auditor and the management in this
respect. (JAN 2025)

Ans-54: As per SA 580, “Written Representations”, the date of the written

representations shall be as near as practicable to, but not after, the date of the
auditor’s report on the financial statements. The written representations shall be
for all financial statements and period(s) referred to in the auditor’s report.

Furthermore, because 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.
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.
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 of 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. Accordingly, the
requirement for the auditor to request from them written representations that
CA INTERMEDIATE

cover the whole of the relevant period(s) still applies. In view of above, management
is required to provide the written representation for all the periods even when
current management were not present during all periods referred to in the
auditor’s report.

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Chapter-5: Audit of Items of Financial Statements

Question: Newton Ltd. has made loans and advances on the basis of following
securities to various borrowers. As an auditor what type of documents can be
verified to ensure that the company holds a legally enforceable security?

i. Shares and Debentures

ii. Life Insurance Policy
iii. Hypothecation of goods [RTP –MAY 2021]
Answer: Documents to be seen in case of Securities:

Types of Security Documents etc. to be seen

(i) Shares and debentures The scrip and the endorsement thereon of the
name of the transferee, in the case of transfer.

(ii) Life Insurance Policy. Assignment of policy in favour of the lender, duly
registered with the insurer

(iii) Hypothecation of Deed of hypothecation or other document creating

goods the charge, together with a statement of
inventories held at the Balance Sheet date

Question: Explain how you will verify the items given while conducting an audit
of an entity:

a. Recovery of Bad debts written off

b. Receipt of Insurance claims
CA INTERMEDIATE

c. Payment of Taxes
d. Sale proceeds of scrap material [RTP –MAY 2022]

Answer:

a. Recovery of bad debts written off is verified with reference to relevant

correspondence and proper authorization.

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i. Ascertain the total amount lying as bad debts and verify the relevant
correspondence with the trade receivables whose accounts were written
off as bad debt.
ii. Ensure that all recoveries of bad debts have been properly recorded in
the books of account.
iii. Examine notification from the Court or from bankruptcy trustee. Letters
from collecting agencies or from account receivables should also be seen.
iv. Check Credit Manager’s file for the amount received and see that the
said amount has been deposited into the bank promptly.
v. Vouch acknowledgement receipts issued to account receivables or
trustees.
vi. Review the internal control system regarding writing off and recovery of
bad debts.
b. Receipt of Insurance Claims: Insurance claims may be in respect of fixed
assets or current assets. While vouching the receipts of insurance claims
i. The auditor should examine a copy of the insurance claim lodged with the
insurance company correspondence with the insurance company and with
the insurance agent should also be seen. Counterfoils of the receipts issued
to the insurance company should also be seen.
ii. The auditor should also determine the adjustment of the amount received
in excess or short of the value of the actual loss as per the insurance
policy.
iii. The copy of certificate/report containing full particulars of the amount of
loss should also be verified.
iv. The accounting treatment of the amount received should be seen
particularly to ensure that revenue is credited with the appropriate
amount and that in respect of claim against asset, the Statement of Profit
and Loss is debited with the short fall of the claim admitted against book
value, if the claim was lodged in the previous year but no entries were
passed, entries in the Statement of Profit and Loss should be
appropriately described.
c. Payment of Taxes:
CA INTERMEDIATE

i. Obtain the computation of taxes prepared by the auditee and verify

whether it is as per the Income Tax Act/GST Act/ Rules/ Notifications/
Circulars etc.
ii. Examine relevant records and documents pertaining to payment of advance
income tax and self assessment tax.

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iii. Payment on account of income-tax and other taxes like GST consequent
upon a regular assessment should be verified by reference to the copy of
the assessment order, notice of demand and the receipted challan
acknowledging the amount paid.
iv. The penal interest charged for non-payment should be debited to the
interest account.
v. Nowadays, electronic payment of taxes is also in trend. Such electronic
payment of taxes by way of internet banking facility or credit or debit
cards shall also be verified.
vi. The assessee can make electronic payment of taxes also from the account
of any other person. Therefore, it should be verified that the challan for
making such payment is clearly indicating the PAN No./TAN No./TIN
No./GSTIN etc. of the assessee on whose behalf the payment is made.
d. Sale Proceeds of Scrap Material:
i. Review the internal control on scrap materials, as regards its generation,
storage and disposal and see whether it was properly followed at every
stage.
ii. Review the production and cost records for determination of the extent
of scrap materials that may arise in a given period.
iii. Ascertain whether the organisation is maintaining reasonable records for
the sale and disposal of scrap materials.
iv. Compare the income from the sale of scrap materials with the
corresponding figures of the preceding three years
v. Check the rates at which different types of scrap materials have been
sold and compare the same with the rates that prevailed in the preceding
year.
vi. See that scrap materials sold have been billed and check the calculations
on the invoices.
vii. Ensure that there exists a proper procedure to identify the scrap
material and good quality material is not mixed up with it and sold as scrap
viii. Make an overall assessment of the value of the realisation from the sale
of scrap materials as to its reasonableness.
CA INTERMEDIATE

Question: While conducting audit of Air Space Ltd, the auditor observes that it
has issued shares at discount to its creditors when its debt is converted into
shares in pursuance of debt restructuring scheme in accordance with any
guidelines specified by the Reserve Bank of India. Discuss explaining clearly

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the provisions relating to discount on issue of shares and its verification by

the auditor. [RTP –MAY 2022]

Answer: Shares issued at a discount

According to Section 53 of the Companies Act, 2013,

1. A company shall not issue shares at a discount, except in the case of an issue
of sweat equity shares given under Section 54 of the Companies Act, 2013.
2. Any share issued by a company at a discounted price shall be void.
2A. Notwithstanding anything contained in sub-sections (1) and (2), a company
may issue shares at a discount to its creditors when its debt is converted into
shares in pursuance of any statutory resolution plan or debt restructuring
scheme in accordance with any guidelines or directions or regulations
specified by the Reserve Bank of India under the Reserve Bank of India Act,
1934 or the Banking (Regulation) Act, 1949.
3. Where any company fails to comply with the provisions of this section,
such company and every officer who is in default shall be liable to a penalty
which may extend to an amount equal to the amount raised through the issue
of shares at a discount or five lakh rupees, whichever is less, and the company
shall also be liable to refund all monies received with interest at the rate of
twelve per cent. per annum from the date of issue of such shares to the
persons to whom such shares have been issued.
The auditor needs to check
i. The movement in share capital during the year and wherever there is any
issue,
ii. He should verify that the Company has not issued any of its shares at a
discount by reading the minutes of meeting of its directors and shareholders
authorizing issue of share capital and the issue price.
iii. Further, auditor should also verify that in case a company has issued shares
at a discount to its creditors when its debt is converted into shares in
pursuance of any statutory resolution plan or debt restructuring scheme in
accordance with any guidelines or directions or regulations specified by the
CA INTERMEDIATE

Reserve Bank of India under the Reserve Bank of India Act, 1934 or the
Banking (Regulation) Act, 1949.
In the given case of Air Space Ltd, it is clear that it can issue shares to its creditors
when its debt is converted into shares in accordance with approved restructuring
scheme.

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Question: Name the assertions for the following audit procedures:

i. Year end inventory verification.
ii. Depreciation has been properly charged on all assets.
iii. The title deeds of the lands disclosed in the Balance Sheet are held in
the name of the company.
iv. All liabilities are properly recorded in the financial statements.
v. Related party transactions are shown properly. [RTP –NOV 2022]
Answer:

i. Year-end inventory verification: Existence Assertion.

ii. Depreciation has been properly charged on all assets: Valuation Assertion.

iii. Title deed of lands disclosed in the Balance Sheet are held in the name of the
Company: Rights & Obligations Assertion.

iv. All liabilities are properly recorded in the financial statements:

Completeness.

v. Related party transactions are shown properly: Presentation & Disclosure.

Question: PK Pvt Ltd, based in Moradabad, is engaged in export of brassware

goods. The company has huge export receivables as on 31st March 2022. It is
also analysed from Export Sales account of the company that large number of
small shipments were almost dispatched daily during month of March 2022. List
out few audit procedures you would adopt as an auditor to verify completeness
assertion of export trade receivables. [RTP –NOV 2022]

Answer: Completeness assertion in respect of account balances means that all

balances which should have been recorded have been recorded. The auditor needs
to satisfy himself about cut off so that there is no understatement or
overstatement in account balances of export receivables.

In this context, while verifying completeness assertion of export trade receivables,

CA INTERMEDIATE

following audit procedures are required:-

1. Check that in respect of invoices raised in last few days nearing the cutoff date,
goods have been actually dispatched and not lying with the company.

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2. Check stock records, e-way bill, and transporter receipt regarding actual
movement of goods. It would provide assurance that export invoices in respect
of which revenue was booked have been actually moved out of company’s premises.

3. Ensure that all goods invoiced prior to cut off date/year end have been included
in export receivables on test check basis.

4. Ensure that no goods despatched after year end have been included in export
receivables by tracing entries in export sales, stock records of next year. The
same can be verified from e-way bills also.

5. Match invoices to despatch/shipping details. Further match invoices dates to

despatch dates to see if sales are being recorded in correct accounting period.

6. Test invoices in receivable report. Select invoices from ageing report of export
receivables and compare them with supporting documentation to ensure that
these are billed with correct names, dates and amounts.

Question: B Ltd. is covered u/s 135 of the Companies Act, 2013 i.e. Corporate
Social Responsibility (CSR). What matters (other than the amount spent, amount
not spent, amount required to be spent etc.) shall be disclosed by the company
with regard to CSR activities done by the company? [MAY 2022]

Answer: Corporate Social Responsibility (CSR): Since B Ltd is covered under

section 135 of the Companies Act, the following matters shall be disclosed by the B
Ltd with regard to CSR activities:

a. total of previous years shortfall,

b. reason for shortfall,

c. nature of CSR activities,

d. details of related party transactions, e.g., contribution to a trust controlled by

CA INTERMEDIATE

the company in relation to CSR expenditure as per relevant Accounting Standard,

e. where a provision is made with respect to a liability incurred by entering into a

contractual obligation, the movements in the provision during the year should be
shown separately.

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Question: CA R is the statutory auditor of QRS Ltd. While performing testing

of additions during the year, he wanted to verify that:

i. All PPE (property, plant and equipment) are in the name of the entity he
is auditing.

ii. For all additions to land and building in particular, the auditor desires to
have concrete about the ownership.

iii. The auditor wants to know whether the entity has valid legal ownership
rights over the PPE, where it is kept as security for any borrowings.

Advise the auditor on the audit procedure to be undertaken by him to establish

the Rights and Obligations of the entity over the PPE. [DEC 2021]

Answer: Audit procedure to establish Rights and Obligations of the entity over
PPE:

i. In addition to the procedures undertaken for verifying completeness of

additions to PPE during the period under audit, CA R, the statutory auditor of
B Ltd, while performing testing of additions should also verify that all PPE
purchase invoices are in the name of the entity that entitles legal title of
ownership to the respective entity. Verify whether the PPE additions have
been approved by authorized person

ii. For all additions to land, building in particular, CA R, the statutory auditor of
B Ltd, should obtain copies of conveyance deed/ sale deed to establish
whether the entity is mentioned to be the legal and valid owner.

iii. The auditor should insist and verify the original title deeds for all immoveable
properties held as at the balance sheet date.

iv. in case the entity has given such immoveable property as security for any
borrowings and the original title deeds are not available with the entity, CA R,
the statutory auditor of B Ltd should request the entity’s management for
CA INTERMEDIATE

obtaining a confirmation from the respective lenders that they are holding
the original title deeds of immoveable property as security.

v. In addition, the auditor should also verify the register of charges, available
with the entity to assess that any charge has been created against the PPE.

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Question: Profit and Loss account of an organization shows various types of

expenses like rent, power and fuel, repairs and maintenance, insurance,
travelling, miscellaneous expenses etc., that are essential and incidental to
running of business operations. What are the attributes that an auditor generally
prefers for vouching these types of expenses? [DEC 2021]

Answer: Attributes to be preferred for vouching other expenses:

While the auditor may choose to analyse the monthly trends for expenses like rent,
power and fuel, an auditor generally prefers to vouch for other expenses to verify
following attributes:

i. Whether the expenditure pertained to current period under audit;

ii. Whether the expenditure qualified as a revenue and not capital expenditure;

iii. Whether the expenditure had a valid supporting documents like travel tickets,
insurance policy, third party invoice etc.;

iv. Whether the expenditure has been classified under the correct expense head;

v. Whether the expenditure was authorised as per the delegation of authority

matrix;

vi. Whether the expenditure was in relation to the entity’s business and not a
personal expenditure.

Question: How is “Cash and cash equivalents” disclosed in the Financial

Statements as required under Schedule III (part I) to Companies Act, 2013?
[DEC 2021]

Answer: Disclosure of Cash & Cash Equivalent in the Financial Statements:

Regarding Cash and cash equivalents- Ensure whether the following disclosures as
required under Schedule III (Part 1) to Companies Act, 2013 have been made:

i. Cash and cash equivalents shall be classified as:

CA INTERMEDIATE

a. Balances with banks;

b. Cheques, drafts on hand;

c. Cash on hand;

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d. Others (specify nature)

ii. Earmarked balances with banks (for example, for unpaid dividend) shall be
separately stated.

iii. Balances with banks to the extent held as margin money or security against
the borrowings, guarantees, other commitments shall be disclosed separately.

iv. Repatriation restrictions, if any, in respect of cash and bank balances shall be
separately stated.

v. Bank deposits with more than 12 months’ maturity shall be disclosed

separately.

Question: Statutory Auditors of TRB Ltd. observed various instances when either
the TDS required to be deducted has not been deducted or deducted at lower
than prescribed rates resulting in non-compliance of Income Tax provisions.
Besides this, non-compliance under other acts like Labour Laws was also noticed
by the auditor. What type of policies and procedures will you implement to assist
in prevention and detection of non-compliance with laws and regulations?

[DEC 2021]

Answer: Types of polices and procedures to assist prevention and detection of

non- compliance with laws & regulation:

The following are examples of the types of policies and procedures, TRB Ltd may
implement to assist in the prevention and detection of non-compliance with laws and
regulations:

i. Monitoring legal requirements and ensuring that operating procedures are

designed to meet these requirements.

ii. Instituting and operating appropriate systems of internal control.

iii. Developing, publicizing and following a code of conduct.

CA INTERMEDIATE

iv. Ensuring employees are properly trained and understand the code of conduct.

v. Monitoring compliance with the code of conduct and acting appropriately to

discipline employees who fail to comply with it.

vi. Engaging legal advisors to assist in monitoring legal requirements.

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vii. Maintaining a register of significant laws and regulations with

viii. which the entity has to comply within its particular industry and a record of
complaints.

Question: Whether it is possible to independently verify the correctness of some

of the items of expenses included in the statement of profit and loss? Explain
with the help of some examples. [DEC 2021]

Answer: Often it is possible to independently verify the correctness of some of the

items of expenses included in the Statement of Profit and Loss.

For instance, the cost of importing goods which are subjected to an ad-valorem
duty at uniform rate can be verified from the amount of duty paid. Similarly, a
quantity of sugar sold by sugar mill can be verified independently from the amount
of excise duty/ GST paid.

Similarly, the amount of any income or expenses which has a direct relationship with
the amount of profits or that of sales can be verified independently, e.g., commission
paid to a manager calculated on the basis of net profits, commission paid to a selling
agent as percentage of sales, etc. Such calculation of ratios, trends and comparisons
is also termed as analytical review.

Thus, it is important to note that Analytical procedures may help identify the
existence of unusual transactions or events, and amounts, ratios, and trends that
might indicate matters that have audit implications. Unusual or unexpected
relationships that are identified may assist the auditor in identifying risks of
material misstatement, especially risks of material misstatement due to fraud.

Question: CA "X" while conducting an audit of Joyful Ltd. found a considerable

increase in sales as compared to the previous year, he doubts that few fictitious
sales have been recorded by the company to overstate its revenues. Discuss any
four audit procedures to be undertaken by the auditor to ensure revenue from
sales of goods and services performed during the period is not overstated?
CA INTERMEDIATE

[JULY 2021]

Answer: CA X, having doubts about fictitious sales being recorded by Joyful Ltd.
would ensure that revenue is not overstated by performing following audit
procedures:

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▪ Check whether a single sales invoice is recorded twice or a cancelled sales invoice
could also be recorded.

▪ Test check few invoices with their relevant entries in sales journal.

▪ Obtain confirmation from few customers to ensure genuineness of sales

transaction

▪ Whether any fictitious customers and sales have been recorded.

▪ Whether any shipments were done without the consent and agreement of the
customer, especially at the year end to inflate the sales figure

▪ Whether unearned revenue recorded as earned.

▪ Whether any substantial uncertainty exists about collectability

▪ Whether customer obligations are contingent on other actions (financing, resale

etc.)

Question: The value of intangible assets may diminish due to efflux of time, use
and/or obsolescence. The diminution of the value represents cost to the entity
for earning revenue during a given period. Discuss the audit procedures to be
applied by the auditor to ensure that Intangible assets have been valued
appropriately and as per generally accepted accounting policies and practices.
[JULY 2021]

Answer: The value of intangible assets may diminish due to efflux of time, use and/
or obsolescence. The diminution of the value represents cost to the entity for
earning revenue during a given period. Unless this cost in the form of amortization
is charged to the accounts, the profit or loss would not be correctly ascertained and
the values of intangible asset would be shown at higher amounts.

The auditor should:

• Verify that the entity has charged amortization on all intangible assets;
CA INTERMEDIATE

• Verify that the amortization method used reflects the pattern in which the
asset’s future economic benefits are expected to be consumed by the entity.

The auditor should also verify whether the management has done an impairment
assessment to determine whether an intangible asset is impaired. For this purpose,
the auditor needs to verify whether the entity has applied AS 28 - Impairment of

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Assets for determining the manner of reviewing the carrying amount of its intangible
asset, determining the recoverable amount of the asset to determine impairment
loss, if any

Question: You have been appointed as an auditor of VJM Schools. Discuss the
points which merit your consideration as an auditor while verifying Assets and
Liabilities of VJM Schools. [JULY 2021]

Answer: Verification of Assets & Liabilities of VJM Schools:

1. Report any old heavy arrears on account of fees, dormitory rents, etc. to the
Managing Committee.

2. Confirm that caution money and other deposits paid by students on admission,
have been shown as liability in the balance sheet and not transferred to revenue,
unless they are not refundable.

3. See that the investments representing endowment funds for prizes are kept
separate and any income in excess of the prizes has been accumulated and
invested along with the corpus.

4. Ascertain that the system ordering inspection on receipt and issue of provisions,
food stuffs, clothing and other equipment is efficient and all bills are duly
authorised and passed before payment.

5. Verify the inventories of furniture, stationery, clothing, provision and all

equipment etc. These should be checked by reference to Inventory Register or
corresponding inventories of the previous year and values applied to various items
should be test checked.

Question: Depreciation and amortisation expense generally constitute an entity's

significant part of overall expenses and have direct impact on the profit/loss of
the entity. What are the attributes, the Auditor needs to consider while
verifying Depreciation and amortisation expense. [JAN 2021]
CA INTERMEDIATE

Answer: Depreciation and amortisation generally constitute an entity’s significant

part of overall expenses and have direct impact on the profit/ loss of the entity,
hence auditors need to verify and ensure that such expenditure is appropriate,
accurately calculated and has been accounted as per applicable provisions of

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Companies Act or other statutes, to the extent applicable on the respective industry
and as per generally accepted accounting principles.

Auditor needs to consider the following attributes while verifying for depreciation
and amortization expenses:

• Obtain the understanding of entity’s accounting policy related to depreciation

and amortisation.

• Ensure the Company policy for charging depreciation and amortisation is as per
the relevant provisions of Companies Act/ applicable accounting standards.

• Whether the depreciation has been calculated after making adjustment of

residual value from the cost of the assets.

• Whether depreciation and amortisation charges are valid.

• Whether depreciation and amortisation charges are accurately calculated and

recorded.

• Whether all depreciation and amortisation charges are recorded in the

appropriate period.

• Ensure the parts (components) of each item of property, plant and equipment
that are to be depreciated separately have been properly identified.

• Whether the most appropriate depreciation method for each separately

depreciable component has been used.

Question: ABC Limited has a closing balance of work in progress of inventories

aggregating Rs.850 lakhs in their balance sheet as at March 31, 2020.

As Statutory Auditor of ABC Limited, explain various audit procedures which

need to be performed to confirm Work-in-progress of inventories have been
valued appropriately and as per generally accepted accounting policies and
practices. [JAN 2021]
CA INTERMEDIATE

Answer: Audit procedure which needs to be performed to confirm work in progress

worth Rs.850 lakhs has been valued appropriately and as per generally accepted
accounting policies and practices is given hereunder:

1. Ascertain how the various stages of production/ value add are measured and in
case estimates are made, understand the basis for such estimates.

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2. Ascertain what elements of cost are included. If overheads are included,

ascertain the basis on which they are included and compare such basis with the
available costing and financial data/ information maintained by the entity.

3. Ensure that material costs exclude any abnormal wastage factors.

Question: As a Statutory Auditor of the company list out audit procedure

required to be undertaken for the recognition of following other income:

i. Interest income from fixed deposit

ii. Dividend income

iii. Gain/(loss) on sale of investment in mutual funds. [JAN 2021]

Answer: Statutory auditor would perform the following audit procedure for
recognition of different items given in the question:

1. Interest income on fixed deposits is recognized on a time proportion basis taking

into account the amount outstanding and the applicable interest rate.

2. Dividends are recognised in the statement of profit and loss only when:

i. the entity’s right to receive payment of the dividend is established;

i. it is probable that the economic benefits associated with the dividend will
flow to the entity; and

ii. the amount of the dividend can be measured reliably.

3. Gain/(loss) on sale of investment in mutual funds is recorded as other income on

transfer of title from the entity and is determined as the difference between
the redemption price and carrying value of the investments.

Question: XYZ Ltd. made huge additions to Intangible assets during the period
01-04-2021 to 31-03-2022 i.e. period under audit. You have been appointed
as an auditor and you want to verify the additions made to intangible assets
CA INTERMEDIATE

during the period. Suggest the audit procedure to verify the additions to
intangible assets. [MTP NOV 2022]

Answer:

1. Verify the movement in the intangible assets schedule (asset class wise like
software, designs/ drawings, goodwill etc.) compiled by the management i.e.

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Opening balances + Additions – Deletions = Closing balances. Tally the closing

balances to the entity’s books of account.

2. Check the arithmetical accuracy of the movement in intangible assets schedule.

For additions during the period under audit, obtain a listing of all additions from
the management and undertake the following procedures:

i. For all material additions, verify whether such expenditure meets the
criterion for recognition of an intangible asset as per AS 26.

ii. Ensure that no cost related to research (or from the research phase of an
internal project) gets recognized as intangible asset.

iii. Check the certificate or report or other similar documentation maintained by

the entity to verify the date of use of the intangible which could be linked to
date of commencement of commercial production/ economic use to the entity,
for all additions to intangible assets during the period under audit.

iv. Verify whether the additions (acquisitions) have been approved by appropriate
entity’s personnel.

v. Verify whether proper internal processes and procedures like inviting

competitive quotations/ proper tenders etc. were followed prior to finalizing
the vendor for procuring item of intangible assets by testing those documents
on a sample basis.

vi. In relation to deletions of intangible assets, understand from the management

the reason and rationale for deletion and the manner of disposal. Obtain the
management approval and disposal note authoring disposal of the asset from
its active use. Verify the process followed for sale of discarded asset,
example inviting competitive quotes, tenders and the basis of calculation of
sales proceeds. Verify that the management has accurately recorded the
deletion of intangible asset (original cost and accumulated amortization up to
the date of disposal) and the resultant gain/ loss on disposal in the entity’s
CA INTERMEDIATE

books of account.

Question: Reserves are a vital source of financing by internal means. Explain

and also discuss the meaning of reserves along with revenue reserve and capital
reserve. [MTP NOV 2022]

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Answer: Reserves are the amounts appropriated out of profits that are not
intended

▪ to meet any liability,

▪ contingency,

▪ commitment or

▪ diminution in the value of assets known to exist as at the date of the Balance
Sheet.

Reserves are a vital source of financing by internal means. They are held for the
purpose of distribution of dividend or financing the expansion of the company or
strengthening the company financially. The company utilizes the reserves according
to the nature and type of such reserve. The reserves can be segregated as revenue
or capital reserves.

Revenue reserves represent profits that are available for distribution to

shareholders or below purposes such as:

• To supplement divisible profits in lean years,

• to finance an extension of business,
• to augment the working capital of the business or
• to generally strengthen the company’s financial position.

Capital Reserve represents a reserve which does not include any amount regarded
as free for distribution. They can be utilized only for certain limited purposes.

Example

Securities premium, capital redemption reserve.

It may be noted that if a company appropriates revenue profit for being credited to
the asset replacement reserve with the objective that these are to be used for a
capital purpose, such a reserve shall also be in the nature of a capital reserve.
CA INTERMEDIATE

Question: Explain how you would verify Employee Benefit Expense incurred by a
Company. [MTP NOV 2022]

Answer: The auditor shall verify that:

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i. Employee benefit expense has been incurred during the period in respect of
the personnel employed by the entity. Employee benefit expense does not
include the cost of any unauthorized personnel.

ii. Employee benefit expenses in respect of all personnel have been fully
accounted for.

iii. Employee benefit expenses recognized during the period relates to the
current accounting period only.

iv. Employee benefit expense has been measured/ calculated accurately. Any
adjustments such as tax deduction at source have been correctly reconciled
and accounted for.

v. Employee benefit expense has been fairly allocated between:

▪ Operating expenses incurred in production activities;

▪ General and administrative expenses; and

▪ Cost of personnel relating to any self-constructed assets other than

inventory.

Question: The securities premium account may only be applied by the Company
towards the issue of unissued shares of the company to the members of the
company as fully paid bonus shares. Is the statement correct. Explain. [MTP
NOV 2022]

Answer: The statement is not correct.

The securities premium account may be applied by the Company for the following
purposes:

a. towards the issue of unissued shares of the company to the members of the
company as fully paid bonus shares

b. in writing off the preliminary expenses of the Company;

CA INTERMEDIATE

c. in writing off the expenses of, or the commission paid or discount allowed on, any
issue of shares or debentures of the company;

d. in providing for the premium payable on the redemption of any redeemable

preference shares or of any debentures of the company; or

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e. for the purchase of its own shares or other securities under section 68.

Question: The auditor has to ensure whether PPE has been valued appropriately
and as per generally accepted accounting policies and practices and also the
entity has valid legal ownership rights over the PPE claimed to be held by the
entity and recorded in the financial statements. Explain how the auditor will
verify the same. [MTP NOV 2022]

Answer: The auditor has to ensure whether PPE has been valued appropriately
and as per generally accepted accounting policies and practices.

The value of fixed assets/ PPE depreciates due to efflux of time, use and
obsolescence. The diminution of the value represents an item of cost to the entity
for earning revenue during a given period. Unless this cost in the form of
depreciation is charged to the accounts, the profit or loss would not be correctly
ascertained, and the values of PPE would be shown at higher amounts.

The auditor should:

o Verify that the entity has charged depreciation on all items of PPE unless any
item of PPE is non- depreciable like freehold land;

o Assess that the depreciation method used reflects the pattern in which the
asset’s future economic benefits are expected to be consumed by the entity.
It could be Straight line method, diminishing value method, unit of production
method, as applicable.

o The auditor should also verify whether the management has done an
impairment assessment to determine whether an item of property, plant and
equipment is impaired as per the requirements of AS 28 - Impairment of
Assets.

To verify whether the entity has valid legal ownership rights over the PPE
claimed to be held by the entity and recorded in the financial statements
CA INTERMEDIATE

• In addition to the procedures undertaken for verifying completeness of

additions to PPE during the period under audit, the auditor while performing
testing of additions should also verify that all PPE purchase invoices are in the
name of the entity that entitles legal title of ownership to the respective
entity.

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• For all additions to land and building in particular, the auditor should check
the conveyance deed/ sale deed to verify whether the entity is the legal and
valid owner or not.

• The auditor should insist and verify the original title deeds for all immoveable
properties held as at the balance sheet date.

• In case the entity has given such immoveable property as security for any
borrowings and the original title deeds are not available with the entity, the
auditor should request the entity’s management for obtaining a confirmation
from the respective lenders that they are holding the original title deeds of
immoveable property as security.

• In addition, the auditor should also verify the register of charges, available
with the entity to assess that any charge has been created against the PPE.

Question: While checking sales of the client, the auditor has to ensure that all
sales are accurately measured as per applicable accounting standards and
correctly journalized, summarized, and posted. Explain the audit procedures to
ensure the same. [MTP NOV 2022]

Answer: While checking sales of the client, the auditor has to ensure that all sales
are accurately measured as per applicable accounting standards and correctly
journalized, summarized, and posted. T he auditor can perform the following
procedures to ensure the same.

o Trace a few transactions from inception to completion. (Examination in depth)

o E.g: Take few sales transaction, and check from the receipt of sales order to the
payment of receivable balance, every underlying document to ensure if it is
properly recorded at every stage and measured accurately taking into
consideration all the incentives, discounts, if any. The recognition shall be
according to the revenue recognition policy of the entity.

o If the client is engaged in export sales, then compliance with AS 11 shall be

CA INTERMEDIATE

ensured.

o Auditor must understand client’s operations and related GAAP issues e.g. point
of sale revenue recognition vs. percentage of completion, wherever applicable.

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o Compare the rate of sales affected with related parties and review them for
collectability, as well as whether they were properly authorized and the value of
such transactions were reasonable and at arm’s length.

Question: Explain how you would verify rent expense incurred by a Company.
[MTP NOV 2022]

Answer: Rent expense can be verified by:

o Obtaining a month wise expense schedule along with the rent agreements.

o Verifying if expense has been recorded for all 12 months and whether the rent
amount is as per the underlying agreement.

o Giving specific consideration to the escalation clause in the agreement to verify

if the rent was required to be recorded on a straightline basis during the period
under audit.

o Also, verifying if the agreement is in the name of the entity and whether the
expense pertains to premises used for running business operations of the entity.

Question: While conducting audit of Air Space Ltd, the auditor observes that
it has issued shares at discount to its creditors when its debt is converted into
shares in pursuance of debt restructuring scheme in accordance with any
guidelines specified by the Reserve Bank of India. Discuss explaining clearly the
provisions relating to discount on issue of shares and its verification by the
auditor. [MTP NOV 2022]

Answer: Shares issued at a discount

According to Section 53 of the Companies Act, 2013,

1. a company shall not issue shares at a discount, except in the case of an issue of
sweat equity shares given under Section 54 of the Companies Act, 2013.

2. any share issued by a company at a discounted price shall be void.

CA INTERMEDIATE

2a. Notwithstanding anything contained in sub-sections (1) and (2, a) company may
issue shares at a discount to its creditors when its debt is converted into shares in
pursuance of any statutory resolution plan or debt restructuring scheme in
accordance with any guidelines or directions or regulations specified by the Reserve

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Bank of India under the Reserve Bank of India Act, 1934 or the Banking (Regulation)
Act, 1949.

3. Where any company fails to comply with the provisions of this section, such
company and every officer who is in default shall be liable to a penalty which may
extend to an amount equal to the amount raised through the issue of shares at a
discount or five lakh rupees, whichever is less, and the company shall also be liable
to refund all monies received with interest at the rate of twelve per cent. per
annum from the date of issue of such shares to the persons to whom such shares
have been issued.

The auditor needs to check

i. the movement in share capital during the year and wherever there is any issue,

ii. he should verify that the Company has not issued any of its shares at a
discount by reading the minutes of meeting of its directors and shareholders
authorizing issue of share capital and the issue price.

iii. Further, auditor should also verify that in case a company has issued shares
at a discount to its creditors when its debt is converted into shares in
pursuance of any statutory resolution plan or debt restructuring scheme in
accordance with any guidelines or directions or regulations specified by the
Reserve Bank of India under the Reserve Bank of India Act, 1934 or the
Banking (Regulation) Act, 1949.

In the given case of Air Space Ltd, it is clear that it can issue shares to its creditors
when its debt is converted into shares in accordance with approved restructuring
scheme.

Question: While auditing the accounts of ABC Ltd, a member of audit team is
not clear about :

i. the criteria regarding classification of liability into current liability and

non-current liability.
CA INTERMEDIATE

ii. Classification of Reserves and Surplus

You being the senior member of audit team guide the member of the audit team
about such criteria and classification as per general instructions for preparation
of balance sheet as per Schedule III. [MTP MAY 2022]

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Answer:

i. A liability shall be classified as current when it satisfies any of the following

criteria:

a. it is expected to be settled in the company’s normal operating cycle;

b. it is held primarily for the purpose of being traded;

c. it is due to be settled within twelve months after the reporting date; or

d. the company does not have an unconditional right to defer settlement of the
liability for at least twelve months after. the reporting date. Terms of a
liability that could, at the option of the counterparty, result in its settlement
by the issue of equity instruments do not affect its classification.

All other liabilities shall be classified as non-current.

ii. Reserves and Surplus shall be classified as:

a. Capital Reserves;

b. Capital Redemption Reserve;

c. Securities Premium;

d. Debenture Redemption Reserve;

e. Revaluation Reserve;

f. Share Options Outstanding Account;

g. Other Reserves – (specify the nature and purpose of each reserve and the
amount in respect thereof);

h. Surplus i.e. balance in Statement of Profit & Loss disclosing allocations and
appropriations such as dividend, bonus shares and transfer to/from reserves
etc. (Additions and deductions since last balance sheet to be shown under each
CA INTERMEDIATE

of the specified heads)

Note: A reserve specifically represented by earmarked investments shall be

termed as a ‘fund’.

Note: Debit balance of statement of profit and loss shall be shown as a

negative figure under the head ‘Surplus’. Similarly, the balance of ‘Reserves

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and Surplus’, after adjusting negative balance of surplus, if any, shall be shown
under the head ‘Reserves and Surplus’ even if the resulting figure is in the
negative.

Question: Proceedings have been initiated against the company ABC Ltd for
holding one of its property as benami property under the Benami Transactions
(Prohibition) Act, 1988 (45 of 1988) and the rules made thereunder. State the
disclosure requirements to be complied with by ABC Ltd as per Schedule III to
the Companies Act, 2013. [MTP MAY 2022]

Answer: Details of Benami Property held

Where any proceedings have been initiated or pending against the company for
holding any benami property under the Benami Transactions (Prohibition) Act, 1988
(45 of 1988) and the rules made thereunder, the company shall disclose the
following:-

i. Details of such property, including year of acquisition,

ii. Amount thereof,

iii. Details of Beneficiaries,

iv. If property is in the books, then reference to the item in the Balance Sheet,

v. If property is not in the books, then the fact shall be stated with reasons,

vi. Where there are proceedings against the company under this law as an
abetter of the transaction or as the transferor then the details shall be
provided,

vii. Nature of proceedings, status of same and company’s view on same.

Question: "While the auditor may choose to analyse the monthly trends for
expenses like rent, power and fuel but for other expenses, an auditor generally
prefers to verify other attributes." Mention those attributes. [MTP NOV 2021]
CA INTERMEDIATE

Answer: While the auditor may choose to analyse the monthly trends for
expenses like rent, power and fuel, an auditor generally prefers to vouch for other
expenses to verify following attributes:

i. Whether the expenditure pertained to current period under audit;

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ii. Whether the expenditure qualified as a revenue and not capital expenditure;

iii. Whether the expenditure had a valid supporting like travel tickets, insurance
policy, third party invoice etc.;

iv. Whether the expenditure has been classified under the correct expense
head;

v. Whether the expenditure was authorised as per the delegation of authority

matrix;

vi. Whether the expenditure was in relation to the entity’s business and not a
personal expenditure

Question: Management of Z Ltd. wants to include all the cost incurred by the
Company in valuing the cost of its inventories. The Accountant is, however, of
the view that certain costs should be excluded from the cost of inventories and
should be recognised as expenses for the period in which they are incurred.
What are such costs that should be excluded while determining the cost of
inventories? [MTP NOV 2021]

Answer: Examples of costs to be excluded in determining cost of Inventory:

In determining the cost of inventories, it is appropriate to exclude certain costs and

recognise them as expenses in the period in which they are incurred. Examples of
such costs are:

i. abnormal amounts of wasted materials, labour, or other production costs;

ii. storage costs, unless those costs are necessary in the production process
prior to a further production stage;

iii. administrative overheads that do not contribute to bringing the inventories

to their present location and condition; and

iv. selling and distribution costs.

CA INTERMEDIATE

In the given situation, contention of Z Ltd. is not correct to include all the cost of
its inventories while determining the cost of inventory. However, contention of
accountant is correct that certain cost should be excluded from the cost of
inventories and to be recognised as expenses in period in which they are incurred.

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Question: State assertions that are implied in the extract of financial statement
given below:

Particulars (Rs.) (Rs.)

Plant & Machinery (at Cost) 4,00,000
Less: Depreciation:
Up to Previous year 1,40,000

For the year 26,000 1,66,000

2,34,000

i. Indicate assertions in respect of transactions and events for the period

relating to PPE.

ii. State specific assertions relating to the above extract of financial statement.
[MTP NOV 2021]

Answer:

i. Assertions about transactions and events for the period relating to PPE:

1. Occurrence—transactions and events relating to PPE have been

recorded, have occurred and pertain to the entity.

2. Completeness—all transactions and events relating to PPE that should

have been recorded have been recorded.

3. Accuracy—amounts and other data relating to recorded transactions

and events have been recorded appropriately.

4. Cut-off—transactions and events have been recorded in the correct

accounting period.

5. Classification—transactions and events have been recorded in the

proper accounts.
CA INTERMEDIATE

ii. The specific assertions are as follows:

1. the firm owns the plant and machinery;

2. the historical cost of plant and machinery is Rs. 4 lacs;

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3. the plant and machinery physically exists;

4. the asset is being utilised in the business of the company productively;

5. total charge of depreciation on this asset is Rs. 1,66,000 to date on

which Rs. 26,000 relates to the year in respect of which the accounts
are drawn up; and

6. the amount of depreciation has been calculated on recognised basis and

the calculation is correct.

Question: You are an auditor of PQR Ltd. which has spent Rs. 10 lakhs on
Research activities of the product during period under audit. Board of Directors
want to recognize it as an internally generated intangible asset. Advise and
discuss the conditions necessary to be fulfilled to recognize the intangible assets
in the financial statements. [MTP MAY 2021]

Answer: No Intangible asset arising from research (or from the research phase of
an internal project) shall be recognised. Expenditure on research shall be recognised
as an expense when it is incurred since in the research phase of an internal project,
an entity cannot demonstrate that an intangible asset exists that will generate
probable future economic benefits. Thus, board of directors of PQR Ltd cannot
recognize the expense as internally generated intangible asset.

An intangible asset shall be recognised if, and only if:

i. the said asset is identifiable;

ii. the entity controls the asset i.e. the entity has the power to obtain the future
economic benefits flowing from the underlying resource and to restrict the
access of others to those benefits;

iii. it is probable that future economic benefits associated with the asset will
flow to the entity;

iv. the cost of the item can be measured reliably.

CA INTERMEDIATE

Question: From the auditing point of view, the auditor should verify that a
proper disclosure about contingent liabilities is made in financial statements as
required by AS 29. What type of disclosures should be made for each class of
contingent liability as at the balance sheet date? [MTP MAY 2021]

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Answer: Disclosure for each class of Contingent Liability: From the auditing point
of view, the auditor should verify that a proper disclosure about contingent liabilities
is made in financial statement as required by AS 29. As per, AS 29 an enterprise
should disclose for each class of contingent liability at the balance sheet date.

i. A brief description of the nature of the contingent liability and where

practicable.

ii. An estimate of the amount as per measurement principle as prescribed for

provision in AS 29.

iii. Indication of the uncertainty relating to outflow.

iv. The possibility of any reimbursement.

Where any of the information as required above is not disclosed because it is not
practicable to do so, that fact should be stated.

Question: Name the assertions for the following audit procedures:

i. Year end inventory verification.

ii. Depreciation has been properly charged on all assets.

iii. The title deeds of the lands disclosed in the Balance Sheet are held in
the name of the company.

iv. All liabilities are properly recorded in the financial statements.

v. Related party transactions are shown properly. [MTP MAY 2021]

Answer:

i. Year end inventory verification: Existence Assertion.

ii. Depreciation has been properly charged on all assets: Valuation Asser tion.

iii. Title deeds of the lands disclosed in the Balance Sheet are held in the name
CA INTERMEDIATE

of the Company: Rights & Obligations Assertion.

iv. All liabilities are properly recorded in the financial statements: Completeness.

v. Related party transactions are shown properly: Presentation & Disclosure.

Question: Expenses which are essentially of a revenue nature if incurred for

creating an asset or adding to its value for achieving higher productivity are
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regarded as expenses of a capital nature. Describe any six such expenses. [MTP
MAY 2021]

Answer: Expenses which are essentially of a Revenue Nature, if incurred for

creating an asset or adding to its value for achieving higher productivity, are
regarded as expenditure of a capital nature. Examples of capital expenditure are-

i. Material and wages- capital expenditure when expended on the construction

of a building or erection of machinery.

ii. Legal expenses- capital expenditure when incurred in connection with the
purchase of land or building.

iii. Freight- capital expenditure when incurred in respect of purchase of plant

and machinery.

iv. Repair- Major repairs of a fixed asset that increases its productivity.

v. Wages- Wages paid on installation costs incurred in Plant & machinery.

vi. Interest- Interest paid for the qualification period as per AS-16 i.e. before
the asset is constructed.

Whenever, therefore, a part of the expenditure, ostensibly of a revenue nature, is

capitalised it is the duty of the auditor not only to examine the precise particulars
of the expenditure but also the considerations on which it has been capitalised.

Question: From the auditing point of view, the auditor should verify that a
proper disclosure about contingent liabilities is made in financial statements as
required by AS 29. What type of disclosures should be made for each class of
contingent liability as at the balance sheet date? [MTP MAY 2021]

Answer: Disclosure for each class of Contingent Liability: From the auditing point
of view, the auditor should verify that a proper disclosure about contingent liabilities
is made in financial statement as required by AS 29. As per, AS 29 an enterprise
should disclose for each class of contingent liability at the balance sheet date.
CA INTERMEDIATE

i. A brief description of the nature of the contingent liability and where

practicable.

ii. An estimate of the amount as per measurement principle as prescribed for

provision in AS 29.

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iii. Indication of the uncertainty relating to outflow.

iv. The possibility of any reimbursement.

Where any of the information as required above is not disclosed because it is not
practicable to do so, that fact should be stated.

Question: You are an auditor of PQR Ltd. which has spent ` 50 lakhs on Research
activities of the product during period under audit, Board of Directors want to
recognize it as an internally generated intangible assets. Advise and discuss the
conditions necessary to be fulfilled to recognize the intangible assets in the
financial statements. [MTP NOV 2020]

Answer: No Intangible asset arising from research (or from the research phase of
an internal project) shall be recognised. Expenditure on research shall be recognised
as an expense when it is i ncurred since in the research phase of an internal project,
an entity cannot demonstrate that an intangible asset exists that will generate
probable future economic benefits. Thus, board of directors of PQR Ltd cannot
recognize the expense as internally generated intangible asset.

An intangible asset shall be recognised if, and only if:

i. the said asset is identifiable;

ii. the entity controls the asset i.e. the entity has the power to obtain the future
economic benefits flowing from the underlying resource and to restrict the
access of others to those benefits;

iii. it is probable that future economic benefits associated with the asset will
flow to the entity;

iv. the cost of the item can be measured reliably.

Question: BNP Ltd has reduced its Share Capital to a greater extent in the
year for which you are conducting the audit. State how will you proceed for
verifying the reduction of Capital. [MTP NOV 2020]
CA INTERMEDIATE

Answer: Reduction of Capital

For verifying reduction of capital, the auditor needs to undertake the following
procedures:

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i. Verify that the meeting of the shareholders held to pass the special
resolution was properly convened and that the proposal was circularized in
advance to all the shareholders;

ii. Verify that the Articles of Association authorises reduction of capital;

iii. Examine the order of the Tribunal confirming the reduction and verify that a
copy of the order and the minutes have been registered and filed with the
Registrar of Companies;

iv. Check the Registrar’s Certificate as regards to reduction of capital;

v. Vouch the accounting entries recorded to reduce the capital and to write down
the assets by reference to the resolution of shareholders and other
documentary evidence; also check whether the requirements of Schedule III,
Part I, have been complied with in relation to presentation;

vi. Confirm whether the revaluation of assets has been properly disclosed in the
Balance Sheet;

vii. Verify the adjustment made in the members’ accounts in the Register of
Members and confirm that either the paid up amount shown on the old share
certificates has been altered or new certificates have been issued in lieu of
the old, and the old ones have been cancelled;

viii. Confirm that the words “and reduced”, if required by the order of the
Tribunal, have been added to the name of the company in the Balance Sheet.

ix. Verify that the Memorandum of Association of the company has been suitably
amended.

Question: Proceedings have been initiated against False Limited for holding
benami property under law relating to prohibition of benami transactions and
the rules made thereunder but such property is not recorded in books of
accounts. As a consultant to the company, what will you advise the company
CA INTERMEDIATE

as far as disclosure requirements are concerned in financial statements in

relation to said proceedings? [RTP MAY 2024]
Answer: Disclosure in case of Benami Properties held by the Company: Where
any proceedings have been initiated or pending against the company for holding any
benami property under the relevant law relating to prohibition of such transactions,
the company shall disclose the following: -

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(a) Details of such property, including year of acquisition

(b) Amount thereof
(c) Details of Beneficiaries
(d) If property is not in the books, then the fact shall be stated with reasons
(e) Where there are proceedings against the company under this law as an a
better of the transaction or as the transferor, then the details shall be
provided
(f) Nature of proceedings, status of same and company’s view on same

Question: Droma Shoes Private Limited was established in year 2022-23 for
manufacturing of footwear. As funds were needed to carry on its business
activities - including for purchase of different raw materials, incurring of
regular expenses like power and fuel and payment of wages etc., it had got
sanctioned a credit facility amounting to Rs.2 crores repayable on demand from
a bank against primary security of its current assets and collateral security of
residential house of one of its directors. Duly signed guarantee documents by
directors in favour of bank also form part of bank’s loan documentation.
Account statement of above facility downloaded from bank’s website shows debit
balance of Rs.1.85 crores as on 31st March, 2023. The operations in above
credit facility are satisfactory. In this regard: -

1. Identify nomenclature of such credit facility given by banks. How would

above amount of Rs.1.85 crores be reflected and classified in financial
statements of company as on 31.3.23?
2. Also state specific disclosure requirements of Schedule III of Companies
Act, 2013 in relation to above. [RTP MAY 2024]
Answer:

I. The type of credit facilities referred to in above situation given by banks to

meet working capital requirements of business which are repayable on demand
CA INTERMEDIATE

are known as “cash credit facilities/overdraft” facilities. The amount of `1.85

crores outstanding as on 31st March, 2023 reflects borrowings of the company
and it would be classified as “short-term borrowings” as loans repayable on
demand from banks under current liabilities in balance sheet of the company.
Borrowings shall further be subclassified as secured.

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II. Specific disclosure requirements of short-term borrowings under Schedule

III to Companies Act, 2013 in given situation are as under:-
a. Nature of security i.e. primary security of current assets and
collateral security of residential house belonging to a director shall
be specified.
b. As loans have been guaranteed by directors, the aggregate
amount of such loans shall be disclosed.
To be disclosed as Additional Regulatory Information

Since the Company has borrowings from bank on the basis of

security of current assets, it shall also disclose the following :-

a. whether quarterly returns or statements of current assets

filed by the Company with banks or financial institutions are in
agreement with the books of accounts.
b. if not, summary of reconciliation and reasons of material
discrepancies, if any to be adequately disclosed.

Question: Following is extract of notes to accounts of financial statements of

STU Private Limited listing some ratios. Discuss, whether disclosure, given in
following manner meets requirements of Schedule III of the Companies Act,
2013. Ignore other ratios which are not listed in extract given below:

Name of ratio 31.3.2023 31.3.2022

Current ratio 2.50 2.30

Inventory turnover ratio 3.00 6.00
Trade receivables turnover ratio 1.75 5.00
Net profit ratio (in%) 13% 10%

Answer: The disclosure given in the question does not meet requirements of
CA INTERMEDIATE

Schedule III to Companies Act, 2013.

Schedule III requires that the company shall explain the items included in
numerator and denominator for computing the ratios. Further explanation shall be
provided for any change in the ratio by more than 25% as compared to the
preceding year.

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In the given table, the company has not explained the items included in numerator
and denominator for computing ratios. Further, variations in ratios as compared to
preceding year are as under: -

Name of ratio 31.3. 31.3.2 Variatio

23 2 n
Current ratio 2.50 2.30 8.69%
Inventory turnover ratio 3.00 6.00 50%
Trade receivables turnover ratio 1.75 5.00 65%
Net Profit ratio (in%) 13% 10% 30%
As calculated above, there is change in inventory turnover ratio, trade receivables
turnover ratio and net profit ratio by more than 25% as compared to preceding year.
Therefore, explanations for such changes have also to be provided where there are
changes by more than 25% as compared to preceding year.

Question: During the audit of Rapid Industries Private Limited, CA Akshat

notices that inventories of raw materials & consumables and work-in- progress
amounting Rs.2.50 crores and Rs. 0.25 crores appear in the financial statements
of the company as on March 31st, 2024. He wants to verify that the above-
mentioned inventories have been valued appropriately and as per generally
accepted accounting policies and practices. How should he proceed to verify the
above? (RTP JAN 2025)

Answer: To verify that inventories of raw material & consumables and work-in-
progress have been valued appropriately and as per generally accepted accounting
policies and practices, the following procedures should be performed by CA Akshat:

For Raw materials and consumables:

• Ascertain what elements of cost are included e.g. carriage inward, non-
refundable duties etc.
If standard costs are used, enquire into basis of standards; how these are
CA INTERMEDIATE

•
compared with actual costs and how variances are analysed and accounted for/
treated in accounting records.
• Test check cost prices used with purchase invoices received in the month(s)
prior to counting.
• Follow up valuation of all damaged or obsolete inventories noted during

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observance of physical counting with a view to establishing a realistic net

realizable value.
For Work in Progress:

• Ascertain how the various stages of production/ value additions are measured
and in case estimates are made, understand the basis for such estimates.
• Ascertain what elements of cost are included. If overheads are included,
ascertain the basis on which they are included and compare such basis with the
available costing and financial data/ information maintained by the entity.
• Ensure that material costs exclude any abnormal wastage factors.
•
Question: The financial statements of XYZ Limited reflects long-term
borrowings from the banks, financial institutions, leasing, and hire purchase
companies. Additionally, the company has issued debentures to its 1000 members
to raise funds in accordance with the provisions of the Companies Act, 2013.
The money raised by issuing debentures is also reflected in long-term
borrowings. As the statutory auditor of XYZ Limited, CA X wants to verify
that all borrowings on the balance sheet represent valid claims by banks or
other third parties. Suggest a few audit procedures in this regard.

(RTP SEP 2024)

Answer: The audit procedures required to be undertaken by CA X while auditing

borrowings is as follows:

• Review board minutes for approval of new lending agreements. During review,
ensure that new loan agreements or bond issuances were authorized. Ensure
that significant debt commitments are approved by the board of directors.
• Check the details of loans recorded (interest rate, nature and repayment
terms) to the loan agreement. Verify that borrowing limits, if any, imposed by
the agreements are not exceeded.
• Roll out and obtain independent balance confirmations (SA 505) in respect of
CA INTERMEDIATE

all the borrowings from the lender (banks/ financial institutions etc.).
• Verify the details of leases and hire purchase creditors recorded to underlying
contracts/agreements.
• In case of Debentures, examine trust deed for terms and dates of redemption,
borrowing restrictions and compliance with covenants.

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• When debt is retired, ensure that a discharge is received on assets securing

the debt.
• Obtain Written Representation that all the liabilities which have been
recorded represent a valid claim by the lenders.

Question: JB Limited has invested huge sums of money on establishment of new

Property, Plant and Equipment during the year under audit. They have incurred
an amount of Rs. 5,70,000/- on dismantling of an old plant, which had become
obsolete, so that a new plant can be set up at the existing location. The Auditor
is in the process of verifying the cost incurred towards addition to Property,
Plant and Equipment. What should be the accounting treatment of the amount
spent on dismantling of old plant in the financial statements? Which elements of
cost should be considered for valuing Property, Plant and Equipment.

(PYQ SEP 2024)

Answer: In the given situation, JB Limited has invested huge sums of money on
establishment of new Property, Plant and Equipment and incurred an amount of
Rs.5,70,000 on dismantling of old plant which had become obsolete so that new plant
can be set up at the existing location. An item of property, plant and equipment that
qualifies for recognition as an asset should be measured at its cost. The costs of
dismantling, removing the item and restoring the site on which it is located referred
to as decommissioning will form part of the new Property, Plant and Equipment.

Elements of Cost: The cost of an item of property, plant and equipment comprises:

i. its purchase price, including import duties and non-refundable purchase taxes,
after deducting trade discounts and rebates.
ii. any costs directly attributable to bringing the asset to the location and
condition necessary for it to be capable of operating in the manner intended
by management
iii. the initial estimate of the costs of dismantling, removing the item and
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restoring the site on which it is located, referred to as decommissioning,

restoration and similar liabilities’, the obligation for which an enterprise incurs
either when the item is acquired or as a consequence of having used the item
during a particular period for purposes other than to produce inventories
during that period.

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Question: ABC & Co. are in the business of manufacturing toys. The stock taking
process has been done by the company as on 31.3.2024. The company has used
FIFO method for valuation of its inventories. The cost of inventory as on
31.3.24 is Rs.25,25,000/- and the net realizable value of the inventory on the
same date is Rs.25,24,000/-.

The cost of inventory includes the following:

(1) Material purchase cost – Rs.25,05,000/-

(2) Allocated transport cost – Rs.18,000/-

(3) Abnormal wastage – Rs.2,000/-

The management seeks your advice in arriving at the value of inventory to be

shown in the financial statements of the company. What should be the value of
inventory in accordance with AS-2? (PYQ MAY 2024)

Answer: Value of Inventory: Inventory to be recognized at the lower of cost and

net realizable value in accordance with AS 2 - Inventories. Further, any costs that
could not be reasonably allocated to the cost of production (e.g. general and
administrative costs) and any abnormal wastage have been excluded from the cost
of inventory. An acceptable valuation basis (e.g. FIFO, Weighted average etc.) has
been used to value inventory as at the period-end.

In the given situation, ABC & Co. is using FIFO method for valuation of its
inventories. Further, cost of inventory as on 31.03.2024 is rupees 25,25,000 which
includes material purchase cost of rupees 25,05,000, allocated cost of transport of
rupees 18,000 and abnormal wastage of rupees 2,000. Net realizable value of said
inventory is Rs.25,24,000. In view of provisions of AS 2, cost allocated to transport
for inventory is relating to bringing the inventory to the location, thus it will be
added in cost of material. However, abnormal wastage of rupees 2000 should be
excluded from cost of inventory.
CA INTERMEDIATE

Thus, cost of inventory will be Rs.25,25,000 – Rs.2,000 = 25,23,000 rupees and Net
realizable value of inventory is Rs.25,24,000/-.

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For valuation in accordance with AS 2, “Inventory”, lower of cost and net realizable
value will be considered. Accordingly, Rs. 25,23,000/- to be considered as value of
inventory in the given situation.

Question: Mr. Z, at the time of appointment as an independent director in EF

Ltd. a listed company, came to know that the Companies Act, 2013 has placed
a greater emphasis on the effective implementation and reporting on internal
controls for a listed Company. He wants to know the responsibilities as casted
under Companies Act, 2013 with regards to Internal Financial Control for (1)
Directors (2) Independent directors and (3) Audit committee as per section
134(5)(e), 149(8) & 177(4) (vii) respectively of the Companies Act, 2013.

(PYQ MAY 2024)

Answer: Internal financial controls as per regulatory requirements: The Companies

Act, 2013 has placed a greater emphasis on the effective implementation and
reporting on the internal controls for a company. The term “internal financial
controls” is used at some places in Companies Act, 2013 casting responsibilities as
under: -

Relevant provision of Companies Nature of Responsibility

Act,2013
Section 134(5)(e) In case of listed Companies, the
Directors’ responsibility statement shall
state that the Directors had laid down
Internal financial controls to be
followed by the company and that such
Internal financial controls are adequate
and were operating effectively.
As per Section 149(8) of the Act The company and independent directors
shall abide by the provisions specified in
Schedule IV which lays down the Code
CA INTERMEDIATE

for independent Directors. As per this

code, the role and functions of
independent directors include that they
shall satisfy themselves on the integrity
of financial information and that

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financial controls and the systems of

risk management are robust and
defensible.
Section 177(4)(vii) of the Act Every audit Committee shall act in
accordance with the terms of reference
specified in writing by the Board which
shall, inter alia, include - evaluation of
internal financial controls and risk
management systems.

Question: LD Ltd. has given below loans to the following borrowers during the
financial year 2023-24. Mr. В an auditor wants your guidance regarding
additional regulatory information required to be provided under the Companies
Act, 2013:

Borrowers Maximum Loan granted during Outstanding Loan as at

the year 2023-2024 ([Link] 31/03/2024 ([Link] Lakh)
Lakh)
X (Promoter) 20 15
Y (Director) 30 25
Z (KMP) 10 05
A(Related Party) 20 10
Others 80 65
Total 160 120
Answer: As additional regulatory requirements, following disclosures shall be made
where Loans or Advances in the nature of loans are granted to promoters, Directors,
KMPs and the related parties (as defined under Companies Act, 2013,) either
severally or jointly with any other person, that are:

(a) repayable on demand or

(b) without specifying any terms or period of repayment.

CA INTERMEDIATE

Type of Borrower Amount of loan or Percentage to the total

advance in the nature of Loans and Advances in
loan outstanding ([Link] the nature of loans
Lakhs) ([Link] Lakhs)
X (Promoter) 15 12.5% =15/120 X 100
Y (Director) 25 20.833% =25/120 X 100
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Z (KMP) 05 4.167% =5/120 X 100

A (Related Party) 10 8.333% =10/120 X 100

Question: PQ & Co. want to diversify its business and for that purpose they
want to raise money by issuing shares to the general public. The face value of
the shares is Rs.100 but the directors of the company propose to issue the
shares at a discounted rate of Rs.95/- so as to receive more response. The
statutory auditor, however, objects to the same as it is not allowed as per the
Companies Act, 2013. State the provisions of Section 53 of the Companies Act,
2013 with reference to shares issued at a discount and the consequences where
the company fails to comply with the provisions of this section. (PYQ MAY 2024)

Answer: Shares issued at a discount: According to Section 53 of the Companies Act,

2013,

(1) a company shall not issue shares at a discount, except in the case of an issue of
sweat equity shares given under Section 54 of the Companies Act, 2013.

(2) any share issued by a company at a discounted price shall be void.

Notwithstanding anything contained in above sub-sections (1) and (2), a company may
issue shares at a discount to its creditors when its debt is converted into shares in
pursuance of any statutory resolution plan or debt restructuring scheme in
accordance with any guidelines or directions or regulations specified by the Reserve
Bank of India under the Reserve Bank of India Act, 1934 or the Banking (Regulation)
Act, 1949.

(3) Where any company fails to comply with the provisions of this section, such
company and every officer who is in default shall be liable to a penalty which may
extend to an amount equal to the amount raised through the issue of shares at a
discount or five lakh rupees, whichever is less, and the company shall also be liable
to refund all monies received with interest at the rate of twelve per cent. per annum
from the date of issue of such shares to the persons to whom such shares have been
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issued.

Question: HR & Associates are the auditors of a large manufacturing company.

The company has recently invested huge amount in Property, Plant and Equipment
(PPE) for its new unit. They have added many incidental expenses to the cost

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of PPE. The junior audit team members are not sure about which costs should
be excluded from the cost of PPE. Give examples of costs that should not form
part of costs of PPE.

Answer: Examples of costs that are not costs of an item of property, plant and
equipment are:

i. costs of opening a new facility or business, such as, inauguration costs;

ii. costs of introducing a new product or service (including costs of advertising and
promotional activities);
iii. costs of conducting business in a new location or with a new class of customer
(including costs of staff training); and
iv. administration and other general overhead costs.

Question: JK Ltd. has opened a new manufacturing unit and for that they want
plant & machinery. Since the capital outflow will be huge, they are considering of
taking it on lease. They have approached several parties and have shortlisted one
of them who is ready to give the plant on lease for 11 years, which is
approximately the estimated economic life of the asset. As per the agreement,
JK Ltd. will bear the insurance and maintenance expenses of the asset. Which
kind of lease agreement have JK Ltd. Entered into and what is the ownership
status, the accounting treatment and the tax benefits of the same?

(PYQ MAY 2024)

Answer: In the given situation, JK Ltd. has opened a new manufacturing unit and for
that they want plant & machinery. They have taken the plant on lease for 11 years,
which is approximately the estimated economic life of the asset. As per the
agreement, JK Ltd. will bear the insurance and maintenance expenses of the asset.

Same will be considered as Finance Lease as per AS-19 since the lease term is for a
major part of the economic life of the asset even if title is not transferred.
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Status of Ownership: Ownership transfer option at the end of the lease period is with
the lessee. Title may or may not be eventually transferred.

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Accounting treatment: Finance lease is treated like loan arrangement. Hence, the
asset ownership is considered of that of the lessee and thus appears on the balance
sheet of the lessee.

Tax benefit: Lessee can claim both interest and depreciation expense as financial
lease is treated like a loan.

Question: Kyte Private Limited acquired an immovable property of substantial

value during the financial year 2023-24, which is recorded in the financial
statements as an addition in the Schedule of PPE. The auditor also observed that
this immovable property has been mortgaged to a bank for availing credit
facilities. How should the auditor verify the rights and obligations assertion for
this property to ensure the entity's legal ownership and identify any charges
against it? (JAN MTP 2025)

Answer: To verify the rights and obligations assertion regarding Property, Plant, and
Equipment (PPE), the auditor must ensure the entity has valid legal ownership and
identify any charges against it. The audit procedures should include the following:

• In addition to the procedures undertaken for verifying completeness of additions

to PPE during the period under audit, the auditor while performing testing of
additions should also verify that all PPE purchase invoices are in the name of the
entity that entitles legal title of ownership to the respective entity.
• For all additions to land and building in particular, the auditor should check the
conveyance deed/ sale deed to verify whether the entity is the legal and valid
owner or not.
• The auditor should insist and verify title deeds for immoveable property
acquired.
• In case, the entity has given such immoveable property as security for any
borrowings and the original title deeds are not likely to be available with the
entity, the auditor should request the entity’s management for obtaining a
CA INTERMEDIATE

confirmation from the respective lenders that they are holding the original title
deeds of immoveable property as security.
• The auditor should also verify the register of charges, available with the entity
to assess that any charge has been created against the PPE.

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Question: As the statutory auditor of Ginni Ltd., you need to verify if the
company has valid legal ownership rights over the inventories recorded in the
balance sheet as on March 31, 2024. What audit procedures should you perform
to verify the company’s ownership of the inventories, including items stored at
third-party locations? (MTP JAN 2025)

Answer: The statutory auditor of Ginni Ltd. should perform the following audit
procedures to verify if the company has valid legal ownership rights over the
inventories recorded in the balance sheet as on March 31st, 2024.

• Vouch recorded purchases to underlying documentation (purchase requisition,

purchase order, receiving report, vendor invoice and cancelled cheque or
payment file).
• Evaluate the consigned goods.
• Examine client correspondence, sales and receivables records, purchase
documents.
• Determine existence of collateral agreements.
• Review consignment agreements.
• Review material purchase commitment agreements.
• Examine invoices for evidence of ownership i.e. the invoices shall be in the name
of the client.
• Obtain confirmation for significant items of inventory.
• For instances of inventory held by third party, the auditor should insist on
obtaining declaration from the third party on its business letterhead and signed
by an authorized personnel of that third party confirming that the items of
inventory belong to the entity and are being held by such third party on behalf
of and for the benefit of the entity under audit.

Question: During the audit of a company, CA Atul noticed that company is facing
significant skilled labour shortages resulting in hampering operations of the
CA INTERMEDIATE

company. The company’s manufacturing is dependent upon skilled labour coming

from villages in certain districts of Eastern UP. However, due to job
opportunities available near villages now, many are not interested in leaving their
native villages.

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The company failed to keep its commitments due to such situation, consequently
lost orders and faced decrease in its revenues. The fixed costs of the company
remain at a high level. As a result, the company is facing a liquidity crunch and
is not able to pay its creditors on time. The bankers of the company are also
not willing to help the company to tide over liquidity crisis. The auditor has
doubts over going concern status of the company. How should management of
the company try to address auditor’s concerns? What audit procedures may
be performed by auditors in such a situation? (MTP JAN 2025)

Answer: Significant shortage of skilled labour, inability to pay creditors on time

and overall liquidity crisis faced by the company are examples of events or
conditions that, individually or collectively, may cast significant doubt on the
entity’s ability to continue as a going concern.

In such a situation, management should try to address auditor’s concerns by

preparing its future plan of action including preparation of cash flow forecast
showing inflow and outflow of cash. Such a cash flow forecast should address
auditor’s concerns regarding liquidity crisis being faced by the company.
The auditor should perform audit procedures to evaluate the reliability of the
underlying data to prepare the forecast and determining whether there is adequate
support for the assumptions underlying the forecast.
The auditor should also consider whether any additional facts or information have
become available since the date on which management made its assessment.

Question: During the audit of HST Ltd., CA Mukund, the auditor, observed a
significant volume of unsold electronic parts as inventory that had remained
stagnant for more than two years. He noted that the company was facing
difficulty selling these items due to the changes in the market. Additionally,
some parts were damaged, and others were discontinued models. CA Mukund
also ensured that the inventory was accurately valued to ensure proper financial
reporting. You are required to outline the detailed audit procedures that are
generally undertaken when auditing such inventories which at the time of
CA INTERMEDIATE

observance of physical counting were noted as being damaged or obsolete.

Answer: Follow up for items that are obsolete, damaged, slow moving and
ascertain the possible realizable value of such items. Carefully examine the valuation
of obsolete and damaged inventory.

For the purpose, request the client to provide inventory ageing split and follow up

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for any inventories which at time of observance of physical counting were noted as
being damaged or obsolete.
• Compare recorded costs with replacement costs.
• Examine vendor price lists to determine if recorded cost is less than current
prices.
• Calculate inventory turnover ratio. Obsolete inventory may be revealed if ratio
is significantly lower.
• In manufacturing environments, test overhead allocation rates and ensure that
only direct labour, direct material and overhead have been included.
• Verify the correct application of lower-of- cost-or-net realizable value
principles.

Question: M/s AR & Associates have been appointed as statutory auditors

of Future Limited, a company engaged in the business of manufacturing of
hardware products. They are analyzing the monthly trends for other expenses
like rent, power and fuel, repairs, etc. and are also verifying attributes of such
types of expenses. List down the attributes for verifying such expenses.

(MTP JAN 2025)

Answer: Attributes for verifying other expenses like Power and Fuel, Repair
etc.: An entity in addition to making purchases and incurring employee benefit
expenses, also incurs other expenditures like rent, power and fuel, repairs and
maintenance, insurance, travelling, miscellaneous expenses etc., that are essential
and incidental to running of business operations.

While the auditor may choose to analyse the monthly trends for expenses like
rent, power and fuel, an auditor generally prefers to vouch for other expenses to
verify following attributes:

(i) Whether the expenditure pertained to current period under audit;

CA INTERMEDIATE

(ii) Whether the expenditure qualified as a revenue and not capital expenditure;
(iii) Whether the expenditure had a valid supporting document like travel
tickets, insurance policy, third party invoice etc.;

(iv) Whether the expenditure has been classified under the correct expense
head;

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(v) Whether the expenditure was authorised as per the delegation of authority
matrix;
(vi) Whether the expenditure was in relation to the entity’s business and not a
personal expenditure.

CA INTERMEDIATE

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Chapter-6: Audit Documentation

Question 1: Audit documentation provides evidence of the auditor’s basis for a

conclusion about the achievement of the overall objectives of the auditor and
evidence that the audit was planned and performed in accordance with SAs and
applicable legal and regulatory requirements. Explain stating clearly purpose of
audit documentation. (MTP 5 Marks 2018 & Oct 2018)
OR

Audit documentation serves a number of purposes. List such purposes. (MTP 3

Marks March 2021)

OR

A new team member of GSR & Co., the auditors of Esteem Limited, was of the
view that Audit Documentation would not serve any purpose at any stage of
Audit. Explain. (RTP May 2021)
OR

SA 230, “Audit Documentation” deals with the auditor’s responsibility to prepare

audit documentation for an audit of financial statements. Such audit
documentation serves various purposes. Explain. (RTP May 2023)
OR

Discuss any two purposes of audit documentation. (Study Mat)

OR

CAM is the engagement partner of S Ltd. He has instructed his audit team to
maintain proper audit documentation. The audit team members are not sure
about the purpose for which the documentation should be made. Explain the
various purposes of audit documentation with reference to SA 230. (3 Marks
Nov 2022)
CA INTERMEDIATE

Answer 1: Audit documentation: SA 230 on “Audit Documentation”, audit

documentation refers to the record of audit procedures performed, relevant audit
evidence obtained, and conclusions the auditor reached. (terms such as “working
papers” or “work papers” are also sometimes used.) Nature of Audit Documentation
Audit documentation provides:

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a. evidence of the auditor’s basis for a conclusion about the achievement of the
overall objectives of the auditor; and
b. evidence that the audit was planned and performed in accordance with SAs
and applicable legal and regulatory requirements.
Purpose of Audit Documentation
The following are the purpose of Audit documentation:
1. Assisting the engagement team to plan and perform the audit.
2. Assisting members of the engagement team to direct and supervise the audit
work, and to discharge their review responsibilities.
3. Enabling the engagement team to be accountable for its work.
4. Retaining a record of matters of continuing significance to future audits.
5. Enabling the conduct of quality control reviews and inspections.
6. Enabling the conduct of external inspections in accordance with applicable
legal, regulatory or other requirements.
From the above, it can be concluded that Audit documentation serves a number of
purposes and hence it would be incorrect to say that audit documentation would not
serve any purpose at any stage of audit.

Question 2: Discuss with reference to SA-230, factors affecting form,

contents and extent of audit documentation. (MTP 4 Marks April 2019)
OR
The form, content and extent of audit documentation depend on factors such
as the size and complexity of the entity, the nature of the audit procedures to
be performed etc. Explain in detail. (RTP Nov 2018)
Answer 2: Form, Content and Extent of Audit Documentation: Working papers
should record the audit plan, nature, timing and extent of auditing procedures
performed, and the conclusions drawn from the evidence obtained.
The form, content and extent of working papers depend on factors such as:
✓ The size and complexity of the entity.
✓ The nature of the audit procedures to be performed.
✓ The identified risks of material misstatement.
CA INTERMEDIATE

✓ The significance of the audit evidence obtained.

✓ The nature and extent of exceptions identified.
✓ The need to document a conclusion or the basis for a conclusion not readily
determinable from the documentation of the work performed or audit
evidence obtained.
✓ The audit methodology and tools used.

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Question 3: "Completion Memorandum" is helpful as part of the audit

documentation. Explain. (MTP 3 Marks May 2020, 3 Marks, May 2019 )

Answer 3: Completion Memorandum or Audit Documentation Summary.

The auditor may consider it helpful to prepare and retain as part of the audit
documentation a summary (sometimes known as a completion memorandum) that
describes-
i. the significant matters identified during the audit.
ii. how they were addressed.
Such a summary may facilitate effective and efficient review and inspection of the
audit documentation, particularly for large and complex audits. Further, the
preparation of such a summary may assist auditor’s consideration of the significant
matters. It may also help the auditor to consider whether there is any individual
relevant SA objective that the auditor cannot achieve that would prevent the
auditor from achieving the overall objectives of the auditor.

Question 4: An important factor in determining the form, content and extent of

audit documentation of significant matters is the extent of professional judgment
exercised in performing the work and evaluating the results. Explain stating
clearly the examples of significant matters. (RTP Nov 2020).

Or

Judging the significance of a matter requires an objective analysis of the facts

and circumstances. Documentation of the professional judgments made, where
significant, serves to explain the auditor’s conclusions and to reinforce the
quality of the judgment. Explain with the help of examples. (RTP May 2019)
Answer 4: Documentation of Significant Matters and Related Significant
Professional Judgments Judging the significance of a matter requires an objective
analysis of the facts and circumstances. Examples of significant matters include:

• Examples of significant matters include:

1. Matters that give rise to significant risks (as defined in SA 315).
CA INTERMEDIATE

2. Results of audit procedures indicating

a. That the financial statements could be materially misstated
b. A need to revise the auditor’s previous assessment of the risks of
material misstatement and the auditor’s responses to those risks.
3. Circumstances that cause the auditor significant difficulty in applying

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necessary audit procedures.

4. Findings that could result in a modification to the audit opinion or the
inclusion of an Emphasis of Matter paragraph in the auditor’s report.
• An important factor in determining the form, content and extent of audit
documentation of significant matters is the extent of professional judgement
exercised in performing the work and evaluating the results.
• Documentation of the professional judgements made, where significant,
serves to explain the auditor’s conclusions and to reinforce the quality of the
judgement.

Question 5: The nature and timing of the audit procedures to be used may be
affected by the fact that some of the accounting data and other information
may be available only in electronic form or only at certain points or periods in
time. Explain with the help of examples. (RTP Nov 2020)

Answer 5: The nature and timing of the audit procedures to be used may be
affected by the fact that some of the accounting data and other information may
be available only in electronic form or only at certain points or periods in time. For
example, source documents, such as purchase orders and invoices, may exist only in
electronic form when an entity uses electronic commerce, or may be discarded after
scanning when an entity uses image processing systems to facilitate storage and
reference.

Certain electronic information may not be retrievable after a specified period of

time, for example, if files are changed and if backup files do not exist. Accordingly,
the auditor may find it necessary as a result of an entity’s data retention policies to
request retention of some information for the auditor’s review or to perform audit
procedures at a time when the information is available.

Question 6: While documenting the nature, timing and extent of audit procedures
performed in case of audit of PQR Ltd, explain the important matters its auditor
should record. (RTP May 2021)
CA INTERMEDIATE

Answer 6: In documenting the nature, timing and extent of audit procedures

performed, the auditor of PQR Ltd shall record:
i. The identifying characteristics of the specific items or matters tested.
ii. Who performed the audit work and the date such work was completed; and
Who reviewed the audit work performed and the date and extent of such review?

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Question 7: The auditor shall prepare audit documentation that is sufficient to

enable an experienced auditor to understand significant matters arising during
the audit. Explain the above statement and also give examples of significant
matters. (RTP Nov 2022)

Answer 7: The auditor shall prepare audit documentation that is sufficient to enable
an experienced auditor, having no previous connection with the audit, to understand
significant matters arising during the audit, the conclusions reached thereon, and
significant professional judgments made in reaching those conclusions.
Judging the significance of a matter requires an objective analysis of the facts and
circumstances. Examples of significant matters include:
▪ Matters that give rise to significant risks.
▪ Results of audit procedures indicating (a) that the financial statements could
be materially misstated, or (b) a need to revise the auditor’s previous
assessment of the risks of material misstatement and the auditor’s responses
to those risks.
▪ Circumstances that cause the auditor significant difficulty in applying
necessary audit procedures.
▪ Findings that could result in a modification to the audit opinion or the inclusion
of an Emphasis of Matter paragraph in the auditor’s report.

Question 8: Audit Documentation refers to the record of three items. Explain

stating clearly the objective and nature of audit documentation. (RTP Nov 2023)
Answer 8: Audit Documentation refers to the record of audit procedures
performed, relevant audit evidence obtained, and conclusions the auditor reached.

The objective of the auditor is to prepare documentation that provides:

i. A sufficient and appropriate record of the basis for the auditor’s report; and
ii. Evidence that the audit was planned and performed in accordance with SAs
and applicable legal and regulatory requirements.

Nature of Audit Documentation Audit documentation provides:

a. Evidence of the auditor’s basis for a conclusion about the achievement of the
overall objectives of the auditor; and
b. Evidence that the audit was planned and performed in accordance with SAs
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and applicable legal and regulatory requirements.

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Question 9: The auditor shall assemble the audit documentation in an audit file
and complete the administrative process of assembling the final audit file on a
timely basis. Explain in detail. (RTP Nov 2023, May 2023)

Answer 9: The auditor shall assemble the audit documentation in an audit file and
complete the administrative process of assembling the final audit file on a timely
basis after the date of the auditor’s report.
▪ SQC 1 “Quality Control for Firms that perform Audits and Review of Historical
Financial Information, and other Assurance and related services”, requires
firms to establish policies and procedures for the timely completion of the
assembly of audit files.
▪ An appropriate time limit within which to complete the assembly of the final
audit file is ordinarily not more than 60 days after the date of the auditor’s
report. The completion of the assembly of the final audit file after the date of
the auditor’s report is an administrative process that does not involve the
performance of new audit procedures or the drawing of new conclusions.
▪ Changes may, however, be made to the audit documentation during the final
assembly process, if they are administrative in nature.

Examples of such changes include:

• Deleting or discarding superseded documentation.
• Sorting, collating and cross-referencing working papers.
• Signing off on completion checklists relating to the file assembly process.
• Documenting audit evidence that the auditor has obtained, discussed and
agreed with the relevant members of the engagement team before the
date of the auditor’s report.
▪ After the assembly of the final audit file has been completed, the auditor
shall not delete or discard audit documentation of any nature before the end
of its retention period.
▪ SQC 1 requires firms to establish policies and procedures for the retention
of engagement documentation. The retention period for audit engagements
ordinarily is no shorter than seven years from the date of the auditor’s
report, or, if later, the date of the group auditor’s report.
CA INTERMEDIATE

Question 10: CA Ripun completed the audit of a listed company, and the audit
report was issued on July 17th, 2024. However, he had not properly organized
the audit working papers, including records of discussions with management,
audit procedures performed, and conclusions reached. More than six months
after issuing the report, he received a letter from the regulator in connection

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with audit of the company requesting him to share copy of audit file. In a hurry,
CA Ripun quickly assembled the audit file, adding some papers he thought were
necessary, but he used the current date on these newly added documents.
He then sent the audit file to the regulator. Discuss the issues involved related
to “audit documentation” and assembling of the final audit file in this case.
(RTP Jan 2025)

Answer 10: The auditor shall assemble the audit documentation in an audit file and
complete the administrative process of assembling the final audit file on a timely
basis after the date of the auditor’s report.

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

Question 11: An important factor in determining the form, content and extent
of audit documentation of significant matters is the extent of professional

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judgment exercised in performing the work and evaluating the results. Explain
stating clearly the examples of significant matters. (RTP SEP 2024)

Answer 11: As per SA 230, ”Audit documentation” judging the significance

of a matter requires an objective analysis of the facts and circumstances.

Examples of significant matters include:

• Matters that give rise to significant risks.
• Results of audit procedures indicating (a) that the financial statements could
be materially misstated, or (b) a need to revise the auditor’s previous
assessment of the risks of material misstatement and the auditor’s responses
to those risks.
• Circumstances that cause the auditor significant difficulty in applying
necessary audit procedures.
• Findings that could result in a modification to the audit opinion or the inclusion
of an Emphasis of Matter Paragraph in the auditor’s report.
An important factor in determining the form, content and extent of audit
documentation of significant matters is the extent of professional judgement
exercised in performing the work and evaluating the results.
Documentation of the professional judgements made, where significant, explains the
auditor’s conclusions and reinforces the quality of the judgement.
Such matters are of particular interest to those responsible for reviewing audit
documentation, including those carrying out subsequent audits, when reviewing
matters of continuing significance (for example, when performing a retrospective
review of accounting estimates).

Question 12: M/s. PK & Company, Chartered Accountants, are the statutory
auditors of JC Limited. CA Tarun, partner of M/s. PK & Company, was entrusted
to supervise and verify the inventory items as on 31.03.2024. During the process
of verification, a large chunk of draft inventory sheets were accumulated and
CA INTERMEDIATE

then a final inventory sheet was prepared. The audit assistant has kept all these
drafts and the final inventory sheet in the audit file. Is the approach of the
audit assistant correct? Which papers/ documents may not be included in the
audit documentation? (PYQ SEP 2024)

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Answer 12: In the given case, the audit assistant has kept a large chunk of draft
inventory sheets and the final inventory sheet in the audit file which is not correct
as the auditor is not required to document draft inventory sheets. Auditor should
ensure that only final inventory sheets will form part of the audit documentation.
Thus, approach of the audit assistant of filing draft and final inventory sheet is not
correct.

As per SA 230, “Audit documentation”, audit documentation may be recorded on

paper or on electronic or other media.

The auditor need not include in audit documentation:

• superseded drafts of working papers and financial statements,

• notes that reflect incomplete or preliminary thinking,

• previous copies of documents corrected for typographical or other errors, and

• duplicates of documents.

Question 13: CA B, an auditor, after the completion of busy audit season, was
occupied in assembling of final audit files of one of his client. First of all, he
started preparing various documents of that client and then kept those
documents in various folders. He was preparing documents as well as audit file
in paper form because he believed that it is mandatory. He could complete
documentation as well as assembling of final audit file of that client after three
months from the date of audit report. Generally, he retains audit file of the
clients for 4 years from the date of audit report. Check the validity of the
action of CA B. (PYQ MAY 2024)

Answer 13: Assembly of the Final Audit File:

CA INTERMEDIATE

Audit documentation may be recorded on paper or on electronic or other media.

Audit file may be defined as one or more folders or other storage media, in physical
or electronic form, containing the records that comprise the audit documentation
for a specific engagement. Hence the views of CA B that audit documentation should
be maintained mandatorily in paper form is not correct.

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The auditor shall prepare audit documentation on timely basis. Preparing sufficient
and appropriate audit documentation on a timely basis helps to enhance the quality
of the audit and facilitates the effective review and evaluation of the audit evidence
obtained and conclusions reached before the auditor’s report is finalized.
Documentation prepared after the audit work has been performed is likely to be less
accurate than documentation prepared at the time such work is performed.
Completing the audit Documentation by CA B not on timely basis is not proper.

An appropriate time limit within which to complete the assembly of the final audit
file is ordinarily not more than 60 days after the date of the auditor’s report. In
the given situation, CA. B, after completion of audit season, is completing the audit
file as well as assembling of final audit files of his client after three months of the
date of audit report which is not valid as per SQC 1.

SQC 1 “Quality Control for Firms that perform Audits and Review of Historical
Financial Information, and other Assurance and Related Services”, requires firms to
establish policies and procedures for the retention of engagement documentation.
The retention period for audit engagements ordinarily is no shorter than seven years
from the date of the auditor’s report, or, if later, the date of the group auditor’s
report. He retains audit file of the client for 4 years from the date of audit report
is also non-compliance of SQC 1.

Question 14: M/s KSJS & Associates are the statutory auditors of Moon Ltd.
for the financial year 2023-24. During an audit briefing, CA Sanket, the
engagement partner, explained that the auditor must assemble the audit
documentation in an audit file and complete the administrative process of
finalising the audit file on a timely basis after the date of the auditor’s report.
He also highlighted the requirements of SQC 1 regarding establishment of
policies and procedures for the retention of engagement documentation in a
firm. Explain the requirements related to the timely assembly and retention of
CA INTERMEDIATE

audit files in accordance with relevant Engagement and Quality Control

Standards. (MTP JAN 2025)

Answer 14: The auditor shall assemble the audit documentation in an audit file and
complete the administrative process of assembling the final audit file on a timely
basis after the date of the auditor’s report.

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

Question 15: CA Tanuj, the auditor of Kiran Ltd., completed the audit work
and issued the auditor's report on 18th August 2024 for the financial year
ended on 31st March 2024. During the final assembly of the audit file, he
discarded some supporting schedules as same were outdated and corrected

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cross- referencing errors of working papers. No new audit conclusions were

drawn, and the final audit file was assembled on 10th October 2024.

On the basis of Standards on Auditing regarding audit documentation, comment

on the action taken by CA Tanuj. (MTP JAN 2025)

Answer 15: As per SA 230, “Audit Documentation”, the auditor shall assemble the
audit documentation in an audit file and complete the administrative process of
assembling the final audit file on a timely basis after the date of the auditor’s
report.

• An appropriate time limit within which to complete the assembly of the final
audit file is ordinarily not more than 60 days after the date of the auditor’s
report. The completion of the assembly of the final audit file after the date of
the auditor’s report is an administrative process that does not involve the
performance of new audit procedures or the drawing of new conclusions.
• Changes may, however, be made to the audit documentation during the final
assembly process, if they are administrative in nature.
• After the assembly of the final audit file has been completed, the auditor shall
not delete or discard audit documentation of any nature before the end of its
retention period.
In the given situation, the auditor CA Tanuj has issued the auditor's report on
18th August 2024 for the financial year ended on 31st March 2024. However, he
discarded some supporting schedules and corrected cross-referencing errors of
working papers during the final assembly of the audit file by 10th October 2024
which is under prescribed time-limit of 60 days from the issuance of auditors
report. Further, no new audit conclusions were drawn. Thus, CA Tanuj can make said
changes to the audit documentation during the final assembly process.

CA INTERMEDIATE

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Chapter-7: Completion and Review

Question: Financial Statement may be affected by certain events that occur

after the date of Financial Statements. How financial reporting frameworks
specifically refer to such events, explain giving examples.

Answer: Financial reporting frameworks ordinarily identify two types of events

(a) Those that provide evidence of conditions that existed at the date of the
financial statements
(b) Those that provide evidence of conditions that arose after the date of the
financial statements

Examples of events providing evidence of conditions that existed at the date of

the financial statements
1. Declaration of insolvency of a major debtor of the entity between the date of
financial statements and the date of auditor’s report providing evidence on the
recoverability of the money due from debtor as on date of the financial
statements.
2. Settling a legal claim outside the court at a reduced amount between the date of
financial statements and the date of auditor’s report for which provision has
already been made in financial statements. It provides evidence on adjustment
in provision amount already made in financial statements, if any.

Examples of events providing evidence of conditions that arose after the date of
the financial statements
1. Issue of new share capital.
2. Planned merger of the company.
3. Destruction of substantial inventories due to fire between the date of the
financial statements and the date of auditor’s report.

Question: When performing risk assessment procedures as required by SA 315,

the auditor shall consider whether events or conditions exist that may cast
CA INTERMEDIATE

significant doubt on the entity’s ability to continue as a going concern. In so

doing, the auditor has determined that management of XYZ Ltd has already
performed a preliminary assessment of the entity’s ability to continue as a
going concern. Explain how would auditor of XYZ Ltd proceed in the above case.

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Also explain how would the auditor proceed if such an assessment has not yet
been performed by the management. [RTP –MAY 2021]

Answer: When performing risk assessment procedures as required by SA 315, the

auditor shall consider whether events or conditions exist that may cast significant
doubt on the entity’s ability to continue as a going concern.

In so doing, the auditor shall determine whether management has already

performed a preliminary assessment of the entity’s ability to continue as a going
concern, and:

i. If such an assessment has been performed, the auditor shall discuss the
assessment with management and determine whether management has identified
events or conditions that, individually or collectively, may cast significant doubt
on the entity’s ability to continue as a going concern and, if so, management’s plans
to address them; or

ii. If such an assessment has not yet been performed, the auditor shall discuss
with management the basis for the intended use of the going concern basis of
accounting, and inquire of management whether events or conditions exist that,
individually or collectively, may cast significant doubt on the entity’s ability to
continue as a going concern.

Question: Under the going concern basis of accounting, the financial statements
are prepared on the assumption that the entity is a going concern and will
continue its operations for the foreseeable future. Explain. Also discuss the
objectives of an auditor regarding Going concern as per relevant standard on
auditing.
Answer: Under the going concern basis of accounting, the financial statements are
prepared on the assumption that the entity is a going concern and will continue it s
operations for the foreseeable future.

General purpose financial statements are prepared using the going concern basis of
CA INTERMEDIATE

accounting, unless management either

i. intends to liquidate the entity or to cease operations,

ii. or has no realistic alternative but to do so

When the use of the going concern basis of accounting is appropriate, assets and
liabilities are recorded on the basis that the entity will be able to realize its assets

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and discharge its liabilities in the normal course of business.

The objectives of the auditor regarding Going Concern are:

1. To obtain sufficient appropriate audit evidence regarding, and conclude on,
the appropriateness of management’s use of the going concern basis of
accounting in the preparation of the financial statements.
2. To conclude, based on the audit evidence obtained, whether 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
3. To report in accordance with this SA.

Question: While doing audit of ABC Pvt Ltd, on the basis of sufficient and
appropriate evidence, auditor comes to a conclusion that use of the Going
Concern Basis of Accounting is appropriate, but a material uncertainty exists.
Discuss the implications for auditor’s report if:

A. Adequate Disclosure of a Material Uncertainty is Made in the Financial

Statements.
B. Adequate Disclosure of a Material Uncertainty is Not Made in the Financial
Statements. [RTP –NOV 2021]

Answer: Use of the Going Concern Basis of Accounting is Appropriate but a

Material Uncertainty Exists

The identification of a material uncertainty is a matter that is important to users’

understanding of the financial statements. The use of a separate section with a
heading that includes reference to the fact that a material uncertainty related to
going concern exists alerts users to this circumstance.

A. Adequate Disclosure of a Material Uncertainty is Made in the Financial

Statements

If adequate disclosure about the material uncertainty is made in the financial

statements, the auditor shall express an unmodified opinion and the auditor’s
CA INTERMEDIATE

report shall include a separate section under the heading “Material

Uncertainty Related to Going Concern.”
B. Adequate Disclosure of a Material Uncertainty is Not Made in the
Financial Statements.
If adequate disclosure about the material uncertainty is not made in the

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financial statements, the auditor shall:

a. Express a qualified opinion or adverse opinion, as appropriate, in

accordance with SA 705 (Revised); and

b. In the Basis for Qualified (Adverse) Opinion section of the auditor’s

report, state that a material uncertainty exists that may cast significant
doubt on the entity’s ability to continue as a going concern and that the
financial statements do not adequately disclose this matter.

Question: Give examples of financial events or conditions that, individually or

collectively, may cast significant doubt on the entity’s ability to continue as a
going concern. [RTP –NOV 2021]

Answer: The following are examples of Financial events or conditions that,

individually or collectively, may cast significant doubt on the entity’s ability to
continue as a going concern

1. Net liability or net current liability position.

2. Fixed-term borrowings approaching maturity without realistic prospects of
renewal or repayment; or excessive reliance on short-term borrowings to
finance long-term assets.
3. Indications of withdrawal of financial support by creditors.
4. Negative operating cash flows indicated by historical or prospective financial
statements.
5. Adverse key financial ratios
6. Substantial operating losses or significant deterioration in the value of assets
used to generate cash flows
7. Arrears or discontinuance of dividends
8. Inability to pay creditors on due dates
9. Inability to comply with the terms of loan agreements
10. Change from credit to cash-on-delivery transactions with suppliers Inability
to obtain financing for essential new product development or other essential
investments.
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Question: SA 560, “Subsequent Events” deals with the auditor’s responsibilities

relating to subsequent events in an audit of financial statements. Financial
statements may be affected by certain events that occur after the date of the
financial statements. Many financial reporting frameworks specifically refer to
such events. Explain those events and also define subsequent events.

[RTP –NOV 2021]

Answer: SA 560, “Subsequent Events” deals with the auditor’s responsibilities
relating to subsequent events in an audit of financial statements.

Financial statements may be affected by certain events that occur after the date
of the financial statements. Many financial reporting frameworks specifically refer
to such events. Such financial reporting frameworks ordinarily identify two types of
events:

a. Those that provide evidence of conditions that existed at the date of the
financial statements; and

b. Those that provide evidence of conditions that arose after the date of the
financial statements.
SA 700 explains that the date of the auditor’s report informs the reader that the
auditor has considered the effect of events and transactions of which the auditor
becomes aware and that occurred up to that date.

Subsequent events refer to events occurring between the date of the financial
statements and the date of the auditor’s report, and facts that become known to the
auditor after the date of the auditor’s report.

Question: The auditor shall perform audit procedures designed to obtain

sufficient appropriate audit evidence that all events occurring between the date
of the financial statements and the date of the auditor's report, that requires
adjustment of, or disclosure in, the financial statements have been identified.
With reference to SA 560, what are the audit procedures included in the
auditor's risk assessment? [JULY 2021]
CA INTERMEDIATE

Answer: The auditor shall perform audit procedures designed to obtain sufficient
appropriate audit evidence that all events occurring between the date of the
financial statements and the date of the auditor’s report that require adjustment
of, or disclosure in, the financial statements have been identified.

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The auditor is not, however, expected to perform additional audit procedures on

matters to which previously applied audit procedures have provided satisfactory
conclusions.

The auditor shall perform the procedures required above so that they cover the
period from the date of the financial statements to the date of the auditor’s
report, or as near as practicable thereto. The auditor shall take into account the
auditor’s risk assessment which shall include the following:

a. Obtaining an understanding of any procedures management has established to

ensure that subsequent events are identified.

b. Inquiring of management and, where appropriate, those charged with

governance as to whether any subsequent events have occurred which might
affect the financial statements.

c. Reading minutes, if any, of the meetings, of the entity’s owners, management

and those charged with governance, that have been held after the date of the
financial statements and inquiring about matters discussed at any such
meetings for which minutes are not yet available.

d. Reading the entity’s latest subsequent interim financial statements, if any.

Question: CA K is re-appointed as the auditor of B Ltd. He wants to re-confirm

certain matters and has asked the management to give written representations
for the same. Under what circumstances can an auditor ask the management to
reconfirm its acknowledgement and understanding of responsibilities in written
representation? [DEC 2021]

Answer: Other Written Representation: Other SAs require the auditor to request
written representations. If, in addition to such required representations, the
auditor determines that it is necessary to obtain one or more written
representations to support other audit evidence relevant to the financial statements
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or one or more specific assertions in the financial statements, the auditor shall
request such other written representations.

The written representations draw on the agreed acknowledgement and

understanding of management of its responsibilities by requesting confirmation that
it has fulfilled them. The auditor, CA K of B Ltd, may also ask management of B

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Ltd to reconfirm its acknowledgement and understanding of those responsibilities

in written representations. This is particularly appropriate when:

1. Those who signed the terms of the audit engagement on behalf of the entity no
longer have the relevant responsibilities.

2. The terms of the audit engagement were prepared in a previous year;

3. There is any indication that management misunderstands those responsibilities;

or

4. Changes in circumstances make it appropriate to do so

Question: Explain the objectives of the auditor regarding written

representations. [JAN 2021]

Answer: The objectives of the auditor regarding written representation:

1. To obtain written representations: To obtain written representations from

management. Also that management believes that it has fulfilled its responsibility
for the preparation of the financial statements and for the completeness of the
information provided to the auditor.

2. To support other evidence: To support other audit evidence relevant to the

financial statements or specific assertions in the financial statements by means
of written representations; and
3. To respond appropriately: To respond appropriately to written representations
provided by management or if management does not provide the written
representations requested by the auditor.

Question: Management's assessment of the entity's ability to continue as a going

concern involves making a judgement about inherently uncertain future outcomes
of events or conditions. What are relevant factors to that judgement? [JAN
2021]
Answer: Management’s assessment of the entity’s ability to continue as a going
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concern involves making a judgment, at a particular point in time, about inherently

uncertain future outcomes of events or conditions. The following factors are
relevant to that judgment:

• The degree of uncertainty associated with the outcome of an event or condition

increases significantly the further into the future an event or condition or the

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outcome occurs. For that reason, most financial reporting frameworks that
require an explicit management assessment specify the period for which
management is required to take into account all available information.
• The size and complexity of the entity, the nature and condition of its business
and the degree to which it is affected by external factors affect the
judgment regarding the outcome of events or conditions.
• Any judgment about the future is based on information available at the time
at which the judgment is made. Subsequent events may result in outcomes that
are inconsistent with judgments that were reasonable at the time they were
made.

Question: Give examples of operating events or conditions that, individually or

collectively, may cast significant doubt on the entity’s ability to continue as a
going concern.

Answer: Examples of operating events or conditions that, individually or collectively,

may cast significant doubt on the entity’s ability to continue as a going concern are
as follows:

• Management intentions to liquidate the entity or to cease operations

• Loss of key management without replacement
• Loss of a major market, key customer(s), franchise, license, or principal
supplier(s)
• Labour difficulties
• Shortages of important supplies
• Emergence of a highly successful competitor

Question: If management does not provide one or more of the requested

written representations, the auditor shall do what?
Answer: If management does not provide one or more of the requested written
representations, the auditor shall: -
a. Discuss the matter with management
CA INTERMEDIATE

b. Re-evaluate the integrity of management and evaluate the effect that this
may have on the reliability of representations and audit evidence in general; and
c. Take appropriate actions, including determining the possible effect on the
opinion in the auditor’s report in accordance with SA 705 having regard to
the requirement of disclaimer of opinion.

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Question: Who are “Those Charged With Governance”?

Answer: The person(s) or organization(s) (e.g., a corporate trustee) with
responsibility for overseeing the strategic direction of the entity and obligations
related to the accountability of the entity.
• This includes overseeing the financial reporting process.
• Governance structures vary by entities, reflecting influences such as
different cultural and legal backgrounds, and size and ownership
characteristics.
• For example, in some entities, a supervisory board exists that is separate from
executive board. In other entities, both supervisory and executive functions
are performed by a single board.
• In some entities, those charged with governance hold positions that are an
integral part of the entity’s legal structure. For example, company directors.
• In some cases, some or all of those charged with governance are involved in
managing the entity. In others, those charged with governance and
management comprise different persons.
• In most entities, governance is the collective responsibility of a governing
body, such as a board of directors, a supervisory board, partners, proprietors,
a committee of management, trustees, or equivalent persons. In some smaller
entities, however, one person may be charged with governance, for example,
the owner-manager where there are no other owners, or a sole trustee.
• Also, in some cases, the appropriate persons with whom to communicate may
not be clearly identifiable from the applicable legal framework or other
engagement circumstances, for example, entities where the governance
structure is not formally defined, such as some family- owned entities and
some not-for-profit organizations.
In such cases, the auditor may need to discuss and agree with the engaging party
the relevant persons with whom to communicate.

Question: What is the objectives of the auditor as per SA 260 “SIGNIFICANCE

OF COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE”?
CA INTERMEDIATE

Answer: The objectives of the auditor are:-

a. To communicate clearly with those charged with governance the
responsibilities of the auditor in relation to the financial statement audit, and
an overview of the planned scope and timing of the audit
b. To obtain from those charged with governance information relevant to the
audit
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c. To provide those charged with governance with timely observations arising

from the audit that are significant and relevant to their responsibility to
oversee the financial reporting process and
d. To promote effective two-way communication between the auditor and those
charged with governance.

Question: The auditor shall communicate with those charged with governance,
what are the significant findings form the audit communicated as per SA 260?
Answer: The auditor shall communicate with those charged with governance:
a. The auditor’s views about significant qualitative aspects of the entity’s
accounting practices, including accounting policies, accounting estimates and
financial statement disclosures. When applicable, the auditor shall explain to
those charged with governance why the auditor considers a significant accounting
practice, that is acceptable under the applicable financial reporting framework,
not to be most appropriate to the particular circumstances of the entity.
b. Significant difficulties, if any, encountered during the audit
c. Unless all of those charged with governance are involved in managing the entity:
i. Significant matters arising during the audit that were discussed, or
subject to correspondence, with management
ii. Written representations the auditor is requesting
d. Circumstances that affect the form and content of the auditor’s report, if any and
e. Any other significant matters arising during the audit that, in the auditor’s
professional judgment, are relevant to the oversight of the financial reporting
process.

Question: Give examples of matters that the auditor may consider in determining
whether a deficiency or combination of deficiencies in internal control constitutes
a significant deficiency?

Answer: The likelihood of the deficiencies leading to material misstatements in the

financial statements in the future.
• The susceptibility to loss or fraud of the related asset or liability.
• The subjectivity and complexity of determining estimated amounts, such as
fair value accounting estimates.
CA INTERMEDIATE

• The financial statement amounts exposed to the deficiencies.

• The importance of the controls to the financial reporting process, for
example:
▪ General monitoring controls (such as oversight of management).
▪ Controls over the prevention and detection of fraud.
▪ Controls over the selection and application of significant accounting
policies.

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▪ Controls over significant transactions with related parties.

▪ Controls over significant transactions outside the entity’s normal course
of business.
▪ Controls over the period-end financial reporting process (such as
controls over non-recurring journal entries).
• The cause and frequency of the exceptions detected as a result of the
deficiencies in the controls.
• The interaction of the deficiency with other deficiencies in internal control.

Question: Give examples of indicators of significant deficiencies in internal

control as per SA 265?
Answer:
• Evidence of ineffective aspects of the control environment, such as: -
▪ Indications that significant transactions in which management is
financially interested are not being appropriately scrutinised by those
charged with governance.
▪ Identification of management fraud, whether or not material, that was
not prevented by the entity’s internal control.
▪ Management’s failure to implement appropriate remedial action on
significant deficiencies previously communicated.
• Absence of a risk assessment process within the entity where such a process
would ordinarily be expected to have been established.
• Evidence of an ineffective entity risk assessment process, such as
management’s failure to identify a risk of material misstatement that the
auditor would expect the entity’s risk assessment process to have identified.
• Evidence of an ineffective response to identified significant risks (e.g., absence
of controls over such a risk).
• Misstatements detected by the auditor’s procedures that were not prevented,
or detected and corrected, by the entity’s internal control.
• Disclosure of a material misstatement due to error or fraud as prior period
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items in the current year’s Statement of Profit and Loss.

• Evidence of management’s inability to oversee the preparation of the financial
statements.

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Question: Facts which becomes known to the auditor after the date of the
auditor’s report but before the date the financial statements are issued, What
shall the auditor do, When law, regulation or the financial reporting framework
does not prohibit management from restricting the amendment of the financial
statements to the effects of the subsequent events or events causing that
amendments and those responsible for approving the financial statements are
not prohibited from restricting their approval to that amendment, the auditor
is permitted to restrict the audit procedures on subsequent events to that
amendment.

Answer:

Question: CA K is statutory auditor of DEMA Private Limited for the year

2022-23. The company has three plants in India. He is nearing completion of
audit procedures relating to financial statements for the year under audit
and has yet to sign audit report. Meanwhile, a huge fire had broken out in
one of plants of the company located near Nashik on 25th June, 2023 damaging
substantial part of machinery and work-in-process resulting in loss of about
Rs.5 crores. Unaware of the incident, he is in process of finalizing his report
in first fortnight of July 2023. State few audit procedures to be performed
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by him to obtain sufficient appropriate evidence for identifying such events.

Also explain auditor’s responsibilities in this situation. [RTP May 2024]

Answer: In the given situation, a huge fire had broken out in one of plants of
company on 25th June, 2023 destroying substantial part of machinery and work-
in-process resulting in loss of Rs.5 crores. The auditor has yet to sign audit report.

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Before signing audit report, he should perform following audit procedures to obtain
sufficient appropriate audit evidence that all such events have been identified and
are appropriately reflected in financial statements: -
• Inquiry of management whether any subsequent events have occurred
• Reading minutes of the meetings of owners, management that have been held
after date of financial statements and inquiring about matters discussed at
such meetings for which minutes are not available.
• Reading entity’s latest subsequent interim financial statements
• Obtaining Written representations from management in accordance with SA 580
The situation is an example of subsequent event occurring between date of financial
statements and date of audit report requiring disclosure in financial statements. The
auditor has a responsibility to obtain sufficient appropriate audit evidence whether
such an event requiring disclosure in financial statements is appropriately
reflected in financial statements.
Question: Kundan, a CA student, is part of an engagement team conducting
audit of an entity. The audit procedures are nearing completion. He notices
that engagement partner has asked for a cash flow forecast from management
for next twelve months from date of financial statements. Keeping in view above,
answer the following:-

1. Discuss likely purpose of engagement partner in the above situation.

Elaborate upon significance of such testing being performed by engagement
partner.
2. State any two audit procedures in relation to cash flow forecast likely to
be performed by engagement partner. [RTP May 2024]
Answer: In the given situation, the engagement partner has asked for a cash flow
forecast from management for next twelve months from date of financial
statements. The audit procedures are also nearing completion.

Therefore, purpose of engagement partner in requiring a cash flow forecast is to

CA INTERMEDIATE

obtain sufficient appropriate audit evidence regarding and to conclude on

appropriateness of management’s use of going concern basis of accounting in
preparation of its financial statements. Further, his purpose is also to conclude on
basis of audit evidence obtained, whether a material uncertainty exists related to
events or conditions that may cast a significant doubt on ability to entity to continue
as a going concern, and to report in accordance with SA 570.

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The significance of testing going concern assumption is due to its effect on

preparation of financial statements. When the use of going concern is considered
as appropriate, assets and liabilities are recorded on the basis that entity will be
able to realize its assets and discharge liabilities in normal course of business. In
case it is not so viewed, financial statements are prepared on liquidation basis.
Hence, testing such an assumption provides evidence to auditor whether use of
such assumption is appropriate or not.
Two audit procedures in relation to cash flow forecast likely to be performed

• Evaluate reliability of underlying data generated to prepare the forecast

• Determine whether there is adequate support for assumptions underlying the
forecast.
Question: During the audit of a company, CA Kartik has noticed that company’s
turnover has fallen drastically as compared to last three years due to loss
of its major markets and key customers. The company is in need of funds for
new product development, but bankers are not willing to lend financial support.
Which additional audit procedures need to be performed by CA Kartik in
accordance with SA 570 when such events or conditions are identified? (RTP
Jan 2025)

Answer: Loss of major markets, key customers and inability to obtain financing
for new product development are examples of events or conditions that may cast a
significant doubt on the entity’s ability to continue as going concern.

If events or conditions have been identified that may cast significant doubt on
the entity’s ability to continue as a going concern, the auditor shall obtain
sufficient appropriate audit evidence to determine whether or not a material
uncertainty exists related to events or conditions that may cast significant doubt
on the entity’s ability to continue as a going concern through performing additional
audit procedures, including consideration of mitigating factors. These procedures
shall include:
CA INTERMEDIATE

(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

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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.

Question: CA Manoj is the statutory auditor of a company. He has completed

the audit and issued the audit report dated June 30, 2024. Before signing
the audit report, written representations dated June 29, 2024, were obtained
from the management of the company. Discuss the significance of the date
of written representations. Also state whether the written representations
obtained on June 29, 2024 is appropriate or not. (RTP SEP 2024)

Answer: As per SA 580,”Written Representations” the date of the written

representations shall be as near as practicable to, but not after, the date of the
auditor’s report on the financial statements.

Since 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. Furthermore, because the auditor must consider events
CA INTERMEDIATE

occurring up to the date of the auditor’s report that might 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 the given situation, CA Manoj obtained written representations dated June 29,
2024, from the management of the company before signing the audit report on June

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30, 2024.
From the above is can be concluded that written representations have been obtained
appropriately.

Question: While conducting audit of BYN Limited, CA Y notices that company

has lost one of its key markets along with important customers. Additionally,
several highly successful competitors have emerged, impacting business of the
company. Despite the existence of material uncertainty, CA Y finds the use of
going concern basis of accounting appropriate for preparation of financial
statements. The company has also disclosed material uncertainty in notes to
accounts adequately. How should he deal with the matter in auditor’s report?
(RTP SEP 2024)

Answer: As per SA 570, ”Going concern”, 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: -

(a) Draw attention to the note in the financial statements that

discloses such matters.
(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.

Question: CA Vasu was appointed as the statutory auditor of M/s. Pizza Limited
for the financial year 2023-24. While reviewing the internal controls, he
observed that the company has entered into many transactions with firms in
which the directors are interested. The company's specified procedure was by-
passed in such transactions. CA Vasu considered it as a significant deficiency in
CA INTERMEDIATE

internal control over related party transactions. He communicated this deficiency

to Those Charged With Governance (TCWG) as under, "Controls over significant
transactions with related parties are weak." In view of the above, please explain

i. What is meant by deficiency in internal control?

ii. As per SA 265, whether the significant deficiency communicated by CA

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Vasu to TCWG is appropriate? Explain.

Answer: (i) Meaning of Deficiency in internal control: This exists when

1. A control is designed, implemented or operated in such a way that it

is unable to prevent, or detect and correct, misstatements in the
financial statements on a timely basis or
2. A control necessary to prevent, or detect and correct,
misstatements in the financial statements on a timely basis is
missing.
(ii) As per SA 265, While pointing out significant deficiencies in internal control,
auditor has not only to communicate significant deficiencies giving their description
but also explain the potential effects and sufficient information to those charged
with governance and management to understand context of communication.

Therefore, the above communication is not proper. Not only significant deficiency
has to be communicated, it should also be explained to management the potential
effects of transactions with firm in which the directors are interested. It should
explain that such a significant deficiency can lead to misstatement of transactions
with related party. Highlighting importance of such a control, it should be stated
that responsibility be fixed for concerned persons for adhering to such an important
control.

Question: CA Z, the auditor of MNO Ltd., during the course of audit, assesses
a risk of material misstatements regarding the litigations and claims involving
the company. CA Z is not convinced with the management's explanations
regarding the status of the litigations or claims. It is considered unlikely that
the entity's external legal counsel will respond appropriately to a letter of
general enquiry. The auditor sent a letter of specific enquiry requesting the
entity's external legal counsel to communicate directly with the auditor. List out
the inclusions in the letter of specific enquiry.

In certain circumstances the auditor may judge it necessary to meet with

entity's external legal counsel to discuss the likely outcome of the litigations or
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claims. What will be auditor's reporting responsibility if the management refuses

to give permission to the auditor to communicate or meet with the external legal
counsel?

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Answer: A letter of specific inquiry includes:

i. A list of litigation and claims;

ii. Where available, management’s assessment of the outcome of each of the
identified litigation and claims and its estimate of the financial implications,
including costs involved; and
iii. A request that the entity’s external legal counsel confirm the reasonableness
of management’s assessments and provide the auditor with further
information if the list is considered by the entity’s external legal counsel to
be incomplete or incorrect.
In certain circumstances, the auditor also may judge it necessary to meet with the
entity’s external legal counsel to discuss the likely outcome of the litigation or
claims. Further, if management refuses to give the auditor permission to
communicate or meet with the entity’s external legal counsel, or the entity’s external
legal counsel refuses to respond appropriately to the letter of inquiry, or is
prohibited from responding, and the auditor is unable to obtain sufficient
appropriate evidence by performing alternate audit procedures, the auditor shall
modify the opinion in the auditor’s report in accordance with SA 705.

Alternatively, if the auditor is able to perform alternate audit procedures and can
obtain sufficient and appropriate audit evidence to resolve the issue, then he can
give an unmodified opinion.

Question: ABC Pvt. Ltd., a manufacturing company, is facing significant financial

difficulties due to downfall in market and increase in cost of production. CA
Ram, the auditor of ABC Pvt. Ltd. has identified the following conditions:

• The company has defaulted on a major loan repayment.

• Current liabilities exceed current assets by 50%.

• Sales revenue has declined by 30% compared to the previous year.

CA INTERMEDIATE

Management has not yet performed an assessment of the company’s ability to

continue as a going concern, but they provided assurance for implementing
corrective measures, including cost-cutting initiatives and discussions with
creditors for restructuring the loan.

Which additional audit procedures need to be performed by CA Ram in

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accordance with SA 570 when such events or conditions are identified?

(MTP JAN 2025)

Answer: SA 570, “Going Concern”, deals with the auditor’s responsibilities in the
audit of financial statements relating to going concern and the implications for the
auditor’s report.

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.
CA INTERMEDIATE

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.

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Chapter-8: Audit Report

Question 1: Mention the examples of circumstances where the auditor may consider
it necessary to include an Emphasis of Matter paragraph. [RTP –NOV 2022]
Answer 1: Examples of circumstances to include Emphasis of Matter Paragraph:
As per SA 706 (Revised) on “Emphasis of Matter Paragraphs and Other Matter
Paragraphs in The Independent Auditor’s Report”, the examples of circumstances
where the auditor may consider it necessary to include an Emphasis of Matter
paragraph are;

a. An uncertainty relating to the future outcome of an exceptional litigation or

regulatory action.
b. A significant subsequent event that occurs between the date of the financial
statements and the date of the auditor’s report.
c. Early application (where permitted) of a new accounting standard that has a
material effect on the financial statements.
d. A major catastrophe that has had, or continues to have, a significant effect
on the entity's financial position.

Question 2: While drafting auditor’s report of LK Ltd., what are the matter to
be included by auditor in Opinion Section paragraph? [RTP –NOV 2022]

Answer 2: The first section of the auditor’s report shall include the auditor’s
opinion, and shall have the heading “Opinion”.

Opinion Section of the Auditor’s report shall also:

i. Identify the entity whose financial statements have been audited;

ii. State that the financial statements have been audited;
iii. Identify the title of each statement that comprises the financial statements;
iv. Refer to the summary of significant accounting policies and other explanatory
information; and
v. Specify the date or period covered by each financial statement comprising
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the financial statements.

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Question 3: When the auditor disclaims an opinion on the financial statements

due to an inability to obtain sufficient appropriate audit evidence, the auditor
shall amend the description of the auditor’s responsibilities required by SA 700.
Explain [RTP – MAY 2022]
Answers 3: When the auditor disclaims an opinion on the financial statements due
to an inability to obtain sufficient appropriate audit evidence, the auditor shall
amend the description of the auditor’s responsibilities required by SA 700 (Revised)
to include only the following:
a. A statement that the auditor’s responsibility is to conduct an audit of the
entity’s financial statements in accordance with Standards on Auditing and to
issue an auditor’s report;
b. A statement that, however, because of the matter(s) described in the Basis
for Disclaimer of Opinion section, the auditor was not able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on the
financial statements and
c. The statement about auditor independence and other ethical responsibilities
required by SA 700 (Revised).

Question 4: As an auditor of listed company, what are the matters that the
auditor should keep in mind while determining "Key Audit Matters". [RTP –NOV
2021]
Answer 4: Determining Key Audit Matters: As per SA 701, “Communicating Key
Audit Matters in the Independent Auditor’s Report”, the auditor shall determine,
from the matters communicated with those charged with governance, those matters
that required significant auditor attention in performing the audit. In making this
determination, the auditor shall take into account the following:
i. Areas of higher assessed risk of material misstatement, or significant risks
identified in accordance with SA 315 Identifying and Assessing the Risks of
Material Misstatement through Understanding the Entity and Its
Environment.
ii. Significant auditor judgments relating to areas in the financial statements
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that involved significant management judgment, including accounting estimates

that have been identified as having high estimation uncertainty.
iii. The effect on the audit of significant events or transactions that occurred
during the period.
The auditor shall determine which of the matters determined in accordance with
above were of most significance in the audit of the financial statements of the

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current period and therefore are the key audit matters.

Question 5: Delightful Ltd. is a company engaged in the production of smiley

balls. During the FY 2020-21 the company transferred its accounts to
computerised system (SAP) from manual system of accounts. Since the employees
of the company were not well versed with the SAP system, there were many
errors in the accounting during the transition period. As such the statutory
auditors of the company were not able to extract correct data and reports from
the system. Such data was not available manually also. Further, the employees
and the management of the company were not supportive in providing the
requisite information to the audit team. The auditor believes that the possible
effects on the financial statements of undetected misstatements could be both
material and pervasive.
Explain the kind of audit report that the statutory auditor of the company
should issue in this case. [RTP –NOV 2021]

Answer 5: The auditor shall disclaim an opinion when the auditor is unable to obtain
sufficient appropriate audit evidence on which to base the opinion, and the auditor
concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive.
The auditor shall disclaim an opinion when, in extremely rare circumstances involving
multiple uncertainties, the auditor concludes that, notwithstanding having obtained
sufficient appropriate audit evidence regarding each of the individual uncertainties,
it is not possible to
form an opinion on the financial statements due to the potential interaction of the
uncertainties and their possible cumulative effect on the financial statements.
In the present case Delightful Ltd, the statutory auditor of the company is unable
to extract correct data and reports from the SAP system for conduct of audit. Also,
such data and reports are not available manually. Moreover, the auditor believes that
the possible effects on the financial statements of undetected misstatements could
be both material and pervasive.
As such, the statutory auditor of Delightful Ltd. should give a disclaimer of opinion.
CA INTERMEDIATE

Question 6: The requirements of SA 700 are aimed at addressing an appropriate

balance between the need for consistency and comparability in auditor reporting
globally. Explain. [RTP –MAY 2021]
Answer 6: The requirements of SA 700 are aimed at addressing an appropriate

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balance between the need for consistency and comparability in auditor reporting
globally and the need to increase the value of auditor reporting by making the
information provided in the auditor’s report more relevant to users. This SA
promotes consistency in the auditor’s report but recognizes the need for flexibility
to accommodate particular circumstances of individual jurisdictions.
Consistency in the auditor’s report, when the audit has been conducted in accordance
with SAs, promotes credibility in the global marketplace by making more readily
identifiable those audits that have been conducted in accordance with globally
recognized standards. It also helps to promote the user’s understanding and to
identify unusual circumstances when they occur.
Question 7: The senior member of the firm Kaur & Associates, Chartered
Accountants, informed to its auditing staff that at the time of audit reporting
regarding corresponding figures, when corresponding figures are presented, the
auditor's opinion shall not refer to the corresponding figures except in specified
circumstances. What are those exceptional circumstances? [MAY 2022]
Answer 7: Audit reporting Regarding Corresponding Figures:

When corresponding figures are presented, the auditor’s opinion shall not refer to
the corresponding figures except in the following circumstances:

1. the auditor’s report on the prior period, as previously issued, included a

qualified opinion, a disclaimer of opinion, or an adverse opinion and the If
matter which gave rise to the modification is unresolved, the auditor shall
modify the auditor’s opinion on the current period’s financial statements. In the
Basis for Modification paragraph in the auditor’s report, the auditor shall
either:
a. Refer to both the current period’s figures and the corresponding figures in
the description of the matter giving rise to the modification when the
effects or possible effects of the matter on the current period’s figures
are material; or
b. In other cases, explain that the audit opinion has been modified because of
the effects or possible effects of the unresolved matter on the
comparability of the current period’s figures and the corresponding figures.
CA INTERMEDIATE

2. If the auditor obtains audit evidence that a material misstatement exists

in the prior period financial statements on which an unmodified opinion has
been previously issued, the auditor shall verify whether the misstatement has
been dealt with as required under the applicable financial reporting framework
and, if that is not the case, the auditor shall express a qualified opinion or an

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adverse opinion in the auditor’s report on the current period financial

statements, modified.

3. Prior Period Financial Statements Not Audited- If the prior period financial
statements were not audited, the auditor shall state in an Other Matter
paragraph in the auditor’s report that the corresponding figures are unaudited.
Such a statement does not, however, relieve the auditor of the requirement to
obtain sufficient appropriate audit evidence that the opening balances do not
contain misstatements that materially affect the current period’s financial
statements.

Question 8: M/s S & Associates are the Statutory Auditors of Real Ltd., a
company engaged in the business of manufacturing of garments. The auditor has
completed the audit and is in the process of forming an opinion on the financial
statements for the F.Y. 2020-2021. CA K, the engagement partner, wants to
conclude that whether the financial statements as a whole are free from
material misstatements, whether due to fraud or error. What factors he should
consider to reach that conclusion? [DEC 2021]
Answer 8: Factors to be considered to form an opinion:
The auditor shall form an opinion on whether the financial statements are
prepared, in all material respects, in accordance with the applicable financial
reporting framework.
In order to form that opinion, the auditor shall conclude as to whether the auditor
has obtained reasonable assurance about whether the financial statements as a
whole are free from material misstatement, whether due to fraud or error. That
conclusion shall take into account:
a. The auditor’s conclusion, in accordance with SA 330, whether sufficient
appropriate audit evidence has been obtained
b. The auditor’s conclusion, in accordance with SA 450, whether uncorrected
misstatements are material, individually or in aggregate.
c. The evaluations required
CA INTERMEDIATE

i. The auditor shall evaluate whether the financial statements are

prepared in accordance with the requirements of the applicable financial
reporting framework.
ii. This evaluation shall include consideration of the qualitative aspects of
the entity’s accounting practices, including indicators of possible bias in
management’s judgments.

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Question 9: If the financial statements of the prior period were audited by a

predecessor auditor, in addition to expressing an opinion on the current period’s
financial statements, what is required to be stated by the auditor in an Other Matter
paragraph. [MTP NOV 2022]
Answer 9: If the financial statements of the prior period were audited by a
predecessor auditor, in addition to expressing an opinion on the current period’s
financial statements, the auditor shall state in an Other Matter paragraph:
i. That the financial statements of the prior period were audited by a
predecessor auditor
ii. The type of opinion expressed by the predecessor auditor and, if the
opinion was modified, the reasons therefor; and
iii. The date of that report, unless the predecessor auditor’s report on the
prior period’s financial statements is revised with the financial statements.

Question 10: What is meant by Emphasis of Matter Paragraph? Give some

examples of circumstances where the auditor may consider it necessary to include
an Emphasis of Matter paragraph. [MTP NOV 2022]
Answer 10: Emphasis of Matter Paragraph is a paragraph included in the auditor’s
report that refers to a matter appropriately presented and disclosed in the financial
statements that in the auditor’s judgment, is of such importance that it is
fundamental to the user’s understanding of the financial statements.

Some examples of circumstances where the auditor may consider it necessary to

include an Emphasis of Matter paragraph.

▪ An uncertainty relating to the future outcome of exceptional litigation or

regulatory action.
▪ A significant subsequent event that occurs between the date of the financial
statements and the date of the auditor’s report.
▪ Early application (where permitted) of a new accounting standard that has a
material effect on the financial statements.
▪ A major catastrophe that has had, or continues to have, a significant effect on
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the entity’s financial position.

Questions 11: Discuss the reporting requirements regarding statutory dues and
Internal Audit as per CARO, 2020. [NOV 2022]
Answer 11: Matters to be included as per CARO, 2020:

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Statutory dues Clause (vii)

a. whether the company is regular in depositing undisputed statutory dues including

Goods and Services Tax, provident fund, employees' state insurance, income
tax, sales-tax, service tax, duty of customs, duty of excise, value added tax,
cess and any other statutory dues to the appropriate authorities and if not,
the extent of the arrears of outstanding statutory dues as on the last day of
the financial year concerned for a period of more than six months from the
date they became payable, shall be indicated;
b. where statutory dues referred to in sub-clause (a) have not been deposited on
account of any dispute, then the amounts involved and the forum where dispute
is pending shall be mentioned (a mere representation to the concerned
Department shall not be treated as a dispute);

Internal Audit Clause (xiv)

a. whether the company has an internal audit system commensurate with the size
and nature of its business.
b. whether the reports of the Internal Auditors for the period under audit were
considered by the statutory auditor;
Question 12: State the matters to be included in auditor's report as per CARO,
2020 regarding “Default in repayment of loan or borrowing to a financial
institution, bank etc.” [MTP NOV 2022]
Answer 12: The auditor is required to report as per clause (ix) of paragraph 3
of CARO 2020

a. whether the company has defaulted in repayment of loans or other borrowings

or in the payment of interest thereon to any lender, if yes, the period and the
amount of default to be reported as per the format below:-
Nature of Name of Amount Whether No. of Remarks
Borrowing lender not paid principal days if any
including debt on due or delay
Securities date interest or unpaid
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Lender wise
details to be
provided in
case of
defaults to
banks,
financial
institutions
And
Government.

b. whether the company is a declared wilful defaulter by any bank or financial

institution or other lender

c. whether term loans were applied for the purpose for which the loans were
obtained; if not, the amount of loan so diverted and the purpose for which it is
used may be reported
d. whether the company has taken any funds from any entity or person on account
of or to meet the obligations of its subsidiaries, associates or joint ventures,
if so, details thereof with nature of such transactions and the amount in each
case;
e. whether the company has raised loans during the year on the pledge of
securities held in its subsidiaries, joint ventures or associate companies, if so,
give details thereof and also report if the company has defaulted in repayment
of such loans raised.

Question 13: State the matters to be included in auditor's report as per CARO,
2020 regarding - Verification of inventory and working capital limits. [MTP MAY
2022]
Answer 13: Matters to be included in Auditor’s report as per CARO 2020:
Clause (ii) of Para 3 of CARO, 2020, requires the auditor to report
a. whether physical verification of inventory has been conducted at reasonable
intervals by the management and whether, in the opinion of the auditor, the
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coverage and procedure of such verification by the management is

appropriate; whether any discrepancies of 10% or more in the aggregate for
each class of inventory were noticed and if so, whether they have been
properly dealt with in the books of account;
b. whether during any point of time of the year, the company has been sanctioned

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working capital limits in excess of five crore rupees, 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;

Question 14: The practice of appointing Chartered Accountants as joint auditors

is quite widespread in big companies and corporations. Explain stating the
advantages of the joint audit. [MTP MAY 2023]
Answer 14: Joint Audit: The practice of appointing Chartered Accountants as joint
auditors is quite widespread in big companies and corporations. Joint audit basically
implies pooling together the resources and expertise of more than one firm of
auditors to render an expert job in a given time period which may be difficult to
accomplish acting individually. It essentially involves sharing of the total work. This
is by itself a great advantage.
In specific terms the advantages that flow may be the following:

a. Sharing of expertise
b. Advantage of mutual consultation
c. Lower workload
d. Better quality of performance
e. Improved service to the client
f. Displacement of the auditor of the company taken over in a takeover often
obviated
g. In respect of multi-national companies, the work can be spread using the
expertise of the local firms which are in a better position to deal with detailed
work and the local laws and regulations
h. Lower staff development costs
i. Lower costs to carry out the work
j. A sense of healthy competition towards a better performance

Question 15: Mention some examples of circumstances where the auditor may
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consider it necessary to include an Emphasis of Matter paragraph. [RTP May

2024]

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Answer 15: Examples of circumstances to include Emphasis of Matter

Paragraph:
As per SA 706 (Revised) on “Emphasis of Matter Paragraphs and Other Matter
Paragraphs In The Independent Auditor’s Report”, the examples of circumstances
where the auditor may consider it necessary to include an Emphasis of Matter
paragraph are:-

a. An uncertainty relating to the future outcome of an exceptional litigation or

regulatory action.
b. A significant subsequent event that occurs between the date of the financial
statements and the date of the auditor’s report.
c. Early application (where permitted) of a new accounting standard that has
a material effect on the financial statements.
d. A major catastrophe that has had, or continues to have, a significant effect
on the entity's financial position.

Question 16: CA. S, while conducting audit of an entity is facing the following
issues: -

i. He has not been provided with necessary support for attending inventory
count process of entity as at year end.
ii. Accounts Manager is not providing him present addresses of customers as
well as suppliers for sending external confirmations. Even mail ids have
not been provided on the pretext of business confidentiality.
iii. He was not able to verify revenues of entity due to lack of complete
details.
iv. He has been asking for bills on a sample basis for the purpose of verifying
expenses, but staff has been making lame excuses.
The matter was brought to knowledge of higher management, but of no avail.
The auditor, CA S has come to the conclusion that the possible effects on the
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financial statements of undetected misstatements would be material and

affecting many aspects of financial statements and in such a case, a
qualification of the opinion would be inadequate to communicate the gravity of
the situation.
How should the auditor proceed in such a situation?

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Answer 16: In the given case, auditor has not been able to obtain sufficient
appropriate audit evidence relating to inventories, debtors, creditors, revenues and
expenses. The matter was brought to the knowledge of management but no result
has been achieved. In such circumstances, auditor should proceed as given here
under: -

If the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive so that a
qualification of the opinion would be inadequate to communicate the gravity of the
situation, the auditor shall:
(i) Withdraw from the audit, where practicable and possible under applicable law
or regulation; or
(ii) If withdrawal from the audit before issuing the auditor’s report is not
practicable or possible, disclaim an opinion on the financial statements.
If auditor withdraws from such an engagement, before withdrawing, auditor shall
communicate to those charged with governance any matters regarding
misstatements identified during the audit that would have given rise to a
modification of the opinion.

Question 17: The nature of the comparative information that is presented in

an entity’s financial statements depends on the requirements of the applicable
financial reporting framework. There are two different broad approaches to the
auditor’s reporting responsibilities in respect of such comparative information:
corresponding figures and comparative financial statements.

Explain clearly the differences between the approaches stating the essential
audit reporting. Also define comparative information and audit procedures
regarding comparative information. (RTP JAN 2025)

Answer 17: The nature of the comparative information that is presented in an

entity’s financial statements depends on the requirements of the applicable
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financial reporting framework. There are two different broad approaches to the
auditor’s reporting responsibilities in respect of such comparative information:
corresponding figures and comparative financial statements. The approach to be
adopted is often specified by law or regulation but may also be specified in terms
of engagement.

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The essential audit reporting differences between the approaches are

a. For corresponding figures, the auditor’s opinion on the financial statements

refers to the current period only; whereas
b. For comparative financial statements, the auditor’s opinion refers to each
period for which financial statements are presented
Definition of Comparative Information – The amounts and disclosures included
in the financial statements in respect of one or more prior periods in
accordance with the applicable financial reporting framework

Audit Procedures regarding comparative information

The auditor shall determine whether the financial statements include the
comparative information required by the applicable financial reporting
framework and whether such information is appropriately classified. For
this purpose, the auditor shall evaluate whether:
(a) The comparative information agrees with the amounts and other
disclosures presented in the prior period; and
(b) The accounting policies reflected in the comparative information
are consistent with those applied in the current period or, if there
have been changes in accounting policies, whether those changes have
been properly accounted for and adequately presented and disclosed

Question 18: Kiran, a CA student, was reviewing an audit report of the company
when she noticed an 18-digit alphanumeric code below the auditor's signature
and membership number. She wants to understand the purpose and importance
of this randomly generated number as unique code. Is this code required for
audit reports only? (RTP JAN 2025)

Answer 18: The 18-digit alpha numeric number noticed by her at the end of the
audit report is Unique Document Identification number (UDIN). It is a system
generated unique number. It was noticed that financial documents/ certificates
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attested by third persons misrepresenting themselves as CA Members were

misleading the Authorities and Stakeholders. ICAI also received number of
complaints of signatures of CAs being forged by non CAs. To curb the
malpractices, ICAI implemented the concept of UDIN i.e. Unique Document
Identification Number. Chartered Accountants having full-time Certificate of

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Practice can register on UDIN Portal and generate UDIN by registering the
certificates attested/certified by them. An auditor is required to mention the
UDIN with respect to each audit report being signed by him, along with his
membership number while signing an audit report and Certificates.

It is required to be stated in case of audit reports and certificates.

Question 19: Discuss the reporting requirements as per CARO, 2020, regarding:

(i) Statutory Dues

(ii) Transactions with Related Parties (RTP SEP 2024)

Answer 19:

(i) Reporting under CARO,2020 regarding statutory Dues [Para 3(vii)]

(a) whether the company is regular in depositing undisputed statutory dues

including Goods and Services Tax, provident fund, employees' state
insurance, income tax, sales-tax, service tax, duty of customs, duty of
excise, value added tax, cess and any other statutory dues to the
appropriate authorities and if not, the extent of the arrears of
outstanding statutory dues as on the last day of the financial year
concerned for a period of more than six months from the date they
became payable, shall be indicated;
(b) where statutory dues referred to in sub-clause (a) have not been
deposited on account of any dispute, then the amounts involved and the
forum where dispute is pending shall be mentioned (a mere
representation to the concerned Department shall not be treated as a
dispute)
(ii) Reporting under CARO,2020 regarding transactions with related
parties [Para 3(xiii)]
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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.

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Question 20: M/s. PQ Limited has a turnover of ` 807 crores during the financial
year 2023-24. It has outstanding dues towards Goods and Services Tax (GST)
of Rs.10 lakhs since June 2023. When enquired by the auditor, the company's
management informed him that they have filed an objection letter for the said
demand with the GST Authorities, however, no response is received from the
GST Department. State the reporting responsibility of the auditor under
paragraph 3, clause (vii) of the Companies Auditor's Report Order, 2020 [CARO,
2020]. (PYQ SEP 2024)

Answer 20: Reporting responsibility of the auditor under paragraph 3 of CARO,

2020: The auditor is required to report as per clause (vii) (a) of Paragraph 3 of
CARO, 2020 that whether the company is regular in depositing undisputed statutory
dues including Goods and Services Tax, provident fund, employees' state insurance,
income tax, sales-tax, service tax, duty of customs, duty of excise, value added tax,
cess and any other statutory dues to the appropriate authorities and if not, the
extent of the arrears of outstanding statutory dues as on the last day of the
financial year concerned for a period of more than six months from the date they
became payable, shall be indicated;

Further, the auditor is also required to report as per Clause (vii) (b) of Paragraph 3
of CARO, 2020, where statutory dues referred to in sub-clause (a) have not been
deposited on account of any dispute, then the amounts involved and the forum where
dispute is pending shall be mentioned (a mere representation to the concerned
Department shall not be treated as a dispute).

Question 21: CA Ayush has recently qualified and has joined a CA Firm. On going
through various audit reports, he observed that different phrases were used to
express an unmodified opinion on the financial statements. On enquiring with a
senior, he got to know that all those phrases can be regarded as being
equivalent. Which phrases are appropriate and which phrases are inappropriate
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while drafting an unmodified opinion? (PYQ SEP 2024)

Answer 21: Appropriate and Inappropriate Phrases while drafting an Unmodified

Opinion: When expressing an unmodified opinion on financial statements, the
auditor’s opinion shall, unless otherwise required by law or regulation, use one of the
following phrases, which are regarded as being equivalent:

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(i) In our opinion, the accompanying financial statements present fairly, in all
material respects, […] in accordance with [the applicable financial reporting
framework]; or

(ii) In our opinion, the accompanying financial statements give a true and fair view of
[…] in accordance with [the applicable financial reporting framework].

The phrases “present fairly, in all material respects,” and “give a true and fair view”
are regarded as being equivalent.

Inappropriate Phrases: When the auditor expresses an unmodified opinion, it is not

appropriate to use phrases such as “with the foregoing explanation” or “subject to”
in relation to the opinion, as these suggest a conditional opinion or a weakening or
modification of opinion.

Question 22: “When the auditor modifies the audit opinion, the auditor shall use
the heading “Qualified Opinion,” “Adverse Opinion,” or “Disclaimer of Opinion,”
as appropriate, for the Opinion section.” Briefly explain when the auditor should
express:

(i) Qualified Opinion.

(ii) Adverse Opinion and

(iii) Disclaimer of Opinion. (MTP JAN 2025)

Answer 22: “When the auditor modifies the audit opinion, the auditor shall use the
heading “Qualified Opinion,” “Adverse Opinion,” or “Disclaimer of Opinion,” as
appropriate, for the Opinion section.” The auditor should consider the following
while expressing the opinion in accordance with SA 705, “Modifications to the
Opinion in the Independent Auditor’s Report”.

(i) Qualified Opinion

• The auditor, having obtained sufficient appropriate audit
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evidence, concludes that misstatements, are material, but not

pervasive or
• The auditor is unable to obtain sufficient appropriate audit
evidence on which to base the opinion, but the auditor concludes
that the possible effects on the financial statements of
undetected misstatements, if any, could be material but not

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pervasive.
(ii) Adverse Opinion: The auditor shall express an adverse opinion when
the auditor, having obtained sufficient appropriate audit evidence,
concludes that misstatements, individually or in the aggregate, are
both material and pervasive to the financial statements.
(iii) Disclaimer of Opinion: The auditor shall disclaim an opinion when he
is unable to obtain sufficient appropriate audit evidence on which to
base the opinion, and he concludes that the possible effects on the
financial statements of undetected misstatements, if any, could be
both material and pervasive.

Question 23: During the audit of a limited company as a statutory auditor you
discovered that a fraud amounting to Rs. 5 lakh has been committed by the
company. What are the reporting requirements regarding fraud under the
Companies Auditor's Report Order, 2020? (MTP JAN 2025)

Answer 23: Reporting requirements of a fraud under the CARO 2020: The
auditor is required to report the fraud under clause (xi) of Paragraph 3 of CARO
2020:

(a) whether any fraud by the company or any fraud on the company has been
noticed or reported during the year, if yes, the nature and the amount
involved is to be indicated;
(b) whether any report under sub-section (12) of section 143 of the Companies
Act has been filed by the auditors in Form ADT-4 as prescribed under rule
13 of Companies (Audit and Auditors) Rules, 2014 with the Central
Government;
(c) whether the auditor has considered whistle-blower complaints, if any,
received during the year by the company
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Question 24: CARO, 2020 shall apply to every company including foreign company.
However, it specifically exempts certain class of companies. State which class
of companies are specifically exempt from the applicability of CARO, 2020?

(MTP JAN 2025)

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Answer 24: CARO, 2020 shall apply to every company including a foreign company
as defined in clause (42) of section 2 of the Companies Act, 2013, except:

(i) a banking company as defined in clause (c) of section 5 of the Banking Regulation
Act, 1949 (10 of 1949);
(ii) an insurance company as defined under the Insurance Act,1938 (4 of 1938);
(iii) a company licensed to operate under section 8 of the Companies Act;
(iv) a One Person Company as defined in clause (62) of section 2 of the Companies
Act and a small company as defined in clause (85) of section 2 of the Companies
Act; and
(v) a private limited company, not being a subsidiary or holding company of a public
company, having a paid up capital and reserves and surplus not more than one
crore rupees as on the balance sheet date and which does not have total
borrowings exceeding one crore rupees from any bank or financial institution
at any point of time during the financial year and which does not have a total
revenue as disclosed in Scheduled III to the Companies Act (including
revenue from discontinuing operations) exceeding ten crore rupees during the
financial year as per the financial statements.

Question 25: ASD Limited's business has grown from one state of India to
various countries of the world. Since the business has increased manifold, the
management decided to appoint joint auditors for conducting the statutory
audit of the company. They appointed three CA firms for it. For which audit
work the joint auditors will be jointly & severally responsible? (MTP JAN 2025)

Answer 25: Joint Audit of Financial Statements: As per SA 299, “Joint Audit of
Financial Statements”, all the joint auditors shall be jointly and severally responsible
for:

(i) the audit work which is not divided among the joint auditors and is carried out
by all joint auditors;
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(ii) decisions taken by all the joint auditors under audit planning in respect of
common audit areas;
(iii) matters which are brought to the notice of the joint auditors by any one of
them and there is an agreement among the joint auditors on such matters;
(iv) examining that the financial statements of the entity comply with the

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requirements of the relevant statutes;

(v) presentation and disclosure of the financial statements as required by the
applicable financial reporting framework;
(vi) ensuring that the audit report complies with the requirements of the relevant
statutes, applicable Standards on Auditing and other relevant
pronouncements issued by ICAI.

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Chapter-9: Special Features of Audit of Different Type of

Entities

Question 1: Government audit has not only adopted the basic essentials of
auditing as known and practised in the profession to suit the requirements of
governmental transactions but has also added new concepts, techniques and
procedures to the audit profession. Explain stating clearly the definition of
Government auditing as discussed in U.N. Handbook on Govt Auditing and
Developing Countries and also state Objectives of Govt audit. [RTP –MAY 2021]

Answer 1: Government audit has not only adopted the basic essentials of auditing
as known and practised in the profession to suit the requirements of governmental
transactions but has also added new concepts, techniques and procedures to the
audit profession.

The U.N. Handbook on Government Auditing and Developing Countries defines

government auditing in a comprehensive manner which is as follows :

Government auditing is

• the objective, systematic, professional and independent examination

• of financial, administrative and other operations

• of a public entity

• made subsequently to their execution

• for the purpose of evaluating and verifying them,

• presenting a report containing explanatory comments on audit findings

together with conclusions and recommendations for future actions
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• by the responsible officials

• and in the case of examination of financial statements, expressing the

appropriate professional opinion regarding the fairness of the presentation.

OBJECTIVES :-

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 Auditing & Ethics Descriptive Question Bank | CA Deepika Rathi

a) Accounting for Public Funds:-Government audit serves as a mechanism or

process for public accounting of government funds.

b) Appraisal of Government policies:-It also provides public accounting of the

operational, management, programme and policy aspects of public
administration as well as accountability of the officials administering them.

c) Base for Corrective actions:-Audit observations based on factual data

collection also serve to highlight the lapses of the lower hierarchy, thus
helping supervisory level officers to take corrective measures.

Question 2: Government audit is neither equipped nor intended to function as an

investigating agency, to pursue every irregularity or misdemeanour to its logical
end. Explain [RTP –MAY 2021]

Answer 2: Government audit is neither equipped nor intended to function as an

investigating agency, to pursue every irregularity or misdemeanour to its logical end.
The main objective of audit is a combination of ensuring accountability of
administration to legislature and functioning as an aid to administration. In India,
the function of Government Audit is discharged by the independent statutory
authority of the Comptroller and Auditor General through the agency of the Indian
Audit and Accounts

Department. Audit is a necessary function to ensure accountability of the executive

to Parliament, and within the executives of the spending agencies to the sanctioning
or controlling authorities. The purpose or objectives of audit need to be tested at
the touchstone of public accountability. The Comptroller and Auditor General
(C&AG), in the discharge of his functions, watches that the various authorities act
in regard to financial matters in accordance with the Constitution and the laws made
by Parliament, and conform to the rules or orders made thereunder.

Question 3: The external control of municipal expenditure is exercised by the

state governments through the appointment of auditors to examine municipal
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accounts. Explain stating important objectives of audit of such bodies. [RTP –

NOV 2021]

Answer 3: The external control of municipal expenditure is exercised by the state

governments through the appointment of auditors to examine municipal accounts.

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However, the municipal corporations of Delhi, Mumbai and a few others have powers
to appoint their own auditors for regular external audit.

The important objectives of audit are:

a. reporting on the fairness of the content and presentation of financial statements;

b. reporting upon the strengths and weaknesses of systems of financial control;

c. reporting on the adherence to legal and/or administrative requirements;

d. reporting upon whether value is being fully received on money spent; and

e. detection and prevention of error, fraud and misuse of resources.

Question 4: While planning the audit of an NGO, the auditor may focus on
Knowledge of the NGO’s work, its mission and vision, Updating knowledge of
relevant statutes especially with regard to recent amendments, circulars etc.
Explain the other relevant points the auditor needs to focus while planning the
audit of NGO. [RTP –NOV 2021]

Answer 4: While planning the audit, the auditor may concentrate on the
following:

i. Knowledge of the NGO’s work, its mission and vision, areas of operations and
environment in which it operate.

ii. Updating knowledge of relevant statutes especially with regard to recent

amendments, circulars, judicial decisions viz. Foreign Contribution (Regulation)
Act 1976, Societies Registration Act, 1860, Income Tax Act 1961 etc. and the
Rules related to the statutes.

iii. Reviewing the legal form of the Organisation and its Memorandum of
Association, Articles of Association, Rules and Regulations.

iv. Reviewing the NGO’s Organisation chart, then Financial and Administrative
Manuals, Project and Programme Guidelines, Funding Agencies Requirements
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and formats, budgetary policies if any.

v. Examination of minutes of the Board/Managing Committee/Governing Body/

Management and Committees thereof to ascertain the impact of any decisions
on the financial records.

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vi. Study the accounting system, procedures, internal controls and internal
checks existing for the NGO and verify their applicability.

Question 5: Pilfering is one of the greatest problems in any hotel and the
importance of internal control cannot be undermined. Explain. [RTP –MAY 2022]

Answer 5: Pilfering is one of the greatest problems in any hotel and the importance
of internal control cannot be undermined. It is the responsibility of management to
introduce controls which will minimise the leakage as far as possible. Evidence of
their success is provided by the preparation of regular perhaps weekly, trading
accounts for each sales point and a detailed scrutiny of the resulting profit
percentages, with any deviation from the anticipated form being investigated. The
auditor should obtain these regular trading accounts for the period under review,
examine them and obtain explanations for any apparent deviations.

The auditor should verify a few restaurant bills by reference to K.O.T.s (Kitchen
Order Tickets) or basic record. This would enable the auditor to ensure that controls
regarding revenue cycle are in order.

The auditor should satisfy himself that all taxes collected from occupants on food
and occupation have been paid over to the proper authorities. If the internal control
in a hotel is weak or perhaps breaks down, then a very serious problem exists for
the auditor. As a result of the transient nature of many of his clients’ records, the
auditor must rely to a very large extent on the gross margin shown by the accounts.
As a result, the scope of his audit tests will necessarily be increased and, in the
event of a material margin discrepancy being unexplained, he will have to consider
qualifying his audit report.

Question 6: No inspection under Section 79 of Multi-State Co-operative

Societies Act, 2002 shall be made unless a notice has been given to the multi-
state co-operative society. Explain stating clearly when and how such inspection
can be made. Also state the powers available with the Central Registrar in this
regard along with provisions relating to communication of the inspection report
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under the said section. [RTP –MAY 2022]

Answer 6: Inspection of Multi-State Co-operative societies under Section 79

1. When: The Central Registrar may, on a request from

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i. federal co-operative to which a Multi-State Co-operative society is

affiliated or a creditor or

ii. not less than one-third of the members of the board or

iii. not less than one-fifth of the total number of members of a Multi-State
co-operative society

2. How: By general or special order in writing in this behalf inspect or direct any
person authorized by him by order in writing in this behalf to make an inspection
into the constitution, working and financial condition of a Multi-State co-
operative society.

3. Opportunity of Being heard: No inspection shall be made unless a notice of not

less than fifteen days has been given to the multi-state co-operative society.

4. Powers available: The Central Registrar or the person authorized by him shall
have the following powers:

a. He shall at all times have access to all books, accounts, papers,

vouchers, securities, stock and other property of that society and may,
in the event of serious irregularities discovered during inspection, take
them into custody and shall have power to verify the cash balance of
the societyand subject to the general or special order of the central
registrar to call a meeting of the society where such general meeting
is, in his opinion necessary.

b. Every officer or member of a Multi-State Co-operative society shall

furnish such information with regard to the working of the society as
the central registrar or the person making such inspection may require.

5. Inspection Report: A copy of the report of inspection under this section shall
be communicated to the Multi-State Co-operative society within a period of
three months from the date of completion of such inspection.
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Question 7: You have been appointed as an auditor of ABC Hotel, a three star
hotel, for Financial Year 2021-22. As an auditor what are the special points
that need to be considered in verifying the Inventories in the nature of food
and beverages? [RTP –NOV 2022]

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Answer 7: Verification of inventories in the nature of food and beverages: The

inventories in any hotel are both readily portable and saleable particularly the food
and beverage inventories. It is therefore extremely important that all movements
and transfers of such inventories should be properly documented to enable control
to be exercised over each individual stores’ areas and sales point. The auditor should
carry out tests to ensure that all such documentation is accurately processed.
Therefore, following points may be noted in this regard:

a. All movement and transfer of inventories must be properly documented.

b. Areas where inventories are kept must be kept locked and the key retained by
the departmental manager.

c. The key should be released only to trusted personnel and unauthorized persons
should not be permitted in the stores area.

d. Many hotels use specialized professional valuers to count and value the
inventories on a continuous basis throughout the year.

e. The auditor should ensure that all inventories are valued at the year end and that
he should himself be present at the year-end physical verification, to the extent
practicable, having regard to materiality consideration and nature and location of
inventories.

Question 8: Cinescreen Multiplex Ltd. is operating cinemas in different locations

in Mumbai and has appointed you as an internal auditor. What are the areas
that need to be verified in relation to receipts from sale of Tickets? [RTP –
NOV 2022]

Answer 8: Audit of Cinema: The special steps involved in the audit of receipts from
sale of tickets are stated below-

i. Verify that entrance to the cinema-hall during show is only through printed
tickets;
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ii. Verify that they are serially numbered and bound into books;

iii. Verify that the number of tickets issued for each show and class, are
different though the numbers of the same class for the show on the same
day, each week, run serially;

iv. Verify that for advance booking a separate series of tickets is issued;

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v. Verify that the inventory of tickets is kept in the custody of a responsible

official.

vii. Confirm that at the end of show, a statement of tickets sold is prepared and
cash collected is agreed with it. Verify that a record is kept of the ‘free
passes’ and that these are issued under proper authority.

viii. Reconcile the amount of Entertainment Tax collected with the total number
of tickets issued for each class.

ix. Vouch the entries in the Cash Book in respect of cash collected on sale of
tickets for different shows on a reference to Daily Statements which have
been test checked as aforementioned with record of tickets issued for the
different shows held.

Question 9: M/s T & Co. Chartered Accountants, a partnership firm, is appointed

as an auditor of Treatment Hospital run by Smile Foundation, a charitable trust.
Over and above the receipts of treatment of patients, during the year trust
has received donations from various donors to treat COVID-19 patients and also
incurred some capital expenditure for further development of the hospital. On
some of the investment income, income tax has been deducted. What are the
special points to be considered by M/s T & Co. while auditing such transactions
of Treatment Hospital? [MAY 2022]

Answer 9: Audit of a Hospital:

A. Receipts from treatment of patients

1. Register of Patients: Vouch the Register of patients with copies of bills

issued to them. Verify bills for a selected period with the patients’
attendance record to see that the bills have been correctly prepared. Also
see that bills have been issued to all patients from whom an amount was
recoverable according to the rules of the hospital.

2. Collection of Cash from patients: Check cash collections as entered in the

CA INTERMEDIATE

Cash Book with the receipts counterfoils and other evidence for example,
copies of patient’s bills.

B. Donations from donors to treat the patients: Ascertain legacies and donation
received for a specific purpose have been applied in the manner agreed upon.

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C. Capital Expenditure Incurred: Verify the Capital Expenditure was incurred only
with the prior sanction of the Trustees or the Managing Committee.

D. Where income-tax has been deducted from the Investment income, it should
be seen that a refund thereof has been obtained since charitable institutions are
exempt from payment of Income-tax. This involves:

i. vouching the Income-tax refund with the correspondence with the

Income-tax Department; and

ii. checking the calculation of the repayment of claims/refund claim.

Question 10: Local Fund Audit Wing of a State of a State Government has
appointed you to audit the accounts of one of the Local body governed by it. As
an auditor, what will be your reporting areas? [DEC 2021]

Answer 10: Reporting areas in audit of Local Fund:

The external control of municipal expenditure is exercised by the state governments

through the appointment of auditors to examine municipal accounts. However, the
municipal corporations of Delhi, Mumbai and a few others have powers to appoint
their own auditors for regular external audit.

The important objectives of audit are:

a. reporting on the fairness of the content and presentation of financial statements;

b. reporting upon the strengths and weaknesses of systems of financial control;

c. reporting on the adherence to legal and/or administrative requirements;

d. reporting upon whether value is being fully received on money spent; and

e. detection and prevention of error, fraud and misuse of resources.

Question 11: In case of Government entities, audit of accounts of stores and

inventories has been developed as a part of expenditure audit. Discuss about
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the duties and responsibilities entrusted to C&AG. [DEC 2021]

Answer 11: Audit of Accounts of Stores and Inventories in Government

Companies:

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Audit of the accounts of stores and inventories has been developed as a part of
expenditure audit with reference to the duties and responsibilities entrusted to
C&AG. Audit is conducted :-

i. to ascertain whether the Regulations governing purchase, receipt and issue,

custody, sale and inventory taking of stores are well devised and properly
carried out.

ii. to bring to the notice of the government any deficiencies in quantities of

stores held or any defects in the system of control.

iii. to verify that the purchases are properly sanctioned, made economical and in
accordance with the Rules for purchase laid down by the competent authority.

iv. to ensure that the prices paid are reasonable and are in agreement with those
shown in the contract for the supply of stores, and that the certificates of
quality and quantity are furnished by the inspecting and receiving units. Cases
of uneconomical purchase of stores and losses attributable to defective or
inferior quality of stores are specifically brought by the audit.

v. to check the accounts of receipts, issues and balances regarding accuracy,

correctness and reasonableness of balances in inventories with particular
reference to the specified norms for level of consumption of inventory
holding. Any excess or idle inventory is specifically mentioned in the report
and periodical verification of inventory is also conducted to ensure their
existence. When priced accounts are maintained, the auditor should see that
the prices charged are reasonable and have been reviewed from time to time.
The valuation of the inventories is seen carefully so that the value accounts
tally with the physical accounts and that adjustment of profits or losses due
to revaluation, inventory taking or other causes is carried out.

Question 12: CA A is appointed as the auditor of a charitable institutions.

Discuss the audit procedure undertaken by him while auditing the Subscription
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and Donation received by the charitable institution. [DEC 2021]

Answer 12: Audit Procedure in audit of Subscriptions & donations:

Audit Procedure to be undertaken by CA A in respect of Subscriptions and donations

received by a Charitable Institution is:

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i. Ascertaining, if any, the changes made in amount of annual or life membership

subscription during the year.

ii. Whether official receipts are issued;

a. confirming that adequate control is imposed over unused receipt books;

b. obtaining all receipt books covering the period under review;

c. test checking the counterfoils with the cash book; any cancelled
receipts being specially looked into;

d. obtaining the printed list of subscriptions and donations and agreeing

them with the total collections shown in the accounts;

e. examining the system of internal check regarding moneys received from

box collections, flag days, etc. and checking the amount received from
representatives, with the correspondence and the official receipts
issued; paying special attention to the system of control exercised over
collections and the steps taken to ensure that all collections made have
been accounted for; and

f. verifying the total subscriptions and donations received with any

figures published in reports, etc. issued by the charity.

Question 13: Define Government Audit and explain its objectives. [JULY 2021]

Answer 13: Government auditing is

▪ the objective, systematic, professional and independent examination

▪ of financial, administrative and other operations

▪ of a public entity

▪ made subsequently to their execution

▪ for the purpose of evaluating and verifying them,

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▪ presenting a report containing explanatory comments on audit findings together

with conclusions and recommendations for future actions

▪ by the responsible officials

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▪ and in the case of examination of financial statements, expressing the

appropriate professional opinion regarding the fairness of the presentation.

OBJECTIVES of Govt Audit are:

a. Accounting for Public Funds: Government audit serves as a mechanism or process

for public accounting of government funds.

b. Appraisal of Government policies: It also provides public accounting of the

operational, management, programme and policy aspects of public administration
as well as accountability of the officials administering them.

c. Base for Corrective actions: Audit observations based on factual data collection
also serve to highlight the lapses of the lower hierarchy, thus helping supervisory
level officers to take corrective measures.

d. Administrative Accountability: The main objective of audit is a combination of

ensuring accountability of administration to legislature and functioning as an aid
to administration.

Question 14: Tomo Construction Engineering LLP approached CA K to understand

various returns to be maintained and filed by them. Guide/Discuss the various
returns to be maintained and filed by them. [JULY 2021]

Answer 14: Returns to be maintained and filed by an LLP:

➢ Every LLP would be required to file annual return in Form 11 with ROC within 60
days of closer of financial year. The annual return will be available for public
inspection on payment of prescribed fees to Registrar.

➢ Every LLP is also required to submit Statement of Account and Solvency in Form
8 which shall be filed within a period of thirty days from the end of six months
or the financial year to which the Statement of Account and Solvency relates. CA INTERMEDIATE

Question 15: You have been appointed as internal auditor of 'City Club' in Delhi.
The receipts of the club were 50 lakhs during the previous year ending 2019-
20. You are required to mention special points of consideration while auditing
such receipts of the club. [JAN 2021]

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Answer 15: The special steps involved, to be considered by the Internal Auditor
of City Club in conducting the audit of receipts of the club are stated below-

1. Vouch the receipt on account of entrance fees with members’ applications,

counterfoils issued to them, as well as on a reference to minutes of the
Managing Committee.

2. Vouch members’ subscriptions with the counterfoils of receipt issued to them,

trace receipts for a selected period to the Register of Members; also
reconcile the amount of total subscriptions due with the amount collected and
that outstanding.

3. Ensure that arrears of subscriptions for the previous year have been
correctly brought over and arrears for the year under audit and subscriptions
received in advance have been correctly adjusted.

4. Check totals of various columns of the Register of members and tally them
across.

5. See the Register of Members to ascertain the Member’s dues which are in
arrear and enquire whether necessary steps have been taken for their
recovery; the amount considered irrecoverable should be mentioned in the
Audit Report.

6. Verify the internal check as regards members being charged with the price
of foodstuffs and drinks provided to them and their guests, as well as, with
the fees chargeable for the special services rendered, such as billiards,
tennis, etc.

Question 16: You are appointed as an auditor of co-operative society. State

the special features of the co-operative audit to be borne in mind by the
auditor, concerning:

1. Audit classification of society.

CA INTERMEDIATE

2. Discussion of draft audit report with the management committee.

[NOV 2020]

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Answer 16:

i. Audit classification of society - After a judgement of an overall performance

of the society, the auditor has to award a class to the society. This judgement
is to be based on the criteria specified by the Registrar. It may be noted here
that if the management of the society is not satisfied about the award of
audit class, it can make an appeal to the Registrar, and the Registrar may
direct to review the audit classification. The auditor should be very careful,
while making a decision about the class of society. special services rendered,
such as billiards, tennis, etc.

ii. Discussion of draft audit report with managing committee – On conclusion

of the audit, the auditor should ask the Secretary of the society to convene
the managing committee meeting to discuss the audit draft report. The audit
report should never be finalised without discussion with the managing
committee. Minor irregularities may be got settled and rectified. Matters of
policy should be discussed in detail.

Question 17: The audit of receipts of government is not as old as audit of

expenditure but with the rapid growth of public enterprises audit of receipts
tax or non-tax has come to stay. Discuss audit of receipts with respect to
Government Audit. [NOV 2020]

Answer 17: Government auditing in India as elsewhere was primarily expenditure-

oriented Gradually, audit of receipts-tax and non-tax was taken up.

The audit of receipts is neither all pervasive nor as old as audit of expenditure but
has come to stay in some countries. Such an audit provides for checking;

i. whether all revenues or other debts due to government have been correctly
assessed, realised and credited to government account by the designated
authorities;

ii. whether adequate regulations and procedures have been framed by the
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department/agency concerned to secure an effective check on assessment,

collection and proper allocation of cases;

iii. whether such regulations and procedures are actually being carried out;

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iv. whether adequate checks are imposed to ensure the prompt detection and
investigation of irregularities, double refunds, fraudulent or forged refund
vouchers or other loss of revenue through fraud or wilful omission or
negligence to levy or collect taxes or to issue refunds; and

v. review of systems and procedures to see that the internal procedures

adequately secure correct and regular accounting of demands collection and
refunds and pursuant of dues up to final settlement and to suggest
improvement. The basic principle of audit of receipts is that it is more
important to look at the general than on the particular, though individual cases
of assessment, demand, collection, refund, etc. Are important within the area
of test check. A review of the judicial decisions taken by tax authorities is
done to judge the effectiveness of the assessment procedure.

vi. The extent and quantum of audit required to be done under each category of
audit are determined by the C&AG. These are neither negotiable nor
questioned. The prescribed extent and quantum of audit are structured in
accordance with the design of test check, random sampling, general review ,in-
depth study of specified areas, etc .as may be warranted by the nature of
transactions, its importance in the scheme of activities of a department and
the totality of its transactions, the frequency of check and total plan of audit
to be executed during a period.

vii. Institutional mechanism provides for primary check by the auditor, test check
by the supervisor and control and direction by the group leader. Planning,
executing and reporting of work is directed and monitored at middle and top
levels of the audit hierarchy. There are built –in arrangements within the
C&AG to ensure that the work assigned to each employee is carried out as
prescribed.

viii. The audit is conducted both centrally where accounts and original vouchers
are kept and locally where the drawing and disbursing functions are performed
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depending on the organisational and institutional arrangements obtaining.

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Question 18: Explain the different types of revenue grants which local bodies
may receive. [NOV 2020]

Answer 18: Local bodies may receive different types of grants from the state
administration as well. Broadly, the revenue grants are of three categories:

a. General purpose grants: These are primarily intended to substantially bridge

the gap between the needs and resources of the local bodies.

b. Specific purpose grants: These grants which are tied to the provision of
certain services or performance of certain tasks.

c. Statutory and compensatory grants: These grants, under various enactments,

are given to local bodies as compensation on account of loss of any revenue on
taking over a tax by state government from local government.

Question 19: What is the function of audit while examining various rules,
regulations and orders with regard to Audit against Rules & Orders by C&AG?
[NOV 2020]

Answer 19: Audit against Rules & Orders – Audit against rules and orders aims to
ensure that the expenditure conforms to the relevant provisions of the Constitution
and of the laws and rules made there under. It also seeks to satisfy that the
expenditure is in accordance with the financial rules, regulations and orders issued
by a competent authority.

It is the function of the executive government to frame rules, regulations and

orders, which are to be observed by its subordinate authorities. The job of audit is
to see that these rules, regulations and orders are applied properly by the
subordinate authorities. It is, however, not the function of audit to prescribe what
such rules, regulations and orders shall be. But it is the function of audit to carry
out examination of the various rules, regulations and orders issued by the executive
authorities to see that:
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a. they are not inconsistent with any provisions of the Constitution or any laws
made there under;

b. they are consistent with the essential requirements of audit and accounts as
determined by the C&AG;

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c. they do not come in conflict with the orders of, or rules made by, any higher
authority; and

d. in case they have not been separately approved by competent authority, the
issuing authority possesses the necessary rule-making power.

Question 20: What is the function of audit while examining various rules,
regulations and orders with regard to Audit against Rules & Orders by C&AG?

i. Pilfering is one of the greatest problems in any hotel and the importance
of internal control cannot be undermined.

ii. The inventories in any hotel are both readily portable and saleable. Areas
where large quantities of inventory are held should be kept locked.

[RTP NOV 2020]

Answer 20:

i. Internal control: Pilfering is one of the greatest problems in any hotel and
the importance of internal control cannot be undermined. It is the
responsibility of management to introduce controls which will minimise the
leakage as far as possible. Evidence of their success i s provided by the
preparation of regular perhaps weekly, trading accounts for each sales point
and a detailed scrutiny of the resulting profit percentages, with any deviation
from the anticipated form being investigated. The auditor should obtain these
regular trading accounts for the period under review, examine them and obtain
explanations for any apparent deviations. The auditor should verify a few
restaurant bills by reference to K.O.T.s (Kitchen Order Tickets) or basic
record. This would enable the auditor to ensure that controls regarding
revenue cycle are in order. The auditor should satisfy himself that all taxes
collected from occupants on food and occupation have been paid over to the
proper authorities. If the internal control in a hotel is weak or perhaps breaks
CA INTERMEDIATE

down, then a very serious problem exists for the auditor. As a result of the
transient nature of many of his clients’ records, the auditor must rely to a
very large extent on the gross margin shown by the accounts. As a result, the
scope of his audit tests will necessarily be increased and, in the event of a

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material margin discrepancy being unexplained, he will have to consider

qualifying his audit report.

ii. Inventories: The inventories in any hotel are both readily portable and
saleable particularly the food and beverage inventories. It is therefore
extremely important that all movements and transfers of such inventories
should be properly documented to enable control to be exercised over each
individual stores areas and sales point. The auditor should carry out tests to
ensure that all such documentation is accurately processed.

Areas where large quantities of inventory are held should be kept locked, the key
being retained by the departmental manager. The key should be released only to
trusted personnel and unauthorised persons should not be permitted in the stores
areas except under constant supervision. In particular, any movement of goods in or
out of the stores should be checked. Many hotels use specialised professional valuers
to take and value the inventories on a continuous basis throughout the year. Such a
valuation is then almost invariably used as the basis of the balance sheet inventory
figure at the year end. Although such valuers are independent of the audit client, it
is important that the auditor satisfies himself that the amounts included for such
inventories are reasonable. In order to satisfy himself of this, the auditor should
consider attending the physical inventory taking and carrying out certain pricing and
calculation tests. The extent of such tests could well be limited since the figures will
have been prepared independently of the hotel.

Question 21: Audit against rules and orders aims to ensure that the expenditure
conforms to the relevant provisions of the Constitution and of the laws and rules
made thereunder. These rules, regulations and orders against which regularity
audit is conducted fall under various categories. Explain. [MTP NOV 2022]

Answer 21: Audit against rules and orders aims to ensure that the expenditure
conforms to the relevant provisions of the Constitution and of the laws and rules
CA INTERMEDIATE

made thereunder. It also seeks to satisfy that the expenditure is in accordance with
the financial rules, regulations and orders issued by a competent authority. Audit of
expenditure against regularity is of a quasi-judicial type of work performed by the
audit authorities. It involves interpretation of the Constitution, statutes, rules,

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regulations and orders. The final power of interpretation of these, however, does
not vest with the C&AG.

These rules, regulations and orders against which regularity audit is conducted
mainly fall under the following categories:

i. Rules and orders regulating the powers to incur and sanction expenditure from
the Consolidated Fund of India or of a State (and the Contingency Fund of
India or of a State);

ii. Rules and orders dealing with the mode of presentation of claims against
government, withdrawing moneys from the Consolidated Fund, Contingency
Fund and Public Accounts of the Government of the India and of the States,
and in general the financial rules prescribing the detailed procedure to be
followed by government servants in dealing with government transactions; and

iii. Rules and orders regulating the conditions of service, pay and allowances, and
pensions of government servants.

Question 22: Explain the meaning of Government Audit and also discuss its
objectives. [MTP NOV 2022]

Answer 22: The U.N. Handbook on Government Auditing and Developing Countries
defines government auditing in a comprehensive manner which is as follows:

Government Audit is the objective, systematic, professional and independent

examination of financial, administrative and other operations of a public entity ,made
subsequently to their execution for the purpose of evaluating and verifying them,
presenting a report containing explanatory comments on audit findings together with
conclusions and recommendations for future action by the responsible officials and
in the case of examination of financial statements, expressing the appropriate
professional opinion regarding the fairness of the presentation.
CA INTERMEDIATE

OBJECTIVES of the Govt Audit are:

1. Accounting for Public Funds: It serves as a mechanism or process for public

accounting of government funds.

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2. Appraisal of Govt. Policies: It also provides public accounting of the operational,

management, programme and policy aspects of public administration as well as
accountability of the officials administering them.

3. Corrective Actions: Audit observations based on factual data collection also serve
to highlight the lapses of the lower hierarchy, thus helping supervisory level
officers to take corrective measures.

4. Administrative Accountability: The main objective of audit is a combination of

ensuring accountability of administration to legislature and functioning as an aid
to administration.

Question 23: Explain and also state the role of auditor with respect to the
following in case of a school:

i. The fees from the students.

ii. Other Receipts/Grants & Donations. [MTP NOV 2022]

Answer 23:

i. Fee from Students :-

1. Check names entered in the Students Fee Register for each month or
term, with the respective Class Registers, showing names of students
on rolls and test amount of fees charged; and verify that there
operates a system of internal check which ensures that demands
against the students are properly raised.

2. Check fees received by comparing counterfoils of receipts granted with

entries in the Cash Book and tracing the collections in the Fee Register
to confirm that the revenue from this source has been duly accounted
for.
CA INTERMEDIATE

3. Total up the various columns of the Fees Register for each month or
term to ascertain that fees paid in advance have been carried forward
and that the arrears that are irrecoverable have been written off
under the sanction of an appropriate authority.

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4. Check admission fees with admission slips signed by the head of the
institution and confirm that the amount has been credited to a Capital
fund, unless the Managing Committee has taken a decision to the
contrary.

5. See that free studentship and concessions have been granted by a

person authorised to do so, having regard to the Rules prepared by the
Managing Committee.

6. Confirm that fines for late payment or absence, etc. have been either
collected or remitted under proper authority.

7. Confirm that hostel dues were recovered before student’s accounts

were closed and their deposits of caution money refunded.

ii. Other Receipts/Grants & Donations :-

1. Verify rental income from landed property with the rent rolls, etc.

2. Vouch income from endowments and legacies, as well as interest and

dividends from investment; also inspect the securities in respect of
investments held.

3. Verify any Government or local authority grant with the memo of grant.
If any expense has been disallowed for purposes of grant, ascertain the
reasons thereof.

Question 24: Audit of government expenditure is one of the major components

of government audit conducted by the office of C & AG. The basic standards
set for audit of expenditure are to ensure that there is provision of funds
authorised by competent authority fixing the limits within which expenditure can
be incurred. Explain those standards. [MTP MAY 2022]

Answer 24: Expenditure Audit: The audit of government expenditure is one of the
CA INTERMEDIATE

major components of government audit. The basic standards set for audit of
expenditure are to ensure that there is provision funds authorised by competent
authority fixing the limits within which expenditure can be incurred. These
standards are—

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i. that the expenditure incurred conforms to the relevant provisions of the

statutory enactment and in accordance with the Financial Rules and
Regulations framed by the competent authority. Such an audit is called as the
audit against ‘rules and orders’.

ii. that there is sanction, either special or general, accorded by competent

authority authorising the expenditure. Such an audit is called as the audit of
sanctions.

iii. that there is a provision of funds out of which expenditure can be incurred
and the same has been authorised by competent authority. Such an audit is
called as audit against provision of funds.

iv. that the expenditure is incurred with due regard to broad and general
principles of financial propriety. Such an audit is also called as propriety audit.

v. that the various programmes, schemes and projects where large financial
expenditure has been incurred are being run economically and are yielding
results expected of them. Such an audit is termed as the performance audit.

Question 25: You have been appointed auditor of M/s. BLK Hospital. Discuss
important points that would attract your attention while audit. [MTP MAY 2022]

Answer 25: AUDIT OF HOSPITAL

The important points involved in such an audit are stated below-

i. Register of patients: Vouch the Register of patients with copies of bills

issued to them. Verify bills for a selected period with the patients’ attendance
record to see that the bills have been correctly prepared. Also see that bills
have been issued to all patients from whom an amount was recoverable
according to the rules of the hospital.

ii. Collection of Cash: Check cash collections as entered in the Cash Book with
CA INTERMEDIATE

the receipts, counterfoils and other evidence. For eg. copies of patients bills,
counterfoils of dividend and other interest warrants, copies of rent bills etc.

iii. Income from Investments, Rent etc.: See by reference to the property and
Investment Register that all income that should have been received by way of
rent on properties, dividends and interest on securities have been collected.

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iv. Legacies and Donations: Ascertain that legacies and donations received for a
specific purpose have been applied in the manner agreed upon.

v. Reconciliation of Subscriptions: Trace all collections of subscription and

donations from the Cash Book to the respective Registers. Reconcile the total
subscriptions due (as shown by the Subscription Register and the amount
collected and that still outstanding).

vi. Authorisation and sanctions: Vouch all purchases and expenses and verify
that the capital expenditure incurred only with the prior sanction of the
trustees of the Managing Committee and that appointments and increments
to staff have been duly authorised.

vii. Grants and TDS: Verify that grants, if any, received from Government or
local authority has been duly accounted for. Also, that refund in respect of
taxes deducted at source has been claimed.

viii. Budgets: Compare the totals of various items of expenditure and income with
the amount budgeted for them and report to the Trustees or the Managing
Committee, significant variations which have taken place.

ix. Internal Check: Examine the internal check as regards the receipt and issue
of stores, medicines, linen, apparatus, clothing, instruments, etc. so as to
ensure that purchases have been properly recorded in the Inventory Register
and that issues have been made only against proper authorisation.

x. Depreciation: See that depreciation has been written off against all the
assets at the appropriate rates.

xi. Registers: Inspect the bonds, share scrips, title deeds of properties and
compare their particulars with those entered in the property and Investment
Registers.

xii. Inventories: Obtain inventories, especially of stocks and stores as at the end
of the year and check the percentage of the items physically, also compare
CA INTERMEDIATE

their total values with respective ledger balances.

xiii. Management Representation and Certificate: Get proper Management

Representation and Certificate with respect to various aspects covered during
the course of audit.

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Question 26: Audit against rules and orders aims to ensure that the expenditure
conforms to the relevant provisions of the Constitution and of the laws and rules
made thereunder. The job of audit is to see that these rules, regulations and
orders are applied properly by the subordinate authorities. It is, however, not
the function of audit to prescribe what such rules, regulations and orders shall
be. Analyse and Explain. [MTP MAY 2022]

Answer 26: Audit against Rules & Orders - Audit against rules and orders aims
to ensure that the expenditure conforms to the relevant provisions of the
Constitution and of the laws and rules made thereunder. It also seeks to satisfy that
the expenditure is in accordance with the financial rules, regulations and orders
issued by a competent authority. These rules, regulations and orders against which
regularity audit is conducted mainly fall under the following categories:

i. Rules and orders regulating the powers to incur and sanction expenditure from
the Consolidated Fund of India or of a State (and the Contingency Fund of
India or of a State);

ii. Rules and orders dealing with the mode of presentation of claims against
government, withdrawing moneys from the Consolidated Fund, Contingency
Fund and Public Accounts of the Government of the India and of the States,
and in general the financial rules prescribing the detailed procedure to be
followed by government servants in dealing with government transactions; and

iii. Rules and orders regulating the conditions of service, pay and allowances, and
pensions of government servants.

Question 27: Audit against rules and orders aims to ensure that the expenditure
conforms to the relevant provisions of the Constitution and of the laws and rules
made thereunder. The job of audit is to see that these rules, regulations and
CA INTERMEDIATE

orders are applied properly by the subordinate authorities. It is, however, not
the function of audit to prescribe what such rules, regulations and orders shall
be. Analyse and Explain. [MTP MAY 2022]

Answer 27: Audit against Rules & Orders - Audit against rules and orders aims
to ensure that the expenditure conforms to the relevant provisions of the

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Constitution and of the laws and rules made thereunder. It also seeks to satisfy that
the expenditure is in accordance with the financial rules, regulations and orders
issued by a competent authority. These rules, regulations and orders against which
regularity audit is conducted mainly fall under the following categories:

i. Rules and orders regulating the powers to incur and sanction expenditure from
the Consolidated Fund of India or of a State (and the Contingency Fund of
India or of a State);

ii. Rules and orders dealing with the mode of presentation of claims against
government, withdrawing moneys from the Consolidated Fund, Contingency
Fund and Public Accounts of the Government of the India and of the States,
and in general the financial rules prescribing the detailed procedure to be
followed by government servants in dealing with government transactions; and

iii. Rules and orders regulating the conditions of service, pay and allowances, and
pensions of government servants.

It is the function of the executive government to frame rules, regulations and

orders, which are to be observed by its subordinate authorities. The job of audit is
to see that these rules, regulat ions and orders are applied properly by the
subordinate authorities. It is, however, not the function of audit to prescribe what
such rules, regulations and orders shall be. But, it is the function of audit to carry
out examination of the various rules, regulations and orders issued by the executive
authorities to see that:

a. they are not inconsistent with any provisions of the Constitution or any laws
made thereunder;

b. they are consistent with the essential requirements of audit and accounts as
determined by the C&AG;

c. they do not come in conflict with the orders of, or rules made by, any higher
authority; and
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d. in case they have not been separately approved by competent authority, the
issuing authority possesses the necessary rule-making power.

Audit of expenditure against regularity is of a quasi-judicial type of work performed

by the audit authorities. It involves interpretation of the Constitution, statutes,

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rules, regulations and orders. The final power of interpretation of these, however,
does not vest with the C&AG.

Question 28: Government audit has not only adopted the basic essentials of
auditing as known and practised in the profession to suit the requirements of
governmental transactions but has also added new concepts, techniques and
procedures to the audit profession. Explain stating clearly the definition of
Government auditing as discussed in U.N. Handbook on Govt Auditing and
Developing Countries and also state Objectives of Govt audit. [MTP MAY 2022]

Answer 28: Government audit has not only adopted the basic essentials of auditing
as known and practised in the profession to suit the requirements of governmental
transactions but has also added new concepts, techniques and procedures to the
audit profession.

The U.N. Handbook on Government Auditing and Developing Countries defines

government auditing in a comprehensive manner which is as follows:

Government auditing is

▪ the objective, systematic, professional and independent examination

▪ of financial, administrative and other operations

▪ of a public entity

▪ made subsequently to their execution

▪ for the purpose of evaluating and verifying them,

▪ presenting a report containing explanatory comments on audit findings

together with conclusions and recommendations for future actions

▪ by the responsible officials

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▪ and in the case of examination of financial statements, expressing the

appropriate professional opinion regarding the fairness of the presentation.

OBJECTIVES:-

a. Accounting for Public Funds:- Government audit serves as a mechanism or

process for public accounting of government funds.

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b. Appraisal of Government policies:- It also provides public accounting of the

operational, management, programme and policy aspects of public
administration as well as accountability of the officials administering them.

c. Base for Corrective actions:-Audit observations based on factual data

collection also serve to highlight the lapses of the lower hierarchy, thus
helping supervisory level officers to take corrective measures.

Question 29: What are the special steps involved in conducting the audit of an
Educational Institution? (Write any 12 points). [MTP MAY 2022]

Answer 29: The Special Steps Involved in the Audit of an Educational Institution
are the following:

i. Examine the Trust Deed, or Regulations in the case of school or college and
note all the provisions affecting accounts. In the case of a university, refer
to the Act of Legislature and the Regulations framed thereunder.

ii. Read through the minutes of the meetings of the Managing Committee or
Governing Body, noting resolutions affecting accounts to see that these have
been duly complied with, specially the decisions as regards the operation of
bank accounts and sanctioning of expenditure

iii. Check names entered in the Students’ Fee Register for each month or term,
with the respective class registers, showing names of students on rolls and
test amount of fees charged; and verify that there operates a system of
internal check which ensures that demands against the students are properly
raised.

iv. Check fees received by comparing counterfoils of receipts granted with

entries in the cash book and tracing the collections in the Fee Register to
confirm that the revenue from this source has been duly accounted for.
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v. Total up the various columns of the Fees Register for each month or term to
ascertain that fees paid in advance have been carried forward and the arrears
that are irrecoverable have been written off under the sanction of an
appropriate authority.

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vi. Check admission fees with admission slips signed by the head of the institution
and confirm that the amount had been credited to a Capital Fund, unless the
Managing Committee has taken a decision to the contrary.

vii. See that free studentship and concessions have been granted by a person
authorised to do so, having regard to the prescribed Rules.

viii. Confirm that fines for late payment or absence, etc., have either been
collected or remitted under proper authority.

ix. Confirm that hostel dues were recovered before students’ accounts were
closed and their deposits of caution money refunded.

x. Verify rental income from landed property with the rent rolls, etc.

xi. Vouch income from endowments and legacies, as well as interest and dividends
from investment; also inspect the securities in respect of investments held.

xii. Verify any Government or local authority grant with the relevant papers of
grant. If any expense has been disallowed for purposes of grant, ascertain
the reasons and compliance thereof.

xiii. Report any old heavy arrears on account of fees, dormitory rents, etc, to the
Managing Committee.

xiv. Confirm that caution money and other deposits paid by students on admission
have been shown as liability in the balance sheet and not transferred to
revenue.

xv. See that the investments representing endowment funds for prizes are kept
separate and any income in excess of the prizes has been accumulated and
invested along with the corpus.

xvi. Verify that the Provident Fund money of the staff has been invested in
appropriate securities.
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xvii. Vouch donations, if any, with the list published with the annual report. If some
donations were meant for any specific purpose, see that the money was
utilised for the purpose.

xviii. Vouch all capital expenditure in the usual way and verify the same with the
sanction for the Committee as contained in the minute book.

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xix. Vouch in the usual manner all establishment expenses and enquire into any
unduly heavy expenditure under any head.

xx. See that increase in the salaries of the staff have been sanctioned and
minuted by the Committee.

xxi. Ascertain that the system ordering inspection on receipt and issue of
provisions, foodstuffs, clothing and other equipment is efficient and all bills
are duly authorised and passed before payment.

xxii. Verify the inventories of furniture, stationery, clothing, provision and all
equipment, etc. These should be checked by reference to Inventory Register
and values applied to various items should be test checked.

xxiii. Confirm that the refund of taxes deducted from the income from investment
(interest on securities, etc.) has been claimed and recovered since the
institutions are generally exempted from the payment of income-tax.

xxiv. Verify the annual statements of accounts and while doing so see that separate
statements of account have been prepared as regards Poor Boys Fund, Games
Fund, Hostel and Provident Fund of Staff, etc.

Question 30: You have been appointed auditor of Dr. Prem Ratan Hospital.
Discuss any eight important points that would attract your attention while audit.
[MTP MAY 2022]

Answer 30: AUDIT OF HOSPITAL

The important points involved in such an audit are stated below-

i. Register of patients: Vouch the Register of patients with copies of bills

issued to them. Verify bills for a selected period with the patients’ attendance
record to see that the bills have been correctly prepared. Also see that bills
have been issued to all patients from whom an amount was recoverable
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according to the rules of the hospital.

ii. Collection of Cash: Check cash collections as entered in the Cash Book with
the receipts, counterfoils and other evidence. For eg. copies of patients bills,
counterfoils of dividend and other interest warrants, copies of rent bills etc.

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iii. Income from Investments, Rent etc.: See by reference to the property and
Investment Register that all income that should have been received by way of
rent on properties, dividends and interest on securities have been collected.

iv. Legacies and Donations: Ascertain that legacies and donations received for a
specific purpose have been applied in the manner agreed upon.

v. Reconciliation of Subscriptions: Trace all collections of subscription and

donations from the Cash Book to the respective Registers. Reconcile the total
subscriptions due (as shown by the Subscription Register and the amount
collected and that still outstanding).

vi. Authorisation and sanctions: Vouch all purchases and expenses and verify
that the capital expenditure incurred only with the prior sanction of the
trustees of the Managing Committee and that appointments and increments
to staff have been duly authorised.

vii. Grants and TDS: Verify that grants, if any, received from Government or
local authority has been duly accounted for. Also, that refund in respect of
taxes deducted at source has been claimed.

Question 31: "Public moneys should not be utilised for the benefit of a particular
person or section of the community". List out the exceptions to this rule while
audit against propriety. [MTP MAY 2022]

Answer 31: Exceptions to the rule – Audit Against Propriety: Public moneys should
not be utilised for the benefit of a particular person or section of the community
unless:

i. the amount of expenditure involved is insignificant; or

ii. a claim for the amount could be enforced in a Court of law; or

iii. the expenditure is in pursuance of a recognised policy or custom; and

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iv. the amount of allowances, such as travelling allowances, granted to meet

expenditure of a particular type should be so regulated that the allowances
are not, on the whole, sources of profit to the recipients.

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Question 32: The Comptroller and Auditor General's (Duties, Powers and
Conditions of Service) Act, 1971 provides certain powers to the C & AG in
connection with performance of his duties. Discuss. [MTP MAY 2022]

Answer 32: Powers of C & AG in performance of his duties: The Comptroller and
Auditor General's (Duties, Powers and Condition of Service) Act, 1971 gives the
following powers to the C&AG in connection with the performance of his duties:

i. To inspect any an office accounts under the control of the union or a State
Government including office responsible for creation of initial or subsidiary
accounts.

ii. To require that any accounts, books, papers and other documents which deal
with or are otherwise relevant to the transactions under audit, be sent to
specified places.

iii. To put such questions or make such observations as he may

iv. consider necessary to the person- in charge of the office and to call for such
information as he may require for preparation of any account or report, which
is his duty to prepare.

In carrying out the audit, the C&AG has the power to dispense with any part of
detailed audit of any accounts or class of transactions and to apply such limited
checks in relation to such accounts or transaction as he may determine.

Question 33: PQR Ltd., a government company, constructed a building in

conformity with rules and regulations for installing a telephone exchange but not
used for the same purpose resulting in the infructuous expenditure.

Considering the above case, explain the type of expenditure audit to be

performed to curb the situation. [MTP NOV 2021]
CA INTERMEDIATE

Answer 33: Propriety audit: According to ‘propriety audit’, the auditors try to bring
out cases of improper, avoidable, or infructuous expenditure even though the
expenditure has been incurred in conformity with the existing rules and regulations.
Further, it may so happen that a transaction may satisfy all the requirements of

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regularity audit insofar as the various formalities regarding rules and regulations
are concerned but may still be highly wasteful.

In the given situation, PQR Ltd. being a government company, constructed a building
in conformity with rules and regulations for installing a telephone exchange but not
used for the same purpose resulting in an infructuous expenditure.

Thus, propriety audit should be done for PQR Ltd. to bring out improper, avoidable,
or infructuous expenditure even though the expenditure has been incurred in
conformity with the existing rules and regulations to the notice of the proper
authorities of wastefulness in public administration.

Question 34: List out the types of Revenue Grants received by local bodies from
the State. [MTP NOV 2021]

Answer 34: Revenue grants received by Local Bodies:

Local bodies may receive different types of grants from the state administration.
Broadly the revenue grants are of three types:

1. General purpose grants: These are primarily intended to substantially bridge

the gap between the needs and resources of the local bodies.

2. Specific purpose grants: These grants which are tied to the provision of
certain services or performance of certain tasks.

3. Statutory and compensatory grants: These grants, under various

enactments, are given to local bodies as compensation on account of loss of
any revenue on taking over a tax by state government from local government.

Question 35: The audit of government expenditure is one of the major

components of government audit. Explain the basic standards set for such audit
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of expenditure. [MTP NOV 2021]

Answer 35: The audit of government expenditure is one of the major components
of government audit. The basic standards set for audit of expenditure are to ensure
that there is provision funds authorised by competent authority fixing the limits
within which expenditure can be incurred. These standards are—

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i. that the expenditure incurred conforms to the relevant provisions of the

statutory enactment and in accordance with the Financial Rules and
Regulations framed by the competent authority. Such an audit is called as the
audit against ‘rules and orders’.

ii. that there is sanction, either special or general, accorded by competent

authority authorising the expenditure. Such an audit is called as the audit of
sanctions.

iii. that there is a provision of funds out of which expenditure can be incurred
and the same has been authorised by competent authority. Such an audit is
called as audit against provision of funds.

iv. that the expenditure is incurred with due regard to broad and general
principles of financial propriety. Such an audit is also called as propriety
audit.

v. that the various programmes, schemes and projects where large financial
expenditure has been incurred are being run economically and are yielding
results expected of them. Such an audit is termed as the performance audit.

Question 36: GSR & Co. has been appointed as an auditor of Tagore School.
Engagement team wants to verify Fees from students in detail. Advise the audit
procedure to be followed by the engagement team. [MTP NOV 2021]

Answer 36: Fee from Students :-

1. Check names entered in the Students Fee Register for each month or term,
with the respective Class Registers, showing names of students on rolls and
test amount of fees charged; and verify that there operates a system of
internal check which ensures that demands against the students are properly
raised.
CA INTERMEDIATE

2. Check fees received by comparing counterfoils of receipts granted with

entries in the Cash Book and tracing the collections in the Fee Register to
confirm that the revenue from this source has been duly accounted for.

3. Total up the various columns of the Fees Register for each month or term to
ascertain that fees paid in advance have been carried forward and that the

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arrears that are irrecoverable have been written off under the sanction of an
appropriate authority.

4. Check admission fees with admission slips signed by the head of the institution
and confirm that the amount has been credited to a Capital fund, unless the
Managing Committee has taken a decision to the contrary.

5. See that free studentship and concessions have been granted by a person
authorised to do so, having regard to the Rules prepared by the Managing
Committee.

6. Confirm that fines for late payment or absence, etc. have been either collected
or remitted under proper authority.

7. Confirm that hostel dues were recovered before student’s accounts were
closed and their deposits of caution money refunded.

Question 37: The audit programme of NGO should include in a sequential order
all assets, liabilities, income and expenditure ensuring that no material item is
omitted. Explain. [MTP NOV 2021]

Answer 37: The audit programme should include in a sequential order all assets,
liabilities, income and expenditure ensuring that no material item is omitted.

i. Corpus Fund: The contributions / grants received towards corpus be vouched

with special reference to the letters from the donor(s). The interest income
be checked with Investment Register and Physical Investments in hand.

ii. Reserves: Vouch transfers from projects / programmes with donors letters
and board resolutions of NGO. Also check transfer of gross value of asset
sold from capital reserve to general reserve and adjustments during the year.

iii. Ear-marked Funds: Check requirements of donors institutions, board

resolution of NGO, rules and regulations of the schemes of the ear-marked
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funds.

iv. Project / Agency Balances: Vouch disbursements and expenditure as per

agreements with donors for each of the balances.

v. Loans: Vouch loans with loan agreements, counterfoil of receipt issued.

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vi. Fixed Assets: Vouch all acquisitions / sale or disposal of assets including
depreciation and the authorisations for the same. Also check donor’s letters/
agreements for the grant. In the case of immovable property check title, etc.

vii. Investments: Check Investment Register and the investments physically

ensuring that investments are in the name of the NGO. Verify further
investments and dis - investments for approval by the appropriate authority
and reference in the bank accounts for the principal amount and interest.

viii. Cash in Hand: Physically verify the cash in hand and imprest balances, at the
close of the year and whether it tallies with the books of account.

Question 38: Briefly explain the provisions for qualification and appointment of
Auditors under the Multi-State Co-operative Societies Act, 2002. [MTP NOV
2021]

Answer 38: Qualification of Auditors -Section 72 of the Multi-State Co-operative

Societies Act, 2002 states that a person who is a Chartered Accountant within the
meaning of the Chartered Accountants Act, 1949 can only be appointed as auditor
of Multi-State co-operative society.

However, the following persons are not eligible for appointment as aud itors of a
Multi-State co- operative society-

i. A body corporate.

ii. An officer or employee of the Multi-State co-operative society.

iii. A person who is a member or who is in the employment, of an officer or

employee of the Multi- State co-operative society.

iv. A person who is indebted to the Multi-State co-operative society or who has
given any guarantee or provided any security in connection with the
indebtedness of any third person to the Multi-State co-operative society for
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an amount exceeding one thousand rupees.

If an auditor becomes subject, after his appointment, to any, of the disqualifications

specified above, he shall be deemed to have vacated his office as such.

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Appointment of Auditors - Section 70 of the Multi-State Co-operative Societies

Act, 2002 provides that the first auditor or auditors of a Multi-State co-operative
society shall be appointed by the board within one month of the date of registration
of such society and the auditor or auditors so appointed shall hold office until the
conclusion of the first annual general meeting. If the board fails to exercise its
powers under this sub-section, the Multi-State co-operative society in the general
meeting may appoint the first auditor or auditors.

The subsequent auditor or auditors are appointed by Multi-State co-operative

society, at each annual general meeting. The auditor or auditors so appointed shall
hold office from the conclusion of that meeting until the conclusion of the next
annual general meeting.

Question 39: Cinescreen Multiplex Ltd. is operating cinemas in different

locations in Mumbai and has appointed you as an internal auditor. What are the
areas that need to be verified in relation to receipts from sale of Tickets?
[MTP NOV 2021]

Answer 39: Audit of Cinema: The special steps involved in its audit are stated
below-

i. Verify that entrance to the cinema-hall during show is only through printed
tickets;

ii. Verify that they are serially numbered and bound into books;

iii. Verify that the number of tickets issued for each show and class, are
different though the numbers of the same class for the show on the same
day, each week, run serially;

iv. Verify that for advance booking a separate series of tickets is issued;

v. Verify that the inventory of tickets is kept in the custody of a responsible

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official.

vi. Confirm that at the end of show, a statement of tickets sold is prepared and
cash collected is agreed with it.

vii. Verify that a record is kept of the ‘free passes’ and that these are issued
under proper authority..

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viii. Reconcile the amount of Entertainment Tax collected with the total number
of tickets issued for each class.

ix. Vouch the entries in the Cash Book in respect of cash collected on sale of
tickets for different shows on a reference to Daily Statements which have
been test checked as aforementioned with record of tickets issued for the
different shows held.

Question 40: The Comptroller and Auditor General shall be responsible for
compiling the accounts of the Union and of each State from the initial and
subsidiary accounts rendered to the audit and accounts offices under his control
by treasuries, offices or departments responsible for the keeping of such
account. Explain. [MTP NOV 2020]

Answer 40: Compile and submit Accounts of Union and States - The Comptroller
and Auditor General shall be responsible for compiling the accounts of the Union and
of each State from the initial and subsidiary accounts rendered to the audit and
accounts offices under his control by treasuries, offices or departments responsible
for the keeping of such account. The Comptroller and Auditor General shall, from
the accounts compiled by him or [by the Government or any other person responsible
in that behalf] prepare in each accounts (including, in the case of accounts compiled
by him, appropriation accounts) showing under the respective heads the annual
receipts and disbursements for the purpose of the Union, of each State and of each
Union Territory having a Legislative Assembly, and shall submit those accounts to
the President or the Governor of a State or Administrator of the Union Territory
having a Legislative Assembly, as the case may be, on or before such dates as he
may, with the concurrence of the Government concerned, determine.

The C&AG Act of 1971 has provisions for relieving him of this responsibility to give
information and render assistance to the Union and States: The Comptroller and
Auditor General shall, in so far as the accounts, for the compilation or keeping of
CA INTERMEDIATE

which he is responsible, enable him so to do, give to the Union Government, to the
State Government or to the Governments of Union Territories having Legislative
Assemblies, as the case may be, such information as they may, from time to time,
require and render such assistance in the preparation of the annual financial
statements as they may reasonably ask for.

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Question 41: Pilfering is one of the greatest problems in any hotel and the
importance of internal control cannot be undermined. Explain. [RTP May 2024]

Answer 41: Pilfering is one of the greatest problems in any hotel and the
importance of internal control cannot be undermined. It is the responsibility of
management to introduce controls which will minimize the leakage as far as possible.
Evidence of their success is provided by the preparation of regular perhaps
weekly, trading accounts for each sales point and a detailed scrutiny of the
resulting profit percentages, with any deviation from the anticipated form being
investigated. The auditor should obtain these regular trading accounts for the
period under review, examine them and obtain explanations for any apparent
deviations.

The auditor should verify a few restaurant bills by reference to K.O.T.s (Kitchen
Order Tickets) or basic record. This would enable the auditor to ensure that
controls regarding revenue cycle are in order.
The auditor should satisfy himself that all taxes collected from occupants on food
and occupation have been paid over to the proper authorities. If the internal control
in a hotel is weak or perhaps breaks down, then a very serious problem exists for
the auditor. As a result of the transient nature of many of his clients’ records, the
auditor must rely to a very large extent on the gross margin shown by the accounts.
As a result, the scope of his audit tests will necessarily be increased and, in the
event of a material margin discrepancy being unexplained, he will have to consider
qualifying his audit report.

Question 42: From a lessee’s perspective, highlight main differences between an

operating lease and finance lease only in relation to accounting treatment and
tax benefits. [RTP May 2024]

Answer 42: Accounting treatment: Operating lease is generally treated like a

renting arrangement. Lease payments are treated as operating expenses and asset
does not appear as asset in lessee’s balance sheet. Finance lease is treated like a
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loan arrangement Hence, asset ownership is considered of that of lessee and thus
appears on the balance sheet of the lessee.

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Tax benefits: Operating lease payment is considered like an expense just as in

case of renting. However, no depreciation can be claimed by lessee. In case of
finance lease, lessee can claim both interest and depreciation as it is treated like
a loan.

Question 43: An NGO based in Kolkata collected significant donations for

flood victims in Bihar. The funds were distributed to various NGOs operating
in Bihar to support relief efforts. You have been appointed as the auditor for
this NGO’s accounts for the year in which it collected and disbursed these
donations. Draft an audit program to audit the receipts of donations and the
remittance of the collected funds to different NGOs. [RTP JAN 2025]

Answer 43: Receipt of Donations:

(i) Internal Control System: Existence of internal control system
particularly with reference to division of responsibilities in respect
of authorised collection of donations, custody of receipt books and
safe custody of money.
(ii) Custody of Receipt Books: Existence of system regarding issue of
receipt books, whether unused receipt books are returned and the same
are verified physically including checking of number of receipt books
and sequence of numbering therein.
(iii) Receipt of Cheques: Receipt Book should have carbon copy for duplicate
receipt and signed by a responsible official. All details relating to date
of cheque, bank’s name, date, amount, etc. should be clearly stated.
(iv) Bank Reconciliation: Reconciliation of bank statements with reference
to all cash deposits not only with reference to date and amount but also
with reference to receipt book.
(v) Cash Receipts: Register of cash donations to be vouched more
extensively. If addresses are available of donors who had given cash,
the same may be cross-checked by asking entity to post thank you
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letters mentioning amount, date and receipt number.

(vi) Foreign Contributions, if any, to receive special attention to compliance
with applicable laws and regulations.

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Remittance of Donations to Different NGOs:

(i) Mode of Sending Remittance: All remittances are through account
payee cheques. Remittances through Demand Draft would also need
to be scrutinised thoroughly with reference to recipient.
(ii) Confirming Receipt of Remittance: All remittances are supported
by receipts and acknowledgements.

(iii) Identity: Recipient NGO is a genuine entity. Verify address, 80G

Registration Number, etc.

(iv) Direct Confirmation Procedure: Send confirmation letters to

entities to whom donations have been paid.

Question 44: Section 77 of Multi-State Cooperative Societies Act, 2002 states

that the Central Government may at any time by order direct that a special
audit of the Multi-State Co-Operative Society’s accounts for such period or
periods as may be specified in the order, shall be conducted. Further, it may
by the same or a different order appoint either a Chartered Accountant or the
Multi-State Co-Operative Society’s auditor himself to conduct special audit.
Under which circumstances such power can be exercised by the Central
Government? (RTP SEP 2024)

Answer 44: The Central government has power to order special audit of Multi-State
Cooperative Society’s Accounts where it is of the opinion -

(a) that the affairs of any multi-state co-operative society are not being
managed in accordance with self-help and mutual deed and co-operative
principles or prudent commercial practices or with sound business principles
or
(b) that any multi-state co-operative society is being managed in a manner likely
to cause serious injury or damage to the interests of the trade industry or
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business to which it pertains or ;

(c) that the financial position of any multi-state co-operative society is such as
to endanger its solvency.

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Question 45: P Financial Services Ltd. (PFSL) is a leasing & hire purchase
company. You, as an auditor of PFSL, are in the process of examining finance
lease agreements executed by them for equipment given on lease. Which points
shall be noted by you while examining a particular finance lease agreement
entered into by PFSL in respect of a leasing transaction? (PYQ MAY 2024)

Answer 45: The lease agreement should be examined, and the following points may
be noted:
(i) the description of the lessor, the lessee, the equipment and the location where
the equipment is to be installed. (The stipulation that the equipment shall not be
removed from the described location except for repairs. For the sake of
identification, the lessor may also require plates or markings to be attached to the
equipment).
(ii) the amount of tenure of lease, dates of payment, late charges, deposits or
advances etc. should be noted.
(iii) whether the equipment shall be returned to the lessor on termination of the
agreement and the cost shall be borne by the lessee.
(iv) whether the agreement prohibits the lessee from subletting the equipment and
authorises the lessor to do so.

Question 46: Sanskar Foundation is a Non-Governmental Organisation (NGO) for

orphan children. They have received voluntary contribution of Rs. 50 lacs from
the promoters, specifying that Rs. 20 lacs are towards the Corpus contribution
and ` 30 lacs are towards Revolving fund. Explain the terms "Corpus contribution"
and "Revolving fund".(PYQ MAY 2024)

Answer 46: A contribution made towards the capital or the corpus of an NGO is
known as corpus contribution. The donors are generally required to specify whether
the donation/grant given by him shall form part of the corpus of the NGO. Such
contributions are generally given with reference to the total funds required by an
NGO.
CA INTERMEDIATE

The objective of a contribution or grant towards a Revolving Fund is to rotate the

amount by giving temporary loans from the fund to other NGO or beneficiaries for
their projects and then recover the loan so as to give temporary loans again and so on.
However, any interest earned from the beneficiary on such temporary loans from the
revolving fund could be either added back to the fund or credited to the Income and
Expenditure Account depending on restrictions laid down by the authority providing

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the contribution (for the revolving fund) or by the rules and regulations laid down by
the concerned NGO in this regard.

Question 47: You are appointed as an auditor of “The Prestigious Township Club”.
As the auditor of "The Prestigious Township Club" for the financial year 2023-
24, what are the key points you would consider while auditing the income and
expenditure items of the club? (MTP JAN 2025)
Answer 47: The following points need to be considered while auditing income and
expenditure items of a club: -

(1) Entrance Fee: Vouch the receipt on account of entrance fees with members’
applications, counterfoils issued to them, as well as on a reference to minutes
of the Managing Committee.
(2) Subscriptions: Vouch members’ subscriptions with the counterfoils of
receipt issued to them, trace receipts for a selected period to the Register
of Members; also reconcile the amount of total subscriptions due with the
amount collected and that outstanding.
(3) Arrears of Subscriptions: Ensure that arrears of subscriptions for the
previous year have been correctly brought over and arrears for the year
under audit and subscriptions received in advance have been correctly
adjusted.
(4) Arithmetical accuracy: - Check totals of various columns of the Register of
members and tally them across.
(5) Irrecoverable Member Dues :- See the Register of Members to ascertain
the Member’s dues which are in arrear and enquire whether necessary steps
have been taken for their recovery; the amount considered irrecoverable
should be mentioned in the Audit Report.
(6) Pricing: Verify the internal check as regards members being charged with
the price of foodstuffs and drinks provided to them and their guests, as
well as, with the fees chargeable for the special services rendered, such as
billiards, tennis, etc.
CA INTERMEDIATE

(7) Member Accounts: Trace debits for a selected period from subsidiary
registers maintained in respect of supplies and services to members to
confirm that the account of every member has been debited with amounts
recoverable from him.
(8) Purchases: Vouch purchase of sports items, furniture, crockery, etc. and
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trace their entries into the respective inventory registers.

(9) Margins earned: Vouch purchases of foodstuffs, cigars, wines, etc., and test
their sale price so as to confirm that the normal rates of gross profit have
been earned on their sales. The inventory of unsold provisions and stores, at
the end of year, should be verified physically and its valuation checked.
(10) Management Powers: Examine the financial powers of the secretary and,
if these have been exceeded, report specific case for confirmation by the
Managing Committee.

Question 48: Aman Cooperative Society appointed FAB & Associates as an

auditor for the financial year 2023-2024. During the audit, the auditors noted
the following details :

Number of shares 1000 shares @ Rs.10/- each

Net Profit before compulsory Rs.10,000/-
transfer to reserve fund
Net Profit after compulsory Rs.8000/-
transfer to reserve fund

(I) Mr. Dhairya, a member of society, holds 200 shares amounting

to
₹ 2000 from the previous year.

(II) Upon verifying the society’s borrowings, the auditors found that
Cooperative Society had accepted a loan from Mr. Shivam, a
non- member. The auditors did not find any restrictions
regarding this in the society’s bye laws.
Comment on the above transactions of the society with reference to the Co-
operative Societies Act, 1912. (MTP JAN 2025)
Answer 48: Restrictions on share holdings: - According to section 5 of the Central
Act, in the case of a society where the liability of a member of the society is limited,
CA INTERMEDIATE

no member of a society other than a registered society can hold such portion of
the share capital of the society as would exceed a maximum of twenty percent of
the total number of shares or of the value of shareholding to ₹ 1,000/-.

Restrictions on borrowings - Section 30 of the Central Act further puts restriction

on borrowings. According to this section, a registered society shall accept loans and

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deposits from persons who are not members subject to the restrictions and limits
of the bye-laws of the society. The auditor will have to examine the bye-laws in
this respect.”
In the given situation, Mr. Dhairya, a member of the society, is holding 200 shares
amounting to ₹ 2000 from the previous year. In view of the aforementioned
restriction on shareholding by a member, Mr. Dhairya is allowed to hold a maximum
of 100 shares according to the Act.
Further, Aman Co-operative Society had accepted a loan from Mr. Shivam, a non-
member. Since, there are no restrictions regarding the acceptance of loan received
from non-member in the society’s bye-laws, the loan received from Mr. Shivam is
permissible.

CA INTERMEDIATE

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Chapter-10: Audit of Banks

Question 1: Your firm of auditors, SRG & Co., has been appointed as Statutory
Central Auditors of Reliable Bank. Explain the reporting requirements of the
Statutory Central Auditors (SCAs) in addition to their main audit report.

[RTP –MAY 2021]

Answer 1: Presently, the Statutory Central Auditors (SCAs) have to furnish the
following reports in addition to their main audit report:

a) Report on adequacy and operating effectiveness of Internal Controls over

Financial Reporting in case of banks which are registered as companies under the
Companies Act in terms of Section 143(3)(i) of the Companies Act, 2013 which is
normally to be given as an Annexure to the main audit report as per the Guidance
Note on Audit of Internal Financial Controls over Financial Reporting issued by
the ICAI.

b) Long Form Audit Report. (LFAR)

c) Report on compliance with SLR requirements.

d) Report on whether the treasury operations of the bank have been conducted in
accordance with the instructions issued by the RBI from time to time.

e) Report on whether the income recognition, asset classification and provisioning

have been made as per the guidelines issued by the RBI from time to time.

f) Report on whether any serious irregularity was noticed in the working of the bank
which requires immediate attention.

g) Report on status of the compliance by the bank with regard to the implementation
of recommendations of the Ghosh Committee relating to frauds and malpractices
and of the recommendations of Jilani Committee on internal control and
CA INTERMEDIATE

inspection/credit system.

h) Report on instances of adverse credit-deposit ratio in the rural areas.

Question 2: Advances generally constitute the major part of the assets of the
bank. There are large number of borrowers to whom variety of advances are

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granted. The audit of advances requires the major attention from the auditors.
Explain the broad considerations about which the auditor is primarily concerned
with obtaining evidence in carrying out audit of advances. [RTP –MAY 2021]

Answer 2: Advances generally constitute the major part of the assets of the bank.
There are large number of borrowers to whom variety of advances are granted. The
audit of advances requires the major attention from the auditors.

a. In carrying out audit of advances, the auditor is primarily concerned with

obtaining evidence about the following:

b. Amounts included in balance sheet in respect of advances which are outstanding

at the date of the balance sheet.

c. Advances represent amount due to the bank.

d. Amounts due to the bank are appropriately supported by loan documents and
other documents as applicable to the nature of advances.

e. There are no unrecorded advances.

f. The stated basis of valuation of advances is appropriate and properly applied and
the recoverability of advances is recognised in their valuation.

g. The advances are disclosed, classified and described in accordance with

recognized accounting policies and practices and relevant statutory and
regulatory requirements.

h. Appropriate provisions towards advances have been made as per the RBI norms,
Accounting Standards and generally accepted accounting practices.

Question 3: The engagement team discussion ordinarily includes a discussion of

the matters such as - Errors that may be more likely to occur; Errors which
have been identified in prior years;

Method by which fraud might be perpetrated by bank personnel or others within

CA INTERMEDIATE

particular account balances and/or disclosures; etc.

In the above context, explain the advantages of such a discussion. [RTP –NOV
2021]

Answer 3: Advantages of such a discussion:-

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• Specific emphasis should be provided to the susceptibility of the bank’s financial

statements to material misstatement due to fraud, that enables the engagement
team to consider an appropriate response to fraud risks, including those related
to engagement risk, pervasive risks, and specific risks.

• It further enables the audit engagement partner to delegate the work to the
experienced engagement team members, and to determine the procedures to be
followed when fraud is identified.

• Further, audit engagement partner may review the need to involve specialists to
address the issues relating to fraud.

Question 4: In carrying out an audit of interest expense, the auditor is primarily

concerned with; assessing the overall reasonableness of the amount of interest
expense. Analyse and explain stating the audit approach and procedure in regard
to interest expense. [RTP –NOV 2021]

Answer 4: In carrying out an audit of interest expense, the auditor is primarily

concerned with assessing the overall reasonableness of the amount of interest
expense by analysing ratios of interest paid on different types of deposits and
borrowings to the average quantum of the respective liabilities during the year. In
modern day banking, the entries for interest expenses are automatically generated
through a batch process in the CBS system.

The auditor should obtain from the bank an analysis of various types of deposits
outstanding at the end of each quarter. From such information, the auditor may work
out a weighted average interest rate. The auditor may then compare this rate with
the actual average rate of interest paid on the relevant deposits as per the annual
accounts and enquire into the difference, if material.

The auditor should also compare the average rate of interest paid on the relevant
deposits with the corresponding figures for the previous years and analyse any
material differences. The auditor should obtain general ledger break-up for the
CA INTERMEDIATE

interest expense incurred on deposits (savings and term deposits) and borrowing
each month/quarter. The auditor should analyse month on month (or quarter on
quarter) cost analysis and document the reasons for the variances as per the
benchmark stated. He should examine whether the interest expense considered in
the cost analysis agrees with the general ledger. The auditor should understand the

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process of computation of the average balance and re-compute the same on sample
basis.

The auditor should, on a test check basis, verify the calculation of interest and
ensure that:

a) Interest has been provided on all deposits upto the date of the balance sheet;

b) Interest rates are in accordance with the bank’s internal regulations, the RBI
directives and agreements with the respective deposit holder;

c) Interest on savings accounts are in accordance with the rules framed by the
bank/RBI in this behalf.

d) Interest on inter–branch balances has been provided at the rates prescribed by

the head office/RBI.

The auditor should ascertain whether there are any changes in interest rate on
saving accounts and term deposits during the period. The auditor should obtain the
interest rate card for various types of deposits and analyse the interest cost for
the period accordingly. The auditor should examine the completeness that interest
has been accrued on the entire borrowing portfolio and the same should agree with
the general ledgers. The auditor should re-compute the interest accrual i.e., by
referring to the parameters like frequency of payment of interest amount, rate of
interest, period elapsed till the date of balance sheet, etc. from the term sheet,
deal ticket, agreements, etc. and ensure that the recomputed amount is tallying with
the amount as per books of accounts without any significant difference.

Question 5: There are different provisioning requirements as regards to

categories of NPA such as Sub-standards assets, Doubtful assets and loss
assets. Explain in detail. [RTP –MAY 2022]

Answer 5: Classification as NPA should be based on the record of recovery.

Availability of security or net worth of borrower/guarantor is not to be taken into

CA INTERMEDIATE

account for purpose of treating an advance as NPA or otherwise. Further, asset

classification would be borrower-wise and not facility-wise. All facilities including
investments in securities would be termed as NPA.

There are different provisioning requirements as regards to categories of NPA such

as Sub-standards assets, Doubtful assets and loss assets which are given below:

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Categories of Non-Performing Assets: Provision required

Substandard Assets:

Would be one, which has remained NPA for a period less 15%
than or equal to 12 months.

Doubtful Assets:

Would be one, which has remained in the substandard

Secured+ Unsecured
category for a period of 12 months.

Sub-categories:
25% + 100%
Doubtful up to 1 Year (D1)
40% + 100%
Doubtful 1 to 3 Years (D2)
100% + 100%
Doubtful more than 3 Years (D3)

Loss Assets:

Would be one, where loss has been identified by the bank

or internal or external auditors or the RBI inspection but 100%
the amount has not been written off wholly.

Question 6: Explain the following in the context of Bank audit:

a. For audit of operating expenses, the auditor should study and evaluate
the system of internal control relating to expenses.

b. For audit of Provisions and contingencies, the auditor should ensure that
the compliances for various regulatory requirements for provisioning as
contained in the various circulars have been fulfilled. [RTP –MAY 2022]
CA INTERMEDIATE

Answer 6:

a. For audit of operating expenses, the auditor should study and evaluate the
system of internal control relating to expenses, including authorization
procedures in order to determine the nature, timing and extent of his other audit
procedures. The auditor should examine whether there are any divergent trends

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in respect of major items of expenses. The auditor should perform substantive

analytical procedures in respect of these expenses. e.g. assess the
reasonableness of expenses by working out their ratio to total operating
expenses and comparing it with the corresponding figures for previous years. The
auditor should also verify expenses with reference to supporting documents and
check the calculations wherever required.

b. For audit of Provisions and contingencies, the auditor should ensure that the
compliances for various regulatory requirements for provisioning as contained in
the various circulars have been fulfilled. The auditor should obtain an
understanding as to how the bank computes provision on standard assets and non-
performing assets. It will primarily include checking the basis of classification of
loans and receivables into standard, sub-standard, doubtful, loss and non-
performing assets. The auditor may verify the loan classification on a sample
basis.

The auditor should obtain the detailed break up of standard loans, non-performing
loans and agree the outstanding balances with the general ledger. The auditor should
obtain the tax provision computation from the bank’s management and verify the
nature of items debited and credited to profit and loss account to ascertain that
the same are appropriately considered in the tax provision computation. The other
provisions for expenses should be examined vis-a-vis the circumstances warranting
the provisioning and the adequacy of the same by discussing and obtaining the
explanations from the bank’s management.

Question 7: CA. Puranjay is appointed as statutory branch auditor of two

branches of a nationalized bank for year 2021-22. During the course of audit,
he came across the following:

a. While verifying advances of one semi-urban branch, he noticed substantial

number of accounts categorized as SMA (Special mention accounts). In
this context, explain the nature and significance of SMA.
CA INTERMEDIATE

b. While verifying interest income of a mid-corporate branch of an urban

centre having advances consisting of only cash credit limits for large
borrowers, it was noticed that advances of Rs.300 crores were
outstanding as on balance sheet date carrying average interest rate @8%
p.a.

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One articled clerk in audit team makes quick back of the envelope
calculations of interest income of Rs.24 crores on advances. However,
schedule of profit & loss a/c shows interest income on advances for Rs.10
crores. Discuss any two probable reasons for such variation. [RTP –NOV
2022]

Answer 7:

a. Special Mention accounts (SMA) are those accounts which are resulting signs of
incipient stress leading to the possibility that borrowers may default on debt
obligations. These are in the nature of warning system to alert the banks about
probable NPAs so that remedial action can be taken before accounts actually turn
NPAs. Therefore, their significance lies in the fact that proper and timely
identification of SMAs can help in preventing turning potential NPAs into actual
NPAs.

b. The probable reasons for difference in interest calculation could be due to

following:

i. Cash credit accounts, by their very nature, are running accounts and their
utilization depends upon needs of business. Further, interest on cash
credit account is charged on the extent of funds utilized by the borrower.
It could be possible that all cash credit limits were not fully utilized during
the year which resulted in lower interest income.

ii. Some large accounts may have been sanctioned during later part of the
year resulting in lower interest income on advances for whole year.

Question 8: In carrying out audit of advances, the auditor is primarily concerned

with obtaining evidence about amounts included in balance sheet in respect of
advances which are outstanding. Explain stating clearly all the considerations in
this context. [RTP –NOV 2022]

Answer 8: Advances generally constitute the major part of the assets of the bank.
CA INTERMEDIATE

There are large number of borrowers to whom variety of advances are granted. The
audit of advances requires the major attention from the auditors.

In carrying out audit of advances, the auditor is primarily concerned with

obtaining evidence about the following:

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a. Amounts included in balance sheet in respect of advances which are outstanding

at the date of the balance sheet.

b. Advances represent amount due to the bank.

c. Amounts due to the bank are appropriately supported by loan documents and
other documents as applicable to the nature of advances.

d. There are no unrecorded advances.

e. The stated basis of valuation of advances is appropriate and properly applied and
the recoverability of advances is recognised in their valuation.

f. The advances are disclosed, classified and described in accordance with

recognized accounting policies and practices and relevant statutory and
regulatory requirements.

g. Appropriate provisions towards advances have been made as per the RBI norms,
Accounting Standards and generally accepted accounting practices.

Question 9: Compute the Drawing Power for Cash Credit A/c of S Limited for
the month of March 2022 with following information:

Stock 50,000

Debtors 45,000

(Including Debtor of Rs.5,000 for an invoice dated 17.11.2021)

Sundry creditors 15,000

Sanctioned Limit 45,000

Margin on stock is 20% and on debtors is 50%.

Note: Debtors older than 3 months are ineligible for calculation of DP.
CA INTERMEDIATE

[MAY 2022]

Answer 9: Computation of Drawing Power:

Computation of Drawing Power for CC A/c of S Ltd.

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Particulars of current assets Amount (Rs.) DP Amt (Rs.)

(A) Stocks:

Stocks at realizable value 50,000

Less: Unpaid stocks:

- Sundry creditors 15000 15000

Paid for stocks 35000

Margin @ 20% 7000 28000

(B) Debtors:

Total Debtors 45000

Less: Ineligible debtors 5000

Eligible debtors 40000

Margin @ 50% 20000 20000

Total Drawing Power 48000

The sanctioned limit given in the question is Rs.45000 whereas drawing power as per
the above working is Rs.48000. So, drawing power would be restricted to sanctioned
limit i.e. Rs. 45000.

Question 10: After becoming Chartered Accountant, you have got your first
assignment as an auditor of a bank branch dealing in various types of advances.
What are the areas which you will be looking for obtaining sufficient appropriate
evidence (for advances) besides studying and evaluating internal controls? [MAY
2022]
CA INTERMEDIATE

Answer 10: Audit Procedure in Audit of Advances in case of Bank Audit: The
auditor can obtain sufficient appropriate audit evidence about advances by study and
evaluation of internal controls relating to advances, and by:

i. examining the validity of the recorded amounts;

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ii. examining loan documentation.

iii. reviewing the operation of the accounts;

iv. examining the existence, enforceability and valuation of the security;

v. checking compliance with RBI norms including appropriate classification and

provisioning; and

vi. carrying out appropriate analytical procedures.

Question 11: In a bank, all accounts should be kept within the drawing power
and the sanctioned limit. The accounts which exceed the sanctioned limit or
drawing power should be brought to the notice of the management regularly.
Analyse the following points to be considered in the computation of drawing
power in case of bank audit.

i. Bank’s Duties

ii. Auditor’s concern

iii. Computation of DP

iv. Stock audit [MAY 2022]

Answer 11: Computation of Drawing Power:

a. Bank’s Duties: Banks should ensure that drawings in the working capital account
are covered by the adequacy of the current assets. Drawing power is required to
be arrived at based on current stock statement. However, considering the di
fficulties of large borrowers, stock statements relied upon by the banks for
determining drawing power should not be older than three months. The
outstanding in the account based on drawing power calculated from stock
statements older than three months is deemed as irregular.

b. Auditor’s Concern: The stock statements, quarterly returns and other

statements submitted by the borrower to the bank should be scrutinized in
CA INTERMEDIATE

detail. The audited Annual Report submitted by the borrower should be

scrutinized properly. The monthly stock statement of the month for which the
audited accounts are prepared and submitted should be compared and the
reasons for deviations, if any, should be ascertained.

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c. Computation of DP: It needs to be ensured that the drawing power is calculated

as per the extant guidelines formulated by the Board of Directors of the
respective bank and agreed upon by the concerned statutory auditors. Special
consideration should be given to proper reporting of sundry creditors for the
purposes of calculating drawing power.

d. Stock Audit: The stock audit should be carried out by the bank for all accounts
having funded exposure of more than I 5 crores. Auditors can also advise for
stock audit in other cases if the situation warrants the same. Branches should
obtain the stock audit reports from lead bank in the cases where the Bank is not
leader of the consortium of working capital. The report submitted by the stock
auditors should be reviewed during the course of the audit and special focus
should be given to the comments made by the stock auditors on valuation of
security and calculation of drawing power.

Question 12: N Ltd. has been sanctioned a Cash Credit Facility by XYZ Bank
Ltd. for INR 1 crore and drawing power as per the stock statements furnished
for the last quarter is INR 80 Lakh. Outstanding balance in the account is INR
75 lakh. Interest charged to the account is INR 3.5 Lakh and total credit into
the account for the quarter is INR 2.5 Lakh. As an auditor how will you report
this account in your report. [JULY 2021]

Answer 12: Out of Order: An account should be treated as ‘out of order’ if:

➢ the outstanding balance remains continuously in excess of the sanctioned

limit/drawing power or

➢ In cases where the outstanding balance in the principal operating account is less
than the sanctioned limit/drawing power, but there are no credits continuously
for 90 days as on the date of Balance Sheet; or

➢ Credits are there but are not enough to cover the interest debited during the
same period, these accounts should be treated as ‘out of order’.
CA INTERMEDIATE

Applying the above to the given case of N Ltd, its Drawing power is Rs.80 Lakhs,
although outstanding balance in the account is Rs.75 Lakhs, but still the account
would be reported as out of order because credits in the account are not sufficient
to cover the interest debited during the same period

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Question 13: Discuss the advantages of engagement team discussion done at the
planning stage of the bank audit. [JULY 2021]

Answer 13: Advantages of engagement team discussion done at the planning

stage of Bank audit are:

➢ Specific emphasis should be provided to the susceptibility of the bank’s

financial statements to material misstatement due to fraud, that enables the
engagement team to consider an appropriate response to fraud risks, including
those related to engagement risk, pervasive risks, and specific risks.

➢ It further enables the audit engagement partner to delegate the work to the
experienced engagement team members, and to determine the procedures to
be followed when fraud is identified.

➢ Further, audit engagement partner may review the need to involve specialists
to address the issues relating to fraud.

Question 14: Explain "Advances under Consortium" in the context of Prudential

Norms on Income Recognition, Asset Classification and Provisioning pertaining to
Advances. [JAN 2021]

Answer 14: Advances under Consortium: Consortium advances should be based on

the record of recovery of the respective individual member banks and other aspects
having a bearing on the recoverability of the advances. Where the remittances by
the borrower under consortium lending arrangements are pooled with one bank
and/or where the bank receiving remittances is not parting with the share of other
member banks, the account should be treated as not serviced in the books of the
other member banks and therefore, an NPA.

The banks participating in the consortium, therefore, need to arrange to get their
share of recovery transferred from the lead bank or to get an express consent from
the lead bank for the transfer of their share of recovery, to ensure proper asset
classification in their respective books.
CA INTERMEDIATE

Question 15: You are appointed as Statutory Auditor of DEF Bank Limited for
the year 2019-20. As an Auditor how will you verify Provisions created by DEF
Bank Limited? [JAN 2020]

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Answer 15: For audit of Provisions, the auditor should ensure that the compliances
for various regulatory requirements for provisioning as contained in the various
circulars have been fulfilled. The auditor should obtain an understanding as to how
the bank computes provision on standard assets and non-performing assets. It will
primarily include checking the basis of classification of loans and receivables into
standard, sub-standard, doubtful, loss and non-performing assets. The auditor may
verify the loan classification on a sample basis.

The auditor should obtain the detailed break up of standard loans, non-performing
loans and agree the outstanding balances with the general ledger. The auditor should
obtain the tax provision computation from the bank’s management and verify the
nature of items debited and credited to profit and loss account to ascertain that
the same are appropriately considered in the tax provision computation. The other
provisions for expenses should be examined vis-à-vis the circumstances warranting
the provisioning and the adequacy of the same by discussing and obtaining the
explanations from the bank’s management.

Question 16: Explain the audit approach you would follow to check the Operating
Expenses of a Bank. [RTP NOV 2022]

Answer 16: Auditing the Operating Expenses of a Bank:

i. Internal Controls: The auditor should study and evaluate the system of
internal control relating to expenses, including authorization procedures in
order to determine the nature, timing and extent of his other audit
procedures.

ii. Divergent Trends: The auditor should examine whether there are any
divergent trends in respect of major items of expenses.

iii. Substantive analytical Procedures: The auditor should perform substantive

analytical procedures in respect of these expenses. eg. assess the
reasonableness of expenses by working out their ratio to total operating
CA INTERMEDIATE

expenses and comparing it with the corresponding figures for previous years.

iv. Vouching & Verification: The auditor should also verify expenses with
reference to supporting documents and check the calculations wherever
required.

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 Auditing & Ethics Descriptive Question Bank | CA Deepika Rathi

Question 17: What are the general requirements of an effective Risk

Management System in Banks? [RTP NOV 2022]

Answer 17: Understanding the Risk Management Process: Management develops

controls and uses performance indicators to aid in managing key business and
financial risks. An effective risk management system in a bank generally requires the
following:

i. Oversight and involvement in the control process by those charged with

governance: Those charged with governance (Board of Directors/Managing
Director) should approve written risk management policies. The policies should
be consistent with the bank’s business objectives and strategies, capital
strength, management expertise, regulatory requirements and the types and
amounts of risk it regards as acceptable.

ii. Identification, measurement and monitoring of risks: Risks that could

significantly impact the achievement of bank’s goals should be identified,
measured and monitored against pre-approved limits and criteria.

iii. Control activities: A bank should have appropriate controls to mitigate its
risks including effective segregation of duties (particularly between front and
back offices), accurate measurement and reporting of positions, verification
and approval of transactions, reconciliation of positions and results, setting
up limits, reporting and approval of exceptions, physical security and
contingency planning.

iv. Monitoring activities: Risk management models, methodologies and

assumptions used to measure and mitigate risk should be regularly assessed
and updated. This function may be conducted by the independent risk
management unit.

v. Reliable information systems: Banks require reliable information systems

that provide adequate financial, operational and compliance information on a
CA INTERMEDIATE

timely and consistent basis. Those charged with governance and management
require risk management information that is easily understood and that
enables them to assess the changing nature of the bank’s risk profile.

Question 18: When is an agricultural advance considered as non performing as

per the RBI guidelines? [MTP NOV 2022]

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Answer 18: As per the guidelines, Agricultural Advances are of two types:

1. Agricultural Advances for “long duration” crops; and

2. Agricultural Advances for “short duration” crops.

The “long duration” crops would be crops with crop season longer than one year and
crops, which are not “long duration” crops would be treated as “short duration” crops.

The crop season for each crop, which means the period up to harvesting of the crops
raised, would be as determined by the State Level Bankers’ Committee in each State.

The following NPA norms would apply to agricultural advances (including Crop Term
Loans):

▪ A loan granted for short duration crops will be treated as NPA, if the instalment
of principal or interest thereon remains overdue for two crop seasons; and

▪ A loan granted for long duration crops will be treated as NPA, if the instalment
of principal or interest thereon remains overdue for one crop season.

Question 19: Explain hypothecation and assignment as the modes of creation of

security with respect to advance granted by a bank. [MTP NOV 2022]

Answer 19: Hypothecation:

The hypothecation is the creation of an equitable charge (i.e., a charge created not
by an express enactment but by equity and reason), which is created in favor of the
lending bank by execution of hypothecation agreement in respect of the moveable
securities belonging to the borrower.

Neither ownership nor possession is transferred to the bank. However, the borrower
holds the physical possession of the goods as an agent/trustee of the bank. The
borrower periodically submits statements regarding quantity and value of
hypothecated assets (stocks, debtors, etc.) to the lending banker on the basis of
which the drawing power of the borrower is fixed.
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Assignment:

Assignment represents a transfer of an existing or future debt, right or property

belonging to a person in favor of another person. Only actionable claims (i.e., claim
to any debt other than a debt secured by a mortgage of immovable property or by
hypothecation or pledge of moveable property) such as book debts and life insurance

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policies are accepted by banks as security by way of assignment. An assignment gives

the assignee absolute right over the moneys/debts assigned to him.

Question 20: In carrying out audit of income, the auditor is primarily concerned
with obtaining reasonable assurance that the recorded income arose from
transactions, which took place during the relevant period and pertained to the
bank, there is no unrecorded income and the income is recorded at appropriate
amount. Explain the Audit Approach and Procedures regarding following points in
the above context :

i. RBI’s Directions

ii. Materiality

iii. Revenue Certainty

iv. Revenue Uncertainty [MTP NOV 2022]

Answer 20: Audit Approach and Procedures

▪ Auditor’s Concern: In carrying out audit of income, the auditor is primarily

concerned with obtaining reasonable assurance that the recorded income arose
from transactions, which took place during the relevant period and pertained to
the bank, there is no unrecorded income and the income is recorded at
appropriate amount.

▪ RBI’s Directions: RBI has advised that in respect of any income which exceeds
one percent of the total income of the bank if the income is reckoned on a gross
basis or one percent of the net profit before taxes if the income is reckoned net
of costs, should be considered on accrual as per Accounting Standard 9.

▪ Materiality: If any item of income is not considered to be material as per the

above norms, it may be recognised when received and the auditors need not
qualify their report in that situation.

▪ Revenue Certainty: Banks recognise income (such as interest, fees and

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commission) on accrual basis, i.e., as it is earned. It is an essential condition for

accrual of income that it should not be unreasonable to expect its ultimate
collection. In modern day banking, the entries for interest income on advances
are automatically generated through a batch process in the CBS system.

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▪ Revenue Uncertainty: In view of the significant uncertainty regarding ultimate

collection of income arising in respect of non-performing assets, the guidelines
require that banks should not recognize income on non-performing assets until it
is actually realised. When a credit facility is classified as non-performing for the
first time, interest accrued and credited to the income account in the
corresponding previous year which has not been realized should be reversed or
provided for. This will apply to Government guaranteed accounts also.

Question 21: In case of a Bank, explain the meaning of Funded loans. Also give
examples. [MTP NOV 2021]

Answer 21: Funded loans are those loans where there is an actual transfer of funds
from the bank to the borrower.

Advances comprise of funded amounts by way of:

▪ Term loans

▪ Cash credits, Overdrafts, Demand Loans

▪ Bills Discounted and Purchased

▪ Participation on Risk Sharing basis

▪ Interest-bearing Staff Loans

Question 22: ''There is no difference in provisioning of NPA as regards to

categories of NPA, whether the debt is secured or unsecured." Critically
evaluate the statement on the basis of provisioning norms of NPA of nationalised
bank stating clearly the provision percent required. [MTP NOV 2021]

Answer 22: Classification as NPA should be based on the record of recovery.

Availability of security or net worth of borrower/guarantor is not to be taken into
account for purpose of treating an advance as NPA or otherwise.

Further, asset classification would be borrower-wise and not facility-wise. All

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facilities including investments in securities would be termed as NPA.

There are different provisioning requirements as regards to categories of NPA such

as Sub- standards assets, Doubtful assets and loss assets which are given below:

Categories of Non-Performing Assets: Provision required

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 Substandard Assets: Would be one, which

has remained NPA for a period less than or
15%
equal to 12 months.

 Doubtful Assets: Would be one, which has

remained in the substandard category for a Secured+ Unsecured
period of 12 months.

 Sub-categories:

• Doubtful up to 1 Year (D1) 25% + 100%

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

Question 23: There are different types of banks prevailing in India. Explain
giving examples of such banks. [MTP NOV 2021]

Answer 23: There are different types of banking institutions prevailing in India
which are as follows:

Commercial Banks Regional Rural Banks

Co-operative Banks. Payment Banks.

Development Banks (more commonly known as Small Finance Banks.

‘Term-Lending Institutions’).

1. Commercial banks are the most wide spread banking institutions in India, that
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provide a number of products and services to general public and other segments
of economy. Two of its main functions are:-

a) accepting deposits and

b) granting advances.

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2. Regional Rural Banks known as RRBs are the banks that have been set up in rural
areas in different states of the country to cater to the basic banking and
financial needs of the rural communities. Examples are :- Punjab Gramin Bank ,
Tripura Gramin Bank , Allahabad UP Gramin Bank , Andhra Pradesh Grameen Vikas
Bank, etc.

3. Co-operative Banks function like Commercial Banks only but are set up on the
basis of Cooperative Principles and registered under the Cooperative Societies
Act of the respective state or the Multistate Cooperative Societies Act and
usually cater to the needs of the agricultural and rural sectors. Examples are :-
The Gujarat State Co-operative Bank Ltd. , Chhatisgarh Rajya Sahakari Bank
Maryadit , etc.

4. Payments Banks are a new type of banks which have been recently introduced by
RBI. They are allowed to accept restricted deposits but they cannot issue loans
and credit cards. However, customers can open Current & Savings accounts and
also avail the facility of ATM cum Debit cards , Internet-banking & Mobile
banking. Examples are :- Airtel Payments Bank , India Post Payments Bank, Paytm
Payments Bank , etc.

5. Development Banks had been conceptualized to provide funds for infrastructural

facilities important for the economic growth of the country. Examples are:-
Industrial Finance Corporation of India (IFCI), Industrial Development Bank of
India (IDBI), Small Industries Development Bank of India (SIDBI) , etc.

6. Small Finance Banks have been set up by RBI to make available basic financial
and banking facilities to the unserved and unorganised sectors like small marginal
farmers, small & micro business units, etc. Examples are:- Equitas Small Finance
Bank , AU Small Finance Bank , etc.

Question 24: In case of a Bank, explain the meaning of Funded loans. Also give
examples. [MTP NOV 2021]
CA INTERMEDIATE

Answer 24: Funded loans are those loans where there is an actual transfer of funds
from the bank to the borrower.

Advances comprise of funded amounts by way of:

▪ Term loans :-

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▪ Cash credits, Overdrafts, Demand Loans

▪ Bills Discounted and Purchased

▪ Participation on Risk Sharing basis

▪ Interest-bearing Staff Loans

Question 25: Newton Ltd. has made loans and advances on the basis of following
securities to various borrowers. As an auditor what type of documents can be
verified to ensure that the company holds a legally enforceable security?

i. Shares and Debentures

ii. Life Insurance Policy

iii. Hypothecation of goods. [MTP NOV 2021]

Answer 25: Documents to be seen in case of Securities:

Types of Security Documents etc. to be seen

(i)Shares and debentures The scrip and the endorsement thereon of the name
of the transferee, in the case of transfer.

(ii)Life Insurance Policy. Assignment of policy in favour of the lender, duly

registered with the insurer

(iii) Hypothecation of goods Deed of hypothecation or other document creating

the charge, together with a statement of
inventories held at the Balance Sheet date

Question 26: Banks ask Security or Collateral while lending to assure that the
Borrower will return the money to bank in prescribed time. Explain stating clearly
the concept of Primary and Collateral Security. Also give examples of most
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common types of securities accepted by banks. [MTP NOV 2020]

Answer 26: Banks ask Security or Collateral while lending to assure that the
Borrower will return the money to bank in prescribed time else the Banks have legal
authority to sell the collateral to recover its money.

Nature of Security

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A. Primary security refers to the security offered by the borrower for bank finance
or the one against which credit has been extended by the bank. This security is
the principal security for an advance.

B. Collateral security is an additional security. Security can be in any form i.e.

tangible or intangible asset, movable or immovable asset.

Examples of most common types of securities accepted by banks are the

following:

▪ Personal Security of Guarantor

▪ Goods/Stocks/Debtors/Trade Receivables

▪ Gold Ornaments and Bullion

▪ Immovable Property

▪ Plantations (For Agricultural Advances)

▪ Third Party Guarantees

▪ Banker’s General Lien

▪ Life Insurance Policies

▪ Stock Exchange Securities and Other Instruments

Question 27: Agrim, a CA student, is part of an engagement team conducting

audit of Madurai branch of ARB Bank. CA Bhuvan, engagement partner, has
asked him to verify provision made by branch as on March 31st, 2024 in respect
of the following non-performing assets: -

Name of NPA classification Outstanding Amount of

Account amount as on provision made
March 31st, 2024 (In
(In Rs. lakhs) Rs. lakhs)
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AK Industries Doubtful (D1) 10.00 5.00

Jupiter Traders Substandard asset 50.00 7.50
VT & Co. Doubtful (D2) 30.00 30.00
ASD & Sons Loss 1.00 1.00
The engagement partner has already verified NPA classification. Outstanding

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amounts as on March 31st, 2024, relating to each NPA account listed above
(except ASD & Sons) are fully secured. However, only personal guarantee of
proprietor (Net worth of proprietor `50 lakhs) is available in account of ASD
& Sons. Comment on the correctness of the above provisions.
Agrim is in dilemma regarding classification of above accounts as NPA although
these are fully secured or guaranteed. Guide him. [RTP JAN 2025]
Answer 27: The auditor is required to ensure that provision for NPA is made
as per its classification in different categories which are given as under:

Categories of Non-Performing Assets: Provision required

□ Substandard Assets:

Would be one, which has 15%

remained NPA for a period less
12 months.
than or equal to
□ Doubtful Assets:
Would be one which has remained in
the substandard category for a
of 12 months. period
(Secured +
Sub-categories:
Unsecured) 25% +
Doubtful up to 1 Year (D1)
100%
Doubtful 1 to 3 Years (D2)
40% + 100%
Doubtful more than 3 Years
100% + 100%
(D3)
From the 100%that in case of:
□ Lossabove provision, it can be concluded
Assets
AK Industries- It has been classified as Doubtful (D1) category.
Therefore, it requires provision of 25% of secured amount. That is
provision of Rs 2.50 lakh (i.e 25% of Rs.10 lakh) should be made instead
of Rs.5 lakh.
Jupiter Traders- It has been classified as Substandard asset. It requires
provision of 15% of outstanding amount (i.e 15% of Rs.50 lakhs) which
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comes to Rs.7.50 lakh. Therefore, provision made by the branch is

correct.
VT & Co.- It has been classified as Doubtful (D2) category. It requires
provision of 40% of secured amount. That is provision of R s . 12.00 lakh
(40% of Rs. 30 lakhs) should be made instead of Rs.30 lakh.

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ASD & Sons- It has been classified as a loss asset which requires
provision of 100% of outstanding amount. Therefore, the provision made
by the branch is correct.
Classification as NPA should be based on the record of recovery.
Availability of security or net worth of borrower/guarantor is not to be
taken into account for purpose of treating an advance as NPA or
otherwise. Hence, these accounts have been classified as NPA on the
record of recovery although these are fully secured or guaranteed.

Question 28: Compute the Drawing Power for Cash Credit A/c of Kirpa Limited
for the month of March 2024 with following information:

(Amount in Rs.)

Stock 60,000
Debtors 55,000
(Including Debtor of Rs.15,000 for an invoice dated
20.10.2023)
Sundry creditors 10,000
Sanctioned Limit 48,000
Margin on stock is 30% and on debtors is 40%.
Note: Debtors older than 3 months are ineligible for calculation of
DP.

(RTP SEP 2024)

Answer 28: Computation of Drawing Power (DP) for CC A/c of Kirpa Ltd.

Particulars of current Amount DP

assets (Rs.) Amount
(Rs.)
(A) Stocks:
CA INTERMEDIATE

Stocks at realizable value 60,000

Less: Unpaid stocks:
- Sundry creditors 10,000
10,000
Paid for stocks 50,000
Margin @ 30% 15,000
(B) Debtors: 35,000

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Total Debtors 55,000

Less: Ineligible debtors 15,000

Eligible debtors 40000

Margin @ 40% 16,000 24,000
Total Drawing Power 59,000

The sanctioned limit given in the question is Rs. 48,000/- whereas drawing power as per the
above working is Rs.59,000/-. So, drawing power would be restricted to sanctioned limit
i.e., Rs.48,000/-.

Question 29: Schedule III of the Companies Act, 2013 prescribes disclosure of
certain ratios as a part of Additional Regulatory Information. Mention any 3
ratios that should be disclosed along with the Rules relating to disclosure of
these ratios. (PYQ SEP 2024)
Answer 29: Disclosure of Ratios as a part of Additional Regulatory Information as
per Schedule III of the Companies Act 2013 and its Rules relating to disclosure are:
(1) Current Ratio,
(2) Debt-Equity Ratio,
(3) Debt Service Coverage Ratio,
(4) Return on Equity Ratio,
(5) Inventory turnover ratio,
(6) Trade Receivables turnover ratio,
(7) Trade payables turnover ratio,
(8) Net capital turnover ratio,
(9) Net profit ratio,
(10) Return on Capital employed,
(11) Return on investment.
CA INTERMEDIATE

Rules relating to disclosures of Ratios: The company shall explain the items included
in the numerator and denominator for computing the above ratios.
Further explanation shall be provided for any change in the ratio by more than 25%
as compared to the preceding year.

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Question 30: K Ltd. is availing cash credit limit of Rs.25 crores from LMN Bank
Ltd. The drawing power of the company range between Rs.22 crores and Rs.25
crores during the year 2023-24. The limit availed by the company remained less
than Rs.20 crores during all the days of the financial year 2023-24. The
company has not deposited any amount in the cash credit account and there are
no other credits to this account during the last two quarters. How will this
account be classified in the books of LMN Bank Ltd. as on 31-03-2024? Explain.
Answer 30: An account should be treated as ‘out of order’ if: -
• the outstanding balance remains continuously in excess of the sanctioned
limit/drawing power or
• In cases where the outstanding balance in the principal operating account is
less than the sanctioned limit/drawing power, but there are no credits
continuously for 90 days as on the date of Balance Sheet; or
• credits are there but are not enough to cover the interest debited during the
same period, these accounts should be treated as ‘out of order’.
In the given case, K Ltd. is availing cash credit limit of Rs. 25 crores from LMN Bank
Ltd and the drawing power of the company range between Rs. 22 crores and Rs. 25
crores during the year 2023-24. The limit availed by K Ltd. remained less than Rs.20
crores during all the days of the financial year 2023- 24 and the company has not
deposited any amount in the cash credit account and there are no other credits to
this account during the last two quarters.
Thus, account should be treated as out of order in the books of LMN Bank Ltd. as
the outstanding balance in the principal operating account (Rs.20 crore) is less than
the sanctioned limit/drawing power (Rs.22 cores and Rs.25 crores), but there are no
credits continuously for 90 days as on the date of Balance Sheet.

Question 31: You are the auditor of Plus Bank Limited. The bank has made
following provisions for the year ended on 31.03.2024:
Particulars Amount ([Link] crores)
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Provision for Bad Debts 66

Provision for Sub-standard Assets 78
Provision for Expenses 24
Provision for Income Tax 55

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You are in the process of verifying the provisions and contingencies of the bank.
What audit approach and procedures will you adopt to verify the above?
(PYQ SEP 2024)
Answer 31: For audit of provisions and contingencies the auditor should:
• ensure that the compliances for various regulatory requirements for provisioning
as contained in the various circulars have been fulfilled.
• obtain an understanding as to how the bank computes provision on standard assets
and non-performing assets. It will primarily include checking the basis of
classification of loans and receivables into standard, sub-standard, doubtful, loss
and non-performing assets. The auditor may verify the loan classification on a
sample basis.
• obtain the detailed break up of standard loans, non-performing loans and agree
the outstanding balances with the general ledger.
• obtain the tax provision computation from the bank’s management and verify the
nature of items debited and credited to profit and loss account to ascertain that
the same are appropriately considered in the tax provision computation.
• examine the other provisions for expenses vis-a-vis the circumstances warranting
the provisioning and the adequacy of the same by discussing and obtaining the
explanations from the bank’s management.

Question 32: MNB bank advanced certain loans guaranteed by government. State
the prudential norms for asset classification and income recognition of such
loans.
Answer 32: Government Guaranteed Advances (In case of accounts overdue for
more than 90 days): Central Government. Guaranteed Advances, where the guarantee
is not invoked/ repudiated would be classified as Standard Assets, but regarded as
NPA for Income Recognition purpose.
The situation would be different if the advance is guaranteed by State Government,
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where advance is to be considered NPA if it remains overdue for more than 90 days
for both Provisioning and Income recognition purposes.
Alternative Solution:
Government Guaranteed Advances (In case of accounts overdue for not more than
90 days):

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Asset Classification: In case of advances guaranteed by both Central Government

and State Government, they would be classified as Standard Advances in the
following manner:
Classification of Advances Particulars
Standard Regular Accounts not overdue
Special Mention Accounts:
1. SMA 0 Accounts showing stress signals
2. SMA 1 Accounts overdue between 31 to 60 days
3. SMA 2 Accounts overdue between 61 to 90 days
Income Recognition
Income would be recognised for all the accounts which are not overdue for more
than 90 days, on accrual basis, in case of advances guaranteed by both Central
Government and State Government.

Question 33: Mahavir and Associates is appointed as the statutory auditor

of KBC Bank for the financial year 2023-2024. During the audit, Ms. Chandana,
an article trainee, noticed that Sidharth Industries had an outstanding loan of
Rs.50,00,000 as on March 31, 2024. On March 29, 2024, the company made
a payment of Rs.10,00,000, reducing the outstanding loan balance to
Rs.40,00,000. However, on April 4, 2024, Sidharth Industries initiated a
reversal transaction of Rs.8,00,000, increasing the outstanding loan balance
back to Rs. 48,00,000. The payment and subsequent reversal occurred within a
short period, with the final outstanding balance remaining Rs.48,00,000 after
the reversal.

Considering this scenario, what should be the response of Mahavir and Associates
to this matter, particularly regarding the classification of the borrower's
account and the potential risk of it slipping into the NPA category?
(MTP JAN 2025)
CA INTERMEDIATE

Answer 33: Accounts regularized near the Balance Sheet Date: The asset
classification of borrower accounts where a solitary or a few credits are recorded
before the balance sheet date should be handled with care and without scope for
subjectivity. Where the account indicates inherent weakness on the basis of the
data available, the account should be deemed as NPA.

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The auditor should check for sample transactions immediately before the closing of
the financial year and immediately after the closing of the financial year to get a
knowledge of the objective behind the transactions if they have any relation to each
other in the borrower accounts or if any/some transactions are being reversed
during the first few days after closing which might show an arrangement to prevent
the Borrower account(s) from slipping into the NPA category.
In the given case of Sidharth Industries, a payment of ₹10,00,000 was made on
March 29, 2024 reducing the outstanding loan balance to Rs. 40,00,000. and
subsequently reversed by ₹8,00,000 on April 4, 2024. Thus, Mahavir and Associates
should carefully assess the classification of Sidharth Industries’ Account, and
determine if the payment and reversal transactions indicate an attempt to prevent
the account from slipping into the NPA category. If yes, the account should be
classified as an NPA in compliance with regulatory guidelines.

Question 34: During the audit of Smile Bank, CA Sweety focused on

understanding the risk management process of the bank. She reviewed how
management developed controls and used performance indicators to monitor key
business and financial risks. CA Sweety also assessed whether the risk
management system effectively identified and mitigated risks in required areas.
How should CA Sweety evaluate the adequacy of the bank’s risk management
controls? (MTP JAN 2025)
Answer 34: Understanding the Risk Management Process: Management develops
controls and uses performance indicators to aid in managing key business and
financial risks. An effective risk management system in a bank generally requires
the following:

(i) Oversight and involvement in the control process by those charged with
governance: Those charged with governance (Board of Directors/Managing
Director) should approve written risk management policies. The policies
should be consistent with the bank’s business objectives and strategies,
capital strength, management expertise, regulatory requirements and the
types and amounts of risk it regards as acceptable.
CA INTERMEDIATE

(ii) Identification, measurement and monitoring of risks: Risks that could

significantly impact the achievement of bank’s goals should be identified,
measured and monitored against pre-approved limits and criteria.
(iii) Control activities: A bank should have appropriate controls to mitigate its
risks including effective segregation of duties (particularly between front

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and back offices), accurate measurement and reporting of positions,

verification and approval of transactions, reconciliation of positions and
results, setting up limits, reporting and approval of exceptions, physical
security and contingency planning.
(iv) Monitoring activities: Risk management models, methodologies and
assumptions used to measure and mitigate risk should be regularly assessed
and updated. This function may be conducted by the independent risk
management unit.
Reliable information systems: Banks require reliable information systems that
provide adequate financial, operational and compliance information on a timely and
consistent basis. Those charged with governance and management require risk
management information that is easily understood and that enables them to assess
the changing nature of the bank’s risk profile.

CA INTERMEDIATE

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Chapter-11: Ethics and Terms of Audit Engagements

Question 1: The fundamental principles of ethics establish the standard of

behaviour expected of a professional accountant. A professional accountant
shall comply with each of the fundamental principles. What are the
fundamental principles of professional ethics?

Answer 1: A professional accountant shall comply with each of the fundamental

principles. The fundamental principles of professional ethics are as follows:

1. Integrity: 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.

A professional accountant shall not knowingly be associated with reports,

returns, communications or other information where the accountant believes
that the information contains a materially false or misleading statement;
contains statements or information provided negligently or omits or obscures
required information where such omission or obscurity would be misleading.
2. Objectivity: The principle of objectivity requires an auditor not to
compromise professional judgment because of bias, conflict of interest or
undue influence of others. It requires that a professional accountant shall
not undertake a professional activity if a circumstance or relationship unduly
influences the accountant’s professional judgment regarding that activity.
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
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accordance with applicable technical and professional standards. Diligence

includes responsibility to act carefully, thoroughly and on a timely basis in
accordance with requirements of an assignment.
4. Confidentiality : 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

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Auditing & Ethics Descriptive Question Bank | CA Deepika Rathi

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.
5. Professional Behaviour : It 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.

Question 2: What is Self-interest threats ? Explain giving examples.

Answer 2: Self-interest threats occur when an auditing firm, its partner or

associate could benefit from a financial interest in an audit client. Examples
include

(i) direct financial interest or materially significant indirect financial

interest in a client

(ii) loan or guarantee to or from the concerned client

(iii) undue dependence on a client’s fees and, hence, concerns about losing
the engagement

(iv) close business relationship with an audit client

(v) potential employment with the client and

(vi) contingent fees for the audit engagement

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Question 3: What is Familiarity threats? Explain giving examples.

Answer 3: 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

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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.

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, which the
guiding principles are to be applied?

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

o For the public to have confidence in the quality of audit, it is essential

that auditors should always be and appears to be independent of the
entities that they are auditing.

o Before taking on any work, an auditor must conscientiously consider

whether it involves threats to his independence.

o 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
safeguards measures need to be recorded in a form that can serve as
evidence of compliance with due process.

o If the auditor is unable to fully implement credible and adequate

safeguards, then he must not accept the work.

Question 4: What is PROFESSIONAL SKEPTICISM? Professional skepticism

includes being alert to?
CA INTERMEDIATE

Answer 4: Professional skepticism refers to an attitude that includes a questioning

mind, being alert to conditions which may indicate possible misstatement due to
error or fraud, and a critical assessment of audit evidence Professional skepticism
includes being alert to, for example:

✓ Audit evidence that contradicts other audit evidence obtained.

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✓ Information that brings into question the reliability of documents

and responses to inquiries to be used as audit evidence.

✓ Conditions that may indicate possible fraud.

✓ Circumstances that suggest the need for audit procedures in addition

to those required by the Sas

Question 5: What is PROFESSIONAL SKEPTICISM? Maintaining professional

skepticism throughout the audit is necessary if the auditor is to reduce the
risks of what?

Answer 5: Professional skepticism refers to an attitude that includes a questioning

mind, being alert to conditions which may indicate possible misstatement due to
error or fraud, and a critical assessment of audit evidence

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.

Question 6: What are the Preconditions for an audit? In order to establish

whether the preconditions for an audit are present, the auditor shall do what?

Answer 6: Preconditions for an audit may be defined as the

➢ use by management of an acceptable FRF in preparation of F.S. and

➢ agreement of management and, where appropriate, TCWG to the premise on
which an audit is conducted.
In order to establish whether the preconditions for an audit are present, the
auditor shall:
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a. Determine whether the financial reporting framework is acceptable and

b. Obtain the agreement of management that it acknowledges and understands

its responsibility:

i. For the preparation of the financial statements in accordance with

the applicable financial reporting framework including where relevant

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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:

➢ 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 7: 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.
Such a letter includes what?
Answer 7: 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.

Such a letter includes:-

a. The objective and scope of the audit of the financial statements

b. The responsibilities of the auditor

c. The responsibilities of management

d. Identification of the applicable financial reporting framework for the

preparation of the financial statements and
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e. 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.

Question 8: The auditor may decide not to send a new audit engagement letter

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or other written agreement each period. However, which are the factors may
make it appropriate to revise the terms of the audit engagement or to remind
the entity of existing terms?
Answer 8: 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.

Question 9: A firm before accepting an engagement should acquire vital

information about the client. With regard to the integrity of a client, matters
that the firm considers include, explain giving examples?

Answer 9: 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
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Compliance with ethical requirements

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

1. The identity and business reputation of the client’s principal owners, key
management, related parties and those charged with its governance.

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2. The nature of the client’s operations, including its business practices.

3. 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.
4. Whether the client is aggressively concerned with maintaining the firm’s fees
as low as possible.
5. Indications of an inappropriate limitation in the scope of work.
6. Indications that the client might be involved in money laundering or other
criminal activities.
7. The reasons for the proposed appointment of the firm and non-
reappointment of the previous firm.

Question 10: As per SA 220, the engagement partner should document what
matters pertaining to an audit engagement?
Answer 10: The engagement partner should document following matters
pertaining to an audit engagement: -

1. Issues identified with respect to compliance with relevant ethical

requirements and how they were resolved.
2. Conclusions on compliance with independence requirements that apply to the
audit engagement, and any relevant discussions with the firm that support
these conclusions.
3. Conclusions reached regarding the acceptance and continuance of client
relationships and audit engagements.

The nature and scope of, and conclusions resulting from, consultations undertaken
during the course of the audit engagement.

Question 11: On 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. Explain the factors an auditor considers to be
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appropriate to revise the terms of the audit engagement or to remind the entity
of existing terms. [RTP –MAY 2021]

Answer 11: On 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.

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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:

▪ Any indication that the entity misunderstands the objective and scope of the
audit.

▪ Any revised or special terms of the audit engagement.

▪ A recent change of senior management.

▪ A significant change in ownership.

▪ A significant change in nature or size of the entity’s business.

▪ A change in legal or regulatory requirements.

▪ A change in the financial reporting framework adopted in the preparation of the

financial statements.

▪ A change in other reporting requirements.

Question 12: The Chartered Accountant has a responsibility to remain

independent by considering the context in which they practice, the threats to
independence and the safeguards available to eliminate the threats. Explain the
guiding principles in this regard.

Answer 12: The Chartered Accountant has a responsibility to remain independent

by considering the context in which they practice, the threats to independence and
the safeguards available to eliminate the threats.

The following are the guiding principles in this regard: -

i. For the public to have confidence in the quality of audit, it is essential that
auditors should always be and appears to be independent of the entities that
they are auditing.
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ii. In the case of audit, the key fundamental principles are integrity,
objectivity and professional skepticism, which necessarily require the
auditor to be independent.

iii. Before taking on any work, an auditor must conscientiously consider

whether it involves threats to his independence.

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iv. When such threats exist, the auditor should either desist from the task or put
in place safeguards that eliminate them.

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

Question 13: An auditor who, before the completion of the engagement, is

requested to change the engagement to one which provides a lower level of
assurance, should consider the appropriateness of doing so. Explain the
circumstances which may contribute towards a request from the client for the
auditor to change the engagement.

Answer 13: An auditor who, before the completion of the engagement, is requested
to change the engagement to one which provides a lower level of assurance, should
consider the appropriateness of doing so.

A request from the client for the auditor to change the engagement may result
from-

1. a change in circumstances affecting the need for the service,

2. a misunderstanding as to the nature of an audit or related service originally

requested.

3. a restriction on the scope of the engagement, whether imposed by management

or caused by circumstances

Question 14: The engagement partner shall take the responsibility for the
overall 'quality on each audit engagement to which that partner is assigned.
Discuss with reference to SA 220 "Quality Control for an audit of financial
statements". [NOV 2019]

Answer 14: As per SA 220 “Quality Control for an Audit of Financial Statements”,
the engagement partner shall take responsibility for the overall quality on each audit
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engagement to which that partner is assigned. 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 standards and

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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; and

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

Question 15: There are two interlinked perspectives of independence of

auditors, one, independence of mind; and two, independence in appearance.
Explain.

Answer 15: There are two interlinked perspectives of independence of auditors,

one, independence of mind; and two, independence in appearance. The Code of Ethics
for Professional Accountants issued by International Federation of Accountants
(IFAC) defines the term ‘Independence’ as follows:

Independence is:

1. Independence of mind – the state of mind that permits the provision of an

opinion without being affected by influences allowing an individual to act with
integrity, and exercise objectivity and professional skepticism; and

2. Independence in appearance – the avoidance of facts and circumstances that

are so significant that a third party would reasonably conclude an auditor’s
integrity, objectivity or professional skepticism had been compromised.”

Question 16: 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
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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. (RTP JAN 2025)

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Answer 16: In the given situation, holding shares by CA Sudhakar involves financial
interest in the company and is in nature of self-interest threat. Though he has
come to hold shares due to nomination made by his distant relative before
accepting the appointment.

Chartered Accountants have a responsibility to remain independent by taking into

account the context in which they practice, the threats to independence and the
safeguards available to address the threats.
Safeguards are actions, individually or in combination, that the professional
accountant takes that effectively reduce threats to comply with the fundamental
principles to an acceptable level.
To address the issue, the following guiding principles are to be applied: -

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

Question 17: ABC & Associates, an audit firm, has been approached by a
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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 access the integrity of prospective client. With
regard to the assessment of integrity, which matters should be considered by
the audit firm? (RTP SEP 2024)

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Answer 17: With regard to the integrity of a client, matters that ABC &
Associates should 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.
Question 18: PD & Co., Chartered Accountants, were appointed as the statutory
auditors of MR Limited for the financial year 2023-24. MR Limited included the
following clause in the appointment letter to the auditors: "The Auditor shall be
responsible for detecting the frauds that may happen in the company during the
financial year 2023-24.”

The auditor objected to inclusion of such a clause in the appointment letter.

Discuss in the light of scope of audit.

Answer 18: Scope of Audit in detection of Fraud: In conducting audit of financial

statements objectives of auditor, in accordance with SA 200, “Overall Objectives
of the Independent auditor and the conduct of an audit in accordance with
Standards on Auditing” is to obtain reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud
or error, thereby enabling the auditor to express an opinion.
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An audit is not an official investigation into alleged wrongdoing. The auditor does not
have any specific legal powers of search or recording statements of witness on oath
which may be necessary for carrying out an official investigation.

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Audit is distinct from investigation. Investigation is a critical examination of the

accounts with a special purpose. For example, if fraud is suspected and it is
specifically called upon to check the accounts whether fraud really exists, it takes
character of investigation.

The scope of audit is general and broad whereas scope of investigation is specific
and narrow.

Thus, inclusion of such a clause in the engagement letter is uncalled for and outside
the scope of audit.

Question 19: 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. (PYQ SEP 2024)

Answer 19: 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
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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.

Question 20: A professional accountant is expected to comply with the

fundamental principles of professional ethics at all times. Explain which

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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.
Answer 20: 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 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
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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 21: 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

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assignment. Discuss the responsibilities of CA M as an engagement partner for

engagement quality control review as per SA-220. (PYQ MAY 2024)

Answer 21: 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.

Question 22: CA Paras has accepted audit of financial statements of an entity.

According to the Standards on Auditing, the auditor is required to send an
audit engagement letter to the entity. What are the key areas that should be
included in the audit engagement letter? Under what circumstances is the auditor
not required to record the terms of engagement in such a written agreement?
(MTP JAN 2025)

Answer 22: Key areas that should be included in Audit engagement letter are:

(i) The objective and scope of the audit of the financial statements;
(ii) The responsibilities of the auditor;
(iii) The responsibilities of management;
Identification of the applicable financial reporting framework for the
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(iv)
preparation of the financial statements and
(v) 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.

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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.

Q-23: 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. (JAN 2025)
Ans-23: 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.
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
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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.

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Q-24: 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. (MTP JAN 2025)

Ans-24: 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.

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