MOCK

TEST
SERIES
ADVANCED AUDITING, ASSURANCE & PROFESSIONAL
ETHICS

2018-2023
MOCK TEST SERIES
 Test Series: October, 2018
MOCK TEST PAPER - 2
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
Question No. 1 is compulsory.
Attempt any five questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100
1. (a) OP & Associates are the statutory auditors of BB Ltd. BB Ltd is a listed company and started its
operations 5 years back. The field work during the audit of the financial statements of the company
for the year ended March 31, 2018 got completed on May 1, 2018. The auditor’s report was dated
May 12, 2018. During the documentation review of the engagement, it was observed that the
engagement quality control review was completed on May 15, 2018. Engagement partner had
completed his reviews in entirety by May 10, 2018. Comment.
(b) XYZ Pvt. Ltd. has submitted the financial statements for the year ended 31-3-18 for audit. The audit
assistant observes and brings to your notice that the company's records show following dues:
Income Tax relating to Assessment Year 2014-15 Rs. 125 lacs - Appeal is pending before Hon'ble
ITAT since 30-9-16.
Customs duty Rs. 85 lakhs - Demand notice received on 15-9-17 but no action has been taken to
pay or appeal. Comment.
(c) In the course of audit of K Ltd., its auditor Mr. 'N' observed that there was a special audit conducted
at the instance of the management on a possible suspicion of a fraud and requested for a copy of
the report to enable him to report on the fraud aspects. Despite many reminders it was not provided.
In absence of the special audit report, Mr. 'N' insisted that he be provided with at least a written
representation in respect of fraud on/by the company. For this request also, the management
remained silent. Please guide Mr. 'N'.
(d) CA. Mack, a recently qualified practicing Chartered Accountant got his first audit assignment of
Captura (P) Ltd. for the financial year 2017-18. He obtained all the relevant appropriate audit
evidence for the items related to Statement of Profit and Loss. However, while auditing the Balance
Sheet items, CA. Mack left out obtaining appropriate audit evidence, say, confirmations, from the
outstanding Accounts Receivable amounting Rs. 145 lakhs, continued as it is from the last year,
on the affirmation of the management that there is no receipts and further credits during the year.
CA. Mack, therefore, excluded from the audit programme, the audit of accounts receivable on the
understanding that it pertains to the preceding year which was already au dited by predecessor
auditor. Comment. (5 x 4 = 20 Marks)
2. (a) Mr. Anil, a Chartered Accountant was the auditor of 'A Limited'. During the financial year
2015-16, the investment appeared in the Balance Sheet of the company of Rs. 10 lakhs and
was the same amount as in the last year. Later on, it was found that the company's investments
were only Rs. 25,000, but the value of investments was inflated for the purpose of obtaining higher
amount of Bank loan.
(b) AB Ltd. is a company in which public are not substantially interested. During the previous year
2017-18, the company issued shares to residents of India and provides you the following data
related to such issue:
No. of shares issued 1,00,000
Face Value Rs. 10 per share

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 Fair Market Value (FMV) Rs. 60 per share
Consideration received Rs. 80 per share
The management of the company contends that, it is a normal issue of shares, thus, needs not to
be reported. As the tax auditor of AB Ltd., how would you deal with the matter in your tax audit
report?
(c) MSY & Co. is an Audit Firm having partners CA Mukti, CA Shakti and CA Yukti. CA Mukti,
CA Shakti and CA Yukti are holding appointment as an Auditor in 4, 6 and 10 companies
respectively.
(i) Provide the maximum number of audits remaining in the name of MSY & Co.
(ii) Provide the maximum number of audits remaining in the name of individual partner i.e.
CA Mukti, CA Shakti, CA Yukti.
(iii) Can MSY & Co. accept the appointment as an auditor in 60 private companies having paid-
up share capital less than Rs. 100 crore which has not committed default in filing its financial
statements under section 137 or annual return under section 92 of the of the Companies Act
with the Registrar, 2 small companies and 1 dormant company?
(iv) Would your answer be different, if out of those 60 private companies, 45 companies are having
paid-up share capital of Rs. 110 crore each?
(d) X Ltd had a net worth of INR 1300 crores because of which Ind AS became applicable to them.
The company had various derivative contracts – options, forward contracts, interest rate swaps
etc. which were required to be fair valued for which company got the fair valuation done through
an external third party. The statutory auditors of the company involved an auditor’s expert to audit
valuation of derivatives. Auditor and auditor’s expert were new to each other i.e. they were working
for the first time together but developed a good bonding during the course of the audit . The auditor
did not enter into any formal agreement with the auditor’s expert. Please advise.
(5 x 4 = 20 Marks)
3. (a) Mr. Mohan is a practising Chartered Accountant. He issued a certificate of consumption which did
not reflect the correct factual position of the consumption of raw material by the concerned entity.
It is found that the certificate is given on the basis of data appearing in the minutes of meeting of
the Board of Directors. Comment on above with reference to the Chartered Accountants Act, 1949,
and Schedules thereto.
(b) A German Company engaged in the business of manufacturing and distribution of industrial gases,
is interested in acquiring a listed Indian Company having a market share of more than 65% of the
industrial gas business in India, request you to conduct a “Due Diligence” of this Indian Company
and submit your Report. As due Diligence Auditor, discuss the key areas you will cover in your
review.
(c) Zed Ltd. has flexi deposit linked current account with various banks. Cheques are issued from the
current account and as per the requirements of funds, the flexi deposits are encashed and
transferred to current accounts. As of 31 st March, 2018 certain cheques issued to vendors are not
presented for payment resulting in the credit balance in the books of the company. The
management wants to present the book overdraft under current liabilities and flexi deposits under
cash & bank balances. Comment.
(d) Moon Ltd. acquired 51% shares of Star Ltd. during the year ending 31-3-2017. During the financial
year 2017-18 the 20% shares of Star Ltd. were sold by Moon Ltd. Moon Ltd. while preparing the
financial statements for the year ending 31-3-2017 and 31-3-2018 did not consider the financial
statements of Star Ltd. for consolidation. As a statutory auditor how would you deal with it?
(5 x 4 = 20 Marks)

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4. (a) CA. X, a practicing Chartered Accountant, failed to return the books of account and other
documents of ABC Ltd. despite many reminders from the company. The company had settled
his entire fees dues also. Comment with reference to the Chartered Accountants Act, 1949.
(b) In the course of audit of QRT Ltd, its statutory auditor wants to be sure of the adequacy of related
party disclosures? Kindly guide the auditor in identifying the possible source of related party
information.
(c) High Life Insurance is into life insurance business and has established presence in this field since
last 25 years. Your firm, SR & Co. are appointed auditors of the High Life Insurance company.
While conducting its audit, you come across several important actuarial processes being followed
in accordance with general regulatory guidelines. You also understand & realise that the actuarial
department is calculating and modelling hub of the company. In the above context explain the role
of auditors.
(d) A real-time environment is a type of automated environment in which business operations and
transactions are initiated, processed and recorded immediately as they happen without delay. It
has several critical IT components that enable anytime, anywhere transactions to take place. You
are required to name the components and its example of real-time environment.
(e) The Comptroller & Auditor General of India plays a key role in the functioning of the financial
committees of Parliament and the State Legislatures. He has come to be recognised as a 'friend,
philosopher and guide' of the Committees. In view of above, you are required to list down any four
role. (4 x 5 = 20 Marks)
5. (a) A Chartered Accountant in practice certified in requisite Form that an articled assistant was
undergoing training with him, whereas, he was also employed in a company between 10 a.m. and
6 p.m. on a monthly salary of Rs. 17,000 and attended the office of the Chartered Accountant
thereafter until 7 p.m. The Chartered Accountant pleaded that the articled assistant was on audit
of the company. Comment with reference to the Chartered Accountants Act, 1949.
(b) XYZ Yarns Ltd. is a manufacturing company engaged in manufacturing of different types of yarns.
Its annual turnover is Rs. 100 Crores and net profit Rs. 10 crores. It has two manufacturing units.
Company is facing difficulties in maintaining adequate system of internal control. Company wants
to appoint Internal Auditor who would help in the above task and also various other functions
including compliance. In view of above, you are required to explain the main responsibility of
Internal Auditors.
OR
CA. Amboj, a practicing chartered accountant has been appointed as an internal auditor of Textile
Ltd. He conducted the physical verification of the inventory at the year -end and handed over the
report of such verification to CA. Kishor, the statutory auditor of the Company, for his view and
reporting. Can CA. Kishor rely on such report?
(c) Every member of the stock-exchange has to issue contract notes to his clients for the trades
executed on their behalf. State the items contained in the SEBI’s check list for auditors in respect
of contract notes issued by a Stock Broker.
(d) Some situations may require an adverse or qualified statement or a disclosure without necessarily
making it a subject matter of qualification in the Auditors’ Certificate, in respect of compliance of
requirements of corporate governance. Give four examples of such situations.
(e) During the course of his audit, the auditor noticed material weaknesses in the internal control
system and he wishes to communicate the same to the management. You are required to elucidate
the important points the auditor should keep in the mind while drafting the letter of weaknesses in
internal control system. (4 x 5 = 20 Marks)

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6. (a) Ganpati Ltd. is a mobile phone operating company. Barring the marketing f unction it had
outsourced the entire operations like maintenance of mobile infrastructure, customer billing,
payroll, accounting functions, etc. Assist the auditor of Ganpati Ltd. as to how he can obtain an
understanding of how Ganpati Ltd. uses the services of the outsourced agency in its operations.
(b) Indicate the precise nature of auditor's liability in the following situations and support your views
with authority, if a misstatement had occurred in the prospectus issued by the company.
(c) MIM & Co. wants to issue a prospectus, to provide potential investors with information about future
expectations of the Company. You are hired by MIM & Co. to examine the projected financial
statements and give report thereon. What audit evidence will be obtained for reporting on projected
financial statements?
(d) Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank. The Bank
follows financial year as accounting year. The bank has recognised on accrual basis income from
dividends on securities and Units of Mutual Funds held by it as at the end of financial year. The
dividends on securities and Units of Mutual Funds were declared after the end of financial year.
Comment.
(e) Arpit, a practicing Chartered Accountant is appointed to conduct the peer review of another
practicing unit. What areas Arpit should review in the assessment of independence of the practicing
unit? (4 x 5 = 20 Marks)

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 Test Series: October, 2018
MOCK TEST PAPER - 2
FINAL NEW COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS
1. (a) Review by Engagement Partner: As per SA 220, “Quality Control for an Audit of Financial
Statements”, the engagement partner shall take responsibility for reviews being performed in
accordance with the firm’s review policies and procedures. For audits of financial statements of
listed entities, the engagement partner shall:
• Determine that an engagement quality control reviewer has been appointed;
• Discuss significant matters arising during the audit engagement, including those identified
during the engagement quality control review, with the engagement quality c ontrol reviewer;
and
• Not date the auditor’s report until the completion of the engagement quality control review.
SA 700, “Forming an Opinion and Reporting on Financial Statements”, requires the auditor’s report
to be dated no earlier than the date on which the auditor has obtained sufficient appropriate
evidence on which to base the auditor’s opinion on the financial statements. In cases of an audit
of financial statements of listed entities where the engagement meets the criteria for an
engagement quality control review, such a review assists the auditor in determining whether
sufficient appropriate evidence has been obtained.
Conducting the engagement quality control review in a timely manner at appropriate stages during
the engagement allows significant matters to be promptly resolved to the engagement quality
control reviewer’s satisfaction on or before the date of the auditor’s report.
In the instant case, OP & Associates are the statutory auditors of a listed company BB Ltd. Which
started its operations 5 years back. The field work during the audit of the financial statements of
the company for the year ended March 31, 2018 got completed on May 1, 2018. The auditor’s
report was dated May 12, 2018. During the documentation review of the engagement, it was
observed that the engagement quality control review was completed on May 15, 2018.
Thus, in the given case, signing of auditor’s report i.e. on May 12, 2018 which is before the
completion of review engagement quality control review i.e. May 15, 2018, is not in order.
(b) Non-Compliance of Laws and Regulations: As per SA 250 “Consideration of Laws and
Regulations in an Audit of Financial Statement”, it is the responsibility of management, with the
oversight of those charged with governance, to ensure that the entity’s operations are conducted
in accordance with the provisions of laws and regulations, including compliance with the provisions
of laws and regulations that determine the reported amounts and disclosures in an entity’s financial
statements.
The auditor is responsible for obtaining reasonable assurance that the financial statements, taken
as a whole, are free from material misstatement, whether caused by fraud or error. In conducting
an audit of financial statements, the auditor takes into account the applicable legal and regulatory
framework. Owing to the inherent limitations of an audit, there is an unavoidable risk that some
material misstatements in the financial statements may not be detected, even though the audit is
properly planned and performed in accordance with the SAs.
If the auditor concludes that the non-compliance has a material effect on the financial statements,
and has not been adequately reflected in the financial statements, the auditor shall express a
qualified or adverse opinion on the financial statements.
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 Further, the auditor is required to report on certain matters specified in Para 3 of CARO, 201 6
under section 143 of the Companies Act, 2013.
One of such matter is non-payment of dues to Government, on account of any dispute. As per
clause (vii)(b) of Para 3 of CARO, 2016, in case dues of income tax or sales tax or service tax or
duty of customs or duty of excise or value added tax have not been deposited on account of any
dispute, then the amounts involved and the forum where dispute is pending shall be mentioned.
In the present case, there is Income Tax demand of Rs. 125 Lacs and the company has gone for
an appeal, it needs considerations as to whether the entire demand is disputed, because it is
difficult to presume that the demand by Income Tax authority is without any basis. Therefore, as
per AS 29 “Provisions, Contingent Liabilities and Contingent Assets”, partly to the extent the
company considers that the demand is based on some logical basis, that amount may be provided
for and the remaining may be disclosed as the contingent liability. Further, it should be brought to
notice of the members by reporting.
Additionally, the demand notice has been received for Customs duty of Rs. 85 lakhs and is
outstanding on the closure of financial year, for which no action has been taken by the
management. Therefore, it should also be brought to notice of the members by reporting.
(c) Auditor’s Responsibilities Relating to Fraud: As per SA 240 on “The Auditor’s Responsibilities
Relating to Fraud in an Audit of Financial Statements”, the auditor is responsible for obtaining
reasonable assurance that the financial statements, taken as a whole, are free from material
misstatement, whether caused by fraud or error.
As per SA 580 “Written Representations”, if management modifies or does not provide the
requested written representations, it may alert the auditor to the possibility that one or more
significant issues may exist.
In the instant case, the auditor observed that there was a special audit conducted at the instance
of the management on a possible suspicion of fraud. Therefore, the auditor requested for special
audit report which was not provided by the management despite of many reminders. The auditor
also insisted for written representation in respect of fraud on/by the company. For this request also
management remained silent.
It may be noted that, if management does not provide one or more of the requested written
representations, the auditor shall discuss the matter with management; re-evaluate the integrity of
management and evaluate the effect that this may have on the reliability of representations (oral
or written) and audit evidence in general; and take appropriate actions, including determining the
possible effect on the opinion in the auditor’s report.
Further, as per section 143(12) of the Companies Act, 2013, if an auditor of a company, in the
course of the performance of his duties as auditor, has reason to believe that an offence involving
fraud is being or has been committed against the company by officers or employees of the
company, he shall immediately report the matter to the Central Government (in case amount of
fraud is Rs. 1 crore or above) or Audit Committee or Board in other cases (in case the amount of
fraud involved is less than Rs. 1 crore) within such time and in such manner as may be prescribed.
The auditor is also required to report as per Clause (x) of Paragraph 3 of CARO, 2016, Whether
any fraud by the company or any fraud on the company by its officers or employees has been
noticed or reported during the year; If yes, the nature and the amount involved is to be indicated .
If, as a result of a misstatement resulting from fraud or suspected fraud, the auditor encounters
exceptional circumstances that bring into question the auditor’s ability to continue performing the
audit, the auditor shall:
(i) Determine the professional and legal responsibilities applicable in the circumstances,
including whether there is a requirement for the auditor to report to the person or persons who
made the audit appointment or, in some cases, to regulatory authorities;
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 (ii) Consider whether it is appropriate to withdraw from the engagement, where withdrawal from
the engagement is legally permitted; and
(iii) If the auditor withdraws:
(1) Discuss with the appropriate level of management and those charged with governance,
the auditor’s withdrawal from the engagement and the reasons for the withdrawal; and
(2) Determine whether there is a professional or legal requirement to report to the person
or persons who made the audit appointment or, in some cases, to regulatory authorities,
the auditor’s withdrawal from the engagement and the reasons for the withdrawal.
(d) Verification of Accounts Receivable: As per SA 510 “Initial Audit Engagements – Opening
Balances”, while conducting an initial audit engagement, the objective of the auditor with respect
to opening balances is to obtain sufficient appropriate audit evidence about whether -
(i) Opening balances contain misstatements that materially affect the current pe riod’s financial
statements; and
(ii) 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.
When the financial statements for the preceding period were audited by another auditor, the current
auditor may be able to obtain sufficient appropriate audit evidence regarding op ening balances by
perusing the copies of the audited financial statements.
Ordinarily, the current auditor can place reliance on the closing balances contained in the financial
statements for the preceding period, except when during the performance of a udit procedures for
the current period the possibility of misstatements in opening balances is indicated.
For current assets and liabilities, some audit evidence about opening balances may be obtained
as part of the current period’s audit procedures, say, the collection of opening accounts receivable
during the current period will provide some audit evidence of their existence, rights and obligations,
completeness and valuation at the beginning of the period.
In addition, according to SA 580 “Written Representations”, the auditor may consider it necessary
to request management to provide written representations about specific assertions in the financial
statements; in particular, to support an understanding that the auditor has obtained from other audit
evidence of management’s judgment or intent in relation to, or the completeness of, a specific
assertion. Although such written representations provide necessary audit evidence, they do not
provide sufficient appropriate audit evidence on their own for that assertion.
In the given case, the management of Captura (P) Ltd. has restrained CA. Mack, its auditor, from
obtaining appropriate audit evidence for balances of Accounts Receivable outstanding as it is from
the preceding year. CA. Mack, on believing that the preceding year balances have already been
audited and on the statement of the management that there are no receipts and credits during the
current year, therefore excluded the verification of Accounts Receivable from his audit programme.
Thus, CA. Mack should have requested the management to provide written representation for their
views and expressions; and he should also not exclude the audit procedure of closing balances of
Accounts Receivable from his audit programme.
2. (a) Grossly Negligent in Conduct of Duties: As per Part I of Second Schedule to the Chartered
Accountants Act, 1949, a Chartered Accountant in practice shall be deemed to be guilty of
professional misconduct, if he, certifies or submits in his name or in the name of his firm, a report
of an examination of financial statements unless the examination of such statements and the
related records has been made by him or by a partner or an employee in his firm or by another
chartered accountant in practice, under Clause (2); does not exercise due diligence, or is grossly
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 negligent in the conduct of his professional duties, under Clause (7); or fails to obtain sufficient
information which is necessary for expression of an opinion or its exceptions are sufficiently
material to negate the expression of an opinion, under Clause (8).
The primary duty of physical verification and valuation of investments is of the management.
However, the auditor’s duty is also to verify the physical existence and valuation of investments
placed, at least on the last day of the accounting year. The auditor should verify the documentary
evidence for the cost/value and physical existence of the investments at the end of the year. He
should not blindly rely upon the Management’s representation.
In the instant case, such non-verification happened for two years. It also appears that auditors
failed to confirm the value of investments from any proper source. In case auditor has simply relied
on the management’s representation, the auditor has failed to perform his duty.
Accordingly, Mr. Anil, will be held liable for professional misconduct under Clauses (2), (7) and (8)
of Part I of the Second Schedule to the Chartered Accountants Act, 1949.
(b) Reporting for issue of shares for value exceeding fair market value: In this case, AB Ltd. is a
company, other than a company in which the public are substantially interested. During the
previous year 2017-18, it receives consideration for issue of shares (i.e. Rs. 80 per share) which
exceeds the face value (i.e. Rs. 10 per share) and fair market value of the shares (i.e.
Rs. 60 per share).
A tax auditor has to furnish the details of shares issued during the previous year, under clause 29
of Form 3CD, in case, the assessee received any consideration for issue of shares wh ich exceeds
the fair market value of the shares as referred to in section 56(2)(viib) of the Income Tax Act, 1961.
Section 56(2)(viib) provides that where a company, not being a company in which the public are
substantially interested, receives, in any previous year, from any person being a resident, any
consideration for issue of shares that exceeds the face value of such shares, the aggregate
consideration received for such shares as exceeds the fair market value of the shares shall be
chargeable to income-tax under the head “Income from other sources”.
Since section 56(2)(viib) is applicable to companies in which public is not substantially interested,
reporting under this clause is to be done only for corporate assessees. The auditor should obtain
from the auditee, a list containing the details of shares issued, if any, by him to any person being
a resident and verify the same from the books of accounts and other relevant documents.
As per the facts of the case, provisions and explanations given above, the income generated by
AB Ltd., due to differences in consideration received and fair market value of shares issued, is
chargeable to income-tax under the head “Income from other sources” as per section 56(2)(viib) of
the Income Tax Act, 1961.
Therefore, the tax auditor of AB Ltd. is required to furnish the details of shares issued under clause
29 of Form 3CD. The contention of the management of the company, behind non -reporting, that it
is a normal issue of shares, is not acceptable.
(c) Ceiling on Number of Audit: As per section 141(3)(g) of the Companies Act, 2013, a person shall
not be eligible for appointment as an auditor if he is in full time employment elsewhere or a person
or a partner of a firm holding appointment as its auditor, if such person or partner is at the date of
such appointment or reappointment holding appointment as auditor of more than twenty companies
other than one person companies, dormant companies, small companies and private companies
having paid-up share capital less than Rs. 100 crore private company (which has not committed a
default in filing its financial statements under section 137 of the said Act or annual return under
section 92 of the said Act with the Registrar).
As per section 141(3)(g), this limit of 20 company audits is per person. In the case of an audit firm
having 3 partners, the overall ceiling will be 3 × 20 = 60 company audits. Some times, a chartered

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 accountant is a partner in a number of auditing firms. In such a case, all the firms in which he i s
partner or proprietor will be together entitled to 20 company audits on his account.
In the given case, CA Mukti is holding appointment in 4 companies, whereas CA Shakti is having
appointment in 6 Companies and CA Yukti is having appointment in 10 Companies. In aggregate
all three partners are having 20 audits.
(i) Therefore, MSY & Co. can hold appointment as an auditor of 40 more companies:
Total Number of Audits available to the Firm = 20*3 = 60
Number of Audits already taken by all the partners
in their individual capacity = 4+6+10 = 20
Remaining number of Audits available to the Firm = 40
(ii) With reference to above provisions an auditor can hold more appointment as auditor = ceiling
limit as per section 141(3)(g) - already holding appointments as an auditor. Hence (1) CA
Mukti can hold: 20 - 4 = 16 more audits. (2) CA Shakti can hold 20-6 = 14 more audits and
(3) CA Yukti can hold 20-10 = 10 more audits.
(iii) In view of above disussed provisions MSY & Co. can hold appointment as an auditor in all the
60 private companies having paid-up share capital less than Rs. 100 crore (private company
which has not committed a default in filing its financial statements under section 137 of the
said Act or annual return under section 92 of the said Act with the Registrar) , 2 small
companies and 1 dormant company as these are excluded from the ceiling limit of company
audits given under section 141(3)(g) of the Companies Act, 2013.
(iv) As per fact of the case, MSY & Co. is already having 20 company audits and they can also
accept 40 more company audits. In addition, they can also conduct the audit of one per son
companies, small companies, dormant companies and private companies having paid up
share capital less than rupees 100 crores (private company which has not committed a default
in filing its financial statements under section 137 of the said Act or annu al return under
section 92 of the said Act with the Registrar). In the given case, out of the 60 private
companies, MSY & Co. is offered 45 companies having paid-up share capital of Rs. 110 crore
each.
Therefore, MSY & Co. can also accept the appointment as an auditor for 2 small companies,
1 dormant company, 15 private companies having paid-up share capital less than Rs. 100 crore
(private company which has not committed a default in filing its financial statements under section
137 of the said Act or annual return under section 92 of the said Act with the Registrar.”.) and 40
private companies having paid-up share capital of Rs. 110 crore each in addition to above 20
company audits already holding.
(d) As per SA 620 “Using the work of an Auditor’s Expert”, the auditor shall agree, in writing when
appropriate, on the following matters with the auditor’s expert:
(i) The nature, scope and objectives of that expert’s work;
(ii) The respective roles and responsibilities of the auditor and that expert;
(iii) The nature, timing and extent of communication between the auditor and that expert, including
the form of any report to be provided by that expert; and
(iv) The need for the auditor’s expert to observe confidentiality requirements.
In the instant case X Ltd. had various derivative contracts – options, forward contracts, interest
rate swaps etc. which were required to be fair valued for which company got the fair valuation done
through an external third party. The statutory auditors of the company involved an auditor’s expert
to audit valuation of derivatives. Considering the complexity involved in the valuation and volume
of derivatives and also due to the fact that the auditor and auditor’s expert were new to each other,

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 auditor should have signed a formal agreement/ engagement letter with the auditor’s expert in
respect of the work assigned to him in accordance with SA 220.
3. (a) According to Clause (2) of Part I of Second Schedule to the Chartered Accountants Act, 1949 a
chartered accountant is held guilty of professional misconduct if he certifies or submits a report of
an examination of financial statements unless the examination of such statements and the related
records has been made by him or by a partner or employee in his firm or any other chartered
accountant in practice.
Mr. Mohan has issued a certificate of consumption which does not reflect the correct factual
position of the consumption of raw material by the concerned entity. He has failed in his duty of
examining the record. He has relied on the minutes of Board of director’s meeting which is not
proper evidence to show the consumption of raw material. The relevant record of production and
stock register should have been scrutinized thoroughly and properly.
Clause (7) of Part I of Second Schedule to the Chartered Accountants Act, 1949 also applies to
this case which states that a Chartered Accountant in practice shall be deemed to be guilty of
professional misconduct, if he does not exercise due diligence or is grossly negligent in the conduct
of his professional duties.
Mr. Mohan will be held guilty of Professional Misconduct under Clause (2) of Part I of Second
Schedule to the Chartered Accountants Act, 1949.
(b) Due Diligence – Key Areas: The German company engaged in the business of manufacturing
and distribution of industrial gases wishing to acquire a listed Indian company has commissioned
the Due Diligence Audit to assess the strengths and weaknesses of this company. It is quite
important for the acquirer to assess the proposal from different angles and specifically as per terms
of the assignment and also see whether proposed merger would create operational synergies. On
the other hand, financial due diligence review would be performed after the c ommercial valuation.
Accordingly, while a preliminary review might be performed during initial stages of the restructuring
exercise and may in fact, be performed simultaneously with the commercial evaluation, at a later
stage, financial due diligence may be performed on the books of account and other information
directly pertaining to the financial matters of the entity. In addition, a legal due diligence may be
required where legal aspects of functioning of the entities are reviewed; for example, the lega l
aspects of property owned by the entity or compliance with various statutory requirements under
various laws. Like other due diligence exercises, environmental and personnel due diligence are
also carried out in order to establish whether various propositions with regard to environment and
personnel of the enterprise under review are appropriate. In any case, it is quite important to look
behind the veil of initial information provided by the company and to assess the benefits and costs
of the proposed acquisition/merger by inquiring into all relevant aspects of the past, present and
future of the business to be acquired. Some of the significant key areas which shall be covered
under the review are as under:
(1) Historical Background: The accountant should begin the financial due diligence review by
looking into the history of the company and the background of the promoters. The details of
how the company was set up and who were the original promoters have to be gone into,
before verification of financial data in detail. An eye into the history of the company may reveal
its turning points, survival strategies adopted from time to time, the market share enjoyed by
and changes therein, product life cycle and adequacy of resources. It could also help the
accountant in determining whether, in the past, any regulatory requirements have had an
impact on the business of the said company. This could, inter alia, include the nature of
business(es), location of production facilities, warehouses, offices, products or s ervices and
markets.
(2) Significant Accounting Policies: The accountant should study the accounting policies being
followed by the target and ascertain whether any accounting policy is inappropriate.The
accountant should also see the effects of the recent changes in the accounting policies. The
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 target might have changed its accounting policies in the recent past keeping in view its
intention of offering itself for sale.
The overall scope has to be based on the accounting policies adopted by the management .
The accountant has to look at the main effect of accounting policies on the overall profitability
and their correctness. It is reiterated that the accountant should mainly look at all material
changes in Accounting Policies in the period subjected to review very carefully.
The accountant's report should include a summary of significant accounting policies used by
the target, that changes that have been made to the accounting policies in the recent past,
the areas in which accounting policies followed by the target are different from those adopted
by the acquiring enterprise, the effect of such differences.
(3) Review of Financial Statements: An evaluation of the profit reported by the company would
be largely based upon its operating results. Any extraordinary item of income or expense that
might have affected the operating results would require close examination. It is advisable to
compare the actual figures with the budgeted figures for the period under review and those of
the previous accounting period. It is important that the trading results for the past four to five
years are compared and the trend of normal operating profit arrived at. The normal operating
profits should further be benchmarked against other similar companies. Besides the above,
and based on the trend of operating results, the accountant has to advise the acquiring
enterprise, through due diligence report, on the indicative valuation of the business. The
exercise to evaluate the balance sheet of the company has to take into considerati on the
basis upon which assets have been valued and liabilities have been recognised. The net
worth of the business has to be arrived at by taking into account the impact of over/under
valuation of assets and liabilities.
(4) Taxation - Tax due diligence is a separate due diligence exercise but since it is an integral
component of the financial status of a company, it is generally included in the financial due
diligence. It is important to check if the company is regular in paying various taxes to the
Government. The accountant has to also look at the tax effects of the merger or acquisition.
(5) Cash Flow: A review of historical cash flows and their pattern would reflect the cash
generating abilities of the target company and should highlight the major trends. It is important
to know if the company is able to meet its cash requirements through internal accruals or does
it have to seek external help from time to time. It is necessary to check that:
(a) Is the company able to honour its commitments to its trade payables, to the banks, to
government and other stakeholders
(b) How well is the company able to turn its trade receivables and inventories
(c) How well does it deploy its funds
(d) Are there any funds lying idle or is the company able to reap maximum benefits out of
the available funds?
(6) Financial Projections: The accountant should obtain from the target company the
projections for the next five years with detailed assumptions and workings. He should ask the
target to give projections on optimistic, pessimistic and most likely bases.
(7) Management and Employees - In most of the companies which are available for take over
the problem of excess work force is often witnessed. It is important to work out how much of
the labour force has to be retained. It is also important to judge the job profile of the
administrative and managerial staff to gauge which of these match the requirements of the
new incumbents. Due to complex set of labour laws applicable to them, companies often have
to face protracted litigation from its workforce and it is important to gauge the likely impact of
such litigation. The aspects whether all employee benefits like PF, Gratuity, ESI and
superannuation have been properly paid/funded. The pay packages of the key employees wi ll
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 be thoroughly reviewed since this can be a crucial factor in future employee costs.
(8) Statutory Compliance: During a due diligence this is one aspect that has to be investigated
in detail. It is important therefore, to make a list of laws that are app licable to the entity as
well as to make a checklist of compliance required from the company under those laws. If the
company has not been regular in its legal compliance it could lead to punitive charges under
the law. These may have to be quantified and factored into the financial results of the
company.
(c) Presentation of Book Overdraft as per Schedule III to the Companies Act, 2013: The
instructions in accordance with which current assets being “cash and cash equivalents” should be
made out to Part I of Schedule III to the Companies Act, 2013 states as follows:
(i) Cash and cash equivalents shall be classified as:
(a) Balances with banks;
(b) Cheques, drafts on hand;
(c) Cash on hand;
(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.
From the facts of the case it is evident that in substance the position is that the composite bank
balance including the balance in flexi deposit accounts are positive, even though physical set -off
has not been made as on the balance sheet date. Further the bank has got the right to set off of
flexi deposits against the cheques issued and hence it would be more informative and useful to the
readers of the financial statements to disclose the book credit balance as a set -off from the flexi
deposit accounts. The disclosure of the said book credit balance as book overdraft under the head
current liabilities as proposed by the management is not correct.
(d) Consolidation of Financial Statements: Accounting Standard 21 “Consolidated Financial
Statements”, states that a subsidiary should be excluded from consolidation when control is
intended to be temporary because the shares are acquired and held exclusively with a view to its
subsequent disposal in the near future.
Where an enterprise owns majority of voting power by virtue of ownership of the shares of another
enterprise and all the shares are acquired & held exclusively with a view to their subsequent
disposal in the near future, the control by the first mentioned enterprise would be considered
temporary and the investments in such subsidiaries should be accounted for in accordance with
AS 13 “Accounting for Investments”.
In the case of an entity which is excluded from consolidation on the ground that the relationship of
parent with the other entity as subsidiary is temporary, the auditor should verify that the intention
of the parent, to dispose the subsidiary, in the near future, existed at the time of acquisition of the
subsidiary. The auditor should also verify that the reasons for exclusion are given in the
consolidated financial statements.
As per Ind AS 110, there is no such exemption for ‘temporary control’, or “for operation under
severe long-term funds transfer restrictions” and consolidation is mandatory for Ind AS compliant
financial statement in this case.

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 However, as per section 129(3) of the Companies Act, 2013 where a company having subsidiary,
which is not required to prepare consolidated financial statements under the applicable Accounting
Standards, it shall be sufficient if the company complies with the provisions on consolidated
financial statements provided in Schedule III to the Act.
In the given case, Moon Ltd. has acquired 51% shares of Star Ltd. during the year ending
31.03.2017 and sold 20% shares during the year 2017-18. Moon Ltd. did not consolidate the
financial statements of Star Ltd. for the year ending 31.03.2017 and 31.03.2018.
The intention of Moon Ltd. is quite clear that the control in Star Ltd. is temporary as the former
company disposed off the acquired shares in the next year of its purchase. Therefore, Moon Ltd.
is not required to prepare consolidated financial statement as per AS 21 however, for the
compliance of provisions related to consolidation of financial statements given under section 129(3)
of the Companies Act, 2013, Moon Ltd. is required to made disclosures in the financial statements
as per the provisions provided in Schedule III to the Companies Act’ 2013.
However, if the Moon Ltd. is required to prepare its financial statements under Ind AS, it shall have
to prepare Consolidated Financial Statements in accordance with Ind AS 110 as exemption for
‘temporary control’, or “for operation under severe long-term funds transfer restrictions” is not
available under Ind AS 110. Paragraph 20 of Ind AS 110 states that “Consolidation of an investee
shall begin from the date the investor obtains control of the investee and cease when the investor
loses control of the investee”.
4. (a) Bringing Disrepute to the Profession: A member is liable to disciplinary action under section 21
of the Chartered Accountants Act, 1949, if he is found guilty of any professional or “Other
Misconduct”. As per Clause (2) of Part IV of the First Schedule to the said Act, a member of the
Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he , in the
opinion of the Council, brings disrepute to the profession or the Institute as a result of his action
whether or not related to his professional work.
A member may be found guilty of “Other Misconduct” as per Clause (2) under the aforesaid
provisions rendering himself unfit to be member if he retains the books of account and documents
of the client and fails to return these to the client on request without a reasonable cause.
In the given case, CA. X failed to return the books of accounts and other documents of his client
without any reasonable cause, therefore, he would be guilty of other misconduct under the
aforesaid provisions.
(b) Identification of possible sources for Related Parties’ information: As per SA 550 on, “Related
Parties”, the auditor should review information provided by the management of the entity identifying
the names of all known related parties. However, it is the management, which is primarily
responsible for identification of related parties. The duties of an auditor with regard to reporting of
related party transaction as required by Accounting Standard 18 “Related Party Disclosures” is
given in SA 550.
(i) SA 550 requires that to identify names of all known related parties, the auditor may inspect
records or documents that may provide information about related party relations hips and
transactions, for example entity income tax returns, information supplied by the entity to
regulatory authorities, shareholder registers to identify the entity’s principal shareholders ,
statements of conflicts of interest from management and those charged with governance,
records of the entity’s investments and those of its pension plans, contracts and agreements
with key management or those charged with governance, significant contracts and
agreements not in the entity’s ordinary course of business, specific invoices and
correspondence from the entity’s professional advisors, life insurance policies acquired by the
entity, significant contracts re-negotiated by the entity during the period, internal auditors’
reports, documents associated with the entity’s filings with a securities regulator (e.g.,
prospectuses).
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 (ii) Some arrangements that may indicate the existence of previously unidentified or undisclosed
related party relationships or transactions as an arrangement involves a formal or informal
agreement between the entity and one or more other parties for such purposes as the
establishment of a business relationship through appropriate vehicles or structures , the
conduct of certain types of transactions under specific terms and conditions or the provision
of designated services or financial support.
Examples of arrangements that may indicate the existence of related party relationships or
transactions that management has not previously identified or disclosed to the auditor include
participation in unincorporated partnerships with other parties, agreements for the provision
of services to certain parties under terms and conditions that are outside the ent ity’s normal
course of business, guarantees and guarantor relationships etc.
(iii) Obtaining further information on significant transactions outside the entity’s normal course of
business enables the auditor to evaluate whether fraud risk factors, if any, are present and,
where the applicable financial reporting framework establishes related party requirements, to
identify the risks of material misstatement. In addition, the auditor needs to be alert for
transactions which appear unusual in the circumstances and which may indicate the existence
of previously unidentified related parties. Examples of transactions outside the entity’s normal
course of business may include complex equity transactions, such as corporate restructurings
or acquisitions, transactions with offshore entities in jurisdictions with weak corporate laws,
the leasing of premises or the rendering of management services by the entity to another
party if no consideration is exchanged, sales transactions with unusually large discounts or
returns, transactions with circular arrangements, for example, sales with a commitment to
repurchase, transactions under contracts whose terms are changed before expiry etc.
(iv) Finally, the auditor should also obtain a written representation from the manage ment
concerning the completeness of information provided regarding the identification of related
parties.
(c) Actuarial Process: Actuaries in Life Insurance business have gained tremendous importance. The
role of Actuary in life insurance has shifted from supervising compliance to certify whether products
and financial reports are in accordance with the general regulatory guidelines.
The job of actuary or actuarial department in any Life Insurance Company involves, detailed
analysis of data to quantify risk. The actuarial department is calculating and modelling hub of the
Company. Within the department fundamentals of Insurance business is determined from pricing
to policy valuations techniques.
Role of Auditor: Auditors in the Audit report are required to certify, whether the actuarial valuation
of liabilities is duly certified by the appointed actuary, including to the effect that the assumptions
for such valuation are in accordance with the guidelines and norms, if any, issued by the authority
and/or the Actuarial Society of India in concurrence with the IRDA.
Hence, Auditors generally rely on the Certificate issued by the Appointed Actuary, certifying the
Policy liabilities. However, Auditor may discuss with the Actuaries with respect to process followed
and assumptions made by him before certifying the Policy liabilities.
(d) Real Time Environment: IT Components: To facilitate transactions in real-time, it is essential to
have the systems, networks and applications available during all times. A real -time environment
has several critical IT components that enable anytime, anywhere transactions to take place. Any
failure even in one component could render the real-time system unavailable and could result in a
loss of revenue. IT Components include:
(i) Applications: For example, ERP applications SAP, Oracle R12, Core banking applications.
(ii) Middleware.: For example, Webservers like Apache, ATM switches.
(iii) Networks: For example, Wide Area Networks, Internet hosting.
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 (iv) Hardware: For example, Data centers, Backup and Storage devices, Power supply.
(e) C&AG's Role – The Comptroller & Auditor General of India plays a key role in the functioning of
the financial committees of Parliament and the State Legislatures. He has come to be recognised
as a 'friend, philosopher and guide' of the Committees.
(i) His Reports generally form the basis of the Committees' working, although they are not
precluded from examining issues not brought out in his Reports;
(ii) He scrutinises the notes which the Ministries submit to the Committees and helps the
Committees to check the correctness of submissions to the Committees and facts and figures
in their draft reports;
(iv) The Financial Committees present their Report to the Parliament/ State Legislature with their
observations and recommendations.
The various Ministries / Department of the Government are required to inform the Committees
of the action taken by them on the recommendations of the Committees (which are generally
accepted) and the Committees present Action Taken Reports to Parliament / Legislature ;
(v) In respect of those Audit Reports, which could not be discussed in detail by the Committees,
written answers are obtained from the Department / Ministry concerned and are sometimes
incorporated in the Reports presented to the Parliament / State Legislatu re.
This ensures that the Audit Reports are not taken lightly by the Government, even if the entire
report is not deliberated upon by the Committee.
5. (a) Failure to Observe Regulations: As per Clause (1) of Part II of Second Schedule to the Chartered
Accountants Act, 1949, a member shall be held guilty of professional misconduct if he contravenes
any of the provisions of the Act or the regulations made thereunder or any guidelines issued by the
Council. The chartered accountant, as per Regulations also, is expected to impart proper practical
training.
In the instant case, the articled assistant is not attending office on timely basis and the explanation
of the Chartered Accountant that the articled assistant was on audit of the company cannot be
accepted particularly in view of the fact that articled assistant is getting monthly salary from that
company. Under the circumstances, the Chartered Accountant would be held guilty of professional
misconduct in regard to the discharge of his professional duties.
(b) Main responsibility of internal auditor must be :
to maintain adequate system of internal control by a continuous examination of accounting
procedures, receipts and disbursements and to provide adequate safeguards against
misappropriation of assets.
to operate independently of the accounting staff and must not in any way divest himself of
any of the responsibilities placed upon him.
Not to involve himself in the performance of executive functions in order that his objective
outlook does not get obscured by the creation of vested interest.
to observe facts and situations and bring them to notice of authorities who would otherwise
never know them; also, they critically appraise various policies of the management and draw
its attention to any deficiencies, wherever these require to be corrected.
to associate closely with management and his knowledge must be kept up to date by his being
kept informed about all important occurrences and events affecting the business, as well as
the changes that are made in business policies. He must enjoy an independent status.
In addition, the Audit Committee of the company or the Board shall, in consultation with the
Internal Auditor, formulate the scope, functioning, periodicity and methodology for conducting
the internal audit.
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 It may also be noted that the Central Government may, by rules, prescribe the manner and
the intervals in which the internal audit shall be conducted and reported to the Board.
OR
Using the Work of Internal Auditor: As per SA 610 “Using the Work of Internal Auditors”,
while determining whether the work of the internal auditors can be used for the purpose of the
audit, the external auditor shall evaluate-
(a) The extent to which the internal audit function’s organizational status and re levant
policies and procedures support the objectivity of the internal auditors;
(b) The level of competence of the internal audit function; and
(c) Whether the internal audit function applies a systematic and disciplined approach,
including quality control.
Further, the external auditor shall not use the work of the internal audit function if the external
auditor determines that:
(a) The function’s organizational status and relevant policies and procedures do not
adequately support the objectivity of internal auditors;
(b) The function lacks sufficient competence; or
(c) The function does not apply a systematic and disciplined approach, including quality
control.
In the instant case, CA. Kishor should ascertain the internal auditor’s scope of verificat ion,
area of coverage and method of verification. He should review the report on physical
verification taking into consideration these factors. If possible he should also test check few
items and he can also observe the procedures performed by the internal auditors.
If the statutory auditor is satisfied about the appropriateness of the verification, he can rely
on the report but if he finds that the verification is not in order, he has to decide otherwise.
The final responsibility to express opinion on the financial statement remains with the statutory
auditor.
(c) SEBI’s check list for auditors in respect of contract notes issued by a Stock Broker: The
auditor should apply appropriate audit procedures to satisfy himself that -
 Contract notes have been serially numbered.
 No serial number has been left blank.
 Format of the Contract Note is as prescribed by the Regulations of the Exchange.
 Duplicate copies / counterfoils of contract notes are maintained.
 Brokerage charged in contract notes is within the permissible limits and is indicated separately
including service tax.
 Contract notes have been signed by an authorised person.
 Contract notes have been issued in respect of all transactions.
 Transaction Identification, Trade Identification and Trade Execution time has been printed on the
contract note issued.
 SEBI Registration number, Settlement number, Settlement dates have been mentioned.
 PAN number of the member and client has been mentioned on Contract Note where if required.
 All clauses specified by the Exchange have been printed on the reverse of the contract notes.

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 (d) Adverse or Qualified Statement: Depending upon the facts and circumstances, some situations
may require an adverse or qualified statement or a disclosure without necessarily making it a
subject matter of qualification in the Auditors’ Certificate, in respect of compliance of requirements
of corporate governance for e.g.,
(i) The number of non-executive directors is less than 50% of the strength of Board of directors.
(ii) A qualified and independent audit committee is not set up.
(iii) The Chairman of the audit committee is not an independent director.
(iv) The Audit Committee does not meet four times a year.
(v) The necessary powers in terms of Part C of Schedule II have not been vested by the Board
in the Audit Committee.
(vi) The time gap between two Board meetings is more than one hundred and twenty days.
(vii) A director is a member of more than ten committees or acts as Chairman of more than five
committees across all companies in which he is a director.
(viii) The information of quarterly results is neither put on the listed entity’s website nor sent in a
form so as to enable the stock exchange on which the entity’s securities are listed to enable
such stock exchange to put it on its own website.
(ix) The power of share transfer is not delegated to an officer or a committee or to the registrar
and share transfer agents.
(e) Important Points to be kept in Mind While Drafting Letter of Weakness: As per SA 265,
“Communicating Deficiencies in Internal Control to Those who Charged with Governance and
Management”, the auditor shall include in the written communication of significant deficiencies in
internal control -
(i) A description of the deficiencies and an explanation of their potential effects; and
(ii) Sufficient information to enable those charged with governance and management to
understand the context of the communication.
In other words, the auditor should communicate material weaknesses to the management or the
audit committee, if any, on a timely basis. This communication should be, preferably, in writing
through a letter of weakness or management letter. Important points with regard to such a letter
are as follows-
(1) The letter lists down the area of weaknesses in the system and offers suggestions for
improvement.
(2) It should clearly indicate that it discusses only weaknesses which have come to the attention
of the auditor as a result of his audit and that his examination has not been designed to
determine the adequacy of internal control for management.
(3) This letter serves as a valuable reference document for management for the purpose of
revising the system and insisting on its strict implementation.
(4) The letter may also serve to minimize legal liability in the event of a major defalcation or other
loss resulting from a weakness in internal control.
6. (a) As per SA 402 on “Audit Considerations Relating to an Entity Using a Service Organisation”,
when obtaining an understanding of the user entity in accordance with SA 315 “Identifying and
Assessing the Risks of Material Misstatement through Understanding the Entity and its
Environment”, the user auditor shall obtain an understanding of how a user entity uses the services
of a service organisation in the user entity’s operations, including:
(i) The nature of the services provided by the service organisation and the significance of those
services to the user entity, including the effect thereof on the user entity’s internal control;
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 (ii) The nature and materiality of the transactions processed or accounts or financial reporting
processes affected by the service organisation;
(iii) The degree of interaction between the activities of the service organisation and those of the
user entity; and
(iv) The nature of the relationship between the user entity and the service organisation, including
the relevant contractual terms for the activities undertaken by the service organisation .
(b) Under section 35 of the Companies Act, 2013 -
(1) Where a person has subscribed for securities of a company acting on any statement
included, or the inclusion or omission of any matter, in the prospectus which is misleading and has
sustained any loss or damage as a consequence thereof, the company and every person who—
(a) is a director of the company at the time of the issue of the prospectus;
(b) has authorized himself to be named and is named in the prospectus as a director of the
company, or has agreed to become such director, either immediately or after an interval
of time;
(c) is a promoter of the company;
(d) has authorised the issue of the prospectus; and
(e) is an expert referred to in sub-section (5) of section 26,
shall, without prejudice to any punishment to which any person may be liable under section
36, be liable to pay compensation to every person who has sustained such loss or damage.
(2) No person shall be liable under sub-section (1), if he proves—
(a) that, having consented to become a director of the company, he withdrew his consent
before the issue of the prospectus, and that it was issued without his authority or
consent, or
(b) that the prospectus was issued without his knowledge or consent, and that on becoming
aware of its issue, he forthwith gave a reasonable public notice that it was issued without
his knowledge or consent.
(3) Notwithstanding anything contained in this section, where it is proved that a prospectus has
been issued with intent to defraud the applicants for the securities of a company or any other
person or for any fraudulent purpose, every person referred to in subsection (1) shall be
personally responsible, without any limitation of liability, for all or any of the losses or damages
that may have been incurred by any person who subscribed to the securities on the basis of
such prospectus.
Under section 448, an auditor is liable for criminal prosecution, if he, in any return, certificate,
balance sheet, prospectus, statement or other document required by or for the purpose of the Act,
makes a statement (a) which is false in any material particular knowing it to be false; or (b) which
omits any material fact knowing it to be material. If convicted, he can be punished with
imprisonment and also with fine as provided under section 447 of the said Act.
(c) Audit evidence to be obtained for Reporting on Projected Financial Statements: The auditor
should document matters, which are important in providing evidence to support his report on
examination of prospective financial information, and evidence that such examination was carried
out.
The audit evidence in form of working papers will include:
(1) the sources of information,
(2) basis of forecasts,
(3) the assumptions made in arriving the forecasts,
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 (4) hypothetical assumptions, evidence supporting the assumptions,
(5) management representations regarding the intended use and distribution of the information,
completeness of material assumptions,
(6) management’s acceptance of its responsibility for the information,
(7) audit plan,
(8) the nature, timing and extent of examination procedures performed, and,
(9) in case the auditor expresses a modified opinion or withdraws from the engagement, the
reasons forming the basis of such decision.
(d) It is not a prudent practice to treat dividend on shares of corporate bodies and units of mutual funds
as income unless these are actually received. Accordingly, income from dividend on shares of
corporate bodies and units of mutual funds should be booked on cash basis. In respect of income
from government securities and bonds and debentures of corporate bodies, where interest rates
on these instruments are pre-determined, income could be booked on accrual basis, provided
interest is serviced regularly and as such is not in arrears. It was further, however, clarified that
banks may book income on accrual basis on securities of corporate bodies/public sector
undertakings in respect of which the payment of interest and repayment of principal have been
guaranteed by the central government or a State government. Banks may book income from
dividend on shares of corporate bodies on accrual basis, provided dividend on the shares has been
declared by the corporate body in its annual general meeting and the owner's right to receive
payment is established. This is also in accordance with AS 9 as well. In the instant case, therefore,
the recognition of income by the bank on accrual basis is not in order.
(e) Review in the Assessment of Independence of the Practicing Unit –The reviewer should carry
out the compliance review of the five general controls, i.e., independence, maintenance of
professional skills and standards, outside consultation, staff supervision and development and
office administration and evaluate the degree of reliance to be placed upon them. The degree of
reliance will, ultimately, affect the attestation service engagements to be reviewed.
A, a practicing Chartered Accountant should review following controls in respect of assessment of
independence of the practicing unit:
(i) Does the practice unit have a policy to ensure independence, objectivity and integrity, on the
part of partners and staff? Who is responsible for this policy?
(ii) Does the practice unit communicate these policies and the expected standards of professional
behaviour to all staff?
(iii) Does the practice unit monitor compliance with policies and procedures relat ing to
independence?
(iv) Does the practice unit periodically review the practice unit's association with clients to ensure
objectivity and independence?

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 Test Series: August, 2018
MOCK TEST PAPER - 1
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
Question No. 1 is compulsory.
Attempt any five questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100
1. (a) A firm of a father and a son is receiving Rs. 2 lakhs towards job work done for XYZ Ltd. during the
year ended on 31.03.16. The total job work charges paid by XYZ Ltd. during the year are over
Rs. 50 lakhs. The father is Managing Director of XYZ Ltd. having substantial holding. The Managing
Director told the auditor that since he is not involved in the activities of the firm and since the
amount paid to it is insignificant; there is no need to disclose the transaction. He further contended
that such a payment made in the last year was not disclosed. Advise whether Managing Director
is right in his approach.
(b) As an auditor of a company registered under section 8 of the Companies Act, 2013 you find that as
per the notification of the Ministry of Corporate Affairs regarding applicability of Indian Accounting
Standards (Ind-AS), the company has to prepare its financial statements for the year ended
31st March, 2018 under Ind-AS. The management of the company is however of the strong view that
being a section 8 company having charitable objects, Ind-AS cannot apply to the company. The
financial statements are therefore prepared by the management under the earlier GAAP and a note
for the same is given in the financial statements. How would you report on these financial statements?
(c) As an auditor of ABC Limited, in view of given circumstances, you are required to draft qualified
opinion and basis for qualified opinion due to the departure from the applicable Financial Reporting
Framework:
• Audit of a complete set of financial statements of an company other than a listed company
(registered under the Companies Act, 2013) using a fair presentation framework.
• The financial statements are prepared by management of the entity in accordance with the
Accounting Standards prescribed under section 133 of the Companies Act, 2013 (a general
purpose framework).
• The terms of the audit engagement reflect the description of management’s responsibility for
the financial statements in SA 210.
• A departure from the applicable financial reporting framework resulted in a qualified opinion.
• The relevant ethical requirements that apply to the audit are the ICAI’s Code of Ethics and
the provisions of the Companies Act, 2013.
• Based on the audit evidence obtained, the auditor has concluded that a material uncertainty
does not exist related to events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern in accordance with SA 570 (Revised).
• Between the date of the financial statements and the date of the auditor’s report, there was a
fire in the entity’s production facilities, which was disclosed by the entity as a subsequent
event. In the auditor’s judgment, the matter is of such importance that it is fundamental to
users’ understanding of the financial statements. The matter did not require significant auditor
attention in the audit of the financial statements in the current period.

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 • The auditor is not required, and has otherwise not decided, to communicate key audit matters
in accordance with SA 701.
• Those responsible for oversight of the financial statements differ from those responsible for
the preparation of the financial statements.
• In addition to the audit of the financial statements, the auditor has other reporting
responsibilities required under the Companies Act, 2013.
(d) During the course of audit of CT Ltd. for the financial year 2017-18, it is noticed that Rs. 3.00 lakhs
of employee contribution and Rs. 7.50 lakhs of employer contribution towards employee state
insurance contribution have been accounted in the books of accounts in respective heads. Whereas,
it was found that Rs. 5.00 lakhs only has been deposited with ESIC department during the year ended
31st March, 2018. The Finance Manager informed the auditor that due to financial crunch they have
not deposited the amount due, but will deposit the amount overdue along with interest as and when
financial position improves. Comment as a statutory auditor. (5 x 4 = 20 Marks)
2. (a) Lily, a chartered accountant prepares and certifies projected financial statements of his client
Amazon Ltd. Amazon Ltd. forwarded the same to their banks to secure some loans and bank, on
that basis sanctioned a loan. Comment with reference to the Chartered Accountants Act, 1949,
and Schedules thereto.
(b) Beam Ltd., having principal place of business in Gujarat, is engaged in the generation,
transmission, distribution and supply of electricity throughout the India. The management of the
company came to know that the provisions related to maintenance of cost records and cost audit
are applicable to the company. The company, therefore, appointed a cost auditor for the financial
year 2017-18.
The cost auditor reported certain disqualifications in Form CRA-3 of the cost audit report to which
the management of the company disagreed.
The management of Beam Ltd. ingeniously instructed its tax auditor not to reveal any of the
disqualifications related to the cost audit while filling particulars to be furnished in Form No. 3CD
contending that the disqualifications are not relevant and there is no correlation between tax audit
and cost audit as well.
As a tax auditor, how would you deal with the matter?
(c) Comment on the following with reference to Schedule III to the Companies Act, 2013:
(i) A company has disclosed performance guarantee and counter guarantees as Contingent
Liabilities.
(ii) A company has clubbed all other expenses under the head ‘Other Expenses” on the basis of
1 percent of total revenue or Rs.5,000 whichever is higher.
(iii) A company has shown Deferred Tax Liability under Non-Current Liabilities and Deferred tax
assets under Non-Current Asset in balance sheet.
(d) Mr. X was appointed as the auditor of M/s Easygo Ltd. and intends to apply the concept of
materiality for the financial statements as a whole. Please guide him as to the factors that may
affect the identification of an appropriate benchmark for this purpose. (5 x 4 = 20 Marks)

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3. (a) A practising Chartered Accountant uses a visiting card in which he designates himself, besides as
Chartered Accountant, as
(i) Tax Consultant
(ii) Cost Accountant.
Advise on above with reference to the Chartered Accountants Act, 1949, and Schedules thereto.
(b) PQR Ltd. is a listed company having turnover of Rs. 50 crores & plans expansion by installation of
new machines at new building-having total additional project cost of Rs. 20 crore.
Rupees (In crore) Purpose
10.0 - for Building
8.5 - for Machinery
1.5 - for Working Capital
20 Crore
Project gets implemented in 2017-18 and one of the accountants points out to Managing Director
that something wrong has happened in the purchase of building material.
On hearing this, the management is planning to appoint Forensic Auditor. Advise the Forensic
Auditor about the steps to be undertaken in case of forensic audit process.
(c) Z Ltd changed its employee remuneration policy from 1st of April 2017 to S provide for 12%
contribution to provident fund on leave encashment also. As per the leave encashment policy the
employees can either utilize or encash it. As at 31st March 18 the company obtained an actuarial
valuation for leave encashment liability. However, it did not provide for 12% PF contribution on it.
The auditor of the company wants it to be provided but the management replied that as and when
the employees availed leave encashment, the provident fund contribution was made. The
company further contends that this is the correct treatment as it is not sure whether the employees
will avail leave encashment or utilize it. Comment.
(d) You are appointed as an auditor of Najib Limited, a listed company which is a main supplier to the
USA building and construction market. With a turnover of Rs. 1.9 billion, the company operates
through 11 business units and has nearly 1,70 branches across the countries.
As an auditor, how will you draft the report in case (I) When the Component(s) Auditor Reports on
Financial Statements under an Accounting Framework Different than that of the Parent?(II) When
the Component(s) Auditor Reports under an Auditing Framework Different than that of the Parent?
(5 x 4 = 20 Marks)
4. (a) M/s LMN, a firm of Chartered Accountants responded to a tender from a State Government for
computerization of land revenue records. For this purpose, the firm also paid Rs. 50,000 as earnest
deposit as part of the terms of the tender. Comment with reference to the Chartered Accountants
Act, 1949.
(b) You have been appointed as the auditor of Good Health Ltd. for 2017-18 which was audited by CA
Trustworthy in 2016-17. As the Auditor of the company state the steps you would take to ensure
that the Closing Balances of 2016-17 have been brought to account in 2017-18 as Opening
Balances and the Opening Balances do not contain misstatements.
(c) While auditing Secure Insurance Ltd., you observed that the major proportion of expense of the
company is the remuneration/commission paid to its insurance agents. As the auditor of the
company, what audit procedure would you adopt for verification of such expense?

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 (d) In a controls-based audit, the audit approach can be classified into three broad phases comprising
of planning, execution, and completion. You are required to briefly explain the relevant
considerations of every phase in above audit approach in case of automated environment.
(e) “The C&AG may direct the appointed auditor the manner in which the accounts of the Government
company are required to be audited and thereupon the auditor so appointed shall submit a copy of
the audit report to the Comptroller and Auditor-General of India.” What are the relevant sections of
the Companies Act, 2013 and steps involved in auditor of Government Companies?
(4 x 5 = 20 Marks)
5. (a) Mr. M, a Chartered Accountant in practice, has printed visiting cards which besides other details
also carries a Quick Response (QR) code. The visiting card as well the QR code contains his name,
office and residential address, contact details, e-mail id and name of the firm's website. Comment
with reference to the Chartered Accountants Act, 1949 and schedules thereto.
(b) XYZ Hospital Private Ltd. is engaged in running a hospital of 200 Beds since last 20 years. Revenue
Track of the hospital for last 3 years is as under:
2015-16 - 20 Crores
2016-17 25 Crores
2017-18 35 Crores
Hospital has its own Pharmacy, Laboratory, Blood Bank, Radiology & General Stores. Its management
suspects that leakages/theft is happening in Pharmacy, Radiology, Laboratory and General Stores
departments. It seeks advice of RST & Co., Internal Auditors of the Company, as to how it can
Institute/Improve its Internal Control. In this context, Management wants to understand the concept of
components of Internal Control Structure in detail. Advise.
(c) ABC Ltd. is engaged in manufacturing of Yarns and Towels. It sells its product in both domestic as
well as in International Market. It has achieved turnover of 200 crores in the F.Y. 2016 -17. Directors
of the company realized that they are not managing the company professionally and thereby
request your firm of Internal Auditors for appraisal of its organizational structure to ascertain
whether it is in harmony with the objectives of ABC (P) Ltd. Comment.
(d) An environment audit may be conducted for many purposes for example, to comply with
environmental laws or as a social responsibility measure or to meet some certification
requirements. Though environmental auditing is conducted using pre-decided policies, procedures
and a proper documented system, there is always an element of subjectivity in audit. In view of
above, you are required to explain stages of environmental audit process.
(e) Every listed company shall constitute a qualified & Independent audit committee in accordance
with the terms of reference subject to a few conditions. Explain. (4 x 5 = 20 Marks)
6. (a) KG Ltd. wants to provide prospective Financial Information to its investors with information about
future expectations of the company. You are engaged by KG Ltd. to examine the Projected
Financial Information and give report thereon. What will you consider in assessing the presentation
and disclosure of the prospective Financial Information and the underlying assumptions?
(b) Mr. Ram, a Chartered Accountant has appeared before the Income Tax Authorities as the
authorized representative of his client and delivers to the Income Tax Authorities a false
declaration. Discuss briefly the liabilities of Mr. Ram under Income Tax Act, 1961 .
(c) The financial statements of AKY & Co. have been prepared by management of an entity in
accordance with the financial reporting provisions of a contract (that is, a special purpose
framework) to comply with provisions of the contract. Based on the contract, management does
not have a choice of financial reporting frameworks. As an auditor advise the considerations to be
taken care while planning and performing audit?

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 (d) M/s. S Ltd. is a MSME unit. The company does multiple banking. The company is availing cash
credit limit from U Bank of Rs. 25 crores. The limit availed remained less than Rs. 5.00 crores
during all the days of F.Y. 2017-18. The company has not done any credit in cash credit account
during the year as it is operating current account in newly opened another bank branch adjoining
to company premises. The company is having sufficient security of stocks and debtors and DP of
Rs.25.00 crores remains all over the year. The company is availing term loans from other bank
branches. Now the Bank Manager is insisting to route the sale proceeds through U Bank, otherwise
cash credit limit and term loan accounts with other banks will be treated as Non-Performing
Accounts. Now company seeks your opinion.
(e) Reviewers, based on the conclusions drawn from the review, shall issue a preliminary report and
subsequently the final report. A clean report indicates that the reviewer is of the opinion that the
affairs are being conducted in a manner that ensures the quality of services rendered. However, a
reviewer may qualify the report due to one or more reasons. In view of above Give example of
some of the situations when Reviewer of Quality Review Board may qualify the report.
(4 x 5 = 20 Marks)

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 Test Series: August, 2018
MOCK TEST PAPER - 1
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS
1. (a) Related Party Disclosures: As per definition given in the AS 18 “Related Party Disclosures”
parties are considered to be related if at any time during the reporting period one party has the
ability to control the other party or exercise significant influence over the other party in making
financial and/or operating decisions. Related party transaction means a transfer of resources or
obligations between related parties, regardless of whether or not a price is charged.
In the instant case, the managing director of XYZ Ltd. is a part ner in the firm with his son which
has been paid Rs. 2 lakhs as job work charges. The managing director is having a substantial
holding in XYZ Ltd. The case is squarely covered by AS 18. According to AS -18, in the case of
related party transactions, the reporting enterprise should disclose the following:
(i) the name of the transacting related party;
(ii) a description of the relationship between the parties;
(iii) a description of the nature of transactions;
(iv) volume of the transactions either as an amount or as an appropriate proportion;
(v) any other elements of the related party transactions necessary for an understanding of the
financial statements;
(vi) the amounts or appropriate proportions of outstanding items pertaining to related parties at
the balance sheet date and provisions for doubtful debts due from such parties at that date;
and
(vii) amounts written off or written back in the period in respect of debts due from or to related
parties.”
Further, SA 550 on “Related Parties”, also prescribes the auditor’s responsibilities and audit
procedures regarding related party transactions.
The approach of the managing director is not tenable under the law and accordingly all disclosure
requirements have to be complied with in accordance with the AS 18. Auditor should insist to make
proper disclosure as per the AS and if management refuses, the auditor shall have to modify his
report. Also it has to be seen whether section 184 of the Companies Act, 2013 regarding disclosure
of interest by director has been complied with. If it is not complied with, the auditor needs to modify
the report appropriately.
(b) Applicability of IND AS: Section 129(1) of the Companies Act, 2013, governs the requirements
to be satisfied by financial statements. The provisions thereunder which should be complied with
are:
• financial statements shall, give a true and fair view of the state of affairs of the company or
companies as at the end of financial year, comply with the notified accounting standards under
section 133 and be in such form or forms specified in Schedule III to the Companies Act, 2013
and
• the items contained in such financial statements shall be in accordance with the accounting
standards.

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 Further, as per section 133 of the Companies Act, 2013, the Central Government has notified
Companies (Indian Accounting Standards) Rules, 2015 dated 16.02.2015 in exercise of the powers
conferred by section 133. The said rules list the Indian Accounting Standards (Ind AS) and the
class of companies required to comply with the Ind AS while preparation of their financial
statements.
Here, it may be noted that the companies covered under Section 8 are required to comply the
provisions of the Companies Act, 2013, unless and until any exemption is provided. Therefo re,
companies registered under Section 8 are not exempted from the requirements of section 133 and
section 129 of the Companies Act, 2013.
In the given case, only contention of management that being a section 8 company having charitable
object, Ind-AS cannot apply to the company, therefore financial statements prepared under the
earlier GAAP and a note for the same is given, is not tenable.
However, the auditor is required to ensure the applicable monetary limits w.r.t Ind-AS and need
to advise the management to prepare the financial statements as per Ind-AS accordingly. In case
of non-compliance the auditor should report accordingly.
(c) Qualified Opinion
We have audited the standalone financial statements of ABC Limited (“the Company”), which
comprise the balance sheet as at March 31, 20X1, and the statement of Profit and Loss, (statement
of changes in equity) and the statement of cash flows for the year then ended, and notes to the
financial statements, including a summary of significant accounting policies and other explanatory
information (in which are included the Returns for the year ended on that date audited by the branch
auditors of the Company’s branches located at (location of branches))2.
In our opinion and to the best of our information and according to the explanations given to us,
except for the effects of the matter described in the Basis for Qualified Opinion section of our report,
the aforesaid financial statements present fairly, in all material respects, or give a true and fair view
in conformity with the accounting principles generally accepted in India of the state of affairs of the
Company as at March 31 st, 2XXX and profit/loss, (changes in equity) and its cash flows for the year
ended on that date.
Basis for Qualified Opinion
The Company’s short-term marketable securities are carried in the statement of financial position
at xxx. Management has not marked these securities to market but has instead stated them at cost,
which constitutes a departure from the Accounting Standards prescribed in section 133 of the
Companies Act, 2013. The Company’s records indicate that had management marked the
marketable securities to market, the Company would have recognized an unrealized loss of Rs.xxx
in the statement of comprehensive income for the year. The carrying amount of the securities in
the statement of financial position would have been reduced by the same amount at March 31,
20X1, and income tax, net income and shareholders’ equity would have been reduced by Rs.xxx,
Rs.xxx and Rs.xxx, respectively.
We conducted our audit in accordance with Standards on Auditing (SAs). Our responsibilities under
those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial
Statements section of our report. We are independent of the Company in accordance with the
ethical requirements that are relevant to our audit of the financial statements under the provisions
of the Companies Act, 2013, and we have fulfilled our other ethical responsibilities in accordance
with these requirements and the ICAI’s Code of Ethics. We believe that the audit evidence we have
obtained is sufficient and appropriate to provide a basis for our qualified opinion.
(d) Non-Compliance of Laws and Regulations & Reporting Requirements: As per SA 250
“Consideration of Laws and Regulations in an Audit of Financial Statement”, it is the responsibility
of management, with the oversight of those charged with governance, to ensure that the entity’s
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 operations are conducted in accordance with the provisions of laws and regulations, including
compliance with the provisions of laws and regulations that determine the reported amounts and
disclosures in an entity’s financial statements. The auditor is responsible for obtaining reasonable
assurance that the financial statements, taken as a whole, are free from material misstatement,
whether caused by fraud or error. In conducting an audit of financial statements, the auditor takes
into account the applicable legal and regulatory framework. If the auditor conc ludes that the non-
compliance has a material effect on the financial statements, and has not been adequately reflected
in the financial statements, the auditor shall express a qualified or adverse opinion on the financial
statements.
Further, the auditor is required to report under clause (vii)(a) of Para 3 of CARO, 2016 whether the
company is regular in depositing undisputed statutory dues including employees’ state insurance
with the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues
as at 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 by the auditor.
In the instant case, even though accrual principles have been followed, disclosure of non-payment
is necessary. The auditor should disclose the fact of non-payment of rupees 7.50 lakhs in his report.
2. (a) Certification of Projected Financial Forecast: Under Clause (3) of Part I of Second Schedule
to the Chartered Accountants Act, 1949, a chartered accountant in practice is deemed to be guilty
of professional misconduct if he permits his name or the name of his firm to be used in connection
with an estimate of earnings contingent upon future transactions in a manner which may lead to
the belief that he vouches for the accuracy of the forecast.
Further, SAE 3400 “The Examination of Prospective Financial Information”, provides that the
management is responsible for the preparation and presentation of the prospective financial
information, including the identification and disclosure of the sources of information, the basis of
forecasts and the underlying assumptions. The auditor may be asked to examine and report on the
prospective financial information to enhance its credibility, whether it is intended for use by third
parties or for internal purposes. Thus, while making report on projection, the auditor need to
mention that his responsibility is to examine the evidence supporting the assumptions and other
information in the prospective financial information, his responsibility does not include verification
of the accuracy of the projections, therefore, he does not vouch for the accuracy of the same.
In the instant case, Mr. Lily, a chartered accountant, has prepared and certified a projected
financial forecast of his client Amazon Ltd. which was forwarded to the client’s bank to secure some
loans and based on which the bank sanctioned a loan to the client is not in order.
Thus, Mr. Lily will be held guilty of misconduct in view of above.
(b) Reporting Requirement for Disqualifications in Cost Audit Report: A tax auditor is required to
ascertain under Clause (37) of Form 3CD whether cost audit was carried out and if yes, provide
the details of disqualification or disagreement on any matter/item/value/quantity as may be
reported/identified by the cost auditor.
The tax auditor should obtain the copy of cost audit from the assessee. Even though the tax auditor
is not required to make any detailed study of such report, he has to take note of the details of
disqualification or disagreement on any matter/item/value/quantity as may be reported/identified
by the cost auditor. The tax auditor need not express any opinion in a case where such audit has
been ordered but the same has not been carried out.
In the given case, the cost auditor of Beam Ltd. has reported certain disqualifications in Form
CRA-3 of the cost audit report.
Therefore, the tax auditor of Beam Ltd. is required to provide the details of disqualifications
reported by the cost auditor under Clause (37) of the Form 3CD. Thus, the contention of the

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 management of Beam Ltd. not to reveal any of the disqualifications related to the cost audit on the
belief that there is no correlation between tax audit and cost audit is not ac ceptable.
(c) (i) A contingent liability in respect of guarantees arises when a company issues guarantees to
another person on behalf of a third party e.g. when it undertakes to guarantee the loan given
to a subsidiary or to another company or gives a guarantee that another company will perform
its contractual obligations.
However, where a company undertakes to perform its own obligations, and for this purpose
issues, what is called a "guarantee", it does not represent a contingent liability and it is
misleading to show such items as contingent liabilities in the Balance sheet. For various
reasons, it is customary for guarantees to be issued by Bankers e.g. for payment of insurance
premia, deferred payments to foreign suppliers, letters of credit, etc. For this purpose, the
company issues a "counter-guarantee" to its Bankers. Such "counter-guarantee" is not really
a guarantee at all, but is an undertaking to perform what is in any event the obligation of the
company, namely, to pay the insurance premia when demanded or to make deferred
payments when due. Hence, such performance guarantees and counter-guarantees should
not be disclosed as contingent liabilities.
(ii) All other expenses not classified under other heads will be classified under "Other Expens es".
For this purpose, any item of expenditure which exceeds one percent of the revenue from
operations or Rs. 1,00,000 whichever is higher, needs to be disclosed separately. The given
treatment in the scenario is not in order.
(iii) Deferred Tax Liability should be shown under Non-Current Liabilities. Deferred Tax Asset
shall be shown under Non-Current Asset. But Deferred tax assets and deferred tax liabilities,
both, cannot be shown in balance sheet because only the net balance of Deferred Tax Liability
or Asset is to be shown. Thus, DTA and DTL shown separately in the balance sheet by the
company is not correct.
(d) SA 320 “Materiality in Planning and Performing an Audit” prescribes the use of Benchmarks
in Determining Materiality for the Financial Statements as a Whole.
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:
(i) The elements of the financial statements (for example, assets, liabilities, equity, revenue,
expenses);
(ii) Whether there are items on which the attention of the users of the partic ular 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);
(iii) 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;
(iv) 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 clai ms on
them, than on the entity’s earnings); and
(v) The relative volatility of the benchmark.
3. (a) (i) Tax Consultant: Section 7 of the Chartered Accountants Act, 1949 read with Clause (7) of
Part I of the First Schedule to the said Act prohibits advertising of professional attainments or
services of a member. It also restrains a member from using any designation or expression
other than that of a chartered accountant in documents through which the professional
attainments of the member would come to the notice of the public. Under the clause, use of
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 any designation or expression other than chartered accountant for a chartered accountant in
practice, on professional documents, visiting cards, etc. amounts to a misconduct unless it be
a degree of a university or a title indicating membership of any other professional body
recognised by the Central Government or the Council. Thus, it is improper to use designation
"Tax Consultant" since neither it is a degree of a University established by law in India or
recognised by the Central Government nor it is a recognised professional membership by the
Central Government or the Council.
(ii) Cost Accountant: As stated in the preceding paragraph, this would also constitute
misconduct under section 7 of the Act read with Clause (7) of Part I of the First Schedule to
the Chartered Accountants Act, 1949. A chartered accountant in practice cannot use any other
designation than that of a chartered accountant. Nevertheless, a member in practice may use
any other letters or descriptions indicating membership of accountancy bodies which have
been approved by the Council. Thus, it is improper for a chartered accountant to state in his
documents that he is a “Cost Accountant”. However as per the Chartered Accountants Act,
1949, the Council has resolved that the members are permitted to use letters indicating
membership of the Institute of Cost and Works Accountants but not the designation "Cost
Accountant".
(b) Each Forensic Accounting assignment is unique. Accordingly, the actual approach adopted and
the procedures performed will be specific to it. However, in general, many Forensic Accounting
assignments will include the steps detailed below.
Step 1. Initialization
It is vital to clarify and remove all doubts as to the real motive, purpose and utility of the assignment.
It is helpful to meet the client to obtain an understanding of the important facts, players and issues
at hand. A conflict check should be carried out as soon as the relevant parties are established. It
is often useful to carry out a preliminary investigation prior to the development of a detailed plan of
action. This will allow subsequent planning to be based upon a more complete understanding of
the issues.
Step 2. Develop Plan
This plan will take into account the knowledge gained by meeting with the client and carrying out
the initial investigation and will set out the objectives to be achieved and the methodology to be
utilized to accomplish them.
Step 3. Obtain Relevant Evidence
Depending on the nature of the case, this may involve locating documents, economic information,
assets, a person or company, another expert or proof of the occurrence of an event. In order to
gather detailed evidence, the investigator must understand the specific type of fraud that has been
carried out, and how the fraud has been committed. The evidence should be sufficient to ultimately
prove the identity of the fraudster(s), the mechanics of the fraud scheme, an d the amount of
financial loss suffered. It is important that the investigating team is skilled in collecting evidence
that can be used in a court case, and in keeping a clear chain of custody until the evidence is
presented in court. If any evidence is inconclusive or there are gaps in the chain of custody, then
the evidence may be challenged in court, or even become inadmissible. Investigators must be alert
to documents being falsified, damaged or destroyed by the suspect(s).
Step 4. Perform the analysis
The actual analysis performed will be dependent upon the nature of the assignment and may
involve:
• calculating economic damages;
• summarizing a large number of transactions;
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 • performing a tracing of assets;
• performing present value calculations utilizing appropriate discount rates;
• performing a regression or sensitivity analysis;
• utilizing a computerized application such as a spread sheet, data base or computer model; and
• utilizing charts and graphics to explain the analysis.
Step 5. Reporting
Issuing an audit report is the final step of a fraud audit. Auditors will include information detailing
the fraudulent activity, if any has been found. The client will expect a report containing the findings
of the investigation, including a summary of evidence and a conclusion as to the amount of loss
suffered as a result of the fraud. The report may include sections on the nature of the assignment,
scope of the investigation, approach utilized, limitations of scope and findings and/or opinions. The
report will include schedules and graphics necessary to properly support and explain the findings.
The report will also discuss how the fraudster set up the fraud scheme, and which controls, if any,
were circumvented. It is also likely that the investigative team will recommend improvements to
controls within the organization to prevent any similar frauds occurring in the future.
The forensic auditor should have active listening skills which will enable him to summarize the facts
in the report. It should be kept in mind that the report should be based on the facts assimilated
during the process and not on the opinion of the person writing the report.
Step 6. Court proceedings
The investigation is likely to lead to legal proceedings against the suspect, and members of the
investigative team will probably be involved in any resultant court case. The evidence gathered
during the investigation will need to be presented at court, and team members may be called to
court to describe the evidence they have gathered and to explain how the suspect was identified.
(c) As per Para 11 of AS-15 on “Employee Benefits”, issued by the Institute of Chartered Accountants
of India, an enterprise should recognize the expected cost of short-term employee benefits in the
form of compensated absences in the case of accumulating compensated absences, when the
employees render service that increases their entitlement to future compensated absences.
Since the company obtained actuarial valuation for leave encashment, it is obvious that the
compensated absences are accumulating in nature. An enterprise should measure the expected
cost of accumulating compensated absences as the additional amount that the enterprise expects
to pay as a result of the unused entitlement that has accumulated at the balance sheet date.
Here, Z Ltd will accumulate the amount of leave encashment benefits as it is the liability of the
company to provide 12% PF on amount of leave encashment. Hence the contention of the auditor
is correct that full provision should be provided by the company.
(d) (I) When the Component(s) Auditor Reports on Financial Statements under an Accounting
Framework Different than that of the Parent: The parent may have components located in
multiple geographies outside India applying an accounting framework (GAAP) that is different
than that of the parent in preparing its financial statements. Foreign components prepare
financial statements under different financial reporting frameworks, which may be a well -
known framework (such as US GAAP or IFRS) or the local GAAP of the jurisdiction of the
component. Local component auditors may be unable to report on financial statements
prepared using the parent’s GAAP because of their unfamiliarity with such GAAP.
When a component’s financial statements are prepared under an accounting framework that
is different than that of the framework used by the parent in preparing group’s consolidated
financial statements, the parent’s management perform a conversion of the components’

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 audited financial statements from the framework used by the component to the framework
under which the consolidated financial statements are prepared. The conversion adjustments
are audited by the principal auditor to ensure that the financial information of the component(s)
is suitable and appropriate for the purposes of consolidation.
A component may alternatively prepare financial statements on the basis of the parent’s
accounting policies, as outlined in the group accounting manual, to facilitate the preparation
of the group’s consolidated financial statements. The group accounting manual would
normally contain all accounting policies, including relevant disclosure requirements, which are
consistent with the requirements of the financial reporting framework under which the gr oup’s
consolidated financial statements are prepared. The local component auditor can then audit
and issue an audit report on the components financial statements prepared in accordance
with “group accounting policies”.
When applying the approach of using group accounting policies as the financial accounting
framework for components to report under, the principal/parent auditors should perform
procedures necessary to determine compliance of the group accounting policies with the
GAAP applicable to the parent’s financial statements. This ensures that the information
prepared under the requirements of the group accounting policies will be directly usable and
relevant for the preparation of consolidated financial statements by the parent entity,
eliminating the need for auditing by the auditor, the differences between the basis used for
the component’s financial statements and that of the consolidated financial statements. The
Principal auditor can then decide whether or not to rely on the components’ audit rep ort and
make reference to it in the auditor’s report on the consolidated financial statements.
(II) When the Component(s) Auditor Reports under an Auditing Framework Different than
that of the Parent: Normally, audits of financial statements, including consolidated financial
statements, are performed under auditing standards generally accepted in India (“Indian
GAAS”). In order to maintain consistency of the auditing framework and to enable the parent
auditor to rely and refer to the other auditor’s audit report in their audit report on the
consolidated financial statements, the components’ financial statements should also be
audited under a framework that corresponds to Indian GAAS.
4. (a) Responding to Tenders: Clause (6) of Part I of the First Schedule to the Chartered Accountants
Act, 1949 lays down guidelines for responding to tenders, etc. As per the guidelines if a matter
relates to any services other than audit, members can respond to any tender. Further, in respect
of a non-exclusive area, members are permitted to pay reasonable amount towards earnest
money/security deposits.
In the instance case, since computerization of land revenue records does not fall within exclusive
areas for chartered accountants, M/s LMN can respond to tender as well as d eposit Rs. 50,000 as
earnest deposit and shall not have committed any professional misconduct.
(b) As per SA 510 “Initial Audit Engagements—Opening Balances”, in conducting an initial audit
engagement, the objective of the auditor with respect to opening b alances is to obtain sufficient
appropriate audit evidence about whether:
(i) Opening balances contain misstatements that materially affect the current period’s financial
statements; and
(ii) 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.
Being new assignment audit evidence regarding opening balances can be obtained by perusing
the copies of the audited financial statements.

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 For current assets and liabilities some audit evidence can ordinarily be obtained as part of audit
procedures during the current period. For example, the collection/payment of opening balances of
receivables and payables will provide audit evidence as to their existence, rights and obligations,
completeness and valuation at the beginning of the period.
In respect of other assets and liabilities such as fixed assets, investments long term debt, the
auditor will examine the records relating to opening balances. The auditor may also be able to get
confirmation from third parties (e.g., balances of long term loan obtained from banks).
(c) Audit Procedure: The auditor should, inter alia, do the following for verification of commission:
• Ensure that commission/brokerage is not paid in excess of the limits specified by IRDAI
• Ensure that commission/brokerage is paid as per rates with the agent and rates filed with
IRDAI
• Ensure that commission/brokerage is paid to the agent/broker who has solicited the business
• Ensure that the agent/broker is not blacklisted by IRDAI and is not terminated for fraud etc.
• Vouch disbursement entries with reference to the disbursement vouchers with copies of
commission bills and commission statements.
• Check whether the vouchers are authorised by the officers-in–charge as per rules in force
and income tax is deducted at source, as applicable.
• Test check correctness of amounts of commission allowed.
• Scrutinise agents’ ledger and the balances, examine accounts having debit balances, if any,
and obtain information on the same. Necessary rectification of accounts and other remedial
actions have to be considered.
• Check whether commission outgo for the period under audit been duly accounted.
(d) In a controls-based audit, the audit approach can be classified into three broad phases comprising
of planning, execution, and completion. In this approach, the considerations of automated
environment will be relevant at every phase as given below:
I. Risk Assessment Process
• Identify significant accounts and disclosures.
• Qualitative and Quantitative considerations.
• Relevant Financial Statement Assertions (FSA).
• Identify likely sources of misstatement.
• Consider risk arising from use of IT systems.
II. Understand and Evaluate
• Document understanding of business processes using Flowcharts / Narratives.
• Prepare Risk and Control Matrices (RCM).
• Understand design of controls by performing walkthrough of end-to-end process.
• Process wide considerations for Entity Level Controls, Segregation of Duties.
• IT General Controls, Application Controls.
III. Test for Operating Effectiveness
• Assess Nature, Timing and Extent (NTE) of controls testing.
• Assess reliability of source data; completeness of population.

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 • Testing of key reports and spreadsheets.
• Sample testing.
• Consider competence and independence of staff /team performing controls testing.
IV. Reporting
• Evaluate Control Deficiencies.
• Significant deficiencies, Material weaknesses.
• Remediation of control weaknesses.
• Internal Controls Memo (ICM) or Management Letter.
• Auditor’s report.
(e) Relevant Sections and Steps involved in Audit of Government Companies: Section 143(5),
143(6) and 143(7) of the Companies Act, 2013 are relevant sections in case of Audit of Government
Companies.
The following steps are involved in the audit of government companies:
(i) Appointment of Auditors under Section 139(5) and 139(7) read with section 143(5) of
the Companies Act, 2013 - Statutory auditors of Government Company are appointed or re-
appointed by the Comptroller and Auditor General of India.
The C&AG may direct the appointed auditor the manner in which the accounts of the
Government company are required to be audited and thereupon the auditor so appointed shall
submit a copy of the audit report to the Comptroller and Auditor-General of India which, among
other things, include the directions, if any, issued by the Comptroller and A uditor-General of
India, the action taken thereon and its impact on the accounts and financial statement of the
company.
(ii) Supplementary audit under section 143(6)(a) of the Companies Act, 2013 - The
Comptroller and Auditor-General of India shall within 60 days from the date of receipt of the
audit report have a right to conduct a supplementary audit of the financial statement of the
company by such person or persons as he may authorize in this behalf; and for the purposes
of such audit, require information or additional information to be furnished to any person or
persons, so authorised, on such matters, by such person or persons, and in such form, as the
Comptroller and Auditor-General of India may direct.
(iii) Comment upon or supplement such Audit Report under section 143(6)(b) of the
Companies Act, 2013 - Any comments given by the Comptroller and Auditor-General of India
upon, or supplement to, the audit report shall be sent by the company to every person entitled
to copies of audited financial statements under sub-section (1) of section 136 of the said Act
i.e. every member of the company, to every trustee for the debenture-holder of any
debentures issued by the company, and to all persons other than such member or trustee,
being the person so entitled and also be placed before the annual general meeting of the
company at the same time and in the same manner as the audit report.
(iv) Test audit under section 143(7) of the Companies Act, 2013 - Without prejudice to the
provisions relating to audit and auditor, the Comptroller and Auditor- General of India may, in
case of any company covered under sub-section (5) or sub-section (7) of section 139 of the
said Act, if he considers necessary, by an order, cause test audit to be conducted of the
accounts of such company and the provisions of the Comptroller and Auditor-General's
(Duties, Powers and Conditions of Service) Act, 1971, shall apply to the report of such test
audit.

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5. (a) Printing of QR Code on Visiting Cards: As per Clause (7) of Part I of First Schedule to the
Chartered Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of
professional misconduct if he advertises his professional attainments or services.
Ethical Standards Board has also clarified that a member in practice is allowed to print Quick
Response Code (QR Code) on the visiting Card, provided that the Code does not contain
information that is not otherwise permissible to be printed on a visiting Card.
In the given case, Mr. M has printed visiting cards which carries Quick Response Code (QR Code)
besides other details. The visiting card as well as the QR Code contains his name, office and
residential address, contact details, e-mail id and name of the firm’s website which are otherwise
allowed to be printed on the visiting cards of a Chartered Accountant in practice.
Thus, Mr. M is not guilty under Clause (7) of Part I of First Schedule to the Chartered Accountants
Act, 1949.
(b) The Internal Control structure in an organization is referred to as the policies and procedures
established by the entity to provide reasonable assurance that the objectives are achieved. The
control structure in an organization basically has the following components:
1. Control Environment - Control environment covers the effect of various factors like
management attitude; awareness and actions for establishing, enhancing or mitigating the
effectiveness of specific policies and procedures.
2. Accounting System - Accounting system means the series of task and records of an entity
by which transactions are processed for maintaining financial records. Such system identifies,
assemble, analyze, calculate, classify, record, summarize and report transactions and other
events.
3. Control Procedure - Policies and procedures means those policies and procedures in
addition to the control environment and accounting systems which the management has
established to achieve the entity’s specific objectives.
In this regard, the management is responsible for maintaining an adequate accounting system
incorporating various internal controls to the extent that they are appropriate to the size and nature
of the business. There should be reasonable assurance for the auditor that the accounting system
is adequate and that all the accounting information required to be recorded has in fact been
recorded.
Internal controls normally contribute to such assurance. The auditor should gain an understanding
of the accounting system and related internal controls and should study and evaluate the operation
of those internal controls upon which he wishes to rely in determining the nature, timing and extent
of other audit procedures. Where the auditor concludes that he can rely on certain internal controls,
he could reduce his substantive procedures which otherwise may be required and may also differ
as to the nature and timing.
Specific Requirement under SA 315 - “Identifying and Assessing the Risks of Material
Misstatement through Understanding the Entity and its Environment” deals with the auditor’s
responsibility to identify and assess the risks of material misstatement in the financial statements,
through understanding the entity and its environment, including the entity’s internal control.
(c) Review of the Organisation Structure - The internal auditor should conduct an appraisal of the
organisation structure to ascertain whether it is in harmony with the objectives of the enterprise
and whether the assignment of responsibilities is in consonance therewith. For this purpose:
➢ He should review the manner in which the activities of the enterprise are grouped for
managerial control. It is also important to review whether responsibility and authority are in
harmony with the grouping pattern.

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 ➢ The internal auditor should examine the organisation chart to find out whether the structure
is simple and economical and that no function enjoys an undue dominance over the others.
➢ He should particularly see that the responsibilities of managerial staff at headquarters do not
overlap with those of chief executives at operating units. He should examine whether there is
a satisfactory balance between authority and responsibility of important executives.
➢ The internal auditor should examine the reasonableness of the span of control of each
executive (the number of sub-ordinates that an executive controls). He should examine
whether there is a unity of command i.e., whether each person reports only to one superior.
➢ Where dual responsibilities cannot be avoided, the primary one should be specified and the
specific responsibility to each senior fixed. This must be made known to all concerned.
➢ Finally, he should evaluate the process of managerial development in the enterprise. This is
a vital aspect in a fast growing enterprise.
(d) Stage 1- Pre-audit or Planning Stage:
Audit planning is vital to the success of the audit undertaken. During this stage of audit, generally
following steps are taken:
Collect background information about the entity
(ii) Define objectives of audit
(iii) Define scope –
(iv) Choose audit criteria
(v) Select the audit team members
(vi) Develop audit plan and protocols
(vii) Inform the facility
(viii) Desktop review.
Stage 2 - On-site or Field Audit
The following are steps involved in on-site or field audit:
(i) Opening conference.
(ii) Facility tour
(iii) Site/ facility inspection
(iv) Evidence
(v) Records/ document review
(vi) Staff interviews
(vii) Initial review of findings
(viii) Closing/ exit conference.
Stage 3- Post – Audit
Steps involved in post – audit are as follows:
Final evaluation of findings
(ii) Draft preliminary audit report
(iii) Get approval of the management
(iv) Hold exit conference
(v) Discuss recommendations, if any
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 (vi) Prepare and submit final report.
Stage 4.: Follow up or Review Stage :
This is also called corrective action follow-up phase. While not technically part of the audit, the
audit manager or team leader may be involved in developing a corrective action plan for addressing
audit findings with the facility and reporting to senior management as to the progress of this plan.
(e) Every listed entity shall constitute a qualified and independent audit committee in
accordance with the terms of reference, subject to the following:
1. The Audit Committee shall have minimum three directors as members. Two-thirds of the
members of audit committee shall be independent directors.
2. All members of Audit Committee shall be financially literate and at least one member shall
have accounting or related financial management expertise.
Explanation (i): The term “financially literate” means the ability to read and understand basic
financial statements i.e. balance sheet, profit and loss account, and statement of cash flows.
Explanation (ii): A member will be considered to have accounting or related financial
management expertise if he or she possesses experience in finance or accounting, or
requisite professional certification in accounting, or any other comparable experience or
background which results in the individual’s financial sophistication, including being or having
been a chief executive officer, chief financial officer or other senior officer with financial
oversight responsibilities.
3. The Chairperson of the Audit Committee shall be an independent director and he shall be
present at Annual General Meeting to answer shareholder queries.
4. The Company Secretary shall act as the secretary to the committee.
5. The Audit Committee at its discretion shall invite the finance director or the head of the finance
function, head of internal audit and a representative of the statutory auditor and any other
such executives to be present at the meetings of the committee, provided that occasionally,
the Audit Committee may meet without the presence of any executives of the listed entity.
6. (a) Consideration for Assessing Presentation and Disclosure of Prospective Financial
Information and Underlying Assumptions: As per SAE 3400 “The Examination of Prospective
Financial Information”, when assessing the presentation and disclosure of the prospective financial
information and the underlying assumptions, in addition to the specific requirements of any relevant
statutes, regulations as well as the relevant professional pronouncements, the auditor wil l need to
consider whether-
(i) the presentation of prospective financial information is informative and not misleading;
(ii) the accounting policies are clearly disclosed in the notes to the prospective financial
information;
(iii) the assumptions are adequately disclosed in the notes to the prospective financial
information. It needs to be clear whether assumptions represent management’s best -
estimates or are hypothetical and, when assumptions are made in areas that are material and
are subject to a high degree of uncertainty, this uncertainty and the resulting sensitivity of
results needs to be adequately disclosed;
(iv) the date as of which the prospective financial information was prepared is disclosed.
Management needs to confirm that the assumptions are appropriate as of this date, even
though the underlying information may have been accumulated over a period of time;
(v) the basis of establishing points in a range is clearly indicated and the range is not selected in
a biased or misleading manner when results shown in the prospective financial information

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 are expressed in terms of a range; and
(vi) there is any change in the accounting policy of the entity from that disclosed in the most recent
historical financial statements and whether reason for the change and the effect of such
change on the prospective financial information has been adequately disclosed.
(b) False Declaration as Authorized Representative: In connection with proceedings under the
Income Tax Act 1961, a Chartered Accountant often acts as the authorised representative of his
clients and attends before an Income Tax Authority or the appellate tribunal.
Any person who acts or induces, in any manner another person to make and deliver to the Income
Tax Authorities a false account, statement, or declaration, relating to any income chargeable to tax
which he knows to be false or does not believe to be true will be liable under section 278 of the
Income Tax Act 1961. Further, in case of submission of any information which is false and which
the Chartered Accountant either knows or believes to be false or untrue, he would be liable to
rigorous imprisonment which may extend to seven years (in other cases two years) and/o r to a
fine.
In the instant case, Mr. Ram, a chartered accountant has appeared before the Income Tax
Authorities as the authorized representative of his client and delivered a false declaration, thus, he
would be liable under section 278 of the Income Tax Act, 1961.
(c) Considerations for Planning and Performing Audit in case of Special Purpose Framework:
As per SA 800 “Special Considerations-Audits of Financial Statements Prepared in accordance
with Special Purpose Frameworks”, financial statements prepared in accordance with a special
purpose framework may be the only financial statements an entity prepares. In such
circumstances, those financial statements may be used by users other than those for whom the
financial reporting framework is designed.
While planning and performing audit of such special purpose framework based company, the
auditor should consider below mentioned factors:
(i) To obtain an understanding of the entity’s selection and application of accounting policies. In
the case of financial statements prepared in accordance with the provisions of a contract, the
auditor shall obtain an understanding of any significant interpretations of the contract that
management made in the preparation of those financial statements.
(ii) Compliance of all SAs relevant to audit, the auditor may judge it necessary to depart from a
relevant requirement in an SA by performing alternative audit procedures to achieve the aim of
that requirement.
(iii) Application of some of the requirements of the SAs in an audit of special purpose financial
statements may require special consideration by the auditor. For example, in SA 320, judgments
about matters that are material to users of the financial statements are based on a
consideration of the common financial information needs of users as a group. In the case of
an audit of special purpose financial statements, however, those judgments are based on a
consideration of the financial information needs of the intended users.
(iv) In the case of special purpose financial statements, such as those prepared in accordance
with the requirements of a contract, management may agree with the intended users on a
threshold below which misstatements identified during the audit will not be cor rected or
otherwise adjusted. The existence of such a threshold does not relieve the auditor from the
requirement to determine materiality in accordance with SA 320 for purposes of planning and
performing the audit of the special purpose financial statements.
(v) Communication with those charged with governance in accordance with SAs is based on the
relationship between those charged with governance and the financial statements subject to
audit, in particular, whether those charged with governance are responsible for overseeing

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 the preparation of those financial statements. In the case of special purpose financial
statements, those charged with governance may not have such a responsibility.
(d) Classification of Account as NPA in case of Multiple Banking: If the account remains overdue
for more than 90 days, the account becomes Non-Performing Assets. The account will also be
called as overdue, if there are not sufficient credits in the cash credit account which even could not
serve the interest charged. In this case, there are no credits in accounts, it means interest has not
been served in the account. Thus, accounts become overdue after 90 days for non -credit of
amounts which could even serve the interest amount. Thus, cash credits will become as NPA if no
credits/sale proceeds are deposited in that account.
However, in multiple banking system, each bank is independent for classification of account as
NPA. If SBI declares the account as NPA due to non-serving of interest amount, other bank will be
free and will not classify the term loan accounts as NPA, if they are regular.
(e) Reviewers, based on the conclusions drawn from the review, shall issue a preliminary report and
subsequently the final report. A clean report indicates that the reviewer is of the o pinion that the
affairs are being conducted in a manner that ensures the quality of services rendered. However, a
reviewer may qualify the report due to one or more of the following:
 non-compliance with technical standards;
 non-compliance with relevant laws and regulations;
 quality control system design deficiency;
 non-compliance with quality control policies and procedures; or
 non-existence of adequate training programmes for staff.

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 Test Series: March, 2019
MOCK TEST PAPER -1
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
All MCQs are compulsory
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100
DIVISION A – MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. One of your team members has recently qualified as a chartered accountant and joined your team to
audit a portfolio of audit clients who are private companies. One of the clients Surrey Pvt. Ltd. is a hotel
in the small town near Jaipur. The revenue generated for the current year ended is Rs.10.5 crores and
the entity is not a holding or subsidiary of any public company. The owner of the business Mr. Hazelwood
runs this family business from last 10 years. Your team member is keen to know whether Surrey Pvt .
Ltd is required to comment on the matter prescribed under CARO 2016. Which of your explanations to
him are correct?
(a) The entity’s revenue exceeds Rs.10 crores. Hence, no need to comment on the matter prescribed under
CARO 2016.
(b) The entity is not a holding or subsidiary of any public company, hence no need to comment on the
matter prescribed under CARO 2016.
(c) The entity’s revenue for the year is Rs.10.5 cr which exceed the limit of Rs.10 cr. Hence, the entity has
to provide the comment on the matter prescribed under CARO 2016.
(d) The entity is not a holding or subsidiary of any public company, hence there is a need to comment on
the matter prescribed under CARO 2016.
2. Prakash Limited has around 25 branch offices and all the branch offices were on company’s own land
and building. Company has the Policy that all the original title deeds for land and building owned by the
company will be kept in the custody of authorised official at company’s head office and a certified copy
of the same is kept with the respective branch for verification. You have been appointed as the internal
auditor for the branches of the company and during the course of audit you observed that the orig inal
title deeds of some of the branch office are kept in the branch under the custody of branch officials itself.
What action will you take in such case?
(a) It is not a material discrepancy, so the auditor is not required to take any action in such case.
(b) The auditor should inform the internal auditor of the Head Office for the compliance of the same.
(c) The auditor should ask the branch office/official to send original title deed to the authorised official
at Head Office of the company immediately and submit the Internal Audit Report once the
confirmation received from Head office of company.
(d) As an internal auditor, report the matter in the Internal Audit Report and check for the compliance
of the same in the next audit period.
3. High Limited is a public limited company engaged in the manufacturing of watches. The company has
appointed CA. Eshaan as statutory auditor of the company for the year 2018-19. On verification of the
composition of Board of Directors of the company, the auditor observed that during the reporting period
in one of the board meeting the chairman was non-executive director and less than one-third of the
Board comprised of Independent Directors. The auditor wants to examine the effect of changes in the
composition of the Board and/or its chairman and its impact on compliance throughout the reporting
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 period. But the management restricts the auditor from examining the same. Whether the auditor has
right to examine the effect of changes in composition of board?
(a) The auditor has no right to verify the composition of Board and examine the effect of changes in
the composition since it is not related with preparation of financial statements.
(b) The auditor should verify the composition of Board and examine its impact on compliance
throughout the reporting period as a part of certifying compliance with the requirements of
corporate governance.
(c) The management’s act is void, as the auditor is appointed by Board of Directors only so the auditor
should necessarily verify the composition of Board and its impact on compliance.
(d) Since High Limited is a public limited company, its Board composition has to be compulsorily
verified by the auditor.
4. Following are the registered persons under GST Act, 2017. Which one of the registered person is
required to get his accounts audited and also furnish a copy of audited annual accounts and a
reconciliation statement, duly certified in FORM GSTR –9C?
(a) Mr. A is an advocate whose turnover for the financial year ended 31 March 2018 was Rs.1.25 crores.
(b) Mr. B is a labour contractor managing construction services and his turnover for 31 March 2018 was
Rs.3.95 crores.
(c) Dr. C is a pediatric surgeon who has newly set up his practice in Pune. He paid an amount of Rs.10.5
lakhs as taxes in the current year.
(d) Mr. D who is an architect has paid taxes of Rs.22.5 lakhs in the current year.
5. As an auditor appointed under section 44AB of the Income Tax Act, 1961, under which c lause of Form
3CD, you will report for amounts deemed to be profits and gains under section 32AC, 33AB or 33ABA
or 33AC
(a) clause 24
(b) clause 40
(c) clauses 31
(d) clause 23
6. Bajaj Allianz General Insurance Ltd. agreed to insure a large commercial client. Due to the size of this
client's operations, there is the potential that it could suffer a substantial loss. It would be financially
difficult for Bajaj Allianz to pay the entire claim itself. To spread this risk, Bajaj Allianz contacted Bharti
AXA General Insurance to request that it cover a portion of the risk. Bharti AXA General Insurance
agreed, but only on the condition that it receive a portion of the premium the client has paid to Bajaj
Allianz General Insurance Ltd. The term that best describes this scenario is
(a) retention.
(b) reinsurance.
(c) loadings.
(d) casualty insurance.
7. An audit firm is the subject of the Peer review, please indicate the maximum number of years in the
review cycle:
(a) 1 year
(b) 2 years
(c) 3 years
(d) 5 years
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8. In Case of PSU, Direct Reporting Engagement does not include
(a) Performance audits
(b) compliance audits
(c) Financial audits
(d) Comprehensive Audit
9. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation (DICGC) is :
(a) Not available to depositors of NBFCs
(b) Available to depositors of NBFCs
(c) Available to depositors of Banks
(d) Not available to depositors of both NBFCs and banks
10. Mr. Sunil was member of Bombay Stock Exchange from 2004 and was conducting the business in
securities from his proprietorship firm. During the financial 2017-2018 his firm conducted the business
of securities for 30days with income of Rs.2 lakhs only. SEBI sent a letter to the firm for getting the
accounts audited for the year 2017-18 but as per Mr. Sunil it was not necessary to get the firm’s accounts
audited as the firm was not in active business of securities during the year. Do you think that Mr. Sunil
was right as per Government notification on Securities Contract Rules?
(a) Mr. Sunil took a right decision as it is not necessary for the proprietary firm to get the accounts
audited as per Securities Contract Rules.
(b) As per Government notification issued in 1984 a member of the stock exchange is considered
active for the purpose of audit if he has conducted the business in securities even for a single day
in the year and shall get its accounts audited if it is required by SEBI.
(c) Mr. Sunil cannot be considered an active member as he has not conducted the business in
securities for 180 days or more during the year. So, he is not required to get his accounts audited.
(d) As during the year the firm’s income from conducting the business in securities is less then Rs.5
lakhs, the firm is not required to get the accounts audited. (10 x 1 = 10 Marks)
Questions (11-20) carry 2 Marks each
11. XY & Co. is a chartered firm with two partners Mr. X and Mr. Y. The firm was appointed auditor for 35
companies in the year 2017 and Mr. X was having total 19 audits in his name. Mr. Y was also partner in
EFY & Co. Where he was appointed auditor in 4 companies. On 4 th August 2017, Mr. X met with an
accident and died. The firm was reconstituted with Mr. Y as the proprietor of new firm and the audits of
the new firm reduced to 16. The new firm, in which Mr. Y is the proprietor, accepted the audit of a Private
Limited Company having paid up capital of Rs. 52 crores on 30 th August 2017. EFY & Co., another
chartered firm, contended that Mr. Y cannot accept the appointment of Private Limited Company as he
has already crossed the ceiling of 20 company audits in that year. Do you think that EFY & Co.’s claim
is valid?
(a) EFY & Co.’s claim is valid as MR. Y has already been appointed auditor for 20 companies i.e. 16
in the reconstituted firm and 4 in EFY & Co.
(b) Mr. Y cannot accept the audit of Private Limited Company in the year in which there is change in
the constitution of firm, therefore the claim of EFY & Co. is valid.
(c) Mr. Y can accept the audit as the ceiling of 20 company audits is applicable for each firm in which
the chartered accountant is a partner or proprietor.
(d) EFY & Co.’s claim is void as the ceiling of 20 company audits doesn’t include audit of private
company having paid up capital less than Rs. 100 crores.

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12. Brown Ltd is a holding company with two subsidiaries Black Ltd and White Ltd. You have been given
the task of covering the valuation of non-current tangible assets in the consolidated financial statements.
You note that Black Ltd and Brown Ltd. adopt straight line method of depreciation for its assets whereas
White Ltd, follows written down method for calculating the depreciation. Which of the following
adjustment would be considered as correct in respect of the consolidated financial statements
preparation?
(a) White Ltd is required to depreciate the assets adopting straight line method of depreciation which is the
method adopted by the holding company.
(b) Brown Ltd is required to make suitable adjustments as to the depreciation charged by White Ltd, at the
time of consolidation.
(c) Brown Ltd and Black Ltd are required to depreciate the assets adopting written down value as to
facilitate the harmonization of accounting policies.
(d) No adjustment is required as there can be different methods of calculation of depreciation for its assets
for the group companies.
13. Management of HFC Ltd. noticed a sudden increase in expense under the head “wages & salaries” for
the year 2015-16 and 2016-17. The management felt a need to get the management audit done in order
to identify the reason for the sudden increase. Mr. Arsh Gupta, Chartered Accountant was appointed as
management auditor by the company on 15th April 2017. What areas do you think the auditor need to
verify for the purpose?
(a) Check the payroll sheet prepared as per approved pay and allowances; verify the overtime
sanctioned and authorised; and verify the payment process followed by the company for the
payment of wages & salaries to employees.
(b) Overtime authorised and the payment done to employees are the main areas need to be verified
by the auditor.
(c) Auditor should first understand the HR Policy of the company. Then verify all the authorised
vouchers for overtime payments done during the year; verify the payroll preparation and reconcile
the gross pay in terms of increments/ promotions & resignations; verify the appointments made
during the year as per HR Policy and payments made to agencies providing contractual staff.
(d) Auditor need to verify the new appointments i.e. of company’s payroll or outsourced staff and the
overtime allowance paid to employees.
14. An educational institute was collecting fees from their students by cash/ cheque / draft and through net
banking. Institute follows the policy to account for the fees received in the year of receipt only and for
the cheques or drafts received but not deposited in bank or credited in bank account, should be shown
in reconciliation statement. The internal auditor of branches noticed that at some branches only the fees
received up to 25th March are accounted for in the same year and the receipts after that date are carried
forward to be accounted for in the next financial year. The fees collected in these branches between
25th to 31st March amounted to Rs. 15 lakhs for the year 2017-18 and the collection for the financial year
ended 31st March 2018 amounted to Rs. 115 crores. The auditor was of the view that it will not give a
true and fair view on institute’s revenue for the year. What do you think should be the next step of the
auditor?
(a) The branches have accounted for those receipts in the next financial year so the auditor can ignore
the observation.
(b) Auditor should report the matter in Executive Summary paragraph and highlight it as significant
internal control lapse.
(c) Internal auditor can discuss the matter with the management to take a strict action against the
branches not following institute’s policy.
(d) Auditor should get the accounts modified and report the matter in action taken report.
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15. AFM coaching institute was accepting fees from its students in cash or cheque or online transfer for an
amount up to Rs.10000/-, and if the amount of fees is above Rs.10000/- by cheque or online transfer
only. In the year 2017 the institute’s total fees collection was of Rs.82 crores. Your firm has been
appointed the internal auditor by the Institute and during the verification of vouchers for fee receipts you
noticed that cash receipts of approximately Rs.5 lakhs were directly credited in bank account instead of
routing through cash account. Management explained that since the deposit slips used for fees rece ived
in cash or cheque are same, the accountant has erroneously shown them in the bank account but he
has always tallied the cash at day end and those cash receipts were deposited in the bank account
same day. Whether the auditor will consider the discrepancy as material for audit report?
(a) The auditor should disclose the fact with his comment in the audit report as it is material for giving
a true and fair view on financial statements.
(b) It is not a material discrepancy as the total receipts amount will remain the same and the fees
collected in cash are deposited in bank account only.
(c) The auditor should verify that whether such cash receipts reflects in bank statement on the same
day and cash ledger reconciles with the cash book on the respective dates or not. If it is followed
then auditor can include the matter in observation paragraph with his comments else disclose the
matter as major internal control lapse.
(d) Auditor can ask the management to give a representation letter in writing.
16. BVM & Associates is an audit firm that employs large number of audit assistants. CA Mahesh, a partner
pays extreme attention to briefing the audit assistants every day while the audit is continuing. All audit
assistants are required to document their notes in the daily briefing and accordingly conduct the audit.
CA Mahesh has made it very clear that any assistant who does not document the notes taken and the
steps taken accordingly will be reprimanded as it will mean that the assistants are not creating their
audit programmes on the job. The practice deployed by CA Mahesh can be termed as?
(a) Unacceptable as CA Mahesh being the auditor should be providing the audit programme and he cannot
expect the team to take daily notes instead of performing the audit.
(b) Appropriate and in line with SA 230 as the audit programme must be prepared on the basis of
documentation of auditor’s briefing notes.
(c) Acceptable but incomplete as CA Mahesh has not given any audit programme to the audit assistants to
follow.
(d) Inappropriate as CA Mahesh should not only provide the audit programme but also make sure that audit
programme is formally approved by all partners of the firm.
17. KJA Ltd is in the business of consultancy services. The business of the company has been growing
significantly and considering the nature of business, it becomes subject to various laws and regulations.
Compliances have also increased because of this and management has found this very difficult to keep
in pace with the changing regulatory requirements. The statutory auditors of the company, Shilpa &
Associates, have considered compliance with laws and regulations as a significant risk for the purpose
of their audit.
Auditors had a audit planning meeting with the management and management has und erstood that it
will be their responsibility including those charged with governance to ensure that the company’s
operations are fully compliant with the provisions of various laws and regulations. This may also have
an impact on the reported amounts and disclosures in the financial statements of the company.
Management is planning to ensure full compliance and may implement policies and procedures,
wherever required, to assist in the prevention and detection of non-compliance with laws and
regulations. Please suggest among the following which one will not be a policy/ procedure to be
implemented to assist in the prevention and detection of non-compliance with laws and regulations in
accordance with SA 250?

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 (a) Maintaining a register of significant transac tions of the company with comparison to particular
industry and a record of complaints.
(b) Monitoring legal requirements and ensuring that operating procedures are designed to meet these
requirements.
(c) Developing, publicising and following a code of conduct.
(d) Instituting and operating appropriate systems of internal control.
18. You are a manager in the audit department of Narang & Co, and you are dealing with several ethical
and professional matters raised at recent management meetings, all of which relate to audit clients of
your firm:
One of your client Bernwood Co has a year ending 31 March 2018. During this year, the company
established a pension plan for its employees, and this year end the company will be recognising for the
first time a pension deficit on the balance sheet, in accordance with Ind AS 19 Employee Benefits. The
finance director of Bernwood Co has contacted the audit engagement partner, asking if your firm can
provide an actuarial valuation service in respect of the amount rec ognised.
Which of the following options need to be considered by the audit engagement partner?
(a) The issue is whether there is a self-review threat, as the valuation of the amount recognised would
be recorded in the financial statements. The audit partner should decline the work of valuation
service.
(b) The issue is whether the audit firm would be likely to possess the requisite competence to provide
such a valuation service. The audit partner should decline since not professionally qualified to
provide the valuation service.
(c) Narang & Co. needs to assess the materiality of the figure, and the degree of subjectivity involved.
If it considers that safeguards like using separate personnel, performing a second partner review,
could reduce the threat to an acceptable level, then it can go ahead with both the audit and the
valuation service.
(d) The audit partner could go ahead with the valuation service and disclose the fact in its audit report
about the service provided during the period. This will safeguard and reduce the threat to an
acceptable level.
19. You are an audit senior at Ghaisas & Co and are currently performing the final audit of Bingham Co. for
the year ended 31 March 2018. The company is a manufacturer and retailer of table lamps. The current
audit senior is ill, and you have been asked to complete the audit of payroll in their absence. On arrival
at the head office of Bingham Co, you determine the following data from a review of the current year
and prior year audit files:
• As at 31 March 2017, the company had 350 employees
• On 1 April 2017, 10% of staff were made redundant, effective immediately, due to discontinuation of a
product line
• On 1 June 2017, all remaining staff received a 5% pay rise
• Over the course of the year, sales levels met performance targets which resulted in a fixed bonus of
Rs.8,000 being paid to each employee on 31 March 2018.
The following audit evidence has been gathered relating to the accuracy of wages and salaries for
Bingham Co.
(1) Proof in total calculation performed by an audit team member
(2) Written representation from the directors of Bingham Co confirming the accuracy of wages and salaries
(3) Verbal confirmation from the finance director of Bingham Co confirming the accuracy of wages and
salaries
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 (4) Recalculation of the gross and net pay for a sample of employees by an internal audit team member of
Bingham Co.
What is the order of reliability of the audit evidence starting with the MOST RELIABLE first?
(a) Audit evidence - 1, 2, 3, 4
(b) Audit evidence - 1, 4, 2, 3
(c) Audit evidence - 4, 1, 2, 3
(d) Audit evidence - 4, 1, 3, 2
20. You are an audit senior of Pendse Accountants and are currently conducting the audit of Stalwart Co
for the year ended 31 March 2018. Below is an extract from the list of supplier statements as at 31 March
2018 held by the company and corresponding payables ledger balances at the same date along with
some commentary on the noted differences:
Supplier Statement balance Payables ledger balance
Rs. Rs.
AB Co 90,000 70,000
CD Co 1,85,000 1,15,000
AB Co: The difference in the balance is due to an invoice which is under dispute due to faulty goods
which were returned on 29 March 2018.
CD Co: The difference in the balance is due to the supplier statement showing an invoice dated 27
March 2018 for Rs. 70,000 which was not recorded in the financial statements until after the year end.
The payables clerk has advised the audit team that the invoice was not received until 3 April 2018.
The audit manager has asked you to review the full list of trade payables and select balances on which
supplier statement reconciliations will be performed. Which of the following statement is correct in
respect of including or excluding from your sample?
(a) Exclude with material balances at the year-end.
(b) Exclude suppliers which have a high volume of business with Stalwart Co
(c) Include major suppliers with nil balances at the year-end.
(d) Include suppliers where the statement agrees to the ledger. (10 x 2 = 20 Marks)
Division B- Descriptive Questions-70 Marks
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
1. Comment on the following:
(a) Statutory auditor of O Ltd requested the management for a written representation in respect of
obsolescence of inventory and warranty obligations recognized by the company in its financial
statements. The management denied the representation on the ground that during the course of
audit, all the required procedures were performed by the auditor and after obtaining sufficient
appropriate audit evidence, auditor has issued a clean report. Please comment. (4 Marks)
(b) OP & Associates are the statutory auditors of BB Ltd. BB Ltd is a listed company and started its
operations 5 years back. The field work during the audit of the financial statements of the company
for the year ended 31 March 2018 got completed on 1 May 2018. The auditor’s report was dated
12 May 2018. During the documentation review of the engagement, it was observed that the
engagement quality control review was completed on 15 May 2018. Engagement partner had
completed his reviews in entirety by 10 May 2018. Please comment. (5 Marks)

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 (c) Rathi Limited had definite plan of its business being closed within a short period from the close of
the accounting year ended on 31 st March, 2018. The Financial Statements for the year ended
31/03/2018 had been prepared on the same basis as it had been in earlier periods with an
additional note that the business of the Company shall cease in near future and the assets shall
be disposed off in accordance with a plan of disposal as decided by the Management. The Statutory
Auditors of the Company indicated this aspect in Key Audit Matters only by a reference as to a
possible cessation of business and making of adjustments, if any, thereto to be made at the time
of cessation only. Comment on the reporting by the Statutory Auditor as above. (5 Marks)
2. (a) YKS & Co., a proprietary firm of Chartered Accountants was appointed as concurrent auditor of a
bank. YKS used his influence for getting some cheques purchased and thereafter failed to repay
the loan/overdraft. Comment with reference to the Chartered Accountants Act, 1949, and
Schedules thereto. (4 Marks)
(b) AQP Limited is one of the prominent players in the chemicals industry. The company is a public
company domiciled in India and listed on BSE and NSE. The Company was facing extreme liquidity
constraints and there were multiple indicators that casted doubt over the company’s ability to
continue as a going concern.
The Company was led into insolvency proceedings by consortium of banks led by PNB and the
NCLT ordered the commencement of corporate insolvency process against the Company on 31
August 2017. The company invited prospective lenders, investors and others to submit their
resolution plans to the Resolution Professional (RP) latest by 1 January 2018. The RP reviewed
the resolution plans and ensured conformity with Insolvency and Bankruptcy Code 2016. The
compliant plans were presented to Committee on Creditors (CoC) on 2 February 2018 and the
resolution plan submitted by PQR Ltd. was evaluated as highest evaluated Compliant Resolution
Plan. CoC of AQP Ltd approved the Resolution Plan submitted by PQR Ltd. on 2 March 2018. The
approval of NCLT was finally obtained on 4 May 2018.
PQR Ltd submitted detailed plans and commitments as part of the resolution plan including
clearance of all outstanding debts which were leading to negative cash flows.
Please suggest how would you deal with this situation as the auditors of AQP Ltd. (5 Marks)
(c) Vedanta Agro Mills Ltd had recently started its operations in the month of May 2018. The company
has to comply with statutory requirements of Water (Prevention and Control of Pollution) Act 1974.
The operations of the company include manufacture of battery cells used for battery-run devices.
The management was keen to have an environmental audit done for the period from June 2018 till
December 2018. Briefly discuss the features of environmental audit for Vedanta? (5 Marks)
3. (a) CA. T, in practice, was appointed to carry out internal audit of a stock broker, listed with BSE.
However, he failed to intimate his appointment to the statutory auditors of the company. The
statutory auditor feels this is violation of professional ethics. Comment with reference to the
Chartered Accountants Act, 1949, and Schedules thereto. (5 Marks)
(b) As an auditor of a company registered under section 8 of the Companies Act, 2013 you find that
as per the notification of the Ministry of Corporate Affairs regarding applicability of Indian
Accounting Standards (Ind-AS), the company has to prepare its financial statements for the year
ended 31st March, 2018 under Ind-AS. The management of the company is however of the strong
view that being a section 8 company having charitable objects, Ind-AS cannot apply to the
company. The financial statements are therefore prepared by the management under the earlier
GAAP and a note for the same is given in the financial statements. How would you report on these
financial statements? (5 Marks)

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 (c) “The C&AG may direct the appointed auditor the manner in which the accounts of the Government
company are required to be audited and thereupon the auditor so appointed shall submit a copy of
the audit report to the Comptroller and Auditor-General of India.” What are the relevant sections of
the Companies Act, 2013 and steps involved in auditor of Government Companies? (4 Marks)
4. (a) Whilst the Audit team has identified various matters, they need your advice to include the same in
your audit report in view of CARO 2016:-
(i) The long term borrowings from the parent has no agreed terms and neither the interest nor the
principal has been repaid so far.
(ii) The Internal Auditor of the Company has identified a fraud in the recruitment of employees by the
HR department wherein certain sums were alleged to have been taken as kick-back from the
employees for taking them on board with the Company. After due investigation, the concerned HR
Manager was sacked. The amount of such kickbacks is expected to be in the range of Rs.12
Lakhs. (5 Marks)
(b) ST Ltd is a growing company and currently engaged in the business of manufacturing of tiles. The
company is planning to expand and diversify its operations. The management has increased the
focus on the internal controls to ensure better governance. The management had a discussion with
the statutory auditors to ensure the steps required to be taken so that the statutory audit is risk
based and focused on areas of greatest risk to the achievement of the company’s objectives.
Please advise the management and the auditor on the steps that should be taken for the same.
(5 Marks)
(c) Ayush, a practicing Chartered Accountant is appointed to conduct the peer review of another
practicing unit. What are the areas excluded from the scope of peer reviewer?
5. (a) JY & Co. is appointed as auditor of Breeze Ltd. JY & Co. seeks your guidance for reviewing the
records and documentation of the company regarding ‘related party transactions in the normal
course of business’. Describe the steps to be followed. (4 Marks)
(b) A Ltd who is one of the leading manufacturer of kids clothing is interested to acquire B Ltd. B Ltd
is currently a manufacturer of women’ clothing. As a professional consultant in due diligence and
valuation, A Ltd entrusted you to value B Ltd. The valuation of B Ltd is dependent on future
maintainable sales. Discuss the factors you would consider in assessing the future maintainable
turnover of B Ltd? (4 Marks)
(c) Concession Ltd. is engaged in the business of manufacturing of threads. The company recorded
the turnover of Rs. 1.13 crore during the financial year 2018-19 before adjusting the following:
Discount allowed in the Sales Invoice Rs. 8,20,000
Cash discount (other than allowed in
Cash memo/ sales invoice) Rs. 9,20,000
Trade discount Rs. 2,90,000
Commission on Sales Rs. 6,00,000
Sales Return (F.Y. 2016-17) Rs. 1,60,000
Sale of Investment Rs. 6,60,000
You are required to ascertain the effective turnover to be considered for the prescribed limit of tax audit
under the relevant Act and guide the company whether the provisions relating to tax audit applies.
(6 Marks)

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6. (a) M/s LMN, a firm of Chartered Accountants having 5 partners accepts an audit assignment of a
newly formed private limited company for audit fees of Rs. 5,000. Comment with reference to the
Chartered Accountants Act, 1949, and Schedules thereto. (3 Marks)
(b) Abhimanyu Finance Ltd. is a Non Banking Finance Company and was in the business of accepting
public deposits and giving loans. The company was having net owned funds of Rs.1,50,00,000/ -
(one crore fifty lakhs) and was not having registration certificate from RBI and applied for it on 30 th
March 2018. The company appointed Mr. Kabra as its statutory auditors for the year 2017-18.
Advise the auditor with reference to auditor procedures to be taken and reporting requirements on
the same in view of CARO 2016? (6 Marks)
(c) X Ltd had a net worth of INR 1300 crores because of which Ind AS became applicable to them.
The company had various derivative contracts – options, forward contracts, interest rate swaps
etc. which were required to be fair valued for which company got the fair valuation done through
an external third party. The statutory auditors of the company involved an auditor’s expert to audit
valuation of derivatives. Auditor and auditor’s expert were new to each other i.e. they were working
for the first time together but developed a good bonding during the course of the audit. The auditor
did not enter into any formal agreement with the auditor’s expert. Please advise. (5 Marks)

10

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 Test Series: March, 2019
MOCK TEST PAPER - 1
FINAL NEW COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS
DIVISION A - MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. (c) The entity’s revenue for the year is Rs.10.5 cr which exceed the limit of Rs.10 cr. Hence, the entity
has to provide the comment on the matter prescribed under CARO 2016.
2. (d) As an internal auditor, report the matter in the Internal Audit Report and check for the compliance
of the same in the next audit period.
3. (b) The auditor should verify the composition of Board and examine its impact on compliance
throughout the reporting period as a part of certifying compliance with the requirements of
corporate governance.
4. (b) Mr. B is a labour contractor managing construction services and his turnover for 31 March 2018
was Rs.3.95 crores.
5. (a) clause 24
6. (b) reinsurance.
7. (c) 3 years
8. (c) Financial audits
9. (a) Not available to depositors of NBFCs
10. (b) As per Government notification issued in 1984 a member of the stock exchange is considered
active for the purpose of audit if he has conducted the business in securities even for a single day
in the year and shall get its accounts audited if it is required by SEBI.
Questions (11-20) carry 2 Marks each
11. (d) EFY & Co.’s claim is void as the ceiling of 20 company audits doesn’t include audit of private
company having paid up capital less than Rs. 100 crores.
12. (d) No adjustment is required as there can be different methods of calculation of depreciation for its
assets for the group companies.
13. (c) Auditor should first understand the HR Policy of the company. Then verify all the authorised
vouchers for overtime payments done during the year; verify the payroll preparation and reconcile
the gross pay in terms of increments/ promotions & resignations; verify the appointments made
during the year as per HR Policy and payments made to agencies providing contractual staff.
14. (d) Auditor should get the accounts modified and report the matter in action taken report.
15. (c) The auditor should verify that whether such cash receipts reflects in bank statement on the same
day and cash ledger reconciles with the cash book on the respective dates or not. If it is followed
then auditor can include the matter in observation paragraph with his comments else disclose the
matter as major internal control lapse.
16. (c) Acceptable but incomplete as CA Mahesh has not given any audit programme to the audit
assistants to follow.
17. (a) Maintaining a register of significant transactions of the company with comparison to particular
industry and a record of complaints.

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18. (c) Narang & Co. needs to assess the materiality of the figure, and the degree of subjectivity involved.
If it considers that safeguards like using separate personnel, performing a second partner review,
could reduce the threat to an acceptable level, then it can go ahead with both the audit and the
valuation service.
19. (b) Audit evidence - 1, 4, 2, 3
20. (c) Include major suppliers with nil balances at the year-end.
DIVISION B - DESCRIPTIVE QUESTIONS (70 Marks)
1. (a) As per SA 540 Auditing Accounting Estimates, Including Fair Value Accounting Estimates and
Related Disclosures, the auditor shall obtain written representations from the management and,
where appropriate, those charged with governance whether they believe significant assumptions
used in making accounting estimates are reasonable.
Depending on the nature, materiality and extent of estimation uncertainty, written representations
about accounting estimates recognised or disclosed in the financial statements may include
representations:
• About the appropriateness of the measurement processes, including related assumptions and
models, used by management in determining accounting estimates in the context of the
applicable financial reporting framework, and the consistency in application of the processes.
• That the assumptions appropriately reflect management’s intent and ability to carry out
specific courses of action on behalf of the entity, where relevant to the accounting estimates
and disclosures.
• That disclosure related to accounting estimates are complete and appropriate under the
applicable financial reporting framework.
• That no subsequent event requires adjustment to the accounting estimates and disclosures
included in the financial statements.
For those accounting estimates not recognised or disclosed in the financial statements, written
representations may also include representations about:
• The appropriateness of the basis used by management for determining that the recognition
or disclosure criteria of the applicable financial reporting framework have not been met.
• The appropriateness of the basis used by management to overcome the presumption relating
to the use of fair value set forth under the entity’s applicable financial reporting framework,
for those accounting estimates not measured or disclosed at fair value.
Thus, management’s contention on the ground that during the course of audit, all the required
procedures were performed by the auditor and after obtaining sufficient appropriate audit evidence,
auditor has issued a clean report, for not providing written representation is not correct. The
management should provide written representations to the auditor.
Further as per SA 580 Written Representation, if management does not provide one or more of the
requested written representations, the auditor shall
(a) Discuss the matter with management;
(b) Re-evaluate the integrity of management and evaluate the effect that this may have on the
reliability of representations (oral or written) 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.

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 (b) As per SA 220, the engagement partner shall take responsibility for reviews being performed in
accordance with the firm’s review policies and procedures. For audits of financial statements of
listed entities, the engagement partner shall:
• Determine that an engagement quality control reviewer has been appointed;
• Discuss significant matters arising during the audit engagement, including those identified
during the engagement quality control review, with the engagement quality control reviewer;
and
• Not date the auditor’s report until the completion of the engagement quality control review.
SA 700 also requires the auditor’s report to be dated no earlier than the date on which the auditor
has obtained sufficient appropriate evidence on which to base the auditor’s opinion on the financial
statements. In cases of an audit of financial statements of listed entities where the engagement
meets the criteria for an engagement quality control review, such a review assists the auditor in
determining whether sufficient appropriate evidence has been obtained.
Conducting the engagement quality control review in a timely manner at appropriate stages during
the engagement allows significant matters to be promptly resolved to the engagement quality
control reviewer’s satisfaction on or before the date of the auditor’s report.
In the given case, the signing of auditors’ report before completion of review of engagement quality
control review is not right.
(c) Closure of Business: As per SA 570 “Going Concern”, management intentions to liquidate the
entity or to cease operations is one of the event or condition that may cast significant doubt on the
entity’s ability to continue as going concern.
As per SA 570, if events or conditions have been identified that may cast significant doubt on the
entity’s ability to continue as a going concern but, based on the audit evidence obtained the auditor
concludes that no material uncertainty exists, the auditor shall evaluate whether, in view of the
requirements of the applicable financial reporting framework, the financial statements provide
adequate disclosures about these events or conditions.
Even when no material uncertainty exists, it requires the auditor to evaluate whether, in view of the
requirements of the applicable financial reporting framework, the financial statements provide
adequate disclosure about events or conditions that may cast significant doubt on the entity’s ability
to continue as a going concern.
Further, as per SA 701 “Communicating Key Audit Matters in the Independent Auditor’s Report”,
when matters relating to going concern may be determined to be key audit matters, and explains
that a material uncertainty related to events or conditions that may cast significant doubt on the
entity’s ability to continue as a going concern is, by its nature, a key audit matter. SA 701 also
emphasis on auditor’s responsibility to communicate key audit matters in the auditor’s report.
As per the facts given in the case, intention of the Mishti Limited had definite plan of its business
being closed down within short period from 31st March, 2018. However, financial statements for
the year ended 31.03.2018 had been prepared on the same basis as it had been in earlier periods
with an additional note.
Thus, management intentions to liquidate the entity or to cease operations is one of the event or
condition that may cast significant doubt on the entity’s ability to continue as going concern is a
key audit matter. Therefore, the auditor is required to Communicate the Key Audit Matters in
accordance with SA 570 in above stated manner. Simple reference as to a possible cessation of
business and making of adjustments, if any, he made at the time of cessation only by the auditor
in his report is not sufficient.

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2. (a) This is a case which is covered under the expression in other misconduct of the Chartered
Accountants Act, 1949. As per Clause (2) of Part IV of First Schedule to the Chartered Accountants
Act, 1949, a member of the Institute, whether in practice or not, shall be deemed to be guilty of
other misconduct, if he, in the opinion of the Council, brings disrepute to the profession or the
Institute as a result of his action whether or not related to his professional work. Here the Chartered
Accountant is expected to maintain the highest standards of integrity even in his personal affairs
and any deviation from these standards calls for disciplinary action.
In the present case, YKS & Co, being a concurrent auditor used his position to obtain the funds
and failed to repay the same to the bank. This brings disrepute to the profession of a Chartered
Accountant. This act of YKS & Co is not pardonable.
Conclusion: Therefore, YKS & Co will be held guilty of other misconduct under Clause (2) of Part
IV of First Schedule to the Chartered Accountants Act, 1949.
(b) As per SA 570 Going Concern, if events or conditions have been identified that may cast
significant doubt on the entity’s ability to continue as a going concern, the auditor shall obtain
sufficient appropriate audit evidence to determine whether or not a material uncertainty exists
related to events or conditions that may cast significant doubt on the entity’s ability to continue as
a going concern (hereinafter referred to as “material uncertainty”) through performing additional
audit procedures, including consideration of mitigating factors. These procedures shall include:
(i) 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.
(ii) 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.
(iii) 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
(1) Evaluating the reliability of the underlying data generated to prepare the forecast; and
(2) Determining whether there is adequate support for the assumptions underlying the
forecast.
(iv) Considering whether any additional facts or information have become available since the date
on which management made its assessment.
(v) Requesting written representations from management and, where appropriate, those charged
with governance, regarding their plans for future actions and the feasibility of these plans.
The auditor shall evaluate whether sufficient appropriate audit evidence has been obtained
regarding, and shall conclude on, the appropriateness of management’s use of the going concern
basis of accounting in the preparation of the financial statements.
If events or conditions have been identified that may cast significant doubt on the entity’s ability to
continue as a going concern but, based on the audit evidence obtained the auditor concludes that
no material uncertainty exists, the auditor shall evaluate whether, in view of the requirements of
the applicable financial reporting framework, the financial statements provide adequate disclosures
about these events or conditions.
In the instant case, the approval of the resolution plan is a significant mitigating factor to counter
the going concern issues of AQP Ltd. PQR Ltd has submitted a detailed plan and commitments
that has been given as part of the resolution plan which includes clearance of all outstanding debts
which were leading to negative cash flows. Therefore, it can be said that the company that the
events and conditions are mitigated effectively and there is no material uncertainty in relatio n to
the ability of the company to continue as a going concern.

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 (c) The following are features of environmental audit:
(i) Management tool – Environmental audit is generally considered as one of the management
tool which is a part of internal control system and is mainly used to assess, evaluate and
manage environmental performance of a company.
(ii) Aim of environmental audit – A green audit may be conducted for many purposes, for
example, to comply with environmental laws or as a social responsibility measure or to meet
some certification requirements. But the main and ultimate aim of any environmental audit is
to evaluate and control the adverse impact of economic activities of an organization on the
environment.
(iii) Environmental audit should be distinguished from Environmental Impact Assessment
(EIA) – EIA is a tool used to predict, evaluate and analyze environmental impacts mostly
before a project commences. It assesses the potential environmental effects of a proposed
facility. The essential purpose of an environmental audit is the systematic scrutiny of
environmental performance throughout a company’s existing operations.
(iv) Systematic – Environmental audit is a systematic process that must be carefully planned,
structured and organized. As it is a part of a long-term process of evaluation and checking, it
needs to be a repeatable process so that over time, it can be easily used by different teams
of people in such a way that the results are comparable and can reflect change in both
quantitative and qualitative terms.
(v) Documented – Like any other audit, the base of any environmental auditing is that its findings
are supported by documents and verifiable information. The audit process is designed in such
away that it seeks to verify on a sample basis past actions, activities, events and procedures
with available evidences to ensure that they were carried out according to system’s
requirements and in a correct manner.
(vi) Periodic – Environmental audit is generally conducted at pre-defined intervals. It is a long-
term process.
(vii) Objective Evaluation – Though environmental auditing is conducted using pre-decided
policies, procedures and a proper documented system, there is always an element of
subjectivity in an audit, particularly if it is conducted internally. In addition to internal
environmental audits, having independent audit teams that have specialized skills and who
come back periodically (say annually) to repeat audits tends to increase objectivity in the
system. Hence for the sake of objectivity, external environmental audits are preferable. This
is also required under many certification guidelines (e.g. ISO 14001).
(viii) Environmental Performance – As mentioned before, the essence of any environmental audit
is to find out how well the environmental organization, environmental management and
environmental equipments are performing. The ultimate aim is to ensure that organization’s
environmental performance meets the goals set in its environmental policy and also to ensure
compliance with standards and regulatory requirements.
3. (a) As per Clause (8) of Part I of First Schedule to the Chartered Accountants Act, 1949, a chartered
accountant in practice is deemed to be guilty of professional misconduct, if he accepts a position
as auditor previously held by another chartered accountant or a certified auditor who has been
Issued certificate under the Restricted Certificate Rules, 1932 without first communicating with him
in writing.
This clause is applicable in situation of replacing of one auditor by another auditor. Internal auditor
and statutory audition are parallel positions and not replacement positions. The management
generally appoints the internal auditor whereas the statutory auditor will be appointed by the
shareholders in the AGM. In this situation, there is no need for communication by one to other.

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 In view of above the contention of the statutory auditor is unacceptable and there is no question of
communicating in writing by Mr. T.
(b) Applicability of IND AS: Section 129(1) of the Companies Act, 2013, governs the
requirements to be satisfied by financial statements. The provisions thereunder which should
be complied with are:
• financial statements shall, give a true and fair view of the state of affairs of the company or
companies as at the end of financial year, comply with the notified accounting standards under
section 133 and be in such form or forms specified in Schedule III to the Companies Act, 2013
and
• the items contained in such financial statements shall be in accordance with the accounting
standards.
Further, as per section 133 of the Companies Act, 2013, the Central Government has notified
Companies (Indian Accounting Standards) Rules, 2015 in exercise of the powers conferred by
section 133. The said rules list the Indian Accounting Standards (Ind AS) and the class of
companies required to comply with the Ind AS while preparation of their financial statements.
Here, it may be noted that the companies covered under Section 8 are required to comply the
provisions of the Companies Act, 2013, unless and until any exemption is provided. Therefore,
companies registered under Section 8 are not exempted from the requirements of section 133 and
section 129 of the Companies Act, 2013.
In the given case, only contention of management that being a section 8 company having charitable
object, Ind-AS cannot apply to the company, therefore financial statements prepared under the
earlier GAAP and a note for the same is given, is not tenable.
However, the auditor is required to ensure the applicable monetary limits w.r.t Ind-AS and need
to advise the management to prepare the financial statements as per Ind-AS accordingly. In case
of non-compliance the auditor should report accordingly.
(c) Relevant Sections and Steps involved in Audit of Government Companies: Section 143(5),
143(6) and 143(7) of the Companies Act, 2013 are relevant sections in case of Audit of Government
Companies.
The following steps are involved in the audit of government companies:
(i) Appointment of Auditors under Section 139(5) and 139(7) read with section 143(5) of
the Companies Act, 2013 - Statutory auditors of Government Company are appointed or re-
appointed by the Comptroller and Auditor General of India.
The C&AG may direct the appointed auditor the manner in which the accounts of the
Government company are required to be audited and thereupon the auditor so appointed shall
submit a copy of the audit report to the Comptroller and Auditor-General of India which, among
other things, include the directions, if any, issued by the Comptroller and Auditor-General of
India, the action taken thereon and its impact on the accounts and financial statement of the
company.
(ii) Supplementary audit under section 143(6)(a) of the Companies Act, 2013 - The
Comptroller and Auditor-General of India shall within 60 days from the date of receipt of the
audit report have a right to conduct a supplementary audit of the financial statement of the
company by such person or persons as he may authorize in this behalf; and for the purposes
of such audit, require information or additional information to be furnished to any person or
persons, so authorised, on such matters, by such person or persons, and in such form, as the
Comptroller and Auditor-General of India may direct.

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 (iii) Comment upon or supplement such Audit Report under section 143(6)(b) of the
Companies Act, 2013 - Any comments given by the Comptroller and Auditor-General of India
upon, or supplement to, the audit report shall be sent by the company to every person entitled
to copies of audited financial statements under sub-section (1) of section 136 of the said Act
i.e. every member of the company, to every trustee for the debenture-holder of any
debentures issued by the company, and to all persons other than such member or trustee,
being the person so entitled and also be placed before the annual general meeting of the
company at the same time and in the same manner as the audit report.
(iv) Test audit under section 143(7) of the Companies Act, 2013 - Without prejudice to the
provisions relating to audit and auditor, the Comptroller and Auditor- General of India may, in
case of any company covered under sub-section (5) or sub-section (7) of section 139 of the
said Act, if he considers necessary, by an order, cause test audit to be conducted of the
accounts of such company and the provisions of the Comptroller and Auditor-General's
(Duties, Powers and Conditions of Service) Act, 1971, shall apply to the report of such test
audit.
4. (a) (i) As per clause (xiii) of para 3 of CARO 2016 the auditor is required to report, “whether all
transactions with the related parties are in compliance with sections 177 and 188 of
Companies Act, 2013 where applicable and the details have been disclosed in the Financial
Statements etc., as required by the applicable accounting standards”.
In the present case, the auditor is required to report as per clause xiii of para 3 of CARO 2016
receipt of long term borrowing from Parent Company which is transactions with the relate d
party.
(ii) As per clause Clause (x) of para 3 of CARO 2016 the auditor is required to report, “whether
any fraud by the company or any fraud on the Company by its officers or employees has been
noticed or reported during the year; If yes, the nature and the amount involved is to be
indicated.”
In the instant case, a fraud has been identified in recruitment of employees by the HR
Department wherein certain sums were alleged to have been taken as kickback from the
company of amounting rupees approx. 12 lakh. The auditor is required to report on the same
in accordance with clause (x) of para 3 of CARO 2016.
(b) Audit should be risk-based or focused on areas of greatest risk to the achievement of the audited
entity’s objectives. Risk-based audit (RBA) is an approach to audit that analyzes audit risks, sets
materiality thresholds based on audit risk analysis and develops audit programmes that allocate a
larger portion of audit resources to high-risk areas.
RBA consists of four main phases starting with the identification and prioritization of risks, to the
determination of residual risk, reduction of residual risk to acceptable level and the reporting to
auditee of audit results. These are achieved through the following:
Step 1 - Understand auditee operations to identify and prioritize risks: Understanding auditee
operations involves processes for reviewing and understanding the audited organization’s risk
management processes for its strategies, framework of operations, operational performance and
information process framework, in order to identify and prioritize the error and fraud risks that
impact the audit of financial statements. The environment in which the auditee operates, the
information required to monitor changes in the environment, and the process or activities integral
to the audited entity’s success in meeting its objectives are the key factors to an understanding of
agency risks. Likewise, a performance review of the audited entity’s delivery of service by
comparing expectations against actual results may also aid in understanding agency operations.
Step 2 - Assess auditee management strategies and controls to determine residual audit
risk: Assessment of management risk strategies and controls is the determination as to how

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 controls within the auditee are designed. The role of internal audit in promoting a sound accounting
system and internal control is recognized, thus the SAI should evaluate the effectiveness of internal
audit to determine the extent to which reliance can be placed upon it in the conduct of substantive
tests.
Step 3 - Manage residual risk to reduce it to acceptable level: Management of residual risk
requires the design and execution of a risk reduction approach that is efficient and effective to bring
down residual audit risk to an acceptable level. This includes the design and execution of necessary
audit procedures and substantive testing to obtain evidence in support of transactions and
balances. More resources should be allocated to areas of high audit risks, which were earlier known
through the analytical procedures undertaken.
Step 4 - Inform auditee of audit results through appropriate report: The results of audit shall
be communicated by the auditor to the audited entity. The auditor must immediately communicate
to the auditee reportable conditions that have been observed even before completion of the audit,
such as weaknesses in the internal control system, deficiencies in the design and operation of
internal controls that affect the organization’s ability to record, process, summarize and report
financial data.
(c) Areas excluded from scope of Peer Reviewer are:
(i) Management Consultancy Engagements;
(ii) Representation before various Authorities;
(iii) Engagements to prepare tax returns or advising clients in taxation matters;
(iv) Engagements for the compilation of financial statements;
(v) Engagements solely to assist the client in preparing, compiling or collating information other
than financial statements;
(vi) Testifying as an expert witness;
(vii) Providing expert opinion on points of principle, such as Accounting Standards or the
applicability of certain laws, on the basis of facts provided by the client; and
(viii) Engagement for Due diligence.
5. (a) Review of Records and Documentation Regarding Related Party Transaction: According to
SA 550 “Related Parties”, during the audit, the auditor shall remain alert, when inspecting records
or documents, for arrangements or other information that may indicate the existence of related
party relationships or transactions that management has not previously identified or disclosed to
the auditor.
In particular, the auditor shall inspect the following for indications of the existence of related party
relationships or transactions that management has not previously identified or disclosed to the
auditor:
(a) Bank, legal and third party confirmations obtained as part of the auditor’s procedures;
(b) Minutes of meetings of shareholders and of those charged with governance; and
(c) Such other records or documents as the auditor considers necessary in the circumstances of
the entity.
The auditor may inspect records or documents that may provide information about related party
relationships and transactions, for example entity income tax returns, information supplied by the
entity to regulatory authorities, shareholder registers to identify the entity’s principal shareholders,
statements of conflicts of interest from management and those charged with governance, records
of the entity’s investments and those of its pension plans, contracts and agreements with key
management or those charged with governance, significant contracts and agreements not in the

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 entity’s ordinary course of business, specific invoices and correspondence from the entity’s
professional advisors, life insurance policies acquired by the entity, significant contracts re-
negotiated by the entity during the period, internal auditors’ reports, documents associated with
the entity’s filings with a securities regulator etc.
(b) In assessing the turnover which the business would be able to maintain in the future, the
following factors should be taken into account:
(i) Trend: Whether in the past, sales have been increasing consistently or they have been
fluctuating. A proper study of this phenomenon should be made.
(ii) Marketability: Is it possible to extend the sales into new markets or that these have been
fully exploited? Product wise estimation should be made.
(iii) Political and economic considerations: Are the policies pursued by the Government likely
to promote the extension of the market for goods to other countries? Whether the sales in the
home market are likely to increase or decrease as a result of various emerging economic
trends?
(iv) Competition: What is the likely effect on the business if other manufacturers enter the same
field or if products which would sell in competition are placed on the market at cheaper price?
Is the demand for competing products increasing? Is the company’s share in the total trade
constant or has it been fluctuating?
(c) The provisions relating to tax audit under section 44AB of the Income Tax Act, 1961 applies to
every person carrying on business, if his total sales, turnover or gross receipts in business exceed
the prescribed limit of Rs. 1 crore and to a person carrying on a profession, if his gross receipts
from profession exceed the prescribed limit of Rs. 50 lakhs (w.e.f. A.Y. 2018-19) in any previous
year. However, the term "sales", "turnover" or "gross receipts" are not defined in the Act, and
therefore the meaning of the aforesaid terms has to be considered for the applicability of the
section.
Some of the points for merit consideration in this regard as discussed in the Guidance Note issued
by the Institute are given below-
(i) Discount allowed in the sales invoice will reduce the sale price and, therefore, the same can
be deducted from the turnover.
(ii) Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of a
financing charge and is not related to turnover. Therefore, should not be deducted from the
turnover.
(iii) Turnover discount is normally allowed to a customer if the sales made to him exceed a
particular quantity. As per trade practice, it is in the nature of trade discount and should be
deducted from the figure.
(iv) Special rebate allowed to a customer can be deducted from the sales if it is in the nature of
trade discount. If it is in the nature of commission on sales, the same cannot be deducted
from the figure of turnover.
(v) Price of goods returned should be deducted from the turnover even if the returns are from the
sales made in the earlier year/s.
(vi) Sale proceeds of any shares, securities, debentures, etc., held as investment will not form
part of turnover. However, if the shares, securities, debentures etc., are held as stock-in-
trade, the sale proceeds thereof will form part of turnover.
In the given case, Concession Ltd. is engaged in manufacturing business. Therefore, the tax audit
would be applicable if the turnover exceeds Rs. 1 crore during the financial year 2018-19. The

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 calculation of effective turnover for the prescribed limit purpose, in accordance with
abovementioned conditions, is given below:
Recorded turnover during the year Rs. 1,13,00,000
Less: (i) Discount allowed in the Sales Invoice (Rs. 8,20,000)
(ii) Trade discount (Rs. 2,90,000)
(iii) Sales Return (Rs. 1,60,000)
Effective turnover Rs. 1,00,30,000
Conclusion: The effective turnover of Concession Ltd. is Rupees one crore and thirty thousand
only which is over and above the prescribed limit for tax audit under section 44AB of the Income
Tax Act, 1961. Thus, the provisions related to tax audit are applicable to the company and is
therefore liable for tax audit
6. (a) Minimum Audit Fee: Prescribed minimum audit fee is recommendatory, not mandatory in nature.
Therefore, acceptance of audit assignment by M/s LMN, a firm of Chartered Accountants having 5
partners of a newly formed private limited company for audit fees of Rs. 5,000 is not violation of
any provisions.
Therefore, M/s LMN will not be held liable for guilty of misconduct.
(b) As per Clause (xvi) of Paragraph 3 of CARO 2016, the auditor is required to report that
“whether the company is required to be registered under section 45-IA of the Reserve Bank
of India Act, 1934 and if so, whether the registration has been obtained.”
The auditor is required to examine whether the company is engaged in the business which attract
the requirements of the registration. The registration is required where the financing activity is a
principal business of the company. The RBI restrict companies from carrying on the business of a
non-banking financial institution without obtaining the certificate of registration.
Audit Procedures and Reporting:
(i) The auditor should examine the transactions of the company with relation to the activities
covered under the RBI Act and directions related to the Non-Banking Financial Companies.
(ii) The financial statements should be examined to ascertain whether company’s financial assets
constitute more than 50 per cent of the total assets and income from financial assets
constitute more than 50 per cent of the gross income.
(iii) Whether the company has net owned funds as required for the registration as NBFC.
(iv) Whether the company has obtained the registration as NBFC, if not, the reasons should be
sought from the management and documented.
(v) The auditor should report incorporating the following:-
(1) Whether the registration is required under section 45-IA of the RBI Act, 1934.
(2) If so, whether it has obtained the registration.
(3) If the registration not obtained, reasons thereof.
In the instant case Abhimanyu Finance Ltd. is a Non Banking Finance Company and was in the
business of accepting public deposits and giving loans since 2015. The company was having net
owned funds of Rs.1,50,00,000/-(one crore fifty lakhs) which is less in comparison to the prescribed
limit i.e. 2 crore rupees and was also not having registration certificate from RBI (though applied
for it on 30th March 2018). The auditor is required to report on the same as per Clause (xvi) of
Paragraph 3 of CARO 2016.

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 (c) As per SA 620, Using the work of an Auditor’s Expert, the nature, scope and objectives of the
auditor’s expert’s work may vary considerably with the circumstances, as may the respective roles
and responsibilities of the auditor and the auditor’s expert, and the nature, timing and extent of
communication between the auditor and the auditor’s expert. It is therefore required that these
matters are agreed between the auditor and the auditor’s expert.
In certain situations, the need for a detailed agreement in writing is required like -
• The auditor’s expert will have access to sensitive or confidential entity information.
• The matter to which the auditor’s expert’s work relates is highly complex.
• The auditor has not previously used work performed by that expert.
• The greater the extent of the auditor’s expert’s work, and its significance in the context of the
audit.
In the given case, considering the complexity involved in the valuation and volume of derivatives
and also due to the fact that the auditor and auditor’s expert were new to each other, auditor should
have signed a formal agreement/ engagement letter with the auditor’s expert in respect of the work
assigned to him.

11

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 Test Series: April, 2019
MOCK TEST PAPER - 2
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
All MCQs are compulsory
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100
DIVISION A – MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. While auditing the complete set of consolidated financial statements of Tulips Ltd., a listed company,
using a fair presentation framework, M/s Pintu & Co., a Chartered Accountant firm, discovered that the
consolidated financial statements are materially m isstated due to the non- consolidation of a subsidiary.
The material misstatement is deemed to be pervasive to the consolidated financial statements. The
effects of the misstatement on the consolidated financial statements have not been determined because
it was not practicable to do so. Thus, M/s Pintu & Co. decided to provide an adverse opinion for the
same and further determined that, there are no key audit matters other than the matter to be described
in the Basis for Adverse Opinion section. Comment whether M/s Pintu & Co. needs to report under
SA 701 ‘Communicating Key Audit Matters in the Independent Auditor’s Report’?
(a) M/s Pintu & Co. have the option to follow SA 701, thus, need not to report any key audit matters.
(b) SA 701 is mandatory in the case of audit of listed entities, however, as there are no key audit
matters other than the matter to be described in the Basis for Adverse Opinion section, no ‘Key
Audit Matters’ para needs to be stated under audit report.
(c) SA 701 is mandatory in the case of audit of listed entities, however, as there are no key audit
matters other than the matter to be described in the Basis for Adverse Opinion section, M/s Pintu
& Co. shall state, under ‘Key Audit Matters’ para, that ‘except for the matter described i n the Basis
for Adverse Opinion section, we have determined that there are no other key audit matters to
communicate in our report.’
(d) M/s Pintu & Co. is under compulsion to follow SA 701 as the audit is of a listed company and shall
report under ‘Key Audit Matters’ para the matter same as stated in ‘Adverse Opinion’ para regarding
non- consolidation of a subsidiary.
2. The audit team has obtained the following results from the trade receivables circularization of Oak Co
for the year ended 31 March 2018.
Customer Balance as per Balance as per Comment
sales ledger customer confirmation
Rs. Rs.
M Co 2,25,000 2,25,000
N Co 3,50,000 2,75,000 Invoice raised on 28 March 2018
O Co 6,20,000 4,80,000 Payment made 30 March 2018
P Co 5,35,000 5,35,000 A balance of Rs.45,000 is currently being
disputed by P Co.
R Co 1,78,000 No reply

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 Which of the following statements in relation to the results of the trade receivables circularisation is
TRUE?
(a) No further audit procedures need to be carried out in relation to the outstanding balances with
M Co. and P Co.
(b) The difference in relation to N Co. represents a timing difference and should be agreed to a pre-
year-end invoice
(c) The difference in relation to O Co. represents a timing difference and should be agreed to pre-
year-end bank statements
(d) Due to the non-reply, the balance with R Co. cannot be verified and a different customer balance
should be selected and circularised
3. MNC Ltd., India is subsidiary of MNC Inc, US. LLP & Associates has been appointed by MNC Ltd. for
audit of statutory financial statements. MNP & Associates has been appointed as the auditors of the
Reporting package of MNC Ltd. prepared for the year ended 31 March which is required for consolidation
purposes. MNP & Associates are also the tax auditors of MNC Ltd. What should be format for reporting
of MNP & Associates on Form 3CD of MNC Ltd.?
(a) MNC Ltd. should report as per the internal formats of the firm.
(b) MNC Ltd. should report as per the formats issued as per ICDS (Income Computation and
Disclosure Standards).
(c) MNC Ltd. should report as per Form 3CB.
(d) MNC Ltd. should report as per Form 3 CA.
4. A Public Limited Company is having its Head Office at Mumbai and the employees from various branch offices
used to visit Mumbai for official meetings. So, the company decided to construct guest house for their
employees staying in Mumbai, as the stay in hotel was very expensive. The management took all sanctions
to construct the building and the expenditure was incurred in conformity with the rules and regulations. The
building was ready for use by the year 2015 on which a total expenditure of Rs. 5 crores was done, but it was
not used by the employees and they continued to stay in hotel. From the financial 2015-16 onwards the
expenses were booked in company’s profit and loss account for the upkeep and maintenance of the building
and the hotel charges paid for the stay of employees. The company was having a separate internal audit
department but one of the director demanded propriety audit to ensure compliance with section 186 of the
Companies Act, 2013 and ensure that the transactions represented by books are prejudicial to the interests
of the company. Do you think that there is any need for propriety audit?
(a) Propriety audit is not required when the company is already having a separate internal audit
department and these areas can be covered in the scope of internal auditors.
(b) The director has no right to demand propriety audit, as in the case of Public Limited Company only
Government is authorised to decide on whether a propriety audit is required or not.
(c) Propriety audit is concerned with the scrutiny of executive decisions and actions affecting the
company’s financial and profit & loss situation. So, in the above case it is required as huge expense
has been done on construction of building and even then it was not used, which had a major impact
on company’s profit and loss statement.
(d) There is no need of propriety audit as the management took all sanctions to construct the building
and the expenditure was incurred in conformity with the rules and regulations.
5. FAC Chartered Accountants was appointed as statutory auditors by KMG Ltd. for the audit of their
financial statements. During the course of audit the auditors noticed a fraud of Rs. 120 lakhs done by
an officer of the company. The officer sanctioned and made the payment to fake vendors for purchase
of fixed assets; however the assets were not entered in the Fixed Assets Register. The auditor reported
the fraud in his audit report to the shareholders of the company presented in the Annual General

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 Meeting, but did not mentioned the name of the parties involved. The Board of Directors of the com pany
asked ICAI to take necessary action against the auditor as he has not complied with his duty to report
fraud as per Section 143(12) of the Companies Act, 2013. What is the duty of the auditor as per
Companies Act in reporting the fraud done by officers or employees of the company?
(a) As per Companies Act, 2013, as the amount of fraud is more than 100 lacs; the auditor should
have reported the matter within 2 days of his knowledge to the Board of Directors/ Audit committee
of the company seeking their reply or observations within 45 days. After completion of 45 days the
auditor should forward his report to the Central Government along with the reply if any received
from Board/ Audit Committee.
(b) As per Companies Act, in the course of audit if the auditor has reason to believe that a fraud has
been conducted by the officers or employees of the company, the auditor shall report the matter to
the Central Government immediately.
(c) The auditor’s duty is restricted to reporting the fraud to shareholders and he is not required to
report the matter to Board of Directors/ Audit Committee/ Central Government.
(d) The auditor can submit his report on fraud to shareholders but is required to mention the name of
the parties involved in fraud, as per Section 143(12) of the Companies Act, 2013.
6. Prabhakar & Associates were the statutory auditors of Inverto & Co for last 2 years. In the current year,
one of the partners Mr. Anant Prabhakar, a qualified chartered accountant from ICAI also got qualified
as a chartered management accountant from a foreign accountancy body CIMA. The management of
Inverto & Co were glad to hear this and offered Mr. Anant to handle the management services of the
company from this year. Is he allowed take up this assignment for Inverto & Co as per the Chartered
Accountants Act 1949 and Schedules thereunder?
(a) Yes, being a qualified management accountant within their group, Prabhakar & Associates should
take this assignment.
(b) Yes, Mr. Anant can cover the management services and another auditor from the firm can cover
the statutory audit of Inverto & Co.
(c) No, the management services cannot be provided by the firm, who currently is the statutory auditor
of Inverto & Co.
(d) No, Mr. Anant is newly qualified management accountant who does not have enough experience,
hence should not take up the management services assignment.
7. One afternoon in the first week of June 2018, there was a heated discussion between the audit
engagement partner of Shah & associates and the finance director of Pecker & Co. The discussion was
mainly on non-co-operation of the company staff to provide the relevant information to the auditors. The
staff thought that the auditors were a hindrance in their routine work. The finance director called an
urgent meeting to discuss the removal of the auditor Shah & Associates. Within the next week the partner
of Shah & Associates was called and informed that they are no more the auditors of Pecker & Co.
Comment if the removal of the auditor was proper in accordance with the Companies Act, 2013.
(a) Yes, the finance director was correct in the procedure of the removal of auditors by a simple board
meeting discussion.
(b) No, the removal of auditors before the expiry of the term should be done with the prior permission
from the Central Government.
(c) Once appointed, the board of directors cannot remove the present auditors of the company.
(d) Yes, Pecker & Co is not a government company, hence the board of directors can remove the
auditors by themselves.

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8. Garg Ltd. has declared dividend of 9% on 15 April 2018, for the year ended 31 March 2018. The company
has not paid or the warrant in respect thereof has not been posted till date 30 June 2018 to any
shareholder whose is entitled to the payment of the dividend. Which of the following is correct in respect
of the effect of non-payment of dividend?
(a) Garg Ltd. shall be liable to pay simple interest of 15% p.a. during the period for which the default
continues.
(b) Garg Ltd. shall be liable to pay simple interest of 18% p.a. during the period for which the default
continues.
(c) Garg Ltd. can still make the payment of dividend by 31 July 2018, with no interest applicable.
(d) Garg Ltd. can still make the payment of dividend by 15 July 2018, with no interest applicable.
9. TSV & Co, Chartered Accountants is an audit firm having two partners CA T and CA V. The firm TSV &
Co. is already holding an appointment as auditors of 36 public companies and none of the partners hold
any company audits in their personal capacity or as partners with another firm. TSV & Co. has been
offered the appointment as auditors of 7 more private limited companies. Of the seven, one is a company
with a paid up share capital of Rs. 150 crores, five are “Small Companies” as per the Compa nies Act
and one is a “Dormant Company”. Determine the number of companies out of 7 for which TSV & Co.
can accept the appointment as an auditor.
(a) 5
(b) 6
(c) 7
(d) 1
10. Your firm has been appointed statutory auditor by a Nationalised Bank for the year 2017-18. Your senior
advised you to check all the standard assets shown in the balance sheet as on 31 st March 2018. While
verification you observed that one of the accounts was regularised on 28 th March 2018, for which the
interest and instalment amount was overdue from the quarter ending 30 th September 2017. The account
was regularised after the repayment of overdue interest and instalment amounts was done on 26 th March
2018. Only the last day of the financial year was reckoned as the date of account becoming NPA by the
Bank. As a statutory auditor will you agree with the Bank’s policy?
(a) As the interest charged in the account was overdue for more than 90 days from the end of quarter,
it should be classified as NPA and should be considered as sub-standard asset for the balance
sheet as on 31st March 2018.
(b) As the overdue interest and instalment amount was paid before the balance sheet date there is no
reason to classify the account as NPA.
(c) The auditor should not agree with the Bank’s policy to regularise the account before balance sheet
date as overdue interest indicates more than normal risk attached to the business.
(d) Bank can regularise the account before balance sheet date but should ensure that the amount has
been paid through genuine resources and not by sanction of additional facilities, and the account
remains in order subsequently. (10 x 1 = 10 Marks)
Questions (11-20) carry 2 Marks each
11 BC Ltd. is the business of manpower consulting. The company has a huge cash and bank balance
including fixed deposits with banks. During the course of audit of the financial statements of the company
for the year ended 31 March 2017, auditors circulated independent bank balance confirmations. The
auditors received all the balance (covering fixed deposits) confirmations independently. Auditors
observed that the fixed deposits balances as per the independent balance confirmation did not match
with the books balances in some cases. Management produced the fixed deposit certificates to the

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 auditors wherein the balances of fixed assets matched with the balances as per the books. How should
the auditor deal with this matter?
(a) Auditor should qualify the audit report in respect of differences in book balances of fixed deposits
vis a vis independent balance confirmations.
(b) Auditor should consider the fixed deposit certificates produced by the management and basis that
any differences in book balances of fixed deposits vis a vis independent balance confirmations
should be ignored.
(c) Auditor should consider the documentation provided by the management i.e. the fixed deposit
certificates, however, independent balance confirmations is also required to be considered by the
auditor which shows various difference. The auditor should obtain balance confirmations again.
(d) Auditor should consider the documentation provided by the management i.e. the fixed deposit
certificates, however, independent balance confirmations is also required to be considered by the
auditor which shows various difference. The auditor should look to perform alternate procedures
and basis that the matter should be looked at.
12. SBC Private Limited appointed Mr. Vijay, Chartered Accountant as auditor of the company for the year
2017-18. While verifying the accounts Mr. Vijay noticed that the company has neither made any provision
for accrued gratuity liability nor obtained the actuarial valuation thereon. Mr. Vijay obtained the actuarial
valuation and includes the matter in his Audit Report to the Company’s Board of Directors mentioning
the amount of accrued liability not provided for. The Board agreed with the auditor’s observation and the
amount of liability quantified by him. But the auditor didn’t disclose the same in his audit report to
Member’s. One of the members raised an objection on the audit report stating that it does not represent
a true and fair view as even though the company has not maintained proper books of accounts as per
accounting standards, the auditor has not qualified his report. Whether the auditor is require to give a
qualified opinion in his report to members on non-provision of gratuity in company’s accounts when the
same has already been included in the report to Company’s Board of Directors?
(a) As the auditor has already disclosed the matter of non-provisioning in his report to Company’s
Board of Directors, there is no need to disclose the same in report to Member’s u/s 143 of the
Companies Act, 2013.
(b) Non-provisioning for accruing gratuity is in contravention to applicable Accounting Standard
(AS-15), therefore the auditor should qualify his report to members through a paragraph on failure
of management to quantify the amount of liability.
(c) The auditor should revise the accounts as per the actuarial valuation obtained by him and the
revised accounts only should be presented before the Board of Directors and Members. The auditor
is not required to qualify his report.
(d) U/s 143 of the Companies Act, 2013, the auditor should qualify his report to members only when
the matter reported by the auditor is answered in the negative or with a qualification by the Board.
In the above case the board agreed with the auditor’s observation so he need not qualify his report.
13. AHKPL Ltd. is an unlisted company in the business of the real estate following Accounting Standards.
The company recognizes revenue on the basis of percentage completion as per AS 7. The company
has various residential and commercial projects at different locations for which separate profitability
statements are prepared by the management. Profitability statements are based on estimated costs of
the projects. While reviewing the profitability statements, statutory auditors observed that the profitability
of the projects have been fluctuating significantly year on year and the prime reason for that is the
change in the estimated costs. As per the auditors, frequent changes are made by the management in
the estimated costs to increase the percentage completion and through which revenue and profit
numbers are manipulated. The auditors are not satisfied with the profitability statements of two major
projects which account for 50% of the total turnover of the company. Management tried to explain the
auditors saying that the changes would happen because of the dynamics of the industry which have

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 been changing significantly and are unfavourable to the industry as a whole. All of this is leadin g to
changes in the estimated costs. How should the auditors deal with this matter?
(a) Management’s view seems reasonable. Estimated costs are only estimates which are subject to
changes and hence the auditors should drop this matter.
(b) The auditors view seems reasonable and if the management does not agree, the auditors should
issue qualified report.
(c) The auditors should consider the impact of the adjustment on the financial statements and if the
impact is pervasive, the auditor should issue adverse opinion.
(d) The auditors should consider the impact of the adjustment on the financial statements and may
take the adjustment to unadjusted entry in the management representation letter and basis that
issue a clean report.
14. OPP & Co LLP is the statutory auditor of ABBA Private Limited. The company has an annual turnover
of INR 1000 crores and profits of INR 250 crores. The company is planning to get listed next year. The
company appointed OPP & CO LLP as new auditors to have a fresh look on their financial systems so
that the financial reporting can be improved wherever required.
During the course of audit, the auditors have been facing lot of challenges to obtain sufficient appropriate
audit evidence and have discussed the same with the management. Now the auditors are determining
the implications. Please suggest which one of the following should not be the implication in respect of
this matter.
(a) If the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive, the auditor shall qualify the opinion.
(b) 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 withdraw from
the audit, where practicable and possible under applicable law or regulation.
(c) 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 withdraw from
the audit, where practicable and possible under applicable law or regulation. If withdrawal from the
audit before issuing the auditor’s report is not practicable or possible, disclaim an opinion on the
financial statements.
(d) 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 withdraw from
the audit, where practicable and possible under applicable law or regulation. If withdrawal from the
audit before issuing the auditor’s report is not practicable or possible, report the matter to the
Registrar of Companies.
15. Yellow Steels Ltd. was engaged in the business of manufacturing and selling steel products. The company
was having sales offices at different locations in and outside India. The company decided to have a sales
office at Kanpur on their own land. A Managing Committee of some officers from the company was formed
in order to get a building constructed at land in Kanpur. Budget of Rs.35 crores was approved by the company
for the same and it was proposed to complete the construction within two years. Rs. 32 crores were already
released by the company within a year of start of the project and the managing committee raised a demand
for Rs. 5 crores for further payments to vendors. The management of Yellow Steels wants to get the
verification done of all the expenses incurred on site and identify the reasons for increase in construction
cost. Which of the following will suffice the purpose of management?
(a) The management should go for operational audit, as it will evaluate the effectiveness, efficiency
and economy of operations done at the construction site.
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 (b) The management should get a Forensic Audit done in order to rule out any possibility of fraud or
any other financial crime.
(c) A Financial Due Diligence is required to be done as no fraud has been reported and the
management just want to analyse the books of accounts and other financial matters pertaining to
financial matters at site.
(d) A management audit should be done to ensure that the increase in cost of construction is not due
to any discrepancies in the formulation of objectives, plans and policies of the top management.
16. APP Ltd. is listed on National Stock Exchange in India. Post audit rotation, KYP & Co LLP have been
appointed as the statutory auditors of APP Ltd. The company has a pending litigation in respect of
service tax matter which has been going on for long time now and exposure of the company towards
that litigation is very significant.
The new auditors got the exposure of this case evaluated by involving their in-house tax experts who
have shared a view that the exposure of the company would be medium. As per the requirements of
accounting standards, medium exposure would be considered as a possible impact for which probability
is 50%. The company has been disclosing this as a contingent liability in the previous years. However,
the new auditors are of the view that this is a significant matter that requires user’s attention by disclosing
this in the financial statements and it is of such importance that it is fundamental to user’s understanding
of financial statements. Further there is a material uncertainty in respect of this matter (i.e. demand
raised by service tax department).
Basis this, auditors want to include Emphasis of matter (EOM) in their report. Management is of the view
that since this was not reported by previous auditors as EOM, hence it should not be included by new
auditors also and also being a listed company, it is not appropriate to include EOM in the first year of
audit by a new firm.
Please suggest which of the following is correct.
(a) EOM should be included by new auditors.
(b) EOM should not be included by new auditors if the previous auditors have not given that.
(c) EOM should not be given, however, there should be a disclosure of this matter in the financial
statements and also the fact that auditors are in the first year of audit and this matter would require
detailed evaluation.
(d) Auditors should quality the report instead of EOM.
17. NT 22 Group is a large group comprising of 22 subsidiary companies, 14 associate companies and
19 joint ventures. NT Ltd. is the holding company which is also listed on Bombay Stock Exchange and
New York Stock Exchange. The Group prepares its consolidated financial statements every quarter
for various reporting requirements – SEBI (Stock and Exchange Board of India), Stock Exchanges,
Registrar of Companies in India and others. The turnover of the Group is INR 15,000 crores and many
of its components have significant operations at standalone level.
The Group is audited by one audit firm, Seema & Co LLP. For the purpose of group audit of the current
year, the auditors have considered perfoming testing of journal entries across the group to address the
significant risk, however, the auditors are facing challenges to perform this audit procedure across the
group because of the volume and limitation of resources. Please suggest the correct options in respect
of this matter.
(a) The Group auditors have a choice to test journal entries of the components which is also backed
up by the auditing standards.
(b) The Group auditors must test journal entries of all components.
(c) The Group auditors need not test journal entries of components requiring analytical response at
group level.

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 (d) The Group auditors need not test journal entries of components scoped with com prehensive
approach.
18. Rajaram is appointed as internal auditor for a finance company with 15 branches across the states. He
needs to conduct a branch visit in the coming week. Based on management inputs and past year audit
reports, he has shortlisted four branches.
Rajaram is not able to decide which branch visit he should prioritize as an internal auditor. Based on the
branch information given below, which branch should Rajaram visit first?
(a) Sonpur – 15 people; two instances of fraud in the last year; regional manager present in the branch
for supervision
(b) Chandpur – 12 people; no fraud, no visit by internal auditor in last two years due to set processes
(c) Rampur – 18 people; no fraud, 6 of 20 employees are new joiners in the last 6 months; ne wly
opened branch
(d) Laxmanpur–10 people; 1 fraud in the last year, all 10 are long term employees of the company; no
audit visit in the last year
19. Don’t Pay for Fun (DPF)’ is a start-up who is trying to get funding from investors. One of the investor s
has expressed interest in looking at the investment proposal but has insisted that the proposal also
contain DPF’s financial statements which are audited by an independent auditor. DPF engages
CA Abhishek to conduct an independent audit and Abhishek issues an engagement letter for the
independent audit to the owner of DPF which is duly acknowledged. DPF while finalising the financial
statements is facing some difficulties so its owner requests Abhishek to provide advice as it needs to
furnish the proposal to the investor fast. Since Abhishek is already engaged in the audit of the
transactions, he assists DPF’s accounting officer and the financial statements are finalised. Abhishek
also completes the audit and presents the audit report which is provided to the investor. Has the
condition set by the investor been fulfilled?
(a) No, the investor had asked for independent audit.
(b) Yes, as the audit report is issued after proper audit engagement letter and also examination of the
books of accounts.
(c) No, because CA Abhishek did not change the terms of engagement to include the advice part
alongwith the independent audit. In order for his audit report to be independent, he should have
charged separate fees for the advice.
(d) Yes, DPF has hired a qualified CA to conduct the audit. Not only there is no evidence to suggest
that the auditor allowed any misrepresentation, but the auditor himself advised DPF in finalising
the financial statements which speaks highly of the quality of financial statements.
20. The auditor has determined that there is a significant going concern uncertainty at PQR Ltd. due to the
requirement to refinance the company’s debt. Discussions with the management and the auditor’s
evaluation of management’s plans for future actions in relation to its going concern assessment have
revealed that plans to raise new equity finance are realistic and likely to deal with the problem. Is it
appropriate for PQR Ltd. to prepare its financial statements on a going concern basis?
(a) No, PQR Ltd. cannot prepare its financial statements on a going concern basis because a
significant uncertainty exists.
(b) Yes, PQR Ltd. can prepare its financial statements on a going concern basis. However, the auditor
is required to express a qualified opinion.
(c) Yes, PQR Ltd. can prepare its financial statements on a going concern basis. No additional
disclosure is necessary in the financial statements or the auditor’s report.
(d) Yes, PQR Ltd. can prepare its financial statements on a going concern basis. However, disclosure
of both the nature of the uncertainty and management’s plan is required. (10 x 2 = 20 Marks)
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 Division B- Descriptive Questions-70 Marks
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
1. (a) NMN & Co LLP and ABC & Associates LLP are the joint statutory auditors of BHS Ltd. BHS Ltd. is
a listed company and has been in existence for the last 50 years. Since beginning this company
was audited by MQS & Associates but due to audit rotation, the company had to bring in ne w
auditors. Considering the size of the company, two auditors were appointed as joint auditors. Since
the company is new to these auditors and the concept of joint auditors to whom audit work has
been divided, management had a discussion and understood that each joint auditor is responsible
only for the work allocated to him, whether or not he has prepared a separate report on the work
performed by him. Advise. (4 Marks)
(b) ADKS & Co LLP are the newly appointed statutory auditors of PKK Ltd. During the c ourse of audit,
the statutory auditors have come across certain significant observations which they believe could
lead to material misstatement of financial statements. Management has a different view and does
not concur with the view of the statutory auditors. Considering this the statutory auditors are
determining as to how to address these observations in terms of their reporting requirement. Please
advise. (5 Marks)
(c) O Ltd. is in the business of manufacturing of steel. The manufacturing process requires raw
material as iron ore for which large stock was maintained by the company at year end – 31 March
2019. The nature of raw material is such that its physical verification requires involvement of an
expert. Management hired their expert for stock take and auditors also involved auditor’s expert
for the stock take.
The auditor observed that the work of the auditor’s expert was not adequate for auditor’s purposes
and the auditor could not resolve the matter through additional audit procedures which included
further work performed by both the auditor’s expert and the auditor.
Basis above, the auditor concluded that it would be necessary to express a modified opinion in the
auditor’s report because the auditor has not obtained sufficient appropriate audit evidence.
However, the auditor issued a clean report and included the name of the expert in his report to
reduce his responsibility for the audit opinion. Comment. (5 Marks)
2. (a) In the course of his audit assignment in M/s Bailey Ltd., CA Soft came to know that the company,
due to financial crunch and unable to meet employees salary, has taken a loan of Rs. 50 lacs from
Employees Gratuity Fund. The said loan was not reflected in the books of account of the company
and the auditor ignored this transaction in his report. Comment with reference to the Chartered
Accountants Act, 1949 and Regulations there to. (4 Marks)
(b) Director (Finance) of Alpha Ltd. is of the opinion that total trade payables mentioned in the financial
statement is sufficient disclosure in the Balance Sheet as per Part I of Schedule III to the
Companies Act, 2013. They did not mention details regarding Micro, Small and Medium Enterprises
(MSME). Give your view as statutory auditor of the Company and state the details required to be
disclosed in notes regarding MSME. (5 Marks)
(c) Yashu & Co., Chartered Accountants have come across in the course of audit of a company that
certain machinery had been imported for production of new product. Although the Auditors have
applied the concept of materiality for the Financial Statements as a whole, they now want to re -
evaluate the materiality concept for this transaction involving foreign exchange. Give your view s in
this regard. (5 Marks)
3. (a) A special notice has been issued for a resolution at 2nd annual general meeting of Fiddle Ltd.
providing expressly that CA. Smart shall not be re-appointed as an auditor of the company.
Consequently, CA. Smart submitted a representation in writing to the company as provided under
section 140(4)(iii) of the Companies Act, 2013. In the representation, CA. Smart incorporated his
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 independent working as a professional throughout the term of office and also indicated his
willingness to continue as an auditor if reappointed by the shareholders of the Company. Comment
with reference to the Chartered Accountants Act, 1949 and Regulations there to. (5 Marks)
(b) Tee & Co., a firm of Chartered Accountants had been appointed by C & AG to conduct statutory
audit of M/s Rare Airlines Limited, a Public Sector Company. They would like to check certain
mandatory propriety points as required under section143(1) of the Companies Act, 2013. List the
areas of check to meet these requirements. (4 Marks)
(c) In course of audit of Fair Prince Bank as at 31st March, 18 you observed that in a particular account
there was no recovery in the past 18 months. The bank has not applied the NPA norms as well as
income recognition norms to this particular account. When queried the bank management replied
that this account was guaranteed by the central government and hence these norms were not
applicable. The bank has not invoked the guarantee. Please respond. Would your answer be
different if the advance is guaranteed by a State Government? (5 Marks)
4. (a) Compute the overall Audit Risk if looking to the nature of business there are chances that 40% bills
of services provided would be defalcated, inquiring on the same matter management has assured
that internal control can prevent such defalcation to 75%. At his part the Auditor assesses that the
procedure he could apply in the remaining time to complete Audit gives him satisfaction level of
detection of frauds & error to an extent of 60%. Analyse the Risk of Material Misstatement and find
out the overall Audit Risk. (5 Marks)
(b) Comment on the following in the light of certificate of compliance of conditions of Corporate
Governance to be issued for a listed company where the Board consists of 10 directors including
a non-executive director as its chairman and further:
(i) There were 5 meetings held during the year as follows 01/04/2017, 01/06/2017, 01/09/2017,
03/01/2018, 25/03/2018.
(ii) There are 4 independent directors. One of them resigned on 25/05/2017. A new independent
director was appointed on 01/09/2017.
(iii) The Chairman of Audit Committee did not attend the Annual General meeting held on 14/09/2017.
(iv) The internal audit reports were obtained by Audit Committee on quarterly basis. Quarter 1 internal
audit report commented on certain serious irregularities as regards electronic online auction of
scrap. The agenda of Audit Committee did not deliberate or take note of the issue.
(v) There is no women director. (5 Marks)
(c) OPQ Ltd. is in the business of software consultancy. The company has had large balances of
accounts receivables in the past years which have been assessed as area of high risk. For the year
ended 31 March 2018, in respect of the valuation of accounts receivable, the statutory auditor has
assigned the checking of the accuracy of the aging of the accounts receivables and provision based
on ageing to the internal auditor providing direct assistance to him. Please advise. (4 Marks)
5. (a) AKJ Ltd. is a small-sized 30 years old company having business of manufacturing of pipes.
Company has a plant based out of Dehradun and have their corporate office in Delhi. Recently the
company appointed new firm of Chartered Accountants as their statutory auditors.
The statutory auditors want to enter into an engagement letter with the company in respect of their
services but the management has contended that since the statutory audit is mandated by law,
engagement letter may not be required. Auditors did not agree to this and have shared a format of
engagement letter with the management for their reference before getting that signed. In this
respect management would like to understand that as per SA 210 (auditing standard referred to by
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 the auditors), if the agreed terms of the engagement shall be recorded in an engagement letter or
other suitable form of written agreement, what should be included in terms of agreed audit
engagement letter? (4 Marks)
(b) Ekbote Co. is currently a large organisation trading in items of office furniture. The entity wants to
expand and hence are looking at acquisition of Rawat Co which deals in items of household furniture.
Ekbote Co. hires a Chartered accountant to conduct a due diligence to consider whether there is the
potential for additional value to be brought out of the target company by improving its operational
function and also whether there are serious operational risks about which the potential buyer should
be concerned (thereby allowing the buyer to consider aborting the deal or renegotiating the price).
Which of the due diligence review would be helpful to achieve the above objective? You are also
required to briefly discuss the contents of a due diligence report. (4 Marks)
(c) (i) While conducting the tax audit of A & Co. you observed that it made an escalation claim to
one of its customers but which was not accounted as income. What is your reporting
responsibility? (3 Marks)
(ii) While writing the audit program for tax audit in respect of A Ltd., you wish to include possible
instances of capital receipt if not credited to Profit & Loss Account which needs to be
reported under clause 16(e) of form 3CD. Please elucidate possible instances. (3 Marks)
6. (a) M/s. ABC, a firm of Chartered Accountants received Rs. 2 lakhs in July, 2018 from a client to
pay the Advance Tax. However, the firm has used that money for its own purpose and later on
adjusted the same with the outstanding fee payable. Comment with reference to the Chartered
Accountants Act, 1949 and Regulations there to. (3 Marks)
(b) You are appointed as the auditor of a NBFC which is an Investment company registered with RBI.
What shall be the special points to be covered for the audit of NBFC in case of Investment
companies? (6 Marks)
(c) XYZ Pvt. Ltd. has submitted the financial statements for the year ended 31-3-19 for audit. The audit
assistant observes and brings to your notice that the company's records show following dues:
• Income Tax relating to Assessment Year 2015-16 rupees 125 lacs - Appeal is pending before
Hon'ble ITAT since 30-9-17.
• Customs duty rupees 85 lakhs - Demand notice received on 15-9-18 but no action has been taken
to pay or appeal.
As an auditor, how would you bring this fact to the members? (5 Marks)

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 Test Series: April, 2019
MOCK TEST PAPER - 2
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS
DIVISION A - MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. (c)
2. (b)
3. (d)
4. (c)
5. (a)
6. (c)
7. (b)
8. (b)
9. (c)
10. (d)
Questions (11-20) carry 2 Marks each
11. (d)
12. (d)
13. (c)
14. (d)
15. (c)
16. (a)
17. (c)
18. (d)
19. (a)
20. (d)
DIVISION B - DESCRIPTIVE QUESTIONS (70 Marks)
1. (a) SA 299 “Joint Audit of Financial Statements” deals with the professional responsibilities which
the auditors undertake in accepting appointments as joint auditors. The joint auditors are required
to issue common audit report, however, where the joint auditors are in disagreement with regard
to the opinion or any matters to be covered by the audit report, they shall express their opinion in
a separate audit report.
A joint auditor is not bound by the views of the majority of the joint auditors regarding the opinion
or matters to be covered in the audit report and shall express opinion formed by the said joint
auditor in separate audit report in case of disagreement. In such circumstances, the audit report(s)
issued by the joint auditor(s) shall make a reference to the separate audit report(s) issued by the
other joint auditor(s). Further, separate audit report shall also make reference to the audit report
issued by other joint auditors. Such reference shall be made under the headi ng “Other Matter

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 Paragraph” as per SA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in
the Independent Auditor’s Report”.
Each joint auditor is entitled to assume that:
• The other joint auditors have carried out their part of the audit work and the work has actually
been performed in accordance with the Standards on Auditing issued by the Institute of
Chartered Accountants of India. It is not necessary for a joint auditor to review the work
performed by other joint auditors or perform any tests in order to ascertain whether the work
has actually been performed in such a manner.
• The other joint auditors have brought to said joint auditor’s notice any departure from
applicable financial reporting framework or significant observations that are relevant to their
responsibilities noticed in the course of the audit.
Where financial statements of a division/branch are audited by one of the joint auditors, the other
joint auditors are entitled to proceed on the basis that such financial statements comply with all the
legal and regulatory requirements and present a true and fair view of the state of affairs and of the
results of operations of the division/branch concerned.
Before finalizing their audit report, the joint auditors shall discuss and communicate with each other
their respective conclusions that would form the content of the audit report.
(b) As per SA 705, if the auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement or the auditor is unable to obtain
sufficient appropriate audit evidence to conclude that the financial statements as a whole are free
from material misstatement, the auditor shall modify the opinion in his report.
The auditor in such a case needs to determine the modification as follows:
(i) Qualified Opinion: The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to the
financial statements; or
(b) 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 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 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.
If, after accepting the engagement, the auditor becomes aware that management has
imposed a limitation on the scope of the audit that the auditor considers likely to result in the
need to express a qualified opinion or to disclaim an opinion on the financial statements, the
auditor shall request that management remove the limitation.

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 If management refuses to remove the limitation, the auditor shall communicate the matter to
those charged with governance, unless all of those charged with governance are involved in
managing the entity, and determine whether it is possible to perform alternative procedures
to obtain sufficient appropriate audit evidence.
(c) As per SA 620, Using the work of an Auditor’s Expert, if the auditor concludes that the work of
the auditor’s expert is not adequate for the auditor’s purposes and the auditor cannot resolve the
matter through the additional audit, which may involve further work being performed by both the
expert and the auditor, or include employing or engaging another expert, it may be necessary to
express a modified opinion in the auditor’s report in accordance with SA 705 because the auditor
has not obtained sufficient appropriate audit evidence
In addition, the auditor shall not refer to the work of an auditor’s expert in an auditor’s report
containing an unmodified opinion unless required by law or regulation to do so. If such reference
is required by law or regulation, the auditor shall indicate in the auditor’s report that the reference
does not reduce the auditor’s responsibility for the audit opinion.
If the auditor makes reference to the work of an auditor’s expert in the auditor’s report because
such reference is relevant to an understanding of a modification to the auditor’s opinion, the auditor
shall indicate in the auditor’s report that such reference does not reduce the auditor’s responsibility
for that opinion.
In the given case, the auditor cannot reduce his responsibility by referring the name of auditor’s
expert and thereby issuing a clean report. Auditor should have issued a modified report and could
have given reference to the work of an auditor’s expert in that report if such reference was relevant
to understanding of a modification to the auditor’s opinion but even in that case the auditor should
have indicated in his report that such reference of auditor’s expert does not reduce his responsibility
for that opinion.
2. (a) Failure to Disclose Material Facts: As per Clause (5) of Part I of Second Schedule to the
Chartered Accountants Act, 1949, a chartered Accountant in practice will be held liable for
misconduct if he fails to disclose a material fact known to him, which is not disclosed in the financial
statements but disclosure of which is necessary to make the financial statements not misleading.
In this case, CA. Soft has come across information that a loan of Rs. 50 lakhs has been taken by
the company from Gratuity Fund. This is contravention of Rules and the said loan has not been
reflected in the books of account.
Further, this material fact has also to be disclosed in the financial statements. The very fact that
CA. Soft has failed to disclose this fact in his report, he would be guilty for professional misconduct
under Clause (5) of Part I of Second Schedule to the Chartered Accountants Act, 1949.
(b) Details required to be disclosed in Notes regarding MSME: Opinion of Director (Finance) of
Alpha Ltd. that total trade payables mentioned in the financial statement is sufficient disclosure in
the Balance Sheet as per Part I of Schedule III to the Companies Act, 2013, is not correct. The
following details relating to Micro, Small and Medium Enterprises shall be disclosed by Alpha Ltd.
in the notes:
(i) the principal amount and the interest due thereon (to be shown separately) remaining
unpaid to any supplier at the end of each accounting year;
(ii) the amount of interest paid by the buyer as per Micro, Small and Medium Enterprises
Development Act, 2006, along with the amount of the payment made to the supplier beyond
the appointed day during each accounting year;
(iii) the amount of interest due and payable for the period of delay in making payment (which
have been paid but beyond the appointed day during the year) but without adding the interest
specified under the Micro, Small and Medium Enterprises Development Act, 2006;

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 (iv) the amount of interest accrued and remaining unpaid at the end of each accounting year;
and
(v) the amount of further interest remaining due and payable even in the succeeding years,
until such date when the interest dues above are actually paid to the small enterprise, for the
purpose of disallowance of a deductible expenditure as per Micro, Small and Medium
Enterprises Development Act, 2006.
(c) Re-evaluation of the Materiality Concept: In the instant case, Yashu & Co., as an auditor has
applied the concept of materiality for the financial statements as a whole. But they want to re -
evaluate the materiality concept on the basis of additional information of import of machinery for
production of new product which draws attention to a particular aspect of the company’s business.
As per SA 320 “Materiality in Planning and Performing an Audit”, while establishing the overall
audit strategy, the auditor shall determine materiality for the financial statement as a whole. He
should set the benchmark on the basis of which he performs his audit procedure. If, in the specific
circumstances of the entity, there is one or more particular classes of transactions, account
balances or disclosures for which misstatements of lesser amounts than the materiality for the
financial statements as a whole could reasonably be expected to influence the economic decisions
of users taken on the basis of the financial statements, the auditor shall also determine the
materiality level or levels to be applied to those particular classes of transactions, account balances
or disclosures.
The auditor shall revise materiality for the financial statements in the event of becoming aware of
information during the audit that would have caused the auditor to have determined a different
amount (or amounts) initially.
If the auditor concludes a lower materiality for the same, then he should consider the fact that
whether it is necessary to revise performance materiality and whether the nature, timing and extent
of the further audit procedures remain appropriate.
Thus, Yashu & Co. can re-evaluate the materiality concepts after considering the necessity of such
revision.
3. (a) Soliciting Clients: As per Clause (6) of Part I of First Schedule to the Chartered Accountants Act,
1949, a Chartered Accountant in practice is deemed to be guilty of professional misconduct if he
solicits clients or professional work either directly or indirectly by circular, advertisement, personal
communication or interview or by any other means except applying or requesting for or inviting or
securing professional work from another chartered accountant in practice and responding to
tenders.
Further, section 140(4)(iii) of the Companies Act, 2013, provides a right, to the retiring auditor, to
make representation in writing to the company. The retiring auditor has the right for his
representation to be circulated among the members of the company and to be read out at the
meeting. However, the content of letter should be set out in a dignified manner how he has been
acting independently and conscientiously through the term of his office and may, in addition,
indicate, if he so chooses, his willingness to continue as auditor, if re-appointed by the
shareholders.
Thus, the incorporation as an independent professional, made by CA. Smart, while submitting
representation under section 140(4)(iii) of the Companies Act, 2013 and indication of willingness
to continue as an auditor if reappointed by shareholders, does not leads to solicitation.
Therefore, CA. Smart will not be held guilty for professional misconduct under Clause (6) of Part I
of First Schedule to the Chartered Accountants Act, 1949.
(b) Mandatory Propriety Points under section 143 (1) of the Companies Act, 2013: The
requirement of the provisions of section 143(1) is essentially propriety-oriented as much as some

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 specific dubious practices are required to be looked into by the auditor. Areas of propriety audit
under the provisions of Section 143(1) may be following:
(i) Whether the terms on which secured loans and secured advances have been made are
prejudicial to the interests of the company or its members”: It may be appreciated that
the terms of loans include such matters as security, interest, repayment period and other
business considerations. The auditor has to inquire whether the terms are such that they can
be adjudged as prejudicial to the legitimate interest of the company or of its shareholders.
This is a process of judging a situation by reference to certain objective standards or
reasonableness whether the terms entered into are prejudicial or not, not only to the company
but also to the shareholders.
(ii) Whether transactions of the company which are represented merely by book entries
are prejudicial to the interests of the company: This proposition has got to be inquired into
by reference to the effects of the book entries, unsupported by transactions, on the legitimate
interests of the company. The auditor has to exercise his judgment based on certain objective
standards. It is also possible that some transactions may not adversely affect the interests of
the company. The auditor has to judiciously consider what does and does not constitute the
interest of the company.
(iii) Whether investment of companies, other than a banking or an investment company, in
the form of shares, debentures and other securities have been sold at a price lower
than the cost: Apparently, this is a matter of verification by the auditor. The intention,
however, is not known whether loss has occurred due to the sale. The auditor is required to
inquire into circumstances of sale of investments that resulted in loss. Obviously, the duty
cast on him is propriety based, i.e., reasonableness of the decision to sell at a loss. It involves
exercise of judgment having regard to the circumstances in which the company was placed
at the time of making the sale.
(iv) Whether loans and advances made by the company have been shown as deposits.
Again, considering the propriety element, rationalizing the proper disclosure of loans
and advance given by company is made:
(v) Whether personal expenses have been charged to revenue: It is an accepted principle
that expenses which are not business expenses should not be charged to revenue. The effect
of charging personal expenses to the business is to distort the profitability of the company
and to secure a personal gain at the cost of the company. Obviously, propriety is involved in
this; charging personal expenses to business account is highly improper and abusive hence
this provision.
(vi) In case it is stated in the books and papers of the company that shares have been
allotted for cash, whether cash has actually been received in respect of such allotmen t,
and if no cash actually received, whether the position in books of account and balance
sheet so stated is correct, regular and not misleading: A control has been set up to verify
the receipt of cash in case of allotment of shares for cash. Further, if c ash is not received, the
books of accounts and statement of affairs shows the true picture.
(c) Government Guaranteed Advance: If a government guaranteed advance becomes NPA, then for
the purpose of income recognition, interest on such advance should not to be taken to income
unless interest is realized. However, for purpose of asset classification, credit facility backed by
Central Government Guarantee, though overdue, can be treated as NPA only when the Central
Government repudiates its guarantee, when invoked.
Since the bank has not revoked the guarantee, the question of repudiation does not arise. Hence
the bank is correct to the extent of not applying the NPA norms for provisioning purpose. But this
exemption is not available in respect of income recognition norms. Hence the income to the extent
not recovered should be reversed.
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 The situation would be different if the advance is guaranteed by State Government because this
exception is not applicable for State Government Guaranteed advances, where advance is to be
considered NPA if it remains overdue for more than 90 days.
In case the bank has not invoked the Central Government Guarantee though the amount is overdue
for long, the reasoning for the same should be taken and duly reported in LFAR.
4. (a) According to SA-200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit
in Accordance with Standards on Auditing”, the Audit Risk is a risk that Auditor will issue an
inappropriate opinion while Financial Statements are materially misstated.
Audit Risk, has two components: Risk of material Misstatement and Detection Risk. The
relationship can be defined as follows.
Audit Risk = Risk of material Misstatement X Detection Risk
Risk of material Misstatement: - Risk of Material Misstatement is anticipated risk that a material
Misstatement may exist in Financial Statement before start of the Audit. It has two components
Inherent risk and Control risk. The relationship can be defined as
Risk of material Misstatement = Inherent risk X control risk
Inherent risk: it is a susceptibility of an assertion about account balance; class of transaction,
disclosure towards misstatements which may be either individually or collectively with other
Misstatement becomes material before considering any related internal control which is 40% in the
given case.
Control risk: it is a risk that there may be chances of material Misstatement even if there is a control
applied by the management and it has prevented defalcation to 75%.
Hence, control risk is 25% (100%-75%)
Risk of material Misstatement: Inherent risk X control risk i.e. 40% X 25 % = 10%
Chances of material Misstatement are reduced to 10% by the internal control applied by
management.
Detection risk: It is a risk that a material Misstatement remained undetected even if all Audit
procedures applied, Detection Risk is 100-60 = 40%
In the given case, overall Audit Risk can be reduced up to 4% as follows:
Audit Risk: Risk of Material Misstatement X Detection Risk = 10X 40% = 4%
(b) Compliance of conditions of Corporate Governance in case of Listed Company: As per Listing
Obligation and Disclosure Requirements Regulations 2015, depending upon the facts and
circumstances, some situations may require an adverse or qualified statement or a disclosure
without necessarily making it a subject matter of qualification in the Auditors’ Certificate, in respect
of compliance of requirements of corporate governance for example:
(i) The Audit Committee shall meet at least four times in a year and not more than one hundred
and twenty days shall lapse between two meetings. The number of days between the
meetings held on 1.9.2017 and 3.01.2018 is more than 120 days. Hence it is a non -
compliance and would require qualification in certificate of corporate governance
(ii) Since the Chairman is the non-executive director, there should be 1/3 rd of directors (rounded
to next integer) to be independent. In this case, 4 directors need to be independent. Any
vacancy during shortfall of independent directorship should be filled within next 3 months or
before the start of next meeting, whichever is later. In the instant case, since the independent
director was appointed after lapse of 3 months (i.e. on 1.9.2017) and after next first meeting
1/6/2017, there is default which would require qualification in certificate on corporate
governance.
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 (iii) Chairman shall be present at Annual General Meeting to answer shareholder queries. In the
given scenario, Chairman of Audit Committee did not attend the Annual General Meeting held
on 14/09/2017 which is not in order/compliance.
(iv) The Audit Committee shall mandatorily review the Internal audit reports relating to internal
control weaknesses as per Part C (B) of Schedule II and the auditor should ascertain from
the minutes book of the Audit Committee and other sources like agenda papers, etc. whether
the Audit Committee has reviewed the above-mentioned information. In the given situation,
the agenda of Audit Committee did not deliberate or take note of serious irregularity mention
in Internal Audit Report which is again not in compliance of conditions of Corporate
Governance and warrant audit qualification in certificate on corporate governance.
(v) The auditor should ascertain whether, throughout the reporting period, the Board of Directors
comprises an optimum combination of executive and non-executive directors, with at least
one-woman director. Therefore, there should be at least one-woman director. In the given
situation there is no woman director which is again not in compliance.
(c) As per SA 610 Using the Work of Internal Auditor, the external auditor (Statutory Auditor) shall not
use internal auditors to provide direct assistance to perform procedures that:
(a) Involve making significant judgments in the audit;
(b) Relate 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) Relate 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) Relate to decisions the external auditor makes in accordance with this SA regarding the
internal audit function and the use of its work or direct assistance.
In the given case where the valuation of accounts receivable is assessed as an area of higher risk,
the statutory auditor could assign the checking of the accuracy of the aging to an internal auditor
providing direct assistance. However, because the evaluation of the adequacy of the provision
based on the aging would involve more than limited judgment, it would not be appropriate to assign
that latter procedure to an internal auditor providing direct assistance.
5. (a) As per SA 210 Agreeing the Terms of Audit Engagements The auditor shall agree the terms of the
audit engagement with management or those charged with governance, as appropriate.
The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other
suitable form of written agreement and shall include:
(i) The objective and scope of the audit of the financial statements;
(ii) The responsibilities of the auditor;
(iii) The responsibilities of management;
(iv) Identification of the applicable financial reporting framework for the 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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 (b) In the instant case Operational Due Diligence is required to confirm that the business plan provided
is achievable with the existing facilities plus the capital expenditure outlined in the business plan.
Contents of a Due Diligence Report: Briefly, the contents of a due diligence report can be
discussed under:
 Terms of reference and scope of verification.
 Objective of due diligence.
 Brief history of the company including shareholding pattern.
 Assessment of management structure.
 Assessment of financial liabilities with special emphasis on Interlocking investments and
financial obligations with group/associates companies, amounts receivables subj ect to
litigation, any other likely liability which is not provided for in the books of account.
 Assessment of valuation of assets including comments on properties, terms of leases, lien
and encumbrances including status of charges, liens, mortgages, assets and properties of the
company.
 Assessment of operating results.
 Assessment of taxation and statutory liabilities.
 Assessment of possible liabilities on account of litigation and legal proceedings against the
company and suggestion on ways and means including affidavits, indemnities, to be executed
to cover unforeseen and undetected contingent liabilities.
 Assessment of net worth.
 Suggestions on various aspects to be taken care of before and after the proposed merger /
acquisition.
 Status of franchises, license and patents.
Finally, an executive summary may be prepared highlighting the significant areas.
(c) (i) Clause 16(c) of Form 3CD: A tax auditor has to report under clause 16(c) of Form 3CD on
any escalation claim accepted during the previous year and not credited to the profit and loss
account under clause 16(c) of Form 3CD.
The escalation claim accepted during the year would normally mean “accepted during the
relevant previous year”. If such amount are not credited to Profit and Loss Account the fact
should be reported. The system of accounting followed in respect of this particular item may
also be brought out in appropriate cases. If the assessee is following cash basis of accounting
with reference to this item, it should be clearly brought out since acceptance of claims during
the relevant previous year without actual receipt has no significance in cases where cash
method of accounting is followed.
Escalation claims should normally arise pursuant to a contract (including contracts entered
into in earlier years), if so permitted by the contract. Only those claims to which the other party
has signified unconditional acceptance could constitute accepted claims. Mere making claims
by the assessee or claims under negotiations cannot constitute accepted claims. After
ascertaining the relevant factors as outlined above, a decision whether to report or not, can
be taken.
(ii) The following is an illustrative list of capital receipts which, if not credited to the profit and loss
account, are to be stated under clause 16(e) of Form 3CD-
(a) Capital subsidy received in the form of Government grants, which are in the nature of
promoters’ contribution i.e., they are given with reference to the total investment of the

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 undertaking or by way of contribution to its total capital outlay. For e.g., Capital
Investment Subsidy Scheme.
(b) Government grant in relation to a specific fixed asset where such grant is shown as a
deduction from the gross value of the asset by the concern in arriving at its book value.
(c) Compensation for surrendering certain rights.
(d) Profit on sale of fixed assets/investments to the extent not credited to the profit and loss
account.
6. (a) Money of clients to be deposited in separate bank account: Clause (10) of Part I of Second
Schedule states that a Chartered Accountant shall be deemed to be guilty of professional
misconduct if “he fails to keep money of his clients in separate banking account or to use such
money for the purpose for which they are intended”.
M/s. ABC received the money in March, 2015 for payment of the advance tax; hence it should be
deposited in a separate bank account. Since in this case M/s. ABC have failed to keep the sum of
Rs. 2 lakhs received on behalf of their client in a separate Bank Account, it amounts to professional
misconduct under Clause (10) of Part I of Second Schedule.
(b) Special points that may be covered in the audit of NBFCs in case of Investment Companies
are given below:
(i) Physically verify all the shares and securities held by a NBFC. Where any security i s lodged
with an institution or a bank, a certificate from the bank/institution to that effect must be
verified.
(ii) NBFC Prudential Norms stipulates that NBFCs should not lend more than 15% of its owned
funds to any single borrower and not more than 25% to any single group of borrower. The
ceiling on investments in shares by a NBFC in a single entity and the aggregate of investments
in a single group of entities has been fixed at 15% and 25% respectively. Moreover, a
composite limit of credit to and investments in a single entity/group of entities has been fixed
at 25% and 40% respectively of the owned fund of the concerned NBFC. Verify that the credit
facilities extended and investments made by the concerned NBFC are in accordance with the
prescribed ceiling.
(iii) Verify whether the NBFC has not advanced any loans against the security of its own shares.
(iv) Verify that dividend income wherever declared by a company, has been duly received by a
NBFC and interest wherever due [except in case of NPAs] has been duly accounted for.
(v) Test check bills/contract notes received from brokers with reference to the prices vis-à-vis the
stock market quotations on the respective dates.
(vi) Verify the Board Minutes for purchase and sale of investments. Ascertain from the Board
resolution or obtain a management certificate to the effect that the investments so acquired
are current investments or Long Term Investments.
(vii) Check whether the investments have been valued in accordance with the NBFC Prudential
Norms Directions and adequate provision for fall in the market value of securities, wherever
applicable, have been made there against, as required by the Directions.
(viii) Obtain a list of subsidiary/group companies from the management and verify the investments
made in subsidiary/group companies during the year. Ascertain the basis for arriving at the
price paid for the acquisition of such shares.
(ix) Check whether investments in unquoted debentures/bonds have not been treated as
investments but as term loans or other credit facilities for the purposes of income recognition
and asset classification.

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 (x) An auditor will have to ascertain whether the requirements of AS 13 “Accounting for
Investments” (to the extent they are not inconsistent with the Directions) have been duly
complied with by the NBFC.
(xi) In respect of shares/securities held through a depository, obtain a confirmation from the
depository regarding the shares/securities held by it on behalf of the NBFC.
(xii) In the case of securities lent/borrowed under the Securities Lending Scheme of SEBI, verify
the agreement entered into with the approved intermediary (i.e. the person through whom the
lender will deposit and the borrower will borrow the securities for lending/borrowing) with
regards to the period of depositing/lending securities, fees for depositing/lending, collateral
securities and provision for the return including pre-mature return of the securities
deposited/lent.
(xiii) Verify that securities of the same type or class are received back by the lender/paid by the
borrower at the end of the specified period together with all corporate benefits thereof (i.e.
dividends, rights, bonus, interest or any other rights or benefit accruing thereon.)
(xiv) Verify charges received or paid in respect of securities lent/borrowed.
(xv) Obtain a confirmation from the approved intermediary regarding securities deposited
with/borrowed from it as at the year end.
(c) Non-Compliance of Laws and Regulations: As per SA 250 “Consideration of Laws and
Regulations in an Audit of Financial Statement”, it is the responsibility of management, with the
oversight of those charged with governance, to ensure that the entity’s operations are conducted
in accordance with the provisions of laws and regulations, including compliance with the provisions
of laws and regulations that determine the reported amounts and disclosures in an entity’s financial
statements.
The auditor is responsible for obtaining reasonable assurance that the financial statements, taken
as a whole, are free from material misstatement, whether caused by fraud or error. In conducting
an audit of financial statements, the auditor takes into account the applicable legal and regulatory
framework. Owing to the inherent limitations of an audit, there is an unavoidable risk that some
material misstatements in the financial statements may not be detected, even though the audit is
properly planned and performed in accordance with the SAs.
If the auditor concludes that the non-compliance has a material effect on the financial statements,
and has not been adequately reflected in the financial statements, the auditor shall express a
qualified or adverse opinion on the financial statements.
Further, the auditor is required to report on certain matters specified in Para 3 of CARO, 2016
under section 143 of the Companies Act, 2013.
One of such matter is non-payment of dues to Government, on account of any dispute. As per
clause (vii)(b) of Para 3 of CARO, 2016, in case dues of income tax or sales tax or service tax or
duty of customs or duty of excise or value added tax 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.}
In the present case, there is Income Tax demand of Rs. 125 Lacs and the company has gone for
an appeal, it needs considerations as to whether the entire demand is disputed, because it is
difficult to presume that the demand by Income Tax authority is without any basis. Therefore, as
per AS 29 “Provisions, Contingent Liabilities and Contingent Assets”, partly to the extent the
company considers that the demand is based on some logical basis, that amount may be provided
for and the remaining may be disclosed as the contingent liability. Further, it should be brought to
notice of the members by reporting.

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 Additionally, the demand notice has been received for Customs duty of Rs. 85 lakhs and is
outstanding on the closure of financial year, for which no action has been taken by the
management. Therefore, it should also be brought to notice of the members by reporting.

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 Test Series: October, 2019
MOCK TEST PAPER -1
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
All MCQs are compulsory
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100
DIVISION A – MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. CA Ram is practicing in the field of financial management planning for over 12 years. He has gained
expertise in this domain over others. Mr. Ratan, a student of Chartered Accountancy course, is very
much impressed with the knowledge of CA. Ram. He approac hed CA. Ram to take guidance on some
topics of financial management subject related to his course. CA. Ram, on request, decided to spare
some time and started providing private tutorship to Mr. Ratan along with some other aspirants for 4
days in a week and for 3 hours in a day. However, he forgot to take specific permission for such private
tutorship from the Council. Later on, he came to know that the Council has passed a Resolution under
Regulation 190A granting general permission (for private tutorship, and part-time tutorship under
Coaching organization of the Institute) and specific permission (for part-time or full time tutorship under
any educational institution other than Coaching organization of the Institute). Such general and specific
permission granted is subject to the condition that the direct teaching hours devoted to such activities
taken together should _______________ in order to be able to undertake attest functions.
(a) not exceed 25 hours a week
(b) not exceed 21 hours a week
(c) not exceed 25 hours a month
(d) not exceed 21 hours a month
2. Rana & Co LLP is a large firm of Chartered Accountants based out of Delhi-NCR. During the financial
year ended 31 March 2019, the firm Rana & Co LLP got an intimation for the peer review on 1 July. The
entire peer review process including on-site review got completed. The peer reviewer did not share any
of his observations with Rana & Co LLP as draft and final report was submitted to the firm.
(a) Peer reviewer need not share any draft report with the firm if there are no observations.
(b) Even the final report is not required to be submitted to the firm.
(c) Peer reviewer needs to share draft report with the firm before finalisation.
(d) There are no reports in case of peer review. On completion, a certificate to that effect is issued.
3. OPE Ltd issued a prospectus in respect of an IPO which had the auditor’s report on the financial
statements for the year ended 31 March 2019. The issue was fully subscribed.
During this year, there was an abnormal rise in the profits of the company for which it was found later
on that it was because of manipulated sales in which there was participation of Whole-time director and
other top officials of the company. On discovery of this fact, the company offered to refund all moneys
to the subscribers of the shares and sued the auditors for the damages alleging that the auditors failed
to examine and ascertain any satisfactory explanation for steep increase in the rate of profits and related
accounts.

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 The company emphasized that the auditor should have proceeded with suspicion and should not have
followed selected verification. The auditors were able to prove that they found internal controls to be
satisfactory and did not find any circumstance to arouse suspicion.
The company was not able to prove that auditors were negligent in performance of their duties. Which
of the following is correct:
(a) The stand of the company was correct in this case. Considering the nature of the work, the Auditors
should have proceeded with suspicion and should not have followed selected verification.
(b) The approach of the auditors look reasonable in this case. The auditors found internal controls to
be satisfactory and also did not find any circumstance to arouse suspicion and hence they
performed their procedures on the basis of selected verification.
(c) In the given case, the auditors should have involved various experts along with them to help them
on their audit procedures. Prospectus is one area wherein management involves various experts
and hence the auditors should also have done that. In the given case, by not involving the experts
the auditors did not perform their job in a professional manner. If they had involved experts like
forensic experts etc, the manipulation could have been detected. Hence the auditors should be
held liable.
(d) In case of such type of engagements, the focus is always on the management controls. If the
controls are found to be effective then an auditor can never be held liable in resp ect of any
deficiency or misstatement or fraud.
4. Rajeev Ltd is a listed company having business of production of motion pictures. For the year ended 31
March 2018, the company wanted to appoint GST auditor. For the purpose, somebody who is familiar
with the business of the company/industry was to be preferred for appointment i.e. who would have
worked with the company in the past to avoid efforts/ duplication in terms of providing the information to
get the GST audit completed. The company had following options for the same. Please advise.
(a) Internal auditors can be appointed for this work.
(b) Both statutory and internal auditors can be jointly appointed for this work.
(c) Internal auditors along with the tax consultants of the company can be appointed for this work.
(d) Statutory auditors can be appointed for this work.
5. CER Ltd is a non-banking financial company and has been operating for the last 10 years. The company
is duly registered as per the requirements of the Reserve Bank of India. The com pany’s assets base
has been very strong over the years due to its efficient management function. The company is also
planning to get listed for which required work is going on.
For the financial year ended 31 March 2019, the company has closed its books of accounts and prepared
the financial statements for the purpose of statutory audit in a timely manner. The auditors of the
company have started their fieldwork. It has been observed by the auditors that the company’s various
term loans which have been given to various parties have become overdue in terms of instalment
including interest for a period of 5 months. As per the auditors these terms loans should be considered
by the company for making provision at the rate of 20% of total outstanding amount, how ever, the
management has considered a provision at the rate of 0.30%. Please advise the auditors and the
management regarding this matter considering that “Non-Banking Financial Company - Systemically
Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016”
are applicable to this NBFC.
(a) Provision should be made at 10%.
(b) Provision should be made 0.30%
(c) Provision should be made at 20%.
(d) Provision should be made at 0.40%
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6. PFS Bank was engaged in the business of providing Portfolio Management Services to its customers,
for which it took prior approval from RBI. Your firm has been appointed as the statutory auditors of the
Bank’s financial statements for the year 2018-19. Your senior has instructed you to verify the
transactions of Portfolio Management Services (PMS). While verifying the transactions you noticed that
the bank has not prepared separate record for PMS transactions from the Bank’s own investments. As
a statutory auditor what will be your decision for verification of PMS transactions?
(a) It is not necessary to maintain separate records for PMS clients from Bank’s own investments, so
the auditor can verify the PMS transactions as part of investment verification for Bank’s financial
statements and submit the audit report accordingly.
(b) As per RBI guidelines PMS investments need to be audited separately by the external auditors and
the auditors are required to give a certificate separately for the same. So, in the above case the
auditor should not verify the PMS transactions till the Bank segregates the transactions from its
own investments.
(c) The auditor can give a qualified opinion in his audit report on the financial statements of the Bank
and report the matter in special purpose certificate.
(d) Auditor should verify that PMS funds are not utilised for lending, inter-bank deposits or deposits to
corporate bodies and bills re-discounting only. So, whether the PMS transactions are recorded
separately or not will not matter for the auditor.
7. The auditor should ensure that the board of directors of the top 100 listed entities shall comprise of –
(a) not less than 7 directors.
(b) not less than 4 directors.
(c) not less than 6 directors.
(d) not less than 2 directors
8. 50:50 test determination is popularly used in
(a) Banking Company
(b) Insurance Company
(c) NBFC Company
(d) Stock Trading Company
9. CA Sameer, after developing the audit strategy for Menka Ltd., develops an audit plan but finds a need
to revise the materiality levels set earlier and therefore a deviation from the already set audit strategy is
felt necessary. In this case, he should
(a) Continue with the Audit Plan without considering the Audit Strategy
(b) Drop the audit and withdraw from the engagement
(c) First Modify the audit strategy and thereafter prepare the audit plan according to the modified
strategy.
(d) Devise a new audit plan and then, change the strategy as per the Revised Plan.
10. An auditor’s expert may be either an auditor’s internal or an external expert. Which of the following can
not be an auditor’s internal expert?
(a) Partner of the Auditor’s Firm
(b) Temporary Staff of the Auditor’s Firm
(c) Permanent Staff of Auditor’s Network Firm
(d) A Prospective CA, soon to join the Auditor’s Firm as a Partner. (10 x 1 = 10 Marks)

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Questions (11-20) carry 2 Marks each
11. The Chanakya Bank Ltd. was having 150 branches all over India by the year ending 31 st March, 2019.
Ten branches of the bank were already covered for concurrent audit and the Bank’s Audit Committee
decided to include the below mentioned branches for concurrent audit from the year 2019-20.
1. Allahabad branch which started foreign exchange business from February 2019.
2. Rae Bareilly branch whose aggregate deposits were more than 35% of the aggregate deposits of
the bank.
Whether the decision of audit committee to include both the branches mentioned in above paragraph
for concurrent audit is as per RBI Guidelines?
(a) The decision of audit committee is valid as according to RBI Guidelines, both the branches fulfil
the criteria for compulsory concurrent audit.
(b) Allahabad branch falls under the compulsory audit criteria as per RBI Guidelines, however Rae
Bareilly branch whose aggregate deposits are less than 50% of the aggregate deposits of the Bank
is not required to be compulsorily covered for concurrent audit.
(c) Allahabad and Rae Bareilly branch are compulsorily not required to be covered under concurrent
audit as per RBI Guidelines.
(d) Allahabad branch has started foreign exchange business in February 2019 and as per RBI
Guidelines only the branches dealing in Foreign exchange business from more than three years
are covered under concurrent audit. Therefore, Allahabad branch is not covered under compulsory
concurrent audit criteria as per RBI Guidelines but the Rae Bareilly branch is covered under
compulsory concurrent audit criteria.
12. KIC Ltd is a company engaged in the business of general insurance and has been in existence for over
15 years. The company has a subsidiary company, PIC Ltd, which is also engaged in the business of
insurance other than general insurance.
The previous statutory auditors of PIC Ltd have completed their tenure as an auditor and accordingly
have resigned and the management of PIC Ltd is looking for new statutory auditors.
KB & Associates, a firm of Chartered Accountants, have vast experience of audit of insurance companies
and would like to get appointed as auditor of PIC Ltd. KB & Associates is a large firm and have also
employed experts – engineers, valuers, lawyers for various client services. The firm is evaluating as to
what should be the criteria for get appointed as auditors of PIC Ltd because in the past they have audited
only the holding companies and considering a subsidiary company for the first time.
In this context, please help the firm by answering which of the following options would be correct?
(a) KB & Associates, a firm of Chartered Accountants, should be appointed by the Board of Directors
of PIC Ltd and should ensure that they don’t take up audit of more than 2 insurance companies.
(b) KB & Associates can take up the audit if the firm is appointed by the Comptroller and Auditor
General of India and should ensure that they don’t take up audit of more than 3 insurance
companies.
(c) KB & Associates cannot take audit of PIC Ltd because they have employed experts which is not
permitted by the IRDAI Guidelines.
(d) KB & Associates can take up audit of PIC Ltd by ensuring that they are eligible to be appointed as
per the criteria laid down in the Companies Act 2013 for audit of subsidiary companies and they
would need to submit a certificate in this respect to the ICAI.
13. KJ Private Ltd has a business of pharmaceuticals and has an annual turnover of INR 1,500 crores.
During the last few years, considering the environment in which the company operates, its profit ha s
reduced and is still falling. Hence the management has been looking at various ways to cut the costs.

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 AD & Associates are the statutory auditors of the company and RM & Associates are the internal auditors
of the company.
Initially the company did not want to appoint any internal auditors to save costs, however, at insistence
of the statutory auditors, the company appointed the internal auditors.
During the course of the statutory audit for the financial year ended 31 March, 2019, the statutory
auditors requested for the detailed working papers of the internal auditors which the internal auditors
refused. However, the statutory auditors told the management if the same are not provided then they
would qualify their report.
In this situation, please advise which of the following would be correct.
(a) The statutory auditors should review the detailed working papers but they cannot qualify their report
on this ground.
(b) The statutory auditors may review the detailed working papers and even after that they may qualify
their report.
(c) The statutory auditors are not required to go to the extent of review of detailed working papers of
internal auditors.
(d) The statutory auditors may review the detailed working papers of internal auditors but for that
purpose they would require prior approval of the ICAI.
14. Employees of LIG Ltd. have to travel frequently for business purposes, so the company entered into a
contract with a Simon Travels Ltd. for managing booking, cancellation and other services required by
their employees. As per contract terms, Simon travels has to raise its monthly bills for the tickets booked
or cancelled during the period and the same are paid by LIG Ltd. within 15 days of the bill date. The bills
raised by Simon travels were of huge amount, so the management of LIG Ltd. decided to get an audit
conducted of the process followed for booking/ cancellation of tickets and verify the accuracy of bills
raised by the travel agency. Which audit do you feel the management should opt for?
(a) Internal audit, as it relates to examine the operational efficiency of the organisation.
(b) Management audit, as it is an audit desired by the management.
(c) Performance audit so as to assess the performance of the Simon travels appointed by the
organisation.
(d) Operational audit, as it is the audit for the management and involves verifying the effectiveness,
efficiency and economy of operations done by the Simon travels for the organisation.
15. ZARI & Associates is a partnership firm and has been in existence for the last 15 years. The firm is
engaged in consultancy business related to various areas and has built a good name for itself over the
period.
Some of the clients of the firm are very old who have been continuing since its existence. The business
of the firm has gone through various phases some of them were very bad. But currently the business is
going very well and the firm is looking to expand its operations into different geographies. For this, the
firm’s management decided that some of its senior partners will move to new offices and new partners
would be inducted.
A team of new partners is in discussion with the senior old partners regarding their joining the firm.
The new partners would be interested to know whether the terms offered to them are reasonable having
regard to the nature of the business, profit records, capital distribution, personal capacity of the existing
partners, socio-economic setting etc. and whether they would be able to derive continuing benefits in
the shape of return of capital to be contributed and remuneration of services to be offered. In addition,
they also want to ascertain whether the capital to be contributed by them would be safe and applied
usefully or not.
For this purpose, an investigation of the business of the firm was set up on behalf of these new partners.
5

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 At the time of scrutiny of the record of profitability of the firm’s business, the investigating acc ountant
picked up records of last 4-5 years wherein he observed 2 years which were unusual because the profits
during those 2 years were highly erratic and fluctuating. The investigating accountant, therefore, went
into the profits of last 7-8 years to iron out the fluctuation. He also examined the provisions of the
partnership deed particularly the composition of partners, their capital contribution, drawing rights,
retirement benefits and goodwill. He also asked for details of jobs/ contracts in hand and the range of
current clientele of the firm for his examination. Some of these procedures of the investigating
accountant were not found appropriate by the senior partners of the firm and they advised the
investigating accountant not to go beyond his scope. In the given situation, which of the following is
correct:
(a) The investigating accountant should not have asked for the records of the profits of last 7-8 years
as that would be too much of the information for his review. Also the details of jobs/ contracts in
hand and the range of current clientele of the firm are confidential and hence does not get covered
in his scope.
(b) After finding 2 years which were unusual because the profits during those 2 years were highly
erratic and fluctuating, the investigating accountant should have reported the matter to the new
partners instead of asking for more details related to the profits of last 7-8 years. Also he is not
required to examine the provisions of the partnership deed as these details would have alrea dy
been discussed with the new partners and they would have checked that.
(c) The procedures of the investigating accountant looks completely reasonable considering his scope
of work. Further, no changes are required in his work approach.
(d) At the outset, it can be said that investigation in the given case was not required. However, even if
the new partners decided to carry out the investigation it should have been limited to mainly inquiry
procedures by the investigating accountant. The investigating accountant could have also reviewed
the manner of computation of goodwill which doesn’t seem to have been performed on the basis
of the above mentioned facts.
16. While conducting the current year audit of Finco Ltd, the auditor obtains audit evidence that a material
misstatement exists in the prior period financial statements. This misstatement was related to
recognition of research and development expenditure. The provisions of Ind AS 38 Intangible Assets
relating to capitalisation of development expenditure was not applied properly. On this, unmodified
opinion had been previously issued. The current auditor verified that the misstatement had not been
dealt with as required under Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
Accordingly, the current auditor will:
(a) Express a qualified or an adverse opinion in the auditor’s report on the current period financial
statements modified with respect to the corresponding figures included therein.
(b) Express an unmodified opinion in the auditor’s report on the current period financial statements
since it was related to the prior year.
(c) Express a qualified opinion in the auditor’s report on the current period financial statements,
modified with respect to the corresponding figures included therein.
(d) Express an adverse opinion in the auditor’s report on the current period financial statements,
modified with respect to the corresponding figures included therein.
17. Honeywell Ltd, a listed company pays its key managerial persons the remuneration in excess of the
limits which have been prescribed under 197 of the Companies Act, 2013 without obtaining the
necessary approvals from the regulatory authority. In this circumstance, the auditor while reporting under
CARO 2016, is required to state:
(a) Name of the managerial persons to whom the remuneration has been paid in excess of limits and
the amount involved.

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 (b) Name of the managerial persons to whom the remuneration in excess of limits are paid and the
steps taken by the company for securing refund of the same.
(c) The maximum remuneration payable and amount paid in excess of the maximum remuneration to
the managerial persons.
(d) The amount involved and steps taken by the company for securing the refund of the same.
18. You are the audit senior in charge of the audit of Swandive Co, and have been informed by your audit
manager that during the current year a fraud occurred at the client. A payroll clerk sets up fictitious
employees and the wages were paid into the clerk’s own bank account. This clerk has subsequently left the
company, but the audit manager is concerned that additional frauds have taken place in the wages
department. Which of the following audit procedures would be undertaken during the audit of wages as a
result of the manager’s assessment of the increased risk of fraud?
(1) Discuss with the payroll manager the nature of the payroll fraud, how it occurred and the financial
impact of amounts incorrectly paid into the payroll clerk’s bank account.
(2) Review the supporting documentation to confirm the total of the fraudulent payments made and
assess the materiality of this misstatement.
(3) Review and test the internal controls surrounding setting up of and payments to new joiners to
assess whether further frauds may have occurred.
(4) Review the legal action taken by the management against the payroll clerk who was involved in
the fraud and see whether he is punished for his actions.
(a) Audit procedures 1,2,3
(b) Audit procedures 2,3,4
(c) Audit procedures 1,3,4
(d) Audit procedures 1,2,4
19. One of your audit client Vernon Co with a year ending 31 March 2019 is planning to prepare the financial
statements from the next year as per Indian Accounting Standards (Ind AS). The finance director of
Vernon Co has contacted the audit engagement partner, asking if your firm can provide training on Ind
AS to the accounts department of the entity. This will help them to understand all the provisions of Ind
AS and the transition process will be easier.
Which of the following options needs to be considered by the audit engagement partner?
(a) The issue is whether there is a self-interest threat, as the auditor will receive separate training fees
for the service provided. The audit partner should decline the training assignm ent.
(b) The issue is whether the audit firm would be likely to possess the requisite competence to provide
such training to the staff of the entity. The audit partner should decline not all the qualified people
are good trainers.
(c) The audit partner could go ahead with the training service and disclose the fact in its audit report
about the service provided during the period. This will safeguard and reduce the threat to an
acceptable level.
(d) The audit partner needs to assess the materiality of the figure, and the degree of subjectivity
involved. If it considers that safeguards like using separate personnel, could reduce the threat to
an acceptable level, then it can go ahead with both the audit and the training assignment.
20. AJ Private Ltd. was incorporated on 21 March, 2018 and has limited operations. However, the capital
induction in the company was huge because it would be capital intensive. The company is in the process
to set up a plant in Karnataka which should be completed by 31 May, 2019. T he company’s management
prepared its financial statements for the year ended 31 March, 2019. The auditors were also called to
start the work in April 2019. The auditors would be able to complete their work by 31 May, 2019 and

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 accordingly would issue their audit report by 1st week of June, 2019 as per the plan agreed with the
management. The auditors have some observations related to preparations of financial statements
which are not in compliance with Schedule III and most importantly the point related to c apitalization of
the plant as Property, Plant and Equipment in the financial statements for the year ended 31 March,
2019. Please suggest which of the following statements would be correct.
(a) The compliance of Schedule III shall start from 1 April 2019 for this company as per Companies
Accounts (Amendment) Rules 2016.
(b) The compliance of Schedule III shall start from first financial period, however, some exemptions
would be applicable as per Companies Accounts Rules 2014.
(c) There should be full compliance of Schedule III and plant should be kept as CWIP as per Schedule
III.
(d) There should be full compliance of Schedule III and plant should be shown as PPE as per Schedule
III. (10 x 2 = 20 Marks)
Division B- Descriptive Questions-70 Marks
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
1. Comment on the following:
(a) MIO Ltd. is a mobile phone operating company. Barring the marketing function it had outsourced
the entire operations like maintenance of mobile infrastructure, customer billing, payroll, accounting
functions, etc. Assist the auditor of MIO Ltd. as to how he can obtain an understanding of how MIO
Ltd. uses the services of the outsourced agency in its operations. (4 Marks)
(b) In an initial audit engagement, the auditor will have to satisfy about the sufficiency and
appropriateness of ‘Opening Balances' to ensure that they are free from misstatements, which may
materially affect the current financial statements. Advise, the auditor about the audit procedures to
be followed, when financial statements are audited for the first time.
If, after performing the procedure, as an auditor you are not satisfied about the correctness of
'Opening Balances', what approach you will adopt in drafting your audit report? (6 Marks)
(c) AKY Ltd. is a listed company engaged in the business of software and is one of the largest company
operating in this sector in India. The company’s annual turnover is Rs. 40,000 crores with profits of Rs.
5,000 crores. Due to the nature of the business and the size of the company, the operations of the
company are spread out in India as well as outside India. The company’s contracts with its various
customers are quite complicated and different. During the course of the audit, the audit team spends
significant time on audit of revenue – be it planning, execution or conclusion. This matter was also
discussed with management at various stages of audit. The efforts towards audit of revenue also involve
significant involvement of senior members of the audit team including the audit partner. After completion
of audit for the year ended 31 March 2019, the audit partner was discussing significant matters with the
management wherein they also communicated to the management that he plans to include revenue
recognition as key audit matter in his audit report. The management did not agree with revenue
recognition to be shown as key audit matter in the audit report. Comment. (4 Marks)
2. (a) In the course of audit of Z Ltd, its auditor wants to rely on audit evidence obtained in previous
audit in respect of effectiveness of internal controls instead of retesting the same during the
current audit. As an auditor discuss the factors that may wa rr ant a re-test of controls. (4 Marks)
(b) Whilst the Audit team has identified various matters, they need your advice to include the same in
your audit report in view of CARO 2016:-
(i) Physical verification of only 40% of items of inventory has been conducted by the company. The
balance 60% will be conducted in next year due to lack of time and resources. (2 Marks)
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 (ii) An amount of Rs. 3.25 Lakhs per month is paid to M/s. WE CARE Associates, a partnership firm,
which is a 'related party' in accordance with the provisions of the Companies Act, 2013 for the
marketing services rendered by them. Based on an independent assessment, the consideration
paid is higher than the arm's length pricing by Rs. 0.25 Lakhs per month. Whilst the transaction
was accounted in the financial statements based on the amounts' paid, no separate disclosure
has been made in the notes forming part of the accounts highlighting the same as a 'related party'
transaction. (3 Marks)
(c) Mr. Rival, a Chartered Accountant in practice, delivered a speech in the national conference
organized by the Ministry of Textiles. While addressing the audience, he informed that he is a
management expert and his firm provides services of taxation and audit at reasonable rates. He
also requested the audience to approach his firm of chartered accountants for these services and
at the request of audience he also distributed his business cards and telephone number of his firm
to those in the audience. Comment with reference to the Chartered Accountants Act, 1949, and
Schedules thereto. (5 Marks)
3. (a) The Comptroller and Auditor General assists the legislature in reviewing the performance of public
undertakings. He conducts an efficiency-cum-performance audit other than the field which has
already been covered either by the internal audit of the individual concerns or by the professional
auditors. He locates the area of weakness for managements’ information. Explain stating clearly
the issues examined in comprehensive audit. (4 Marks)
(b) You are doing Tax Audit of Private Limited Company for the financial year ending 31 st March, 2019.
During audit, you notice that the company is not regular in deposit of VAT/GST and there remains
pendency every year. The details of VAT/GST payable are:
(i) GST payable as on 31/03/2018 of FY 2017-18 was Rs. 200 Lakh and out of which Rs. 100 Lakh
was paid on 15/09/2018 and Rs. 50 Lakh on 30/03/2019 and balance of ` 50 Lakh paid on
16/09/2019.
(ii) GST payable of current financial year 2018-19 was ` 100 lakh and out of this, 40 Lakh was paid
on 25/05/2018 and balance of Rs. 60 Lakh remained unpaid till the due date of return.
The date of Tax Audit report and due date of return was 30 th September.
Now as a Tax Auditor, how/where the said transaction will be reflected in Tax Audit Report under Section
43B(a)? (6 Marks)
(c) A Chartered Accountant in practice certified in requisite Form that an articled assistant was
undergoing training with him, whereas, he was also employed in a company between 9:30 a.m.
and 5:30 p.m. on a monthly salary of Rs. 18,000 and attended the office of the Chartered
Accountant thereafter until 7 p.m. The Chartered Accountant pleaded that the articled assistant
was on audit of the company. Comment with reference to the Chartered Accountants Act, 1949,
and Schedules thereto. (4 Marks)
4. (a) Aviral & Co LLP are the auditors of NBFC (Investment and Credit Company). In this context, please
explain what verification procedures should be performed in relation to audit of NBFC - Investment
and Credit Company (NBFC-ICC). (6 Marks)
(b) OPQ Ltd is in the software consultancy business. The company had large balance of accounts
receivables in the past years which have been assessed as area of high risk. For the year ended 31
March 2019, in respect of the valuation of accounts receivable, the statutory auditor was assigned
with the checking of accuracy of the aging of the accounts receivables and provision based on ageing,
to the internal auditor providing direct assistance to him. Comment. (4 Marks)
(c) Mr. Avin, a practicing Chartered Accountant gave 50% of the audit fees received by him to a non-
Chartered Accountant, Mr. Lucky, under the nomenclature of office allowance and such an
arrangement continued for a number of years. Comment with reference to the Chartered
Accountants Act, 1949, and Schedules thereto. (4 Marks)
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5. (a) INDO Bank appointed your firm of Chartered Accountants as a branch auditor for the financial year
2018-19. Being head-in-charge of the assignment, while planning, you distributed the work among
your team members and assigned Mr. Pary for verification of bills payable. However, Mr. Pary,
being fresh to the bank audits, needs your guidance. Kindly guide. (5 Marks)
(b) Vivan Ltd is a company engaged in the business of software development. It is one of the largest
companies in this sector with a turnover of INR 25,000 crores. The operations of the company are
increasing constantly, however, the focus of the management is more on cost cutting in the coming
years to improve its profitability. In respect of the financial statements of the company which are
used by various stakeholders, some fraud was observed in respect of assets reported therein
due to which those stakeholders suffered damages. As a result, those stakeholders applied to
Tribunal for change of auditor on the basis that auditor is colluded in the fraud.
Elucidate the power of Tribunal to change the auditor of a company if found acting in a fraudulent
manner as provided under sub-section (5) of section 140 of the Companies Act, 2013. (4 Marks)
(c) BSF Limited is engaged in the business of trading leather goods. You are the internal auditor of
the company for the year 2018-19. In order to review internal controls of the Sales Department of
the company, you visited the Department and noticed the work division as follows:
(1) An officer was handling the sales ledger and cash receipts.
(2) Another official was handling dispatch of goods and issuance of Delivery challans.
(3) One more officer was there to handle customer/ debtor accounts and issue of receipts.
As an internal auditor, you are required to briefly discuss the general condition pertaining to the internal
check system prevalent in internal control system. Do you think that there was proper division of work
in BSF Limited? If not, why? (5 Marks)
6. (a) Mr. Shah is reviewing the anti-fraud controls for a construction company. The company has
witnessed a few frauds in the past mainly in the nature of material stolen from the sites and fake
expense vouchers.
Mr. Shah is evaluating options for verifying the process in detecting fraud and the corrective action
to be taken in such cases. As an expert, you are required to advise Mr. Shah as how inventory
fraud occurs and the verification procedure to be followed for detecting the same. (5 Marks)
(b) As an auditor, how would you deal with the following situations:
(i) Nick Ltd. is a subsidiary of Ajanta Ltd., whose 20% shares have been held by Central Government,
25% by Uttar Pradesh Government and 10% by Madhya Pradesh Government. Nick Ltd.
appointed Mr. Prem as its statutory auditor.
(ii) Contravene Ltd. appointed CA Innocent as an auditor for the company for the current financial
year. Further the company offered him the services of actuarial, investment advisory and
investment banking which was also approved by the Board of Directors. (5 Marks)
(c) During the audit of FMP Ltd, a listed company, Engagement Partner (EP) completed his reviews
and also ensured compliance with independence requirements that apply to the audit engagement.
The engagement files were also reviewed by the Engagement Quality Control Reviewer (EQCR)
except the independence assessment documentation. Engagement Partner was of the view that
matters related to independence assessment are the responsibility of the Engagement Partner and
not Engagement Quality Control Reviewer. Engagement Quality Control Reviewer objected to this
and refused to sign off the documentation. Please advise as per SA 220. (4 Marks)
OR
Aarav, a practicing Chartered Accountant is appointed to conduct the peer review of another practicing
unit. What areas A should review in the assessment of independence of the practicing unit? (4 Marks)

10

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 Test Series: October, 2019
MOCK TEST PAPER 1
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS
DIVISION A - MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. (a) not exceed 25 hours a week
2. (c) Peer reviewer needs to share draft report with the firm before finalisation.
3. (b) The approach of the auditors look reasonable in this case. The auditors found internal controls to
be satisfactory and also did not find any circumstance to arouse suspicion and hence they
performed their procedures on the basis of selected verification.
4. (d) Statutory auditors can be appointed for this work.
5. (a) Provision should be made at 10%.
6. (b) As per RBI guidelines PMS investments need to be audited separately by the external auditors and
the auditors are required to give a certificate separately for the same. So, in the above case the
auditor should not verify the PMS transactions till the Bank segregates the transactions from its
own investments.
7. (c) not less than 6 directors.
8. (c) NBFC Company
9. (c) First Modify the audit strategy and thereafter prepare the audit plan according to the modified
strategy.
10. (d) A Prospective CA, soon to join the Auditor’s Firm as a Partner.
Questions (11-20) carry 2 Marks each
11. (b) Allahabad branch falls under the compulsory audit criteria as per RBI Guidelines, howe ver Rae
Bareilly branch whose aggregate deposits are less than 50% of the aggregate deposits of the Bank
is not required to be compulsorily covered for concurrent audit.
12. (b) KB & Associates can take up the audit if the firm is appointed by the Comptroller and Auditor
General of India and should ensure that they don’t take up audit of more than 3 insurance
companies.
13. (c) The statutory auditors are not required to go to the extent of review of detailed working papers of
internal auditors.
14. (d) Operational audit, as it is the audit for the management and involves verifying the effectiveness,
efficiency and economy of operations done by the Simon travels for the organisation.
15. (c) The procedures of the investigating accountant looks completely reasonable considering his scope
of work. Further, no changes are required in his work approach.
16. (a) Express a qualified or an adverse opinion in the auditor’s report on the current period financial
statements modified with respect to the corresponding figures included therein.
17. (d) The amount involved and steps taken by the company for securing the refund of the same.
18. (a) Audit procedures 1,2,3.
19. (d) The audit partner needs to assess the materiality of the figure, and the degree of subjectivity

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 involved. If it considers that safeguards like using separate personnel, could reduce the threat to
an acceptable level, then it can go ahead with both the audit and the training assignment.
20. (c) There should be full compliance of Schedule III and plant should be kept as CWIP as per Schedule
III.
DIVISION B - DESCRIPTIVE QUESTIONS (70 Marks)
1. (a) As per SA 402 on “Audit Considerations Relating to an Entity Using a Service Organisation”,
when obtaining an understanding of the user entity in accordance with SA 315 “Identifying and
Assessing the Risks of Material Misstatement through Understanding the Entity and its
Environment”, the user auditor shall obtain an understanding of how a user entity uses the services
of a service organisation in the user entity’s operations, including:
(i) The nature of the services provided by the service organisation and the significance of those
services to the user entity, including the effect thereof on the user entity’s internal control;
(ii) The nature and materiality of the transactions processed or accounts or financial reporting
processes affected by the service organisation;
(iii) The degree of interaction between the activities of the service organisation and those of the
user entity; and
(iv) The nature of the relationship between the user entity and the service organisation, including
the relevant contractual terms for the activities undertaken by the service organisation.
(b) Audit Procedure for ensuring correctness of Opening Balances: As per SA 510 “Initial Audit
Engagements-Opening Balances”, 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 -
(i) 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;
(ii) Determining whether the opening balances reflect the application of appropriate accounting
policies; and
(iii) By evaluating whether audit procedures performed in the current period provide evidence
relevant to the opening balances; or performing specific audit procedures to obtain evidence
regarding the opening balances.
If the auditor obtains audit evidence that the opening balances contain misstatements that could
materially affect the current period’s financial statements, the auditor shall perform such additional
audit procedures as are appropriate in the circumstances to determine the effect on the current
period’s financial statements. If the auditor concludes that such misstatements exist in the current
period’s financial statements, the auditor shall communicate the misstatements with the
appropriate level of management and those charged with governance.
Approach for drafting Audit Report: SA 705 establishes requirements and provides guidance on
circumstances that may result in a modification to the auditor’s opinion on the financial statements,
the type of opinion appropriate in the circumstances, and the content of the auditor’s report when
the auditor’s opinion is modified. The inability of the auditor to obtain sufficient appropriate audi t
evidence regarding opening balances may result in one of the following modifications to the opinion
in the auditor’s report:
(i) A qualified opinion or a disclaimer of opinion, as is appropriate in the circumstances; or
(ii) Unless prohibited by law or regulation, an opinion which is qualified or disclaimed, as
appropriate, regarding the results of operations, and cash flows, where relevant, and
unmodified regarding State of Affairs.
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 If the auditor concludes that the opening balances contain a misstatement that materially affects
the current period’s financial statements and the effect of the misstatement is not properly
accounted for or not adequately presented or disclosed, the auditor shall express a qualified
opinion or an adverse opinion, as appropriate, in accordance with SA 705.
(c) Determining Key Audit Matters: SA 701, “Communicating Key Audit Matters in the
Independent Auditor’s Report”, deals with the auditor’s responsibility to communicate key audit
matters in the auditor’s report. It is intended to address both the auditor’s judgment as to what to
communicate in the auditor’s report and the form and content of such communication.
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 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 current period and therefore are the
key audit matters.
In the instant case, AKY Ltd., a listed company engaged in the business of software and its
contracts with its various customers are also quite complicated and different. Further, the audit
team spends significant time on audit of revenue and efforts towards audit of revenue also involve
significant involvement of senior members of the audit team including audit partner during audit.
This matter was also discussed with management at various stages. After completion of audit, the
audit partner communicated the management regarding inclusion of paragraph on revenue
recognition as key audit matter in his audit report.
In view of SA 701, the assessment of the auditor is valid as above matter qualifies to be a key audit
matter in the opinion of auditor. Hence, it should be reported accordingly by the auditor in his audit
report.
2. (a) As per SA 330 on “The Auditor’s Responses to Assessed Risks”, changes may affect the
relevance of the audit evidence obtained in previous audits such that there may no longer be a
basis for continued reliance.
The auditor’s decision on whether to rely on audit evidence obtained in previous audits for control
is a matter of professional judgment. In addition, the length of time between retesting such controls
is also a matter of professional judgment.
Factors that may warrant a re-test of controls are-
(i) A deficient control environment.
(ii) Deficient monitoring of controls.
(iii) A significant manual element to the relevant controls.
(iv) Personnel changes that significantly affect the application of the control.
(v) Changing circumstances that indicate the need for changes in the control.
(vi) Deficient general IT -controls.

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 (b) (i) Physical Verification of Inventory: Clause (ii) of Para 3 of CARO, 2016 requires the auditor
to report on whether physical verification of inventory has been conducted at reasonable
intervals by the management. Physical verification of inventory is the responsibility of the
management which should normally verify all material items at least once in a year and more
often in appropriate cases. The auditor in order to satisfy himself about verification at
reasonable intervals should examine the adequacy of evidence and record of verification. In
the given case, the above requirement of CARO, 2016 has not been fulfilled as such and the
auditor should point out the specific areas where he believes the procedure of inventory
verification is not reasonable. He may consider the impact on financial statement and report
accordingly.
(ii) As per clause (xiii) of para 3 of CARO 2016, the auditor is required to report, “whether all
transactions with the related parties are in compliance with sections 177 and 188 of
Companies Act, 2013 where applicable and the details have been disclosed in the Financial
Statements etc., as required by the applicable accounting standards;”
Therefore, the duty of the auditor, under this clause is to report (i)Whether all transactions
with the related parties are in compliance with section 177 and 188 of the Companies Act,
2013 (“Act”); (ii) Whether related party disclosures as required by relevant Accounting
Standards (AS 18, as may be applicable) are disclosed in the financial statements.
In the present case, the auditor is required to report as per clause xiii of para 3 of CARO 2016,
as one of related party transaction amounting 3.25 lakhs per month i.e. in lieu of marketing
services has been noticed of which amount Rs. 0.25 lakh per month is exceeding the arm’s
length price has not been disclosed highlighting the same as related party transactions as per
AS 18. Thus, the auditor is required to report accordingly.
(c) Using Designation Other Than a CA and Providing Details of Services Offered:
Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949 states that a
Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits clients
or professional work either directly or indirectly by a circular, advertisement, personal
communication or interview or by any other means. Such a restraint has been put so that the
members maintain their independence of judgment and may be able to command respect from
their prospective clients.
Section 7 of the Chartered Accountants Act, 1949 read with Clause (7) of Part I of the First
Schedule to the said Act prohibits advertising of professional attainments or services of a member.
It also restrains a member from using any designation or expression other than that of a chartered
accountant in documents through which the professional attainments of the member would come
to the notice of the public. Under the clause, use of any designation or expression other than
chartered accountant for a chartered accountant in practice, on professional documents, visiting
cards, etc. amounts to a misconduct unless it be a degree of a university or a title indicating
membership of any other professional body recognised by the Central Government or the Council.
Member may appear on television and films and agree to broadcast in the Radio or give lectures
at forums and may give their names and describe themselves as Chartered Accountants. Special
qualifications or specialized knowledge directly relevant to the subject matter of the programme
may also be given but no reference should be made, in the case of practicing member to the name
and address or services of his firm. What he may say or write must not be promotional of his or his
firm but must be an objective professional view of the topic under consideration.
Thus, it is improper to use designation "Management Expert" since neither it is a degree of a
University established by law in India or recognised by the Central Government nor it is a
recognised professional membership by the Central Government or the Council. Therefore, he is
deemed to be guilty of professional misconduct under both Clause (6) and Clause (7) as he has
used the designation “Management Expert” in his speech and also he has made reference to the
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 services provided by his firm of Chartered Accountants at reasonable rates. Distribution of cards
to audience is also a misconduct in terms of Clause (6).
3. (a) The Comptroller and Auditor General assist the legislature in reviewing the performance of public
undertakings. He conducts an efficiency-cum-performance audit other than the field which has
already been covered either by the internal audit of the individual concerns or by the professional
auditors. He locates the area of weakness and extravagance for managements’ information.
The areas covered in comprehensive audit naturally vary from enterprise to enterprise depending
on the nature of the enterprise, its objectives and operations. However, in general, the covered
areas are those of investment decisions, project formulation, organisational effectiveness, capacity
utilisation, management of equipment, plant and machinery, production performance, use of
materials, productivity of labour, idle capacity, costs and prices, materials management, sales and
credit control, budgetary and internal control systems, etc.
Some of the issues examined in comprehensive audit are:
(i) How does the overall capital cost of the project compare with the approved planned costs?
Were there any substantial increases and, if so, what are these and whether there is evidence
of extravagance or unnecessary expenditure?
(ii) Have the accepted production or operational outputs been achieved? Has there been under-
utilisation of installed capacity or shortfall in performance and, if so, what has caused it?
(iii) Has the planned rate of return been achieved?
(iv) Are the systems of project formulation and execution sound? Are there inadequacies? What
has been the effect on the gestation period and capital cost?
(v) Are cost control measures adequate and are there inefficiencies, wastages in raw materials
consumption, etc.?
(vi) Are the purchase policies adequate? Or have they led to piling up of inventory resulting in
redundancy in stores and spares?
(vii) Does the enterprise have research and development programm es? What has been the
performance in adopting new processes, technologies, improving profits and in reducing costs
through technological progress?
(viii) If the enterprise has an adequate system of repairs and maintenance?
(ix) Are procedures effective and economical?
(x) Is there any poor or insufficient or inefficient project planning?
The efficiency and effectiveness audit of public enterprises is conducted on the basis of certain
standards and criteria. Profit is not the key criterion on performance; management’s performance
in the economical and efficient use of public funds and in the achievement of objectives is more
relevant. Public enterprises have been set up with certain socio-economic purposes and for
fulfillment of certain objectives. The objectives vary from enterprise to enterprise. Audit appraisal
analyses the performance of an enterprise to bring out the extent to which the objectives for which
the enterprise was set up have been served.
(b) Reporting in Tax Audit Report: Any amount of GST/Tax payable on the last day of previous year
(opening balance) as well as on the last day of current year has to be reported in Tax Audit Report
under clause 26(A) and 26(B) in reference of section 43 B.
Clause 26 (A) dealt GST/VAT payable on the pre-existed of the first day of the previous year but
was not allowed in the assessment of any preceding previous year and was either paid {clause
26(A) (a)}/ or/ and/ not paid during the previous year {clause 26(A)(b)}
The details will be as under in regard to opening balances:

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 Liability Pre-existed on the previous year.
Sr. Section Nature of Outstanding Amount Amount written Amount unpaid
No. Liability Opening paid/set- back to P&L at the end of
balance not off during Account the year
allowed in the year
previous
year
01 43B(a) VAT/GST 100 lakh 50 lakh 0 50 lakh

It has been assumed that 50 lakh was allowed in last year as it was paid before the due date of
return.
Liability incurred during the previous year

Sr. No. Section Nature of Amount Amount Amount

Liability incurred in paid/set-off unpaid on
previous before the the due of
year but due date of filing of
remaining filing return/date
outstanding return/date upto which
on last day upto which reported in
of previous reported in the tax audit
year. the tax audit report,
report, whichever
whichever is earlier
is earlier
01 43B(a) VAT/GST 100 lakh 40 lakh 60 lakh

(c) Failure to Observe Regulations: As per Clause (1) of Part II of Second Schedule to the Chartered
Accountants Act, 1949, a member shall be held guilty of professional misconduct if he contravenes
any of the provisions of the Act or the regulations made thereunder or any guidelines issued by the
Council. The chartered accountant, as per Regulations also, is expected to impart proper practical
training.
In the instant case, the articled assistant is not attending office on timely basis and the explanation
of the Chartered Accountant that the articled assistant was on audit of the company cannot be
accepted particularly in view of the fact that articled assistant is getting monthly salary from that
company. Under the circumstances, the Chartered Accountant would be held guilty of profession al
misconduct in regard to the discharge of his professional duties as per Clause (1) of Part II of
Second Schedule to the Chartered Accountants Act, 1949.
4. (a) Some points that may be covered in the audit of NBFC - Investment and Credit Company
(NBFC-ICC):
i. Physically verify all the shares and securities held by a NBFC. Where any security is lodged
with an institution or a bank, a certificate from the bank/institution to that effect must be
verified.
ii. Verify whether the NBFC has not advanced any loans against the security of its own shares.
iii. Verify that dividend income wherever declared by a company, has been duly received by an
NBFC and interest wherever due [except in case of NPAs] has been duly accounted for. NBFC
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 Prudential Norms directions require dividend income on shares of companies and units of
mutual funds to be recognised on cash basis. However, the NBFC has an option to account
for dividend income on accrual basis, if the same has been declared by the body corporate in
its Annual General Meeting and its right to receive the payment has been established. Income
from bonds/debentures of corporate bodies is to be accounted on accrual basis only if the
interest rate on these instruments is predetermined and interest is serviced regularly and not
in arrears.
iv. Test check bills/contract notes received from brokers with reference to the prices vis-à-vis the
stock market quotations on the respective dates.
v. Verify the Board Minutes for purchase and sale of investments. Ascertain from the Board
resolution or obtain a management certificate to the effect that the investments so acquired
are current investments or Long Term Investments.
vi. Check whether the investments have been valued in accordance with the NBFC Prudential
Norms Directions and adequate provision for fall in the market value of securities, wherever
applicable, have been made there against, as required by the Directions.
vii. Obtain a list of subsidiary/group companies from the management and verify the investments
made in subsidiary/group companies during the year. Ascertain the basis for arriving at the
price paid for the acquisition of such shares.
viii. Check whether investments in unquoted debentures/bonds have not been treated as
investments but as term loans or other credit facilities for the purposes of income recognition
and asset classification.
ix. An auditor will have to ascertain whether the requirements of AS 13 “Accounting for
Investments” or other accounting standard, as applicable, (to the extent they are not
inconsistent with the Directions) have been duly complied with by the NBFC.
x. In respect of shares/securities held through a depository, obtain a confirmation from the
depository regarding the shares/securities held by it on behalf of the NBFC.
xi. Verify that securities of the same type or class are received back by the lender/paid by the
borrower at the end of the specified period together with all corporate benefits thereof (i.e.
dividends, rights, bonus, interest or any other rights or benefit accruing thereon).
xii. Verify charges received or paid in respect of securities lend/borrowed.
xiii. Obtain a confirmation from the approved intermediary regarding securities deposited
with/borrowed from it as at the year end.
xiv. An auditor should examine whether each loan or advance has been properly sanctioned. He
should verify the conditions attached to the sanction of each loan or advance i.e. limit on
borrowings, nature of security, interest, terms of repayment, etc.
xv. An auditor should verify the security obtained and the agreements entered into, if any, with
the concerned parties in respect of the advances given. He must ascertain the nature and
value of security and the net worth of the borrower/guarantor to determine the extent to which
an advance could be considered realisable.
xvi. Obtain balance confirmations from the concerned parties.
xvii. As regards bill discounting, verify that proper records/documents have been maintained for
every bill discounted/rediscounted by the NBFC. Test check some transactions with reference
to the documents maintained and ascertain whether the discounting charges, wherever, due,
have been duly accounted for by the NBFC.
xviii. Check whether the NBFC has not lent/invested in excess of the specified limits to any single
borrower or group of borrowers as per NBFC Prudential Norms Directions.
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 xix. An auditor should verify whether the NBFC has an adequate system of proper appraisal and
follow up of loans and advances. In addition, he may analyse the trend of its recovery
performance to ascertain that the NBFC does not have an unduly high level of NPAs.
xx. Check the classification of loans and advances (including bills purchased and discounted)
made by a NBFC into Standard Assets, Sub-Standard Assets, Doubtful Assets and Loss
Assets and the adequacy of provision for bad and doubtful debts as required by NBFC
Prudential Norms Directions.
(Note: The above checklist is not exhaustive. It is only illustrative. There could be various other
audit procedures which may be performed for audit of an NBFC.)
(b) As per SA 610 Using the Work of Internal Auditor, the external auditor (Statutory Auditor) shall not
use internal auditors to provide direct assistance to perform procedures that:
(i) Involve making significant judgments in the audit;
(ii) Relate 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;
(iii) Relate to work with which the internal auditors have been involved and which has already
been, or will be, reported to management or those c harged with governance by the internal
audit function; or
(iv) Relate to decisions the external auditor makes in accordance with this SA regarding the
internal audit function and the use of its work or direct assistance.
In the given case where the valuation of accounts receivable is assessed as an area of higher risk,
the statutory auditor could assign the checking of the accuracy of the aging to an internal auditor
providing direct assistance. However, because the evaluation of the adequacy of the provision
based on the aging would involve more than limited judgment, it would not be appropriate to assign
that latter procedure to an internal auditor providing direct assistance.
(c) Sharing of Audit Fees with Non-Member: As per Clause (2) of Part I of First Schedule to the
Chartered Accountants Act, 1949 a member shall be held guilty if a Chartered Accountant in
practice pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or
brokerage in the fees or profits of his professional business, to any person other than a member of
the Institute or a partner or a retired partner or the legal representative of a deceased partner, or
a member of any other professional body or with such other persons having such qualification as
may be prescribed, for the purpose of rendering such professional services from time to time in or
outside India.
In the instant case, Mr. Avin, a practising Chartered Accountant gave 50% of the audit fees received
by him to a non-Chartered Accountant, Mr. Lucky, under the nomenclature of office allowance and
such an arrangement continued for a number of years. In this case, it is not the nomenclature to a
transaction that is material but it is the substance of the transaction, which has to be looked into.
The Chartered Accountant had shared his profits and, therefore, Mr. Avin will be held guilty of
professional misconduct under the Clause (2) of Part I of First Schedule to the Chartered
Accountants Act, 1949.
5. (a) Bills Payable: Evaluate the existence, effectiveness and continuity of internal controls over bills
payable. Such controls should usually include the following-
• Drafts, mail transfers, traveller’s cheques, etc. should be made out in standard printed forms.
• Unused forms relating to drafts, traveller’s cheques, etc. should be kept under the custody of
a responsible officer.
• The bank should have a reliable private code known only to the responsible officers of its
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 branches, coding and decoding of the telegrams should be done only by such offic ers.
• The signatures on a demand draft should be checked by an officer with the specimen
signature book.
• All the telegraphic transfers and demand drafts issued by a branch should be immediately
confirmed by advices to the branches concerned. On payment of these instruments, the
paying branch should send a debit advice to the originating branch.
Examine an appropriate sample of outstanding items comprised in bills payable accounts with the
relevant registers. Reasons for old outstanding debits in respect of drafts or other similar
instruments paid without advice should be ascertained.
Correspondence with other branches after the year-end (e.g., responding advices received from
other branches, advices received from other branches in respect of drafts issued by the branch
and paid by the other branches without advice) should be examined specially in so far as large
value items outstanding on the balance sheet date are concerned.
(b) Direction by Tribunal in case auditor acted in a fraudulent manner: As per sub-section (5) of
the section 140, the Tribunal either suo motu or on an application made to it by the Central
Government or by any person concerned, if it is satisfied that the auditor of a company has, whether
directly or indirectly, acted in a fraudulent manner or abetted or colluded in any fraud by, or in
relation to, the company or its directors or officers, it may, by order, direct the company to change
its auditors.
However, if the application is made by the Central Government and the Tribunal is satisfied that
any change of the auditor is required, it shall within fifteen days of receipt of such application, make
an order that he shall not function as an auditor and the Central Government may appoint another
auditor in his place.
It may be noted that an auditor, whether individual or firm, against whom final order has been
passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any
company for a period of five years from the date of passing of the order and the auditor shall also
be liable for action under section 447.
It is hereby clarified that the case of a firm, the liability shall be of the firm and that of every partner
or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation
to, the company or its director or officers.
(c) The general condition pertaining to the internal check system may be summarized as under:
(i) no single person should have complete control over any important aspect of the business
operation. Every employee’s action should come under the review of another person.
(ii) Staff duties should be rotated from time to time so that members do not perform the same
function for a considerable length of time.
(iii) Every member of the staff should be encouraged to go on leave at least once a year.
(iv) Persons having physical custody of assets must not be permitted to have access to the
books of accounts.
(v) There should exist an accounting control in respect of each class of assets, in addition, there
should be periodical inspection so as to establish their physical condition.
(vi) Mechanical devices should be used, where ever practicable to prevent loss or
misappropriation of cash.
(vii) Budgetary control should be exercised and wide deviations observed should be reconciled.
(viii) For inventory taking, at the close of the year, trading activities should, if possible be
suspended, and it should be done by staff belonging to several sections of the organization.
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 (ix) The financial and administrative powers should be distributed very judiciously among different
officers and the manner in which those are actually exercised should be reviewed periodically.
(x) Procedures should be laid down for periodical verification and testing of different sections of
accounting records to ensure that they are accurate.
In the given scenario, Company has not done proper division of work as: (i) the receipts of cash
should not be handled by the official handling sales ledger and (ii)delivery challans should be
verified by an authorised official other than the officer handling despatch of goods.
6. (a) Inventory frauds - Inventory frauds are many and varied but here we are concerned with
misappropriation of goods and their concealment.
(i) Employees may simply remove goods from the premises.
(ii) Theft of goods may be concealed by writing them off as damaged goods, etc.
(iii) Inventory records may be manipulated by employees who have committed theft so that book
quantities tally with the actual quantities of inventories in hand.
Verification Procedure for Defalcation of inventory - It may be of trading stock, raw materials,
manufacturing stores, tools or of other similar items (readily) capable of conversion into cash. The
loss may be the result of a theft by an employee once or repeatedly over a long period, when the
same have not been detected. Such thefts usually are possible through collusion among a number
of persons. Therefore, for their detection, the entire system of receipts, storage and despatch of
all goods, etc. should be reviewed to localise the weakness in the system.
The determination of factors which have been responsible for the theft and the establishment of
guilt would be difficult in the absence of:
(a) a system of inventory control, and existence of detailed record of the movement of inventory,
or
(b) availability of sufficient data from which such a record can be constructed.
The first step in such an investigation is to establish the different items of inventory defalcated and
their quantities by checking physically the quantities in inventory held and those shown by the
Inventory Book.
Afterwards, all the receipts and issues of inventory recorded in the Inventory Book should be
verified by reference to entries in the Goods Inward and Outward Registers and the documentary
evidence as regards purchases and sales. This would reveal the particulars of inventory not
received but paid for as well as that issued but not charged to customers. Further, entries in respect
of returns, both inward and outward, recorded in the financial books should be checked with
corresponding entries in the Inventory Book. Also, the totals of the Inventory Book should be
checked. Finally, the shortages observed on physical verification of inventory should be reconciled
with the discrepancies observed on checking the books in the manner mentioned above. In the
case of an industrial concern, issue of raw materials, stores and tools to the factory and receipts
of manufactured goods in the godown also should be verified with relative source documents.
Defalcations of inventory, sometimes, also are committed by the management, by diverting a part
of production and the consequent shortages in production being adjusted by inflating the wastage
in production; similar defalcations of inventories and stores are covered up by inflating quantities
issued for production. For detecting such shortages, the investigating accountant should take
assistance of an engineer. For that he will be more conversant with factors whic h are responsible
for shortage in production and thus will be able to correctly determine the extent to which the
shortage in production has been inflated. In this regard, guidance can also be taken from past
records showing the extent of wastage in produc tion in the past. Similarly, he would be able to
better judge whether the material issued for production was excessive and, if so to what extent.

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 The per hour capacity of the machine and the time that it took to complete one cycle of production,
also would show whether the issues have been larger than those required.
(b) (i) According to Section 139(7) of the Companies Act, 2013, the auditors of a government
company shall be appointed or re-appointed by the Comptroller and Auditor General of
India(C&AG). As per section 2(45), a Government company is defined as any company in
which not less than 51% of the paid-up share capital is held by the Central Government or by
any State Government or Governments or partly by the Central Government and partly by one
or more State Governments and includes a company which is a subsidiary of a Government
Company as thus defined.
In the given case, Ajanta Ltd is a government company as its 20% shares have been held by
Central Government, 25% by U.P. State Government and 10% by M.P. State Government.
Total 55% shares have been held by Central and State governments, therefore, it is a
Government company.
Nick Ltd. is a subsidiary company of Ajanta Ltd. Hence, Nick Ltd. is covered in the definition
of a government company. Therefore, auditor of Nick Ltd. can be appointed only by C&AG.
Consequently, appointment of Mr. Prem is invalid and he should not give acceptance to the
Directors of Nick Ltd.
(ii) Services not to be Rendered by the Auditor: Section 144 of the Companies Act, 2013
prescribes certain services not to be rendered by the auditor. An auditor appointed under the
Act shall provide to the company only such other services as are approved by the Board of
Directors or the audit committee, as the case may be, but which shall not include any of the
following services (whether such services are rendered directly or indirectly to the company
or its holding company or subsidiary company), namely:
(i) accounting and book keeping services;
(ii) internal audit;
(iii) design and implementation of any financial information system;
(iv) actuarial services;
(v) investment advisory services;
(vi) investment banking services;
(vii) rendering of outsourced financial services;
(viii) management services; and
(ix) any other kind of services as may be prescribed.
Further section 141(3)(i) of the Companies Act, 2013 also disqualifies a person for
appointment as an auditor of a company who is engaged as on the date of appointment in
consulting and specialized services as provided in section 144.
In the given case, CA Innocent was appointed as an auditor of Contravene Ltd. He was offered
additional services of actuarial, investment advisory and investment banking which was also
approved by the Board of Directors. The auditor is advised not to accept the services as these
services are specifically notified in the services not to be rendered by him as an auditor as
per section 144 of the Act.
(c) As per SA 220, Engagement Partner shall form a conclusion on compliance with independence
requirements that apply to the audit engagement. In doing so, Engagement Partner shall:
• Obtain relevant information from the firm and, where applicable, network firms, to identify and
evaluate circumstances and relationships that create threats to independence;

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 • 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
• Take appropriate action to eliminate such threats or reduce them to an acceptable level by
applying safeguards, or, if considered appropriate, to 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.
Engagement Partner shall take responsibility for reviews being perform ed in accordance with the
firm’s review policies and procedures.
As per SA 220, “Quality Control for Audit of Financial Statements”, for audits of financial statements
of listed entities, Engagement Quality Control Reviewer (EQCR), on performing an engagem ent
quality control review, shall also consider the engagement team’s evaluation of the firm’s
independence in relation to the audit engagement.
In the given case, Engagement Partner is not right. The independence assessment documentation
should also be given to Engagement Quality Control Reviewer for his review.
OR
Review in the Assessment of Independence of the Practicing Unit – The reviewer should
carry out the compliance review of the five general controls, i.e., independence, maintenance of
professional skills and standards, outside consultation, staff supervision and development and
office administration and evaluate the degree of reliance to be placed upon them. The degree of
reliance will, ultimately, affect the attestation service engagements to be reviewed.
Aarav, a practicing Chartered Accountant should review following controls in respect of assessment
of independence of the practicing unit:
(i) Does the practice unit have a policy to ensure independence, objectivity and integrity, on the
part of partners and staff? Who is responsible for this policy?
(ii) Does the practice unit communicate these policies and the expected standards of professional
behaviour to all staff?
(iii) Does the practice unit monitor compliance with policies and procedures relating to
independence?
(iv) Does the practice unit periodically review the practice unit's association with clients to ensure
objectivity and independence?

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 Test Series: May, 2020
MOCK TEST PAPER -1
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
All MCQs are compulsory
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100
DIVISION A – MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. A significant deficiency exists in the process of flow of approval of travel re-imbursements of the
officials. This was communicated in the previous year to those charged with Governance and no
remedial action was taken on the same so far. The auditors are of the opinion that it need not be
communicated again. Is the opinion of the auditors on not to communicate the deficiency in internal
control reported in the previous year correct?
(a) Yes, the auditor is not required to communicate the same again as it is the duty of the
management and those charged with governance to maintain the internal control system .
(b) No, the current year’s communication may repeat the description from previous communication or
simply reference the previous communication.
(c) Yes, the auditor is not required to communicate the same again as written representation is being
obtained from management and those charged with governance that they are responsible for
maintaining internal control.
(d) No, it needs to be communicated again but an oral reminder to those charged with governance
on the matter may suffice.
2. The MEA Bank Ltd. has sanctioned overdraft limit of Rs.34 crore to Bharat Ltd. on the working capital
of the company as on 31 st March 2017. As per bank norms the drawing power in the overdraft account
need to be reviewed on quarterly basis as per the audited stock statement of the company. As a
central statutory auditor for the year 2018-19, while verifying the advances for the year ending 31st
March 2019, you noticed that the bank has not obtained the stock statement of Bharat Ltd. for the two
quarters ending 31 st December 2018 and 31st March 2019 and no provision of NPA has been made
for this account in the financial statements for the year 2018-19. What will be your decision as a
central statutory auditor?
(a) Classify the borrower’s account as NPA as the borrower’s financial position cannot be
determined due to non-submission of stock statement.
(b) Instruct the bank to obtain the audited stock statement for both the quarters and review the credit
limit accordingly.
(c) As per bank norms the drawing power need to be determined on the basis of stock statement and
it was more than three months old as on 31st March 2019, so the outstanding in the account will
be deemed as irregular.
(d) You should give a qualificatory note in the audit report as per SA 700.

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3. Nakul Sehdev & Co LLP is a firm of Chartered Accountants. The firm has 12 Partners. The firm has a
good portfolio of clients for statutory audits but the same clients had some other firms as their tax
auditors. In the current year (Financial Year 2019-20), many existing clients for whom Nakul Sehdev &
Co LLP happens to be the statutory auditor have requested the firm to carry out their tax audits as
well. The firm is expecting the no of tax audits to increase significantly this year. One of the partners of
the firm has also raised a point that the firm can accepts tax audits upto a maximum limit. However,
other partners are of the strong view that limits on audits is applicable in case of statutory audits and
not for tax audits. This needs to be decided as soon as possible so that the appointment formalities
can also be completed.
You are requested to advise the firm in this matter.
(a) There is no limit on no of tax audits in case of LLP.
(b) All the partners of the firm can collectively sign 540 tax audit reports.
(c) All the partners of the firm can collectively sign 720 tax audit reports.
(d) All the partners of the firm can collectively sign 540 tax audit reports. However, one partner can
individually sign maximum 60 tax audit reports.
4. SKJ Private Ltd is engaged in the business of construction. The company has also got some real
estate projects few years back on which it started the work in the last 2 years. The annual turnover of
the company is INR 600 crores and profits of INR 40 crores.
The statutory auditors of the company got rotated by another audit firm due to mandatory audit rotation
requirements as per the Companies Act 2013.
The new statutory auditors of the company started audit of the financial statements for the year ended
31 March 2019 in May 2019. The audit team also requested the client to provide certain information on
the opening balances to perform their audit procedures. Initially the management did not provide any
information to the auditors on the opening balances thinking that this is not within the scope of their
work, however, after going through the auditing standards, the management agreed and provided the
required information.
Later on, the audit team also started requesting information for the period from 1 April 2019 to 31 May
2019. With this requirement, CFO of the company got very upset and angry and set up a meeting with
the senior members of the audit team. CFO raised a concern that the audit team has not been doing
the work properly and has been asking for unnecessary information like information on opening
balances and then the information for the period after 31 March 2019. The audit partner explained to
the CFO that everything requested by the audit team has been as per the auditing standards,
however, CFO said that in the earlier years, the previous auditors never asked for such information.
You are requested to give your view in respect of this matter.
(a) The requirement of the auditors for opening balances was valid but for the period after 31 March
2019 is completely wrong as that is out of their scope for the current year’s audit. They can ask
for those details during the audit of next year.
(b) The concern of the CFO was valid. He has seen the previous auditors not performing such audit
procedures and hence the new audit team should also follow the same approach which was
followed by previous auditors as that would lead to efficient in audit.
(c) The requirement of the auditors for opening balances as well as for the period after 31 March
2019 is valid. After the requirements of SA 510 and SA 560, audit team is required to perform
these procedures.
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 (d) The audit team should set up a meeting with previous auditors wherein it should be assessed
why different approach was followed by the previous auditors. On the basis of that discussion
with the previous auditors, next course of action should be decided.
5. XYZ Ltd. is a Public Limited Company engaged in the manufacturing of TMT Bars. M/s. UV &
Associates are the statutory auditors of XYZ Ltd. for the Financial Year 2019-20. The company is
listed on National Stock Exchange. CA Udhav, the engagement partner is considering the
requirements with respect to Regulation 27 and Schedule II (LODR) for corporate governance
compliance of XYZ Ltd. Which of the following is correct in this regard?
(a) XYZ Ltd. shall submit a quarterly compliance report on corporate governance in the format as
specified by its Board from time to time to NSE within 15 days from the close of quarter. The
report shall be signed either by the Compliance Officer or the Chief Executive Officer of XYZ Ltd.
(b) XYZ Ltd. shall submit a monthly compliance report on corporate governance in the format as
specified by its Board from time to time to NSE within 15 days from the end of the month. The
report shall be signed either by the General Manager of the accounts department of XYZ Ltd.
(c) XYZ Ltd. shall submit a quarterly compliance report on corporate governance in the format as
specified by its Board from time to time to NSE within 30 days from the close of quarter. The
report shall be signed either by the Compliance Officer or the Chief Executive Officer of XYZ Ltd.
(d) XYZ Ltd. shall submit the annual compliance report on corporate governance in the format as
specified by its Board from time to time to NSE within 30 days from the year end. The report shall
be signed either by the General Manager of the Accounts Department of the Company.
6. Which among the following is not a factor for determining the necessity to use an auditor’s expert to
assist in obtaining sufficient appropriate audit evidence?
(a) The use of a management’s expert by the management in preparing the financial statements .
(b) The presence of an internal audit function and verification of the subject matter by them.
(c) The nature and significance of matter including its complexity.
(d) The risk of material misstatement in the matter.
7. RK & Associates are the tax auditors of OPQ Pvt Ltd. While performing procedures in respect of
clause 21(d) of form 3 CD, the tax auditors came across various payment vouchers where the cash
paid exceeds INR 50,000 during a day. The tax auditors want the management to report all of these
payments in Form 3CD, however, the management has a different view. The management said that
the payment voucher is one for various payments made during a day to various/ same parties but any
payments made to various parties or all payments taken together during a day to a single party do not
exceed the criteria for reporting under clause 21(d) of Form 3CD. Please suggest how would you deal
with this matter as tax auditor.
(a) Since the payment in a single voucher exceeds the prescribed limit it should be repor ted in Form
3CD otherwise the tax auditor should report this in his tax audit report.
(b) Since the payment in a single voucher exceeds the prescribed limit it should be reported in Form
3CD. Tax auditor should qualify his report and send a written communication about this matter to
Income Tax Department.
(c) None of the payment to a single party during a day exceeds the prescribed limit, thus, it should
not be reported in Form 3CD.

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 (d) Since the payment in a single voucher exceeds the prescribed limit it should be reported in Form
3CD. However, tax auditor may ignore this if the amount is immaterial, however, he should insist
the management to give a disclosure of the same in Form 3CD and should emphasize the same
point in his tax audit report.
8. While investigating the matters relating to possible misappropriation of cash, cashier says that every
day cash is counted and reviewed by the Finance Head. Your specimen review indicates that daily
cash summary was not signed off by the Finance Head. In this situation you should: -
(a) Conclude that cashier is not telling truth.
(b) Consider extending investigation procedures like corroborative enquiry with Finance Head,
review of appropriate daily cash summaries etc.
(c) Conclude that Finance Head is not a responsible person.
(d) Conclude that daily cash summary is not relevant for investigation.
9. The auditor shall express 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
(a) Adverse
(b) Qualified
(c) Disclaimer of opinion
(d) clean
10. What is the difference between management audit and operational audit?
(a) Management audit is concerned with ‘Quality of Operations’ and it is ‘Audit for Management’,
whereas Operational audit is concerned with ‘Quality of managing’ and it is ‘Audit of
Management’.
(b) Management audit is concerned with ‘Quality of Managing’ and it is ‘Audit for Management’,
whereas Operational audit is concerned with ‘Quality of Operations’ and it is ‘Audit of
Management’.
(c) Management audit is concerned with ‘Quality of Managing’ and it is ‘Audit of Management’,
whereas Operational audit is concerned with ‘Quality of Operations’ and it is ‘Audit for
Management’.
(d) Management audit is concerned with ‘Quality of Operations’ and it is ‘Audit of Management’,
whereas Operational audit is concerned with ‘Quality of managing’ and it is ‘Audit for
Management’. (10 x 1 = 10 Marks)
Questions (11-20) carry 2 Marks each
MCQ 11. -15.
Integrated Case Scenario 1
M/s QS & Associates, Chartered Accountants, a Chennai based audit firm had taken up the following
assignments for the Financial Year 2019-20 (Assessment Year 2020-21):
➢ To conduct the management audit of M/s BR Ltd.
➢ To conduct the operational audit of M/s SI Ltd., which is a subsidiary company of M/s BR Ltd.

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➢ Statutory audit of M/s I General Insurance Ltd. The company has a paid-up share capital of Rs. 15,000
lakhs, which includes preliminary expenses of Rs. 3400 lakhs. During the course of audit of the
company, there was a difference of opinion between the auditors and the management with respect to
the minimum amount of solvency margin that needs to be maintained by the company. However, the
issue was later settled.
➢ The auditor of a listed company had resigned due to his personal reason. The board of directors of the
company had appointed M/s QS & associates as replacement within 30 days. The firm also accepted
the assignment without communicating about the same to the previous auditor. Certain shareholders
of the firm opposed the appointment and later the problem was solv ed.
➢ Statutory auditor of M/s FGH (P) Limited company, having paid up capital of Rs. 112 lakhs and a
negative balance of Rs. 15 lakhs in reserves. After a long discussion between the auditors and the
management of the company with respect to the applicability of CARO 2016, both of them arrived at a
conclusion.
During the year, the company had also received few other assignments with respect to valuation for
purpose of direct taxes, actuarial valuation services, cost audit of a private limited company, etc.
However, since the firm was not having enough expertise from its side with respect to those kinds of
assignments, they could not accept the same. As a result of this, the partners of M/s QS & associates
decided to induct three new partners into the firm. The new partners included:
I. Mrs. E, an engineering graduate from IIT Madras
II. Mr. C, a member of The Institute of Cost and Works Accountants of India
III. Mr. A, an architect and member of Indian Institute of Architects.
11. What is the minimum solvency margin that has to be maintained by M/s I General Insurance Ltd?
(a) Rs. 50 crores
(b) Rs. 7500 lakhs
(c) Rs. 5.8 cores
(d) Rs. 750 lakhs
12. What could be the possible reason for the objections raised by the shareholders of the listed
company?
(a) Appointment of the incoming auditor should have been approved by members within 60 days
from date of such appointment.
(b) Appointment of the incoming auditor should have been approved by SEBI within 30 days from
date of such appointment.
(c) Appointment of the incoming auditor should have been approved by members within 30 days
from date of such appointment.
(d) Appointment of the incoming auditor should have been approved by members within 3 months
from date of such appointment.
13. Looking at the above appointment, what is the appropriate inference which you can make about the
professional ethics of M/s QS & associates, Chartered Accountants?
(a) They are guilty of professional misconduct as per clause 7 of part I of Second schedule for being
grossly negligent in conduct of his professional duty

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 (b) They are guilty of professional misconduct as per clause 8 of part I of First schedule due to non -
communication to previous auditor
(c) They are guilty of professional misconduct as per clause 8 of part I of Second schedule due to
non-communication to previous auditor
(d) They are not guilty of any professional misconduct.
14. Whether CARO is applicable to M/s FGH (P) Limited? If so, why?
(a) No. Since as per para 1 of CARO 2016, it is not applicable to any private limited company.
(b) Yes. Since the paid-up share capital of the company exceeds Rs. 1 crore, CARO is applicable.
(c) Yes. Since the total of paid-up share capital and reserves of the company exceeds Rs. 1 crore in
absolute terms.
(d) No. Since the total of paid-up share capital and reserves of the company does not exceeds
Rs. 1 crore.
15. As per Chartered accountants Act, what can you infer from the addition of three new partners in M/s
QS & associates?
(a) The firm is guilty of professional misconduct under clause 4 of part I of First Schedule for
entering into partnership with persons other than chartered accountants (i.e. Guilty for
partnership with all three of them).
(b) The firm is guilty of professional misconduct under clause 4 of part I of First Schedule for
entering into partnership with persons other than chartered accountants or a member of
professional body (i.e. Guilty for partnership with Mrs. E & Mr. A alone, who are Engineer &
Architect respectively).
(c) The firm is guilty of professional misconduct under clause 4 of part I of First Schedule for
entering into partnership with persons other than chartered accountants or a member of
professional body (i.e. Guilty for partnership with Mr. A, an Architect).
(d) The firm is not guilty of any professional misconduct.
MCQ 16. -20.
Integrated Case Scenario 2
QRP Lifecare Private Limited, (the ‘Company’ or ‘QRP’), is engaged in the pharmaceuticals. The Company
is based in Hyderabad and has an annual turnover of INR 400 crores.
One of the directors of the Company did not give declaration to the Company under se ction 164(2) of the
Companies Act 2013 as at 31 March 2018. The auditors of the Company have completed their audit of the
financial statements for the year ended 31 March 2018 and are awaiting this declaration. But the
management is of the view that they will not be able to receive this declaration. All other directors have
given the required declarations and the auditors have also verified that.
QRP had given an advance amounting to INR 50 crores to its subsidiary, RPS Ltd (RPS), on 12 January
2014 for carrying out certain projects. The net worth of the subsidiary has eroded substantially as on 31
March 2018 and looking at the future projections there is no certainty in terms of the profitability of the
subsidiary.
QRP has a subsidiary, SPS Ltd (SPS), in UK. The company has outstanding trade receivables amounting to
INR 10 crores from SPS. QRP has observed that there have been some FEMA (Foreign Exchange
Management Act) non-compliances on the part of QRP but the management has an action plan which they
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have initiated and on the basis of which management is sure that the non-compliance would be done good
and there would be no penalty on the company. In case the penalty arises, the impact would be significant
for QRP. The auditors of QRP have evaluated this matter by involving a regulatory matters expert and also
agree with the management’s view.
QRP was using a customized ERP package upto 31 March 2018. However, with effect from 1 April 2018,
QRP moved on SAP (ERP package) considering the increase in size of the operations of QRP. The
auditors of QRP are of the view that for the financial year ended 31 March 2019, being the first year of SAP
implementation, no work on IT controls would be required and they are also eval uating to qualify report on
IFC because on the basis of their experience on other clients in the past where the IT controls in the first
year of ERP implementation were very weak.
On the basis of the abovementioned facts, you are required to answer the fol lowing MCQs:
16. How should the auditors of QRP deal with the matter related to non-receipt of declaration under 164(2)
of the Companies Act?
(a) Auditors may perform some alternate procedures in respect of non-receipt of declaration under
164(2) of the Companies Act.
(b) If the auditors have been able to verify that all directors except one have given the required
declarations as per the Companies Act then it should be ignored by the auditors on the basis of
materiality.
(c) There is no reporting implication due to non-receipt of declaration under 164(2) of the Companies
Act from just one director. Accordingly, the auditors should issue clean report in respect of this
matter, however, the auditors should insist the management to provide this declaration lat er on.
(d) Auditors would need to report this matter in their main report.
17. How should the auditors of QRP deal with the matter related to erosion of net worth of RPS? Is there
any reporting implication for the same?
(a) In respect of QRP, there is no reporting implication on the part of auditors of QRP due to erosion
in net worth of RPS. This matter would be relevant for the auditors of RPS.
(b) In respect of QRP, auditors of QRP would need to give an emphasis of matter in their report
considering the uncertainty involved related to profitability of RPS.
(c) In respect of QRP, auditors of QRP would need to give qualification in respect of non -recovery of
advances from RPS if the adjustment entry is not recorded in the books.
(d) In respect of QRP, auditors of QRP would need the management to include a note in the financial
statements of QRP explaining about the recoverability of advances from RPS.
18. Please suggest the way auditors have handled the matter related to FEMA non-compliances is
appropriate or not.
(a) Auditors didn’t handle this matter appropriately. Auditors should have informed about this matter
to the RBI (Reserve Bank of India) within a period of 30 days from date this matter came to their
knowledge.
(b) Auditors handled this matter appropriately. The management would need to include this matter in
the notes to accounts to the financial statements.
(c) Auditors handled this matter appropriately. But they would also need to include modification in
their report because the impact of penalty, if levied, can be material.

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 (d) Auditors could have handled this matter in a better manner by also involving a tax expert
because this might result in a penalty and that may have some taxation impact for the Company.
19. QRP has been preparing consolidated financial statements but they do not consolidate financial
statements of SPS every year. This is because the financial year followed by SPS is January to
December as against April to March followed by QRP. The auditors have also been fine with this
position of the management of QRP year on year. Please suggest.
(a) QRP needs to prepare consolidated financial statements by also consolidating SPS. In case this
is not done, the auditors need to qualify their report on consolidated finan cial statements.
(b) QRP needs to prepare consolidated financial statements by also consolidating SPS. In case this
is not done, the auditors need to give emphasis of matter in their report on consolidated financial
statements.
(c) QRP’s management’s view is right because SPS is a foreign company and hence no
consolidation may be done while preparing consolidated financial statements in India.
(d) Auditors of QRP should have done materiality assessment in respect of non -consolidation of SPS
in the consolidated financial statements. The auditors should ask the management to include a
note in the consolidated financial statements and also take management representation letter for
the same.
20. As an expert what will be your advice about the view of the auditors of QRP regarding not testing IT
controls in the first year of SAP implementation and evaluating qualification in IFC report.
(a) The auditors have precedence on the basis of which they have formed a view and that is
completely acceptable. However, the auditors would need to document this properly in their audit
files.
(b) The auditors need to perform procedures before forming any view. Any such precedence of other
client cannot be taken for QRP without performing any procedure by the auditors.
(c) The auditors have precedence on the basis of which they have formed a view and that is fine as
far as they don’t want to test IT controls. However, to qualify the IFC report on the basis of
precedence of other clients only may not be appropriate. Management should include a note in
their financial statements in respect of first year of SAP implementation.
(d) The auditors have precedence on the basis of which they have formed a view and that is fine as
far as they don’t want to test IT controls. However, instead of qualification, disclaimer would be
appropriate in the IFC report because there is no work for making any conclusion by the auditors.
Management should also include a note in their financial statements in respect of first year of
SAP implementation. (10 x 2 = 20 Marks)
Division B- Descriptive Questions-70 Marks
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
1. Comment on the following:
(a) On 15thMarch, 2020, the directors of Phony Ltd. instructed their accountant to enter purchases
amounting Rs. 1.02 crores from a company incorporated dated 11 th March, 2020. However, no
amount was actually paid and Rs. 1.02 crore was provided in the books of account as purchases
for the year ending on 31 stMarch, 2020.

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 On inspection, no documentary or other evidence of such purchases was found. As the auditor of
Phony Ltd., what would be your approach regarding reporting of such bogus purchases?
(5 Marks)
(b) CA. Jill, a recently qualified practicing Chartered Accountant got his first audit assignment of
Natural (P) Ltd. for the financial year 2019-20. He obtained all the relevant appropriate audit
evidence for the items related to Statement of Profit and Loss. However , while auditing the
Balance Sheet items, CA. Jill left out obtaining appropriate audit evidence, say, confirmations,
from the outstanding Accounts Receivable amounting Rs. 190 lakhs, continued as it is from the
last year, on the affirmation of the management that there is no receipts and further credits during
the year. CA. Jill, therefore, excluded from the audit programme, the audit of accounts receivable
on the understanding that it pertains to the preceding year which was already audited by
predecessor auditor. Comment. (5 Marks)
(c) While verifying the employee records in a company, it was found that a major portion of the
labour employed was child labour. On questioning the management, the auditor was told that it
was outside his scope of the financial audit to look into the compliance with other laws. Comment
in accordance with relevant Standards on Auditing. (4 Marks)
2. (a) Choti Limited had definite plan of its business being closed within a short period from the close of
the accounting year ended on 31 stMarch, 2019. The Financial Statements for the year ended
31/03/2019 had been prepared on the same basis as it had been in earlier periods with an
additional note that the business of the Company shall cease in near future and the assets shall
be disposed off in accordance with a plan of disposal as decided by the Management. The
Statutory Auditors of the Company indicated this aspect in Key Audit Matters only by a reference
as to a possible cessation of business and making of adjustments, if any, thereto to be made at
the time of cessation only. Comment on the reporting by the Statutory Auditor as above.
(5 Marks)
(b) The Property, Plant and Equipment of Nasir Ltd. included Rs.23.49crores of earth removing
machines of outdated technology which had been retired from active use and had been kept for
disposal after knock down. These assets appeared at residual value and had been last inspected
seven years back. As an Auditor, what may be your reporting concern in view of CARO, 2016 on
matters specified above? (4 Marks)
(c) Mr. Yuvi, a Chartered Accountant in practice, is the auditor of Prime Ltd. He advised the
Managing Director of the company to include ‘orders under negotiation’ in sales, to reflect higher
profit and better financial position for obtaining bank loans in future. Mr. Yuvi, thereafter, gave
clean reports on the balance sheet prepared accordingly without examining the accounts.
Comment with reference to the Chartered Accountants Act, 1949, and Schedules thereto.
(5 Marks)
3. (a) Ceta Ltd. is a company in which 58% of the paid up share capital is held by Rajasthan
Government. The company is engaged in the business of providing consultancy services in
relation to construction projects. The audit of the financial statements of Ceta Ltd. for the
financial year ended 31 March 2019 got completed with lot of intervention of Comptroller &
Auditor General of India, wherein C&AG was giving directions to the auditors on the manner in
which audit should be conducted in respect of certain areas. Further , it also received comments
from C&AG on the audit report of the auditors. Ceta Ltd is seeking advice to go against C&AG so
that they can avoid unnecessary interference of C&AG. You are required to advise Ceta Ltd. with
respect to role of C&AG in the audit of a Government company. (4 Marks)
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 (b) (i) SSM & Co. is a leading electronics company having multiple branches registered under GST
in different states. The total aggregate turnover of all such branches exceed Rs. 2 crores.
However, the Delhi branch has a turnover of 75 lakhs per annum. Pankaj Gupta, Finance
officer of Delhi branch, is contending that GST audit is not applicable on Delhi branch as the
turnover for that branch does not surpass the threshold. Whether the contention of
Mr Pankaj Gupta is correct or not. Substantiate.
(ii) Colourful Ltd is a printing company with aggregate turnover exceeding rupees 2 crores. ZeM &
Associates is a Chartered Accountant firm which has been appointed for GST audit of Colourful
Ltd. Mr Zed, Chartered Accountant from ZeM & Associates, observes on 23 July 2019 that
Colourful Ltd has not filed its GSTR 3B for the month of July & its GSTR-1 return is also not
complied with. What should Mr. Zed advise the client before conducting GST audit of Colourful
Ltd. (6 Marks)
(c) Mr. Vinod a practicing chartered accountant acting as liquidator of XYZ & Co. charged his
professional fees on percentage of the realization of assets. Comment with reference to the
Chartered Accountants Act, 1949, and Schedules thereto. (4 Marks)
4. (a) Kammo & Co LLP, a firm of Chartered Accountants, was appointed as auditor of an NBFC. The
audit work has been completed. The audit team which was involved in the fieldwork came across
various observations during the course of audit of this NBFC and have also lim ited understanding
about the exceptions which are required to be reported in the audit report. They would like to
understand in detail regarding the obligations on the part of an auditor in respect of exceptions in
his report so that they can conclude their work. Briefly explain. (6 Marks)
(b) You have been appointed as an internal auditor of a company RSM Ltd. The Managing Director
Rakesh is worried about employee attrition in large number. Rakesh requests you to analyse the
causes for high employee attrition rate in his company. What factors would you consider in such
analysis? (4 Marks)
(c) CA. Nikhil, in practice, started project consultancy work as a part of his practice and to advance
the same, sent mail to all the CAs in the country informing them of his services and for securing
professional work. Comment with reference to the Chartered Accountants Act, 1949, and
Schedules thereto. (4 Marks)
5. (a) M/s CAS & Associates have been appointed as one of the statutory central auditors of FDMH
Bank., for the Financial Year 2019-20. During the course of the audit, the auditor found that the
bank has a balance with a Zurich based bank. The auditor understands that such balance is a
matter of important consideration in the audit of the bank. Being head -in-charge of the
assignment, while planning, you distributed the work among your team members and assigned
Mr. Ansh for verification of Balances in account of the bank situated in foreign country. However,
Mr. Ansh, being fresh to the bank audits, needs your guidance. Kindly guide. (4 Marks)
(b) A real-time environment is a type of automated environment in which business operations and
transactions are initiated, processed and recorded immediately (without any delay) as they
happen. It has several critical IT components that enable anytime, anywhere transactions to take
place. You are required to name the components and its example of real-time environment.
(4 Marks)
(c) Comment on the following with reference to Schedule III to the Companies Act, 2013:
(i) A company has disclosed performance guarantee and counter guarantees as Contingent
Liabilities.
10

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 (ii) A company has clubbed all other expenses under the head ‘Other Expenses” on the basis of
1 percent of total revenue or Rs.5,000 whichever is higher.
(iii) A company has shown Deferred Tax Liability under Non-Current Liabilities and Deferred tax
assets under Non-Current Asset in balance sheet. (6 Marks)
6. (a) Lamba, Malhora and Khandelwal are partners in a firm sharing profits and losses in the ratio
2:2:1. The partners have agreed to take Mr. Jain as a partner with effect from 1st April, 2019 as
1/4th partner. What are the important steps involved while conducting investigation on behalf of
Mr. Mistri, the incoming partner? (5 Marks)
(b) You are appointed as an auditor of Azad Limited, a listed company which is a main supplier to
the USA building and construction market. With a turnover of Rs.1.6 billion, the company
operates through 9 business units and has nearly 135 branches across the countries. As an
auditor, how will you draft the report in case (i) When the Parent’s Auditor is also the Auditor of
all its Components? and (ii) When the Parent’s Auditor is not the Auditor of all its Components?
(5 Marks)
(c) During the course of his audit, the auditor noticed material weaknesses in the internal control
system and he wishes to communicate the same to the management. You are required to
elucidate the important points the auditor should keep in the mind while drafting the letter of
weaknesses in internal control system. (4 Marks)
OR
“The Statement defines the scope of peer review which revolves around compliance with
technical, ethical and professional standards; quality of reporting; office systems and procedures
with regard to compliance of assurance engagements; and, training programmes for staff
including articled and audit assistants involved in assurance engagements.” You are required to
explain the meaning assigned to Technical, Ethical and Professional Standards as per Peer
Review Statement. (4 Marks)

11

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 Test Series: May, 2020
MOCK TEST PAPER - 1
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS
DIVISION A - MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. (b)
2. (c)
3. (c)
4. (c)
5. (a)
6. (b)
7. (c)
8. (b)
9. (a)
10. (c)
Questions (11-20) carry 2 Marks each
11. (a)
12. (d)
13. (b)
14. (d)
15. (d)
16. (d)
17. (c)
18. (b)
19. (a)
20. (b)
DIVISION B - DESCRIPTIVE QUESTIONS (70 Marks)
1. (a) Reporting of Fraud Committed by Management/Directors of the Company: As per SA 240 on
“The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements”, fraud can
be committed by management overriding controls using such techniques as recording fictitious
journal entries, particularly close to the end of an accounting period, to manipulate operating
results or achieve other objectives.
In the given case, Phony Ltd. has made purchases amounting Rs. 1.02 crores, at year-end. It
also debited the sum in the books of account, however, no documentary or other evidence of
such purchases was found, on investigation. It is clear that company has passed fictitious journal
entries, near year-end, to manipulate the operating results.

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 Accordingly, the auditor would adopt the approach which will be based on the result of
misstatement on the basis of such fictitious journal entry, i.e. if, as a result of a misstatement
resulting from fraud or suspected fraud, the auditor encounters exceptional circumstances that
bring into question the auditor’s ability to continue performing the audit, the auditor shall
determine the professional and legal responsibilities applicable in the circumstances, including
whether there is a requirement for the auditor to report to the person or persons who made the
audit appointment or, in some cases, to regulatory authorities; or the auditor may consider for
appropriateness of withdrawal from such engagement, where withdrawal from th e engagement is
legally permitted.
In addition, the auditor is required to report according to section 143(12) of the Companies Act,
2013. As per section 143(12), if an auditor of a company in the course of the performance of his
duties as auditor, has reason to believe that an offence of fraud, which involves or is expected to
involve individually an amount of Rs. 1 crore or above is being or has been committed in the
company by its officers or employees, he shall report the matter to the Central Governm ent in
prescribed manner.
The auditor is also required to report under clause (x) of paragraph 3 of Companies (Auditor’s
Report) Order, 2016, whether any fraud by the company or any fraud on the Company by its
officers or employees has been noticed or reported during the year. If yes, the nature and the
amount involved is to be indicated.
(b) Verification of Accounts Receivable: As per SA 510 “Initial Audit Engagements – Opening
Balances”, while conducting an initial audit engagement, the objective of t he auditor with respect
to opening balances is to obtain sufficient appropriate audit evidence about whether -
(i) Opening balances contain misstatements that materially affect the current period’s financial
statements; and
(ii) 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.
When the financial statements for the preceding period were audited by another auditor, the
current auditor may be able to obtain sufficient appropriate audit evidence regarding opening
balances by perusing the copies of the audited financial statements.
Ordinarily, the current auditor can place reliance on the closing balances contained in the
financial statements for the preceding period, except when during the performance of audit
procedures for the current period the possibility of misstatements in opening balances is
indicated.
For current assets and liabilities, some audit evidence about opening balances may be obtained
as part of the current period’s audit procedures, say, the collection of opening accounts
receivable during the current period will provide some audit evidence of their existence, rights
and obligations, completeness and valuation at the beginning of the period.
In addition, according to SA 580 “Written Representations”, the auditor may consider it necessary
to request management to provide written representations about specific assertions in the
financial statements; in particular, to support an understanding that the auditor has obtained from
other audit evidence of management’s judgment or intent in relation to, or the c ompleteness of, a

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 specific assertion. Although such written representations provide necessary audit evidence, they
do not provide sufficient appropriate audit evidence on their own for that assertion.
In the given case, the management of Natural (P) Ltd. has restrained CA. Jill, its auditor, from
obtaining appropriate audit evidence for balances of Accounts Receivable outstanding as it is
from the preceding year. CA. Jill, on believing that the preceding year balances have already
been audited and on the statement of the management that there are no receipts and credits
during the current year, therefore excluded the verification of Accounts Receivable from his audit
programme.
Thus, CA. Jill should have requested the management to provide written representation for their
views and expressions; and he should also not exclude the audit procedure of closing balances
of Accounts Receivable from his audit programme. Consequently, CA. Jill shall also be held guilty
for professional misconduct for not exercising due diligence, or grossly negligence in the conduct
of his professional duties as per the Code of Ethics.
(c) Compliance with Other Laws: As per SA 250, “Consideration of Laws and Regulations in an
Audit of Financial Statements”, the auditor shall obtain sufficient appropriate audit evidence
regarding compliance with the provisions of those laws and regulations generally recognised to
have a direct effect on the determination of material amounts and disclosures in the financial
statements including tax and labour laws.
Further, non-compliance with other laws and regulations may result in fines, litigation or other
consequences for the entity, the costs of which may need to be provided for in t he financial
statements, but are not considered to have a direct effect on the financial statements.
In the instant case, major portion of the labour employed in the company was child labour. While
questioning by auditor, reply of the management that it was outside his scope of financial audit to
look into the compliance with other laws is not acceptable as it may have a material effect on
financial statements.
Thus, auditor should ensure the disclosure of above fact and provision for the cost of fines,
litigation or other consequences for the entity. In case if the auditor concludes that non -
compliance has a material effect on the financial statements and has not been adequately
reflected in the financial statements, the auditor shall express a qualified o r adverse opinion on
the financial statement as per SA 705 “Modifications to the Opinion in the Independent Auditor’s
Report”.
2. (a) Closure of Business: As per SA 570 “Going Concern”, management intentions to liquidate the
entity or to cease operations is one of the event or condition that may cast significant doubt on
the entity’s ability to continue as going concern.
As per SA 570, if events or conditions have been identified that may cast significant doubt on the
entity’s ability to continue as a going concern but, based on the audit evidence obtained the
auditor concludes that no material uncertainty exists, the auditor shall evaluate whether, in view
of the requirements of the applicable financial reporting framework, the financial statem ents
provide adequate disclosures about these events or conditions.
Even when no material uncertainty exists, it requires the auditor to evaluate whether, in view of
the requirements of the applicable financial reporting framework, the financial statement s provide
adequate disclosure about events or conditions that may cast significant doubt on the entity’s
ability to continue as a going concern.

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 Further, as per SA 701 “Communicating Key Audit Matters in the Independent Auditor’s Report”,
when matters relating to going concern may be determined to be key audit matters, and explains
that a material uncertainty related to events or conditions that may cast significant doubt on the
entity’s ability to continue as a going concern is, by its nature, a key audi t matter. SA 701 also
emphasis on auditor’s responsibility to communicate key audit matters in the auditor’s report.
As per the facts given in the case, intention of the Choti Limited had definite plan of its business
being closed down within short period from 31stMarch, 2019. However, financial statements for
the year ended 31.03.2019 had been prepared on the same basis as it had been in earlier
periods with an additional note.
Thus, management intentions to liquidate the entity or to cease operations is one of the event or
condition that may cast significant doubt on the entity’s ability to continue as going concern is a
key audit matter. Therefore, the auditor is required to Communicate the Key Audit Matters in
accordance with SA 570 in above stated manner. Simple reference as to a possible cessation of
business and making of adjustments, if any, he made at the time of cessation only by the auditor
in his report is not sufficient.
(b) Disclosure in Audit Report: The auditor is required to specifically include certain matters as per
CARO, 2016 under section 143 of the Companies Act, 2013.
According to clause (i) (a) of CARO, 2016 the auditor has to comment whether the company is
maintaining proper records showing full particulars, including quantitative details and situation of
fixed assets; and as per clause (i) (b) whether these fixed assets have been physically verified by
the management at reasonable intervals; whether any material discrepancies were noticed on
such verification and if so, whether the same have been properly dealt with in the books of
account;
In the given case, Nasir Ltd. has intention to sale its earth removing machines of outdated
technology which had been retired from active use and had been kept for disposal after knock
down and these assets are appearing at residual value. Further, inspection of such machines
(though it is a retired machine, however value is 23.49crores which is material amount) was done
seven years back, is not in compliance with CARO, 2016.
Hence, this fact needs to be disclosed in the Audit Report as per clause (i) (a) and (b) of
Paragraph 3 of CARO 2016.
(c) Grossly Negligent and Bringing Disrepute to the Institute: Clause (7) of Part I of the Second
Schedule to the Chartered Accountants Act, 1949 states that a Chartered Accountant in practice
shall be deemed to be guilty of professional misconduct if he does not exercise due diligence, or
is grossly negligent in the conduct of his professional duties.
Furthermore, Clause (2) of Part IV of the First Schedule to the said Act states that a member of
the Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he, in
the opinion of the Council, brings disrepute to the profession or the Institute as a result of his
action whether or not related to his professional work.
In the given case, Mr. Yuvi, a Chartered Accountant in practice, is grossly negligence in conduct
of his professional duties by issuing clean reports on the balance sheet without examining the
accounts. Further, he has also brought disrepute to the profession by advising unethical practice
to the managing director of the company. Therefore, Mr. Yuvi will be held guilty for professional
and other misconduct under abovementioned Clauses to the Chartered Accountants Act, 1949.

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3. (a) Role of C&AG in the Audit of a Government company: Role of C&AG is prescribed under sub
section (5), (6) and (7) of section 143 of the Companies Act, 2013.
In the case of a Government company, the comptroller and Auditor-General of India shall appoint
the auditor under sub-section (5) or sub-section (7) of section 139 i.e. appointment of First
Auditor or Subsequent Auditor and direct such auditor the manner in which the accounts of the
Government company are required to be audited and thereupon the auditor so appointed shall
submit a copy of the audit report to the Comptroller and Auditor-General of India which, among
other things, include the directions, if any, issued by the Comptroller and Auditor -General of
India, the action taken thereon and its impact on the accounts and financial statement of the
company.
The Comptroller and Auditor-General of India shall within sixty days from the date of receipt of
the audit report have a right to:
(i) conduct a supplementary audit of the financial statement of the company by such person or
persons as he may authorize in this behalf; and for the purposes of such audit, require
information or additional information to be furnished to any person or persons, so
authorised, on such matters, by such person or persons, and in such form, as the
Comptroller and Auditor-General of India may direct; and
(ii) comment upon or supplement such audit report.
It may be noted that any comments given by the Comptroller and Auditor-General of India
upon, or supplement to, the audit report shall be sent by the company to every person
entitled to copies of audited financial statements under sub-section (1) of section 136 i.e.
every member of the company, to every trustee for the debenture-holder of any debentures
issued by the company, and to all persons other than such member or trustee, being the
person so entitled and also be placed before the annual general meeting of the company at
the same time and in the same manner as the audit report.
Test Audit: Further, without prejudice to the provisions relating to audit and auditor, the
Comptroller and Auditor- General of India may, in case of any company covered under sub-
section (5) or sub-section (7) of section 139, if he considers necessary, by an order, cause test
audit to be conducted of the accounts of such company and the provisions of section 19A of the
Comptroller and Auditor-General's (Duties, Powers and Conditions of Service) Act, 1971, shall
apply to the report of such test audit.
(b) (i) As per Sec 35(5) read with Rule 80(3), the total turnover calculation must be PAN -based,
which means that once the turnover under the PAN is more than Rs. 2 crores, all business
entities registered under GST for that PAN will be liable for GST audit for a financial year.
In the instant case, SSM & Co. is a leading electronics company having multiple branches
registered under GST in different states and the total aggregate turnover of all its branches
exceed Rs. 2 crores. Therefore, instead of Delhi branch is having turnover of 75 lakh, GST
audit is applicable on Delhi branch. Thus, Contention of Mr. Pankaj, Finance Officer, is
incorrect that GST audit is not applicable on Delhi branch as the turnover for that branch
does not surpass the threshold.
(ii) The auditor should advise the company to file all the GSTR-3B, GSTR-1 and annual returns
before conducting GST audit so that auditor can validate and verify the returns filed by the
company, verification of ITC claimed, verification of output GST liability discharged by the
company and for collation of return workings and reconciliations. Auditor needs to have a

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 comprehensive picture of -
(i) Understanding of the back-up of monthly returns as well as annual return and
understanding of reports generated by the GSTN portal as well as internal records of
the company.
(ii) Understanding of the eligibility of Input Tax Credit (ITC) availed i.e. whether ITC
availed by the company is creditable or not and understanding of reversal of ITC
undertaken or applicable (if any).
(iii) Understanding of the taxability of outward supplies and transactions covered under
Reverse Charge Mechanism and other miscellaneous/ specific transactions and
understanding of the positions taken on various transactions by the company.
(c) Chartered Accountant in Practice Acting as Liquidator: According to Clause (10) of Part I of
First Schedule to the Chartered Accountants Act, 1949, a Chartered Accountant in practice shall
be deemed to be guilty of professional misconduct if he charges or offers to charge, accepts or
offers to accept in respect of any professional employment fees which are based on a percentage
of profits or which are contingent upon the findings, or results of such employment, except as
permitted under any regulations made under this Act.
However, CA Regulation allow the Chartered Accountant in practice to charge the fees in respect
of any professional work which are based on a percentage of profits, or which are contingent
upon the findings or results of such work, in the case of a receiver or a liquidator, and the fees
may be based on a percentage of the realization or disbursement of the assets.
In the given case, Mr. Vinod, a practicing Chartered Accountant, has acted as liquidator of XYZ &
Co. and charged his professional fees on percentage of the realisation of assets.
Therefore, Mr. Vinod shall not be held guilty of professional misconduct as he is allowed to
charge fees on percentage of the realisation of assets being a liquidator.
4. (a) Obligation of auditor to submit an exception report to the RBI
(I) Where, in the case of a non-banking financial company, the statement regarding any of the
items referred to in paragraph 3 above, is unfavorable or qualified, or in the opinion of the
auditor the company has not complied with:
(i) the provisions of Chapter III B of RBI Act (Act 2 of 1934); or
(ii) Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 2016; or
(iii) Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking
Company (Reserve Bank) Directions, 2016 and Non-Banking Financial Company -
Systemically Important Non-Deposit taking Company and Deposit taking Company
(Reserve Bank) Directions, 2016.
It shall be the obligation of the auditor to make a report containing the details of such
unfavourable or qualified statements and/or about the non-compliance, as the case may be,
in respect of the company to the concerned Regional Office of the Department of Non -
Banking Supervision of the RBI under whose jurisdiction the registered office of the
company is located as per first Schedule to the Non-Banking Financial Companies
Acceptance of Public Deposits (Reserve Bank) Directions, 2016.

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 (II) The duty of the Auditor under sub-paragraph (I) shall be to report only the contraventions of
the provisions of RBI Act, 1934, and Directions, Guidelines, instructions referred to in sub-
paragraph (1) and such report shall not contain any statement with respect to compliance of
any of those provisions.
(b) The factors to be considered to analyse causes for high employee attrition rate are as
under:
(i) Job Stress & work life imbalance.
(ii) Wrong policies of the Management.
(iii) Unbearable behaviour of Senior Staff.
(iv) Safety factors.
(v) Limited opportunities for promotion.
(vi) Low monetary benefits.
(vii) Lack of labour welfare schemes.
(viii) Whether the organization has properly qualified and experienced personnel for the various
levels of works?
(ix) Is the number of people employed at various work centres excessive or inadequate?
(x) Does the organization provide facilities for staff training so that employees and workers
keep themselves abreast of current techniques and practices?
(c) As per Clause (6) of Part I of First Schedule to the Chartered Accountants Act, 1949, a chartered
accountant in practice is deemed to be guilty of professional misconduct, if he solicit clients or
professional work either directly or indirectly by circular, advertisement, personal communication
or interview or by any other means.
However, nothing herein contained shall be construed as preventing or prohibiting, any chartered
accountant from applying or requesting for or inviting or securing professional work from another
chartered accountants in practice.
In the instant case, CA. Nikhil has written email to all the CA for securing professional work from
them and has not approached any other person or professional or communicated with any client,
Thus, as per exception to the Clause (6), CA. Nikhil is well within the regulation of the act and
has not committed any professional misconduct.
5. (a) Balances in Account of a Bank situated in a Foreign Country: The following procedure may
be followed while verifying balances in account of a bank situated in a foreign country -
(i) Verify the ledger balances in each account with reference to the bank confirmation
certificates and reconciliation statements as at the year-end.
(ii) Review the reconciliation statements and pay particular attention to the following.
(1) Examine that no debit for charges or credit for interest is outstanding and all the items
which ought to have been taken to revenue for the year have been so taken. This
should be particularly observed when the bills collected, etc., are credited with net
amount and entries for commission, etc. are not made separately in the statement of
account.

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 (2) Examine that no cheque sent or received in clearing is outstanding. As per the practice
prevalent among banks, any cheques returned unpaid are accounted for on the same
day on which they were sent in clearing or on the following day.
(3) Examine that all bills or outstanding cheques sent for collection and outstanding as on
the closing date have been credited subsequently.
(iii) Examine the large transactions in inter-bank accounts, particularly towards the year-end, to
ensure that no transactions have been put through for window-dressing.
(iv) Check original deposit receipts in respect of balances in deposit accounts in addition to
confirmation certificates obtained from banks in respect of outstanding deposits.
(v) Check whether these balances are converted into the Indian currency at the exchange rates
prevailing on the balance sheet date and ensure compliance with relevant Accounting
Standard.
(b) Real Time Environment: IT Components: To facilitate transactions in real-time, it is essential to
have the systems, networks and applications available during all times. A real-time environment
has several critical IT components that enable anytime, anywhere transactions to take place. Any
failure even in one component could render the real-time system unavailable and could result in a
loss of revenue. IT Components include:
(i) Applications: For example, ERP applications SAP, Oracle R12, Core banking applications.
(ii) Middleware.: For example, Webservers like Apache, ATM switches.
(iii) Networks: For example, Wide Area Networks, Internet hosting.
(iv) Hardware: For example, Data centers, Backup and Storage devices, Power supply.
(c) (i) A contingent liability in respect of guarantees arises when a company issues guarantees to
another person on behalf of a third party e.g. when it undertakes to guarantee the loan
given to a subsidiary or to another company or gives a guarantee that another company will
perform its contractual obligations.
However, where a company undertakes to perform its own obligations, and for this purpose
issues, what is called a "guarantee", it does not represent a contingent liability and it is
misleading to show such items as contingent liabilities in the Balance sheet. For various
reasons, it is customary for guarantees to be issued by Bankers e.g. for payment of
insurance premia, deferred payments to foreign suppliers, letters of credit, etc. For this
purpose, the company issues a "counter-guarantee" to its Bankers. Such "counter-
guarantee" is not really a guarantee at all, but is an undertaking to perf orm what is in any
event the obligation of the company, namely, to pay the insurance premia when demanded
or to make deferred payments when due. Hence, such performance guarantees and
counter-guarantees should not be disclosed as contingent liabilities.
(ii) All other expenses not classified under other heads will be classified under "Other
Expenses". For this purpose, any item of expenditure which exceeds one percent of the
revenue from operations or Rs. 1,00,000 whichever is higher, needs to be disclosed
separately. The given treatment in the scenario is not in order.
(iii) Deferred Tax Liability should be shown under Non-Current Liabilities. Deferred Tax Asset
shall be shown under Non-Current Asset. But Deferred tax assets and deferred tax
liabilities, both, cannot be shown in balance sheet because only the net balance of Deferred
Tax Liability or Asset is to be shown. Thus, DTA and DTL shown separately in the balance
sheet by the company is not correct.

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6. (a) Steps involved while conducting investigation on behalf of an incoming partner: The
general approach of the investigating accountant in this type of investigation would be more or
less similar, irrespective of the nature of business of the firm-manufacturing, trading or rendering
a service.
Primarily, an incoming partner would be interested to know whether the terms offered to him are
reasonable having regard to the nature of the business, profit records, capital distribution,
personal capability of the existing partners, socio-economic setting, etc., and whether he would
be capable of deriving continuing benefit in the shape of return on capital to be contributed and
remuneration for services to be rendered, which can be justified by the overall economic
conditions prevailing and other considerations considering his own personality and
achievements. In addition, he would be interested to ascertain whether the capital to be
contributed by him would be safe and applied usefully.
Broadly, the steps involved are the following:
(i) Ascertainment of the history of the inception and growth of the firm.
(ii) Study of the provisions of the deed of partnership, particularly for composition of partners,
their capital contribution, drawing rights, retirement benefits, job alloca tion, financial
management, goodwill, etc.
(iii) Scrutiny of the record of profitability of the firm’s business over a suitable number of years,
with usual adjustments that are necessary in ascertaining the true record of business profits.
Particular attention should, however, be paid to the nature of partners’ remuneration, which
may be excessive or inadequate in relation to the nature and profitability of the business,
qualification and expertise of the partners and such other factors as may be relevant.
(iv) Examination of the asset and liability position to determine the tangible asset backing for the
partner’s investment, appraisal of the value of intangibles like goodwill, know how, patents,
etc. impending liabilities including contingent liabilities and those for pending tax
assessment. In case of firms rendering services, the question of tangible asset backing
usually is not important, provided the firm’s profit record, business coverage and standing of
the partners are of the acceptable order.
(v) Position of orders at hand and the range and quality of clientele should be thoroughly
examined, which the firm is presently operating.
(vi) Position and terms of loan finance would call for careful scrutiny to assess its usefulness
and implication for the overall financial position; reason for its absence should be studied.
(vii) It would be interesting to study the composition and quality of key personnel employed by
the firm and any likelihood of their leaving the organisation in the near future.
(viii) Various important contractual and legal obligations should be ascertained and their nature
studied. It may be the case that the firm has standing agreement with the employees as
regards salary and wages, bonus, gratuity and other incidental benefits. Full import of such
standing agreements would be gauged before a final decision is reached.
(ix) Reasons for the offer of admission to a new partner should be ascertained and it should be
determined whether the same synchronises with the retirement of any senior partner whose
association may have had considerable bearing on the firm’s success.
(x) Appraisal of the record of capital employed and the rate of return. It is necessary to have a
comparison with alternative business avenues for investments and evaluation of possible
results on a changed capital and organisation structure, if any, envisaged along with the
admission of the partner.

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 (xi) It would be useful to have a first hand knowledge about the specialisation, if any, attained by
the firm in any of its activities.
(xii) Manner of computation of goodwill on admission as also on retirement, if any, should be
ascertained.
(xiii) Whether any special clause exists in the deed of partnership to allow admission in future of
a new partner, who may be specified, on concessional terms.
(xiv) Whether the incomplete contracts which will be transferred to the reconstituted firm will be a
liability or a loss.
It would always be worthwhile to remember that, in a partnership, personal considerations count
predominantly over other considerations and assessment of standing of the firm, standing and
reliability of other partners, their personal reputation and the goodwill enjoyed by the
products/services are important.
On the basis of the broad frame of considerations as given above, the investigating accountant
should devise his own considerations in each case which may be quite diverse. Additional
considerations may come up in the case of service-rendering firms where profit and business
record, goodwill of the firm and of individual partners would assume greater significance.
Again, in the case of industrial firms, the network of customers, their scatter, size, etc., would be
relevant for consideration.
(b) (i) When the Parent’s Auditor is also the Auditor of all its Components: While drafting the
audit report, the auditor should report whether principles and procedures for preparation and
presentation of consolidated financial statements as laid down in the relevant accounting
standards have been followed. In case of any departure or deviation, the auditor should
make adequate disclosure in the audit report so that users of the consolidated financial
statements are aware of such deviation. Auditor should issue an audit report expressing
opinion whether the consolidated financial statements give a true and fair view of the state
of affairs of the Group as on balance sheet date and as to whether consolidated profit and
loss statement gives true and fair view of the results of consolidated profit or losses of the
Group for the period under audit. Where the consolidated financial statements also include a
cash flow statement, the auditor should also give his opinion on the true and fair view of the
cash flows presented by the consolidated cash flow statements.
(ii) When the Parent’s Auditor is not the Auditor of all its Components: In a case where the
parent’s auditor is not the auditor of all the components included in the consolidated
financial statements, the auditor of the consolidated financial statements should also
consider the requirement of SA 600 “Using the Work of Another Auditor”.
As prescribed in SA 706 “Emphasis of Matter Paragraphs and Other Matter Paragraphs in
the Independent Auditor’s Report”, if the auditor considers it necessary to make reference to
the audit of the other auditors, the auditor’s report on the consolidated financial statements
should disclose clearly the magnitude of the portion of the financial statements audited by
the other auditor(s). This may be done by stating aggregate rupee amounts or percentages
of total assets, revenues and cash flows of components included in the consolidated
financial statements not audited by the parent’s auditor. Total assets, revenues and cash
flows not audited by the parent’s auditor should be presented before giving effect to
permanent and current period consolidation adjustments. Reference in the report of the
auditor on the consolidated financial statements to the fact that part of the audit of the group
was made by other auditor(s) is not to be construed as a qualification of the opinion but
rather as an indication of the divided responsibility between the auditors of the parent and
its subsidiaries.

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 (c) Important Points to be kept in Mind While Drafting Letter of Weakness: As per SA 265,
“Communicating Deficiencies in Internal Control to Those who Charged with Governance and
Management”, the auditor shall include in the written communication of significant deficiencies in
internal control -
(i) A description of the deficiencies and an explanation of their potential effe cts; and
(ii) Sufficient information to enable those charged with governance and management to
understand the context of the communication.
In other words, the auditor should communicate material weaknesses to the management or the
audit committee, if any, on a timely basis. This communication should be, preferably, in writing
through a letter of weakness or management letter. Important points with regard to such a letter
are as follows-
(1) The letter lists down the area of weaknesses in the system and offers suggestions for
improvement.
(2) It should clearly indicate that it discusses only weaknesses which have come to the
attention of the auditor as a result of his audit and that his examination has not been
designed to determine the adequacy of internal control for management.
(3) This letter serves as a valuable reference document for management for the purpose of
revising the system and insisting on its strict implementation.
(4) The letter may also serve to minimize legal liability in the event of a major defalcation or
other loss resulting from a weakness in internal control.
OR
(c) As per the Peer Review Statement, Technical, Professional and Ethical Standards - means
(i) Accounting Standards issued by ICAI and/or prescribed and notified by the Central
Government of India;
(ii) Standards;
Standards issued by the Institute of Chartered Accountants of India including -
(a) Engagement (d) Standards on Internal Audit.
standards (e) Statements on Quality Control.
(b) Statements (f) Notifications / Directions / Announcements /
(c) Guidance notes Guidelines / Pronouncements / Professional standards
issued from time to time by the Council or any of its
committees.

(iii) Framework for the Preparation and presentation of financial statements, Framework of
Statements and Standard on Auditing, Standard on Assurance Engagements, Standards on
Quality Control and Guidance Notes on related services issued, from time to time, by the
Institute of Chartered Accountants of India and Framework for Assuran ce Engagements;
(iv) Provisions of the various relevant statutes and / or regulations which are applicable in the
context of the specific engagements being reviewed including instructions, guidelines,
notifications, directions issued by regulatory bodies as covered in the scope of assurance
engagements.

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Test Series: October, 2020

MOCK TEST PAPER
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
All MCQs are compulsory
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100
DIVISION A – MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. Mr. KTK, was an employee of Youths Ltd, a company engaged in the business of electronics goods;
who retired from his service on 30th September,2018. As he is an electronic Engineer by profession,
on 27th October,2018 he started a retail business dealing in Electronic items under the name KTK
Traders, a proprietary concern, in his hometown. Mr. KTK provides you the following information
regarding the turnover of his proprietary concern for the financial year ended 31st March,2020:
Date Particulars Amount
From 1.4.2019 Gross Turnover 1.25 crore
to 31.3.2020
25-05-2019 Less: Goods returned (sales made during the financial year 2018-2019) 0.08 crore
12-11-2019 Less: Cash discount allowed 0.05 crore
30-12-2019 Less: Goods returned (sales made on 10-12-2019) 0.11 crore
15-02-2020 Less: Discount allowed in the sales invoice 0.03 crore
31-03-2020 Less: Commission on sales 0.01 crore
Net sales 0.97 crore
As per section 44AB of the Income tax Act,1961,every person carrying on business shall, if his total
sales, turnover or gross receipts, as the case may be, in business exceed or exceeds one crore
rupees in any previous year, get his accounts audited by an accountant before the specified date.
Considering the above, which of the following shall be considered as a reason for applicability or non-
applicability of tax audit under section 44AB of the Income Tax Act,1961.
(a) Tax audit under section 44AB of the Income Tax Act,1961 shall be applicable as it is having an
effective turnover of `1.25 crore, which is more than the limit prescribed.
(b) Tax audit under section 44AB of the Income Tax Act,1961 shall be applicable as it is having an
effective turnover of `1.03 crore, which is more than the limit prescribed.
(c) Tax audit under section 44AB of the Income Tax Act,1961 shall not be applicable as it is having
an effective turnover of `0.97 crore, which is less than the limit prescribed.
(d) Tax audit under section 44AB of the Income Tax Act,1961 shall not be applicable as it is having
an effective turnover of `0.98 crore, which is less than the limit prescribed.

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2. MMH & Co, is a large firm of Chartered Accountants having 10 partners and 7 branches across India.
The firm had undertaken Statutory Audit of the branches of some insurance companies and public
sector banks. They were also the Central Statutory Auditors of a major Private Sector Bank in South
India. On 1st September,2019, the firm got an intimation from Peer Review Board (‘Board’) regarding
the peer review of the firm. The Board recommended some names of reviewers. The practice unit,
MMH & Co(‘Firm’), selected CA. R and intimated the name to the Board. CA. R along with his qualified
assistant did an on-site review. The Firm was not happy with the preliminary report issued by the
reviewer arguing that the findings of the reviewer were baseless. The managing Partner of the firm
wrote a letter to the Peer review Board doubting the eligibility of the reviewer.
In this backdrop, you are required to advise on the following matter.
(a) A Peer Reviewer shall be a Chartered Accountant having at least 15 years of experience in
practice and should have conducted audit of Level I entities for at least 7 years.
(b) A Peer Reviewer shall be a Chartered Accountant having at least 10 years of experience in
practice and should have conducted audit of Level I entities for at least 7 years.
(c) A Peer Reviewer shall be a Chartered Accountant having at least 15 years of experience in
practice and should have conducted audit of Level II entities for at least 7 years.
(d) A Peer Reviewer shall be a Chartered Accountant having at least 10 years of experience in
practice and should have conducted audit of Level II entities for at least 7 years
3. Letter head of CA. Panaj, a Practicing Chartered Accountant, is reproduced below:
PANAJ De PANKAJ ACS, LLB, FCA
Chartered Accountant & Member of parliament
As per Chartered Accountants Act, 1949 you are required to choose the appropriate answer :
(a) As per clause 7 of Part I of First Schedule to the Chartered Accountants Act,1949 he shall not
use the designation ‘Member of the Parliament’ in addition to that of a ‘Chartered Accountant’
(b) He shall not use the designation ‘LLB’ in addition to that of a ‘Chartered Accountant’ as he has
not enrolled as an Advocate as per clause 7 of Part I of First Schedule to the Chartered
Accountants Act,1949.
(c) He can use designations such as Member of Parliament, Member of the Legislative Assembly in
addition to that of a ‘Chartered Accountant’ as these are specifically allowed as per clause 7 of
Part I of First Schedule to the Chartered Accountants Act,1949.
(d) As per clause 7 of Part I of First Schedule to the Chartered Accountants Act, 1949 he can
designate himself as ‘Chartered Accountant and Company Secretary’ as he is a member of the
Institute of Company Secretaries of India also.
4. In accordance with provisions of Companies Act, 2013 with respect to investigation into the affairs of a
company, who can be appointed as an inspector?
I. Raj & Associates, a firm
II. CA Rahul
III. Mihim Pvt. Ltd, a body corporate
IV. ABC & Partners LLP, a body corporate
(a) I, III & IV

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(b) I only
(c) III & IV
(d) II only
5. VAS Ltd, a subsidiary of KEP Ltd. is engaged in the business of manufacturing fertilizers. 15% shares
of KEP Ltd are held by the Central Government, 25% by Kerala Government and 20% by Karnataka
Government. M/s ABC & Associate, a firm of Chartered Accountants, has been appointed as first
statutory auditor of VAS Ltd by its Board of Directors. You are required to suggest which of the
following statements would be correct.
(a) The first auditor of VAS Ltd shall be appointed by the Comptroller and Auditor- General of India
within 60 days from the date of registration.
(b) The first auditor of VAS Ltd shall be appointed by the Comptroller and Auditor - General of India
within 180 days from the date of registration.
(c) The first auditor of VAS Ltd shall be appointed by members in EGM within 30 days from the date
of registration.
(d) The first auditor of VAS Ltd shall be appointed by the Board of Directors within 30 days from the
date of registration.
6. During the audit of AMC Finance Ltd, an NBFC, the auditor found that a fraud was committed by its
employees amounting to ` 107.80 lac. The management of the company took severe action against
the employees and the auditors took all necessary steps to report the fraud. Which among the
following steps auditor should take, with respect to the fraud committed by the employees of the
NBFC?
(a) Report in prescribed form should be sent to Central Fraud Monitoring Cell of RBI withing 3 weeks
from date of detection of fraud.
(b) Report in prescribed form should be sent to Regional Office of Dept. of Non-banking supervision
of RBI withing 3 weeks from date of detection of fraud.
(c) Report the matter in prescribed form to the Central government within 21 days from date of
detection of fraud.
(d) Report the matter to the promoters of the company, within 15 days from date of detection of
fraud.
7. As per Regulation 20 and Part D of Schedule II of SEBI (LODR) Regulations, 2015, who among the
following shall be appointed as Chairman of Stakeholder Relationship Committee?
(a) Small Shareholder Director
(b) Whole time director
(c) Any of the Executive Director
(d) Any of the Non-Executive Director
8. M/s Ram Raj & Associates have been appointed as statutory auditors of Venus Ltd. for the FY 2019 -
20. During the year, the company has entered into some related party transactions. CA Ram, the
engagement partner has taken a management representation letter regarding the proper accounting,
presentation and disclosure of such related party transactions. Is there any further responsibility of CA
Ram with respect to the other procedures to be performed for related party transactions?

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(a) No, there is no further responsibility of CA Ram as the best audit evidence for the related party
transaction is the management representation letter.
(b) No, there is no further responsibility of CA Ram as the audit firm is responsible for verifying the
balances and disclosure of related party transactions. The identification of related party
transactions is the responsibility of the management of Venus Ltd.
(c) Yes, the audit firm has the responsibility to perform the audit procedures to identify, assess and
respond to the risk of material misstatement arising from the entity’s failure to appropriately
account for related party relationships, transactions and balances , and obtaining merely
management representation letter can be considered to be sufficient appropriate audit evi dence.
(d) Yes, the auditor has the responsibility to detect fraud and error with respect to the related party
transactions.
9. CA Ajay was appointed as the statutory auditor of TUV Ltd. at Delhi. TUV Ltd has a branch office at
Pune. A branch auditor, CA Suresh, was appointed to conduct the audit of the Pune branch of TUV
Ltd. CA Ajay provided CA Suresh with a questionnaire regarding the details of the branch office of
certain specific accounts and balances to be filled in by CA Suresh in which indication of material
misstatements are involved. However, CA Suresh denied to fill such questionnaire as he explained
that CA Ajay, as the principal auditor has no such right. Which is the relevant SA and which of the
following course of action is correct in this regard?
(a) SA 600 is the relevant SA; CA Ajay is correct in asking for information from CA Suresh through a
questionnaire.
(b) SA 610 is the relevant SA; CA Suresh is correct in denying filling such questionnaire as a
principal auditor can refer to branch auditor’s report or other branch records but cannot ask the
branch auditor to provide any specific information by filling a questionnaire.
(c) SA 600 is the relevant SA; CA Suresh is correct in denying filling such questionnaire as CA Ajay
instead of asking CA Suresh to send the filled up questionnaire, should himself verify the specific
branch details as indication of material misstatement is there.
(d) SA 610 is the relevant SA; CA Ajay should seek management’s permission before asking the
branch auditor for any information.
10. M/s Viaan Viraj & associates are the statutory auditors of ABC Ltd. for the FY 2019 -20. The company
has a strong internal control team. During the course of audit, CA Viaan, the engagement partner
found that the company has factories all across the country. In order to verify the wages expenses at
all the factories, CA Viaan decided to use the Internal Audit Team of the company. He accordingly
discussed the same with Mr. Gaurank, the Chief Internal Auditor of ABC Ltd. to provide him a report
on the wages expenses across all factories. Which of the following requirements as per SA 610 are
required to be fulfilled by CA Viaan prior to using the direct assistance of the Internal Audit Team of
the company?
(a) CA Viaan should obtain written agreement from the management of ABC Ltd. that the internal
audit team will be allowed to follow the statutory auditors’ instructions.
(b) CA Viaan should obtain written agreement from Mr. Gaurank that his team will keep the matters
confidential.
(c) Both a & b
(d) CA Viaan can use the direct assistance of the Internal Audit Team after discussing the same with
the management. No prior written agreement is required. (10 x 1 = 10 Marks)

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Questions (11-20) carry 2 Marks each

MCQ 11. -15.
Integrated Case Scenario 1
MINSAN Ltd, an unlisted company in South India, is engaged in the business of spice oil extraction. Total
paid up capital of the company is ` 9 Crore. Details of annual turnover and profit of the company for the last
3 years are given below:
Year ended Turnover (` in crore) Profit (loss)before tax (` in crore)
31-03-2018 527.21 (Audited) 50.16
31-03-2019 301.37 ( Audited) 01.25
31-03-2020 104.13 ( provisional) (10.25)

The company is using conventional method for extraction of oil from spices. This requires more human
intervention and hence, cost of production is high as compared to innovative method used by other new
companies. Though the company had significant growth in the past years, it has not done well over the last
two financial years due to competition.
A new competitor viz, Natural Extracts Ltd, had come in the market during the year 2018 and by the end of
March, 2019, they captured around 75% of market share by offering the product at a reduced price. They
use new machinery which allows whole range of automated extraction method, th us, minimizing manual
steps and reducing cost of labour.
In order to reduce cost of production and thereby re-capture the market, the management of MINSAN Ltd
has planned to erect a new plant with an automatic machine. The estimated cost of plant & machine ry is
` 90 lac. The company approached SA Bank Ltd for a term loan of ` 80 lac which would be repaid in 5
years. On 28-12-2019, the bank had sanctioned the loan; and disbursed ` 40 lac till 31st March, 2020.
MINSAN Ltd has appointed M/s Check & Check, Chartered Accountants, as auditors of the company at its
AGM held on 18-09-2019 for a period of 5 years. As agreed, the audit team commenced their audit work
for the year 2019-2020 in February, 2020 and completed the work by the end of May, 2020. The audit t eam
submitted following findings to the engagement partner:
➢ PX Ltd, one of the material suppliers, filed a case against the company on 12 -09-2019 for a
compensation of ` 3 crore.
➢ Company has made an estimate for allowance of debtors @5%.
➢ 70% of the value of inventory was only covered in physical verification during the year 2019-20 due to
outbreak of Novel Corona Virus (COVID-19) and subsequent lockdown thereof.
➢ Company got a show cause notice from State Pollution Control Board for the contravention of the
provisions of Hazardous and waste Management Rule.
➢ Three incidence of fraud noticed (Total ` 1.02 crore)- fraud committed by the Purchase manager ` 85
Lakh, by Accounts manager ` 15 Lakh and by a cashier ` 2 lac.
As an auditor of MINSAN Ltd for the year 2019-20, answer the following questions based on the facts given
in the above paragraph:
11. Though the company had significant growth in the past years, it has not done well over the last two
financial years. As per SA 570, there are certain events or conditions that individually or collectively
may cast significant doubt about the going concern assumptions. In order to assess whether MINSAN
Ltd is a going concern or not, which of the following audit procedures should NOT be performed?

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(a) Analysis and discuss with the management of the company to find out whether installation of new
plant and machinery would enable the company to reduce cost of production.
(b) Inquire the company’s legal counsel regarding existence of legal litigation and claim against the
company, reasonableness of management assessments of their outcome and estimate of their
financial implication.
(c) Evaluating management’s future plan and strategy to increase market share of product.
(d) Analysis and discuss the company’s cash flow and profit of the previous years with the projected
accounts.
12. Company has made an estimate for allowance of debtors @5%. Some financial statement items
cannot be measured precisely but can only be estimated. The nature and reliability of information
available to management to support the making of an accounting estimate varies widely, which
thereby affects the degree of estimating uncertainty associated with accounting estimates. Please
advise which among the following may have higher estimate uncertainty and higher risk as per SA
540?
(a) Judgments about the outcome of pending litigation with PX Ltd against the company.
(b) Estimates made for inventory obsolescence that are frequently made and updated.
(c) A model used to measure the accounting estimates is well known and the assumptions to the
model are observable in market place.
(d) Accounting estimate made for allowance for doubtful debts where the result of the auditors
review of similar accounting estimates made in the prior period financial statements do not
indicate any substantial difference between the original accounting estimate and the actual
outcome.
13. The company in the notes accompanying its financial statements disclosed the existence of suit filed
against the company with full details. Based on the audit evidence obtained, it is necessary to draw
user’s attention to the matter presented in the financial statement by way of clear additional
communication as there is an uncertainty relating to the future outcome of the litigation. In this
situation, which of the following reporting option would be correct if auditor is satisfied with the
conclusions reached by the management and this matter is fundamental to the reader of financial
statements?
(a) Include an Emphasis of Matter paragraph in Auditors report having a clear reference to the
matter being emphasized and issue a qualified opinion.
(b) Include in the Basis for Adverse opinion paragraph and issue an adverse opinion having a clear
reference to the matter referred in the notes on accounts.
(c) Include in the Basis for Disclaimer of opinion paragraph having a clear reference to the matter
and issue a disclaimer opinion.
(d) Include an Emphasis of Matter Paragraph in Auditors report having a clear reference to the
matter being emphasized and to where relevant disclosures that fully describe the matter can be
found in the financial statement.
14. Company got a show cause notice from State Pollution Control Board. As per SA 250, the auditor shall
perform the audit procedures to help identify instances of non-compliance with other laws and
regulations that may have a material effect on the financial statements. As the audit team of the
company became aware of information concerning an instance of non-compliance with law, what
would NOT be the audit procedure to be performed?
(a) Understand the nature of the act and circumstances in which it has occurred and o btain further
information to evaluate the possible effect on the financial statement.

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(b) Discuss the matter with management and if they do not provide sufficient information; and if the
effect of non-compliance seems to be material, legal advice may be obtained.
(c) Monitoring legal requirement and compliance with code of conduct and ensuring that operating
procedures are designed to assist in the prevention of non-compliance with law and regulation
and report accordingly.
(d) Evaluate the implication of non-compliance in relation to other aspects of audit including risk
assessment and reliability of written representation and take appropriate action.
15. The company had availed some amount of loan for new plant and machinery during the year under
audit. Out of the total loan sanctioned an amount of ` 25 lac was earmarked for the purchase of the
machinery-Oil Extractor; but, the company has acquired an improved model of machinery, viz, Oil
extractor with Dryer in its stead. State which of the reporting option would be correct.
(a) State the fact in CARO report that out of term loan taken for machinery -Oil Extractor, ` 25 Lakh
was not utilized for acquiring the machinery for which it was sanctioned.
(b) Ask the management to change terms and condition of term loan as the company has acquired a
different machinery. Report under CARO, if the management does not agree with the demand.
(c) State the fact in CARO report that the term loan taken has been applied for the purpose for which
it was sanctioned.
(d) State the fact in CARO report that the term loan taken has not been applied for the purpose for
which it was sanctioned. Also qualify the report as there are misstatements that are material but
not pervasive. (5 x 2 = 10 Marks)
MCQ 16. -20.
Integrated Case Scenario 2
Papa Limited is a listed nationalised bank whose face value per share is ` 100 each having its operation
across India. Papa Limited appointed Mr. Das, Mr. Pas and Mr. Tas as its central joint auditors for the year
2020-21. After making sure that all of them are qualified to be appointed as statutory auditor of the bank,
Papa Limited issued appointment letter as well as engagement letter to all of them. The engagement letter
contains the details on objective and scope of audit, responsibilities of auditor, management and
identification of framework applicable. It also contains the reference to expected form and content of report
from all three joint auditors. During the year Papa Limited has acquired another bank called Baby Limited.
While finalising the books of accounts, some adjustments were made to give the effect of merger. These
adjustments were related to determination of goodwill of `2 crores, determination of amount of minority
interest of ` 50 Lakh and some intra-group transaction adjustment of ` 15 lac were also made. Another
adjustment which was made was harmonization of accounting policies of both Papa Limited and Baby
Limited which was of 30 lac.
While planning the audit, all joint auditors mutually decided that responsibility of verification of cash book
will be entrusted with Mr. Pas. But Mr. Pas failed to detect the fraud committed by the cashier which he
could have detected if he had properly checked the cash book. This fraud was revealed in the special audit
which was conducted on the directions of RBI. Responsibility for verifying compliance with SLR requirement
was entrusted with Mr. Das. While performing audit on compliance with SLR requirements Mr. Das used 12
odd dates in different months of fiscal year. Mr. Das with his professional judgement used the below
mentioned days:
Month Day of month Day
April 2nd Thursday
May 9th Saturday

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June 5th Friday

July 31st Friday
August 31st Monday
September 1st Tuesday
October 30th Friday
November 1st Sunday
December 1st Tuesday
January 10th Sunday
February 8th Monday
March 7th Sunday

Mr. Tas was entrusted with responsibility for calculation of Demand and time liability. On 31 st March total
liability stood at ` 200 Crores. It includes Margin held for funded facilities of ` 3 Crore, credit balance for
one branch of ` 4 crores, adverse balance of nostro Mirror account of ` 2 Crores and unadjusted deposit
for agency business of ` 6 Crore. Papa Limited has total 12 directors including 3 women directors. Out of
them, Mr. Right was non executive chairman as well as promoter of bank. Papa Limited has a total of 5
independent directors in their board.
Wife of CA Das, was also a Chartered Accountant and was actively involved in purchase and sale of
shares. She purchased 100 shares of Papa Limited of ` 100 each for ` 15,00,000. All the required
communication were made among the joint auditors and significant matters were discussed with those
charged with governance. At the end, an unmodified report in accordance with SA 700 was issued which
was signed by all three joint auditors.
16. Which of the fallowing statement is true?
(a) For giving the effect of merger, permanent consolidation adjustment of 250 lac and current period
consolidation adjustment of 45 lac was made.
(b) For giving the effect of merger, permanent consolidation adjustment of 280 lac and current period
consolidation adjustment of 15 lac was made.
(c) For giving the effect of merger permanent consolidation adjustment of 295 lac.
(d) For giving the effect of merger, permanent consolidation adjustment of 265 lac and current period
consolidation adjustment of 30 lac was made.
17. While verifying the compliance of corporate governance, in accordance with Regulation 17 and 17A,
was there any non-compliance in composition of board?
(a) No, as in this scenario there should be at least 1/3 i.e.4 independent directors.
(b) Yes, as in this scenario there should be at least 1/ 2 i.e. 6 independent directors.
(c) No, as its upto the shareholder to decide the composition of board after complying with section
149(4) of companies act 2013.
(d) Yes, as in this scenario there should be at least 2/3 i.e. 8 independent directors.
18. List down all the months whose date has been selected inappropriately by CA Das for calculation of
SLR compliance?
(a) January, February and March.
(b) July, August and October
(c) June, July and October.
(d) May and November.
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19. While calculating SLR compliance of Papa Limited, what will be value of demand and time liability as
on 31st March?
(a) 191 crores
(b) 200 crores.
(c) 197 crores.
(d) 185 crores.
20. Will CA Das be disqualified after his wife purchased 100 shares for ` 15,00,000?
(a) Mr. Das will be disqualified as an auditor of Papa Limited, as his relative owns shares of more
than ` 100,000 market value.
(b) Mr. Das will be not disqualified as an auditor of Papa Limited, as his relative owns shares of less
than ` 20,00,000 market value.
(c) Mr. Das will be not disqualified as an auditor of Papa Limited, as his relative owns shares of less
than ` 100,000 face value.
(d) Mr. Das will be disqualified as an auditor of Papa Limited, as his relative owns shares in Papa
limited irrespective of amount of investment. (5 x 2 = 10 Marks)
Division B- Descriptive Questions-70 Marks
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
1. Comment on the following:
(a) ING Associates, Chartered Accountants, conducting the audit of XYZ Ltd., a listed Company for
the year ended 31 st March 2020 is concerned with the auditor's responsibilities relating to
misstatements in other information, both financial and non-financial, included in the Company’s
annual report. While reading other information, ING Associates considers whether there is any
material misstatement of the other information in the Company. After performing their
procedures, the auditor concludes that a material misstatement of the other information exists.
ING Associates discussed with the Management about the other information that appeared to be
materially misstated to the auditor and also requested management to provide evidence for the
basis of management’s statements in the other information along with supporting documents.
Guide ING Associates as to how to respond to that material misstatement of other information
obtained prior to the date of auditor’s report. Will your answer be different in case ING Associates
conclude the same after the date of auditor’s report? (5 Marks)
(b) Whilst the Audit team has identified few matters, they need your advice to conclude on the same.
Engagement Partner have asked them to review the Board minutes and other secretarial/
regulatory records based on which the following additional matters were brought to the attention
of the Partner:-
(i) The long term borrowings from the parent company has no written terms and neither the interest
nor the principal has been repaid so far.
(ii) Certain computers were received from the parent company free of cost, the value of which is
` 0.23 lac and no accounting or disclosure of the same has been made in the notes to accounts.
(iii) An amount of ` 3.25 Lakhs per month is paid to M/s. WE CARE Associates, a partnership firm,
which is a 'related party' in accordance with the provisions of the Companies Act, 2013 for the
marketing services rendered by them. Based on an independent assessment, the consideration
paid is higher than the arm's length pricing by `0.25 Lakhs per month. Whilst the transaction was
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accounted in the financial statements based on the amounts' paid, no separate disclosure of this
related party transaction has been made in the notes to accounts forming part of the financial
statements highlighting the same as a 'related party' transaction.
Audit Manager has reported that she had asked certain information relating to another 'related
party' transaction (amounting to approx. ` 47 lac) but the CFO refused to provide the same since
the same is perceived to be confidential and cannot be shared with the Auditors.
You are required to advise about items to be reported to those charged with governance, where
applicable, based on your audit findings in the given situation. (5 Marks)
(c) CA. Pointer had been appointed as an Auditor of Textile Ltd. During the course of audit, it was
observed that inventory including work-in-process has been valued by the Management by using
experts hired by them. Analyse relevant factors to decide as to whether CA. Pointer should
accept or not accept the findings from the work of Management expert in valuation of inventories.
(4 Marks)
2. (a) It was observed from the modified audit report of the financial statements of ULFA Ltd. for the
year ended 31 st March, 2019 that depreciation of ` 4.25 crore for the year 2018-2019 had been
charged off to the Statement of Profit and Loss instead of including it in "carrying value of asset
under construction". State in relation to the audit for the year ended 31 st March 2020, whether
such modification in the previous year's audit report would have any audit implication for the
current year i.e. FY 2019-20 and if yes, how the auditor is required to deal with the same in his
audit report for the current year? (5 Marks)
(b) BETA Ltd is the Subsidiary company of ALPHA Ltd. PQR & Associates has been appointed as
auditor of ALPHA Ltd. for the Financial Year 2019-20 and MNO & Associates has been appointed
as auditor of BETA Ltd for the year 2019-20. Explain the role of PQR & Associates and MNO &
Associates as auditors of the parent company and subsidiary company respectively. (4 Marks)
(c) Mr. Aniket, a Chartered Accountant was the auditor of 'Alpha Limited' for the year 2018-19 and
2019-20. During the financial year, the investment appeared in the Balance Sheet of the
company amounting ` 11 lac and was the same amount as in the last year 2018-19. Later on, it
was found that the company's investments were only for ` 45,000, however, the value of
investments was inflated for the purpose of obtaining higher amount of Bank loan. Comment with
reference to the Chartered Accountants Act, 1949, and Schedules thereto. (5 Marks)
3. (a) Solar Limited is a public sector undertaking engaged in production of electricity from solar power.
It has started a new project near Puducherry with a new technology for a cost of
` 9,750 crore. Though there is delay in commencement of project and accordingly, there has
been overrun in the cost. State the matters C&AG while conducting Comprehensive Audit may
cover in reporting on the performance and efficiency of this project. (4 Marks)
(b) (i) While conducting GST Audit of RST Limited., you have observed the following:
RST Limited has exported goods to MNP Limited located in USA. The value of goods is
$2,00,000. The exchange rate (`/$) on the date of filing Shipping Bill is-
CBEC notified rate `65
RBI reference rate `68
At the time of receiving money, the bank exchanged the foreign currency at ` 70.

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How would you report the adjustments, if any, in turnover due to foreign exchange fluctuations in
Reconciliation statement in Form GSTR 9C prescribed in terms of Rule 80(3) of CGST Rules,
2017.
(ii) Will your answer be different if exchange rate (`/$) at the time of receiving money, the bank
exchanged the foreign currency at `66. (6 Marks)
(c) Mr. Dhruv, a practicing Chartered Accountant, did not complete his work relating to the audit of
the accounts of a company and had not submitted his audit report in due time to enable the
company to comply with the statutory requirements. Comment with reference to the Chartered
Accountants Act, 1949, and Schedules thereto. (4 Marks)
4. (a) You have been appointed as an auditor of LCO Bank, a nationalized bank. LCO Bank also deals
in providing credit card facilities to its account holders. The bank is aware of the fact that there
should be strict control over storage and issue of credit cards. As an auditor of the bank, how will
you evaluate the Internal Control System with respect to Credit Card operations maintained by
the LCO Bank? (6 Marks)
(b) The management of Amazon, a manufacturing unit does not accept the recommendations for
improvements made by the Operational Auditor. Suggest an alternative way to tackle the hostile
management. (4 Marks)
(c) Mr. Chintamani, a Chartered Accountant in practice has been elected as the treasurer the
Regional Council of the ICAI. The Regional Council had organized an international tour
through a tour operator during the year for its members. During the audit of the Regional
Council, it was found that Mr. Chintamani had received a personal benefit of ` 40,000 from
the tour operator. Comment with reference to the Chartered Accountants Act, 1949, and
Schedules thereto. (4 Marks)
5. (a) “Generating and preparing meaningful information from raw system data using processes, tools,
and techniques is known as Data Analytics and the data analytics methods used in an audit are
known as Computer Assisted Auditing Techniques or CAATs.” You are required to give
illustration of a suggested approach to get the benefits from the use of CAATs. (4 Marks)
(b) While auditing Innocent Insurance Ltd, you observed that a policy has been issued on 31st
March, 2020 evening to LMN Company. LMN Company had signed all the papers and taken
insurance policy (value insured = ` 11 lac) for its new godown and premium for the same was
paid through cheque subject to realization. However, on the night of 31 st March, a huge fire
accident took place in LMN Company and goods worth `15 lac were destroyed. Further, cheque
was also dishonoured due to insufficient fund. The Company informed the incident to Innocent
Insurance Ltd and a claim was lodged for the same. The insurance company also made a
provision for claim. Advise the Innocent Insurance Ltd in this regard. (4 Marks)
(c) As an Auditor give your comments for the following disclosures made by a Company which
adopted Ind AS for compilation of Financial Statements:
(i) In the Balance Sheet, the sub-head inventories contained an item "goods in transit"
against which a consolidated amount consisting of aggregate of the cost of raw materials
in transit and loose tools which are billed on company but delivery not been made to the
company had been specified.
(ii) Provision for doubtful debts of trade debtors was grouped under, "Provisions" under
current liabilities.
(iii) Sale proceeds of scrap incidental to manufacture were included in "Other Income".
(6 Marks)
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6. (a) A nationalized bank received an application from a Limited company seeking sanction of a
term loan to expand its existing business. In this connection, the Loan Manager of the Bank
approaches you to conduct a thorough investigation of the items of the Balance Sheet of
this Limited company and submit a confidential report based on which he will decide
whether to sanction this loan or not. List out the major steps an investigating accountant
would keep in mind while verifying assets and liabilities included in the Balance Sheet of
the borrower company which has been furnished to the Bank. (5 Marks)
(b) R Limited has been paying dividend consistently over 15% year on year. The Financial year
2019-20 was so very bad for the Company and it was not possible for the Company to maintain
the payment of consistent dividend as mentioned above. The Management, being hopeful of
recovery of its performance in next year, felt that the depreciation of the year to the extent of 65%
alone be charged to the Statement of Profit and Loss and the remaining 35% be kept in a
separate account code in the Balance Sheet- 'Debit Balances Adjustable against Revenue
account'. The Management was of the view that it would be fair practice of accounting if the
depreciation for assets is charged before the expiry of the life of assets and the amount parked in
asset code as above would unfailingly be adjusted to Revenue before the close of next financial
year anyway. Analyse the issues involved and state how the Auditor should decide on this
matter. (5 Marks)
(c) Compute the overall Audit Risk if looking to the nature of business there are chances that 40%
bills of services provided would be defalcated, inquiring on the same matter management has
assured that internal control can prevent such defalcation to 75%. On his part the Auditor
assesses that the procedure he could apply in the remaining time to complete Audit gives him
satisfaction level of detection of frauds & error to an extent of 60%. Analyse the Risk of Mater ial
Misstatement and find out the overall Audit Risk. (4 Marks)
OR
ABC & Co LLP is a large firm of Chartered Accountants based out of Chennai. ABC & Co. LLP is
subject to peer review which was last conducted 3 years back. For the peer review of the
financial year ended 31 March 2020, the firm got an intimation on 31 May 2020. The process of
peer review got started and was completed on 29 September 2020. In view of peer reviewer, the
systems and procedures of ABC & Co. LLP are deficient / non-compliant. The peer reviewer did
not share any of his observations with ABC & Co LLP as draft and final report was submitted to
the Board. Comment. (4 Marks)

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Test Series: October, 2020

MOCK TEST PAPER
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS
DIVISION A - MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. (b)
2. (b)
3. (a)
4. (d)
5. (a)
6. (a)
7. (d)
8. (c)
9. (c)
10. (a)
Questions (11-20) carry 2 Marks each
11. (d)
12. (a)
13. (d)
14. (c)
15. (c)
16. (a)
17. (b)
18. (c)
19. (a)
20. (c)
DIVISION B - DESCRIPTIVE QUESTIONS (70 Marks)
1. (a) Responding When the Auditor Concludes That a Material Misstatement of the Other
Information Exists: As per SA 720, “The Auditor’s Responsibility in Relation to Other
Information”, if the auditor concludes that a material misstatement of the other
information exists, the auditor shall request management to correct the other information.
If management:
(i) Agrees to make the correction, the auditor shall determine that the correction has been
made; or
(ii) Refuses to make the correction, the auditor shall communicate the matter with those
charged with governance and request that the correction be made.

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If the auditor concludes that a material misstatement exists in other informatio n obtained
prior to the date of the auditor’s report, and the other information is not corrected after
communicating with those charged with governance, the auditor shall take appropriate action,
including:
(i) Considering the implications for the auditor’s report and communicating with those charged
with governance about how the auditor plans to address the material misstatement in the
auditor’s report;
(ii) Withdrawing from the engagement, where withdrawal is possible under applicable law or
regulation.
If the auditor concludes that a material misstatement exists in other information obtained
after the date of the auditor’s report, the auditor shall:
(i) If the other information is corrected, perform the procedures necessary in the
circumstances; or
(ii) If the other information is not corrected after communicating with those charged with
governance, take appropriate action considering the auditor’s legal rights and obligations, to
seek to have the uncorrected material misstatement appropriately brought to the attention of
users for whom the auditor’s report is prepared.
(b) As per SA 550, Related Parties, communicating significant matters arising during the audit in
connection with the entity’s related parties helps the auditor to establish a common
understanding with those charged with governance of the nature and resolution of these matters.
Examples of significant related party matters include, non-disclosure (whether intentional or not)
by management to the auditor of related parties or significant related party transactions, which
may alert those charged with governance to significant related party relationships and
transactions of which they may not have been previously aware; The identification of significant
related party transactions that have not been appropriately authorised and approved, which may
give rise to suspected fraud; etc.
It may be noted that unless all of those charged with governance are involved in managing the
entity, the auditor shall communicate with those charged with governance significant matters
arising during the audit in connection with the entity’s related parties.
The auditor is also required to ensure the compliance of Ind AS 24 / AS 18 Related Party
Disclosures.
In view of above in the given scenario, the auditor is required to prepare a brief summary of
following items to be reported to those charged with governance in accordance with SA 260
Communication with Those Charged with Governance:
(i) One of related party transaction amounting 3.25 lac per month i.e. in lieu of marketing
services has been noticed of which amount ` 0.25 lac per month is exceeds the arm’s
length price has not been disclosed highlighting the same as related party transactions as
per Ind- AS 24 / AS 18 Related Party Disclosures.
(ii) Refusal by CFO of the company to provide the details of related party transaction amounting
to rupees 47 lac on the ground that same is perceived to be confidential and cannot be
shared with auditors, is not in order, as denying for the related part details of ` 47 lac is
imposing limitation of scope of auditor in view of SA 705.
(iii) Receipt of free of cost Computers and long-term borrowing (on no agreed terms and
repayment of interest and principal) from the Parent Company need separate disclosure in
financial statements as per Ind AS 24 / AS 18 Related Party Disclosures.

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Further, in case of all the above cases, the auditor would also need to assess his reporting
requirements under the clauses (xiii) of Paragraph 3 of CARO 2016 with respect to related party
transactions that whether all transactions with the related parties are in compliance with sections
177 and 188 of Companies Act, 2013 where applicable and the details have been disclosed in
the Financial Statements etc., as required by the applicable Accounting Standards.
(c) Evaluating the Work of Management’s Expert: As per SA 500 “Audit Evidence”, 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-
(1) Evaluate the competence, capabilities and objectivity of that expert;
(2) Obtain an understanding of the work of that expert; and
(3) Evaluate the appropriateness of that expert’s work as audit evidence for the relevant
assertion.
The auditor may obtain information regarding the competence, capabilities and objectivity of a
management’s expert from a variety of sources, such as personal experience with previous work
of that expert; discussions with that expert; discussions with others who are familiar with that
expert’s work; knowledge of that expert’s qualifications; published papers or books written by that
expert.
Aspects of the management’s expert’s field relevant to the auditor’s understanding may include
what assumptions and methods are used by the management’s expert, and whether they are
generally accepted within that expert’s field and appropriate for financial reporting purposes.
The auditor may also consider the following while evaluating the appropriateness of the
management’s expert’s work as audit evidence for the relevant assertion:
(i) The relevance and reasonableness of that expert’s findings or conclusions, their
consistency with other audit evidence, and whether they have been appropriately reflected
in the financial statements;
(ii) If that expert’s work involves use of significant assumptions and methods, the relevance and
reasonableness of those assumptions and methods; and
(iii) If that expert’s work involves significant use of source data, the relevance, completeness,
and accuracy of that source data.
2. (a) Auditor’s responsibility in cases where audit report for an earlier year is qualified is given
in SA 710 “Comparative Information – Corresponding Figures and Comparative Financial
Statements”.
As per SA 710, when 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 matter which gave rise to
the modified opinion is resolved and properly accounted for or disclosed in the financial
statements in accordance with the applicable financial reporting framework, the auditor’s opinion
on the current period need not refer to the previous modification.
SA 710 further states that if the auditor’s report on the prior period, as previously issued, included
a qualified opinion and the 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:
Refer to both the current period’s figures and the corresponding figures in the
descriptionofthemattergivingrisetothemodificationwhentheeffectsorpossible effects of the matter
on the current period’s figures are material; or

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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.
In the instant case, if ULFA Ltd. does not correct the treatment of depreciation to the extent of
rupees 4.25 crore for previous year, the auditor will have to modify his report for both current and
previous year’s figures as mentioned above. If, however, the figures and provisions are
corrected, the auditor need not consider to the earlier year’s modification.
(b) Role of Auditor in case of Parent Company and Subsidiary Company: As per SA 600
“Using the Work of Another Auditor”, there should be sufficient liaison between the principal
auditor (hereinafter referred as auditor of Parent Company and the other auditor (hereinafter
referred as auditor of Subsidiary Company).
Role of Principal Auditor (PQR & Associates- Auditor of Parent Company):
(i) It is necessary to issue written communication(s) as a principal auditor to the other auditor.
(ii) The principal auditor should advise the other auditor of any matters that come to his
attention that he thinks may have an important bearing on the other auditor’s work.
(iii) When considered necessary by him, the principal auditor may require the other auditor to
answer a detailed questionnaire regarding matters on which the principal auditor requires
information for discharging his duties.
Role of Other Auditor (MNO & Associates- Auditor of Subsidiary Company):
(i) The other auditor, knowing the context in which his work is to be used by the principal
auditor, should co-ordinate with the principal auditor. For example, by bringing to the
principal auditor’s immediate attention to any significant findings requiring to be dealt with at
entity level, adhering to the time-table for audit of the component, etc.
(ii) He should ensure compliance with the relevant statutory requirements.
(iii) The other auditor should respond to the questionnaire sent by Principal Auditor on a timely
basis.
(c) Gross Negligence in Conduct of Duties: As per Part I of Second Schedule to the Chartered
Accountants Act, 1949, a Chartered Accountant in practice shall be deemed to be guilty of
professional misconduct, if he, certifies or submits in his name or in the name of his firm, a report
of an examination of financial statements unless the examination of such sta tements and the
related records has been made by him or by a partner or an employee in his firm or by another
chartered accountant in practice, under Clause (2); does not exercise due diligence, or is grossly
negligent in the conduct of his professional duties, under Clause (7); or fails to obtain sufficient
information which is necessary for expression of an opinion or its exceptions are sufficiently
material to negate the expression of an opinion, under Clause (8).
The primary duty of physical verification and valuation of investments is of the management.
However, the auditor’s duty is also to verify the physical existence and valuation of investments
placed, at least on the last day of the accounting year. The auditor should verify the documentary
evidence for the cost/value and physical existence of the investments at the end of the year. He
should not blindly rely upon the Management’s representation.
In the instant case, such non-verification happened for two years. It also appears that auditors
failed to confirm the value of investments from any proper source. In case auditor has simply
relied on the management’s representation, the auditor has failed to perform his duty.
Conclusion: Accordingly, Mr. Aniket, will be held liable for professional misconduct under
Clauses (2), (7) and (8) of Part I of the Second Schedule to the Chartered Accountants Act, 1949.

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3. (a) The areas covered in comprehensive audit naturally vary from enterprise to enterprise depending
on the nature of the enterprise, its objectives and operations. However, in general, the covered
areas are those of investment decisions, project formulation, organisational effectiveness,
capacity utilisation, management of equipment, plant and machinery, production performance,
use of materials, productivity of labour, idle capacity, costs and prices, materials management,
sales and credit control, budgetary and internal control systems, etc.
Some of the issues examined in comprehensive audit are:
(i) How does the overall capital cost of the project compare with the approved planned costs?
Were there any substantial increases and, if so, what are these and whether there is
evidence of extravagance or unnecessary expenditure?
(ii) Have the accepted production or operational outputs been achieved? Has there been under -
utilisation of installed capacity or shortfall in performance and, if so, what has caused it?
(iii) Are the systems of project formulation and execution sound? Are there inadequacies? What
has been the effect on the gestation period and capital cost?
(iv) Are cost control measures adequate and are there inefficiencies, wastages in raw materials
consumption, etc.?
(v) Are the purchase policies adequate? Or have they led to piling up of inventory r esulting in
redundancy in stores and spares?
(vi) Does the enterprise have research and development programmes? What has been the
performance in adopting new processes, technologies, improving profits and in reducing
costs through technological progress?
(vii) Are procedures effective and economical?
(viii) Is there any poor or insufficient or inefficient project planning?
(b) Reporting of Adjustment in Turnover due to Foreign Exchange Fluctuations in
Reconciliation Statement: Any difference between the turnover reported in the Annual Return
(GSTR9) and turnover reported in the audited Annual Financial Statement due to foreign
exchange fluctuations shall be declared in Sl. No. 5N. Adjustments in turnover due to foreign
exchange fluctuations (Less/ Add).
For the purpose of GST Returns, the exchange rate would be ` 65 and the exports to be
disclosed in the GST Returns would be ` 1,30,00,000. For the purpose of accounting records, the
exchange rate would be ` 68 and the exports recorded in the books would be ` 1,36,00,000. The
difference in revenue being ` 6,00,000 would have to be reduced from the Annual turnover as
per the financials to arrive at the revenue as per GSTR 9.
(i) Additionally, difference in the amount booked in the accounts and actual amount received
being ` 70 – ` 68 = ` 2 x $200,000 = ` 400,000 would be credited to the Profit and
Loss Account as Forex Gain which again needs to be reduced from the Annual turnover
as per the financials to arrive at the revenue as per GSTR 9.
(ii) Yes, as the difference in the amount booked in the accounts and actual amount received
being ` 66 – ` 68 = (-) 2 x $2,00,000 = (-) ` 4,00,000 would be debited to the Profit and
Loss account as forex loss which again needs to be added from the annual turnover as
per the financials to arrive at the revenue as per FORM GSTR-9.
(c) Not Exercising Due Diligence: According to Clause (7) of Part I of Second Schedule of
Chartered Accountants Act, 1949, a Chartered Accountant in practic e is deemed to be guilty of
professional misconduct if he does not exercise due diligence or is grossly negligent in the
conduct of his professional duties.

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It is a vital clause which unusually gets attracted whenever it is necessary to judge whether the
accountant has honestly and reasonably discharged his duties. The expression negligence
covers a wide field and extends from the frontiers of fraud to collateral minor negligence.
Where a Chartered Accountant had not completed his work relating to the audit of the accounts a
company and had not submitted his audit report in due time to enable the company to comply
with the statutory requirement in this regard, he would be held guilty of professional misconduct
under Clause (7).
Since Mr. Dhruv has not completed his audit work in time and consequently could not submit
audit report in due time and consequently, company could not comply with the statutory
requirements, therefore, the auditor is guilty of professional misconduct under Clause (7) of Part I
of the Second Schedule to the Chartered Accountants Act, 1949.
4. (a) The auditor should evaluate the Internal Control System in the area of Credit Card operations of
a Bank in following manner:
 There should be effective screening of applications with reasonably good credit
assessments.
 There should be strict control over storage and issue of cards.
 There should be a system whereby a merchant confirms the status of unutilised limit of a
credit-card holder from the bank before accepting the settlement, in case the amount to be
settled exceeds a specified percentage of the total limit of the card holder.
 There should be a system of prompt reporting by the merchants of all settlements accepted
by them through credit cards.
 Reimbursement to merchants should be made only after verification of the validity of
merchant’s acceptance of cards.
 All the reimbursement (gross of commission) should be immediately charged to the
customer’s account.
 There should be a system to ensure that statements are sent regularly an d promptly to the
customer.
 There should be a system to monitor and follow-up customers’ payments.
 Payments overdue beyond a reasonable period should be identified and attended to
carefully. For defaulting customers, credit should be stopped by informing the merchants
through periodic bulletins, as early as possible, to avoid increased losses.
 There should be a system of periodic review of credit card holders’ accounts. On this basis,
the limits of customers may be revised, if necessary. The review should a lso include
determination of doubtful amounts and the provisioning in respect thereof.
(b) Alternative Way to Tackle the Hostile Management: While conducting the operational audit the
auditor has to come across many irregularities and areas where improveme nt can be made and
therefore, he gives his suggestions and recommendations.
These suggestions and recommendations for improvements may not be accepted by the hostile
managers and in effect there may be cold war between the operational auditor and the
managers. This would defeat the very purpose of the operational audit.
The Participative Approach comes to the help of the auditor. In this approach the auditor
discusses the ideas for improvements with those managers that have to implement them and
make them feel that they have participated in the recommendations made for improvements. By
soliciting the views of the operating personnel, the operational audit becomes a co-operative
enterprise.

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This participative approach encourages the auditee to develop a friendly attitude towards the
auditors and look forward to their guidance in a more receptive fashion. When the participative
method is adopted then the resistance to change becomes minimal, feelings of hostility disappear
and gives room for feelings of mutual trust. Team spirit is developed. The auditors and the
auditee together try to achieve the common goal.
The proposed recommendations are discussed with the auditee and modifications as may be
agreed upon are incorporated in the operational audit report. With this attitude of the auditor it
becomes absolutely easy to implement the proposed suggestions as the auditee themselves take
initiative for implementing and the auditor does not have to force any change on the auditee.
Hence, the Operational Auditor of Amazon Manufacturing Unit should adopt the above-mentioned
participative approach to tackle the hostile management of Amazon.
(c) Section 21 of the Chartered Accountants Act, 1949 provides that a member is liable for
disciplinary action if he is guilty of any professional or “Other Misconduct.” Other misconduct
has been defined in part IV of the First Schedule and part III of the Second Schedule. These
provisions empower the Council to inquire into any misconduct of a member even it does not
arise out of his professional work. This is considered necessary because a chartered accountant
is expected to maintain the highest standards of integrity even in his personal affairs and any
deviation from these standards, even in his non-professional work, would expose him to
disciplinary action. The Council has also laid down that among other things “misappropriation
by an office-bearer of a Regional Council of the Institute of a large amount and utilization
thereof for his personal use” would amount to “other misconduct”.
In the instant case, receipt of personal benefit of ` 40,000 from the tour operator by Mr.
Chintamani for organising an international tour as treasurer of a Regional Council of the
Institute would amount to other misconduct as per section 21. Therefore, Mr. Chintamani would
be held guilty for other misconduct.
5 (a) Generating and preparing meaningful information from raw system data using processes, tools,
and techniques is known as Data Analytics. The data analytics methods used in an audit are
known as Computer Assisted Auditing Techniques or CAATs.
There are several steps that should be followed to achieve success with CAATs and any of the
supporting tools. A suggested approach to benefit from the use of CAATs is given in the
illustration below:
 Understand Business Environment including IT
 Define the Objectives and Criteria
 Identify Source and Format of Data
 Extract Data
 Verify the Completeness and Accuracy of Extracted Data
 Apply Criteria on Data Obtained
 Validate and Confirm Results
 Report and Document Results and Conclusions [SA 230]
(b) Provision for Claim: No risk can be assumed by the insurer unless the premium is received.
According to section 64VB of the Insurance Act, 1938, no insurer should assume any risk in India
in respect of any insurance business on which premium is ordinarily payable in India unless and
until the premium payable is received or is guaranteed to be paid by such person in such manner
and within such time, as may be prescribed, or unless and until deposit of such amount, as may
be prescribed, is made in advance in the prescribed manner.

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Therefore, in the instant case, LMN Company signed the insurance documents on 31.03.2020
and paid the premium through cheque which later on dishonoured due to insuf ficiency of funds.
In such case insurance premium is not being received, thus, if any accidental incident occurs,
insurance company will have no liability to pay claim. In the given case, fire is occurred on 31st
March night and premium was not received, the Innocent Insurance Ltd. will not be liable for
claim for damage of goods amounting rupees 15 lac hence no provision for claim is required.
(c) (i) Goods in Transits: As per Division II of Schedule III of the Companies Act, 2013, cost of
raw material in transit shall be disclosed as sub-head of raw material and loose tools billed
on the company would be shown as separate sub-head of Loose tools under heading of
Inventories i.e. part of Current Asset. Thus, disclosure of consolidated amount aggregating
the cost of raw material in transit and loose tools is not correct.
(ii) Provision for Doubtful Debts of Trade Debtors was grouped in “Provisions” under
current liabilities: The term ‘doubtful debts’ is an adjustment to the carrying amounts of
assets, hence no provision is created separately for it as per Ind-AS 37 “Provisions,
Contingent Liabilities and Contingent Assets”. Thus, provision should be shown as
deduction from gross value of (net) trade receivable.
(iii) Sale Proceeds of Scrap incidental to manufacture were included in “Other Income”: As
per Ind-AS 2 “Inventories”, sale proceeds of scrap incidental to manufacture should be
deducted from the cost of the main product. Thus, presentation of sale proceeds of scrap as
other income is not correct. Alternatively, sale of manufacturing scrap arising from
operations for a manufacturing company could be treated as other operating revenue since
the same arises on account of the company’s main operating activity.
6. (a) Steps involved in the verification of assets and liabilities included in the Balance Sheet of the
borrower company which has been furnished to the Bank - The investigating accountant should
prepare schedules of assets and liabilities of the borrower and include in the particulars stated
below:
(i) Fixed assets - A full description of each item, its gross value, the rate at which depreciation
has been charged and the total depreciation written off. In case the rate at which
depreciation has been adjusted is inadequate, the fact should be stated. In case any asset
is encumbered, the amount of the charge and its nature should be disclosed. In case an
asset has been revalued recently, the amount by which the value of the asset has been
decreased or increased on revaluation should be stated along with the date of revaluation. If
considered necessary, he may also comment on the revaluation and its basis.
(ii) Inventory - The value of different types of inventories held (raw materials, work-in-progress
and finished goods) and the basis on which these have been valued.
Details as regards the nature and composition of finished goods should be disclosed. Slow-
moving or obsolete items should be separately stated along with the amounts of allowances,
if any, made in their valuation. For assessing redundancy, the changes that have occurred
in important items of inventory subsequent to the date of the Balance Sheet, either due to
conversion into finished goods or sale, should be considered.
If any inventory has been pledged as a security for a loan the amount of loan should be
disclosed.
(iii) Trade Receivables, including bills receivable - Their composition should be disclosed to
indicate the nature of different types of debts that are outstanding for recovery; also whether
the debts were being collected within the period of credit as well as the fact whether any
debts are considered bad or doubtful and the provision if any, that has been made against
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Further, the total amount outstanding at the close of the period should be segregated as
follows:
(i) debts due in respect of which the period of credit has not expired;
(ii) debts due within six months; and
(iii) debts due but not recovered for over six months.
If any debts are due from directors or other officers or employees of the company, the
particulars thereof should be stated. Amounts due from subsidiary and affiliated concerns,
as well as those considered abnormal should be disclosed. The recoveries out o f various
debts subsequent to the date of the Balance sheet should be stated.
(iv) Investments - The schedule of investments should be prepared. It should disclose the date
of purchase, cost and the nominal and market value of each investment. If any investment is
pledged as security for a loan, full particulars of the loan should be given.
(v) Secured Loans - Debentures and other loans should be included together in a separate
schedule. Against the debentures and each secured loan, the amounts outstanding for
payments along with due dates of payment should be shown. In case any debentures have
been issued as a collateral security, the fact should be stated. Particulars of assets pledged
or those on which a charge has been created for re-payment of a liability should be
disclosed.
(vi) Provision of Taxation - The previous years up to which taxes have been assessed should
be ascertained. If provision for taxes not assessed appears in be inadequate, the fact
should be stated along with the extent of the shortfall.
(vii) Other Liabilities - It should be stated whether all the liabilities, actual and contingent, are
correctly disclosed. Also, an analysis according to ages of trade payables should be given
to show that the company has been meeting its obligations in time and has not been
depending on trade credit for its working capital requirements.
(viii) Insurance - A schedule of insurance policies giving details of risks covered, the date of
payment of last premiums and their value should be attached as an anne xure to the
statements of assets, together with a report as to whether or not the insurance-cover
appears to be adequate, having regard to the value of assets.
(ix) Contingent Liabilities - By making direct enquiries from the borrower company, from
members of its staff, perusal of the files of parties to whom any loan has been advanced
those of machinery suppliers and the legal adviser, for example, the investigating
accountant should ascertain particulars of any contingent liabilities which have not been
disclosed. In case, there are any, these should be included in a schedule and attached to
the report.
Finally, the investigating accountant should ascertain whether any application for loan to another
bank or any other party has been made. If so, the result thereof should be examined.
(b) Provision of Depreciation :Section 123(1) of the Companies Act, 2013 provides that dividend
cannot be declared or paid by a company for any financial year except out of profits of the
company for that year arrived at after providing for depreciation in accordance with the provisions
of Section 123(2), or out of the profits or the company for any previous financial year or years
arrived at after providing for depreciation in the manner aforementioned and remaining
undistributed, or out of both. Further, it is the duty of auditor to check whether the depreciation
was provided according to provision of AS 10 / IND AS 16/Schedule II to the Act.

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In the instant case, R Limited is in the practice of maintaining consistent dividend payment over a
minimum of 15%. Due to bad financial condition, company has not provided for dividend for the
year 2019-20. In addition to this management has also taken decision to charge 65% of the
depreciation in the statement of Profit and Loss whereas 35% of the depreciation amount kept in
a separate account code in the Balance Sheet – ‘Debit Balances Adjustable against Revenue
Account’.
Contention of management that it would be in fair practice of accounting where the depreciation
of asset is charged before the expiry of the life of assets and the amount parked in asset code
would unfailingly be adjusted to revenue before the close of next financial year is not tenable.
The practice of the company in not charging the depreciation and accumulating 35% of it in a
debit balance for being written of in the next year is not an acceptable accounting treatment. If
dividend is declared in such situation, it would mean payment out of capital.
Therefore, the auditor of the company should ensure the compliance of provisions of section 123
and Schedule II. In case the management does not comply with the provisions and does not
charge the 100% depreciation, the auditor of the company should discuss and suggest the
correct treatment to the management and if the management refuses to correct, the auditor
should qualify his report accordingly.
(c) According to SA-200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit
in Accordance with Standards on Auditing”, the Audit Risk is a risk that Auditor will issue an
inappropriate opinion while Financial Statements are materially misstated.
Audit Risk has two components namely: Risk of material Misstatement and Detection Risk.
The relationship can be defined as follows.
Audit Risk = Risk of material Misstatement x Detection Risk
Risk of material Misstatement: - Risk of Material Misstatement is anticipated risk that a material
Misstatement may exist in Financial Statement before start of the Audit. It has two components
namely Inherent risk and Control risk.
The relationship can be defined as
Risk of material Misstatement = Inherent risk X control risk
Inherent risk: it is a susceptibility of an assertion about account balance; class of transaction,
disclosure towards misstatements which may be either individually or collectively with other
Misstatement becomes material before considering any related internal control which is 40% in
the given case.
Control risk: it is a risk that there may be chances of material Misstatement even if th ere is a
control applied by the management and it has prevented defalcation to 75%.
Hence, control risk is 25% (100%-75%)
Risk of material Misstatement: Inherent risk X control risk i.e. 40% X 25 % = 10%
Chances of material Misstatement are reduced to 10% by the internal control applied by
management.
Detection risk: It is a risk that a material Misstatement remained undetected even if all Audit
procedures were applied, Detection Risk is 100-60=40%
In the given case, overall Audit Risk can be reduced up to 4% as follows:
Audit Risk: Risk of Material Misstatement X Detection Risk = 10X 40% = 4%
or

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(c) Peer Review Report of Reviewer: After completing the on-site Review, the Peer Reviewer,
before making his Report to the Board, shall communicate his findings in the Preliminary
Report to the Practice Unit if in his opinion, the systems and procedures are deficient or non -
compliant with reference to any matter that has been noticed by him or if there ar e other matters
where he wants to seek clarification.
The Practice Unit shall within 15 days after the date of receipt of the findings, make any
submissions or representations, in writing to the Reviewer. (i.e. Response to the Preliminary
Report).
At the end of an on-site Review if the Reviewer is satisfied with the reply received from the
Practice Unit, he shall submit a Peer Review Report to the Board along with his initial findings,
response by the Practice Unit and the manner in which the responses have been dealt with. A
copy of the report shall also be forwarded to the Practice Unit.
In case the Reviewer is of the opinion that the response by the Practice Unit is not satisfactory,
the Reviewer shall accordingly submit a modified Report to the Board incorporating his reasons
for the same. The Reviewer shall also submit initial findings (i.e. Preliminary Report), response
by the Practice Unit (Response to Preliminary Report) and the manner in which the responses
have been dealt with. A copy of the report shall also be forwarded to the Practice Unit.
In case of a modified report, The Board shall order for a “Follow On” Review after a period of
one year from the date of issue of report as mentioned above. If the Board so decides, the
period of one year may be reduced but shall not be less than six months from the date of issue of
the report.
In the instant case, in view of peer reviewer systems and procedures in ABC & Co. LLP are
deficient, therefore, peer reviewer should not submit the report directly to the Board. Thus,
contention of ABC & Co. LLP is correct.

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Test Series: March, 2021

MOCK TEST PAPER -1
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
All MCQs are compulsory
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100
DIVISION A – MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. A bank has some non-interest-bearing staff advances. In the Balance Sheet these should be presented
under:
(a) ‘Term loans’ under ‘Advances’.
(b) ‘Cash Credits, Overdrafts and Loans Repayable on Demand’ under ‘Advances’.
(c) ‘Advances in India – Others’ under ‘Advances’ Schedule.
(d) ‘Others’ under ‘Other assets.
2. CA Dharma has established another branch in the same city. Branch was inaugurated on 3rd October
2020 and on 4th October 2020, friends of CA Dharma gave an article on the front page of local
newspaper congratulating CA Dharma on opening of another branch which also includes half page
photograph of CA Dharma with his consent. In your opinion was the news in newspaper a misconduct
on the part of CA Dharma and what actions can be taken against him?
(a) Yes, it is a misconduct under clause 8 of Part I of Second Schedule and he can be reprimanded,
his name can be removed from the register of members for 3 years and fine upto Rs. 5,00,000.
(b) Yes, it is a misconduct under under clause 5 Part I of First Schedule and he can be reprimanded,
his name can be removed from the register of members for 3 months and fine upto Rs. 1,00,000.
(c) Yes, it is a misconduct under clause 7 of Part I of First Schedule and he can be reprimanded, his
name can be removed from the register of members for 3 months and fine upto Rs. 1,00,000.
(d) Yes, it is a misconduct under clause 8 of Part I of Second Schedule and he can be reprimanded,
his name can be removed from the register of members permanently and fine upto Rs. 5 ,00,000.
3. CA Ram identified that there was a misstatement last year and the same is still not corrected. Although
unmodified audit report was issued last year by CA Ram. Guide CA Ram on the audit opinion considering
the fact that the last year’s misstatement has been identified in the current year and unmodified opinion
was issued in the last year?
(a) In accordance with SA 710, CA Ram should give unmodified opinion, but include Other matters
paragraph in the audit report as last year’s profit is being reflected in reserve and surplus.
(b) In accordance with SA 710, CA Ram should seek legal opinion.
(c) In accordance with SA 710, CA Ram should qualify current period audit report with respect to
corresponding figures only.
(d) In accordance with SA 710, CA Ram should give unmodified opinion, but last period’s modified
opinion should be highlighted in Emphasis of matter paragraph.

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4. For the year ending 31st March 2021, SabkaVikas & Sons has made a claim for refund of custom duty
for Rs. 2 crore but such refund was as admitted as due by authority in April 2021. SabkaVikas & Sons
neither credited the claim in Profit and Loss account nor reported the same in clause 16 of Form 3CD.
Can you please guide the auditor of SabkaVikas & Sons for reporting of refund of custom duty in
accordance with clause 16 of Form 3CD?
(a) Refund of custom duty to the extent of Rs. 2 crore should be reported in clause 16 as the same is
admitted by the custom authorities.
(b) Refund of custom duty to the extent of Rs. 2 crore need not be reported in clause 16 as it is admitted
by custom authorities in the next financial year.
(c) No disclosure is required as refund of custom duties is not covered under clause 16.
(d) Auditor should take a written representation from the management stating that refund of custom
duty of Rs. 2 crore will be credited to profit and loss account for the financial year ending 31st
March 2022 and thus, no reporting is required.
5. B Limited controls entity C Limited (75%) and entity A Limited (an investment company). Entity B Limited
reduced the control of entity C Limited from 75% to 60%. With regard to that certain adjustments were
made to account for the change in the shareholding of entity C Limited which is consolidated. These
adjustments are known as:
(a) Memorandum adjustments.
(b) Current period consolidation adjustments.
(c) Permanent consolidation adjustments.
(d) Temporary period consolidation adjustments.
6. CA Kamal is the statutory auditor of Autocover Ltd. for the FY 2020-21. The company is engaged in the
business of manufacture of car accessories. CA Kamal noticed that the inventories of the company
amounting to Rs. 46 crores (equal to 25% of the total assets of the company) at the end of the year do
not exist. Also, sales amounting to Rs. 33 crores (equal to 10% of the total sales during the year) have
not actually occurred. CA Kamal noticed both the material discrepancies just before the finalisation of
the audit report for the year ending 31.03.2021. CA. Kamal considers that the above misstatement would
distort the true and fair view to a greater extent.
What is correct course of action that CA Kamal should consider in suc h a situation?
(a) CA Kamal should consider withdrawing from the audit engagement or issuing a disclaimer of
opinion for the FY 2020-21.
(b) CA Kamal should consider issuing an adverse opinion and mentioning both the material
discrepancies in the basis for adverse opinion paragraph of the auditor’s report.
(c) CA Kamal should ask the management to explain both the discrepancies in the notes to accounts
and he himself should highlight the matter in the Key Audit matter paragraph of the auditor’s report.
(d) CA Kamal should give a qualified opinion along with the specific mention of the matters in the
Emphasis of matter paragraph in the auditor’s report along with appropriate disclosure in the notes
to accounts to be made by the management of Autocover Ltd.
7. Preparing the financial statements in accordance with the applicable financial reporting framework is the
responsibility of the management of ABC Ltd. Which of the following is correct in regard to the disclosure
of such management responsibility?
(a) This is implied responsibility of management and is presumed in an audit of financial statements
and therefore need not be specifically mentioned anywhere.
(b) The management may undertake to accept such responsibility through an engagement letter itself.

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(c) The auditor’s report should describe the management responsibility in a section with heading
“responsibility of management for financial statements”.
(d) The auditor’s report should refer to the responsibility of auditors and not that of the management
as the same is obvious.
8. The firm from which you are pursuing your articleship training is the internal auditor of ABC Ltd. While
conducting the audit of the medical expense reimbursements of the company employees, you come
across some bills which are clearly not medical in nature, and some others which have been overwritten.
During the discussions, the accountant points out that the employee is a functional head who enjoys a
significantly higher medical expense reimbursement limit, and that you should ignore those bills as the
amount is not material. You will:
(a) Accept the explanation and the bills.
(b) Recommend that the claim should be reduced, and clear guidelines should be issued to all
employees on the matter, with a provision for disciplinary action.
(c) Recommend that the employee be asked to submit fresh bills to avail the tax benefit.
(d) Recommend that the employee be taxed on the aggregate amount of the suspect bills.
9. Sudarshan Roh (P) Ltd. is having 5 branches across India. Its branch-wise turnover during the
financial year 2019-20 is:
Branch Turnover (Rs. in Crore)
Bangalore 1.65
Mumbai 2.95
Delhi 3.35
Chennai Nil
Calcutta 3.00
The Company would be subject to audit under section 35(5) of the CGST Act, select the correct option
from the following-
(a) Only Mumbai and Delhi would be subject to audit.
(b) None of the branch would be subject to audit.
(c) All the branches would be subject to audit except Chennai.
(d) All the branches would be subject to audit.
10. The acceptable detection risk needs to be ______ in order to reduce the audit risk to ______ in the area
of inventories management and handling.
(a) low in order to reduce audit risk to an acceptably high level.
(b) high in order to reduce audit risk to an acceptably high level.
(c) low in order to reduce audit risk to an acceptably low level.
(d) high in order to reduce audit risk to an acceptably low level. (10 x 1 = 10 Marks)
Questions (11-20) carry 2 Marks each
MCQ 11. -15.
Integrated Case Scenario 1
CA D was a practicing Chartered Accountant in Kolkata from last 15 years. He was appointed as the statutory
auditor of Giant Motors Ltd, a listed entity, which was involved in the business of manufacturing of motor cars
for FY 2019-20. CA D was appointed as joint auditor along with CA T and CA P. They have divided the
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responsibility for conducting audit in accordance with SA 299. As the company has huge amount of property,
plant and equipment, it was decided that all 3 auditors will verify the records relev ant to property, plant and
equipment. While forming an opinion, CA D was having a different opinion on property, plant and equipment
but CA T and CA P were having same opinion. CA D wants to qualify capitali sation of post-acquisition costs
incurred on machinery whereas CA T and CA P were of the opinion that the treatment done by Giant Motor
is correct. Both of them contended that as they are forming a majority, CA D will have to certify common audit
report which is in accordance with the opinion of CA T and CA P. While assessing the applicability of CARO,
2016, CA D found that issued share capital of Giant Motors Ltd is Rs. 500 crore along with Rs. 30 crore of
calls which are being unpaid as they are receivable from retail investors. In the month of July 201 9, Giant
Motors Ltd. forfeited shares of worth Rs. 10 crore. There were no reserve and surplus as it was transferred
to parent entity. Also, along with equity shares of Rs. 300 crore, there was preference share capital of
Rs. 200 crore. CA T while reporting under clause (vi) of CARO, 2016 did not report anything under clause
(vi) of CARO 2016 as the government has not ordered Giant Motors Ltd. to conduct cost audit for its books
of account. Hence CA T did not report anything under clause (vi). Giant Motors Ltd has a total number of 11
directors. Mr. Talent is the Executive Chairman of the company. Out of 11 directors, 5 were independent
directors.
Mrs. D was not aware that CA D was the statutory auditor of Giant Motors Ltd. She purchased shares of Giant
Motors Ltd worth Rs. 1,50,000 (book value) on 3rd October 2020 but when she came to know about the
statutory auditor of Giant Motors Ltd, she sold her shares on 10th November 2020. One of the shareholders
of Giant Motors Ltd contended that CA D is disqualified and shall vacate his office of statutory auditor.
On the basis of the abovementioned facts, you are required to answer the following MCQs:
Multiple Choice Questions (5 questions of 2 Marks each):
11. Can you please guide whether CA D really needs to go with the opinion formed by CA T and CA P or
not?
(a) CA D will have to go with the opinion formed by majority auditors.
(b) CA D can add a separate audit opinion paragraph in the common audit report and the same should
be highlighted in emphasis of matter paragraph.
(c) CA D can go with the opinion formed by the majority auditors, but CA D had a difference of opinion
should be highlighted in emphasis of matter paragraph.
(d) CA D can altogether issue a separate audit report and reference of other audit report issued by
majority auditors should be made in the emphasis of matter paragraph.
12. What should have been CA D’s opinion on applicability of CARO, 2016 for FY 2019 -20 assuming
forfeited shares are not included in equity share capital?
(a) CARO will be applicable as paid up share capital and reserves are Rs. 480 crore which is more
than Rs. 1 crore.
(b) CARO will be applicable as paid up share capital and reserves are Rs. 480 crore which is more
than Rs. 10 crore.
(c) CARO will be applicable as paid up share capital and reserves are Rs. 280 crore which is more
than Rs. 1 crore.
(d) CARO will be applicable as paid up share capital and reserves are Rs. 280 crore which is more
than Rs. 10 crore.
13. Was the approach followed by CA T for not reporting under clause (vi) of CARO correct?
(a) Yes, as reporting under said clause is required only if the Giant Motors Ltd were ordered by
government to conduct cost audit under section 148(1).

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(b) Yes, reporting under this clause is only applicable to entities involved in production of electricity.
(c) No, Clause (vi) should be reported irrespective of whether Giant Motors Limited has been ordered
to conduct cost audit by the Central Government or not.
(d) No, should be reported only if there is any discrepancy found while examining the cost records.
14. Was there any non-compliance on the part of Giant Motors Ltd in case of appointment of independent
directors?
(a) No, there was no non- compliance as independent directors were more than 2 directors specified
in the Companies Act, 2013.
(b) Yes, there was a non-compliance as there should have been more than 6 independent directors
specified in Regulation 17 and Regulation 17A.
(c) No, there was no non-compliance as independent directors were 5, which is more than 2/3 of the
total directors in accordance with Regulations 17 and Regulation 17A.
(d) Yes, there was a non-compliance as all the directors should have been independent directors
except the Chairman of the company.
15. Was the contention of shareholder that CA D should vacate the office of statutory auditor correct?
(a) No, as Mrs. D has sold the shares within a grace period of 60 days.
(b) No, as Mrs. D is holding shares of less than book value of Rs. 2,00,000.
(c) Yes, as Mrs. D has purchased shares which are more than book value of Rs.1,00,000.
(d) Yes, as Mrs. D hold share during the financial year and his husband is statutory auditor of Giant
Motors Ltd.
MCQ 16. -20.
Integrated Case Scenario 2
Well & Associates, an audit firm, was selected for the purpose of Quality Review by the Quality Review Board
(QRB) as it was having many of statutory audit assignments of clients engaged into sectors identi fied as
prone to fraud.
There were adverse findings by the Technical Reviewer in the Quality review conducted in the past of
Mr. Ramesh an engagement partner of Well & Associates because of which the QRB selected 5 audit
engagements of the firm for Quality review.
Mr. Jay, a practicing CA for more than 25 years was appointed as the Technical Reviewer to conduct the
Quality Review of the said firm and accordingly, Mr. Jay, after conducting the Quality review with a team of 3
assistants, submitted his preliminary report to Well & Associates with qualifications as under:
Sr. No. Description of Qualifications
1 The AFUR (Audit Firm Under Review) had not obtained a written confirmation of compliance
with its policies and procedures on independence from all firm personnel for the past 2 financial
years.
2 The AFUR had established the policies and procedures for assembling of the final audit file in
accordance with the time limit prescribed in SA 230 but there were delays observed in the
same. (Please Refer Note, as below, for the same)
3 For two of the audit engagements of the AFUR, no engagement documentations were available
for the same and as per the statement of the partner of the AFUR, after retaining them for 4
years and 6 years, respectively, were sent to the Principal Auditors of the said audit
engagements.

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4 There were also instances of delays observed in communicating the significant deficiencies to
those charged with governance. (Please Refer Note, as below, for the same)
5 The AFUR had revised its performance materiality level in case of one of its statutory audit
assignments with respect to auditing of Financial Leasing transactions and the AFUR had only
documented such revision in the performance materiality level.
Note:

Name of the Type of Date of Date of Date of Date of written

entity under Entity Approval Audit assembly of communication of
audit of AFUR Financial Report Final Audit significant deficiencies in
Statements File internal control by AFUR
Req Ltd. Listed 31.05.2021 25.06.2021 03.09.2021 05.06.2021
TIMCO (P) Ltd. Unlisted 15.06.2021 18.08.2021 05.11.2021 25.08.2021
Gles Pvt. Ltd. Unlisted 16.07.2021 28.07.2021 15.09.2021 18.09.2021
Findey Ltd. Listed 12.05.2021 01.06.2021 01.08.2021 05.05.2021
DM Ltd. Unlisted 25.04.2021 18.05.2021 25.06.2021 04.07.2021

On the basis of the abovementioned facts, you are required to answer the following MCQs:
Multiple Choice Questions (5 questions of 2 Marks each):
16. Well & Associates should have obtained a written confirmation of compliance with its policies and
procedures on independence from all of its firm personnel as per requirements of which Statue /
Standard and in what frequency?
(a) As per the requirements of Council Central Guidelines, 2008, at least annually, Well & Associates
should have obtained a written confirmation from all of its firm personnel.
(b) As per the requirements of Standard on Quality Control 1 at least annually, Well & Associates
should have obtained a written confirmation from all of its firm personnel.
(c) As per the requirements of SA 220 at least annually, Well & Associates should have obtained a
written confirmation from all of its firm personnel.
(d) As per the requirements of Code of Ethics at least half yearly, Well & Associates should have
obtained a written confirmation from all of its firm personnel.
17. In case of which entities under audit of Well & Associates, there was delay in assembly of Final Audit
File?
(a) Req Ltd., TIMCO (P) Ltd., Gles Pvt. Ltd. and Findey Ltd., respectively.
(b) Req Ltd., TIMCO (P) Ltd. and Findey Ltd., respectively.
(c) Req Ltd. and TIMCO (P) Ltd., respectively.
(d) Req Ltd., TIMCO (P) Ltd., Gles Pvt. Ltd., Findey Ltd. and DM Ltd., respectiv ely.
18. In case of which entities under audit of Well & Associates, there was delay in written communication of
significant deficiencies in internal control?
(a) TIMCO (P) Ltd., Gles Pvt. Ltd. and DM Ltd., respectively.
(b) Req Ltd., TIMCO (P) Ltd., Gles Pvt. Ltd. and DM Ltd., respectively.
(c) DM Ltd.
(d) Req Ltd., Gles Pvt. Ltd. and DM Ltd., respectively.

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19. For at least how many more years, Well & Associates should have retained the engagement
documentation in respect of the two audit engagements as referred above?
(a) 3 years and 1 year, respectively.
(b) 4 years and 2 years, respectively.
(c) 1 year and for other audit engagement documentation was retained for requisite period.
(d) 6 years and 4 years, respectively.
20. How many audit engagements of Well & Associates the QRB might have selected if there were no
adverse findings by the Technical Reviewer in the Quality review conducted in the past of Mr. Ramesh,
partner of Well & Associates?
(a) QRB might have selected up to 3 audit engagements of Well & Associates for review and not more
than 2 audit engagements of Mr. Ramesh.
(b) QRB might have selected up to 5 audit engagements of Well & Associates for review and not more
than 1 audit engagement of Mr. Ramesh
(c) QRB might have selected up to 5 audit engagements of Well & Associates for review and not more
than 2 audit engagements of Mr. Ramesh
(d) QRB might have selected up to 3 audit engagements of Well & Associates for review and not more
than 1 audit engagement of Mr. Ramesh. (10 x 2 = 20 Marks)
Division B- Descriptive Questions-70 Marks
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
1. (a) J.A.C.K. & Co., a Chartered Accountant firm was appointed as the statutory auditor of Falcon Ltd.
after ensuring the compliance with relevant provisions of the Companies Act, 2013. Mr. Jay was
the engagement partner for the aforesaid audit and prior to commencement of the audit, Mr. Jay
had called for a meeting of the engagement team in order to direct them and assign them their
responsibilities. At the end of meeting, Mr. Jay assigned review responsibilities to two of the
engagement team members who were the most experienced amongst all, for reviewing the work
performed by the less experienced team members. While reviewing the work performed by the less
experienced members of the engagement team, what shall be the considerations of the reviewers ?
(5 Marks)
(b) Rajul Ltd had a net worth of INR 2500 crores because of which Ind AS became applicable to them.
The company had various derivative contracts – options, forward contracts, interest rate swaps
etc. which were required to be fair valued for which company got the fair valuation done through
an external third party. The statutory auditors of the company involved an auditor’s expert to audit
valuation of derivatives. Auditor and auditor’s expert were new to each other i.e., they were working
for the first time together but developed a good bonding during the course of the audit. The auditor
did not enter into any formal agreement with the auditor’s expert. Please advise. (5 Marks)
(c) Mokshda & Co is the statutory auditor of Get My Trip Ltd. The company is in the business of tours
and travels. Annual turnover of the company is INR 2765 crore and profits are INR 285 crore.
During the planning meeting of the management and the auditors, it was discussed that the
management needs to provide written representation letter to the auditors for the preparation of
the financial statements and for the completeness of the information provided to the auditor. At the
time of closure of the audit, there has been some confusion about the requirements of the written
representation letter. Management argued that representation need not be written, it can also be
verbal which has been provided to the audit team during the course of their audit. Auditors have
completed their documentation and hence in a way, representation based on verbal discussions
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with the auditors has also got documented. Auditors explained that this is mandatory to obtain
written representation in accordance with the requirements of SA 580. However, still some
confusion remains regarding the date and period covered by the written representation. You are
required to advise about the date of and period covered by written representation in view of
SA 580. (4 Marks)
2. (a) RAO & Co., a Chartered Accountant Firm, is appointed as the principal auditor of a listed company,
Triumph Ltd.
Figures of income and net-worth of five out of seven components of Triumph Ltd., which are its
unlisted subsidiaries, is tabulated below for the immediate preceding financial year along with the
consolidated amount:- (Rs. in crores)
Particulars Consolidated Component Component Component Component Component
‘A’ ‘B’ ‘C’ ‘D’ ‘E’
Income 300 35 10 70 65 20
Net Worth 800 40 20 140 180 50

The remaining two components i.e., Component ‘F’ & Component ‘G’ of Triumph Ltd. were
unaudited. According to Mr. RAO, the engagement partner, Component ‘F’ is material to the
consolidated financial statements whereas Component ‘G’ is not material to consolidated financial
statements and this fact has also been discussed in writing with those charged with governance of
Triumph Ltd. and it will also form part of report as a ‘Key audit matter’ in accordance with SA 701.
(i) Which of the components of Triumph Ltd. can be termed as “material subsidiary” and in the board
of which of the unlisted subsidiaries at least one independent director of Triumph Ltd. needs to be
appointed or would be appointed? (5 Marks)
(ii) What shall be the audit consideration in relation to reporting in case of unaudited components of
Triumph Ltd. by RAO & Co. and how RAO & Co. as a principal auditor shall report in case of
Component ‘F’ & Component ‘G’, respectively? (4 Marks)
(b) M/s SS limited is a partly owned subsidiary of M/s HH limited. For the upcoming financial year, M/s
DD & Co., Chartered Accountants, were appointed as the statutory auditors of SS limited. The CEO
of the holding company was impressed with the knowledge and experience of Mr. D, one of the
partners of the firm and hence, he offered Mr. D to take up the position of Director (not MD/ whole-
time director) of HH limited. At the same time, Mr. D’s friend approaches him with an assignment
to act as a Recovery Consultant for a bank. Mr. D is now confused whether to accept or reject the
offers. He approaches you and seeks your advice on the same. Advise what Mr. D about what he
can do with the offers with reference to the Chartered Accountants Act, 1949 and Schedules
thereto. (5 Marks)
3. (a) R.O.K. & Co. and TNK & Co. were appointed as the joint statutory auditors at the AGM of Auspic
General Insurance Co. Ltd. Apart from the aforesaid audit, R.O.K. & Co. is also being appointed
as a joint statutory auditor of one another General Insurance Company and TNK & Co. is appointed
as a joint statutory auditor of Life Insurance Company. How many further audits can be accepted
by R.O.K. & Co. and TNK & Co., respectively, of either general or life insurance companies?
(4 Marks)
(b) Mr. Raj, the engagement partner of R.O.K. & Co., in connection with statutory audit of Waria Ltd.,
had assigned the responsibility of enquiring into propriety matters of the Company as required by
section 143(1) of the Companies Act, 2013, to Mr. Samay, an engagement team member. Mr.
Samay while making such enquiries, was having following queries, as tabulated below, which he
ought to get resolved from Mr. Raj, as follows:-

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Sr. No. Query of Mr. Samay

1 What documents to be seen in case of loan given by the company in lieu of
hypothecation of goods from lender as a security for the purpose of reporting as per
clause (a) of section 143(1) of the Companies Act, 2013?
2 What shall be the cost of Debentures and Bonus Shares sold by the company for
which the cost is not ascertainable for the purpose of reporting as per clause (c) of
section 143(1) of the Companies Act, 2013?
3 Whether the shares allotted by Waria Ltd. against a loan taken by it from a NBFC can
be considered to be allotted for cash for the purpose of reporting as per clause (f) of
section 143(1) of the Companies Act, 2013?
Assuming that you are Mr. Raj the engagement partner, please provide answe r to the queries of
Mr. Samay? (6 Marks)
(c) A letter is sent by Mr. Raja, a Chartered Accountant in practice, to the Ministry of Finance inquiring
whether a panel of auditors is being maintained by the Ministry and if so to include his name in the
panel. He also enclosed his CV. Comment on the above with reference to the Chartered
Accountants Act, 1949 and Schedules thereto. (4 Marks)
4. (a) In course of audit of Decent Samaritan Bank as at 31st March, 20 you observed the following:
(i) In a particular account there was no recovery in the past 18 months. The bank has not applied
the NPA norms as well as income recognition norms to this particular account. When queried
the bank management replied that this account was guaranteed by the Central Government
and hence these norms were not applicable. The bank has not invoked the guarantee. Please
respond. Would your answer be different if the advance is guaranteed by a State
Government?
(ii) The bank’s advance portfolio comprised of significant loans against Life Insurance Policies.
Write suitable audit program to verify these advances. (6 Marks)
(b) CA. Sudarshan, appointed as a Peer Reviewer for M/s. Preet Associates, has asked for all the
management consultancy engagements and engagements solely to assist the client in preparing,
compiling or collating information other than financial statements carried out by M/s. Preet
Associates for peer review during the period considered for peer review purposes by the board.
Peer Reviewer CA. Sudarshan has also sent out a mail to Peer Review Board regarding his
selection. Mr. Preet, the managing partner of the firm seeks your advise on this matter.
(4 Marks)
(c) Mr. Abhinandan engaged in business as a sole proprietor presented the following information to
you for the FY 2020-21. Turnover expected to be made during the year Rs. 524 lacs. Goods
returned in respect of sales made during FY 2019-20 is Rs. 20 lacs not included in the above. Cash
discount allowed to his customers Rs. 1 lac for prompt payment. Special rebate allowed to customer
in the nature of trade discount Rs. 5 lacs. Further, the aggregate of all amounts received including
amount received for sales, turnover or gross receipts during the previous year, in cash, does not
exceed five per cent of the said amount and aggregate of all payments made including amount
incurred for expenditure, in cash, during the previous year does not exceed five per cent of the
said payment. Kindly advise him whether he has to get his accounts audited u/s 44AB of the Income
Tax Act, 1961. (4 Marks)
5. (a) Mr. Z, a newly qualified chartered accountant started his practice in February 2018 by setting up
an office in the hill station Kodaikanal. Initially, since he was getting very less assignments, he
decided to set up a temporary office in the nearby city Marudai, situated at about 100 kms from the
main office. As planned, he took an office space on rent for the months of April, May & June. During
these months, his regular office was not closed and Mr. Z was in-charge for both the offices. Mrs.
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A, another newly qualified chartered accountant who is also in practice in Marudai came to know
about the new office of Mr. Z. Thinking that he could be a potential competitor, she informed the
institute stating that Mr. Z had violated the provisions of the Chartered Accountant Act. As a
member of the Board of Discipline of ICAI, you are requested to analyse this complaint.
(5 Marks)
(b) The Marketing Department of ISHITA Ltd. has been consistently showing a lower performance
whereas the cost of the department is increasing in spurts over the years. The management
believes that since the marketing department is under a regular radar of the CFO, an audit might
result in the employee hostility. Also, an operational audit of Marketing Department was done two
years back however, the recommendations of the previous audit were not followed by the
concerned employees. Please advise the management if another audit is the solution and whether
only one-time operational audit is enough? Further, advise on the ways to deal with the employee
hostility. (5 Marks)
(c) VM Ltd., a company wholly owned by Central Government was disinvested during the previous
year, resulting in 45% of the shares being held by public. The shares were also listed on the BSE.
Since the shares were listed, all the listing requirements were applicable, including publication of
quarterly results, submission of information to the BSE etc.
Gautam, the Finance Manager of the Company is of the opinion that now the company is subject
to stringent control by BSE and the markets, therefore the auditing requirements of a limited
company in private sector under the Companies Act 2013 would be applicable to the company and
the C&AG will not have any role to play. Comment. (4 Marks)
6. (a) LMN Ltd. entered into a deal with SP Ltd. for buying its business of manufacturing wooden
products/ goods. LMN Ltd. has appointed your firm for conducting due diligence review and they
want to know the cash generating abilities of SP Ltd. What points will you check in order to ensure
that the manufacturing unit of SP Ltd. will be able to meet the cash requirements internally?
(5 Marks)
(b) Entertainment Paradise, a movie theatre complex, is the foremost theatre located in Ch ennai.
Along with the sale of tickets over the counter and online booking, the major proportion of income
is from the cafe, shops, pubs etc. located in the complex. Its other income includes advertisements
exhibited within/outside the premises such as hoardings, banners, slides, short films etc. The
facility for parking of vehicles is also provided in the basement of the premises.
Entertainment Paradise appointed your firm as the auditor of the entity. Being the head of the audit
team, you are, therefore, required to draw an audit programme initially in respect of its revenue
and expenditure considering the above mentioned facts along with other relevant points relating to
a complex. (5 Marks)
(c) As auditor of ZED Ltd., you would like to limit your examination of account balance tests. What are
the control objectives you would like the accounting control system to achieve to suit your purpose?
(4 Marks)
OR
A real-time environment is a type of automated environment in which business operations and
transactions are initiated, processed and recorded immediately (without any delay) as they happen.
It has several critical IT components that enable anytime, anywhere transactions to take place. You
are required to name the components and its example of real-time environment. (4 Marks)

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Test Series: March, 2021

MOCK TEST PAPER - 1
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS
DIVISION A - MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. (d)
2. (c)
3. (c)
4. (b)
5. (c)
6. (b)
7. (c)
8. (b)
9. (d)
10. (c)
Questions (11-20) carry 2 Marks each
11. (d)
12. (a)
13. (c)
14. (b)
15. (a)
16. (b)
17. (b)
18. (d)
19. (a)
20. (d)
DIVISION B - DESCRIPTIVE QUESTIONS (70 Marks)
1. (a) As per SQC 1, “Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements”, review responsibilities
are determined on the basis that more experienced team members, including the engagement
partner, review work performed by less experienced team members.
In the given situation, Mr. Jay, engagement partner assigned review responsibilities to two of the
engagement team members who were the most experienced team members.
While reviewing the work performed by less experienced members of the engagement team, both
the more experienced Reviewers should consider whether:

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(i) The work has been performed in accordance with professional standards and regulatory and
legal requirements.
(ii) Significant matters have been raised for further consideration.
(iii) Appropriate consultations have taken place and the resulting conclusions have been
documented and implemented.
(iv) There is a need to revise the nature, timing and extent of work performed.
(v) The work performed supports the conclusions reached and is appropriately documented.
(vi) The evidence obtained is sufficient and appropriate to support the report; and
(vii) The objectives of the engagement procedures have been achieved.
(b) As per SA 620, Using the work of an Auditor’s Expert, the nature, scope and objectives of the
auditor’s expert’s work may vary considerably with the circumstances, as may the respective
roles and responsibilities of the auditor and the auditor’s expert, and the nature, timing and extent
of communication between the auditor and the auditor’s expert. It is therefore required that these
matters are agreed between the auditor and the auditor’s expert.
In certain situations, the need for a detailed agreement in writing is required like -
• The auditor’s expert will have access to sensitive or confidential entity information.
• The matter to which the auditor’s expert’s work relates is highly complex.
• The auditor has not previously used work performed by that expert.
• The greater the extent of the auditor’s expert’s work, and its significance in the context of
the audit.
In the given case, considering the complexity involved in the valuation and volume of d erivatives
and also due to the fact that the auditor and auditor’s expert were new to each other, auditor
should have signed a formal agreement/ engagement letter with the auditor’s expert in respect of
the work assigned to him.
(c) As per SA 580, “Written Representations”, as written representations are necessary audit
evidence, the auditor’s opinion cannot be expressed, and the auditor’s report cannot be dated,
before the date of the written representations. 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.
In some circumstances it may be appropriate for the auditor to obtain a written representation
about a specific assertion in the financial statements during the course of the audit. Where this is
the case, it may be necessary to request an updated written representation.
The written representations are for all periods referred to in the auditor’s report because
management needs to reaffirm that the written representations it previously made with respect to
the prior periods remain appropriate. The auditor and management may agree to a form of written
representation that updates written representations relating to the prior periods by addressing
whether there are any changes to such written representations and, if so, what they are.
Situations may arise where current management were not present during all periods referred to in
the auditor’s report. Such persons may assert that they are not in a position to provide some or
all 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
cover the whole of the relevant period(s) still applies.

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2. (a) (i) As per Regulation 16(c) of the SEBI (LODR) Regulations, 2015, “material subsidiary” shall
mean a subsidiary, whose income or net worth exceeds ten percent of the consolidated
income or net worth respectively, of the listed entity and its subsidiaries in the immediately
preceding accounting year. [Explanation- The listed entity shall formulate a policy for
determining ‘material’ subsidiary.]
Regulation 24(1) of the SEBI (LODR) Regulations, 2015, provides that at least one
independent director on the board of directors of the listed entity shall be a director on the
board of directors of an unlisted material subsidiary, whether incorporated in India or not.
[Explanation- For the purposes of Regulation 24(1), notwithstanding anything to the contrary
contained in regulation 16, the term “material subsidiary” shall mean a subsidiary, whose
income or net worth exceeds twenty percent of the consolidated income or net worth
respectively, of the listed entity and its subsidiaries in the immediately preceding accounting
year]
On the basis of above provisions, following information is tabulated as below:
Particulars Share in Consolidated Share in Consolidated
Income Net Worth
Component ‘A’ 11.67% 5%
Component ‘B’ 3.33% 2.5%
Component ‘C’ 23.33% 17.5%
Component ‘D’ 21.67% 22.5%
Component ‘E’ 6.67% 6.25%
It can be observed that Component ‘A’, Component ‘C’ and Component ‘D’, respectively,
can be termed as “material subsidiary” as their shares in either consolidated Income or net
worth exceeds 10%.
Further, at least one independent director from the board of directors of Triumph L td. shall
be appointed or would have been appointed on the board of Component ‘C’ and Component
‘D’, respectively, as their shares in either consolidated income or net worth exceeds 20%.
(ii) Generally, the financial statements of all components included in consolidated financial
statements should be audited or subjected to audit procedures in the context of a multi -
location group audit. Such audits and audit procedures can be performed by the auditor
reporting on the consolidated financial statements or by the components’ auditor.
Where the financial statements of one or more components continue to remain unaudited,
the auditor reporting on the consolidated financial statements should consider unaudited
components in evaluating a possible modification to his report on the consolidated financial
statements. The evaluation is necessary because the auditor (or other auditors, as the case
may be) has not been able to obtain sufficient appropriate audit evidence in relation to such
consolidated amounts/balances. In such cases, the auditor should evaluate both qualitative
and quantitative factors on the possible effect of such amounts remaining unaudited when
reporting on the consolidated financial statements using the guidance provided in SA 705,
“Modifications to the Opinion in the Independent Auditor’s Report”.
In the given situation, two out of seven components of Triumph Ltd. have remained
unaudited where Component ‘F’ is material and Component ‘G’ is not material to the
consolidated financial statements. Since Component ‘F’ is material, therefore, it may be
assumed that reporting of Key Audit Matter in accordance with SA 701 is being done for
Component ‘F’ and not for Component ‘G’.
Thus, in case of Component ‘F’, the Principal Auditor needs to consider its impact on the
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auditor’s opinion on the consolidated financial statements of the group, in terms of the
principles laid down in SA 705, Modifications to the Opinion in the Independent Auditor’s
Report. Whereas in case of Component ‘G’, the principal auditor should make appropriate
reporting under the “Other Matters” paragraph, pursuant to SA 706, Emphasis of Matter
Paragraphs and Other Matter Paragraphs, in the Independent Auditor’s Report.
(b) As per Clause (11) of Part I of First Schedule of Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct if he engages in any
business or occupation other than the profession of Chartered Accountant unless permitted by
the Council so to engage.
Provided nothing contained herein shall disentitle a chartered accountant from being a director of
a company (not being MD or whole-time director) unless he or his partners is interested in such
company as auditor.
The Ethical Standards Board (ESB) noted that Public conscience is expected to be ahead of law.
Members, therefore, are expected to interpret the requirement as regards independence much
more strictly than what the law requires and should not place themselves in positions which
would either compromise or jeopardise their independence. In the view of the above, the Board,
via a clarification, decided that the auditor of a Subsidiary company cannot be a Director of its
Holding company, as it will affect the independence of the auditor.
However, the Council has granted general permission to the members to engage in certain
specific occupation. In respect of all other occupations specific permission of the Institute is
necessary. ‘acting as Recovery Consultant in the banking sector’ is covered under general
permission.
In the given situation, M/s SS limited is a partly owned subsidiary of M/s HH limited. For the
upcoming financial year, M/s DD & Co., Chartered Accountants, were appointe d as the statutory
auditors of SS limited. The CEO of the holding company was impressed with the knowledge and
experience of Mr. D, one of the partners of the firm and hence, he offered Mr. D to take up the
position of Director (not MD/ whole-time director) of HH limited. Further, Mr. D’s friend
approached him for an assignment for acting as a Recovery Consultant for a bank.
Therefore, in view of above in the given case, Mr. D should not accept the offer to be appointed
as director of HH Limited.However, he can accept the assignment offered by his friend and can
act as a recovery consultant for a bank.
3. (a) The appointment of statutory auditors in the General Insurance Corporation of India, and its
subsidiaries and the divisions as well as other public sector Insurance Companies is made by the
Comptroller and Auditor General of India, as in the case of other public sector undertakings .
However, in the case of others, auditor is appointed at the AGM after ensuring that the auditor
satisfies the compliance requirements with the relevant sections of the IRDAI Guidelines on
Corporate Governance. These guidelines pose certain restrictions on the number of insurance
companies a statutory auditor can audit. Currently, an auditor can conduct audit only for three
insurance companies and not more than 2 life or 2 general. The Guidelines also mandate a
mandatory joint audit for all insurance companies.
In the given case, R.O.K. & Co. is joint statutory auditor of Auspic General Insurance Co. Ltd.
And of one another General Insurance Company. Accordingly, it can now, further, accept only
one audit and that too of a Life Insurance Company only.
Further, TNK & Co. is joint statutory auditor of Auspic General Insurance Co. Ltd. as well as of
one Life Insurance Company. Accordingly, it can now, further, accept only one audit of either a
Life Insurance Company or a General Insurance Company.

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(b)
Sr. Query of Mr. Samay Response to Query
No.
1 What documents to be seen in case of Mr. Samay should see deed of Hypothecation or
loan given by the company in lieu of other document creating the charge, together
hypothecation of goods from lender as a with a statement of stocks held at the balance
security for the purpose of reporting as sheet date in order.
per clause (a) of section 143(1) of the
Companies Act, 2013?
2 What shall be the cost of Debentures For Debentures sold: Where the cost of
and Bonus Shares sold by the company debentures sold is not ascertainable, the book
for which the cost is not ascertainable for value thereof at the date of sale may be treated
the purpose of reporting as per clause as the cost for the purposes of this clause.
(c) of section 143(1) of the Companies For Bonus Shares sold: When bonus shares are
Act, 2013? received, the number of shares in the portfolio
would be increased by the bonus shares while
the cost of the total portfolio would remain the
same as before. The result would be that the
average cost per unit of the total holding would
come down proportionately. The usual
accounting practice for apportioning the cost of a
part of the total holding on the sale thereof is to
take it at its average cost.
3 Whether the shares allotted by Waria The law on the subject has hitherto been that,
Ltd. against a loan taken by it from a where the consideration for the issue of shares
NBFC can be considered to be allotted is an adjustment against a bona fide debt
for cash for the purpose of reporting as payable in money on demand by the company,
per clause (f) of section 143(1) of the the shares are deemed to have been
Companies Act, 2013? subscribed in cash (vide the decision in
Spargo’s Case – 1873, 8, Ch. A. 407). According
to the legal opinion obtained by the ICAI, the
expression “shares allotted for cash” may also
include shares allotted against a debt.
Therefore, in cases which are covered by the
decision in Spargo’s case, no comment is
required by the auditor, even though the
company may have in the Return of Allotment
under Section 75, shown such shares as allotted
against adjustment of a debt.
Thus, the shares allotted by Waria Ltd. against a
loan taken by it from a NBFC can be considered
to be allotted for cash.

(c) Making Roving Inquiries: Clause (6) of Part I of the First Schedule to the Chartered
Accountants Act, 1949 states that a Chartered Accountant in practice shall be deemed to be

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guilty of misconduct if he solicits clients or professional work either directly or indirectly by a

circular, advertisement, personal communication or interview or by any other means. Such a
restraint has been put so that the members maintain their independence of judgement and may
be able to command respect from their prospective clients.
In case of making an application for the empanelment for the allotment of audit and other
professional work, the Council has opined that, “where the existence of such a panel is within the
knowledge of the member, he is free to write to the concerned organization with a request to
place his name on the panel. However, it would not be proper for the member to make roving
inquiries by applying to any such organization for having his name included in any such panel.”
Accordingly, Mr. Raja is guilty of misconduct in terms of the above provision as he has solicited
professional work from the Finance Ministry, by inquiring about the maintenance of the panel .
4. (a) (i) Government Guaranteed Advance: If a government guaranteed advance becomes NPA,
then for the purpose of income recognition, interest on such advance should not to be taken
to income unless interest is realized. However, for purpose of asset classification, credit
facility backed by Central Government Guarantee, though overdue, can be treated as NPA
only when the Central Government repudiates its guarantee, when invoked.
Since the bank has not invoked the guarantee, the question of repudiation does not arise.
Hence the bank is correct to the extent of not applying the NPA norms for provisioning
purpose. But this exemption is not available in respect of income recognition norms. Hence
the income to the extent not recovered should be reversed.
The situation would be different if the advance is guaranteed by State Government because
this exception is not applicable for State Government Guaranteed advances, where advance
is to be considered NPA if it remains overdue for more than 90 days.
In case the bank has not invoked the Central Government Guarantee though the amount is
overdue for long, the reasoning for the same should be taken and duly reported in LFAR.
(ii) The Audit Programme to Verify Advances against Life Insurance Policies is a s under-
(i) The auditor should inspect the policies and see whether they are assigned to the bank
and whether such assignment has been registered with the insurer.
(ii) The auditor should also examine whether premium has been paid on the policies and
whether they are in force.
(iii) Certificate regarding surrender value obtained from the insurer should be examined.
(iv) The auditor should particularly see that if such surrender value is subject to payment of
certain premium, the amount of such premium has been deducted from the surrender
value.
(b) Selection of Assurance Service Engagements for Review: The Statement on Peer Review
defines the scope of peer review which revolves around compliance with technical, ethical and
professional standards; quality of reporting; office systems and procedures with regard to
compliance of assurance engagements; and, training programmes for staff including articled and
audit assistants involved in assurance engagements. The entire peer review process is
directed at the assurance services.
Assurance Services means assurance engagements services as specified in the “Framework
for Assurance Engagements” issued by the Institute of Chartered Accountants of India and as
may be amended from time to time. Assurance engagements does not include management
consultancy engagements or engagements solely to assist the client in preparing, compiling or
collating information other than financial statements.

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In the given situation, CA. Sudarshan is appointed as a peer reviewer for M /s Preet Associates,
has asked for all management consultancy engagements and engagements solely to assist the
client in preparing, compiling or collating information other than financial statements carried out
by M/s Preet Associates for her peer review. In view of above, Peer Review of management
consultancy engagements and engagements solely to assist the client in preparing, compiling or
collating information other than financial statements at the time of execution step by CA.
Sudarshan is not correct as management consultancy engagements and engagements solely
to assist the client in preparing, compiling or collating information other than financial statements
are not covered in the scope of Assurance engagement and Peer Review is directed at
assurance engagement only.
(c) Turnover limit for the purpose of Tax Audit: The following points merit consideration as stated
in the Guidance note on Tax Audit issued by the Institute of Chartered Accountants of India -
(i) Price of goods returned should be deducted from the figure of turnover even if the return are
from the sales made in the earlier years.
(ii) Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of
a financing charge and is not related to turnover. The same shoul d not be deducted from the
figure of turnover.
(iii) Special rebate allowed to a customer can be deducted from the sales if it is in the nature of
trade discount.
Applying the above stated points to the given problem,
1. Total Turnover 524 Lac
2. Less – (i) Goods Returned 20 Lac
(ii) Special rebate allowed to customer in the nature of trade
discount would be deducted 5 Lac
Balance 499 Lac

Since the aggregate of all amounts received including amount received for sales, turnover or
gross receipts during the previous year, in cash, does not exceed five per cent of the said
amount and aggregate of all payments made including amount incurred for expenditure, in cash,
during the previous year does not exceed five per cent of the said pay ment, limit for tax audit is
five crore rupees. In the given situation, Abhinandan would not be required to get his accounts
audited under section 44AB of the Income Tax Act, 1961 as Rs. 499 lac is below prescribed tax
audit limit i.e. five crore rupees.
5. (a) As per section 27 of Chartered Accountants Act 1949, if a Chartered Accountant in practice or a
Firm of Chartered Accountants has more than one office in India, each one of such offices should
be in the separate charge of a member of the Institute. Failure on the part of a member or a firm
to have a member in charge of its branch and a separate member in case of each of the
branches, where there is more than one, would constitute professional misconduct. This
condition applies to any additional office situated at a place beyond 50 kms from the municipal
limits in which any office is situated.
However, exemption has been given to members in practicing in hill areas subject to certain
conditions such as:
− Such member/ firm be allowed to open temporary offices in a city in the plains for a limited
period not exceeding 3 months in a year.
− The regular office need not be closed during this period and all correspondence can

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continue to be made at the regular office.

− The name board of the firm in temporary office should not be displayed at times other than
the period such office is permitted to function.
− The temporary office should not be mentioned in letter head, visiting card, any other
documents as a place of business of the member/ firm.
− Before commencement of every winter, it shall be obligatory on the member/firm to inform
the Institute that he/it is opening the temporary office from a particular date and after the
office is closed at the expiry of the period of permission, an intimation to that effect shou ld
also be sent to the office of the Institute by registered post.
In the given case, Mr. Z has set up his regular office in the hill area of Kodaikanal , he decided to
set up a temporary office in the nearby city Marudai, situated at about 100 kms from the main
office. As planned, he took an office space on rent for the months of April, May & June. During
these months, his regular office was not closed. Further he was in-charge for both the offices. In
view of abovementioned criteria’s, he is eligible to avail the benefits of the above exemptions.
Also, it is given that the temporary office was open in Madurai for only 3 months and not beyond
that. The fact that Mr. Z is in-charge for both the offices, the temporary office being set-up in the
plains which is 100 kms away and the regular office kept open during the 3 months does not
constitute any violation of the provisions of the Chartered Accountant Act. Assuming Mr. Z has
informed the Institute regarding such temporary office in the prescribed mann er.
Therefore, in the given case, no penal action needs to be taken on the basis of complaint
registered by Mrs. A, as Mr. Z is not guilty of professional misconduct.
(b) The Operational Audit is not one-time activity. It should be viewed as a continuous
improvement cycle:

Plan

Act Do

Check

The continuous improvement cycle of Operational Audit can be depicted through Plan, Do, Check and Act diagram.

All the significant operations must be subjected to the scrutiny of operational audit, at least, once
in three years. Therefore, the operational audit should be done in the current scenario. However,
to deal with the employee hostility the participative approach of the audit should be adopted .
In this approach the auditor discusses the ideas for improvements with those managers that have
to implement them and make them feel that they have participated in the recommendations made
for improvements. By soliciting the views of the operating personnel, the operational audit
becomes a co-operative enterprise.
This participative approach encourages the auditee to develop a friendly attitude towards the
auditors and look forward to their guidance in a more receptive fashion. When the participative
method is adopted then the resistance to change becomes minimal, feelings of hostility disappear
and gives room for feelings of mutual trust. Team spirit is developed. The auditors and the
auditee together try to achieve the common goal. The proposed recommendations are discussed
with the auditee and modifications as may be agreed upon are incorporated in the operational

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audit report. With this attitude of the auditor, it becomes absolutely easy to implement the
proposed suggestions as the auditee themselves take initiative for implementing and the auditor
does not have to force any change on the auditee.
(c) Section 2(45) of the Companies Act, 2013, defines a “Government Company” as a company in
which not less than 51% of the paid-up share capital is held by the Central Government or by any
State Government or Governments or partly by the Central Government an d partly by one or
more State Governments, and includes a company which is a subsidiary company of such a
Government company. The auditors of these government companies are firms of Chartered
Accountants, appointed by the Comptroller & Auditor General, who gives the auditor directions on
the manner in which the audit should be conducted by them.
In the given scenario, VM Ltd., a company wholly owned by Central Government was disinvested
during the previous year, resulting in 45% of the shares being held by public. Since, shares were
listed on the BSE therefore all the listing requirements were applicable.
Opinion of Finance Manager of the Company Mr. Gautam that since company is subject to
stringent control by BSE and the markets, therefore the auditing requirements of a limited
company in private sector under the Companies Act 2013 would be applicable to the Company
and the C&AG will not have any role to play, is not correct as listing of company’s shares on a
stock exchange is irrelevant for this purpose.
6. (a) In order to ensure that the manufacturing unit of SP Ltd. will be able to meet the cash
requirements internally, one is required to verify:
(i) Is the company able to honour its commitments to its trade payables, to the banks, to the
government and other stakeholders?
(ii) How well is the company able to convert its trade receivables and inventories?
(iii) How well the Company deploys its funds?
(iv) Are there any funds lying idle or is the company able to reap maximum benefits out of the
available funds?
(v) What is the investment pattern of the company and are they easily realizable?
(b) Audit Programme of Movie Theatre Complex:
(i) Peruse the Memorandum of Association and Articles of Association of the entity.
(ii) Ensure the object clause permits the entity to engage in this type of business.
(iii) In the case of income from sale of tickets:
(1) Verify the control system as to how it is ensured that the collections on sale of tickets
of various shows are properly and accurately accounted.
(2) Verify the system relating to online booking of various shows and the system of
realization of money.
(3) Check that there is overall system of reconciliation of collections with the number of
seats available for different shows in a day.
(iv) Verify the internal control system and its effectiveness relating to the income from café,
shops, pubs, game zone etc., located within the multiplex.
(v) Verify the system of control exercised relating to the income receivable from advertisements
exhibited within the premises and inside the hall such as hoarding, banners, slides, short
films etc.
(vi) Verify the system of collection from the parking areas in respect of the vehicles parked by
the customers.

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(vii) In the case of payment to the distributors verify the system of payment which may be either
through out right payment or percentage of collection or a combination of both. Ensure at
the time of settlement, any payment of advance made to the distributor is also adjusted
against the amount due.
(viii) Verify the system of payment of salaries and other benefits to the employees and ensure
that statutory requirements are complied with.
(ix) Verify the payments effected in respect of the maintenance of the building and ensure the
same is in order.
(x) Verify the insurance premium paid and ensure it covers the entire assets.
(c) Basic Accounting Control Objectives: The basic accounting control objectives which are
sought to be achieved by any accounting control system are -
(i) Whether all transactions are recorded;
(ii) Whether recorded transactions are real;
(iii) Whether all recorded transactions are properly valued;
(iv) Whether all transactions are recorded timely;
(v) Whether all transactions are properly posted;
(vi) Whether all transactions are properly classified and disclosed;
(vii) Whether all transactions are properly summarized.
or
Real Time Environment: IT Components: To facilitate transactions in real-time, it is essential to
have the systems, networks and applications available during all times. A real-time environment
has several critical IT components that enable anytime, anywhere transactions to take place. Any
failure even in one component could render the real-time system unavailable and could result in a
loss of revenue. IT Components include:
(i) Applications: For example, ERP applications SAP, Oracle E-Business Suite, Core banking
applications.
(ii) Middleware.: For example, Webservers like Apache, Oracle Fusion, IIS.
(iii) Networks: For example, Wide Area Networks, Local Area Network.
(iv) Hardware: For example, Servers, Backup and Storage devices.

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Test Series : October, 2021

MOCK TEST PAPER -I
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
All MCQs are compulsory
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100
DIVISION A – MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. Pradyuman & Co. was one of the joint auditors of Lok Sahay Insurance Co. Ltd. Mr. Vicky, one of the
engagement team members, of the said joint auditor, was examining the expenses included in different
accounts.
While verifying the expenses incurred in relation to employees, Mr. Vicky made a list of the same as
follows, which he was going to discuss with his senior: -
Particulars ` Included in which account?
Payment of Salaries to employees 100 lakh Employees’ Remuneration and Welfare
Benefits Account
Reimbursement of premium in respect 20 lakh Employees’ Remuneration and Welfare
of employees’ health cover Benefits Account
Training and non-training expenses 30 lakh Employees’ Remuneration and Welfare
incurred for employees Benefits Account
Expenses incurred towards medical 10 lakh Employees’ Remuneration and Welfare
treatment of employees not having Benefits Account
health cover
Incentives paid to employees of the 40 lakh Commission account
company who have solicited insurance
policies
Whether it can be said that Lok Sahay Insurance Co. Ltd. has properly accounted for the expenses
incurred in relation to employees?
(a) No, reimbursement of premium in respect of employees’ health cover should be included in ‘Others’
account and incentives paid to employees should be included in Employees’ Remuneration and
Welfare Benefits Account.
(b) No, non-training expenses have to be shown separately and incentives paid to employees should
be included in Employees’ Remuneration and Welfare Benefits Account.
(c) No, expenses incurred towards medical treatment of employees not having health cover should be
included in ‘Others’ account and non-training expenses have to be shown separately.
(d) No, training and non-training expenses incurred for employees should be bifurcated and shown
separately and expenses incurred towards medical treatment of employees not having health cover
should be included in ‘Others’ account.

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2. While auditing Veer Ltd., CA. Vardhman divided the whole population of trade receivables balances to
be tested in a few separate groups called ‘strata’ and started taking a sample from each of them. He
treated each stratum as if it was a separate population. He divided the trade receivables balances of
Veer Ltd. for the Financial Year 2020-21 into groups on the basis of personal judgment as follows:
S. No. Particulars
1 Balances in excess of ` 10,00,000;
2 Balances in the range of ` 7,75,001 to ` 10,00,000;
3 Balances in the range of ` 5,50,001 to ` 7,75,000;
4 Balances in the range of ` 2,25,001 to ` 5,50,000;
5 Balances ` 2,25,000 and below
From the abovementioned groups, CA. Vardhman picked up different percentage of items for
examination from each of the groups, for example, from the top group i.e. balances in excess of
`10,00,000, he selected all the items to be examined; from the second group, he opted for 25 % of the
items to be examined; from the lowest group, he selected 2% of the items for examination; and so on
from rest of the groups. Which one of the following methods of sample selection is he following?
(a) Systematic sampling.
(b) Stratified sampling.
(c) Section sampling.
(d) Selection sampling.
3. The notes to the account statement of Nemi Ltd. shows the break-up of accounts payable for the
Financial Year 2020-21 as follows:
Accounts Payable Amount (in `)
Mr. K 1,20,000
Mr. R 40,000
Mr. B 14,56,000
Total 16,16,000

CA. Raju, the auditor of Nemi Ltd., wants to investigate the valuation of accounts payable of Mr. B
amounting to ` 14,56,000. Which of the following procedures is best fitted & more reliable to be followed
by CA. Raju to get more reliable evidence for the existence of such balance as on 31st March, 2021?
(a) Inspect each and every journal entry passed in the books of Nemi Ltd.
(b) Ask Nemi Ltd. to provide the details of payment made during the year 2021-22.
(c) Inspect the invoices issued by Mr. B and the payments made.
(d) Interrogate the cash manager of Nemi Ltd.
4. The firm from which you are pursuing your articleship training is the internal auditor of Shanti Ltd. While
conducting the audit of the medical expense reimbursements of the company employees, you come
across some bills which are clearly not medical in nature, and some others which have been overwritten.
During the discussions, the accountant points out that the employee is a functional head who enjoys a
significantly higher medical expense reimbursement limit, and that you should ignore those bills as the
amount is not material. You will:
(a) Accept the explanation and the bills.

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(b) Recommend that the claim should be reduced, and clear guidelines should be issued to all
employees on the matter, with a provision for disciplinary action.
(c) Recommend that the employee be asked to submit fresh bills to avail the tax benefit .
(d) Recommend that the employee be taxed on the aggregate amount of the suspect bills .
5. Factors that the auditor may consider in determining the appropriate level of detail for communication
of significant deficiencies under SA 265 depends upon:
I. Nature, size and complexity of the entity
II. Nature of the significant deficiencies identified
III. Estimated time required by management to resolve the deficiency
IV. Fees charged from the client
(a) I and II.
(b) I, II and III.
(c) III and IV.
(d) Only II.
6. Shrenik Ltd. was set up initially as a private limited company. Subsequently, it got converted into a publi c
company. The company’s management has plans of expansion, but the business was not growing in an
organic manner. Therefore, the management decided to acquire the competitors. During the financial
year ended 31 st March, 2021, the company acquired two companies in India and France in September,
2020 and January, 2021 respectively. The company controls both of these companies as per the
criteria’s laid down in the Companies Act, 2013 as well as the applicable accounting standards.
The management started discussions with the auditors regarding the audit wherein it was also pointed
out by the auditors that the management should also prepare consolidated financial statements, if they
want. Management needs your advise on the same.
(a) Management must prepare the consolidated financial statements as per the requirements of the
Companies Act, 2013.
(b) Management has a choice not to prepare consolidated financial statements but should go for that
considering that its true performance and financial position can th en be demonstrated.
(c) Management could have prepared consolidated financial statements if the acquired companies
would have completed at least one year post acquisition.
(d) Management must prepare consolidated financial statements, but it should include only the
company acquired in India.
7. As per SA 550 on Related Parties, existence of which relationship indicate the presence of control or
significant influence?
(a) Friend of a family member of a person who has the authority and responsibility for pla nning.
(b) Holding debentures in the entity.
(c) The entity’s holding of debentures in other entities.
(d) The entity’s holding of equity in other entities.
8. KPC Limited is a garment manufacturing company having Head Office in Mumbai, 4 factories, 10
marketing offices across the country. The company uses SAP ERP for almost all its business processes
except Payroll which is being outsourced to an Agency in Bangalore. Once payroll is processed, data is
sent to the HR department at HO. HR department shares such details with Finance Department at HO
for making the payment. Journal entries are recorded in SAP. Employees complained about incorrect

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Income Tax calculation and KPC Limited appointed a CA firm to review the payroll system in detail. It
was observed that logic of Income Tax calculation is not as per the requirements of the Act and when
the outsourced Agency confirmed that they carried out program changes recently and error may be due
to such changes. The Auditor attributed the error of such incorrect software changes to:
(a) Loss of Application Controls.
(b) Loss of Overall Controls.
(c) Loss of IT General Controls.
(d) Human oversight.
9. Siddha and Associates, Chartered Accountants has been appointed as the branch statutory auditor of
CRR Bank. Auditor identified cases of Advances where primary security is not adequate to cover the
margin as stipulated by the Loan covenants. Further no documentation exists to confirm that the
collateral security is unencumbered. For the advances not having adequate security, the auditor should:
(a) Mention the cases in the Long Form Audit report only.
(b) Not mention the cases in the Long Form Audit report.
(c) Document the cases and discuss with branch management.
(d) Consider to downgrade the asset as per RBI prudential norms.
10. RST Ltd has a Net Worth of ` 80 crore and a market capitalisation of ` 350 crore. However, its ranking
is 800 among all the Listed Companies based on the said capital for the previous year. It has a subsidiary
Company PQR Pvt Ltd whose net worth is ` 25 crore. Whether RST Ltd. and PQR Ltd. are required to
undertake Secretarial Audit?
(a) Both RST Ltd. and PQR Ltd. shall undertake Secretarial Audit.
(b) Only RST Ltd., being a listed entity, is required to undertake Secretarial Audit.
(c) None of them are required to undertake Secretarial Audit since they are not among the top 500
Companies on the basis of Market Capitalisation.
(d) Only RST Ltd. shall undertake Secretarial Audit since it is among the top 1,000 Companies on the
basis of Market Capitalisation. (10 x 1 = 10 Marks)
Questions (11-20) carry 2 Marks each
MCQ 11. -15.
Integrated Case Scenario 1
Chartered Accountant Firms - Tink & Co., Llyods & Co. and Manohar & Co., respectively, were appointed as
the joint auditors for conducting the statutory audit for the financial year 2020 -21 of Anitya Ltd.
They were having difference of opinion with regards to following points: -
Sr. No. Reasons for Differences in Opinion
1 Manohar & Co. wanted to refer to the work of the auditor’s expert, Mr. Tanmay in the audit
report but the other joint auditors were not agreeing on the same as such reference was not
relevant to an understanding in the final audit opinion and also it was not required by any statute.
2 Certain misstatements affected information to be included in ‘Management Discussion and
Analysis’ of Anitya Ltd.’s annual report but as they were lower than materiality set for the
financial statements as a whole and so according to the Llyods & Co., there was no requirement
to perform any audit procedures on the same but the other joint auditors were not agreeing on
the same for the reason that the information may reasonably be expected to influence the
economic decisions of the users of the financial statements

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3 For a selected item, the joint auditors were not able to apply the designed audit procedures or
suitable alternate procedures and Llyods & Co. wanted to treat that item as a misstatement in
the case of test of controls as well as in the case of test of details but the other joint auditors
were not agreeing on the said treatment.
4 Manohar & Co. had determined for a particular account balance positive confirmation request
was necessary to obtain sufficient and appropriate audit evidence but as it had not obtained
such confirmation and alternate audit evidence would not have sufficed its requirements,
Manohar & Co. wanted to determine its implications on the audit opinion but the other joint
auditors were not agreeing on the same.
The differences of opinion in case of Tink & Co. and Llyods & Co. were resolved but there remained
disagreement with the one of the opinions of Manohar & Co. due to which Manohar & Co. expressed its
opinion in a separate audit report.
Manohar & Co. was initially appointed as a joint auditor in Anitya Ltd. for 5 years term with other two auditors
but it gave its resignation as an auditor to the company on 20 th October, 2021, due to the reason of having
differences of opinion with other joint auditors.
Manohar & Co. filed the required statement with respect to its resignation on 27 th November, 2021, with Anitya
Ltd. as well as the Registrar, respectively.
The Board of Directors of Anitya Ltd. appointed Namo & Co. as a joint auditor in place of Manohar & Co.
which was later approved by members in the general meeting of the company.
Namo & Co. before getting appointed, as aforesaid, had :-
(i) Communicated vide a registered post acknowledgment due to the previous joint auditor, Manohar & Co.
but the said post was received back with the remarks “Office Found Locked”.
(ii) Ascertained that the requirements of Section 139 and Section 140 of the Companies Act, 2013, with the
respect to its appointment had been duly complied with or not by Anitya Ltd.
On the basis of the abovementioned facts, you are required to answer the following MCQs:
Multiple Choice Questions (5 questions of 2 Marks each):
11. Whether the opinion of Manohar & Co. for referring the work of the auditor’s expert, Mr. Tanmay in the
audit report, can be considered as valid?
(a) No, as such reference was not relevant to an understanding in the final audit opinion and also it
was not required by any law or regulation.
(b) Yes, such a reference in the auditor’s opinion was relevant to the understanding of the users of the
financial statement.
(c) No, as such reference was not required by any law or regulation.
(d) Yes, if such reference was relevant to any ‘key audit matter’ as per SA 701 even though it was not
required by any law or regulation.
12. Whether the opinion of Llyods & Co. for treating the item as a misstatement in the case of test of controls
as well in the case of test of details for which the joint auditors were not able to apply the designed audit
procedures or suitable alternate procedures, can be considered as valid?
(a) No, as such item shall be as a misstatement only in the case of test of controls and for test of
details such item shall be treated as a deviation.
(b) Yes, as such item shall be treated as a misstatement in the case of test of controls and te st of
details.
(c) No, as such item shall be treated as a deviation in the case of test of controls and test of details.
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(d) No, as such item shall be treated as a misstatement only in the case of test of details and for test
of controls such item shall be treated as a deviation.
13. Whether the insistence by Manohar & Co. for determining implications of not obtaining response to
positive confirmation request on the audit opinion can be considered as valid?
(a) No, because in such a case the auditor should have enquired the reasons for the same from the
management in writing and included the same as a ‘Key Audit Matter’ as per SA 701
(b) Yes, because in such a case the auditor should have determined implications for the audit and the
auditor’s opinion in accordance with SA 705.
(c) No, because in such a case the auditor should have obtained and relied upon a written
representation as per SA 580 in this regard.
(d) No, because in such a case the auditor should have determined the need to include an ‘Emp hasis
of matter’ paragraph in the audit report as per SA 706 after considering the implications on the
audit.
14. By what date, Manohar & Co. should have filed the statement with respect to its resignation with Anitya
Ltd. as well as the Registrar and in what form?
(a) Manohar & Co. should have filed the statement in Form ADT-3 by 19th November, 2021.
(b) Manohar & Co. should have filed the statement in Form ADT-4 by 19th November, 2021.
(c) Manohar & Co. should have filed the statement in Form ADT-2 by 19th December, 2021.
(d) Manohar & Co. should have filed the statement in Form ADT-3 by 20th November, 2021.
15. Whether Namo & Co. would be considered to have satisfied the requirements of communicating with
the previous auditor?
(a) No, as the communication through registered post acknowledgment due could not be done, Namo
& Co. should have tried an alternative form of communication as prescribed by the Council of the
ICAI for the same.
(b) Yes, as it would be deemed that such post was delivered.
(c) No, because in such a case Namo & Co. should have informed the Council of the ICAI with respect
to the non-delivery of post to the previous auditor along with the reasons for the same.
(d) No, however, Namo & Co. can commence the audit of Anitya Ltd. but should try to satisfy the
requirement of communicating with the previous auditor at least before signing of the audit report.
MCQ 16. -20.
Integrated Case Scenario 2
A special resolution was passed by Dunk Ltd., an unlisted public company, for the purpose of conducting
investigation into the affairs of the company by getting order of the Central Government for the same.
The Central Government on receipt of such application from Dunk Ltd. supported by a copy of special
resolution did not deem fit to pass an order for investigation and thereby, rejected such request. Thereafter,
certain specified number of members of Dunk Ltd. made an application to the Tribunal for seeking
investigation and the Tribunal upon being satisfied that such investigation was required, passed an order
which was forwarded to the Central Government.
On receipt of such order from the Tribunal, the Central Government passed an order for investigation into the
affairs of Dunk Ltd., by appointing Mr. Rajesh as an inspector for the s ame, who is practicing as a chartered
accountant in partnership firm named RS & Co.

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Mr. Rajesh started with the investigation into the affairs of Dunk Ltd. from 03.04.2021. All books and papers
of Dunk Ltd. were handed over to Mr. Rajesh from 04.04.2021. During the investigation, Mr. Rajesh
considered it necessary to examine the books and papers of Blue Bell (P) Ltd., a supplier company of Dunk
Ltd. while investigating on a particular matter relating to purchases of Dunk Ltd. Accordingly, Mr. Rajesh
obtained the same through an officer of Dunk Ltd. on 20.04.2021. Such books and papers of Blue Bell (P)
Ltd. were returned by Mr. Rajesh on 05.06.2021 but he again obtained the same on 20.06.2021 by an order
in writing, due to certain reasons which were returned on 25.08.2021.
Mr. Rajesh, at the later stage of investigation, also initiated investigated into the affairs of Sinq Ltd., an
unlisted public company, which was being managed 2 years ago by an ex-manager of Dunk Ltd., Mr. Jayesh,
as he considered it necessary to do so, after obtaining required approvals.
Mr. Rajesh examined on oath by summoning and enforcing attendance of following persons: -
• Mr. Jayesh
• Mr. Urvil, a director of Dunk Ltd.
• Mr. Sunny, an employee of Sinq Ltd.
• Mr. Raj, an employee of Blue Bell (P) Ltd.
The investigation, in case of the aforesaid companies i.e. Dunk Ltd. and Sinq Ltd. was concluded by Mr.
Rajesh but he only forwarded the report of the results of investigation of Dunk Ltd., after authentication, to
the Central Government.
On perusal of such investigation report of Dunk Ltd., the Central Government observed that revenue of Dunk
Ltd. was misrepresented during F.Y. 2019-20 as they were booking fictitious sales in anticipation of actual
sales and thus, it concluded that the affairs of the company were mismanaged during the F.Y. 2019-20 which
casted a doubt on the reliability of financial statements for the said financial year and because of which it
made an application to the Tribunal for the purpose of re-opening books of account of Dunk Ltd. and recasting
its financial statements.
The tribunal passed an order on 12.01.2022 for re-opening books of account of Dunk Ltd. and recasting its
financial statements for F.Y. 2019-20 on the basis of aforesaid reason, after giving notice to the Central
Government for the same and taking into consideration the representations made by it in this regard.
On the basis of the abovementioned facts, you are required to answer the following MCQs:
Multiple Choice Questions (5 questions of 2 Marks each):
16. Whether it was justifiable on the part of the Central Government to reject the application of Dunk Ltd.
even though it was supported by a copy of special resolution and whether RS & Co. could have been
appointed as inspector instead of Mr. Rajesh, in order to have more manpower for the investigation?
(a) Yes, as the Central Government possesses discretion to reject the application received from any
person if it does not deem fit for investigation and RS & Co. was eligible to be appointed as
inspector.
(b) No, the Central Government should have accepted the application as necessary formalities were
complied with by Dunk Ltd. and RS & Co. was ineligible to be appointed as inspector.
(c) Yes, as the Central Government possesses discretion to reject such an application and RS & Co.
was eligible to be appointed as an inspector provided it had minimum 3 partners.
(d) Yes, as the Central Government possesses discretion to reject such an application and RS & Co.
was ineligible to be appointed as inspector.

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17. Till what time period, Mr. Rajesh was having the authority to keep in his custody, the books and papers
of Dunk Ltd. and Blue Bell (P) Ltd which were obtained again?
(a) 01.10.2021 & 03.12.2021, respectively
(b) 03.07.2021 & 03.12.2021, respectively
(c) 01.10.2021 & 21.02.2022, respectively
(d) 03.06.2021 & 02.12.2021, respectively
18. For which of the following person(s), Mr. Rajesh was required to obtain prior approval of Central
Government for examining them on oath by summoning and enforcing their attendance?
(a) Mr. Jayesh, Mr. Sunny and Mr. Raj, respectively
(b) Mr. Sunny and Mr. Raj, respectively
(c) Mr. Sunny
(d) Mr. Raj
19. Whether it was justifiable on the part of Mr. Rajesh for not forwarding the investigati on report of Sinq
Ltd. to the Central Government and what type of fraud had been identified by the Central Government
on perusal of investigation report of Dunk Ltd.?
(a) Yes, provided reasons for not forwarding the same are recorded in writing by Mr. Raj esh and the
type of fraud identified is in the nature of ‘Teeming and Lading’, respectively.
(b) No, as it is the responsibility of the inspector to forward to the Central Government, the results of
investigation of all the companies done by him and the type of fraud identified is in the nature of
‘Tampering of receipts’, respectively.
(c) No, because at the first place, Mr. Rajesh was not only having the authority to investigate into the
affairs of Sinq Ltd. and the type of fraud identified is in the nature of ‘Teeming and Lading’,
respectively.
(d) Yes, if according to Mr. Rajesh such report was not relevant to the investigation of affairs of Dunk
Ltd. and the type of fraud identified is in the nature of ‘Advance billing’, respectively.
20. Whether it was mandatory for the Tribunal to take into consideration the representations made by the
Central Government before passing the order for re-opening of accounts and till what financial year,
Tribunal can make such order of re-opening of accounts?
(a) No, it was discretionary for the Tribunal to take into consideration the representations made by the
Central Government and the Tribunal can make such order of re-opening of accounts till
F.Y. 2016-17.
(b) No, provided reasons for the same are recorded in writing by the Tribunal for not taking into
consideration the representations made by the Central Government and the Tribunal can make
such order of re-opening of accounts till F.Y. 2014-15.
(c) No, it was discretionary for the Tribunal to take into consideration the representations made by the
Central Government and the Tribunal can make such order of re-opening of accounts till
F.Y. 2013-14.
(d) Yes, it was mandatory for the Tribunal to take into consideration the representations made by the
Central Government and the Tribunal can make such order of re-opening of accounts till
F.Y. 2014-15. (10 x 2 = 20 Marks)

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Division B- Descriptive Questions-70 Marks

Question No. 1 is compulsory.
Attempt any four questions from the Rest.
1. (a) Mr. S & Mr. J are a senior and junior articled assistant respectively, in a renowned audit firm. Both
were assigned statutory audit of a manufacturing company. Mr. S instructed his junior to draft an
audit plan by taking reference from a similar client (a partnership f irm) who was engaged in the
same business. Mr. J was confused as to how that reference could suit in this case, since the
nature and extent of planning would vary for both clients. After few days, the audit work
commenced. During the course of the audit, certain events took place, which made Mr. J to rethink
about the audit plan initially designed. He approached Mr. S and enquired about when would an
audit plan require a change. Comment about both the situations face by Mr. J in the above situation.
(5 Marks)
(b) Jinchandra & Co., Chartered Accountants, have been appointed Statutory Auditors of Gurudeva
Ltd. for the F.Y. 2020-21. The audit team has completed the audit and is in the process of preparing
audit report Management of the company has also prepared draft annual report.
Audit in-charge was going through the draft annual report and observed that the company has
included an item in its Annual Report indicating downward trend in market prices of key
commodities/raw material as compared to previous year. However, the actual profit margin of the
company as reported in financial statements has gone in the reverse direction. Audit Manager
discussed this issue with partner of the firm who in reply said that auditors are not covered with
such disclosures made by the management in its annual report, it being the responsibility of the
management.
Do you think that the partner is correct in his approach on this issue?
Discuss with reference to relevant Standard on Auditing the Auditor's duties with regard to
reporting. (4 Marks)
(c) In the course of audit of Kushal Ltd, you suspect that the management has made misstatements in
the financial statements intentionally to deceive the users and to succumb to pressures to meet
market expectations. Elucidate how the fraudulent financial reporting may be accomplished and
also discuss the techniques of committing fraud by management overriding controls. (5 Marks)
2. (a) Mr. DG, Partner in M/s. DG and Associates, as part of their audit presentation to the Audit
Committee of MABD Limited, a listed company, highlighted the following:
• Difficulties faced during the audit;
• Disagreements with the management;
• Management Letter Points;
• Draft Management Representation letter to be provided by the Company in connecti on with
the audit.
Some of the Audit Committee members were not happy with the above presentation and asked
Mr. DG to take it back and submit directly to the Board. They believe that Audit Committee is not
the forum for discussing such problems and this has to be sorted out between auditors and the
management. Please comment on the above. (6 Marks)

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(b) As a part of the listing process, M/s FRAD Limited had prepared and issued its prospectus to the
public. The top executives thought that a pending litigation against the company (which would
cause a cash outflow of ` 1 crore) may affect the demand for share application. Due to this, they
had omitted the fact, for the well-being of the company. Mr. K, who was well aware of this matter,
had authorized himself to be named in the prospectus as a director. However, Mr. K was little
reluctant, so he informed and agreed that he shall become such director after an interval of some
time. Unfortunately, after few days, this matter got leaked and several subscribers sustained huge
loss. Mr. K is now defending himself stating that he is currently not holding the director post hence
no action can be taken against him. Analyse. (4 Marks)
(c) Mr. Manipal, a practicing Chartered Accountant has signed the Tax Audit Reports u/s 44AB of the
Income tax Act, 1961 for the financial year 2019-20 that are filed online using Digital Signature and
without generating UDIN on the ground that there is no field for mentioning UDIN on digitally signed
online reports. Is the contention of Mr. Manipal valid? Give your comments with reference to the
Chartered Accountants Act, 1949 and schedules thereto. (4 Marks)
3. (a) As at 31st March 2021 while auditing Reliable Insurance Ltd, you observed that a policy has been
issued on 25 th March 2021 for fire risk favouring one of the leading corporate houses in the country
without the actual receipt of premium and it was reflected as premium receivable. The company
maintained that it is a usual practice in respect of big customers and the money was c ollected on
5th April, 2021. You further noticed that there was a fire accident in the premises of the insured on
31st March 2021 and a claim was lodged for the same. The insurance company also made a
provision for claim. Comment. (4 Marks)
(b) Gambit Ltd., engaged in the leasing of goods carriage, appointed you as the tax auditor for the
financial year 2020-21. How would you deal with the following payments to Mr. X, Mr. Y and Mr. Z
(engaged in leasing of goods carriage) relating to the leasing transact ions in your tax audit report:
(i) Payments of 6 invoices of ` 5,000 each made in cash to Mr. X on 4 th July, 2020.
(ii) Payments of 2 invoices of ` 18,000 each made in cash to Mr. Y on 5 th July, 2020 and 6 th July,
2020 respectively.
(iii) Payment of ` 40,000 made in cash to Mr. Z on 7 th July, 2020 against an invoice for expenses
booked in 2019-20. (6 Marks)
(c) Mr. Sheetal, a Chartered Accountant during the course of audit of SS Ltd. came to know that the
company has taken a loan of ` 12 lakh from Employees Provident Fund. The said loan was not
reflected in the books of account. However, the auditor ignored this information in his report.
Comment with reference to the Chartered Accountants Act, 1949, and Sc hedules thereto.
(4 Marks)
4. (a) Rishabh Finance Ltd. is a Non-Banking Finance Company and was in the business of accepting
public deposits and giving loans since 2015. The company was having net owned funds of
` 1,50,00,000/-(one crore fifty lakh) and was not having registration certificate from RBI and applied
for it on 30 th March 2020. The company appointed Mr. Gautam as its statutory auditors for the year
2019-20. Advise the auditor with reference to auditor procedures to be taken and reporting
requirements on the same in view of CARO 2016? (6 Marks)
(b) Manidhari Ltd. has come across many instances where it could buy products at lesser cost than
the actual procurement price it paid. The management believes that the adequate purchase policy
is in place including the requirements of three quotations from registered vendors, appropriate
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vendor vetting and rating mechanism, however, the on-ground implementation of the purchase
policy might be defective. Further, it has observed that there might be some employees involved
in choosing the higher cost vendors as well. The company approaches you to advise the type of
audit it should get done: Management or Operational. Please advise through a comparison
between both the audits. (4 Marks)
(c) CA. Intelligent, a practicing Chartered Accountant was on Europe tour bet ween 15-09-20 and
25-09-20. On 18-09-20 a message was received from one of his clients requesting for a stock
certificate to be produced to the bank on or before 20-09-20. Due to urgency, CA. Intelligent
directed his assistant, who is also a Chartered Accountant, to sign and issue the stock certificate
after due verification, on his behalf. Comment with reference to the Chartered Accountants Act,
1949, and Schedules thereto. (4 Marks)
5. (a) M/s Aadi & Co., Chartered Accountants, have been allotted the branch audit of a nationalized bank
for the year ended 31 st March, 2021. You are part of audit team and have been instructed by your
partner to verify the following areas:
(i) Fulfilment of the criteria prescribed for NPA norms for government guaranteed advance.
(ii) Fulfilment of the criteria prescribed for NPA norms for the advances given for agricultural
purposes.
(iii) Drawing power calculation from stock statements in respect of working capital accounts.
(iv) Accounts where regular/ad hoc limits are not reviewed within 180 days from the due date/date
of ad hoc sanction.What may be your areas of concern as regards matters specified above?
(6 Marks)
(b) Gem Ltd. is an exporter of precious and semi-precious stones. The turnover of the company is
` 150 crore, out of which ` 105 crore is from export business and remaining ` 45 crore from
domestic sales. Amount received from export business is all in foreign currency. Directors of Gem
Ltd. are of the opinion that cost audit is not applicable to their company as maximum revenue has
been generated from export business. Give your opinion. (4 Marks)
(c) Whilst the Audit team has identified various matters, they need your advice to include the same in
your audit report in view of CARO 2016: -
(i) The Company is in the process of selling its office along with the freehold land available at
Pune and is actively on the lookout for potential buyers. Whilst the same was purchased at
` 20 Lakh in 2006, the current market value is ` 200 Lakh. This property is pending to be
registered in the name of the Company, due to certain procedural issues associated with the
Registration though the Company is having a valid possession and has paid its purchase cost
in full. The Company has disclosed this amount under Fixed Assets though no disclosure of
non-registration is made in the notes forming part of the accounts.
(ii) The Internal Auditor of the Company has identified a fraud in the recruitment of employees by
the HR department wherein certain sums were alleged to have been taken as kick -back from
the employees for taking them on board with the Company. After due investigation, the
concerned HR Manager was sacked. The amount of such kickbacks is expected to be in the
range of `13.50 Lakh. (4 Marks)

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6. (a) You have been appointed as auditor of ARHAM Ltd. After having determined the audit objectives,
now you have been requested to draft audit criteria. What are the sources that you will use while
doing the task? (5 Marks)
(b) CA. V is the auditor of Superb Ltd., a parent company which presents Consolidated Financial
Statements. The management of Superb Ltd. has provided the list of the components included in
the Consolidated Financial Statements. As an auditor of Consolidated Financial Statements, CA V
has to verify that all the components have been included in the Consolidated Financial Statements
and review the information provided by the management in identifying the components. State the
procedures to be followed by CA. V in respect of completeness of this information. (5 Marks)
(c) As an Auditor of TRP Ltd., you are suspicious that there might be non -compliance with laws and
regulations to which the Company is subject to. Indicate the possible areas or aspects where you
may have to look out for forming an opinion as to whether your suspicion has some basis to further
inquire. (4 Marks)
OR
The elements of skill, experience and independence of reviewers are ensured before initiating them
in Peer Review process. In the above light, state few eligibility criteria fixed for a person to be
empanelled and also for being appointed as a Peer Reviewer.

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 Test Series: October, 2021
MOCK TEST PAPER - 1
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS
DIVISION A - MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. (b)
2. (b)
3. (c)
4. (b)
5. (a)
6. (a)
7. (d)
8. (c)
9. (d)
10. (a)
Questions (11-20) carry 2 Marks each
11. (a)
12. (d)
13. (b)
14. (a)
15. (b)
16. (d)
17. (c)
18. (d)
19. (d)
20. (d)
DIVISION B - DESCRIPTIVE QUESTIONS (70 Marks)
1. (a) SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
accordance with Standards on Auditing” states that in order to achieve the overall objectives
of the audit, the auditor shall use the objectives stated in relevant SAs in planning and performing
the audit. Without a careful plan, the overall objective of an audit may not be achieved. The audit
planning is necessary to conduct an effective audit, in an efficient and timely manner. So far as
the nature of planning is concerned, it would vary according to-
(i) Size and Complexity of the Auditee - If the size and complexity of organization of which
audit is to be conducted is large, then much more planning activities would be required as
compared to an entity whose size and complexity is small.

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 (ii) Past Experience & Expertise - The key engagement team members’ previous experience &
expertise also contributes towards variation in planning activities.
(iii) Change in Circumstances - Another factor contributing towards variation in planning
activities is change in circumstances.
Changes to Audit Planning: The auditor should update and change the overall audit strategy
and audit plan as necessary during the course of the audit. The auditor may need to modify the
overall audit strategy and audit plan due to the factors such as (i) result of unexpected events, (ii)
changes in conditions, or (iii) the audit evidence obtained from the results of audit procedures.
Further, the auditor would also have to modify the nature, timing & extent of further audit
procedures, based on the revised considerations of assessed risks. This may be the case when
information coming to the auditor differs significantly from the information when he planned the
audit process.
In addition to the above, there may be possibilities of change in law, notifications, government
policies, which warrants updation of overall audit strategy and audit plan.
(b) Responding When the Auditor Concludes That a Material Misstatement of the Other
Information Exists: As per SA 720, “The Auditor’s Responsibility in Relation to Other
Information”, descriptions of trends in market prices of key commodities or raw materials is an
example of amounts or other Items that may be Included in the other information.
The auditor’s discussion with management about a material inconsistency (or other information
that appears to be materially misstated) may include requesting management to provide support
for the basis of management’s statements in the other information. Based on management’s
further information or explanations, the auditor may be satisfied that the other information is
not materially misstated. For example, management explanations may indicate reasonable and
sufficient grounds for valid differences of judgment.
Auditor’s duties with regard to reporting in the given case are given hereunder:
As per SA 720, “The Auditor’s Responsibility in Relation to Other Information”, if the auditor
concludes that a material misstatement of the other information exists, the auditor shall request
management to correct the other information. If management:
(i) Agrees to make the correction, the auditor shall determine that the correction has been
made; or
(ii) Refuses to make the correction, the auditor shall communicate the matter with those
charged with governance and request that the correction be made.
Contention of the partner of the firm that auditors are not concerned with such disclosures made
by the management in its annual report, is incorrect.
(c) In the given case, management of Kushal Ltd has made intentional misstatements to deceive the
users in order to meet market expectations. Auditor is suspecting such intentional behavior of the
management and in such situations, SA 240 discusses how fraudulent financial reporting may be
accomplished and also discusses techniques of committing fraud by management overriding
controls.
As per SA 240 on “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements”
Fraudulent financial reporting may be accomplished by the following:
i. Manipulation, falsification (including forgery), or alteration of accounting records or
supporting documentation from which the financial statements are prepared.
ii. Misrepresentation in or intentional omission from, the financial statements of events,

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 transactions or other significant information.
iii. Intentional misapplication of accounting principles relating to amounts, classification,
manner of presentation, or disclosure.
Fraudulent financial reporting often involves management override of controls that otherwise may
appear to be operating effectively. Fraud can be committed by management overriding controls
using such techniques as:
i. Recording fictitious journal entries, particularly close to the end of an accounting period, to
manipulate operating results or achieve other objectives.
ii. Inappropriately adjusting assumptions and changing judgments used to estimate account
balances.
iii. Omitting, advancing or delaying recognition in the financial statements of events and
transactions that have occurred during the reporting period.
iv. Concealing, or not disclosing, facts that could affect the amounts recorded in the financial
statements.
v. Engaging in complex transactions that are structured to misrepres ent the financial position
or financial performance of the entity.
vi. Altering records and terms related to significant and unusual transactions.
2. (a) Mandatory Review Areas of Audit Committee: As per the Auditing Standards, the statutory
auditor of the Company is having an obligation to bring certain matters to the attention of those in
charge of governance, which inter alia includes aspects such as -
 Difficulties faced by them during the audit
 Disagreements with the management
 Management Letter Points
 Draft Management Representation letter to be provided by the Company in connection with
the audit.
Further, the Audit Committee is also having an obligation to mandatorily review certain areas
before providing their recommendations/inputs to the board.
Given below are the areas required to be mandatorily reviewed by the AGM in the case of listed
companies.
The Audit Committee shall mandatorily review among other points the following information as
per LODR Regulations:
(i) Management discussion and analysis of financial condition and results of operations;
(ii) Statement of significant related party transactions (as defined by the Audit Committee),
submitted by management;
(iii) Management letters / letters of internal control weaknesses issued by the statutory auditors;
(iv) Internal audit reports relating to internal control weaknesses;
The auditor should further ascertain whether the Management Discussion and Analysis report
includes discussion on the matters stipulated. Where certain deficiencies or adverse findings are
noted by the Audit Committee, the auditor will be required to see that these have been suitably
dealt with by the management in the report on corporate governance.
In the instant case, Mr. DG, Partner in M/s DG and Associates highlighted the facts such as
difficulties faced during the audit, disagreements with the management, managements letters
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 points and draft management letters to be provided by the Company in connection with the audit.
However, some of the audit committee members were not happy and as according to them audit
committee is not the forum for discussing such problems.
Contention of those audit committee members regarding problems to be sorted out between
auditors and the management is not in order as Audit Committee is required to mandatorily
review the same in accordance with Schedule II of SEBI (Listing Obligations and Disclosure
Requirements) Regulations, 2015
(b) Damages for negligence: Civil liability for mis-statement in prospectus under section 35 of the
Companies Act, 2013, includes where a person has subscribed for securities of a company acting
on any statement included, or the inclusion or omission of any matter, in the prospectus which is
misleading and has sustained any loss or damage as a consequence thereof, the company and
every person who has authorized himself to be named and is named in the prospectus as a
director of the company or has agreed to become such director either immediately or after an
interval of time; shall, without prejudice to any punishment to which any person may be liable
under section 36, be liable to pay compensation to every person who has sustained such loss or
damage.
Further. As per Section 447 of the Companies Act, 2013, without prejudice to any liability
including repayment of any debt under this Act or any other law for the time being in force, any
person who is found to be guilty of fraud [involving an amount of at least ten lakh rupees or one
percent of the turnover of the company, whichever is lower] shall be punishable with
imprisonment for a term which shall not be less than six months but which may extend to ten
years and shall also be liable to fine which shall not be less than the amount involved in the
fraud, but which may extend to three times the amount involved in the fraud . It may be noted that
where the fraud in question involves public interest, the term of imprisonment shall not be less
than three years.
Hence, in this case, Mr. K is liable for punishment even though he is currently not a director in
the company as per section 35 of the Companies Act, 2013. He shall be liable to punishment as
per section 447 discussed above as he was aware of the litigation against the company which
may cause outflow of Rs. 1 crore which may affect the demand for share application and had also
authorized himself to be named in the prospectus as director.
(c) Non Generation of UDIN: Whereas, to curb the malpractice of false/certification/attestation by
the unauthorized persons and to eradicate the practice of bogus certificates and to save various
regulators, banks, stakeholders etc. from being misled, the Council of the Institute decided to
implement an innovative concept to generate Unique Document Identification Number (UDIN)
mandatorily for all kinds of the certificates/GST and tax audit reports and other attest function in
phased manner, for which members of the ICAI were notified through the various announcements
published on the website of ICAI at the relevant times.
In exercise of the powers conferred on it under clause 1 of Part II of the Second Schedule to the
Chartered Accountants Act,1949, the Council of the Institute of Chartered Accountants of India
issued the following guidelines for information of public and necessary compliance by members
of the Institute-
A member of the Institute in practice shall generate Unique Document Identification Number
(UDIN) for all kinds of the certification, GST and Tax Audit Reports and other Audit, Ass urance
and Attestation functions undertaken/signed by him which are made mandatory from the following
dates through announcements published on the website of the ICAI-
 For all Certificates w.e.f. 1 st February,2019.
 For all GST and Tax Audit Reports w.e.f. 1st April, 2019.

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  For all other Audit, Assurance and Attestation functions, w.e.f. 1 st July, 2019.
Conclusion: UDIN will be applicable to Tax Audit Reports signed by Mr. Manipal for the financial
year 2019-20 that are filed online using Digital Signature. In case where there is no field for
mentioning UDIN on digitally signed online reports, UDIN has to be generated and communicated
to “Management” or “Those Charged with Governance” for disseminating it to the stakeholders
from their end.
Hence he will be held guilty under Clause 1 of Part II of the Second Schedule to the Chartered
Accountants Act,1949.
3. (a) Provision for Claim: No risk can be assumed by the insurer unless the premium is received.
According to section 64VB of the Insurance Act, 1938, no insurer should assume any risk in India
in respect of any insurance business on which premium is ordinarily payable in India unl ess and
until the premium payable is received or is guaranteed to be paid by such person in such manner
and within such time, as may be prescribed, or unless and until deposit of such amount, as may
be prescribed, is made in advance in the prescribed manner. The premium receipt of insurance
companies carrying on general insurance business normally arise out of three sources, viz.,
premium received from direct business, premium received from reinsurance business and the
share of co-insurance premium.
In view of the above, the insurance company is not liable to pay the claim and hence no provision
for claim is required.
(b) Reporting of Payments Exceeding ` 35,000 in Cash: Disallowance under section 40A(3) of the
Income Tax Act, 1961 is attracted if the assessee incurs any expenses in respect of which
payment or aggregate of payments made to a person in a day, otherwise than by an account
payee cheque drawn on bank or account payee draft, exceeds ` 10,000. However, in case of
payment made for plying, hiring or leasing of goods carriage, limit is ` 35,000 instead of `
10,000.
Further, as per section 40A(3A) of the Income Tax Act, 1961, where an allowance has been
made in the assessment for any year in respect of any liability incurred by the assessee for any
expenditure and subsequently during any previous year the assessee makes payment in respect
thereof, otherwise than by an account payee cheque drawn on a bank or account payee bank
draft, the payment so made shall be deemed to be the profits and gains of business or profession
and accordingly chargeable to income-tax as income of the subsequent year if the payments
made to a person in a day, exceeds ` 10,000 (` 35,000 in case of plying, hiring or leasing of
goods carriages).
However, exemption is provided under Rule 6DD having regard to nature and extent of banking
facilities available and other relevant factors.
Subsequently, under clause 21(d)(A) and 21(d)(B) of Form 3CD, the tax auditor has to scrutinize
on the basis of the examination of books of account and other relevant documents/evidence,
whether the expenditure covered under section 40A(3) and 40A(3A) respectively read with rule
6DD were made by account payee cheque drawn on a bank or account payee bank draft. If not,
the same has to be reported under abovementioned clauses.
Therefore, as per the provisions and explanations discussed above, the given cases are dealt as
under-
(i) Payments of 6 invoices of ` 5,000 each aggregating ` 30,000 made in cash on 4th July,
2020 need not be reported as the aggregate of payments do not exceed ` 35,000.
(ii) Payments of 2 invoices of ` 18,000 each made in cash on 5 th July, 2020 and 6 th July, 2020
respectively aggregating ` 36,000 need not be reported as the payment do not exceed
` 35,000 in a day.
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 (iii) Payment of ` 40,000 made in cash against an invoice for expenses booked in 2019-20 is
likely to be deemed to be the profits and gains of business or profession under section
40A(3A) of the Income Tax Act, 1961. Thus, the details of such amount needs to be
furnished under clause 21(d)(B) of Form 3CD.
(c) Failure to Disclose Material Facts: As per Clause (5) of Part I of Second Schedule to the
Chartered Accountants Act, 1949, a chartered Accountant in practice will be held liable for
misconduct if he fails to disclose a material fact known to him, which is not disclosed in the
financial statements but disclosure of which is necessary to make the financial statements not
misleading. In this case, Mr. Sheetal has come across information that a loan of ` 12 lakhs has
been taken by the company from Employees Provident Fund. This is contravention of Rules and
the said loan has not been reflected in the books of accounts. Further, this material fact has also
to be disclosed in the financial statements. The very fact that Mr. She etal has failed to disclose
this fact in his report, he is attracted by the provisions of professional misconduct under Clause
(5) of Part I of Second Schedule to the Chartered Accountants Act, 1949.
4. (a) As per Clause (xvi) of Paragraph 3 of CARO 2016, the auditor is required to report that “whether
the company is required to be registered under section 45-IA of the Reserve Bank of India Act,
1934 and if so, whether the registration has been obtained.”
The auditor is required to examine whether the company is engaged in the business which attract
the requirements of the registration. The registration is required where the financing activity is a
principal business of the company. The RBI restrict companies from carrying on the business of a
non-banking financial institution without obtaining the certificate of registration.
Audit Procedures and Reporting:
(i) The auditor should examine the transactions of the company with relation to the activities
covered under the RBI Act and directions related to the Non-Banking Financial Companies.
(ii) The financial statements should be examined to ascertain whether company’s financial
assets constitute more than 50 per cent of the total assets and income from financial assets
constitute more than 50 per cent of the gross income.
(iii) Whether the company has net owned funds as required for the registration as NBFC.
(iv) Whether the company has obtained the registration as NBFC, if not, the reasons should be
sought from the management and documented.
(v) The auditor should report incorporating the following:-
(1) Whether the registration is required under section 45-IA of the RBI Act, 1934.
(2) If so, whether it has obtained the registration.
(3) If the registration not obtained, reasons thereof.
In the instant case Rishabh Finance Ltd. is a Non Banking Finance Company and was in the
business of accepting public deposits and giving loans since 2015. The company was having net
owned funds of ` 1,50,00,000/-(one crore fifty lakhs) which is less in comparison to the
prescribed limit i.e. 2 crore rupees and was also not having registration certificate from RBI
(though applied for it on 30 th March 2020). The auditor is required to report on the same as per
Clause (xvi) of Paragraph 3 of CARO 2016.
(b) A comparison between the Management Audit & the Operational Audit is as follows:
Management audit is concerned with the “Quality of managing”, whereas operational audit
focuses on the “Quality of operations”.

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 Management audit is the “Audit of management” while the operational audit is the “Audit for the
management”. The focus of Management Audit is on “Quality of Decision Making” rather than the
effectiveness or efficiency of operations.
The basic difference between the two audits, then, is not in method, but in the level of appraisal.
In a management audit, the auditor is to make his tests to the level of top management, its
formulation of objectives, plans and policies and its decision making. It is not that he just verifies
the operations of control and procedures and fulfilment of plans in conformity with the prescribed
policies.
Since it is not the Management’s Decisions that are creating the operational bottlenecks. The
Purchase Policy and Procedure seem to be in place, the missing part is the operati onal
implementation by the process employees. Therefore, the Operational Audit is recommended in
this case.
(c) Allowing a Member Not Being a Partner to Sign Certificate: As per Clause (12) of Part I of the
First Schedule to the Chartered Accountants Act, 1949, a Chartered Accountant in practice is
deemed to be guilty of professional misconduct “if he allows a person not being a member of the
Institute in practice or a member not being his partner to sign on his behalf or on behalf of his
firm, any balance sheet, profit and loss account, report or financial statements”.
In this case, CA. Intelligent allowed his assistant who is not a partner but a member of the
Institute of Chartered Accountants of India to sign stock certificate on his behalf and thereby
commits misconduct.
Conclusion: Thus, CA. Intelligent is guilty of professional misconduct under Clause (12) of Part I
of First Schedule to the Chartered Accountants Act, 1949.
5. (a)
Area of Focus Suggested Audit Procedures
Government Guaranteed  If government guaranteed advance becomes NPA,
Advances then for the purpose of income recognition, interest on
such advance should not to be taken to income unless
interest is realized. However, for purpose of asset
classification, credit facility backed by Central
Government Guarantee, though overdue, can be
treated as NPA only when the Central Government
repudiates its guarantee, when invoked. This
exception is not applicable for State Government
Guaranteed advances, where advance is to be
considered NPA if it remains overdue for more than 90
days.
 In case the bank has not invoked the Central
Government Guarantee though the amount is overdue
for long, the reasoning for the same should be taken
and duly reported in LFAR.
Agricultural Advances  Ensure that NPA norms have been applied in
accordance with the crop season determined by the
State Level Bankers’ Committee in each State.
Depending upon the duration of crops – short term/
long term - raised by an agriculturist, the NPA norms
would also be made applicable to agricultural term
loans availed of by them. Also ensure that these
norms are made applicable to all direct agricultural

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 advances listed in Master Circular on lending to
priority sector.
 In respect of agricultural loans, other than those
specified in the circular, ensure that identification of
NPAs has been done on the same basis as non-
agricultural advances.
Drawing Power Calculation  Ensure that the drawing power is calculated as per the
extant guidelines (i.e. the Credit Policy of the Bank)
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.
 The stock audit should be carried out by the bank for
all accounts having funded exposure of more than
stipulated limit. 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.
The drawing power needs to be calculated carefully in case of
working capital advances to companies engaged in
construction business. The valuation of work in progress
should be ensured in consistent and proper manner. It also
needs to be ensured that mobilization advance being
received by the contractors is reduced while calculating
drawing power.
Limits not reviewed Accounts where regular/ad hoc limits are not reviewed within
180 days from the due date/date of ad hoc sanction, should
be considered as NPA. Auditors should also ensure that the
ad hoc/short reviews are not done on repetitive basis. In such
cases, auditor can consider the classification of account
based on other parameters and functioning of the account.
(b) Cost Audit Rules not to apply in certain cases: The requirement for cost audit shall not be
applicable to a company whose revenue from exports, in foreign exchange, exceeds seve nty-five
per cent of its total revenue (as per Rule 3 of the Companies (Cost Records and Audit) Rules,
2014).
In the instant case, Gem Ltd. is an exporter of precious and semi-precious stones and the
turnover of the company is rupees 150 crore out of which rupees 105 crore i.e. 70% is from
export business and remaining rupees 45 crore i.e. 30% from domestic sales.
Thus, opinion of director is not tenable as revenue from exports in foreign ex changes is below
prescribed limit. Therefore, cost audit is applicable on Gem Ltd. as per Rule 3 of the Companies
(Cost Records and Audit) Rules, 2014. Gem Ltd. has to appoint cost auditor to get the cost
accounts of the company audited.
(c) (i) As per clause (i) (c) of para 3 of CARO 2016 the auditor is required to report, “whether the
title deeds of immovable properties are held in the name of the company. If not, provide the
details thereof.”
In the present case, the Company has office along with freehold land in Pune. Though
company has paid its purchase cost in full however, this property is pending to be registered
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 in the name of the company i.e. title deed is not in the name of Company since 2006.
Therefore, the auditor is required to report the same in accordance with clause (i)(c) of para
3 of CARO 2016.
The reporting under this clause, where the title deeds of the immovable property are not
held in the name of the Company, may be made incorporating following details, in the form
of a table or otherwise in case of land:-
 total number of cases,
 whether leasehold / freehold,
 gross block and net block, (as at Balance Sheet date), and
 remarks, if any.
(ii) As per clause Clause (x) of para 3 of CARO 2016 the auditor is required to report, “whether
any fraud by the company or any fraud on the Company by its officers or employees has
been noticed or reported during the year; If yes, the nature and the amount involved is to be
indicated.”
In the instant case, a fraud has been identified in recruitment of employees by the HR
Department wherein certain sums were alleged to have been taken as kickback from the
company of amounting rupees approx. 13.50 lakh. The auditor is required to report on the
same in accordance with clause (x) of para 3 of CARO 2016.
6. (a) Determining Audit Criteria - Audit criteria are the standards used to determine whether a
program meets or exceeds expectations. It provides a context for understanding the results of the
audit. Audit criteria are reasonable and attainable standards of performance against which
economy, efficiency and effectiveness of programmes and activities can be assessed.
The audit criteria may be sought to be obtained from the following sources:
(i) procedure manuals of the entity.
(ii) policies, standards, directives and guidelines.
(iii) criteria used by the same entity or other entities in similar activities or programmes.
(iv) independent expert opinion and know how.
(v) new or established scientific knowledge and other reliable information.
(vi) general management and subject matter literature and research papers.
(b) A parent which presents consolidated financial statements is required to consolidate all its
components in the consolidated financial statements other than those for which exceptions have
been provided in the relevant accounting standards under the applicable financial reporting
framework.
The auditor should obtain a listing of all the components included in the consolidated financial
statements and review the information provided by the management of the parent identifying the
components. The auditor should verify that all the components have been included in the
consolidated financial statements unless these components meet criterion for exclusion.
In the given case, Superb Ltd has provided the list of components included in the consolidated
financial statements (CFSs). CA V shall verify that all the components have been included in the
CFSs.
Further, in respect of completeness of this information, CA V should perform the following
procedures:
i. review his working papers for the prior years for the known components;

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 ii. review the parent’s procedures for identification of various components;
iii. make inquiries of the management to identify any new components or any component which
goes out of consolidated financial statements;
iv. review the investments of parent as well as its components to determine the shareholding in
other entities;
v. review the joint ventures and joint arrangements as applicable;
vi. review the other arrangements entered into by the parent that have not been included in the
consolidated financial statements of the group;
vii. review the statutory records maintained by the parent, for example registers under section
186, 190 of the Companies Act, 2013;
viii. Identify the changes in the shareholding that might have taken place during the reporting
period.
(c) Indications of Non-Compliance with Laws and Regulations: When the auditor becomes
aware of the existence of, or information about, the following matters, it may be an indication of
non-compliance with laws and regulations, possible areas or aspects to look out for forming an
opinion are:
 Investigations by regulatory organisations and government departments or payment of fines
or penalties.
 Payments for unspecified services or loans to consultants, related parties, employees or
government employees.
 Sales commissions or agent’s fees that appear excessive in relation to those ordinarily paid
by the entity or in its industry or to the services actually received.
 Purchasing at prices significantly above or below market price.
 Unusual payments in cash, purchases in the form of cashiers’ cheques payable to bearer or
transfers to numbered bank accounts.
 Unusual payments towards legal and retainership fees.
 Unusual transactions with companies registered in tax havens.
 Payments for goods or services made other than to the country from which the goods or
services originated.
 Payments without proper exchange control documentation.
 Existence of an information system which fails, whether by design or by accident, to provide
an adequate audit trail or sufficient evidence.
 Unauthorised transactions or improperly recorded transactions.
 Adverse media comment.
Or
(c) Eligibility to be a Reviewer:
1. A Peer Reviewer shall: -
(a) Shall be a member in practice with at least 10 years of experience for Level I entities
and 7 years of experience for Level II entities.
(b) In case a member has moved from industry to practice and is currently in practice he
should have at least 15 years of experience in industry and at least 5 years’
experience in practice for Level I entities and an experience of at least 10 years in
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 industry and at least 3 years’ experience in practice, for Level II entities.
(c) Should have undergone the requisite training and cleared the requisite test for Peer
Review as prescribed by the Board.
(d) Should have conducted audit of Level I Entities for at least 7 years or got his entity
audited for at least 7 years which should be a Level I entity to be eligible for
conducting Peer Review of Level I Entities.
2. A member on being appointed as a Reviewer shall be required to -
(a) furnish a declaration as prescribed by the Board, at the time of acceptance of Peer
Review appointment.
(b) sign a Declaration of Confidentiality as per Annexure A to this Statement.
3. A member shall not be eligible for being appointed as a Reviewer, if -
(i) any disciplinary action / proceeding is pending against him
(ii) he has been found guilty of professional or other misconduct by the Council or the
Board of Discipline or the Disciplinary Committee at any time
(iii) he has been convicted by a competent court whether within or outside India, of an
offence involving moral turpitude and punishable with imprisonment
(iv) he or his partners or personnel has any obligation or conflict of interest in the
Practice Unit.
4. A Reviewer shall not accept any professional assignment from the Practice Unit for a period
two years from the date of appointment. Further, he should not have accepted any
professional assignment from the Practice Unit for a period of two years before the date of
appointment as reviewer of that Practice Unit.

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 Test Series : November, 2021
MOCK TEST PAPER -2
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
All MCQs are compulsory
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100
DIVISION A – MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. Kinfin Private Limited had taken overdrafts from three banks (Bank A, Bank B and Bank C) with a limit
of ` 40 lacs each against the security of fixed deposit it had with those banks and an unsecured
overdraft from a financial institution (Financial Institution X) of ` 36 lacs.
As on 30th October 2019, the management used the overdraft fully of the A & C bank to the tune of
` 40 lacs each. However, the overdraft of second bank (Bank B) was not used until 31 st December,
2020. On 31st December, 2020, Management took overdraft of B bank and very next day management
paid the overdraft of C bank as the rate of interest charged by Bank C on overdraft facility was 15%
whereas, the rate of interest charged by Bank B was 12%.
As at 31st March 2021 only overdraft of Bank A and Bank B were used fully, overdrafts of Bank C and
Financial Institution X were unused. The paid-up capital and reserves of the company as at that date
was ` 85 lacs and its revenue for the financial year ended on 31st March 2021 was ` 8.95 crores. The
management of the company is of the opinion that CARO, 2016 is not applicable to it because
turnover and paid-up capital were within the limits prescribed. With respect to the loans, management
was of the view that the total outstanding as at 31 March 2021 is less than the prescribed limit. The
company further contended that loan limit is to be reckoned per bank or financial institution and not
cumulatively. Comment.
(a) The CARO 2016 is applicable to the company as the turnover of the company exceeds the
prescribed limit.
(b) The CARO 2016 is not applicable to the company as the turnover of the company does not
exceeds the prescribed limit.
(c) The CARO 2016 is not applicable to the company as the borrowing of the company does not
exceeds the prescribed limit.
(d) The CARO 2016 is applicable to the company as the borrowing of the company exceeds the
prescribed limit.
2 SuperFin Rollers Ltd. has declared dividend of 10% on 22 nd April, 2021, for the year ended 31 March
2021. The company did not pay or transfer the dividend declared to its 4 shareholders (Mr Sunil, Mr
Mukesh, Mr Rakesh & Mr Haresh) who were entitled to receive the dividend. Upon inquiry by the
auditor regarding the reason, the Executive Director Mr. Ram provided that there is a legal dispute
regarding the right to receive the dividend for these four shareholders. Executive Director Mr. Ram
decided not to take any further step to pay the dividend till the time the disputes were not resolved. In
the light of the same, kindly guide the auditor with respect to the penalty in the current case as per
section 127 of the Companies Act.
(a) Executive Director Mr. Ram shall be liable shall be liable to pay simple interest at the rate of
twelve per cent per annum during the period for which such default continues.
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 (b) Executive Director Mr. Ram shall be liable to pay simple interest at the rate of eighteen per cent
per annum during the period for which such default continues.
(c) Executive Director Mr. Ram punishable with imprisonment which may extend to two years and
with fine which shall not be less than one thousand rupees for every day during which such
default continues.
(d) Executive Director Mr. Ram is not liable for punishment as there is no offence under section 127
section of the Act.
3. Ms Kee, the engagement partner of Best Hospitality Limited’s audit team did not perform the
necessary communication with those charged with governance over some critical issues identified
during the course of the audit. Moreover, when management identified that the engagement partner
has not communicated to those charged with governance of the Best Hospitality Limited, they also
chose not to communicate. Upon identification of this issue, the personnel charged with governance
inquired with management and auditors as to why there was no communication of the critical matters
to them.
Upon such inquiry, Engagement Partner contended that it was the responsibility of Management to
communicate first, then only the audit team should communicate. However, Management was of the
view that they are not liable to communicate to those charged with governance. As an Engagement
Quality Control Reviewer, what will be your opinion?
(a) The auditor is responsible for communicating matters required by SA 260 to those charged with
governance. Also, management has a responsibility to communicate matters of governance
interest to those charged with governance. Communication by the auditor does not relieve
management of its responsibility.
(b) SAs are not applicable to the management and hence the management was not responsible for
communicating the same to those charged with governance. Also, as per SA 260, Auditor can
only communicate when management has already informed those charged with governance
about the matters. Auditors cannot communicate first without management’s communication.
(c) Communication by management with those charged with governance of matters that the auditor
is required to communicate does relieve the auditor of the responsibility to also communicate
them if the management has already communicated. Hence, in the current case Management
should have communicated as it was their responsibility.
(d) SA 260 requires the auditor to perform procedures specifically to identify any other matters to
communicate with those charged with governance which includes matters already communicated
by the management of non-material nature. Hence, it was the responsibility of the Auditor to
communicate.
4. XYZ & Associate Chartered Accountants were appointed auditors for Weknow LLP. The engagement
manager of the audit team, while designing the auditor response to assessed risk, concluded that
there are no requirements of the applicable financial reporting framework for disclosing the related
party transaction in the Firm’s Financial Statement and hence the audit team is not required to perform
any audit procedures with respect to identification and disclosure of related party relationship and
transaction in financial statement. You as an engagement partner guide the engagement manager by
selecting the appropriate response from below:
(a) Even if the applicable financial reporting framework establishes minimal or no related party
requirements, the auditor nevertheless needs to obtain an understanding of the entity’s related
party relationships and transactions and should sufficiently be able to conclude whether the
financial statements, insofar as they are affected by those relationships and transactions achieve
a true and fair presentation and are not misleading.

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 (b) If the applicable financial reporting framework establishes minimal or no related party
requirements, then the auditor is not required to obtain an understanding of the entity’s related
party relationships and transactions.
(c) Even if the applicable financial reporting framework establishes minimal or no related party
requirements, the auditor nevertheless needs to obtain an understanding of the entity’s related
party relationships and transactions and should sufficiently be able to conclude whether the
financial statements, as a whole, are free from all the material related party transactions.
(d) Because related parties are not independent of each other, hence auditor can obtain the written
representation from the Related Party’s auditor regarding the accuracy and completeness of the
related party transactions disclosed in Firm’s Financial Statement. This should only be carried
where the applicable financial reporting framework establishes minimal or no related party
requirements.
5. 50:50 test determination is popularly used in :
(a) Banking Company.
(b) Insurance Company.
(c) NBFC Company.
(d) Stock Trading Company.
6. Description of each key audit matter in the “key audit matters section” needs to cover following
aspects:
(a) Reference to related disclosures, if any, in the financial statements.
(b) Explanation on the matter given by management.
(c) How the matter was addressed in the audit.
(d) Why the matter was considered to be one of most significance in the audit and therefore
determined to be a key audit matter.
7. What is the difference between management audit and operational audit?
(a) Management audit is concerned with ‘Quality of Operations’ and it is ‘Audit for Management’,
whereas Operational audit is concerned with ‘Quality of managing’ and it is ‘Audit of
Management’.
(b) Management audit is concerned with ‘Quality of Managing’ and it is ‘Audit of Management’,
whereas Operational audit is concerned with ‘Quality of Operations’ and it is ‘Audit for
Management’.
(c) Management audit is concerned with ‘Quality of Managing’ and it is ‘Audit for Management’,
whereas Operational audit is concerned with ‘Quality of Operations’ and it is ‘Audit of
Management’.
(d) Management audit is concerned with ‘Quality of Operations’ and it is ‘Audit of Management’,
whereas Operational audit is concerned with ‘Quality of managing’ and it is ‘Audit for
Management’.
8. Andromeda Limited issued a prospectus in respect of an IPO which had the auditor’s report on the
financial statements for the year ended 31 st March, 2021. The issue was fully subscribed. During this
year, there was an abnormal rise in the profits of the company for which it was found later that it was
because of Dealer dumping technique used by the company to inflate the sales. Upon further
investigation it was identified that the Whole-time director and other top officials of the company were
involved in the scheme. On discovery of this fact, the company offered to refund all moneys to the
subscribers of the shares and sued the auditors for the damages alleging that the auditors failed to
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 examine and ascertain any satisfactory explanation for steep increase in the rate of profits and related
accounts.
The company emphasized that the auditor should have proceeded with suspicion and should not have
followed selected verification. In response, the auditors were able to prove that they found internal
controls to be satisfactory based on the samples which were selected for testing design and operating
effectiveness and did not find any circumstance to arouse suspicion. Further, they were able to prove
to the satisfaction that the sampling performed for substantive procedures was also appropriate as per
sampling guidelines and was sufficient to reflect the population.
The company was not able to prove that auditors were negligent in performance of their duties. You
are required to advise on the same.
(a) The stand of the company was correct in this case. Considering the nature of the work, the
Auditors should have proceeded with suspicion and should not have followed selected
verification.
(b) The approach of the auditors appears to be reasonable in this case. The auditors found internal
controls to be satisfactory and also did not find any circumstance to arouse suspicion and hence
they performed their procedures on the basis of selected verification.
(c) In the given case, the auditors should have involved various experts along with them to help them
on their audit procedures. Prospectus is one area wherein management involves various experts
and hence the auditors should also have done that. In the given case, by not involving the
experts the auditors did not perform their job in a professional manner. If they had involved
experts like forensic experts etc, the manipulation could have been detected. Hence the auditors
should be held liable.
(d) In case of such type of engagements, the focus is always on the management controls. If the
controls are found to be effective, then an auditor can never be held liable in respect of any
deficiency or misstatement or fraud.
9. Mr Q, a peer reviewer appointed for the firm ABC & Co. for the period under review starting from 2017-
18 to 2019-2020 decided to select 5 samples of audit engagement. All samples were appropriate, and
no deviations or issues were identified in the review with respect to those samples. Post that, Mr Q
reviewed the training & development program for the staff, article assistant and other assistant and he
found that the training and development program were not appropriate and rather outdated. The staff,
article assistant and other assistant placed on the audits were not trained related to the specific
matters of the industries to which the audit client belonged. As a result, the peer reviewer included a
comment in the preliminary report regarding training programmes for staff (including articled assistant
and other audit assistants) concerned with assurance functions, including availability of appropriate
infrastructure. Upon receiving such preliminary report, the Practice Unit raised concerns that the said
comment of peer reviewer is related to the matter which is out of scope of the peer review.
Kindly decide whether the comment of peer reviewer on the training programmes for staff (including
articled assistants and other audit assistants) concerned with assurance functions is within the scope
of peer review or not?
(a) The Review shall only cover Compliance with Technical, Professional and Ethical Standards,
Quality of reporting, Systems and procedures for carrying out assurance services, Compliance
with directions and / or guidelines issued by the Council to the Members and Compliance with
directions and / or guidelines issued by the Council in relating to article assistants and / or audit
assistants. Hence the comment of peer reviewer on the training programmes for staff (including
articled and other assistants) concerned with assurance functions is not within the scope of peer
review.

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 (b) The Statement defines the scope of peer review which revolves around compliance with
technical, ethical and professional standards; quality of reporting; office systems and procedures
with regard to compliance of assurance engagements; and, training programmes for staff
including articled and audit assistants involved in assurance engagements. Hence the comment
of peer reviewer on the training programmes for staff (including articled and other assistants)
concerned with assurance functions is within the scope of peer review.
(c) The Statement of Peer Review makes it clear that the peer review, "does not seek to redefine the
scope and authority of the Technical, Professional and Ethical Standards specified by the Council
but seeks to enforce them within the parameters prescribed by the Technical Standards but only
seeks to ensure that they are implemented, both in letter and spirit. Therefore, it is evident that
the scope of peer review is restricted to the compliance Technical, Professional and Ethical
Standards
(d) The scope of Peer Review is decided by the Practice Unit and Peer Reviewer Mutually and hence
if the Practice Unit is contending that it is out of scope then it should be considered as out of
scope.
10. Mr. Chitragupta Bakutra, a Chartered Accountant is a sole proprietor of Bakutra & Co. which has been
appointed as a statutory auditor of Kraftic Ltd. from F.Y. 2020-21, for a term of 5 years. Mr.
Chitragupta is a director simplicitor of Kalavitur Ltd. which acquired 55% shares of Kraftic Ltd., for the
first time, on 25th May, 2020. Mr. Chitragupta’s term as a director of Kalavitur Ltd. got expired on 31st
March, 2021 and he was not re-appointed. Kalavitur Ltd. made a proposal to Mr. Chitragupta for
appointing Bakutra & Co. as its statutory auditor from F.Y. 2020-21, for a term of 5 years, which was
accepted by Mr. Chitragupta. Is there any violation of the Code of Ethics by Mr. Chitragupta Bakutra?
(a) Yes, as he cannot be continued to be director of a company, the subsidiary of which he is an
auditor and also he cannot accept appointment of auditor of a Kalavitur Ltd. without finishing of
the cooling period for the same.
(b) There is no bar in being a director simplicitor of a company, the subsidiary of which the person is
an auditor. However, by accepting appointment as an auditor of Kalavitur Ltd. without finishing of
the cooling period for the same, he has violated the Code of Ethics.
(c) Yes, as he cannot be continued to be director of a company, the subsidiary of which he is an
auditor. However, there is no bar in becoming an auditor of a company of which a person has
been its director.
(d) There is no bar in being a director simplicitor of a company, the subsidiary of which the person is
an auditor and also there is no requirement of following the cooling period by a director
simplicitor who on expiry of its term, wants to become auditor of such company.
(10 x 1 = 10 Marks)
Questions (11-20) carry 2 Marks each
MCQ 11. – 15.
Integrated Case Scenario 1
Mr. Sunil Verma is conducting the statutory audit of Upshaant Ltd., an unlisted public company, for F.Y.
2020-21 as an engagement partner on behalf of Verma & Associates having six partners out of which four
are chartered accountants and two are advocates. This was the third consecutive year of audit by the said
audit firm of Upshaant Ltd. For current year’s audit, a new audit engagement letter was sent by the audit
firm to the company.
Upshaant Ltd. changed its employee remuneration policy from 1st April, 2020, to provide for 12%
contribution to provident fund on leave encashment also. As per the leave encashment policy, the
employees can either utilize or encash it. As at 31st March, 2021, the company obtained an actuarial
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valuation for leave encashment liability. As and when the employees availed leave encashment, the
provident fund contribution was made. The company was not sure whether the employees will avail leave
encashment or utilize it and obtained consultancy of Mr. Sunil for the correct accounting treatment to be
given as per the relevant IND-AS applicable.
Because of the inherent consistency of IT processing, Mr. Sunil did not consider it necessary to increase
the extent of testing of a relevant control in inventory handling and maintenance system of the company.
Further, for this year’s audit, Mr. Sunil observed that controls over sales order processing have been
weakened due to change in hierarchy of organization which he also discussed with the management of the
company through a letter of weakness.
Mr. Sunil, based on the audit evidence available, narrowed his range for the purpose of evaluating the
management’s point estimate on particular items which required accounting estimates to be made as
disclosed in the balance sheet of the company.
The financial statements of Upshaant Ltd. for F.Y. 2020-21 was required to be amended due to occurrence
of subsequent events after the balance sheet date because of which the audit report was also amended by
Verma & Associates which indicated that the auditor’s procedures on subsequent events were restricted
solely to the amendment of the financial statements described in the relevant note to the financial
statements.
Apart from receiving his remuneration as a partner in Verma & Associates, Mr. Sunil also received a sum of
Rs. 90,000 as renewal commission on the Life Insurance Agency License held by him for the said purpose.
On the basis of the abovementioned facts, you are required to answer the following MCQs:
Multiple Choice Questions (5 questions of 2 Marks each):
11. For what type of control in inventory handling and maintenance system, Mr. Sunil would have not
considered it necessary to increase the extent of testing?
(a) Application control
(b) Automated control
(c) Process Level control
(d) Entity Level control
12. Whether Mr. Sunil is permitted to hold license as a life insurance agent?
(a) Yes, general permission has been granted by the Council of the ICAI for the said purpose.
(b) Yes, if specific permission has been obtained by Mr. Sunil for the same.
(c) No, it is not permitted for a chartered accountant to do so as per recent Decisions of Ethical
Standards Board.
(d) License as a life insurance agent can be held by CA not for the purpose of getting renewal
commission but for some other purpose that does not amount to degrading of the profession.
13. Till what extent ordinarily, Mr. Sunil would have narrowed his range for evaluating the management’s
point estimate for the particular items disclosed in the balance sheet?
(a) To be equal to or less than materiality in order to cover all reasonable outcomes.
(b) To be equal to or less than performance materiality in order to cover all reasonable outcomes.
(c) To be equal to or less than materiality in order to cover all possible outcomes.
(d) To be equal to or less than performance materiality in order to cover all possible outcomes.

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14. Whether due to amendment in audit report, its date need to be changed and what other alternative
was available to Verma & Associates with respect to such amendment in financial statements?
(a) Date of audit report will be changed. Alternative available was to provide new or amended audit
report by including a Key Matters paragraph.
(b) Original Date of audit report will remain unchanged and additional date will be included.
Alternative available was to provide new or amended audit report by extending the Basis of
opinion paragraph.
(c) Date of audit report will be changed. Alternative available was to provide new or amended audit
report by including an Emphasis of Matter paragraph or Other Matter(s) paragraph.
(d) Original Date of audit report will remain unchanged and additional date will be included.
Alternative available was to provide new or amended audit report by including an Emphasis of
Matter paragraph or Other Matter(s) paragraph.
15. What advise Mr. Sunil would have given for the accounting treatment of leave encashment liability?
(a) Provision should be created each time when the company makes provident fund contribution.
(b) Provision should not be created because as and when the employees availed leave encashment,
the provident fund contribution was made.
(c) Full provision should be provided by the company for liability with respect to 12% PF on amount
of leave encashment as per the actuarial valuation.
(d) Provision should not be created as there was uncertainty that whether the employees will avail
leave encashment or utilize it.
MCQ 16. -20.
Integrated Case Scenario 2
Mr. Tushar Jalani is a CA as well as CMA, who is working as an internal auditor in Gomez Realty Ltd. on
full-time employment basis. In his visiting card, he has mentioned that he is a Chartered Accountant as well
as Cost Accountant. During the month of May, 2020, he was approached by the director of the company,
Mr. Kunal Surpan, to write his personal books of accounts from F.Y. 2020-21 onwards and also to file his
Income Tax Return which was accepted by Mr. Tushar.
Mr. Danish Bhadra, the partner of Badhra & Co., a CA firm, was appointed as an expert, during F.Y. 2020-
21, by giving a written consent to Gomez Realty Ltd. with respect to issue of prospectus by the company
whereby he provided a report on the valuation of the company and one person who had subscribed to the
securities of the company alleged that he had suffered a loss because of omission of a matter in the
valuation report provided in the prospectus. Mr. Danish had not withdrawn his consent at any time as an
expert and he firmly believed that it was a correct and fair representation of the statement in the valuation
report. The fees charged by Mr. Danish for the said assignment was on the basis % of valuation.
Vedya & Co. was appointed as the statutory auditor of Gomez Realty Ltd. from F.Y. 2018-19 onwards for
five consecutive years. However, during F.Y. 2020-21, it did not offer itself for reappointment as an auditor
of such company owing to certain professional reasons and communication with respect to the same was
made to the relevant authorities.
Kesar & Associates was then appointed as the statutory auditor of Gomez Realty Ltd. for F.Y. 2020-21 and
Mr. Raj Kesar was appointed as the engagement partner for the said assignment. Brother of one of the
partners of the said firm holds 18% share in Badhra & Co., since 2017, and who is also a chartered
accountant by profession.
Mr. Raj decided to take direct assistance from Mr. Tushar in accordance with the procedure as prescribed
in SA 610 and in that connection he inquired about the fraud risks in the organization from him. Prior to

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taking such direct assistance, Mr. Raj communicated the same to the relevant authority in the company and
also that he directed, supervised and reviewed the work performed by Mr. Tushar.
On the basis of the abovementioned facts, you are required to answer the following MCQs:
Multiple Choice Questions (5 questions of 2 Marks each):
16. Whether Mr. Tushar can be held guilty under Part-I of First Schedule to the CA Act, 1949?
(a) No, as he is not a member in practice.
(b) Yes, as per Clause (7) he can be held guilty.
(c) No, as it is permitted for member to mention such designations in his visiting card.
(d) No, provided he has been permitted to do so.
17. Whether any civil liability can be imposed upon Mr. Danish?
(a) No, if he is able to prove what he is contending.
(b) Yes, as he had not withdrawn his consent before delivery of a copy of the prospectus for
registration or, to the defendant's knowledge, before allotment thereunder.
(c) Yes, provided such omission of a matter in the valuation report was misleading in nature.
(d) Yes, as the omission of a matter was in the valuation report prepared by the expert himself
irrespective of whether the consent was withdrawn or not.
18. Whether it was appropriate for Mr. Raj to take direct assistance from Mr. Tushar for the matter as
aforesaid?
(a) No, as it tantamount to taking direct assistance of internal auditor for making significant
judgments in the audit.
(b) Yes, as inquiry is allowed to be done and having a discussion with respect to the said matter is
not appropriate.
(c) No, as it tantamount to taking direct assistance of internal auditor relating to higher assessed
risks of material misstatement.
(d) No, as it tantamount to taking direct assistance of internal auditor relating to decisions the
external auditor makes in accordance with SA 610 regarding the internal audit function and the
use of its work or direct assistance.
19. In accordance with SA 610, with what Standards on Auditing, respectively, Mr. Raj would have made
communication for taking direct assistance of Mr. Tushar and also directed, supervised and reviewed
the work performed by him?
(a) As per SA 580 and SA 500 respectively.
(b) As per SA 260 and SA 240 respectively.
(c) As per SA 265 and SA 220 respectively.
(d) As per SA 260 and SA 220 respectively.
20. To which authorities, Vedya & Co. would have made the communication and whether there was any
obligation on part of Kesar & Associates with respect to such communication made?
(a) Vedya & Co. would have made the communication to the ICAI and to the management for
circulation among the shareholders of Gomez Realty Ltd. However, it was not obligatory for
Kesar & Associates to obtain a copy of such communication before accepting the appointment.
(b) Vedya & Co. would have made the communication to the ICAI only and it was obligatory for
Kesar & Associates to obtain a copy of such communication before accepting the appointment.

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 (c) Vedya & Co. would have made the communication to BOD of Gomez Realty Ltd. and the ICAI
and it was obligatory for Kesar & Associates to obtain a copy of such communication before
accepting the appointment.
(d) Vedya & Co. would have made the communication to the ICAI only and it was obligatory for
Kesar & Associates to obtain a copy of such communication before making communication with
the outgoing auditor relating to its appointment. (10 x 2 = 20 Marks)

Division B- Descriptive Questions-70 Marks

Question No. 1 is compulsory.
Attempt any four questions from the Rest.

1. (a) ZED Limited is availing the services of MEA Private Limited for its payroll operations. Payroll
cost accounts for 65% of total cost for ZED Limited. MEA Limited has provided the type 2 report
as specified under SA 402 for its description, design and operating effectiveness of control.
MEA Private Limited has also outsourced a material part of payroll operation M/s MPS &
Associates in such a way that M/s MPS & Associates is sub-service organization to ZED Limited.
The Type 2 report which was provided by MEA Private Limited was based on carve-out method
as specified under SA 402.
CA Vasu while reviewing the unmodified audit report drafted by his assistant found that, a
reference has been made to the work done by the service auditor. CA Vasu hence asked his
assistant to remove such reference and modify report accordingly.
Comment whether CA Vasu is correct in removing the reference of the work done by service
auditor? (5 Marks)
(b) Sudharma Limited is a listed company having its operation across India. Sudharma Limited appointed
Mr. S, Mr. D and Mr. M, as its joint auditors for the year 2019-20. After making sure that all of them are
qualified to be appointed as statutory auditor, Sudharma Limited issued engagement letter to all of
them. But Mr. S was not clear on some points, so he requested Sudharma Limited to slightly change
the terms of his engagement. This change will not impact the ultimate opinion on the financial
statement. The engagement letter contains the details on objective and scope of audit, responsibilities
of auditor and identification of framework applicable. It also contains the reference to expected form
and content of report from all three joint auditors. In your opinion what was the discrepancy in the
Audit engagement letter issued by Sudharma Limited? (4 Marks)
(c) OM Ltd. is a company engaged in the business of manufacture of spare parts. Shanti & Associates
are the statutory auditors of the company for the FY 2020-21. During the course of audit, CA Shanti
noticed that the company had a major customer, namely, Korean Mart from South Korea. Owing to an
outbreak of war and subsequent destruction leading to government ban on import and export in South
Korea, the demand from Korean Mart for the products of OM Ltd. ended for an unforeseeable time
period. When discussed with the management, CA Shanti was told that the company is in the process
of identifying new customers for their products. CA Shanti understands that though the use of going
concern assumption is appropriate but a material uncertainty exists with respect to the identification of
new customers. This fact is duly reflected in the financial statements of OM Ltd. for the FY 2020-21.
How should CA Shanti deal with this matter in the auditor’s report for the FY 2020-21 in accordance
with relevant Standard on Auditing? (5 Marks)
2. (a) Mr. Bharat was appointed as statutory auditor of N Limited and O Limited. Both the Companies
were having their base in Mumbai they had recently listed their shares on the Stock Exchange.
For the financial year 2020-21, Mr. Bharat had signed limited review reports for each quarter, till
the quarter ended 31st December 2020 for both the companies. Owing to his personal
commitments and increased workload, he tendered his resignation to N Limited on 30th January
9

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 2021 and asked the Company to appoint another auditor to issue audit report for the remaining
quarter and the FY 2020-21 as a whole. But the management of the Company did not accept the
same.
Mr. Bharat continued to as act as auditor for O limited. During the 1st week of March 2021, Mrs. D
(wife of Mr. Bharat) had borrowed a sum of Rs. 5.85 lakh from the Company for her personal use.
Having come to know about this, Mr. Bharat immediately informed the management that he had
been disqualified to act as auditor and told them that he won ’t issue audit report for last quarter.
But management of the Company argued that it’s the legal responsibility of Mr. Bharat to do the
same.
Whether contention of management of N Limited and O Limited is justified in asking Mr. Bharat to
issue audit report for the last quarter and the FY 2020-21 as a whole, despite his resignation?
Please comment on the above. (5 Marks)
(b) The financial statements of Prabhu Ltd. as on March 31, 2020 are to be prepared under Division
Il of Schedule III to the Companies Act, 2013. Comment on the disclosure compliances for
Prabhu Ltd. from the following information in the financial statements which are required to be
drawn up in compliance with Ind AS.
(i) Property, Plant and Equipment include ` 2.50 crore for a boiler-plant under construction.
(ii) Cash and cash equivalents include ` 1.25 crore deposited with a nationalized bank on
31st March, 2020 for 18 months. It is shown under current assets.
(iii) Non-current assets include under caption "Biological assets other than bearer Plants" a sum
of ` 1.50 crore being cost of cultivation for bringing to yield level, the cashewnut trees
whose yield period, according to estimate shall not be less than 10 years. (4 Marks)
(c) C.A. Bahubali is Special Executive Magistrate. He also took over as the executive chairman of
Software Company on 1.4.2021. He is also a leading income tax practitioner and consultant for
derivative products. He resides in Chennai near to the ION commodity stock exchange and does
trading in commodity derivatives. Every day, he invests nearly 38% of his time to settle the commodity
transactions. He has not taken any permission for becoming Special Executive Magistrate. However,
he has got special permission of Council of ICAI for becoming executive chairman and for trading in
commodity derivatives. Is C.A. Bahubali liable for professional misconduct? Comment with reference
to the Chartered Accountants Act, 1949, and Schedules thereto. (5 Marks)
3. (a) M/s Rajul & Associates, Chartered Accountants started the statutory audit of their client Concession
Ltd., a General Insurance company, which has a paid-up capital of ` 18,600/- lac. During the course
of the audit, it was found that the Company was not maintaining the required solvency margin as per
the provisions of Insurance Act, 1938. When the issue was escalated to the management, they replied
that solvency margin needs to be maintained as per limits prescribed only on last day of the financial
year. Comment whether reply of management is tenable or not. (4 Marks)
(b) Excellent Ltd. is engaged in the business of manufacturing of threads. The company is expecting to
record turnover of ` 8.13 crores during the financial year 2020-21 before adjusting the following:
Discount allowed in the Sales Invoice ` 8,20,000
Cash discount (other than allowed in
Cash memo/ sales invoice) ` 9,20,000
Trade discount ` 2,90,000
Commission on Sales ` 6,00,000
Sales Return (F.Y. 2018-19) ` 1,60,000
Sale of Investment ` 6,60,000

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 You are required to ascertain the effective turnover to be considered for the prescribed limit of
tax audit under the relevant Act and guide the company whether the provisions relating to tax
audit applies. (6 Marks)
(c) CA. Paras, the auditor of Vardhman Pvt. Ltd. has delegated following works to his articles and
staff:
 Asking for information or issue of questionnaire.
 Letter forwarding draft observations/financial statements.
 Issue of memorandum of cash verification and other physical verification or recording the
results thereof in the books of the clients.
 Signing financial statements of the company.
Is this correct as per the Professional Ethics and ICAI’s guidelines and pronouncements?
(4 Marks)
4. (a) Sheetal & Co LLP, a firm of Chartered Accountants, was appointed as auditor of an NBFC. The
audit work has been completed. The audit team which was involved in the fieldwork came across
various observations during the course of audit of this NBFC and have also limited understanding
about the exceptions which are required to be reported in the audit report. They would like to
understand in detail regarding the obligations on the part of an auditor in respect of exceptions in
his report so that they can conclude their work. Briefly explain. (5 Marks)
(b) Employees of MIG Ltd. have to travel frequently for business purposes, so the company entered
into a contract with a Chinmay Travels Ltd. for managing booking, cancellation and other services
required by their employees. As per contract terms, Chinmay travels has to raise its monthly bills
for the tickets booked or cancelled during the period and the same are paid by MIG Ltd. within 15
days of the bill date. The bills raised by Chinmay travels were of huge amount, so the
management of MIG Ltd. decided to get an audit conducted of the process followed for booking/
cancellation of tickets and verify the accuracy of bills raised by the travel agency. Which audit do
you feel the management should opt for? Also briefly discuss the qualities the auditor should
possess for such audit. (5 Marks)
(c) Mr. Gautam & Mr. Mahaveer, partners of a Chartered Accountant Firm, one in-charge of Head
Office and another in-charge of Branch at a distance of 80 km. from the municipal limits, puts up
a name-board of the firm in both premises and also in their respective residences. Comment with
reference to the Chartered Accountants Act, 1949, and Schedules thereto. (4 Marks)
5. (a) You are auditing a small bank branch with staff strength of the manager, cashier and three other
staff P, Q and R. Among allocation of work for other areas, P who is a peon also opens all the
mail and forwards it to the concerned person. He does not have a signature book so as to check
the signatures on important communications. Q has possession of all bank forms (e.g. Cheque
books, demand draft/pay order books, travelers’ cheques, foreign currency cards etc.). He
maintains a record meticulously which you have test checked also. However, no one among staff
regularly checks that. You are informed that being a small branch with shortage of manpower, it
is not possible to always check the work and records. Give your comments. (5 Marks)
(b) Arham Bank Ltd., received an application from a pharmaceutical company for takeover of their
outstanding term loans secured on its assets, availed from and outstanding with a nationalised
bank. Arham Bank Ltd., requires you to make a due diligence audit in the areas of assets of
pharmaceutical company especially with reference to valuation aspect of assets. State what may
be your areas of analysis in order to ensure that the assets are not stated at overvalued
amounts. (5 Marks)

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 (c) Whilst the Audit team has identified various matters, they need your advice to include the same in
your audit report in view of CARO 2016:-
(i) The long term borrowings from the parent has no agreed terms and neither the interest nor
the principal has been repaid so far.
(ii) An amount of ` 2.35 Lakh per month is paid to M/s. RARE Associates, a partnership firm,
which is a 'related party' in accordance with the provisions of the Companies Act, 2013 for
the marketing services rendered by them. Based on an independent assessment, the
consideration paid is higher than the arm's length pricing by ` 0.35 Lakh per month. Whilst
the transaction was accounted in the financial statements based on the amounts' paid, no
separate disclosure has been made in the notes forming part of the accounts highlighting
the same as a 'related party' transaction. (4 Marks)
6. (a) Nalanda Limited is a public sector undertaking engaged in production of electricity from solar
power. It had commissioned a new project near Puducherry with a new technology for a cost of
` 8,500 crore. The project had seen delay in commencement and cost overrun. State the matters
that a Comprehensive Audit by C&AG may cover in reporting on the performance and efficiency
of this project. (5 Marks)
(b) You are appointed as an auditor of NEMI Limited, a listed company which is a company providing
information technology service across the globe. NEMI limited was having turnover for the financial
year ended on 31 March 2021 ` 22 crore. The company operates through 15 business units and has
nearly 130 branches across the world. As an auditor, how will you draft the report in case:
(I) When the Component(s) auditor reports on financial statements under an accounting
framework different than that of the Parent?
(II) When the Component(s) auditor reports under an auditing framework different than that of
the Parent? (5 Marks)
(c) Adeshvar Pvt Ltd is engaged in the business of real estate. The auditor of the company
requested the information from the management to review the outcome of accounting estimates
(like estimated costs considered for percentage completion etc) included in the prior period
financial statements and their subsequent re-estimation for the purpose of the current period.
The management has refused the information to the auditor saying that the review of prior period
information should not be done by the auditor. Please advise. (4 Marks)
OR
(c) You are required to classify the following practice units into Level I entity or Level II entity for the
purpose of peer review along with providing the reason for such classification, assuming the
services have been undertaken in the period under review by such CA firms:
Name of the Firm Data of assurance services provided by such firms
Abhinanadan & Co. Conducted statutory audit of a private company which is an associate of
a company, the net worth of which is ` 279 crore.
Sambhav & Co. Conducted statutory audit of a mutual fund company and of a branch of
a regional rural bank, respectively.
Kunthu & Associates Conducted statutory audit of LLP which has raised has a loan of ` 29
crore from a bank and a loan of ` 18 crore from an NBFC, respectively.
Dharam & Co. Conducted statutory audit of an unlisted public company having net
worth of ` 3.79 crore and turnover of ` 63 crore. The net worth of its
parent company is ` 295 crore.
(4 Marks)
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 Test Series: November, 2021
MOCK TEST PAPER - 2
FINAL (NEW) COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS
DIVISION A - MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. (d)
2. (d)
3. (a)
4. (a)
5. (c)
6. (b)
7. (b)
8. (b)
9. (b)
10. (a)
Questions (11-20) carry 2 Marks each
11. (b)
12. (a)
13. (b)
14. (d)
15. (c)
16. (b)
17. (a)
18. (b)
19. (d)
20. (c)
DIVISION B - DESCRIPTIVE QUESTIONS (70 Marks)
1 (a) Reporting by the User Auditor: As per SA 402, “Audit Considerations Relating to an Entity
Using a Service Organisation”, the user auditor shall modify the opinion in the user auditor’s
report in accordance with SA 705, “Modifications to the Opinion in the Independent Auditor’s
Report”, if the user auditor is unable to obtain sufficient appropriate audit evidence regarding the
services provided by the service organisation relevant to the audit of the user e ntity’s financial
statements.
The user auditor shall not refer to the work of a service auditor in the user auditor’s report
containing an unmodified opinion unless required by law or regulation to do so. If such reference
is required by law or regulation, the user auditor’s report shall indicate that the reference does
not diminish the user auditor’s responsibility for the audit opinion.

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 Thus, in view of above, contention of CA. Vasu in removing reference of the work done by
service auditor is in order as in case of unmodified audit report, user auditor cannot refer to the
work done by service auditor.
(b) Agreement on Audit Engagement Terms : As per SA 210, “Agreeing the Terms of Audit
Engagements”, the auditor shall agree the terms of the audit engagement with management or
those charged with governance, as appropriate.
Subject to prescribed details under Law or Regulations, the agreed terms of the audit
engagement shall be recorded in an audit engagement letter or other suitable form of written
agreement and shall include:
(i) The objective and scope of the audit of the financial statements;
(ii) The responsibilities of the auditor;
(iii) The responsibilities of management;
(iv) Identification of the applicable financial reporting framework for the 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.
In the given scenario, Sudharma Limited appointed Mr. S, Mr. D and Mr. M, as its joint auditors
for the year 2019-20 and issued engagement letter to all of them. The engagement letter contains
the details on objective and scope of audit, responsibilities of auditor, identification of framework
applicable and reference to expected form and content of report from all three joint auditors.
However, engagement letter issued by Sudharma Ltd. does not specify the responsibilities of
management, whereas as per SA 210, it should also specify responsibilities of management.
(c) As per SA 570, “Going Concern”, loss of a major market or a key customer is one of the
operating indicators that may cast significant doubt on the company’s ability to continue as a
going concern.
In the present case, OM Ltd. has a key customer in South Korea from which the demand for its
products has ended on account of outbreak of war, subsequent destruction and government ban
on import and export in South Korea. Further, the company has not yet i dentified new customers
and is in the process of doing the same. As such, the identification of new customer is a material
uncertainty that cast a significant doubt on the company’s ability to continue as a going concern.
However, this matter is duly disclosed by the management of OM Ltd. in the financial statements
for the year ended 31.03.2021.
As such, considering that the going concern assumption is appropriate but a material uncertainty
exists with respect to identification of new customer, CA Shanti should:
(1) Express an unmodified opinion and
(2) Include in his audit report, a separate section under the heading “Material Uncertainty
Related to Going Concern” to:
(i) Draw attention to the note in the financial statements that discloses the matters and
(ii) 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.
Thus, CA Shanti should deal with this matter in his auditor’s report in the above mentioned
manner.

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2 (a). In the given scenario, Mr. Bharat was appointed as statutory auditor of two listed entities i.e., N
Limited and O Limited. For the financial year 2020-21, Mr. Bharat had signed limited review
reports for first three quarter i.e., till the quarter ended 31 st December 2020 for both the
companies. Owing to his personal commitments and increased workload, he resigned from N
Limited and asked the Company to appoint another auditor to issue audit report for the remaining
quarter and audit report for the FY 2020-21.
Further, Mr. Bharat immediately informed the management of O Limited that he had been
disqualified to act as auditor and told them that he won ’t issue audit report for last quarter as
Mrs. D (wife of Mr. Bharat) had borrowed a sum of ` 5.85 lakh from the Company for her
personal use.
As per SEBI LODR Regulations, if the auditor has signed the limited review/ audit report for the
first three quarters of a financial year, then the auditor shall, before such resignation, issue the
limited review/ audit report for the last quarter of such financial year as well as the audit report for
such financial year. This provision will not apply if the auditor is disqualified due to Section 141 of
the Companies Act, 2013.
Thus, in the given situation, in view of above conditions to be complied with upon resignation of
the statutory auditor of a listed entity/material subsidiary with respect to limited review / audit
report as per SEBI LODR Regulations, Mr. Bharat is required to issue the audit report for the last
quarter and audit report for the year 2020-21 for N Limited as he has issued audit report for the
first three quarters whereas Mr. Bharat is not required to issue the audit report for remaining
quarter and audit report for the year 2020-21 as a whole for O Limited as he is disqualified under
section 141 of Companies Act.
Accordingly, contention of Management of N Limited is correct and tenable for issuing the audit
report for remaining quarter and audit report for financial year 2020-21 however, contention of
management of O Limited is not correct regarding the legal responsibility of Mr. Bharat to issue
audit report for remaining quarter and for the whole year.
(b) (i) Disclosure of Boiler Plant under Construction: Boiler plant under construction should be
shown under the heading ‘Capital Work in Progress’ instead of Property Plan and
Equipment. Thus, inclusion of value of boiler plant under construction in Property Plan and
Equipment is not in order.
(ii) Disclosure of Cash and Cash Equivalents deposited with Nationalised Bank : Bank
deposits with more than 12 months maturity shall be disclosed under 'Other financial
assets'. Therefore, disclosure of deposits rupees 1.25 crores in a nationalised bank for 18
months as Cash and Cash Equivalents is not in order as per Division II of Schedule III.
(iii) Disclosure of Cost of Cultivation for bringing to yield level the Cashewnut trees: Cost
of 1.5 crore rupees for Cultivation for bringing to yield level, the cashewnut trees whose
yield period is more than one period will form part of ‘Bearer Plant’. Hence it will not be
considered as ‘Biological Assets other than bearer plant’. Therefore, it sh ould be shown
under the heading ‘Property Plant and Equipment’ as Bearer Plant as per Division II of
Schedule III.
(c) Engaging into a Business: As per Clause (11) of Part I of First Schedule of Chartered
Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional
misconduct if he engages in any business or occupation other than the profession of Chartered
Accountant unless permitted by the Council so to engage.
However, the Council has granted general permission to the members to engage in certain
specific occupation. In respect of all other occupations specific permission of the Institute is
necessary.

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 In this case, C.A. Bahubali is Special Executive Magistrate, engaged in the occupation of trading
in commodity derivatives and also took over as the Executive Chairman on 01.04.202 1.
In this context, it may be noted that the Special Executive Magistrate which is generally permitted
for Members of the Institute in practice, further specific permission is required for holding the
position of Executive Chairman and getting engaged in the occupation of trading in commodity
derivatives.
In the given situation, C.A. Bahubali is acting as Special Executive Magistrate which is generally
permitted for Members of the Institute in practice. Further, He is engaged in the occupation of
trading in commodity derivatives which is not covered under the general permission. He also took
over as the Executive Chairman for which specific permission is required. CA. Bahubali got the
permission for the same from the Council of ICAI.
Conclusion: Hence, CA. Bahubali is not guilty for acting as Special Executive Magistrate as it is
covered under the general permission. He is also not guilty for holding the position of Executive
Chairman after getting specific permission of the Institute.
However, he is guilty of professional misconduct under Clause (11) of Part I of First Schedule of
Chartered Accountants Act, 1949 for getting engaged in the occupation of trading in commodity
derivatives which is not covered under the general permission.
3 (a) Maintenance of Solvency Margin: Section 64VA of the Insurance Act, 1938 as amended by
Insurance Laws (Amendment) Act, 2015 requires every insurer and re-insurer to maintain an
excess of the value of assets over the amount of liabilities at all times which shall not be less
than 50% of the amount of minimum capital as stated under section 6 (requirement as to capital)
of the Act and arrived at in the manner specified by the regulations.
If, at any time, an insurer or re-insurer does not maintain the required control level of solvency
margin, he is required to submit a financial plan to the Authority indicating the plan of action to
correct the deficiency. If, on consideration of the plan, the Authority finds it inadequate, the
insurer has to modify the financial plan.
Sub-section (2) of section 64VA states that if an insurer or re-insurer fails to comply with the
prescribed requirement of maintaining excess of value of assets over amount of liabilities, it shall
deemed to be insolvent and may be wound up by the Court on an application made by the
authority.
Therefore, in the said case Concession Ltd has not maintained the Solvency Margin throughout
the year. Accordingly, contention of Concession Ltd. that solvency margin is required to be
maintained as per limits prescribed only on last day of the financial year is not tenable.
(b) The provisions relating to tax audit under section 44AB of the Income Tax Act, 1961 applies to
every person carrying on business, if his total sales, turnover or gross receipts in business
exceed the prescribed limit of ` 1 crore (Provided that in the case of a person whose aggregate
of all amounts received including amount received for sales, turnover or gross receipts during the
previous year, in cash, does not exceed five per cent of the said amount and aggregate of all
payments made including amount incurred for expenditure, in cash, during the previous year
does not exceed five per cent of the said payment, the limit of one crore rupees shall change to
five crore rupees) and to a person carrying on a profession, if his gross receipts from profession
exceed the prescribed limit of ` 50 lakh in any previous year. However, the term "sales",
"turnover" or "gross receipts" are not defined in the Act, and therefore the meaning of the
aforesaid terms has to be considered for the applicability of the section.
Some of the points for merit consideration in this regard as discussed in the Guidance Note
issued by the Institute are given below-

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 (i) Discount allowed in the sales invoice will reduce the sale price and, therefore, the same can
be deducted from the turnover.
(ii) Cash discount otherwise than that allowed in a cash memo/sales invoice is in the nature of
a financing charge and is not related to turnover. Therefore, should not be deducted from
the turnover.
(iii) Turnover discount is normally allowed to a customer if the sales made to him exceed a
particular quantity. As per trade practice, it is in the nature of trade discount and shou ld be
deducted from the figure.
(iv) Special rebate allowed to a customer can be deducted from the sales if it is in the nature of
trade discount. If it is in the nature of commission on sales, the same cannot be deducted
from the figure of turnover.
(v) Price of goods returned should be deducted from the turnover even if the returns are from
the sales made in the earlier year/s.
(vi) Sale proceeds of any shares, securities, debentures, etc., held as investment will not form part
of turnover. However, if the shares, securities, debentures etc., are held as stock-in-trade, the
sale proceeds thereof will form part of turnover.
In the given case, Excellent Ltd. is engaged in manufacturing business. Therefore, the tax audit
would be applicable if the turnover exceeds ` 5 crore during the financial year 2020-21. The
calculation of effective turnover for the prescribed limit purpose, in accordance with
abovementioned conditions, is given below:
Expected turnover during the year ` 8,13,00,000
Less: (i) Discount allowed in the Sales Invoice (` 8,20,000)
(ii) Trade discount (` 2,90,000)
(iii) Sales Return (` 1,60,000)
Effective turnover ` 8,00,30,000
Conclusion: The expected effective turnover of Excellent Ltd. is Rupees Eight Crore and Thirty
Thousand only which is over and above the prescribed limit for tax audit under section 44AB of
the Income Tax Act, 1961. Thus, the provisions related to tax audit would be applicable to the
company and would therefore be liable for tax audit.
(c) As per Clause (12) of Part I of the First Schedule of the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he allows a
person not being a member of the institute in practice or a member not being his partner to sign
on his behalf or on behalf of his firm, any balance sheet, profit and loss account, report or
financial statements.
The Council has clarified that the power to sign routine documents on which a professional
opinion or authentication is not required to be expressed may be delegated in the following
instances and such delegation will not attract provisions of this clause:
(i) Issue of audit queries during the course of audit.
(ii) Asking for information or issue of questionnaire.
(iii) Letter forwarding draft observations/financial statements.
(iv) Initiating and stamping of vouchers and of schedules prepared for the purpose of audit.
(v) Acknowledging and carrying on routine correspondence with clients.
(vi) Issue of memorandum of cash verification and other physical verification or recording the
results thereof in the books of the clients.

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 (vii) Issuing acknowledgements for records produced. Raising of bills and issuing
acknowledgements for money receipts.
(ix) Attending to routine matters in tax practice, subject to provisions of Section 288 of Income
Tax Act.
(x) Any other matter incidental to the office administration and routine work involved in practice
of accountancy.
In the instant case, CA. Paras, the auditor of Vardhman Pvt. Ltd. has delegated certain task to
his articles and staff such asking for information or issue of questionnaire, letter forwarding draft
observations/financial statements, issue of memorandum of cash verification and other physical
verification or recording the results thereof in the books of the clients and signing financial
statements of the company.
Therefore, CA. Paras is correct in allowing first three tasks i.e. asking for information or issue of
questionnaire, letter forwarding draft observations/financial statements and issue of
memorandum of cash verification and other physical verification or recording the results thereof
in the books of the clients.
However, if the person signing the financial statements on his behalf is not a member of the
institute in practice or a member not being his partner to sign on his behalf or on behalf of his
firm, CA. Paras is not right in delegating signing of financial statements to his staff.
Conclusion: In view of this, CA. Paras would be guilty of professional misconduct for allowing
the person signing the financial statements on his behalf to his articles and staff un der Clause 12
of Part 1 of First Schedule of the Chartered Accountants Act, 1949.
4 (a) Obligation of auditor to submit an exception report to the RBI:
(I) Where, in the case of a non-banking financial company, the statement regarding any of the
items referred to in paragraph 3 above, is unfavorable or qualified, or in the opinion of the
auditor the company has not complied with:
(a) the provisions of Chapter III B of RBI Act (Act 2 of 1934); or
(b) Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 2016; or
(c) Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking
Company (Reserve Bank) Directions, 2016 and Non-Banking Financial Company -
Systemically Important Non-Deposit taking Company and Deposit taking Company
(Reserve Bank) Directions, 2016.
It shall be the obligation of the auditor to make a report containing the details of such
unfavourable or qualified statements and/or about the non-compliance, as the case may be,
in respect of the company to the concerned Regional Office of the Department of Non-
Banking Supervision of the RBI under whose jurisdiction the registered office of the
company is located as per first Schedule to the Non-Banking Financial Companies
Acceptance of Public Deposits (Reserve Bank) Directions, 2016.
(II) The duty of the Auditor under sub-paragraph (I) shall be to report only the contraventions of
the provisions of RBI Act, 1934, and Directions, Guidelines, instructions referred to in sub -
paragraph (1) and such report shall not contain any statement with respect to compliance of
any of those provisions.
(b) Operational audit, (functional audit) as it is the audit for the management and involves verifying
the effectiveness, efficiency and economy of operations done by the Chinmay travels for the
organisation.

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 The operational auditor should possess some very essential personal qualities to be eff ective in
his work:
1. In areas beyond accounting and finance, his knowledge ordinarily would be rather scanty,
and this is a reason which should make him even more inquisitive.
2. He should ask the who, why, how of everything. He should try to visualise whether simpler
alternative means are available to do a particular work.
3. He should try to see everything as to whether that properly fits in the business frame and
organisational policy. He should be persistent and should possess an attitude of skepti cism.
4. He should not give up or feel satisfied easily. He should imbibe a constructive approach
rather than a fault-finding approach and should give a feeling that his efforts are to help
attaining an improved operation and not merely fault finding.
5. If the auditor succeeds in giving a feeling of help and assistance through constructive
criticism, he will be able to obtain co-operation of the persons who are involved in the
operations. This will itself be a tremendous achievement of the operational auditor. He
should try to develop a team comprised of people of different backgrounds. Involvement of
technical people in operational auditing is generally helpful.
(c) Putting Name Board of the Firm at Residence: The council of the Institute has decided that
with regard to the use of the name-board, there will be no bar to the putting up of a name-board
in the place of residence of a member with the designation of chartered accountant, provided, it
is a name-plate or board of an individual member and not of the firm.
In the given case, partners Mr. Gautam and Mr. Mahaveer, put up a name board of the firm in
both offices but also in their respective residences.
Conclusion: Thus, Mr. Gautam and Mr. Mahaveer are guilty of misconduct. Distance given in the
question is not relevant for deciding.
5 (a) Banks are required to implement and maintain a system of internal controls for mitigating risks,
maintain good governance and to meet the regulatory requirements. Given below are examples
of internal controls that are violated in the given situation:
In the instant case, P who is a peon opens all the mail and forwards it to the concerned person.
Further, he does not have a signature book so as to check the signatures on important
communications is not in accordance with implementation and maintenance of general internal
control. As the mail should be opened by a responsible officer. Signatures on all the letters and
advices received from other branches of the bank or its correspondence should be checked by an
officer with the signature book.
All bank forms (e.g. Cheque books, demand draft/pay order books, travelers’ cheques, foreign
currency cards etc.) should be kept in the possession of an officer, and another respons ible
officer should verify the issuance and stock of such stationery. In the given case, Q has
possession of all bank forms (e.g. cheque books, demand draft/pay order books, travelers’
cheques, foreign currency cards etc.). He maintains a record meticulous ly which were also
verified on test check basis.
Further, contention of bank that being a small branch with shortage of manpower they are not
able to check the work and records on regular basis, is not tenable as such lapses in internal
control pose risk of fraud.
The auditor should report the same in his report accordingly.
(b) Area of analysis in order to ensure that assets are not stated at over-valued amounts are:
Uncollected/uncollectable receivables.

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 Obsolete, slow non-moving inventories or inventories valued above NRV; huge inventories
of packing materials etc. with name of company.
Underused or obsolete Plant and Machinery and their spares; asset values which have been
impaired due to sudden fall in market value etc.
Assets carried at much more than current market value due to capitalization of
expenditure/foreign exchange fluctuation, or capitalization of expenditure mainly in the nature of
revenue.
Litigated assets and property.
Investments carried at cost though realizable value is much lower.
Investments carrying a very low rate of income / return.
Infructuous project expenditure/deferred revenue expenditure etc.
Group Company balances under reconciliation etc.
Intangible assets of no value.
5 (c) (i) As per clause (xiii) of para 3 of CARO 2016 the auditor is required to report, “whether all
transactions with the related parties are in compliance with sections 177 and 188 of
Companies Act, 2013 where applicable and the details have been disclosed in the Financial
Statements etc., as required by the applicable accounting standards”.
In the present case, the auditor is required to report as per clause xiii of para 3 of CARO
2016 regarding receipt of long term borrowing from Parent Company which qualifies as a
transaction with the related party.
(ii) As per clause (xiii) of para 3 of CARO 2016, the auditor is required to report, “whether all
transactions with the related parties are in compliance with sections 177 and 188 of
Companies Act, 2013 where applicable and the details have been disclosed in the Financial
Statements etc., as required by the applicable accounting standards;”
Therefore, the duty of the auditor, under this clause is to report (i)Whether all transactions
with the related parties are in compliance with section 177 and 188 of the Companies Act,
2013 (“Act”); (ii) Whether related party disclosures as required by relevant Accounting
Standards (AS 18, as may be applicable) are disclosed in the financial statements.
In the present case, the auditor is required to report as per clause xiii of para 3 of CARO
2016, as one of related party transaction amounting ` 2.35 lakhs per month i.e. in lieu of
marketing services has been noticed of which amount ` 0.35 lakh per month is exceeding
the arm’s length price has not been disclosed highlighting the same as related party
transactions as per AS 18. Thus, the auditor is required to report accordingly.
6 (a) The areas covered in comprehensive audit naturally vary from enterprise to enterprise depending
on the nature of the enterprise, its objectives and operations. However, in general, the covered
areas are those of investment decisions, project formulation, organisational effectiveness,
capacity utilisation, management of equipment, plant and machinery, production performance,
use of materials, productivity of labour, idle capacity, costs and prices, materials management,
sales and credit control, budgetary and internal control systems, etc.
Some of the issues examined in comprehensive audit are:
(i) How does the overall capital cost of the project compare with the approved planned costs?
Were there any substantial increases and, if so, what are these and whether there is
evidence of extravagance or unnecessary expenditure?
(ii) Have the planned production or operational outputs been achieved? Has there been under -
utilisation of installed capacity or shortfall in performance and, if so, what has caused it?

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 (iii) Has the planned rate of return been achieved?
(iv) Are the systems of project formulation and execution sound? Are there inadequacies? What
has been the effect on the gestation period and capital cost?
(e) Are cost control measures adequate and are there inefficiencies, wastages in raw materials
consumption, etc.?
(f) Are the purchase policies adequate? Or have they led to piling up of inventory resulting in
redundancy in stores and spares?
(g) Does the enterprise have research and development programmes? What has been the
performance in adopting new processes, technologies, improving profits and in reducing
costs through technological progress?
(h) If the enterprise has an adequate system of repairs and maintenance?
(i) Are procedures effective and economical?
(j) Is there any poor or insufficient or inefficient project planning?
(b) (I). When the Component(s) Auditor Reports on Financial Statements under an Accounting
Framework Different than that of the Parent: The parent may have components located in
multiple geographies outside India applying an accounting framework ( GAAP) that is
different than that of the parent in preparing its financial statements. Foreign components
prepare financial statements under different financial reporting frameworks, which may be a
well-known framework (such as US GAAP or IFRS) or the local GAAP of the jurisdiction of
the component. Local component auditors may be unable to report on financial statements
prepared using the parent’s GAAP because of their unfamiliarity with such GAAP.
When a component’s financial statements are prepared under an accounting framework that
is different than that of the framework used by the parent in preparing group’s consolidated
financial statements, the parent’s management perform a conversion of the components’
audited financial statements from the framework used by the component to the framework
under which the consolidated financial statements are prepared. The conversion
adjustments are audited by the principal auditor to ensure that the financial information of
the component(s) is suitable and appropriate for the purposes of consolidation.
A component may alternatively prepare financial statements on the basis of the parent’s
accounting policies, as outlined in the group accounting manual, to facilitate the preparation
of the group’s consolidated financial statements. The group accounting manual would
normally contain all accounting policies, including relevant disclosure requirements, which
are consistent with the requirements of the financial reporting framework under which the
group’s consolidated financial statements are prepared. The local component auditor can
then audit and issue an audit report on the components financial statements prepared in
accordance with “group accounting policies”.
When applying the approach of using group accounting policies as the financial accounting
framework for components to report under, the principal/parent auditors should pe rform
procedures necessary to determine compliance of the group accounting policies with the
GAAP applicable to the parent’s financial statements. This ensures that the information
prepared under the requirements of the group accounting policies will be di rectly usable and
relevant for the preparation of consolidated financial statements by the parent entity,
eliminating the need for auditing by the auditor, the differences between the basis used for
the component’s financial statements and that of the consolidated financial statements. The
Principal auditor can then decide whether or not to rely on the components’ audit report and
make reference to it in the auditor’s report on the consolidated financial statements.

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 (II) When the Component(s) Auditor Reports under an Auditing Framework Different than
that of the Parent: Normally, audits of financial statements, including consolidated financial
statements, are performed under auditing standards generally accepted in India (“Indian
GAAS”).
In order to maintain consistency of the auditing framework and to enable the parent auditor
to rely and refer to the other auditor’s audit report in their audit report on the consolidated
financial statements, the components’ financial statements should also be audit ed under a
framework that corresponds to Indian GAAS.
(c) As per SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and
Related Disclosures”, the auditor shall review the outcome of accounting estimates included in
the prior period financial statements, or, where applicable, their subsequent re-estimation for the
purpose of the current period. The nature and extent of the auditor’s review takes account of the
nature of the accounting estimates, and whether the information obtained from the review would
be relevant to identifying and assessing risks of material misstatement of accounting estimates
made in the current period financial statements.
The outcome of an accounting estimate will often differ from the accounting esti mate recognised
in the prior period financial statements. By performing risk assessment procedures to identify and
understand the reasons for such differences, the auditor may obtain:
• Information regarding the effectiveness of management’s prior period estimation
process, from which the auditor can judge the likely effectiveness of management’s
current process.
• Audit evidence that is pertinent to the re-estimation, in the current period, of prior
period accounting estimates.
• Audit evidence of matters, such as estimation uncertainty, that may be required to be
disclosed in the financial statements.
The review of prior period accounting estimates may also assist the auditor, in the current period,
in identifying circumstances or conditions that increase the susceptibility of accounting estimates
to, or indicate the presence of, possible management bias. The auditor’s professional skepticism
assists in identifying such circumstances or conditions and in determining the nature, timing and
extent of further audit procedures.
However, the review is not intended to call into question the judgments made in the prior periods
that were based on information available at that time.
In the given case, the management is not correct in refusing the relevant information to t he
auditor.
Or
(c) ` Classification of Entity as per Statement of Peer Review
Name of Entity Type of Entity Reason for such classification based on the Statement
of Peer Review
Abhinanadan & Level I entity A Practice Unit which has undertaken Statutory Audit of a
Co. company which is an associate of an entity having net
worth of more than ` 250 Crores at any time during the
period under Review, shall be treated as a Level I entity.
Sambhav & Co. Level I entity A Practice Unit which has undertaken Statutory Audit of a
mutual fund shall be treated as a Level I entity.
Kunthu & Level II entity A Practice Unit which has undertaken Statutory Audit of an

10

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 Associates entity which has raised funds from public or banks or
financial institutions of more than ` 25 crore but less than `
50 crore during the period under Review, shall be treated
as a Level II entity.
Dharam & Co. Level I entity A Practice Unit which has undertaken Statutory Audit of a
company which is a subsidiary of an entity having net
worth of more than ` 250 Crores at any time during the
period under Review, shall be treated as a Level I entity.

11

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Test Series: April, 2022

MOCK TEST PAPER 2
FINAL COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
All MCQs are compulsory
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100
DIVISION A – MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. Shripal Company got a show cause notice from State Pollution Control Board for the contravention of
the provisions of Hazardous and waste Management Rule. As per SA 250, the auditor shall perform the
audit procedures to help identify instances of non-compliance with other laws and regulations that may
have a material effect on the financial statements. As the audit team of the company became aware of
information concerning an instance of non-compliance with law, what would NOT be the audit procedure
to be performed?
(a) Understand the nature of the act and circumstances in which it has o ccurred and obtain further
information to evaluate the possible effect on the financial statement.
(b) Discuss the matter with management and if they do not provide sufficient information; and if the
effect of non-compliance seems to be material, legal advice may be obtained.
(c) Monitoring legal requirement and compliance with code of conduct and ensuring that operating
procedures are designed to assist in the prevention of non-compliance with law and regulation and
report accordingly.
(d) Evaluate the implication of non-compliance in relation to other aspects of audit including risk
assessment and reliability of written representation and take appropriate action.
2. Bhagwan & Co. has received an order in writing from the Central Government, in respect of one of its
clients, to carry out an investigation under section 210 of the Companies Act 2013. During the course of
carrying out investigation as above, Bhagwan & Co. requires certain evidence from a place outside India
in order to establish the correctness of an investment in the shares of a company outside India. What
should be the procedure of Bhagwan & Co. to seek evidence from outside India for the investigation?
(a) Seeking evidence from outside India for investment in shares outside India is outs ide the scope of
investigation.
(b) An application is to be made to the competent court in India by the inspector and such court may
issue a letter of request to a court or an authority in such country for seeking evidence.
(c) The evidence can be sought by electronic mail by writing to the concerned authorities of the entity
outside India.
(d) Powers of seeking evidence outside India is available only to an investigator under section 212 -
Serious Fraud Investigation.
3. While reporting under clause (ii) of Paragraph 3 of CARO 2020, which of the following is correct:
(a) The 10% threshold for reporting must be applied on a gross basis before adjusting excesses and
shortages within the class of an inventory and must be based on value for each class of Inventory.

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(b) The 10% threshold for reporting must be applied on a gross basis before adjusting excesses and
shortages within the class of an inventory and must be based on value for all classes of Inventory.
(c) The 10% threshold for reporting must be applied on a net basis after adjusting excesses and
shortages within the class of an inventory and must be based on value for each class of Inventory.
(d) The 10% threshold for reporting must be applied on a net basis after adjusting excesses and
shortages within the class of an inventory and must be based on value for all classes of Inventory.
4. The Splendid General Insurance Company has entered into reinsurance contract with Adi Reinsurance
Co. Ltd. against the risk of fire only. Adi Reinsurance Co. Ltd. is one of the largest reinsurers in India.
Identify the type of reinsurance contract between Splendid General Insurance Company and Adi
Reinsurance Co. Ltd.
(a) Treaty Reinsurance.
(b) Proportional Treaty Reinsurance.
(c) Non-Proportional Treaty Reinsurance.
(d) Facultative Reinsurance.
5. The amount of materiality initially determined needs to be revised as the audit progresses:
(a) If there is a delay in the audit.
(b) In the event of becoming aware of information during the audit that woul d have caused the auditor
to have determined a different amount (or amounts) initially.
(c) Only in the event of becoming aware of information during the audit that would have caused the
auditor to have determined a higher amount (or amounts) initially.
(d) Only in the event of becoming aware of information during the audit that would have caused the
auditor to have determined a lower amount (or amounts) initially.
6. While examining the computation of Demand and Time liabilities which of the following i s to be included
in liabilities:
(a) Part amounts of recoveries from the borrowers in respect of debts considered bad and doubtful of
recovery.
(b) Amounts received in Indian Currency against import bills and held in sundry deposits pending
receipts of final rates.
(c) Net credit balance in branch adjustment accounts including these relating to foreign branches.
(d) Margins held and kept in sundry deposits for funded facilities.
7. While verifying the salary expense of employees, the auditor has been asked to rely on the values as
per SAP software and some hard copy reports and documents as the HRMS package (source software)
has become corrupt during the year and the management is not having any data backup. How should
the auditor deal with the same?
(a) The auditor should issue a qualified opinion as records are destroyed and he is unable to obtain
sufficient appropriate audit evidence.
(b) The auditor should perform alternative procedures to obtain sufficient and appropriate audit
evidence before disclaiming the opinion.
(c) The auditor should issue an adverse opinion stating that it is deficiency in internal controls.
(d) The auditor can rely on the SAP data and there is no need for qualification of report.

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8. As per SA 701- Communicating Key audit matters in the Independent auditor’s Report, which among
the following areas should CA & Co. take into account to determine “Key Audit Matt er”?
(i) The effect on audit of significant transactions that took place in the financial year.
(ii) Areas of high risk as assessed and reported by management’s expert.
(iii) Significant auditor judgement relating to areas in the financials that involve d significant
management judgement.
(a) (i) & (ii)
(b) (ii) only
(c) (i) & (iii)
(d) (i), (ii) & (iii)
9. Rimmi Ltd. was set up initially as a private limited company. Subsequently, it got converted into a public
company. The company’s management has plans of expansion but the business was not growing in an
organic manner. Therefore, the management decided to acquire the competitors. During the financial
year ended 31st March, 2021, the company acquired two companies in India and France in September,
2020 and January, 2021 respectively. The company controls both of these companies as per the criteria
laid down in the Companies Act, 2013 as well as the applicable accounting standards.
The management started discussions with the auditors regarding the audit wherein it was also pointed
out by the auditors that the management should also prepare consolidated financial statements (CFS),
if they want. Management needs your advise on the same.
(a) Management must prepare the CFS as per the requirements of the Compa nies Act, 2013.
(b) Management has a choice not to prepare CFS but should go for that considering that its true
performance and financial position can then be demonstrated.
(c) Management could have prepared CFS if the acquired companies would have complet ed at least
one year post acquisition.
(d) Management must prepare CFS but it should include only the company acquired in India.
10. Gamma Private Ltd. duly appoints CA Palak as the tax auditors of their Company and the appointed
Tax-auditor chalks out a detailed Audit Programme to be assigned to her audit engagement team to
carry out the tax audit efficiently & effectively. Which of the following situations wouldn’t warrant an
alteration in the Audit Programme during the course of Audit by the Tax Auditor of Gamma Private
Limited during the next Financial Year ?
(a) Significant changes in Procedures and Personnel of the Company subsequent to audit Procedures.
(b) A Substantial increase in the volume of turnover as against the anticipated results of the C ompany.
(c) An extraordinary increase in the amount of Book Debts as compared to that in the First Year.
(d) A New Contract received by Gamma Ltd. form a Foreign Client during the course of the audit.
(10 x 1 = 10 Marks)
Questions (11-20) carry 2 Marks each
MCQ 11. -15.
Integrated Case Scenario 1
While preparing the financial statement for the year ended on 31 March 2022, ABC Limited, a listed entity,
provided the below information:

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Excerpt of Standalone Balance sheet of ABC Ltd as of 31 March 2022

(in ` Lakhs)
Particulars Note No As on As on
31.03.2022 31.03.2021
Equity and Liabilities
Current liabilities
(a) Financial Liabilities
(ii) Trade Payables: - 10
(A) total outstanding dues of micro enterprises and 300
small enterprises; and
(B) total outstanding dues of creditors other than 210
micro enterprises and small enterprises.
(iii) Other financial liabilities (other than those specified in
item (c)
Note 10: Ageing of Trade Payables
Particulars Ageing of Trade Payables (` in Lakhs)
Ageing Less than 3-5 More than Total Non- MSME Total
3 Year Years 5 Years MSME Trade Trade Trade
Payables Payables Payables
Undisputed 100 50 30 180 160 340
Disputed 10 20 0 30 40 70
Total 110 70 30 210 200 410
Additional Information:
1. Mr. A while performing the statutory audit of ABC Ltd identified that the total trade payables reported in
the Balance Sheet as of 31 March 2022 and the amount reported in Note 10: Ageing of Trade Payables
are different. Upon inquiry, management informed that the difference between both amounts is the
Intercompany Trade Payables which is eliminated as part of consolidation Adjustment. Hence, there
was no requirement to show intercompany Trade Payables in the ageing schedule. Mr . A accepted the
explanation and did not perform any further procedures to validate the explanation.
2. When Audit Committee inquired with Mr. A as to how they have verified and validated the segregation
of the trade payables, Mr. A replied that they purely relied upon the management representation as there
was no alternate procedure available to gather sufficient and appropriate audit evidence to validate the
said information. Moreover, they informed the management that they have not qualified their audit
opinion as they have relied in true faith upon management representation.
3. While performing the audit procedure to validate the Trade Payables ageing, Mr. A identified that
management has calculated the due date of trade payables from the end of 180 days from the date of
transaction. Mr. A found it appropriate based on the conservative approach.
4. Mr. A did not qualify his audit opinion on the financial statement prepared for the period ending on
31 March 2022 on any grounds. Also, Mr. A specified that :
“The financial statements for the year ended on 31 March 2022 give a true and fair view of the state of
affairs of the company, comply with the accounting standards notified under section 133 and are in the
form provided for the company in Schedule III of the Act”

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5. While preparing the audit report Mr. A, provided the following information in Key Audit Matters.
Key Audit Matters How our audit addressed KAM
While auditing the Trade Payables, the auditor We have relied upon the assessment
identified that the trade payables balance includes performed by the management with
` 100 lakh payable to the intercompany which is respect to the litigation and disputed Trade
aged more than 3 years. Payables Balance.

Upon Inquiry with management, it was identified the Moreover, the amount is not material and
same amount is not paid on account of a dispute hence no further procedure other than
with respect to commercial terms. obtaining management representation was
performed on the said balance.
However, no such amount was outstanding as
receivable in the accounts statement shared by
Intercompany. The amount was already written off
by such an Intercompany in past years.
6. Other than the disputed trade payables disclosed, there were claims against the company which were
not yet acknowledged as debt. The aggregate amount and exposure for such claims were ` 25 Lakh.
As per an expert hired by the management, no amount is required to be provided in books of accounts
as in all the claims there are high chances that the decision will be in favour of the company.
7. Following were the materiality levels decided by the auditor for the current period’s audit :
• Overall Materiality: ` 50 Lakh;
• Performance Materiality: 5 Lakh;
• Materiality for Aggregate Uncorrected Misstatement: ` 1 Lakh.
On the basis of the abovementioned facts, you are required to answer the following MCQs:
Multiple Choice Questions (5 questions of 2 Marks each):
11. In the given situation whether Mr. A will be held guilty of professional Misconduct.
(a) Yes, Mr. A, is guilty of professional misconduct under Clause 7 of Part I of First Schedule.
(b) Yes, Mr. A, is guilty of professional misconduct under Clause 7 & 8 of Part I of First Schedule.
(c) Yes, Mr. A, is guilty of professional misconduct under Clause 7 & 8 of Part I of the Second
Schedule.
(d) No, Mr. A is not guilty of professional misconduct as he has performed all the audit procedures
appropriately.
12. Whether Financial statements given in the scenario are in confirmation with the requirements of
Division II of Schedule III?
(a) Yes, the financial statements are in confirmation with requirements mentioned in Division II of
Schedule III
(b) No, management should have eliminated the Intercompany Trade Payables balance from the
amount disclosed in the Standalone Balance Sheet. This will bring Note 10: Ageing Schedule and
Standalone Balance Sheet in alignment.
(c) No, Management should not have disclosed the disputed trade payables less than 3 years as these
trade payables are still under the period of limitation as per Limitation Act and they should not be
disclosed in Financial Statement.
(d) No, management should have added the Intercompany Trade Payables balance to the ageing
schedule. This will bring Note 10: Ageing Schedule and Standalone Balance Sheet in alignment.
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13. In continuation to MCQ no 12, what is an appropriate way to report the above-mentioned issues?
(a) Mr. A should have expressed a modified opinion if he was not able to gather appropriate & sufficient
audit evidence to validate the disputed trade payables. Moreover, he should have modified or
issued an adverse opinion as Financial Statements were not in confirmation with requirements of
Division II of Schedule III.
(b) Mr. A should have expressed an unmodified opinion if he was not able to gather appropriate &
sufficient audit evidence to validate the intercompany trade payables. Moreover, he should have
been unmodified as Financial Statements were not in confirmation with requirements of Division II
of Schedule III.
(c) Mr. A should have expressed an unmodified opinion as per SA 700, as he was able to obtain all
the explanation and information required and sought by him. Moreover, he should have modified it
as the Cash Flow Statement was not in confirmation with the requirements of Division II of
Schedule III.
(d) Mr. A should have reported matters related to Trade Payables Ageing as a qualification in Key
Audit Matters, as he was not able to obtain all the explanation and information required and sought
by him.
14. Whether the reporting performed by Mr. A related to intercompany trade payables under the
paragraph/section of Key Audit Matter in the audit report appropriate? Select from the below option to
support your answer.
(a) Mr. A should have expressed an unmodified opinion if he was not able to gather appropriate &
sufficient audit evidence to validate the disputed intercompany trade payables. As per SA 701,
those matters that, in the auditor’s professional judgment, were of most significance in the audit of
the financial statements of the current period are Key Audit Matters. The auditor shall not
communicate a matter in the Key Audit Matters section of the auditor’s report when the auditor
would be required to modify the opinion in accordance with SA 705 (Revised) as a result of t he
matter.
(b) Mr. A should have expressed a modified opinion if he was not able to gather appropriate & sufficient
audit evidence to validate the disputed intercompany trade payables. As per SA 701, those matters
that, in the auditor’s professional judgment, were of most significance in the audit of the financial
statements of the current period are Key Audit Matters. The auditor shall not communicate a matter
in the Key Audit Matters section of the auditor’s report when the auditor would be required to m odify
the opinion in accordance with SA 705 (Revised) as a result of the matter.
(c) Mr. A should have expressed an unmodified opinion if he was not able to gather appropriate &
sufficient audit evidence to validate the disputed intercompany trade payables. As per SA 701, the
auditor shall report the matter in Key Audit Matters in the auditor’s report when the auditor
concludes that, based on the audit evidence obtained, the financial statements as a whole are not
free from material misstatement or the auditor is unable to obtain sufficient appropriate audit
evidence to conclude that the financial statements as a whole are free from material misstatement.
(d) The auditor shall express an adverse opinion and report the said matter in Key Audit Matter Para
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. In the current case, the auditor has appropriately disclosed the said matter in Key Audit
Matter Paragraph.
15. As per the expert appointed by the Auditor, the exposure for the company can be ` 20 lacs as in past in
similar cases, the judgement was delivered against the company. However, the management of ABC
Limited was of the view that when management has already hired an expert, then there is no need to
hire another expert by the auditor. Seeking your advice, kindly guide the auditor by selecting the below
option, and what next steps should perform.

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(a) The auditor shall design and perform audit procedures in order to identify litigation and claims
involving the entity which may give rise to a risk of material misstatement. Also, if expertise in a
field other than accounting or auditing is necessary to obtain sufficient appropriate audit evidence,
the auditor shall determine whether to use the work of an auditor’s expert. Hence auditor can
appoint his expert to validate the assumption and estimate performed by the management’s expert.
(b) The auditor shall rely upon the work performed by the management’s expert. Management expert
will be equivalent to the auditor’s expert and hence no other expert is required to be appointed.
(c) The auditor shall not rely upon the management’s expert unless he evaluates the adequacy of the
expert’s work for the auditor’s purposes, including the relevance and reasonableness of that
expert’s findings or conclusions, and their consistency with other audit evidence. Although in the
current case, there is no consonance between the management’s expert’s findings and other audit
evidence, the auditor is still required to rely upon the findings of the management’s expert.
(d) The auditor shall rely upon the management’s expert without evaluating the adequacy of the
expert’s work for the auditor’s purposes, including the relevance and reasonableness of that
expert’s findings or conclusions, and their consistency with other audit evidence. Hence auditor is
required to rely upon the findings of management’s expert in the current case.
MCQ 16. -20.
Integrated Case Scenario 2
HF Limited – ND, a Non-Banking financial company which is exclusively into housing finance business
completed one month of operations. They approached their auditor M/s UVW & Co. Chartered Accountants
to know about the process to apply for certificate of registration under section 45 IA of RBI Act. After
calculating the net owned funds (which stood at ` 249 lakh) and considering other details, the company was
told that they need not apply for the certificate.
After the completion of the financial year, UVW & Co. started the statutory audit and tax audit for HF limited.
During the course of the audit, the management disagreed on the following matters:
(I) The company had revalued a particular class of its asset (no intangible asset was revalued). The
carrying value before revaluation was ` 77 lakh and the value post revaluation was ` 84.70 lakh. The
auditors wanted to mention the same along with the amount of change in CARO.
(II) It was found that an amount of ` 5 lakh had been written off as bad debts. The complete amount was
not admissible as per the Income tax Act and hence the auditor decided to mention about the same
under clause 19 of the tax audit report and disallow the inadmissible amount.
MC Limited approached UVW & Co. for providing few management and consultancy services for their
company. The offers given by the company was:
(i) Inventory management, material handling & storage
(ii) Personnel recruitment and selection
(iii) Tax representation and advice concerning tax matters
Mr. U, the senior partner of the firm was not consulted while deciding to respond to the above offers made by
MC Limited. Hence, he resigned from the partnership and went into practice as a sole proprietor. Since
Mr. U was having an interest in the field of merchant banking, he applied and obtained a registration as
category IV merchant banker under SEBI’s Rules and Regulations. Upon obtaining the same, he was
approached by HF limited, who wanted to go for a capital issue. Mr. U accepted the offer. The offer document
and advertisements regarding the capital issue prominently displayed the name and address of Mr. U, un der
the caption ‘Advisor to the Issue’. It was later found that Mr. U was guilty of professional misconduct because
of the above incident.
On the basis of the abovementioned facts, you are required to answer the following MCQs:
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Multiple Choice Questions (5 questions of 2 Marks each):

16. Why the auditor advised HF Limited – ND, a Non-Banking financial company not to apply for certificate
under section 45 IA ?
(a) Since the company is Non-Deposit taking NBFC, there is no need to apply for certificate of
registration.
(b) The company needs to completed one year of operations before applying for the certificate.
(c) Net owned funds are below the stipulated limit of ` 250 lakh, hence the company need not apply
for certificate.
(d) The company falls under exempt category as notified by RBI.
17. Is the auditor’s decision to report issue I given in the situation correct? What is the reason?
(a) Yes. Since the revaluation of asset has brought a change of 10% in the carrying amount, the same
shall be reported in CARO, including the amount.
(b) No. The reporting requirement under CARO relates to physical verification of assets, record
maintenance, etc. only. It does not require the details of revaluation to be provided.
(c) No. Since no intangible asset is revalued, the above matter need not be reported.
(d) No. Since the revaluation of asset has not reduced the carrying value, the same need not be
reported.
18. Assuming yourself to be a part of the management, how would you respond to point II relating to
reporting of written off Bad debts in Tax Audit Report ?
(a) Completely agree with the above matter as told by the auditor.
(b) Disagree to the point, since the above details need not be reported under clause 19 of Form 3CD.
(c) Disagree to the point, since the above details need not be reported under clause 19 of Form 3CD,
but under clause 25 of Form 3CD.
(d) Partially agree with respect to reporting the same, but not with respect to the amount being
disallowed by the auditor.
19. Assuming all responsibilities & protocols being fulfilled properly, from the above case scenario, what
can you infer about the appointment of M/s UVW & Co. as auditors for HF limited?
(a) They were appointed by Shareholders.
(b) They were appointed by Empanelment Committee.
(c) They were appointed by Board of Directors.
(d) They were re-appointed as auditors.
20. In the above case of Mr. U, which act of his could have led to professional misconduct?
(a) Obtaining registration as category IV merchant banker.
(b) Allowing the caption ‘Advisor to the Issue’ in the offer document and advertisement.
(c) Accepting the offer of HF limited without communicating the same to their a uditors.
(d) Allowing his name and address to be displayed prominently in the offer document and
advertisement. (10 x 2 = 20 Marks)

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DIVISION B- Descriptive Questions-70 Marks

Question No. 1 is compulsory.
Attempt any four questions from the Rest.
1. (a) After accepting the statutory audit of M/s All-in-All Ltd., a departmental store, you became aware
of the fact that management of the company have imposed certain limitations on the scope of your
assurance function which may adversely affect and result in your inability to obtain sufficient
appropriate audit evidence to discharge your responsibility required by the statute. Indicate the
consequences and your response to the limitations imposed by the management on your scope.
(5 Marks)
(b) M/s Krishna Associates, Chartered Accountants, while conducting the audit of Love Kush Ltd want
to conduct an inquiry of management and those charged with governance as to whether any
subsequent events have occurred which might affect the financial statements. Guide M/s K rishna
Associates with the matters where specific inquiries may be conducted to evaluate subsequent
events. (4 Marks)
(c) Yupee (P) Ltd. got incorporated on 15 th May 2021 and Mr. Harsh, the director of Yupee (P) Ltd.
proposed to Kamal & Co. on 24th May 2021, for being appointed as its statutory auditor. Mr. Kamal,
the sole proprietor of Kamal & Co., after checking the compliance with all the statutory
requirements, accepted the said offer and issued an audit engagement letter vide email to
Yupee (P) Ltd.
Mr. Harsh found all terms of audit engagement to be proper but in the paragraph relating to auditor’s
responsibly in the engagement letter, as produced below:-
“We will conduct our audit in accordance with Standards on Auditing (SAs), issued by the Institute
of Chartered Accountants of India (ICAI). Those Standards require that we comply with ethical
requirements and plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free from material misstatement.”
Certain queries raised in his mind that what does reasonable assurance meant? Which Standard
on Auditing requires the auditor to obtain such reasonable assurance? Is it possible to give absolute
assurance on such financial statements?
Assuming that you are Mr. Kamal, the newly appointed statutory auditor of Yupee (P) Ltd. Please
address to the queries of Mr. Harsh as stated above. (5 Marks)
2. (a) Sambhav & Co., a Chartered Accountant Firm, is appointed as the principal auditor of a listed
company, Moksh Ltd.
Figures of income and net-worth of five out of seven components of Moksh Ltd., which are its
unlisted subsidiaries, is tabulated below for the immediate preceding financial year along with the
consolidated amount: (` in crore)
Particulars Consolidated Component Component Component Component Component
‘A’ ‘B’ ‘C’ ‘D’ ‘E’
Income 600 70 20 140 130 40
Net Worth 1,600 80 40 280 360 100

The remaining two components i.e., Component ‘F’ & Component ‘G’ of Moksh Ltd. were unaudited.
According to Mr. Sambhav, the engagement partner, Component ‘F’ is material to the consolidated
financial statements whereas Component ‘G’ is not material to consolidated financial statements
and this fact has also been discussed in writing with those charged with governance of Moksh Ltd.

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(i) Which of the components of Moksh Ltd. can be termed as “material subsidiary” and in the
Board of which of the unlisted subsidiaries at least one independent director of Moksh Ltd.
needs to be appointed or would be appointed? (4 Marks)
(ii) What shall be the audit consideration in relation to reporting in case of unaudited components
of Moksh Ltd. by Sambhav & Co. and how Sambhav & Co. as a principal auditor shall report
in case of Component ‘F’ & Component ‘G’, respectively? (5 Marks)
(b) The auditors are required to understand, evaluate and validate the entity level controls as a part of
audit engagement, the result of which has an impact on the nature, timing and extent of other audit
procedures. In evaluating the effect of such control, existence, effectiveness and assessment of
the whistle-blower policy in the company is very important. Specify the procedure you would
perform for an understanding and evaluation of such whistle-blower policy. (5 Marks)
3. (a) You are an auditor of Great Insurance Company Ltd. which offers variety of risk management
products to business entities wishing to protect their business activities against losses due to
various probable risks. Great Insurance Company Ltd. is in the process of offering to Uniqu e Ltd.,
a multinational group having worldwide market, “Trade Credit Insurance Policy” to cover domestic
risk, export risk and political risk. You as an auditor of Insurance Company have been requested
to ensure that all the requirements have been met by Great Insurance Company Ltd. before Trade
Credit Insurance Product is offered to Unique Ltd. List down those requirements. (5 Marks)
(b) While conducting the tax audit of RRR Ltd. you observed that company has timely filed ETDS return
for TDS deducted on salary under section 192 of the Income Tax Act, 1961 in form 24Q in respect
of fourth quarter period from 1st January 2021 to 31st March 2021. The company has not furnished
list of details which are not reported in the statement of tax deducted at source under the pretext
that TDS statements are furnished within the prescribed time. As a Tax Auditor of RRR Ltd. how
you would deal and report? (5 Marks)
(c) Sanyam, a chartered accountant in practice is owner of three agriculture lands. He lost his father
due to Covid Pandemic. After death of his father, he started carrying out agricultural activities. His
neighbour Raja who is a farmer, filed a complaint against him to ICAI that being a member he is
carrying out agricultural activities, therefore, he is liable for misconduct. You are required to
examine the same with reference to the Chartered Accountants Act, 1949 and Schedules thereto.
(4 Marks)
4. (a) OM & Co. is the statutory auditor of OTAPS NBFC Ltd. While planning the audit procedures to be
done during the audit of entity, there was a difference of opinion between Mr. O and his partner
Mr. M. Mr. O is of the opinion that evaluation of internal control system and verification of
registration with RBI should not be the part of audit procedure, as it is the part of interna l audit
only. Briefly state what broad areas should mandatorily become part of the audit procedure of
OM & Co. for conducting the audit of OTAPS NBFC Ltd.? Also comment whether contention of Mr.
O is correct? (6 Marks)
(b) The Marketing Department of Charitra Ltd. has been consistently showing a lower performance
whereas the cost of the department is increasing in spurts over the years. The management
believes that since the marketing department is under a regular radar of the CFO, an audit might
result in the employee hostility. Also, an operational audit of Marketing Department was done two
years back however, the recommendations of the previous audit were not followed by the
concerned employees. Please advise the management if another audit is the solution and whether
only one-time operational audit is enough? Further, advise on the ways to deal with the employee
hostility. (4 Marks)
(c) Mr. Shreyansh, a Chartered Accountant in practice was invited to deliver a seminar on
Amendments in Schedule III and CARO 2020 which was attended by professionals as well as by
representatives of various Industries. One section of audience raised a particular issue unique to
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the industry to which it pertains. Mr. Shreyansh enthusiastically explained the issue and ela borated
how he solved this, for his client facing the same issue with worked out examples from the computer
storage device using the actual data of one of his clients with full identification of client details
being displayed to the group for the sake giving clarity on a topic in a real-life situation. Comment
with reference to the Chartered Accountants Act, 1949, and Schedules thereto. (4 Marks)
5. (a) Dharam & Karam Company Ltd. had prepared its financial statements for the financial year
2021-22 which were approved by the Board of Directors of the company and thereafter they were
signed by the Chairperson of the company as authorized by the Board, as well as by its CEO, CFO
and CS, respectively. Also, its board report was signed by its Managing Director as well as by an
Executive Director. You are required to comment whether financial statements and the Board’s
report of the company have been signed by the persons mandatorily required to sign, as prescribed
by the relevant Act. (4 Marks)
(b) Darshan Ltd. is a manufacturing company, provided following details of wastages of raw materials
in percentage, for various months. You have been asked to enquire into causes of abnormal
wastage of raw materials. Draw out an audit plan.
Wastage percentage are
July 2021 1.3%
Aug 2021 1.6%
Sep 2021 1.5%
Oct 2021 3.9%
(6 Marks)
(c) BR Construction was into the business of building roads and other infrastructure facilities for
government contracts. Mr. Tiwari, one of the senior official, was looking after the procurement of
cement required at the construction sites. There was a substantial increase in the price of cement
bags bought as compared to those bought prior to the appointment of Mr. Tiwari. The management
of the company decides to get a forensic audit done for the transactions handled by Mr. Tiwari.
What points should be kept in mind by the management while appointing a forensic auditor?
(4 Marks)
6. (a) The Comptroller and Auditor General of India has appointed a chartered accountant firm to conduct
the comprehensive audit of Tram Company Limited (a listed government company) which is
handling the Metro project of the metropolitan city for the period endi ng 31-03-2021. The work to
be conducted under Project ‘D’ handled by the Tram Company Limited was of laying down railway
line of 124 kilometers. [The chartered accountant firm reviewed the internal audit report and
observed the shortcoming reported about the performance of Project ‘D’ regarding the
understatement of the Current liabilities and Capital work in progress by ` 95.39 crore.] Explain
some of the matters to be undertaken by the chartered accountant firm while conducting the
comprehensive audit of Tram Company Limited. (5 Marks)
(b) Samyak Limited is engaged in the business of trading leather goods. You are the internal auditor
of the company for the year 2021-22. In order to review internal controls of the Sales Department
of the company, you visited the Department and noticed the work division as follows:
(1) An officer was handling the sales ledger and cash receipts.
(2) Another official was handling dispatch of goods and issuance of Delivery challans.
(3) One more officer was there to handle customer/ debtor accounts and issue of receipts.
As an internal auditor, you are required to briefly discuss the general condition pertaining to the
internal check prevalent in internal control system. Do you think that there was proper division of
work in Samyak Limited? If not, why? (5 Marks)
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(c) Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank. The Bank
follows financial year as accounting year. Your Audit Manager informed that the bank has
recognised on accrual basis income from dividends on securities and Units of Mutual Funds held
by it as at the end of financial year. The dividends on securities and Units of Mutual Funds were
declared after the end of financial year. Comment. (4 Marks)
OR
CA. Sita, appointed as a Peer Reviewer for M/s. Ram Associates, has asked for all the compilation
and the Due Diligence engagements carried out by M/s. Ram Associates for her peer review during
the period considered for peer review purposes by the board. She has also sent out a mail to Peer
Review Board regarding her selection. Mr. Ram, the managing partner of the firm seeks your
advice on this matter. (4 Marks)

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Test Series: April, 2022

MOCK TEST PAPER - II
FINAL COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS
DIVISION A - MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. (c)
2. (b)
3. (c)
4. (d)
5. (b)
6. (c)
7. (b)
8. (c)
9. (a)
10. (d)
11. (c)
12. (d)
13. (a)
14. (b)
15. (a)
16. (d)
17. (a)
18. (b)
19. (c)
20. (d)
DIVISION B - DESCRIPTIVE QUESTIONS (70 Marks)
1. (a) Consequence of an Inability to Obtain Sufficient Appropriate Audit Evidence Due to a
Management-Imposed Limitation after the Auditor Has Accepted the Engagement: As per SA
705, Modification to the Opinion in the Independent Auditor’s Report”, if, after accepting the
engagement, the auditor becomes aware that management has imposed a limitation on the scope
of the audit that the auditor considers likely to result in the need to express a qualified opinion or
to disclaim an opinion on the financial statements, the auditor shall request that management
remove the limitation.
If management refuses to remove the prescribed limitation, the auditor shall communicate the
matter to those charged with governance, unless all of those charged with governance are involved
in managing the entity and determine whether it is possible to perform alternative procedures to
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If the auditor is unable to obtain sufficient appropriate audit evidence, the auditor shall
determine the implications as follows:
(i) If the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive, the auditor shall qualify the opinion;
or
(ii) 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:
1. Withdraw from the audit, where practicable and possible under applicable law or
regulation; or
2. If withdrawal from the audit before issuing the auditor’s report is not practicable or
possible, disclaim an opinion on the financial statements.
If the auditor withdraws as discussed above, before withdrawing, the 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.
(b) Specific Inquiries to Evaluate Subsequent Events: As per SA 560, “Subsequent Events”, in
inquiring of management and, where appropriate, those charged with governance, as to whether
any subsequent events have occurred that might affect the financial statements, the auditor may
inquire as to the current status of items that were accounted for on the basis of preliminary or
inconclusive data and may make specific inquiries about the following matters:
(i) Whether new commitments, borrowings or guarantees have been entered into.
(ii) Whether sales or acquisitions of assets have occurred or are planned.
(iii) Whether there have been increases in capital or issuance of debt instruments, such as the
issue of new shares or debentures, or an agreement to merge or liquidate has been made or
is planned.
(iv) Whether any assets have been appropriated by government or destroyed, for example, by fire
or flood.
(v) Whether there have been any developments regarding contingencies.
(vi) Whether any unusual accounting adjustments have been made or are contemplated.
(vii) Whether any events have occurred or are likely to occur that will bring into question the
appropriateness of accounting policies used in the financial statements, as would be the case,
for example, if such events call into question the validity of the going concern assumption.
(viii) Whether any events have occurred that are relevant to the measurement of estimates or
provisions made in the financial statements.
(ix) Whether any events have occurred that are relevant to the recoverability of assets.
(c) As per SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, the auditor is required:-
“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.”
Reasonable assurance is a high level of assurance and is less than absolute assurance. It 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.
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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, which result in most of
the audit evidence on which the auditor draws conclusions and bases the audito r’s opinion being
persuasive rather than conclusive. The inherent limitations of an audit arise from:
• The nature of financial reporting;
• The nature of audit procedures; and
• The need for the audit to be conducted within a reasonable period of time and at a reasonable
cost.
2. (a) (i) As per Regulation 16(c) of the SEBI (LODR) Regulations, 2015, “material subsidiary” shall
mean a subsidiary, whose income or net worth exceeds ten percent of the consolidated
income or net worth respectively, of the listed entity and its subsidiaries in the immediately
preceding accounting year. [Explanation- The listed entity shall formulate a policy for
determining ‘material’ subsidiary.]
Regulation 24(1) of the SEBI (LODR) Regulations, 2015, provides that at least one
independent director on the board of directors of the listed entity shall be a director on the
board of directors of an unlisted material subsidiary, whether incorporated in India or not.
[Explanation- For the purposes of Regulation 24(1), notwithstanding anything to the contrary
contained in regulation 16, the term “material subsidiary” shall mean a subsidiary, whose
income or net worth exceeds twenty percent of the consolidated income or net worth
respectively, of the listed entity and its subsidiaries in the immediately preceding accounting
year]
On the basis of above provisions, following information is tabulated as below:
Particulars Share in Consolidated Income Share in Consolidated Net Worth
Component ‘A’ 11.67% 5%
Component ‘B’ 3.33% 2.5%
Component ‘C’ 23.33% 17.5%
Component ‘D’ 21.67% 22.5%
Component ‘E’ 6.67% 6.25%
It can be observed that Component ‘A’, Component ‘C’ and Component ‘D’, respectively, can
be termed as “material subsidiary” as their shares in either consolidated Income or net worth
exceeds 10%.
Further, at least one independent director from the board of directors of Moksh Ltd. shall be
appointed or would have been appointed on the board of Component ‘C’ and Component ‘D’,
respectively, as their shares in either consolidated income or net worth exceeds 20%.
(ii) Generally, the financial statements of all components included in consolidated financial
statements should be audited or subjected to audit procedures in the context of a multi -
location group audit. Such audits and audit procedures can be performe d by the auditor
reporting on the consolidated financial statements or by the components’ auditor.
Where the financial statements of one or more components continue to remain unaudited, the
auditor reporting on the consolidated financial statements should consider unaudited
components in evaluating a possible modification to his report on the consolidated financial
statements. The evaluation is necessary because the auditor (or other auditors, as the case
may be) has not been able to obtain sufficient appropriate audit evidence in relation to such
consolidated amounts/balances. In such cases, the auditor should evaluate both qualitative
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and quantitative factors on the possible effect of such amounts remaining unaudited when
reporting on the consolidated financial statements using the guidance provided in SA 705,
“Modifications to the Opinion in the Independent Auditor’s Report”.
In the given situation, two out of seven components of Moksh Ltd. have remained unaudited
where Component ‘F’ is material and Component ‘G’ is not material to the consolidated
financial statements.
Thus, in case of Component ‘F’, the Principal Auditor needs to consider its impact on the
auditor’s opinion on the consolidated financial statements of the group, in terms of the
principles laid down in SA 705, Modifications to the Opinion in the Independent Auditor’s
Report. Whereas in case of Component ‘G’, the principal auditor should make appropriate
reporting under the “Other Matters” paragraph, pursuant to SA 706, Emphasis of Matter
Paragraphs and Other Matter Paragraphs, in the Independent Auditor’s Report.
(b) Procedure for understanding and evaluation of whistle-blower policy - Auditors are required
to understand, evaluate and validate the entity level controls as a part of an audit engagement.
The results of testing entity level controls could have an impact on the nature, timing and extent of
other audit procedures including testing of controls. For example, when the entity level controls at
a company are effective, the auditor may consider reducing the number of samples in the test of
controls and where the auditor finds the entity level controls ineffective, the auditor may consider
to increase the rigour of testing by increasing sample sizes. In small and less complex companies,
the entity level controls may not formally defined or documented. In such situations, the auditor
should design audit procedures accordingly to obtain evidence of the existence and effectiveness
of entity level controls.
The following example shows how the auditor performs an understanding and evaluation of the
whistle-blower policy in a company:
(i) Does the company have a whistle-blower policy?
(ii) Is this policy documented and approved?
(iii) Has the whistle-blower policy been communicated to all the employees?
(iv) Are employees aware of this policy and understand its purpose and their obligations?
(v) Has the company taken measures viz., training, to make the employees understand the
contents and purpose of the policy?
(vi) Does the company monitor effectiveness of the policy from time-to-time?
(vii) How does the company deal with deviations and non-compliance?
3. (a) Basic Requirements of a Trade Credit Insurance Product: An insurer shall offer trade credit
insurance product only if all requirements mentioned below are met -
(i) Policyholder's loss is non-receipt of trade receivable arising out of a trade of goods or
services.
(ii) Policyholder is a supplier of goods or services in consideration for a fair market value.
(iii) Policyholder's trade receivable does not arise out of factoring or reverse factoring
arrangement or any other similar arrangement.
(iv) Policyholder has a customer (i.e. Buyer) who is liable to pay a trade receivable to the
policyholder in return for the goods and services received by him from the policyholder, in
accordance with a policy document filed with the insurer.
(v) Policyholder undertakes to pay premium for the entire Policy Period.
(vi) Any other requirement that may be specified by the Authority from time to time.

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(b) As per Clause 34 (b) of the Form 3CD, the auditor has to report whether the assessee is
required to furnish the statement of tax deducted or tax collected. If yes, please furnish the
details:

Tax Type Due date Date of Whether the If not,

deduction of for furnishing, statement of tax please
and Form furnishing if furnished deducted or furnish list
collection collected contains of
Account information about details/trans
Number all transactions actions
(TAN) which are required which are
to be reported not reported

Accordingly, clause 34 (b) requires, a list of details/transactions which are not reported in the
statement of tax deducted at source and statement of tax collected at source are required to be
furnished. The reporting requirement is notwithstanding the fact that the assessee has furnished
the statements of tax deducted at source and tax collected at source within the prescribed time.
In the given situation, RRR Ltd., has timely filed ETDS return for TDS deducted on Salary under
section 192 of the Income Tax Act in Form 24Q in respect of 4 th quarter. The company has not
furnished list of details which are not reported in the statement of tax deducted at source under the
pretext that TDS Statements are furnished within the prescribed time. Therefore, in vi ew of above,
RRR Ltd. is required to furnish list of details which are not reported in the statement of tax deducted
at source.
(c) Engaging into Agricultural Activity: As per Clause (11) of Part I of First Schedule of Chartered
Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional
misconduct if he engages in any business or occupation other than the profession of Chartered
Accountant unless permitted by the Council so to engage.
However, the Council has granted general permission to the members to engage in certain specific
occupation. In respect of all other occupations specific permission of the Institute is necessary.
In this case, CA. Sanyam is owner of 3 agriculture lands, and he is carrying out agricultural activities
which is covered under the general permission.
Therefore, CA Sanyam is not guilty of professional misconduct under Clause (11) of Part I of First
Schedule of Chartered Accountants Act, 1949 and complain of neighbor to the Institute is not
correct.
4. (a) Following are broad areas that should be mandatorily part of the audit procedure for conducting
the audit of NBFC:
(1) Ascertaining the Business of the Company - The first step in carrying out the audit of a NBFC
is to scan through the Memorandum and Articles of Association of the company, so as to
acquaint oneself with the type of business that the company is engaged into. The task of
ascertaining the principal business activity of any NBFC is of paramount importance since the
very classification of a company as a NBFC and its further classification would all depend
upon its principal business activity. Based on the classification of a company, it wi ll be
required to comply with the provisions relating to limits on acceptance of public deposits as
contained in the NBFC Public Deposit Directions.
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(2) Evaluation of Internal Control System - An auditor should gain an understanding of the
accounting system and related internal controls adopted by the NBFC to determine the nature,
timing and extent of his audit procedures. An auditor should also ascertain whether the
internal controls put in place by the NBFC are adequate and are being effectively followed . In
particular, an auditor should review the effectiveness of the system of recovery prevalent at
the NBFC. He should ascertain whether the NBFC has an effective system of periodical review
of advances in place which would facilitate effective monitoring and follow up. The absence
of a periodical review system could result in non-detection of sticky advances at their very
inception which may ultimately result in the NBFC having an alarmingly high level of NPAs.
(3) Registration with the RBI - Section 45-IA of the RBI Act, 1934, has made it incumbent on the
part of all NBFCs to comply with registration requirements and have minimum net owned
funds. An auditor should obtain a copy of the certificate of registration granted by the RBI or
in case the certificate of registration has not been granted, a copy of the application form filed
with the RBI for registration. It may particularly be noted that NBFCs incorporated after 9th
January, 1997 are not entitled to commence business without first obtaining a regist ration
certificate from the RBI. An auditor should, therefore, verify whether the dual conditions
relating to registration with the RBI and maintenance of minimum net owned funds have been
duly complied with by the concerned NBFC. The auditor should ascertain whether investment
in prescribed liquid assets have been made and whether quarterly returns as mentioned
above have been regularly filed with the RBI by the concerned NBFC.
(4) The auditors must ascertain whether the company properly classified as per the requirements
of various regulations. In case, the NBFC has not been classified by the RBI, the classification
of a company will have to be determined after a careful consideration of various factors such
as particulars of earlier registration granted, if any, particulars furnished in the application
form for registration, company’s Memorandum of Association and its financial results.
(5) NBFC Prudential Norms Directions - Check compliance with prudential norms encompassing
income recognition, income from investments, accounting standards, accounting for
investments, asset classification, provisioning for bad and doubtful debts, capital adequacy
norms, prohibition on granting of loans by a NBFC against its own shares, prohibition on loans
and investments for failure to repay public deposits and norms for concentration of
credit/investments.
In the given situation, OM & Co., is the statutory auditor of OTAPS NBFC Ltd. While planning the
audit procedures to be done during the audit of entity, there was difference of opinion between O
and his partner M regarding evaluation of internal control and verification of registration with RBI.
As discussed above NBFCs are not entitled to commence business without first obtaining a
registration certificate from the RBI. An auditor should, therefore, verify whether the dual conditions
relating to registration with the RBI and maintenance of minimum net owned funds have been duly
complied with by the concerned NBFC. Further, auditor should gain an understanding of the
accounting system and related internal controls adopted by the NBFC to determine the nature,
timing and extent of his audit procedures. An auditor should also ascertain whether the internal
controls put in place by the NBFC are adequate and are being effectively followed. Accordingly,
contention of Mr. O regarding evaluation of internal control system and verification of registration
with RBI should not be part of the audit procedure as it is part of internal audits only, is not correct.

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(b) The Operational Audit is not one-time activity. It should be viewed as a continuous
improvement cycle:

Plan

Act Do

Check

The continuous improvement cycle of Operational Audit can be depicted through

Plan, Do, Check and Act diagram.
All the significant operations must be subjected to the scrutiny of operational audit, at least, once
in three years. Therefore, the operational audit should be done in the current scenario. However,
to deal with the employee hostility the participative approach of the audit should be adopted:
In this approach the auditor discusses the ideas for improvements with those managers that have
to implement them and make them feel that they have participated in the recommendations made
for improvements. By soliciting the views of the operating personnel, the operational audit becomes
a co-operative enterprise.
This participative approach encourages the auditee to develop a friendly attitude towards the
auditors and look forward to their guidance in a more receptive fashion. When the participative
method is adopted then the resistance to change becomes minimal, feelings of hostility disappear
and gives room for feelings of mutual trust. Team spirit is developed. The auditors and the auditee
together try to achieve the common goal. The proposed recommendations are discussed with the
auditee and modifications as may be agreed upon are incorporated in the operational audit report.
With this attitude of the auditor, it becomes absolutely easy to implement the proposed suggestions
as the auditee themselves take initiative for implementing and the auditor does not have to force
any change on the auditee.
(c) Disclosure of Information to third Party: Clause (1) of Part I of the Second Schedule to the
Chartered Accountants Act, 1949 states that a chartered accountant in practice shall be deemed
to be guilty of professional misconduct if he discloses information acquired in the course of his
professional engagement to any person other than his client, without the consent of the client or
otherwise than as required by law for the time being in force.
SA 200 on " Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing" also reiterates that, "the auditor should respect the
confidentiality of information acquired during his work and should not disclose any such information
to a third party without specific authority or unless there is a legal or professional duty to disclose".
In the instant case, Mr. Shreyansh is a Chartered Accountant in practice and he was invited to
deliver a seminar on Amendments in Schedule III and CARO 2020 which was attended by
professional as well as by representatives of various industries. During his session, a query was
raised on particular issue and Mr. Shreyansh used the actual data of one of his clients with full
identification of client details displayed to explain and elaborate such query. Applying the above
provision, the auditor cannot disclose the information in his possession without specific permission
of the client.
Thus, CA. Shreyansh will be liable for professional misconduct under clause 1 of
Part I of the Second Schedule to the Chartered Accountants Act, 1949.
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5. (a) As per section 134 of the Companies Act, 2013, the financial statements, including cons olidated
financial statements, if any, shall be approved by the Board of Directors before they are signed on
behalf of the Board by the Chairperson of the Company where he is authorized by the Board or by
two directors out of which one shall be Managing Director, if any, and the Chief Executive Officer,
the Chief Financial Officer and the Company Secretary of the Company, wherever they are
appointed, or in the case of One Person Company, only by one director, for submission to the
auditor for his report thereon.
The Board’s report shall be signed by its chairperson of the company if he is authorised by the
Board and where he is not so authorised, shall be signed by at least two directors, one of whom
shall be a Managing Director.
Here, Dharam and Karam Company Ltd. had prepared its financial statements for the financial year
2021-22 which were approved by the Board of Directors of the company and thereafter they were
signed by the Chairperson of the company as authorised by the Board, as well as by its CEO, CFO
and CS, respectively. Also, its board report was signed by its Managing Director as well as by an
Executive Director.
Hence, it can be said that the financial statements and the Board’s report of the Dharam and Karam
Company Ltd. have been signed are in accordance with section 134 of the Companies Act, 2013.
(b) Audit Plan to locate the Abnormal Wastage of Raw Material: To locate the reasons for the
abnormal wastage, the auditor of Darshan Ltd. should first assess the general requirements as
under:
(i) Procure a list of raw materials, showing the names and detailed characteristics of each raw
material.
(ii) Obtain the standard consumption figures, and ascertain the basis according to which normal
wastage figures have been worked out. Examine the break-up of a normal wastage into that
in process, storage and handling stages. Also obtain control reports, if any, in respect of
manufacturing costs with reference to predetermined standards.
(iii) Examine the various records maintained for recording separately the various lots purchased
and identification of each lot with actual material consumption and for ascertaining actual
wastage figures therein.
(iv) Obtain reports of Preventive Maintenance Programme of machinery to ensure that the quality
of goods manufacture is not of sub-standard nature or leads to high scrappage work.
(v) Assess whether personnel employed are properly trained and working efficiently.
(vi) See whether quality control techniques have been consistent or have undergone any change.
(vii) Examine inventory plans and procedures in report of transportation storage efficiency,
deterioration, pilferage and whether the same are audited regularly.
(viii) Examine whether the basis adopted for calculating wastage for September is the same as
was adopted for the other three months.
(ix) Obtain a statement showing break up of wastage figures in storage, handling and process for
the four months under reference and compare the results of the analysis for each of the four
months.
In addition, some specific reasons for abnormal wastage in process may be considered by
the auditor are as under:
(i) Examine laboratory reports and inspection reports to find out if raw materials purchased were
of a poor quality or were of sub-standard quality. This will be most useful if it is possible to
identify the wastage out of each lot that has been purchased.

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(ii) Machine breakdown, power failure, etc. may also result into loss of materials in process.
Check the machine utilisation statements.
(iii) A high rate of rejections in the finished lots may also be responsible for abnormal wastage;
therefore, examine the inspectors’ reports in respect of inspection carried out on the
completion of each stage of work or process.
(iv) It is possible that the wastage may have occurred because the particular lot out of which
issues were made was lying in the store for a long time, leading to deterioration in quality or
because of a change in the weather which may have led to the deterioration. Compare the
wastage figures.
(v) Abnormal wastage in storage and handling may arise due to the following reasons:
(1) Write offs on account of reconciliation of physical and book inventories: In case of
periodical physical inventory taking, such write offs will be reflected only in the month
such reconciliation takes place.
(2) Accidental, theft or fire losses in storage: The auditor should examine the possibility of
these for the purpose.
(vi) Examine whether any new production line was taken up during the month in respect of which
standard input-output ratio is yet to be set-up.
(c) A Forensic Auditor is often retained to analyze, interpret, summarize and present complex financial
and business-related issues in a manner which is both understandable and properly supported.
Forensic Accountants are trained to look beyond the numbers and deal with the business reality of
the situation. Forensic auditor needs to have an understanding on various frauds that can be
carried off and how evidence need to be collected.
While appointing a forensic auditor, the Management of BR Construction must initially consider
whether the firm has the necessary skills and experience to accept the work. In view of above,
Management of BR Construction should ensure that the forensic auditor should necessarily
possess the following characteristics and skills:
➢ Crafting questions to be posed.
➢ Responding to questions posed.
➢ Identifying documents to be requested and/or subpoenaed.
➢ Identifying individuals to be most knowledgeable of facts.
➢ Conducting research relevant to facts of the case.
➢ Identifying and preserving key evidence.
➢ Evaluating produced documentation and information for completeness.
➢ Analysing produced records and other information for facts.
➢ Identifying alternative means to obtain key facts and information.
➢ Providing questions for deposition and cross examination of fact and expert witnesses .
6. (a) A CA Firm has been appointed to conduct comprehensive audit of Tram Company Limited, which
is a listed Govt Company handling the Metro project. CA firm has observed the shortcomings as
stated in internal audit report regarding understatement of Current lia bilities and CWIP by ` 95.39
crore.
Matters to be undertaken by the CA Firm while conducting the comprehensive audit of Tram
Company Limited are:

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(i) How does the overall capital cost of the project compare with the approved planned costs?
Were there any substantial increases and, if so, what are these and whether there is evidence
of extravagance or unnecessary expenditure?
(ii) Have the accepted production or operational outputs been achieved? Has there been under -
utilisation of installed capacity or shortfall in performance and, if so, what has caused it?
(iii) Has the planned rate of return been achieved?
(iv) Are the systems of project formulation and execution sound? Are there inade quacies? What
has been the effect on the gestation period and capital cost?
(v) Are cost control measures adequate and are there inefficiencies, wastages in raw materials
consumption, etc.?
(vi) Are the purchase policies adequate? Or have they led to piling up of inventory resulting in
redundancy in stores and spares?
(vii) Does the enterprise have research and development programmes? What has been the
performance in adopting new processes, technologies, improving profits and in reducing costs
through technological progress?
(viii) If the enterprise has an adequate system of repairs and maintenance?
(ix) Are procedures effective and economical?
(x) Is there any poor or insufficient or inefficient project planning?
(b) The general condition pertaining to the internal check system may be summarized as under:
(i) no single person should have complete control over any important aspect of the business
operation. Every employee’s action should come under the review of another person.
(ii) Staff duties should be rotated from time to time so that members do not perform the same
function for a considerable length of time.
(iii) Every member of the staff should be encouraged to go on leave at least once a year.
(iv) Persons having physical custody of assets must not be permitted to have access to the books
of accounts.
(v) There should exist an accounting control in respect of each class of assets, in addition, there
should be periodical inspection so as to establish their physical condition.
(vi) Mechanical devices should be used, wherever practicable to prevent loss or misappropriation
of cash.
(vii) Budgetary control should be exercised and wide deviations observed should be reconciled.
(viii) For inventory taking, at the close of the year, trading activities should, if possible be
suspended, and it should be done by staff belonging to several sections of the organiz ation.
(ix) The financial and administrative powers should be distributed very judiciously among different
officers and the manner in which those are actually exercised should be reviewed periodically.
(x) Procedures should be laid down for periodical verification and testing of different sections of
accounting records to ensure that they are accurate.
In the given scenario, Samyak Limited has not done proper division of work as:
(i) the receipts of cash should not be handled by the official handling sales ledger and
(ii) delivery challans should be verified by an authorised official other than the officer handling
despatch of goods.
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(c) Banks may book income from dividend on shares of corporate bodies on accrual basis, provided
dividend on the shares has been declared by the corporate body in its annual general meeting and
the owner's right to receive payment is established. This is also in accordance with AS 9. In this
case the dividends have been declared after the financial year end. Therefore, the re cognition of
income by the bank on accrual basis is not in order.
In respect of income from government securities and bonds and debentures of corporate bodies,
where interest rates on these instruments are pre-determined, income could be booked on accrual
basis, provided interest is serviced regularly and as such is not in arrears. It was further, however,
clarified that banks may book income on accrual basis on securities of corporate bodies/public
sector undertakings in respect of which the payment of interest and repayment of principal have
been guaranteed by the Central Government or a State Government.
OR
(c) Selection of Assurance Service Engagements for Review: The Statement on Peer Review
defines the scope of peer review which revolves around compliance with technical, ethical and
professional standards; quality of reporting; office systems and procedures with regard to
compliance of assurance engagements; and, training programmes for staff including articled and
audit assistants involved in assurance engagements. The entire peer review process is directed at
the assurance services.
Assurance Services means assurance engagements services as specified in the “Framework for
Assurance Engagements” issued by the Institute of Chartered Accountants of India and as may be
amended from time to time. Assurance engagements does not include engagements for the
compilation of financial statements or engagements solely to assist the client in preparing,
compiling or collating information other than financial statements; or engagement for Due diligence.
In the given situation, CA. Sita is appointed as a peer reviewer for M/s Ram Associates, has asked
for all the compilations and the due diligence engagements carried out by M/s Ram Associates for
her peer review. In view of above, Peer Review of compilation and due diligence at the time of
execution step by CA. Sita is not correct as due diligence and compilation engagements are not
covered in the scope of Assurance engagement and Peer Review is direct ed at assurance
engagement only.

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 Test Series : March, 2022
MOCK TEST PAPER -I
FINAL COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
All MCQs are compulsory
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100
DIVISION A – MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. M/s. ASH Brothers is a partnership firm engaged in the business of selling old vehicles. Mr. A, Mr. S and
Mr. H are the three partners of the firm. In the month of January 2021, Mr. H’s son (a minor) was admitted
for the benefit of partnership who attained majority in April 2022, but no change was made in the
Partner’s share during the year. Whether the tax auditor is required to mention the details of Mr. H’s son
admitted to the partnership during the year, as per clause 9 of Form3CD of the Income Tax?
(a) Since the minor has not attained majority during the audit period, no details need to mention in
Form 3CD.
(b) The auditor is not required to give details of minor admitted to partnership as there was no change
in the Partner’s Share during the year.
(c) Any change in the Partners since the last date of the preceding year has to be mentioned under
clause 9(b) of Form 3CD.
(d) As the father of minor is his guardian till he attains majority and Mr. H was already partner in the
firm, there is no need to mention the details of minor in Form 3CD.
2. M/s Brahmi and Associates have been appointed as the statutory auditor of Prompton Leaves Limited,
a manufacturer of gas geysers for the FY 2021-22. During the course of audit, the auditor found that two
customer complaints have been filed against the company in the FY 2021-22, for the use of sub standard
pipes and wires in manufacture of gas geysers. The gas geyser blasted at high temperature leading to
severe injuries to the family of complainant along with damage to their property. They have sought a
demand of rupees 10 crore. However, the lawyer of Prompton Leaves Limited believes that such claim
is unsustainable as the incident occurred due to short circuit at both the complainants place. The
management of Prompton Leaves Limited accordingly did not include any reference to the litigation in
the financial statements. The auditor obtained legal advice from some independent lawyer according to
whom the outcome of the case is not ascertainable as of now.
(a) The statutory auditor should give an unqualified opinion.
(b) The statutory auditor should give an unqualified opinion with Emphasis of Matter paragraph.
(c) The statutory auditor should withdraw from the audit engagement.
(d) The statutory auditor should give a qualified opinion.
3. M/s Vardhman and Associates have been appointed as the statutory auditors of a NBFC (UVW Ltd.) for
the financial year 2021-22. The company is required to comply with the Indian Accounting Standards.
During the course of audit CA Vardhman found that the company has classified its Assets and Liabilities
as financial and non-financial instead of current and non-current. What should CA Vardhman advice the
management of NBFC UVW Ltd. in this regard?

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 (a) The management of NBFC UVW Ltd. is correct in classifying the Balance Sheet items as financial
and non-financial as per requirement of Division III of Schedule III of Companies Act 2013.
(b) The management of NBFC UVW Ltd. is not correct in this regard and should classify the Balance
Sheet items as current and non-current as is required by all other companies as per the requirement
of the Division III under Schedule III of the Companies Act 2013.
(c) The management of NBFC UVW Ltd is right in this regard as the NBFC has the option to classify
the balance sheet items either as current and non-current or as financial and non- financial.
(d) The management of NBFC UVW Ltd. should classify the Balance Sheet items as current and non-
current as per the requirement of Division II of Schedule III of the Companies Act 2013 applicable
in case of NBFC.
4. M/s Shiva & Associates have been appointed as statutory auditors of Kailash Ltd. which is the company
registered under Section 8 of the Companies Act 2013. During the course of aud it, CA Shiva noticed
that the Board of Directors have held their meetings only twice, in the financial year under audit. How
should CA Shiva deal with the same in the compliance certificate to be issued by him?
(a) CA Shiva should give an adverse statement stating that the meeting of board of directors were held
only twice as against the minimum requirement of 4 meetings of financial year.
(b) CA Shiva need not mention regarding the same in the compliance certificate as there is no minimum
requirement of meeting of board of directors in case of companies registered under Section 8.
(c) Kailash Ltd. being a company registered under Section 8 of the Companies Act 2013 is exempt
from obtaining compliance certificate from the statutory auditors.
(d) Kailash Ltd. is correct in conducting two meeting of board of directors therefore , CA Shiva should
not give an adverse or qualified statement in this regard.
5. M/s Sati and Associates were appointed as the statutory auditors of Power King Limited for the audit o f
financial year 2021-22. Power King Limited has a power generating plant in Sikkim. At the time of
accepting the engagement, it was decided among the engagement partner (CA S ati) and the
management that since CA Sati and his team is doing the audit of a client having power plant in Sikkim
for the first time, it will be the duty of the management to update the audit team regarding all the taxes
and statutes applicable to units situated in Sikkim. Which of the following is correct in this regard?
(a) The engagement team, being the auditor of Sikkim based power plant for the first time can always
rely on the management’s information and can work accordingly.
(b) The engagement team should understand the Power King Limited business environment and
should obtain knowledge about the laws and statutes applicable in this case.
(c) The engagement team should not accept the audit of such power plant situated in Sikkim of which
he has no prior knowledge.
(d) The engagement team can very well accept the audit of Power King Limited and with respect to
aspects related to Sikkim law he can give disclaimer of opinion, if required.
6. Employees of Star Ltd. have to travel frequently for business purposes, so the company entered into a
contract with a Sudarshan Travels Ltd. for managing booking, cancellation and other services required
by their employees. As per contract terms, Sudarshan travels has to raise its monthly bills for the tickets
booked or cancelled during the period and the same are paid by Star Ltd. within 15 days of the bill date.
The bills raised by Sudarshan travels were of huge amount, so the management of Star Ltd. decided to
get an audit conducted of the process followed for booking/ cancellation of tickets and verif y the accuracy
of bills raised by the travel agency. Which audit do you feel the management should opt for?
(a) Internal audit, as it relates to examine the operational efficiency of the organisation.
(b) Management audit, as it is an audit desired by the management.
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 (c) Performance audit so as to assess the performance of the Sudarshan travels appointed by the
organisation.
(d) Operational audit, as it is the audit for the management and involves verifying the effectiveness,
efficiency and economy of operations done by the Sudarshan travels for the organisation.
7. PRS Ltd. issued a prospectus in respect of an IPO which had the auditor’s report on the financial
statements for the year ended 31st March 2021. The issue was fully subscribed. During this year, there
was an abnormal rise in the profits of the company for which it was found later on that it was because
of manipulated sales in which there was participation of whole-time director and other top officials of the
company. On discovery of this fact, the company offered to refund all moneys to the subscribers of the
shares and sued the auditors for the damages alleging that the auditors failed to examine and ascertain
any satisfactory explanation for steep increase in the rate of profits and related accou nts. The company
emphasized that the auditor should have proceeded with suspicion and should not have followed
selected verification. The auditors were able to prove that they found internal controls to be satisfactory
and did not find any circumstance to arouse suspicion. The company was not able to prove that auditors
were negligent in performance of their duties. Please suggest your views on this.
(a) The stand of the company was correct in this case. Considering the nature of the work, the Auditors
should have proceeded with suspicion and should not have followed selected verification.
(b) The approach of the auditors looks reasonable in this case. The auditors found internal controls to
be satisfactory and also did not find any circumstance to arouse suspicion and hence they
performed their procedures on the basis of selected verification.
(c) In the given case, the auditors should have involved various experts along with them to help them
on their audit procedures. Prospectus is one area wherein management involves various experts
and hence the auditors should also have done that. In the given case, by not involving the experts
the auditors did not perform their job in a professional manner. If they had involved experts like
forensic experts etc., the manipulation could have been detected. Hence the auditors should be
held liable.
(d) In case of such type of engagements, the focus is always on the management controls. If the
controls are found to be effective, then an auditor can never be held liab le in respect of any
deficiency or misstatement or fraud.
8. Which of the following is not an indicator about material uncertainty over the entity’s ability to continue
as a going concern:
(a) Net liability or net current liability position.
(b) Cancellation of company’s production license due to change on government policies.
(c) Non-declaration of dividend to equity shareholders.
(d) Substantial operating losses or significant deterioration in the value of assets used to generate
cash flows.
9. ………….. approach to sampling has the following characteristics:
I. Random selection of the sample items; and
II. The use of probability theory to evaluate sample results, including measurement of sampling risk.
(a) Statistical sampling
(b) Non-statistical sampling
(c) Stratified sampling
(d) Haphazard sampling

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10. Which of the following is an example of Direct Entity level control
(a) Company code of conduct and ethics policies.
(b) Human resource policies.
(c) Job roles & responsibilities of employees.
(d) Monitoring of effectiveness of controls activities by Internal Audit function. (10 x 1 = 10 Marks)
Questions (11-20) carry 2 Marks each
MCQ 11. -15.
Integrated Case Scenario 1
M/s Head Limited, had recently issued right shares for all the existing shareholders. The total proceeds
collected amounted to ` 200 crore, out of which 50 % was planned to be used for construction of a new
factory next to the existing one and the balance was to be used for working capital purpose. However, due to
the Covid-19 pandemic, the proposed factory work was affected and hence the company decided to park 9%
of the specific fund in a debt mutual fund instead of keeping it idle. Similarly, the company decided to park
11% of the working capital fund in government securities.
M/s Legs Limited, an unlisted associate entity of Head Limited had similarly raised funds through qualified
institutional placement & used the funds fully for the specified purpose. The auditor of the Legs Limited (Mr.
G, partner of M/s GK & Associates) and the auditor of Head Limited (Mr. Q, partner of M/s CYQ & Associates)
suggested that they shall mandatorily disclose the details of utilization of funds, as per SEBI LODR
Regulation 32.
However, Mr. C, one of the partners of M/s CYQ & Associates argued that there is no need to report the
above matter under SEBI LODR Regulations, but the same shall be reported under CARO 2020. Mr. Q argued
that the matter need not be reported under CARO 2020. This argument had spoiled the relationship between
the two partners, as a result of which, Mr. C decided to quit from the partnership and started his own practice.
Mr. C then decided to induct Mr. J, a newly qualified Chartered Accountant as a partner in his firm. After this,
the firm got an audit assignment from M/s Bank Limited. Mr. C consulted with his partner whether to accept
the offer. Mr. J told that he has a loan (amounting to 75% of FD) against fixed deposit (of `6.8 lakh) in the
said bank and feared that they cannot accept the offer. However, Mr. C told that since the loan is against
fixed deposit there is no problem in taking up the offer, but he didn’t want to force Mr. J in giving his
acceptance. Therefore, the offer was dropped.
Few months later, Mr. C passed away and the whole firm was managed by his partner Mr. J. The legal
representative of Mr. C (Mrs. C) quoted the partnership agreement clause regarding the right of legal
representative of the deceased partner to receive share of profit from the firm and requested for such share
of profit. However, Mr. J informed that there is no such provision as per the Chartered Accountants Act and
denied to share any profits/ revenue from the firm. Agitated by the decision of Mr. J, Mrs. C filed a complaint
with the Institute of Chartered Accountants of India against Mr. J.
On the basis of the abovementioned facts, you are required to answer the following MCQs:
Multiple Choice Questions (5 questions of 2 Marks each):
11. Is the advice of Mr. Q correct in case of Head Limited? If yes what are the details which need to be
disclosed by the company?
(a) Yes. The company shall indicate the deviations in use of proceeds and category wise variation
between projected utilization and actual utilization.
(b) No. There is no need to indicate the statement since such deviations were due to Covid -19
pandemic.

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 (c) Yes. The company shall indicate the deviations in use of proceeds in form of an explanatory
statement.
(d) Yes. The company shall indicate the % of deviation if such deviation is more than 10% of the total
funds allotted for the specified purpose. Hence, the company shall indicate only the deviation in
utilization funds allocated for working capital purpose.
12. In case if Head Limited is to report the deviation in use of funds, at what interval should it report the
same?
(a) Disclose it every year in its Annual Report
(b) Biannual reporting
(c) Every quarter
(d) Monthly reporting, till the funds are fully utilised.
13. Assuming yourself as the auditor of Head Limited, what would be your stand on reporting the deviation
in utilization of funds under CARO 2020?
(a) There is no need to report the matter under CARO, since such deviations were due to Covid -19
pandemic.
(b) The matter should be reported under CARO, under clause (xi)(a)
(c) The matter should be reported under CARO, under clause (x)
(d) The matter should be reported under CARO, under clause (xvi)(b)
14. In the above case, is the act of Mr. J to deny share of profits to legal representative of Mr. C right?
What is the relevant provision of the Chartered Accountants Act which you need to refer in this case?
(a) Mr. J has no right to deny the share of profit since it is given in the partnership agreement. The
relevant provision to be considered here is Clause 2 of Part I of First Schedule of Chartered
Accountants Act.
(b) Mr. J has all right to deny the share of profit since it shall lead to professional misconduct. The
relevant provision to be considered here is clause 2 of Part I of First Schedule of Chartered
Accountants Act.
(c) Mr. J has no right to deny the share of profit since it is given in the partnership agreement. The
relevant provision to be considered here is Clause 4 of Part I of First Schedule of Chartered
Accountants Act.
(d) Mr. J is correct in denying the share of profit. Though the same is mentioned in the agreement, it
is against the provisions of Chartered Accountants Act. The relevant provision to be considered
here is Clause 1 of Part II of Second Schedule.
15. Had the firm accepted the audit assignment of Bank Limited, would it have led to invalid appointment
as per the Companies Act, 2013? If yes, under what provision?
(a) No. As explained by Mr. C, since the loan was against a fixed deposit (loan against a collateral)
appoint of the firm would not be void had they accepted the offer.
(b) Yes. The acceptance of the offer would have led to invalid appointment of the firm as per the
section 141(3)(d)(ii) of the Companies Act, 2013.
(c) Yes. The acceptance of the offer would have led to invalid appointment of the firm as per the
section 141(3)(d)(iii) of the Companies Act, 2013.
(d) Yes. The acceptance of the offer would have led to professional to invalid appointment of the firm
as per the section 141(3)(c)(ii) of the Companies Act, 2013.

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MCQ 16. -20.
Integrated Case Scenario 2
M/s Audit & Co. were appointed as internal auditors of M/s Manufacturing Limited, whose shares were held
by Mr. F, Mrs. F, Mr. S & Ms. D in equal proportion.
CA Senior and his articled assistant Mr. Junior were a part of the team which was looking after the above
assignment. As a part of the work, Mr. Junior was required to take care of the P2P internal controls established
to ensure the three-way match is properly functioning. Being new to internal audit, he asked from help from
a fellow team member regarding the above matter.
After completion of the audit, the firm submitted its report directly to the Board of Directors of the company.
A copy of the same was also sent to the company’s statutory auditors. The report had clearly mentioned that
the existing internal audit system in the company was not commensurate with its size and nature of business.
Following this, the company offered the assignment of Tax Audit to M/s Audit & Co. itself. All the partners
were happy to accept the offer, except CA New, an ex-articled assistant and newly inducted partner of the
firm. He was of the opinion that if the above offer was accepted, it would lead to professional misconduct
under the Chartered Accountants Act. However, despite his advice, the firm went on to accept the offer.
After the above incident, CA New resigned from the firm and started his own practice as a sole proprietor.
Few days after the resignation of CA New, the following things happened:
(i) M/s Audit & Co. had advertised the changes in partnership of the firm, by limiting the ad to a bare
statement of facts and consideration given to the appropriateness of the area of distribution of the
magazine.
(ii) CA New issued a classified advertisement in the newsletter of the Institute, for seeking partnership. The
ad contained his name, phone number and addresses of Social Networking sites.
On the basis of the abovementioned facts, you are required to answer the following MCQs:
Multiple Choice Questions (5 questions of 2 Marks each):
16. Assuming yourself to be a fellow team member of Mr. Junior, explain him what is a three -way match
internal control involved in P2P process.
(a) Matching of Purchase order, Sales order & Invoice raised to ensure all ordered quantity of
intended goods have been invoiced and proper control over quantity of inventory is maintained.
(b) Matching of Sales order, Goods delivery note & invoice to ensure all ordered quantity of intended
goods have been delivered and invoiced accordingly.
(c) Matching of Sales order, Invoice & Payment receipt details to ensure all ordered quantity of
intended goods have been invoiced and payment for the same is received.
(d) Matching of Purchase order, Goods receipt note & invoice to ensure all ordered quantity of
intended goods have been received and invoiced accordingly.
17. Assuming yourself to be the statutory auditors of the company, would you need to mention about the
details in the internal audit under CARO 2020? If yes, under what clause should it be mentioned?
(a) The above matter should be reported under clause (xiv) of CARO 2020
(b) The above matter need not be reported under CARO, but it shall be reported under Emphasis of
Matter Paragraph as per SA 706.
(c) The above matter should be reported under clause (xviii) of CARO 2020
(d) The above matter should be reported under clause (xv) of CARO 2020

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18. From the above information that M/s Manufacturing Limited appointed an internal auditor, what could
you infer about their Paid-up share capital, outstanding deposit & turnover?
(a) Paid up share capital of ≥ 40 crore Outstanding deposits > 20 crore; Turnover ≥ 190 crore
(b) Paid up share capital of ≥ 25 crore Outstanding deposits ≥ 25 crore; Turnover ≥ 100 crore
(c) Paid up share capital of ≥ 50 crore Outstanding deposits ≥ 25 crore; Turnover ≥ 200 crore
(d) Paid up share capital of ≥ 45 crore Outstanding deposits ≥ 15 crore; Turnover > 100 crore
19. Will accepting the Tax Audit offer lead to professional misconduct? If yes, as per which clause?
(a) No. There will be no professional misconduct on the firm, if it accepts the offer.
(b) Yes. By accepting the offer, the firm will be guilty of professional misconduct as per clause 4 of
Part I of Second Schedule read along with Council Guidelines.
(c) Yes. By accepting the offer, the firm will be guilty of professional misconduct as per clause 12 of
Part I of First Schedule.
(d) Yes. By accepting the offer, the firm will be guilty of professional misconduct as per clause 2 of
Part I of Second Schedule read along with Council guidelines.
20. Comment on following incidents (i) & (ii) discussed in the scenario from the perspective of Professional
Ethics as per the Chartered Accountants Act.
(i) M/s Audit & Co. had advertised the changes in partnership of the firm, by limiting the ad to a bare
statement of facts and consideration given to the appropriateness of the area of distribution of the
magazine.
(ii) CA New issued a classified advertisement in the newsletter of the Institute, for seeking partnership.
The ad contained his name, phone number and addresses of Social Networking sites.
(a) Incident (ii) makes CA New guilty of professional misconduct, since he is advertising for seeking
partnership.
(b) Neither of the incidents violate any provisions of Chartered Accountants Act. Hence, there is no
professional misconduct.
(c) Incident (i) makes M/s Audit & Co. firm guilty of professional misconduct, as the advertisement is
published in newspaper other than that issued by the Institute.
(d) Incident (ii) makes CA New guilty of professional misconduct, since he has provided the addresses
of his social networking sites. (10 x 2 = 20 Marks)
Division B- Descriptive Questions-70 Marks
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
1. (a) M/s Chandra & Co., Chartered Accountants were appointed as Statutory Auditors of Green
Essence Limited for the F.Y 2021-2022. The previous year's audit was conducted by M/s. Nath &
Associates. After the audit was completed and report submitted, it was found that closing balances
of last financial year i.e., 2020-21 were incorrectly brought forward. It was found that M/s Chandra
& Co. did not apply any audit procedures to ensure that correct opening balances have been
brought forward to the current period. Accordingly, a complaint was filed against Chandra & Co. in
relation to this matter.
You are required to inform what policies are required to be implemented by Chandra & Co. for
dealing with such complaints and allegations as required by Standard on Quality Control (SQC).
(5 Marks)
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 (b) M/s. Sumati & Co. was appointed as an auditor of Mati Limited, a company operating its business
in telecom sector. As per spectrum allocation agreement with Government, Mati Limited is required
to pay certain percentage of its annual revenue as license fee. Mati Limited paid the license fee on
its core business for last two years. At the end of third year, the communication was received from
Government that it needs to pay agreed percentage on its total revenues and not only on core
business revenues. Matter was disputed and went to court of law. On prudence basis, Mati Limited
made a provision on estimated business in its books of accounts of agreed percentage on non -
core business receipts also. The amount of provision was of such huge amount that the Mati
Limited's profit and loss account for that quarter reflected loss due to that provision. How you as
an auditor can evaluate this accounting estimate which involves significant risk and what if
Management has not addressed the effects of estimation uncertainty on prov ision made?
(4 Marks)
(c) In the financial year 2020-21, Shreyansh Ltd. faced an extraordinary event (earthquake), which
destroyed a lot of business activity of the company. These circumstances indicate material
uncertainty on the company’s ability to continue as going concern. Due to such event it may not be
possible for the company to realize its assets or pay off the liabilities during the regular course of
its business. The financial statement and notes to the financial statements of the company do no t
disclose this fact. What kind of opinion should the statutory auditor of Shreyansh Ltd. issue in such
circumstances and why? Also, draft the opinion and basis for opinion para for the same.
(5 Marks)
2. (a) Prabhu Ltd., a company incorporated in India and listed on a recognized Stock Exchange in India,
has entered into various related parties transactions during the financial year. You are required to
answer the following keeping in mind the Listing Obligations and Disclosure Requirements (LODR)
on Corporate Governance.
(i) Who should sign the report of material transactions with related parties? (1 Mark)
(ii) What type of transactions and policy are required to be disclosed in relation to related party
transactions? (2 Marks)
(iii) Whether disclosures of related party transactions on consolidated financial statements are
required to be made? If yes, what are the guidelines? (2 Marks)
(b) The volatility, unpredictability and pace of fast changes that exists in the automated environment
today is far greater than in the past and consequently it throws more risk to business which requires
them to have a need to continuously manage such risks. State various risks which an enterprise
may have to face and manage. (4 Marks)
(c) CA Bahu, a newly qualified professional with certificate of practice, approached CA Subahu, the
auditor of his father's company Apex Ltd., to allow him to have some practical and professional
knowledge and experience in his firm before he can set up his own professional practic e. CA
Subahu allowed him to sit in his office for 6 month and allotted a small chamber with other office
infrastructure facility. In the course of his association with CA Subahu' s office, he used to provide
tax consultancy independently to the client of the firm and also filed few IT and GST return and
represented himself before various tax authorities on behalf of the firm although no documents
were signed by him. During his association in CA Subahu's office, he did not get any salary or
share of profit or commission but only re-imbursement of usual expenses like conveyance,
telephone etc. was made to him. After the end of the agreed period, he was given a lump sum
amount of ` 2,50,000 by CA Subahu for his association out of gratitude. Give your comments with
reference to the Chartered Accountants Act, 1949 and Schedules thereto. (5 Marks)
3. (a) You have been appointed to carry out the audit of Blue Heaven Life Insurance Company Ltd. for
the year 2021-22. During the course of audit, you observed that the commission payable to agents
constituted a major expense in operating expenses of the Company. Enumerate the audit concerns
8

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 that address to the assertions required for the Auditor to ensure the continued existence of internal
control as well as fairness of the amounts in accounting of commission payable to agents.
(5 Marks)
(b) Mr. Yuvi is a contractor dealing in food catering, flower decorating and light decorating activities.
He has received contract in respect of food catering and flower decorating from one NGO for
holding Annual Talent evening event to celebrate completion of 25 years of their establishment.
For the said event Mr. Yuvi has received in cash ` 1,75,000 for food catering and ` 1,35,000 for
flower decoration. As a tax auditor how would you deal and report on the above? (5 Marks)
(c) CA. Vardhman, a Chartered Accountant in practice, empanelled as an Insolvency Professional (IP)
has mentioned the same on his visiting cards, letter heads and other communications also.
Mr. Tapas residing in his neighbourhood, has filed a complaint for professional misc onduct against
the said member for such mention of IP. You are required to examine the same with reference to
the Chartered Accountants Act, 1949 and Schedules thereto. (4 Marks)
4. (a) CA Sheetal is conducting the statutory audit of Kunthu Ltd., a non-banking financial company. It
has branches in various parts of India. The company with a focus on housing finance, has
outstanding non-convertible debentures worth ` 170 crore. The company reportedly missed
interest payments of ` 17 crore on its debts because of inadequate liquidity. As a result, Kunthu
Ltd. faced a series of downgrades by rating agencies on its debts over the past two months. Rating
was cut to D from A4 implying that the company was in default or expected to be in default soon.
What aspects CA Sheetal should look into in relation to the activity of mobilization of public deposits
(particularly in relation to downgrading of credit facilities) by Kunthu Ltd? (5 Marks)
(b) Moksh Ltd. is a manufacturing company and started its business in the year 2000. The net profit
after tax of the company was 15% up to the financial year 2019-20, but for the financial year 2020-
21 and 2021-22 the company’s profit declined even when there was increase in the sales and
production of goods by the company. So, the management of AS Ltd. felt a need to get the
management audit conducted with the objective of detecting and overcoming current managerial
deficiencies. Briefly discuss the steps to prepare the management audit report. (5 Marks)
(c) Mr. Shanti, a Chartered Accountant, employed as a paid Assistant with a Chartered Accountant
firm, leaves the services of the firm on 31 st December, 2020. Despite many reminders from ICAI
he fails to reply regarding the date of leaving the services of the firm. Comment with reference to
the Chartered Accountants Act, 1949, and Schedules thereto. (4 Marks)
5. (a) Mr. Shripal, a practising Chartered Accountant, has been appointed as an auditor of Rani Ltd on
12th June, 2021 for the year ended 31 st March, 2022. The following persons have done following
transactions in securities of Rani Ltd.:
➢ Daughter of Mr. Shripal Purchase of Securities on 10 th September, 2021 of face value of
` 45,000 (market value ` 90,000).
➢ Husband of daughter of Mr. Shripal: Purchase of Securities on 10th December, 2021 of face
value of ` 90,000 (market value ` 1,90,000).
All the above securities were sold on 18 th February, 2022 for ` 3,00,000. Discuss the implications
of the above on the appointment of Mr. Shripal. (5 Marks)
(b) EROS, a movie theatre complex, is the foremost theatre located in Bangalore. Along with the sale
of tickets over the counter and online booking, the major proportion of income is from the cafe,
shops, pubs etc. located in the complex. Its other income includes advertisements exhibited
within/outside the premises such as hoardings, banners, slides, short films etc. The facility for
parking of vehicles is also provided in the basement of the premises.

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 EROS appointed your firm as the auditor of the entity. Being the head of the audit team, you are,
therefore, required to draw an audit programme initially in respect of its revenue and expenditure
considering the above mentioned facts along with other relevant points relating to a complex.
(5 Marks)
(c) HSDC Bank Ltd., received an application from a pharmaceutical company for take over of their
outstanding term loans secured on its assets, availed from and outstanding with a nationalised
bank. HSDC Bank Ltd., requires you to make a due diligence audit in the areas of assets of
pharmaceutical company especially with reference to valuation aspect of assets. State what may
be your areas of analysis in order to ensure that the assets are not stated at overvalued amounts.
(4 Marks)
6. (a) Bahubali & Co., a CA. firm was appointed by C&AG to conduct comprehensive audit of Brahmi
Ltd., a public sector undertaking. C&AG advised Bahubali & Co. to cover areas such as investment
decisions, project formulation, organisational effectiveness, capacity utilisation, management of
equipment, plant and machinery, production performance, use of materials, productivity of labour,
idle capacity, costs and prices, materials management, sales and credit control, budgetary and
internal control systems, etc. Discuss stating the issues examined in comprehensive audit.
(5 Marks)
(b) The Auditor of Rapid Limited succumbed to the pressure of the management in certifying the
financials with an over stated figure of turnover by not adhering to the cut -off principles of the time
scale for the transactions of the year. On taking cognizance of this act of the a uditor, the Tribunal
under the Companies Act, 2013 initiated the proceedings against him. Briefly list the powers of the
Tribunal in this respect including those relating to making orders against the Auditor found to be
guilty. (5 Marks)
(c) CA Rajul has been appointed as Forensic Auditor by BMY Bank Limited for one of its borrowal
accounts AMISS Ltd. CA Rajul started the audit by first reviewing the transactions of the borrower
in Bank statement as per Bank records to identify any hidden patterns in that information. She had
to review huge volume of data, as the number of transactions per day were in hundreds and the
data was to be reviewed for the last three years. So, she was stuck up as to how to proceed further
to identify any hidden patterns in information, if any. Guide CA Rajul, suggesting which technique
to be used for identifying any hidden patterns in the information. (4 Marks)
OR
While assigning the quality review work to the respective Technical Reviewers, in order to ensure
independence and avoid conflict of interest, certain eligibility conditions were specified for carrying
out the specified quality review assignment to the Technical Reviewers who were required to submit
a declaration of eligibility before starting the assignment. In view of above, briefly discuss those
eligibility conditions prescribed for Technical Reviewer. (4 Marks)

10

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 Test Series : March, 2022
MOCK TEST PAPER 1
FINAL COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS
DIVISION A - MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. (c)
2. (d)
3. (a)
4. (d)
5. (b)
6. (d)
7. (b)
8. (c)
9. (a)
10. (d)
Questions (11-20) carry 2 Marks each
11. (a)
12. (c)
13. (c)
14. (a)
15. (b)
16. (d)
17. (a)
18. (c)
19. (b)
20. (b)
DIVISION B - DESCRIPTIVE QUESTIONS (70 Marks)
1. (a) In the given question, Chandra & Co. did not apply audit procedures to ensure that opening
balances had been correctly brought forward. A complaint was filed against the auditors in this
context. As per Standard on Quality Control (SQC) 1 “Quality Control for Firms that Perform Audits
and Reviews of Historical Financial Information, and Other Assurance and Related Services
Engagements”,
(i) The firm should establish policies and procedures designed to provide it with reasonable
assurance that it deals appropriately with:
(a) Complaints and allegations that the work performed by the firm fails to comply with
professional standards and regulatory and legal requirements; and
(b) Allegations of non-compliance with the firm’s system of quality control.

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 (ii) Complaints and allegations (which do not include those that are clearly frivolous) may
originate from within or outside the firm. They may be made by firm personnel, clients or other
third parties. They may be received by engagement team members or other firm personnel.
(iii) As part of this process, the firm establishes clearly defined channels for firm personnel to
raise any concerns in a manner that enables them to come forward without fear of reprisals.
(iv) The firm investigates such complaints and allegations in accordance with established policies
and procedures. The investigation is supervised by a partner with sufficient and appropriate
experience and authority within the firm but who is not otherwise involved in the engagement,
and includes involving legal counsel as necessary. Small firms and sole practitioners may use
the services of a suitably qualified external person or another firm to carry out the
investigation. Complaints, allegations and the responses to them are documented.
(v) Where the results of the investigations indicate deficiencies in the design or operation of the
firm’s quality control policies and procedures, or non-compliance with the firm’s system of
quality control by an individual or individuals, the firm takes appropriate action.
(b) In the given case, Sumati & Co. was appointed as an auditor of Mati Ltd., operating in Telecom
sector. GSB Ltd paid the license fee on its core business revenue whereas Govt required it to pay
on non-core business receipts as well. Consequently, the amount of provision was of such a huge
amount that Mati Ltd.’s profit and loss account reflected a loss due to that provision. As an auditor
evaluation would be done as under:
For accounting estimates that give rise to significant risks, in addition to other substantive
procedures performed to meet the requirements of SA 330, the auditor shall evaluate the following:
(i) How management has considered alternative assumptions or outcomes, and why it has rejected
them, or how management has otherwise addressed estimation uncertainty in making the
accounting estimate.
(ii) Whether the significant assumptions used by management are reasonable.
(iii) Where relevant to the reasonableness of the significant assumptions used by management or the
appropriate application of the applicable financial reporting framework, management’s intent to
carry out specific courses of action and its ability to do so.
(iv) If, in the auditor’s judgment, management has not adequately addressed the effects of estimation
uncertainty on the accounting estimates that give rise to significant risks, the auditor shall, if
considered necessary, develop a range with which to evaluate the reasonableness of the
accounting estimate.
(c) In the present case, there exists a material uncertainty that cast a significant doubt on the
company’s ability to continue as going concern and the same is not disclosed in the financial
statements of Shreyansh Ltd.
As such, the financial statements of Shreyansh Ltd. for the FY 2020 -21 are materially misstated
and the effect of the misstatement is so material and pervasive on the financial statements that
giving only a qualified opinion will be insufficient and therefore the statutory auditor of Shreyansh
Ltd . should issue an adverse opinion.
The relevant extract of the Adverse Opinion Paragraph and Basis for Adverse Opinion paragraph
is as under:
Adverse Opinion
In our opinion, because of the omission of the information mentioned in the Basis for Adverse
Opinion section of our report, the accompanying financial statements do not present fairly, the
financial position of Shreyansh Ltd. as at March 31, 2021, and of its financial performa nce and its

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 cash flows for the year then ended in accordance with the Accounting Standards issued by the
Institute of Chartered Accountants of India.
Basis for Adverse Opinion
Shreyansh Ltd. has faced an extraordinary event (earthquake), which destroy ed a lot of business
activity of the company. Due to such event it may not be possible for the company to realize its
assets or pay off the liabilities during the regular course of its business. This situation indicates
that a material uncertainty exists that may cast significant doubt on the Company’s ability to
continue as a going concern. The financial statement and notes to the financial statements of the
company do not disclose this fact.
2. (a) An Indian company, Prabhu Ltd., listed on stock exchange entered into various related party
transactions.
(i) The report shall be signed either by the compliance officer or the chief executive officer of the
listed entity.
(ii) (a) The company shall disclose the policy on dealing with related party transactions on its
website and a web link thereto shall be provided in the Annual Report.
(b) The listed entity shall disclose the transactions with any person or entity belonging to
the promoter/ promoter group which hold(s) 10% or more shareholding in the listed
entity, in the format prescribed in the relevant accounting standards for annual results.
(iii) (a) Yes, disclosures of related party transactions on consolidated financial statements are
required to be made by the listed entity within 30 days from the date of publication of its
standalone and consolidated financial results for the half year.
(b) The listed entity shall disclose related party transactions on a consolidated basis, in the
format specified in the relevant accounting standards for annual results to the stock
exchanges and publish the same on its website. Provided that a ‘high value debt listed
entity’ shall submit such disclosures along with its standalone financial results for the
half year
(b) Various Risk: Businesses today operate in a dynamic environment. The volatility, unpredictability
and pace of changes that exist in the business environment today is far greater than in the past.
Some of the reasons for this dynamic environment include globalization, us e of technology, new
regulatory requirements, etc. Because of this dynamic environment the associated risks to
business have also increased and companies have a need to continuously manage risks.
Examples of risks include:
• Market Risks;
• Regulatory & Compliance Risks;
• Technology & Security Risks;
• Financial Reporting Risks;
• Operational Risks;
• Credit Risk;
• Business Partner Risk;
• Product or Project Risk;
• Environmental Risks.
(c) Clause (1) of Part I of the First Schedule to the Chartered Accountants Act, 1949 states that a
chartered accountant in practice shall be deemed to be guilty of professional misconduct if he

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 allows any person to practice in his name as a chartered accountant unless such person is also a
chartered accountant in practice and is in partnership with or employed by him.
The above clause is intended to safeguard the public against unqualified accountant practicing
under the cover of qualified accountants. It ensures that the work of the accountant will be carried
out by a Chartered Accountant who may be his partner, or his employee and would work under his
control and supervision.
In the instant case, CA Subahu allowed CA Bahu (who is a newly qualified CA professional with
COP) to sit in his office for 6 months, and allowed him to provide tax consultancy independently to
his firm’s clients, filing of some IT and GST Returns. He also allowed him to appear before various
tax authorities on behalf of his firm. CA Bahu was only reimbursed with his usual expenses and
was not paid any salary or share of profit for the same. However, after the end of agreed period he
was given a lump-sums of ` 2,50,000 for his association out of gratitude.
Thus, in the present case CA. Subahu will be held guilty of professional misconduct as per Clause
(1) of Part I of First Schedule to the Chartered Accountants Act, 1949 as he allowed CA Bahu to
practice in his name as Chartered accountant and CA Bahu is neither in partnership nor in
employment with CA. Subahu.
3. (a) Commission payable to Agents: Insurance business is generally solicited by the Insurance
agents. The remuneration of agent is paid by way of commission which is calculated by applying
percentage to premium collected by him. Agency commission contributes towards significant
portion of expenses incurred by the Insurance Commission. Commission is payable towards
generation of new business and towards settlement of renewal premium
Role of Auditor: The Auditor during his review of Commission paid to Agents should mainly
consider the following:
Review the system established by the Insurer with respect to calculation of commission to
eligible agents accurately and processing the same in timely manner.
Review the commission payment system is in sync with the premium collecti on system.
Check whether commission paid is within the limit prescribed under Insurance Act.
Check whether commission is clawed-back on the cancelled policies.
(b) Section 269ST provides that no person shall receive sum of ` 2 lakh or more a) in aggregate from
a person in a day; or b) in respect of a single transaction; or c) in respect of transactions relating
to one event or occasion from a person otherwise than by an account payee cheque or an account
payee demand draft or by use of electronic clearing system through a bank account.
Further, the tax auditor has the responsibility to verify the compliance with the provisions of 269T
of the Income Tax Act.
Furthermore, the tax auditor is required to report under Clause 31 (ba) particulars of each receipt
in an amount exceeding the limit specified in section 269ST, in aggregate from a person in a day
or in respect of a single transaction or in respect of transactions relating to one event or occasion
from a person, during the previous year, where such receipt is otherwise than by a cheque or bank
draft or use of electronic clearing system through a bank account:-
(i) Name, address and Permanent Account Number (if available with the assessee) of the payer;
(ii) Nature of transaction;
(iii) Amount of receipt (in `);
(iv) Date of receipt;
In the present case, Mr. Yuvi, contractor dealing in food catering, flower decorating and light
decorating activities, received in cash ` 1,75,000 for food catering and ` 1,35,000 for flower

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 decoration from one NGO for holding one event, by way of cash which is exceeding prescribed
amount of ` 2,00,000. Thus, tax auditor is required to report the same in compliance with Clause
31 (ba) of Form 3CD.
(c) Using Designation of Insolvency Professional: As per Clause (7) of Part I of First Schedule to
the Chartered Accountants Act, 1949, a CA in practice is deemed to be guilty of professional
misconduct if he (i) advertises his professional attainments or services or (ii) uses any designation
or expressions other than ‘Chartered Accountant” on professional document s, visiting cards, letter
heads or sign boards unless it be a degree of a university established by law in India or recognized
by the Central Government or a title indicating membership of the ICAI or of any other institution
that has been recognized by the Central Government or may be recognized by the council.
In the given situation, CA. Vardhman is a Chartered Accountant in practice. He is also empanelled
as an Insolvency Professional (IP), accordingly, has mentioned the same on his visiting cards,
letter heads and other communications also. As per Clause (7) of Part I of First Schedule to the
Chartered Accountants Act, 1949, a Chartered Accountant empaneled as IP (Insolvency
Professional) can mention “Insolvency Professional” on his visiting cards, let ter heads and other
communication, as this is a title recognised by the Central Government in terms of Clause 7 of Part
1 of First Schedule to the Chartered Accountants Act, 1949. Thus, complaint of neighbor Mr. Tapas
is not enforceable/ valid.
4. (a) CA Sheetal has to ascertain whether the company has complied with the following aspects
in relation to the activity of mobilization of public deposits:-
i. The ceiling on quantum of public deposits has been linked to its credit rating as given by an
approved credit rating agency. In the event of a upgrading/downgrading of credit rating, the
auditor should bear in mind that the NBFC will have to increase/reduce its public deposits in
accordance with the revised credit rating assigned to it within a specified time frame and
should ensure that the NBFC has informed about the same to the RBI inwriting.
ii. In the event of downgrading of credit rating below the minimum specified investment grade,
a non-banking financial company, being an investment and credit company or a factor, shall
regularise the excess deposit as provided hereunder:
a. with immediate effect, stop accepting fresh public deposits and renewing existing deposits;
b. all existing deposits shall run off to maturity; and
c. report the position within 15 working days, to the concerned Regional Office of the RBI where
the NBFC is registered.
d. No matured public deposit shall be renewed without the express and voluntary consent of
the depositor.
(b) Steps to Prepare the Management Audit Report:
Planning the Audit Report - Before starting the report, the auditor should ask himself, “What do I
want to tell the reader about this audit?” The answer will enable him to communicate effectively.
Supporting information - The management auditor should supplement his report with appropriate
audit evidence which sufficiently and convincingly supports the conclusions.
Preparing draft report - Before writing the final report, the auditor should prepare a draft report.
This would help him in finding out the most effective manner of presenting his report. It would also
indicate whether there is any superfluous information or a gap in reasoning.
Writing and issuing the final report - The final report should be written only when the auditor is
completely satisfied with the draft report. The head of the management auditing department may
review and approve the final report. Before issuing the final report, the auditor should discuss

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 conclusions and recommendations at appropriate levels of management. The rep ort should be
duly signed and dated.
Follow-up of the audit report - The management auditor should review whether follow-up action
is taken by management on the basis of his report. If no action is taken within a reasonable time,
he should draw management’s attention to it.
Action / Response of Management on Audit Report: Where management has not acted upon
his suggestions or not implemented his recommendations, the auditor should ascertain the reasons
thereof. In cases where he finds that non-implementation is due to a gap in communication, he
should initiate further discussions to bridge such gaps. The actions and responses to the
Management Audit Report reflect management’s attitude to the audit. In any case, the auditor to
retain the usefulness of the audit function should ascertain from the management, preferably in
writing, the reasons for non- implementation. It is possible that because of change in
circumstances, the audit observation did not require any action on the part of the management.
The auditor should satisfy himself on the appropriateness of such reasons as well to close the
issue.
(c) Failed to Supply Information Called For: As per Clause (2) of Part III of the First Schedule to the
Chartered Accountants Act, 1949, a member, whether in practice or not, will be deemed to be guilty
of professional misconduct if he does not supply the information called for, or does not comply with
the requirements asked for, by the Institute, Council or any of its Committees, Director (Discipline),
Board of Discipline, Disciplinary Committee, Quality Review Board or the Appellate authority.
Thus, in the given case, Mr. Shanti has failed to reply to the letters of the Institute asking him to
confirm the date of leaving the service as a paid assistant. Therefore, he is held guilty of
professional misconduct as per Clause (2) of Part III of the First Schedule to the Chartered
Accountants Act, 1949.
5. (a) Implications of relatives' securities holding on the Appointment of the Auditor: According
to Section 141(3)(d)(i) of the Companies Act, 2013, read with Rule 10, an auditor is disqualified
to be appointed as an auditor if the auditor or his relative holds securities or interest in the
company of face value exceeding ` 100,000.
Further the definition of relative also includes daughter and a daughter's husband. Both are
covered in the definition of relative as defined by the Companies Act 2013.
Thus, the disqualifications will be applicable as the relative/s are holding securities of face value
of more than ` 100,000 and market value is not important.
It is also to note that in the event of acquiring any security or interest by a relative above the
threshold prescribed, the corrective action to maintain the limits as specified above can be taken
by the auditor within 60 days of such acquisition or interest. The same has however not been
done.
In the instant case, Daughter of Mr. Shripal purchased the securities on 10 th September 2021 of
face value of ` 45,000 and husband of daughter of Mr. Shripal purchased the securities on 10 th of
December, 2021 of face value of ` 90,000. Aggregating the value of holding of securities exceeds
the limits mentioned in proviso to section 141(3)(d)(i) i.e. ` 1,00,000.
Further, corrective action taken by Husband of Daughter of Mr. Shripal on 18th February, is also
not in accordance with prescribed grace period of 60 days.
Therefore, CA. Shripal will be disqualified for appointment as an auditor of Raja Ltd. as per section
141(3)(d)(i) and he shall vacate his office.
(b) Audit Programme of Movie Theatre Complex:
(i) Peruse the Memorandum of Association and Articles of Association of the entity.
(ii) Ensure the object clause permits the entity to engage in this type of business.
6

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 (iii) In the case of income from sale of tickets:
(1) Verify the control system as to how it is ensured that the collections on sale of tickets of
various shows are properly accounted.
(2) Verify the system of relating to online booking of various shows and the system of realization
of money.
(3) Check that there is overall system of reconciliation of collections with the number of seats
available for different shows on a day.
(iv) Verify the internal control system and its effectiveness relating to the income from café,
shops, pubs, game zone etc., located within the multiplex.
(v) Verify the system of control exercised relating to the income receivable from
advertisements exhibited within the premises and inside the hall such as hoarding, banners,
slides, short films etc.
(vi) Verify the system of collection from the parking areas in respect of the vehicles parked by
the customers.
(vii) In the case of payment to the distributors verify the system of payment which may be either
through out right payment or percentage of collection or a combination of both. Ensure at the
time of settlement any payment of advance made to the distributor is also adjusted against
the amount due.
(viii) Verify the system of payment of salaries and other benefits to the employees and ensure
that statutory requirements are complied with.
(ix) Verify the payments effected in respect of the maintenance of the building and ensure the
same is in order.
(x) Verify the insurance premium paid and ensure it covers the entire assets.
(c) Over-Valued Assets: In case of due diligence exercise, the area of analysis in order to ensure
that the assets are not stated at over-valued amounts are:
• Uncollected/uncollectable receivables.
• Obsolete, slow non-moving inventories or inventories valued above NRV; huge inventories of
packing materials etc. with name of company.
• Underused or obsolete Plant and Machinery and their spares; asset values which h ave been
impaired due to sudden fall in market value etc.
• Assets carried at much more than current market value due to capitalization of
expenditure/foreign exchange fluctuation, or capitalization of expenditure mainly in the nature
of revenue.
• Litigated assets and property.
• Investments carried at cost though realizable value is much lower.
• Investments carrying a very low rate of income / return.
• Infructuous project expenditure/deferred revenue expenditure etc.
• Group Company balances not reconciled.
• Intangibles having no relisable value.

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6. (a) Issues examined in Comprehensive Audit: Some of the issues examined in comprehensive audit
are-
(i) How does the overall capital cost of the project compare with the approved planned costs?
Were there any substantial increases and, if so, what are these and whether there is evidence
of extravagance or unnecessary expenditure?
(ii) Have the accepted production or operational outputs been achieved? Has there been under
utilisation of installed capacity or shortfall in performance and, if so, what has caused it?
(iii) Has the planned rate of return been achieved?
(iv) Are the systems of project formulation and execution sound? Are there inadequacies? What
has been the effect on the gestation period and capital cost?
(v) Are cost control measures adequate and are there inefficiencies, wastages in raw materials
consumption, etc.?
(vi) Are the purchase policies adequate? Or have they led to piling up of inventory resulting in
redundancy in stores and spares?
(vii) Does the enterprise have research and development programmes? What has been the
performance in adopting new processes, technologies, improving profits and in reducing costs
through technological progress?
(viii) If the enterprise has an adequate system of repairs and maintenance?
(ix) Are procedures effective and economical?
(x) Is there any poor or insufficient or inefficient project planning?
(b) Power of Tribunal in case Auditor acted in a Fraudulent Manner: As per sub-section (5) of the
section 140 of the Companies Act, 2013, the Tribunal either suo motu or on an application made
to it by the Central Government or by any person concerned, if it is satisfied that the auditor of a
company has, whether directly or indirectly, acted in a fraudulent manner or abetted or colluded in
any fraud by, or in relation to, the company or its directors or officers, it may, by order, direct t he
company to change its auditors.
However, if the application is made by the Central Government and the Tribunal is satisfied that
any change of the auditor is required, it shall within fifteen days of receipt of such application, make
an order that he shall not function as an auditor and the Central Government may appoint another
auditor in his place.
It may be noted that an auditor, whether individual or firm, against whom final order has been
passed by the Tribunal under this section shall not be eligible to be appointed as an auditor of any
company for a period of five years from the date of passing of the order and the auditor shall also
be liable for action under section 447 of the said Act.
It is hereby clarified that in the case of a firm, the liability shall be of the firm and that of every
partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in
relation to, the company or its director or officers.
(c) Data Mining Techniques:
i. Data mining technique is a set of assisted techniques designed to automatically mine large
volumes of data for new, hidden or unexpected information or patterns.
ii. It discovers the usual knowledge or patterns in data, without a predefined idea or hypothesis
about what the pattern may be, i.e. without any prior knowledge of fraud.
iii. It explains various affinities, association, trends and variations in the form of conditional logic.

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 iv. Data mining techniques are categorized in three ways: Discovery, Predictive modeling and
Deviation and Link analysis.
In the given case of BMY Bank Ltd., CA Rajul appointed as forensic auditor for its borrower, AMISS
Ltd, shall use above stated data mining techniques to identify any hidden patterns of information.
OR
(c) While assigning the quality review work to the respective Technical Reviewers, in order to ensure
independence and avoid conflict of interest, the following eligibility conditions were specified for
carrying out the specified quality review assignment to the Technical Reviewers who were required
to submit a declaration of eligibility before starting the assignment.
For being a technical reviewer (TR):
• He should not have disciplinary proceeding under the Chartered Accountants Act, 1949
pending against him/her or any disciplinary action under the Chartered Accountants Act, 1949
/ penal action under any other law taken/pending against him during last three financial years
and/or thereafter.
• He or his/her firm or any of the network firms or any of the partners of the firm or that of the
network firms should not have been the statutory auditor of the company, as specified, or
have rendered any other services to the said entity during last three financial years and /or
thereafter.
• He or his/her firm or any of the network firms or any of the partners of the firm or that of the
network firms should not have had any association with the specified AFUR, during the last
three financial years and /or thereafter.
• He should comply with all the eligibility conditions laid down for appointment as an auditor of
a company u/s 141(3) of the Companies Act, 2013 which apply mutatis mutandis in respect
of the review of the quality of statutory audit of the entity, as specified, so far as applicable.
• He does not belong to the city/region of head office of the AFUR.

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 Test Series: September, 2022
MOCK TEST PAPER -I
FINAL COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
All MCQs are compulsory
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100
DIVISION A – MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. Mr. Kartik a practicing Chartered Accountant was engaged in conducting statutory audits, data privacy
assessments and other trade compliance risk assessments for his clients. As a result, he had good
knowledge of the laws and regulations applicable to an entity operating digital space. In 2022, some of
his clients approached him and asked him to share his knowledge and guide them in which Technology
Company they should invest in. Mr. Kartik considered their request and started providing paid advisory
regarding investment in Technology and Fintech Sector stock. By the end of FY 2022, Mr. Kartik’s clients
made a good amount of profit based on the advice provided by Mr. Kartik.
The overall income (gross) earned by Mr. Kartik is mentioned below:
Client Name Statutory Audit Other Advisory Investment Advisory
Service Fee Service Fee Service Fee
Fondue Forte Pvt Ltd - 6,57,000 2,36,200
Home Made Pvt Ltd 7,50,000 - 6,75,000
Home Fresh Pvt Ltd (Fully owned 3,45,000 - 12,50,000
subsidiary of Home Made Pvt Ltd.)
Whether Mr. Kartik can do so?
(a) Mr. Kartik is allowed to provide investment advisory services to its clients under section 144 of the
Companies Act 2013. Hence, Mr. Kartik is not liable for professional misconduct.
(b) Mr. Kartik cannot provide investment advisory services directly or indirectly to the company or its
holding company or subsidiary company as per section 144 of the Companies Act 2013. Moreover,
a Chartered Accountant in Practice is not permitted to render any service which is out of the sco pe
of the approved Management Consultancy Service.
(c) Mr. Kartik can provide investment advisory services directly or indirectly to the company or its
holding company or subsidiary company as per section 144 of the Companies Act 2013 up to
` 50,00,000 in each calendar year. Hence, Mr. Kartik is not liable for professional misconduct.
(d) Mr. Kartik can provide investment advisory services directly or indirectly to the company or its
holding company or subsidiary company as per section 144 of the Companies Act 2013 up to
` 5,00,000 in each calendar year. Hence, Mr. Kartik is liable for professional misconduct.
2. A branch of ABC Bank was having three staff i.e., one cashier, one officer and one manager. The cashier
was responsible for the signing of cash slips, passing entries for cash withdrawals and providing cash
to customers. You as a Bank’s branch Auditor decided to verify the cash withdrawal transaction s and
after testing you decided to pass the control over the cash process. Also, there were no observations
identified during the testing. Moreover, as the process is present in the branch, work performed by the
cashier is not monitored on daily basis. However, on a quarterly basis, certain test checks are performed

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 by an officer of the branch. Internal Audit team reported the said controls over process as operating.
You are required to guide whether reporting of the said controls by Internal Audit Team is correct or not
(a) The controls over the cash process should be reported as operating because no issues were
identified during the testing of controls.
(b) The controls over the cash process should be reported operating as test checks are being
performed by officers on a quarterly basis.
(c) This control should be reported as non-operating because segregation of duties was not present
with respect to the processing of payment transactions by the cashier.
(d). This control should be reported as non-operating as the manager of the branch should have at
least 2 officers for test checks of cash transactions and for cash process.
3. KFintech Pvt Ltd was having paid-up share capital and reserves of ` 150 lakh including paid-up share
capital of ` 90 lakh at the end of FY 20-21. During FY 21-22, KFintech borrowed ` 80 Lakh from Bank
A and ` 140 Lakh from Bank B. The amount borrowed from Bank B was repaid during the same FY. For
FY 20-21 the turnover of the company was ` 1,850 lakh. Select the appropriate option with respect to
the applicability of CARO 2020:
(a) CARO 2020 will be applicable as the paid-up capital and reserves exceeding the limit specified in
the Order i.e., one crore rupees.
(b) CARO 2020 will be applicable as the company has paid-up capital and reserves exceeding the limit
specified in the Order i.e., one crore rupees and have total borrowings exceeding one crore rupees
from any bank or financial institution at any point of time during the financial year.
(c) CARO 2020 will not be applicable as the company repaid the amount borrowed from bank B before
the end of the financial year and hence, the borrowings do not exceed the limit specified in the
Order.
(d) CARO 2020 will not be applicable as the company will fall under the exemption provided in the
Order for Small Company as per section 2(85) of the Companies Act 2013.
4. ABC & Co were appointed to conduct a forensic audit of XYZ Limited. After successfully conducting the
forensic audit, ABC & Co prepared its report for the appointing authority. A copy of the report was also
shared with the Board of Directors of the company. In the report, Forensic Auditors enumerated the
findings of the investigation, including a summary of the evidence, a conclusion as to the amount of loss
suffered as a result of the fraud and identification of those involved in fraud. The report also cover ed
sections on the nature of the assignment, scope of the investigation, approach utilized, limitations of
scope and opinions. Upon receiving the report, the Board of Directors raised objections as to how
forensic auditors can mention the names of those who are involved in fraud.
You as a Forensic Expert guide whether is it appropriate to mention the details of the person who are
involved in fraud in the final report.
(a) Report can include a section to identify those involved in fraud. This is recommendat ory and in line
with the appropriate practice of reporting.
(b) Report should not contain such details till the time it is proved in a court of law.
(c) Report can include a section to identify those involved in fraud but subject to prior approval of the
Board of Directors of the company.
(d) Report should not include a section to identify those involved in fraud as it is not permitted under
SA 700.
5. Which of the following statements is INCORRECT?
(a) Inoperative saving and current accounts are a fraud prone area.

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 (b) Debit balances in current account are reduced from aggregate demand deposits in balance sheet
of a bank.
(c) Interest accrued but not due on deposits is shown separately under head “Other Liabilities and
provisions.”
(d) FCNR deposits are in designated foreign currencies only.
6. ADI Ltd. is engaged in the business of providing management consultancy services and have been in
operation for the last 15 years. The company’s financial reporting process is very good and its statutory
auditors always issued clean report on the audit of the financial statements of the company. The auditors
were required to be rotated due to mandatory audit rotation requirement of the Companies Act 2013.
RNJ & Associates, a firm of Chartered Accountants, was appointed as the new auditor of the company
for a term of 5 years and have to start their first audit for the financial year ended 31 March 2022.
The auditors had a detailed and clear discussion with the management that they will perform their audit
procedures in respect of opening balances along with the audit procedures for the financial year ended
31 March 2022.
Management agreed with that and the audit was completed as per the plan.
The auditors did not have any significant observations and hence they communicated to the
management that their report will be clean. Management was quite happy with this and also requested
the auditors to share draft report before issuing the final report.
In the draft audit report, all the particulars were fine except ‘other matters paragraph’ wherein the
auditors gave a reference that the financial statements for the comparative year ended 31 March 2021
was audited by another auditor. Management asked the audit team to remove this paragraph as the
auditors had performed all the audit procedures on opening balances also. But the auditors did not agree
with the management.
Please advise the auditor or the management whoever is incorrect with the right guidance.
(a) The contention of the management is valid. After performing all the audit procedures, an auditor
should not pass on the responsibility to another auditor by including such references in his audit
report.
(b) Any auditor has two options, either to perform audit procedures on opening balances or given such
reference of another auditor in his report. An auditor can not mix up the things like this auditor has
done. It is completely unprofessional.
(c) In the given situation even if the auditor wants to give such reference, the management and the
auditor should have taken approval from the previous auditor at the time of appointment of new
auditor. In this case, it cannot be done.
(d) The report of the auditor is absolutely correct and is in line with the auditing standards. An auditor
is required to include such reference in his report as per the requirements of the auditing standard.
7. The following inherent limitations in an audit affect the auditor’s ability to detect material misstatements
except:
(a) Test and sampling.
(b) Audit process permeated by judgement.
(c) Poor corporate governance.
(d) Audit evidence.
8. Vishudh & Co. is the auditor of JIN Insurance Company. The insurance company is also involved in re-
insurance business and necessary provision for re-insurance premium has been made in the books of
accounts. The insurance company is into a re-insurance whereby their contract relates to one particular
risk and is expressed in the re-insurance policy. Each transaction is negotiated individually, and each
3

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 party has a free choice i.e. for the insurance company to offer and the re -insurer to accept. What kind
of a re-insurance business is the insurance company into?
(a) Facultative Re-insurance.
(b) Stop loss treaty re-insurance.
(c) Auto-fac re-insurance.
(d) Proportional treaty re-insurance.
9. SIDH Private Limited uses in-house developed application system for Accounting. The auditor observed
that user ID and password is mandatory to access the application system and felt that this is a good
control. What type of control is this?
(a) IT General Control.
(b) Application Control.
(c) Detective Control.
(d) Preventive Control.
10. Below is an extract from the list of supplier statements as at 31st March 2022 held by the Company and
corresponding payables ledger balances at the same date along with some commentary on the noted
differences:
Supplier Statement balance Payables ledger balance
`'000 `'000
Shubh Company 78 66
Labh Company 235 205
The difference in the balance of Shubh Company is due to an invoice which is under dispute due to
defective goods which were returned on 30 th March 2022. Which of the following audit procedures
should be carried out to confirm the balance owing to Shubh Company?
(I) Review post year-end credit notes for evidence of acceptance of return.
(II) Inspect pre year-end goods returned note in respect of the items sent back to the supplier.
(III) Inspect post year-end cash book for evidence that the amount has been settled.
(a) 1, 2 and 3.
(b) 1 and 3 only.
(c) 1 and 2 only.
(d) 2 and 3 only. (10 x 1 = 10 Marks)
Questions (11-20) carry 2 Marks each
MCQ 11. -15.
Integrated Case Scenario 1
Mr. Paras has been appointed statutory auditor under Companies Act, 2013 of DEMA Limited., a company
engaged in manufacturing of range of products. DEMA Limited was also listed on NSE. Besides, he was also
appointed to conduct audit u/s 44AB of Income Tax Act. Mr. Chandra, relative of Mr. Paras was involved in
the business of trading stocks listed on NSE. During the year FY 21-22 Mr. Chandra performed the following
trades.

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 Name of Stock Date of Transaction Purchase / Quantity FV per Share Market
Sale Value per
Share
DEMA Limited 1-4-2021 Purchase 10 10 3500
DMEA Limited 1-4-2021 Purchase 90 10 3300
DEMA Limited 30-04-2021 Sale 50 10 3600
DEMA Limited 10-05-2021 Purchase 60 10 3450
DEMA Limited 10-05-2021 Purchase 50 10 5000
DEMA Limited 11-05-2021 Purchase 10 10 5050
DEMA Limited 30-06-2021 Sale 30 10 3750
Thereafter no transaction in the shares of DEMA limited was performed by Mr. Chandra during the year.
Moreover, Mr. Paras identified a fraud related to misappropriation of cash amounting to ` 3 Crore in the books
of the company. In this fraud, Procurement Manager and Payment Managers were together involved. As per
provision of Section 143(12) Mr. Paras, reported fraud to Audit Committee within 7 days from date of
identification and asked audit committee to submit their response. Audit Committee did not respond as they
wanted to investigate further on this.
In the absence of any reply, audit committee and, understanding the nature of issue, Mr. Paras did not report
this issue to anyone as it could impact negatively to the image of the company. Further, Mr. Paras made
necessary change in their audit procedures to extent their coverage of Procurement and Payments area.
After performing additional procedures over Procurement and Payment business process, Mr. Paras identified
that the internal controls over the said area are significantly deficient. Mr. Paras did not communicate this
finding with those Charged with Governance as he already reported about the fraud and the Audit Committee
was investigating the same.
Mr. Paras also identified that the internal audit function reports directly to the management and they do not
have any direct communication with those charged with governance or an of ficer with the appropriate
authority. Also, all the findings of internal audit function are first reported to the management and then the
management decides what to report to those charged with governance from the findings of internal audit
function.
At the end, Mr. Paras issued a qualified opinion, and, in his report, he mentioned the following paragraph
under the head “Basis of Qualified Opinion”:
“a. Company has not disclosed the impact of pending litigations on its financial position in its financial
statement. The impact assessed for the pending litigation is ` 4.5 Crore (Best Estimate).
b. During the audit, a fraud related to misappropriation of cash amounting to ` 3 Crore was identified in
the books of the company.
c. Company has not made any provision, as required under any law or accounting standards, for material
foreseeable losses on long term contracts including derivative contracts. During the year, as per
assessment performed by an expert, the amount of provision for material foreseeable lo ss on long term
contracts was estimated at ` 7 Crore for which no provision was made.”
No other reference or reporting was made of these qualifications in audit report.
On the basis of the abovementioned facts, you are required to answer the following MCQ s:
Multiple Choice Questions (5 questions of 2 Marks each):
11. Kindly guide whether Mr. Paras is eligible to be appointed as a Tax Auditor of DEMA Limited u/s 288 of
the Income Tax Act, by selecting the appropriate option from below:

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 (a) As per 288(2)(viii)(a) of Income Tax Act read with Section 141(3) of Companies Act, relative of Mr.
Paras is holding securities of market value of ` 1,00,000 or more and hence Mr. Paras is not eligible
to be appointed as Tax Auditor.
(b) As per 288(2)(viii)(a) of Income Tax Act read with Section 141(3) of Companies Act, relative of Mr.
Paras is not holding securities of face value having ` 1,00,000 or more and hence Mr. Paras is
eligible to be appointed as Tax Auditor.
(c) As per Section 288(2)(viii)(b) relative of Mr. Paras is indebted to the company or its subsidiary or
its holding or associate company or a subsidiary of such holding company and hence Mr. Paras is
not eligible to get appointed as a Tax Auditor.
(d) Relative of Mr. Paras is the person who is competent to verify the return under section 139 in
accordance with the provisions of section 140 and hence Mr. Paras is eligible to get appointed as
a Tax Auditor.
12. With respect to the qualifications (a) and (c) specified in the Audit Report, kindly guide with respect to
the additional reporting requirement of these matters in audit report.
(a) As per the Companies (Auditor's Report) Order, 2020, Auditor is required to report these matters
under reporting done for Para 3(ix) of the Order.
(b) As per section 143(3)(j) read with Rule 11(a) & 11(b) of The Companies (Audit and Auditors) Rules,
2014, Auditor is required to report or give reference of these matters.
(c) Company is not required to report these matters anywhere else except for qualification u nder the
head “Basis for Qualification”
(d) Company should report this matter under the head “Management Responsibilities”.
13. With respect to identification of Fraud in the books of account of the company, Kindly guide Mr. Paras
with respect to the appropriate reporting requirements under section 143(12) of Companies Act.
(a) Mr. Paras should have reported the matter to Audit Committee within 2 days of identification of the
fraud. However, Mr. Paras is valid in not reporting this issue further as it could negatively to the
image of company.
(b) Mr. Paras should have reported the matter to Audit Committee and Board of Directors within 7 days
of identification of the fraud. Hence, Mr. Paras did not report to Board of Director which is
inappropriate.
(c) Mr. Paras should have reported the matter to Audit Committee within 2 days of identification of the
fraud. Over and above Mr. Paras should have reported this matter to the Central Government as
per prescribed rules.
(d) Mr. Paras should not have reported this matter to Audit Committee. Mr. Paras should have reported
matter first to central government within 2 days of identification of fraud .
14. With respect to the reporting of significant deficiencies to those charged with governance, kindly guide
Mr. Paras with respect to appropriate provisions in this regard.
(a) As per SA 315, the engagement partner shall determine which matters are to be communicated to
management and those charged with governance involved in the discussion.
(b) As per SA 265, the auditor shall communicate in writing significant deficiencies in internal control
identified during the audit to those charged with governance on a timely basis .
(c) As per SA 315, the auditor should understand the communications between management and
those charged with governance before communicating anything to those charged with governance.
(d) As per SA 450, the auditor shall communicate on a timely basis critical misstatements accumulated
during the audit with the appropriate level of management, unless they are already communicated
with management earlier in any form.
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15. The external audit team decided to rely on and to use the work of internal audit function in the areas
where more judgment was involved or where the risk of material misstatement was assessed at a higher
level. Based on the above information, kindly guide the audit team regarding use of the work of internal
audit function as per SA 610 by selecting the appropriate option from below:
(a) The external auditor shall not use the work of an internal audit function if the external auditor
determines that the internal audit function’s organizational status and the relevant policies and
procedures do not adequately support the objectivity of the internal auditors.
(b) The external auditors shall not use the work of an internal audit function if the external auditor
determines that the internal audit function’s organizational structure and relevant policies and
procedures do adequately support the objectivity of internal auditors.
(c) The external auditor shall use the work of the internal audit function if the extern al auditor
determines that the internal audit function applies a systematic and discipline approach including
quality control while discharging their duties.
(d) The external auditor shall not use the work of the internal audit function is the external aud itor
determines that the internal audit function does not lack sufficient competence to discharge their
duties.
MCQ 16. -20.
Integrated Case Scenario 2
During the planning stage of audit of Mobile & Cell Limited, the statutory auditor of the company, ABC & Co,
decided:
1. To evaluate whether to use the work of internal audit function to gather sufficient and appropriate audit
evidence for the purpose of expressing opinion on the financial statement of the company.
2. To perform test counts on a sample basis for Inventory Balance which was material. Also, the audit team
will inquire management to provide copies of management’s completed physical inventory count which
will assist them in performing subsequent procedures required to determine whether inventory records
accurately reflect actual inventory count results.
3. To perform substantive analytical procedures to gather sufficient and appropriate audit evidence for
payroll cost. Audit team decided to recalculate the payroll cost by multiplying the total employees of the
company with the average pay-out per employee.
4. To perform substantive procedures over the direct expenses which were assessed as a material with
respect to the financial statement as a whole. Moreover, the number of items/transactions in direct
expense were huge and of were of non-homogenous nature. As a result, audit team decided to select
some samples from each identified strata disaggregated to the lowest level based on their
characteristics.
5. The performance materiality for assessing any misstatement was fixed at ` 10,00,000/-.
During the audit phase the audit team identified that
I. The internal audit function reports directly to the management and they do not have any direct
communication with the those charged with governance or an officer with the appropriate authority. Also,
all the findings of internal audit function are first reported to the management and then the management
decides what to report to those charged with governance from the findings of internal audit function.
II. Since last three years the company is making cash losses and is facing liquidity crisis. Moreover, there
was a huge loan instalment due for repayment in next three months. Considering the company’s liquidity
profile, it was evident that company will default the upcoming loan instalment and the payment of interest
there on. When inquired with the management as to how they will deal with this situation and how they
will consider the impact of these events on management’s assumption of going concern, the

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 management contended that the company would raise more funds through issue of fresh equity in the
primary market to manage the liquidity requirements.
III. Moreover, there was an ongoing litigation on Company and its Officers for misappropriation of loan
funds. As a result, after analysing the SEBI Listing Requirements, it was evident that company was not
in position to issue fresh equity in the primary market.
IV. In one of the direct tax litigations, the adjudicating authority issued an unfavourable order against the
company because of which the company was now required to pay huge fines and interest to the Tax
Authority. The amount of fine and interest there on was material.
V. The engagement manager identified that the total payroll costs booked for the period was ` 30,00,000/-
for total 150 employees employed throughout the year from the payroll records & register . Engagement
manager was able to identify that the average pay-out per employee was ` 20,500/-. Also, the
independent expectation developed for the payroll cost was between ` 30,00,000/- to ` 32,00,000/- for
the year.
VI. The Audit team performed the testing of direct expense and following is the outcome:
Strata Name Balance as Total of No of Exception Reason for
per books sample Samples amount in exception
value samples
Freight Expense ` 5,00,000 ` 1,00,000 10 ` 25,000 one invoice was
incorrectly booked
Loading Charges ` 4,00,000 ` 80,000 15 ` 0 NA
Shipping Charges ` 9,00,000 ` 2,70,000 10 ` 0 NA
Packaging ` 8,00,000 ` 2,40,000 5 ` 3,000 No documents were
Expense available for the said
samples
Storing Expense ` 12,00,000 ` 1,20,000 10 ` 8,000 Warehouse charges
were booked as
storing expense.
Wrong classification.
Total ` 38,00,000 ` 8,10,000 50 ` 36,000 Projected
misstatement was
` 1,68,889/-(36,000 /
8,10,000 x 38,00,000).
VII. Management allowed auditor to attend the physical inventory count, however, management did not allow
audit team to perform any other procedure during the physical count. When inquired from management
regarding the denial to the auditor from performing additional audit procedures along with attending the
inventory count, the management explained that the inventory consists of very unstable chemicals and
inflammable gases which require handling with skill and care. Any carelessness in handling the inventory
can result in catastrophe. As a result, due to safety standards and policies , the management cannot
allow the auditor to perform additional audit procedures.
On the basis of the abovementioned facts, you are required to answer the following MCQs:
Multiple Choice Questions (5 questions of 2 Marks each):
16. Auditor of the company decided to draw attention of the users of the audit report on the existence of the
material uncertainty related to events that have casted significant doubts on the entity’s ability to
continue as going concern by disclosing the same in other matter paragraph. As an Engagement Quality
Control Reviewer, guide the Auditor about the correct way of disclosing the existence of the material
uncertainty related to events that have casted significant doubts on the entity’s ability to continue as
going concern when the management has not made appropriate disclosure of a material uncertainty in
the financial statement.
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 (a) When the management has not made appropriate disclosure of a material uncertainty in the
financial statement and there exists a material uncertainty related to events that have casted
significant doubts on the entity’s ability to continue as going concern then the auditor should
disclose the same in “Key Audit Matter” section in Audit Report only. No other disclosure is
required.
(b) Disclosure of the material uncertainty in the financial statement is the responsibility of the
management and the auditor should not comment on the same.
(c) When the management has not made appropriate disclosure of a material uncertainty in the
financial statement and there exists a material uncertainty related to events that have casted
significant doubts on the entity’s ability to continue as going concern then the auditor should
express a qualified or adverse opinion and should mention in the Basis of Qualified / Adverse
Opinion section of the Audit Report about existence of the material uncertainty .
(d) When the management has not made appropriate disclosure of a material uncertainty in the
financial statement and there exists a material uncertainty related to ev ents that have casted
significant doubts on the entity’s ability to continue as going concern then the auditor should
express an unmodified opinion and should obtain the written representation about existence of the
material uncertainty from management.
17. In view of current scenario, which of the following requirements as per SA 610 are required to be fulfilled
by Statutory Auditors of the Company, prior to using the direct assistance of the Internal Audit Team?
(a) Statutory Auditors should obtain written agreement from the management of the Company. that the
internal audit team will be allowed to follow the statutory auditors’ instructions.
(b) Statutory auditors should obtain written agreement from internal audit team that his team will keep
the matters confidential.
(c) Both a & b.
(d) Statutory Auditors can use the direct assistance of the internal audit team after discussing the
same with the management. No prior written agreement is required.
18. Considering the inherent limitation with respect to the inventory count, the audit team decided not to
perform any other procedure or not to obtain any documentary evidence from management with respect
to inventory. Guide the audit team in the current scenario by selecting the appropriate option from below:
(a) If the auditor has not obtained sufficient appropriate audit evidence as to a m aterial financial
statement assertion, the auditor shall not attempt to obtain further audit evidence.
(b) If the auditor has not obtained sufficient appropriate audit evidence as to a material financial
statement assertion, the auditor shall attempt to obtain further audit evidence. If the auditor is
unable to obtain sufficient appropriate audit evidence, the auditor shall express a qualified opinion
or a disclaimer of opinion.
(c) In case where audit team is not able to obtain sufficient and appropriate a udit evidence as to a
material financial statement assertion, then the auditor should appoint management’s expert and
should try to obtain required evidence from such expert.
(d) In case where audit team is not able to obtain sufficient and appropriate aud it evidence as to a
material financial statement assertion, then the auditor should communicate to management and
should obtain written representation from them.
19. Based on the recalculation performed by the audit team, the total payroll cost arrived for the period was
` 30,75,000/. Analyse and guide the audit team with respect to the results obtained from the substantive
analytical procedure by selecting the appropriate option from below:

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 (a) The difference identified between the payroll costs derived through substantive analytical
procedure and the expectation developed is material based on the materiality fixed by the audit
team and hence it requires further investigation.
(b) The amount derived through substantive analytical procedure is not in congrue nce with the total
amount of the payroll cost booked for the period. Hence the audit team should investigate the
reasons for the difference between the amount derived and the actual cost booked.
(c) The total payroll cost arrived is well within the expectation developed and the difference between
the amount recorded and the amount derived through substantive analytical procedure is not
material. Hence, it does not require any further investigation.
(d) The difference identified between the amount derived through substantive analytical procedure and
amount developed as an expectation is significant and the audit team should obtain appropriate
written representation from management with respect to the completeness and accuracy of the
amount derived through substantive analytical procedure.
20. Based on the above outcome of the direct expense testing the audit team decided to project the total
misstatement on the entire balance considered for testing. As per the calculation performed, the
projected misstatement was ` 1,68,889/-. Kindly analyse and guide the audit team with respect to the
results obtained from the substantive testing by selecting the appropriate option from below:
(a) The projected misstatement calculated is appropriate. Moreover, Based on the performance
materiality and projected misstatement the auditor should modify his opinion.
(b) When a class of transactions or account balance has been divided into strata, then the
misstatement is required to be projected for each stratum separately. Hence, the audit team’s
approach is incorrect with respect to the calculation of projected misstatement. The Audit team
should recalculate the projected misstatement and then they should consider its impact on overall
audit opinion based on the materiality.
(c) The audit team should have considered the exception of ` 8,000/- twice while calculating the
projected misstatement, as the error is regarding wrong classification and the same will affect two
class of transactions or balances. Hence audit team should consider revising the projected
misstatement and then they should consider its impact on overall audit opinion based on the
materiality.
(d) Audit team has appropriately calculated the projected misstatement. However, before modifying
the audit opinion the audit team should obtain written representation with respect to the
completeness and accuracy of the direct expense balance which could serve as a sufficient and
appropriate. (10 x 2 = 20 Marks)

Division B- Descriptive Questions-70 Marks

Question No. 1 is compulsory.
Attempt any four questions from the Rest.
1. (a) NEMI Limited (manufacturer of textile goods) got an order of manufacturing of PPE kits in
December 2021. But there was shortage of machinery and manpower to accomplish the ordered
requirement of PPE kits. NEMI Limited approached another manufacturing unit Rathnemi Limited
for purchase of the unit. Rathnemi Limited was interested in the sale of unit, so the deal went
through, and NEMI Limited acquired ninety five percent shares of Rathnemi Limited. The new
management of Rathnemi Limited proposed and appointed Mani Associates, Chartered
Accountants, (already auditors of NEMI Limited) as new auditors of Rathnemi Limited. Mani
Associates accepted the assignment without considering information whether the conclusions
reached regarding the acceptance and continuance of client relationships and audit engagements
are appropriate. Comment with respect to appropriate Standard on Auditing what type of
information assists the engagements partner in determining whether the conclusions reached
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 regarding the acceptance and continuance of client relationships and audit engagements are
appropriate or not? (5 Marks)
(b) RST Ltd. has been dealing in tyres since 1995. The Company envisaged to expand its business
and wanted to manufacture the tyres besides trading. Accordingly, the machinery was imported,
installed and manufacturing operations commenced. The Government also gave certain incentiv es
like power subsidy, land acquisition subsidy, etc. After 2 years of operations, Company received a
notice from the Income Tax authorities to pay tax on incentive received in the form of power
subsidy. The demand notice was served for ` 150.00 Lakhs.
The Company, however, filed an appeal with higher tax authorities against the demand and the
matter is undecided as on 31.03.2022. Legal team of the Company anticipated that tax liability
might mature. The Company has not made a provision of anticipated tax liability. Considering the
provisions of Companies Act, 2013, how an auditor of RST Ltd. should see this matter and report
in audit report, if required? (5 Marks)
(c) OM Limited is availing the services of APP Private Limited for its payroll operations. Payroll cost
accounts for 65% of total cost for OM Limited. APP Limited has provided the type 2 report as
specified under SA 402 for its description, design and operating effectiveness of control.
APP Private Limited has also outsourced a material part of payroll operation M/s PMS & Associates
in such a way that M/s PMS & Associates is sub-service organization to OM Limited. The Type 2
report which was provided by APP Private Limited was based on carve -out method as specified
under SA 402.
CA Sheetal while reviewing the unmodified audit report drafted by his assistant found that, a
reference has been made to the work done by the service auditor. CA Sheetal hence asked his
assistant to remove such reference and modify report accordingly.
Comment whether CA Sheetal is correct in removing the reference of the work done by service
auditor? (4 Marks)
2. (a) While auditing the complete set of consolidated financial statements of Moksh Ltd., a listed
company, using a fair presentation framework, XYZ & Co., a Chartered Accountant firm, discovered
that the consolidated financial statements are materially misstated due to the non-consolidation of
one of the subsidiary. The material misstatement is deemed to be pervasive to the consolidated
financial statements. The effects of the misstatement on the consolidated financial statements
could not be determined because it was not practicable to do so. Thus, XYZ & Co. decided to
provide an adverse opinion for the same and further determined that, there are no key audit matters
other than the matter to be described in the Basis for Adverse Opinion section. Comment whether
XYZ & Co. needs to report under SA 701 ‘Communicating Key Audit Matters in the Independent
Auditor’s Report’? (5 Marks)
(b) While conducting the tax audit of Rajul Ltd. you observed that company has timely filed ETDS
return for TDS deducted on salary undersection 192 of the Income Tax Act, 1961 in form 24Q in
respect of fourth quarter period from 1 st January 2022 to 31st March 2022. The company has not
furnished list of details which are not reported in the statement of tax deducted at source under the
pretext that TDS statements are furnished within the prescribed time. As a Tax Auditor of Rajul Ltd.
how you would deal and report? (5 Marks)
(c) CA Rani has been appointed as Forensic Auditor by ATM Bank Limited for one of its borrowal
accounts FAR Ltd. CA Rani started the audit by first reviewing the transactions of the borrower in
Bank statement as per Bank records to identify any hidden patterns in that information. She had
to review huge volume of data, as the number of transactions per day were in hundr eds and the
data was to be reviewed for the last three years. So, she was stuck up as to how to proceed further
to identify any hidden patterns in information, if any. Guide CA Rani, suggesting which technique
to be used for identifying any hidden patterns in the information. (4 Marks)

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3. (a) You are an auditor of Fair Insurance Company Ltd. which offers variety of risk management
products to business entities wishing to protect their business activities against losses due to
various probable risks. Fair Insurance Company Ltd. is in the process of offering to Guru Ltd., a
multinational group having worldwide market, “Trade Credit Insurance Policy” to cover domestic
risk export risk and political risk. You as an auditor of Insurance Company have been requested to
ensure that all the requirements have been met by Fair Insurance Company Ltd. before Trade
Credit Insurance Product is offered to Guru Ltd. List down those requirements. (5 Marks)
(b) “What constitutes a ‘true and fair view’ is the matter of an auditor’s judgement in particular
circumstances of a case.” Do you agree? Enlist the requirements you as an auditor will observe to
ensure true and fair view. (5 Marks)
(c) AJ & Associates and PK & Co., chartered accountant firms have joined the Network firm A to Z &
Affiliates registered with Institute. AJ & Associates was statutory auditor of B Ltd. for last 10 years.
Due to rotation of auditor as per section 139 (2) of Companies Act, 2013, B Ltd. retires AJ &
Associates and appoints PK & Co., as auditor for the year 2020-21. Comment as per Chartered
Accountant Act, 1949 - Guidelines for Networking. (4 Marks)
4. (a) Shreyansh & Co LLP, a firm of Chartered Accountants, was appointed as auditor of an NBFC. The
audit work has been completed. The audit team which was involved in the fieldwork came across
various observations during the course of audit of this NBFC and have also limited understanding
about the exceptions which are required to be reported in the audit report. They would like to
understand in detail regarding the obligations on the part of an auditor in respect of e xceptions in
his report so that they can conclude their work. Briefly explain. (6 Marks)
(b) Employees of BIG Ltd. have to travel frequently for business purposes, so the company entered
into a contract with a Chinmay Travels Ltd. for managing booking, cancellation and other services
required by their employees. As per contract terms, Chinmay travels has to raise its m onthly bills
for the tickets booked or cancelled during the period and the same are paid by BIG Ltd. within 15
days of the bill date. The bills raised by Chinmay travels were of huge amount, so the management
of BIG Ltd. decided to get an audit conducted of the process followed for booking/ cancellation of
tickets and verify the accuracy of bills raised by the travel agency. Which audit do you feel the
management should opt for? Also briefly discuss the qualities the auditor should possess for such
audit. (4 Marks)
(c) Mr. Gautam & Mr. Mahaveer, partners of a Chartered Accountant Firm, one in-charge of Head
Office and another in-charge of Branch at a distance of 80 km. from the municipal limits, puts up a
name-board of the firm in both premises and also in their respective residences. Comment with
reference to the Chartered Accountants Act, 1949, and Schedules thereto. (4 Marks)
5. (a) Mr. Bharat was appointed as statutory auditor of N Limited and O Limited. Both the Companies
were having their base in Mumbai they had recently listed their shares on the Stock Exchange. For
the financial year 2021-22, Mr. Bharat had signed limited review reports for each quarter, till the
quarter ended 31 st December 2021 for both the companies. Owing to his personal commitments
and increased workload, he tendered his resignation to N Limited on 30 th January 2022 and asked
the Company to appoint another auditor to issue audit report for the remaining quarter and the
FY 2021-22 as a whole. But the management of the Company did not accept the same.
Mr. Bharat continued to as act as auditor for O limited. During the 1 st week of March 2022, Mrs. D
(wife of Mr. Bharat) had borrowed a sum of ` 5.15 lakh from the Company for her personal use.
Having come to know about this, Mr. Bharat immediately informed the management that he had
been disqualified to act as auditor and told them that he won ’t issue audit report for last quarter.
But management of the Company argued that it’s the legal responsibility of Mr. Bharat to do the
same.

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 Whether contention of management of N Limited and O Limited is justified in asking Mr. Bharat to
issue audit report for the last quarter and the FY 2021-22 as a whole, despite his resignation?
Please comment on the above. (5 Marks)
(b) CA Ram have been doing audit of branch of RICH Bank Ltd. The principal business of the branch
is lending advances to large corporates. Since last one year, many large accounts have become
Non-Performing Asset (NPA) as per guidelines. The Management of the Bank decided to sell one
of the NPA account and consequently one NPA namely Shiva Ltd. amounting to ` 11.00 Crore was
sold to Asset Reconstruction Company. What audit points CA Ram should keep in mind while doing
audit of this transaction? (4 Marks)
(c) CA. Bahubali is Special Executive Magistrate. He also took over as the executive chairman of
Software Company on 1.4.2022. He is also a leading income tax practitioner and consultant for
derivative products. He resides in Chennai near to the ION commodity stock exchange and does
trading in commodity derivatives. Every day, he invests nearly 36% of his time to settle the
commodity transactions. He has not taken any permission for becoming Special Executive
Magistrate. However, he has got special permission of Council of ICAI for becoming executive
chairman and for trading in commodity derivatives. Is CA. Bahubali liable for professional
misconduct? Comment with reference to the Chartered Accountants Act, 1949, and Schedules
thereto. (5 Marks)
6. (a) Shravasti Limited is a public sector undertaking engaged in production of electricity from solar
power. It had commissioned a new project near Mumbai with a new technology for a cost of
` 9,580 crore. The project had seen delay in commencement and cost overrun. State the matters
that a Comprehensive Audit by C&AG may cover in reporting on the performance and efficiency of
this project. (5 Marks)
(b) In assessment procedure of M/s Dim Ltd., Income Tax Officer observed some irregularities.
Therefore, he started investigation of Books of Accounts audited and signed by Mr. O , a practicing
Chartered Accountant. While going through books he found that M/s Dim Ltd. used to maintain two
sets of Books of Accounts, one is the official set and other is covering all the transactions. Income
Tax Department filed a complaint with the Institute of Chartered Accountants of India saying Mr. O
had negligently performed his duties. Comment. (5 Marks)
(c) NEW Limited is a listed company having its operation across India. NEW Limited appointed Mr. N,
Mr. E and Mr. W, as its joint auditors for the year 2021-22. After making sure that all of them are
qualified to be appointed as statutory auditor, NEW Limited issued engagement letter to all of them.
But Mr. N was not clear on some points, so he requested NEW Limited to slightly change the terms
of his engagement. This change will not impact the ultimate opinion on the financial statement. The
engagement letter contains the details on objective and scope of audit, responsibilities of auditor
and identification of framework applicable. It also contains the reference to expected form and
content of report from all three joint auditors. In your opinion what was the discrepancy in the Audit
engagement letter issued by NEW Limited? (4 Marks)
OR
Evaluating the professional judgment exercised by the auditor is one of the important aspects under
Quality review, please explain the situation with reference to applicable SA.

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 Test Series: September, 2022
MOCK TEST PAPER 1
FINAL COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS
DIVISION A - MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. (b)
2. (c)
3. (d)
4. (a)
5. (b)
6. (d)
7. (c)
8. (a)
9. (d)
10. (c)
Questions (11-20) carry 2 Marks each
11. (b)
12. (b)
13. (c)
14. (b)
15. (a)
16. (c)
17. (c)
18. (b)
19. (c)
20. (b)
DIVISION B - DESCRIPTIVE QUESTIONS (70 Marks)
1. (a) Acceptance and Continuance of Client Relationships and Audit Engagements : As per SA
220, “Quality Control for an Audit of Financial Statements” , SQC 1, “Quality Control for Firms that
Perform Audits and Reviews of Historical Financial Information, and Other Assurance and Related
Services Engagements”, requires the firm to obtain information considered necessary in the
circumstances before accepting an engagement with a new client, when deciding whether to
continue an existing engagement, and when considering acceptance of a new engagement with an
existing client.
Information such as the following assists the engagement partner in determining whether the
conclusions reached regarding the acceptance and continuance of client relationships and audit
engagements are appropriate:

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 (i) The integrity of the principal owners, key management and those charged with governance of
the entity.
(ii) Whether the engagement team is competent to perform the audit engagement and has the
necessary capabilities, including time and resources.
(iii) Whether the firm and the engagement team can comply with relevant ethical requirements;
and
(iv) Significant matters that have arisen during the current or previous audit engagement, and
their implications for continuing the relationship.
(b) Audit report - Legal team anticipated tax liability but the company did not make any
provision for that -
The Council of the Institute of Chartered Accountants of India has taken note of the fact that there
is a practice prevalent whereby companies do not make provision for tax even when such a liability
is anticipated. It has expressed the view that on an overall consideration of the relevant provisions
of law, non-provision for tax (where a liability is anticipated) would amount to contravention of the
provisions of Sections 128 and 129 of the Companies Act, 2013.
Accordingly, it is necessary for the auditor to qualify his report and such qualification should bring
out the manner in which the accounts do not disclose a “true and fair” view of the state of affairs of
the company and the profit or loss of the company.
Applying the above to the facts given in the question, auditor should qualify his report.
An example of the manner in which the report on the balance sheet and the Statement of Profit
and Loss may be qualified in this respect is given below: “The company has not provided for
taxation in respect of its profits and the estimated aggregate amount of taxation not so provided
for is ` ............including.............for the Year ended on ..............To the extent of such non -
provision for the year, the profits of the Company for the financial year under report have been
overstated and to the extent of such aggregate non-provision, the reserves of the company
appearing in the said balance sheet have been over-stated and the current liabilities and provisions
appearing in the said balance sheet have been understated”.
(c) Reporting by the User Auditor: As per SA 402, “Audit Considerations Relating to an Entity Using
a Service Organisation”, the user auditor shall modify the opinion in the user auditor’s report in
accordance with SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”, if the
user auditor is unable to obtain sufficient appropriate audit evidence regarding the services
provided by the service organisation relevant to the audit of the user entity’s financial statements.
The user auditor shall not refer to the work of a service auditor in the user auditor’s report containing
an unmodified opinion unless required by law or regulation to do so. If such reference is required
by law or regulation, the user auditor’s report shall indicate that the reference does not diminish
the user auditor’s responsibility for the audit opinion.
Thus, in view of above, contention of CA. Sheetal in removing reference of the work done by service
auditor is in order as in case of unmodified audit report, user auditor cannot refer to the work done
by service auditor.
2. (a) SA 700 establishes requirements and provides guidance on forming an opinion on the financial
statements. Communicating key audit matters is not a substitute for disclosures in the financial
statements that the applicable financial reporting framework requires management to make, or that
are otherwise necessary to achieve fair presentation. SA 705, “Modifications to the Opinion in the
Independent Auditor’s Report”, addresses circumstances in which the auditor concludes that there
is a material misstatement relating to the appropriateness or adequacy of disclosures in the
financial statements.

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 When the auditor expresses a qualified or adverse opinion in accordance with SA 705, presenting
the description of a matter giving rise to a modified opinion in the Basis for Qualified (Adverse)
Opinion section helps to promote intended users’ understanding and to identify such circumstances
when they occur. Separating the communication of this matter from other key audit matters
described in the Key Audit Matters section, therefore, gives it the appropriate prominence in the
auditor’s report.
Further, when the auditor expresses a qualified or adverse opinion, communicating other key audit
matters would still be relevant to enhancing intended users’ understanding of the audit, and
therefore the requirements to determine key audit matters apply. However, as an adverse opinion
is expressed in circumstances when the auditor has concluded that misstatements,
individually or in the aggregate, are both material and pervasive to the financial statements
depending on the significance of the matter(s) giving rise to an adverse opinion, the auditor
may determine that no other matters are key audit matters.
In the given situation Moksh Ltd., a listed company, has not consolidated one of its subsidiary.
Further, Consolidated Financial Statements of Moksh Ltd. Are materially misstated due to such
non-consolidation. The material misstatement is also deemed to be material and pervasive and
effect of the failure to consolidate have not been determined. In the given situation it is appropriate
to give Adverse Opinion by XYZ & Co., a Chartered Accountant Firm.
Since, in the given case, Adverse Opinion is being expressed thus XYZ & Co. can communicate
Key Audit Matter in given below manner:
Key Audit Matters: Except for the matter described in the Basis for Adverse Opinion section, we
have determined that there are no other key audit matters to communicate in our report.
(b) As per Clause 34 (b) of the Form 3CD, the auditor has to report whether the assessee is
required to furnish the statement of tax deducted or tax collected. If yes, please furnish the
details:
Tax Type of Due date Date of Whether the If not, please
deduction Form for furnishing, statement of tax furnish list of
and furnishing if furnished deducted or details/transa
collection collected contains ctions which
Account information about are not
Number all transactions reported
(TAN) which are required
to be reported

Accordingly, clause 34 (b) requires, a list of details/transactions which are not reported in the
statement of tax deducted at source and statement of tax collected at source are required to be
furnished. The reporting requirement is notwithstanding the fact that the assessee has furnished
the statements of tax deducted at source and tax collected at source within the prescribed time.
In the given situation, Rajul Ltd., has timely filed ETDS return for TDS deducted on Salary under
section 192 of the Income Tax Act in Form 24Q in respect of 4 th quarter. The company has not
furnished list of details which are not reported in the statement of tax deducted at source under the
pretext that TDS Statements are furnished within the prescribed time. Therefore, in view of above,
Rajul Ltd. is required to furnish list of details which are not reported in the statement of tax deducted
at source.
(c) Data Mining Techniques:
i. Data mining technique is a set of assisted techniques designed to automatically mine large
volumes of data for new, hidden or unexpected information or patterns.

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 ii. It discovers the usual knowledge or patterns in data, without a predefined idea or hypothesis
about what the pattern may be, i.e. without any prior knowledge of fraud.
iii. It explains various affinities, association, trends and variations in the form of conditional logic.
iv. Data mining techniques are categorized in three ways: Discovery, Predictive modeling and
Deviation and Link analysis.
In the given case of ATM Bank Ltd., CA Rani appointed as forensic auditor for its borrower, FAR
Ltd, shall use above stated data mining techniques to identify any hidden patterns of information.
3. (a) Basic Requirements of a Trade Credit Insurance Product: An insurer shall offer trade credit
insurance product only if all requirements mentioned below are met -
(i) Policyholder's loss is non-receipt of trade receivable arising out of a trade of goods or services.
(ii) Policyholder is a supplier of goods or services in consideration for a fair market value.
(iii) Policyholder's trade receivable does not arise out of factoring or reverse factoring arrangement or
any other similar arrangement.
(iv) Policyholder has a customer (i.e., Buyer) who is liable to pay a trade receivable to the policyholder
in return for the goods and services received by him from the policyholder, in accordance with a
policy document filed with the insurer.
(v) Policyholder undertakes to pay premium for the entire Policy Period.
(vi) Any other requirement that may be specified by the Authority from time to time.
(b) Significance of True and Fair: SA 700 “Forming an Opinion and Reporting on Financial
Statements”, requires the auditor to form an opinion on the financial statements based on an
evaluation of the conclusions drawn from the audit evidence obtained; and express clearly that
opinion through a written report that also describes the basis for the opinion. The auditor is required
to express his opinion on the financial statements that it gives a true and fair view in conformity
with the accounting principles generally accepted in India (a) in the case of the Balance Sheet, of
the state of affairs of the Company as at March 31, 20XX; (b) in the case of the Statement of Profit
and Loss, of the profit/ loss for the year ended on that date; and (c) in the case of the Cash Flow
Statement, of the cash flows for the year ended on that date.
In the context of audit of a company, the accounts of a company shall be deemed as not disclosing
a true and fair view, if they do not disclose any matters which are required to be disclosed by virtue
of provisions of Schedule III to that Act, or by virtue of a notification or an order of the Central
Government modifying the disclosure requirements. Therefore, the auditor will have to see that the
accounts are drawn up in conformity with the provisions of Schedule III of the Companies Act, 2013
and whether they contain all the matters required to be disclosed therein. In case of companies
which are governed by special Acts, the auditor should see whether the disclosure requirements
of the governing Act are complied with.
It must be noted that the disclosure requirements laid down by the law are the minimum
requirements. If certain information is vital for presenting a true and fair view, the accounts should
disclose it even though there may not be a specific legal provision to do so. Thus, what constitutes
a ‘true and fair’ view is the matter of an auditor’s judgment in the particular circumstances of a
case. In more specific terms, to ensure true and fair view, an auditor has to see:
(i) that the assets are neither undervalued or overvalued, according to the applicable accounting
principles,
(ii) no material asset is omitted;
(iii) the charge, if any, on assets are disclosed;
(iv) material liabilities should not be omitted;
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 (v) the statement of profit and loss discloses all the matters required to be disclosed by Part II of
Schedule III
(vi) the balance sheet has been prepared in accordance with Part I of Schedule III;
(vii) accounting policies have been followed consistently; and
(viii) all unusual, exceptional or non-recurring items have been disclosed separately.
(c) As per Council General Guidelines, 2008, Chapter XV, Guidelines for Networking, once the
relationship of network arises, it will be necessary for such a network to comply with all applicable
ethical requirements prescribed by the Institute from time to time in general and the following
requirements in particular in those cases where rotation of firms is prescribed by any regulatory
authority, no member firm of the network can accept appointment as an auditor in place of any
member firm of the network which is retiring.
In the given situation, AJ & Associates was statutory auditor of B Ltd. For last 10 years and due to
rotation of auditor as per section 139(2) of the Companies Act, 2013 B Ltd., retires AJ & Associates
and appoints PK & Co. as auditor for the year 2020-21.
It may be considered that AJ & Associates and PK & Co., chartered accountant firms have joined
the network firm namely A to Z & Affiliates registered with Institute. In view of above Guidelines for
Networking PK & Co., is disqualified for appointment as an auditor of B Ltd.
4 (a) Obligation of auditor to submit an exception report to the RBI:
(I) Where, in the case of a non-banking financial company, the statement regarding any of the
items referred to in paragraph 3 above, is unfavorable or qualified, or in the opinion of the
auditor the company has not complied with:
(a) the provisions of Chapter III B of RBI Act (Act 2 of 1934); or
(b) Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 2016; or
(c) Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking
Company (Reserve Bank) Directions, 2016 and Non-Banking Financial Company -
Systemically Important Non-Deposit taking Company and Deposit taking Company
(Reserve Bank) Directions, 2016.
It shall be the obligation of the auditor to make a report containing the details of such
unfavourable or qualified statements and/or about the non-compliance, as the case may be,
in respect of the company to the concerned Regional Office of the Department of Non -Banking
Supervision of the RBI under whose jurisdiction the registered office of the company is located
as per first Schedule to the Non-Banking Financial Companies Acceptance of Public Deposits
(Reserve Bank) Directions, 2016.
(II) The duty of the Auditor under sub-paragraph (I) shall be to report only the contraventions of
the provisions of RBI Act, 1934, and Directions, Guidelines, instructions referred to in sub -
paragraph (1) and such report shall not contain any statement with respect to compliance of
any of those provisions.
(b) Operational audit, (functional audit) as it is the audit for the management and involves verifying
the effectiveness, efficiency and economy of operations done by the Chinmay travels for the
organisation.
The operational auditor should possess some very essential personal qualities to be effective in
his work:
1. In areas beyond accounting and finance, his knowledge ordinarily would be rather scanty, and
this is a reason which should make him even more inquisitive.
2. He should ask the who, why, how of everything. He should try to visualise whether simpler
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 alternative means are available to do a particular work.
3. He should try to see everything as to whether that properly fits in the business frame and
organisational policy. He should be persistent and should possess an attitude of skepticism.
4. He should not give up or feel satisfied easily. He should imbibe a constructive approach rather
than a fault-finding approach and should give a feeling that his efforts are to help attaining an
improved operation and not merely fault finding.
5. If the auditor succeeds in giving a feeling of help and assistance through constructive
criticism, he will be able to obtain co-operation of the persons who are involved in the
operations. This will itself be a tremendous achievement of the operational auditor. He should
try to develop a team comprised of people of different backgrounds. Involvement of technical
people in operational auditing is generally helpful.
(c) Putting Name Board of the Firm at Residence: The Council of the Institute has decided that with
regard to the use of the name-board, there will be no bar to the putting up of a name-board in the
place of residence of a member with the designation of chartered accountant, provided, it is a
name-plate or board of an individual member and not of the firm.
In the given case, partners Mr. Gautam and Mr. Mahaveer, put up a name board of the firm in both
offices but not in their respective residences.
Conclusion: Thus, Mr. Gautam and Mr. Mahaveer are guilty of misconduct. Distance given in the
question is not relevant for deciding.
5. (a) In the given scenario, Mr. Bharat was appointed as statutory auditor of two listed entities i.e., N
Limited and O Limited. For the financial year 2021-22, Mr. Bharat had signed limited review reports
for first three quarter i.e., till the quarter ended 31 st December 2021 for both the companies. Owing
to his personal commitments and increased workload, he resigned from N Limited and asked the
Company to appoint another auditor to issue audit report for the remaining quarter and audit report
for the FY 2021-22.
Further, Mr. Bharat immediately informed the management of O Limited that he had been
disqualified to act as auditor and told them that he won ’t issue audit report for last quarter as Mrs.
D (wife of Mr. Bharat) had borrowed a sum of ` 5.15 lakh from the Company for her personal use.
As per SEBI LODR Regulations, if the auditor has signed the limited review/ audit report for the
first three quarters of a financial year, then the auditor shall, before suc h resignation, issue the
limited review/ audit report for the last quarter of such financial year as well as the audit report for
such financial year. This provision will not apply if the auditor is disqualified due to Section 141 of
the Companies Act, 2013.
Thus, in the given situation, in view of above conditions to be complied with upon resignation of
the statutory auditor of a listed entity/material subsidiary with respect to limited review / audit report
as per SEBI LODR Regulations, Mr. Bharat is required to issue the audit report for the last quarter
and audit report for the year 2021-22 for N Limited as he has issued audit report for the first three
quarters whereas Mr. Bharat is not required to issue the audit report for remaining quarter and
audit report for the year 2021-22 as a whole for O Limited as he is disqualified under section 141
of the Companies Act, 2013.
Accordingly, contention of Management of N Limited is correct and tenable for issuing the audit
report for remaining quarter and audit report for financial year 2021-22 however, contention of
management of O Limited is not correct regarding the legal responsibility of Mr. Bharat to issue
audit report for remaining quarter and for the whole year.
(b) CA. Ram conducting audit of branch of RICH Bank Ltd. whose principal business is lending money
to large corporates. Many large accounts of this branch have turned NPA category and
Management sold Shiva Ltd.’s NPA account amounting to ` 11 Crore to Asset Reconstruction
Company.
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© The Institute of Chartered Accountants of India

 CA. Ram should proceed as under:
In case of Sale of NPA by Bank, the auditor should examine
(i) the policy laid down by the Board of Directors in this regard relating to procedures, valuation
and delegation of powers.
(ii) only such NPA has been sold which has remained NPA in the books of the bank for at least
2 years.
(iii) the assets have been sold “without recourse’ only.
(iv) subsequent to the sale of the NPA, the bank does not assume any legal, operational or any
other type of risk relating to the sold NPAs.
(v) the NPA has been sold at cash basis only.
(vi) on the sale of the NPA, the same has been removed from the books of the account.
(vii) the short fall in the net book value has been charged to the profit and loss account.
(viii) where the sale is for a value higher than the NBV, no profit is recognised and the excess
provision has not been reversed but retained to meet the shortfall/ loss because sale of other
non-performing financial assets.
(c) Engaging into a Business: As per Clause (11) of Part I of First Schedule of Chartered
Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional
misconduct if he engages in any business or occupation other than the profession of Chartered
Accountant unless permitted by the Council so to engage.
However, the Council has granted general permission to the members to engage in certain specific
occupation. In respect of all other occupations specific permission of the Institute is necessary.
In this case, C.A. Bahubali is Special Executive Magistrate, engaged in the occupation of trading
in commodity derivatives and also took over as the Executive Chairman on 01.04.202 2.
In this context, it may be noted that the Special Executive Magistrate which is generally permitted
for Members of the Institute in practice, further specific permission is required for holding the
position of Executive Chairman and getting engaged in the occupation of trading in commodity
derivatives.
In the given situation, C.A. Bahubali is acting as Special Executive Magistrate which is generally
permitted for Members of the Institute in practice. Further, He is engaged in the occupation of
trading in commodity derivatives which is not covered under the general permission. He also took
over as the Executive Chairman for which specific permission is required. CA. Bahubali got the
permission for the same from the Council of ICAI.
Conclusion: Hence, CA. Bahubali is not guilty for acting as Special Executive Magistrate as it is
covered under the general permission. He is also not guilty for holding the position of Executive
Chairman and getting engaged in the occupation of trading in commodity derivatives after getting
specific permission of the Institute.
6 (a) The areas covered in comprehensive audit naturally vary from enterprise to enterprise depending
on the nature of the enterprise, its objectives and operations. However, in general, the covered
areas are those of investment decisions, project formulation, organisational effectiveness, capacity
utilisation, management of equipment, plant and machinery, production performance, use of
materials, productivity of labour, idle capacity, costs and prices, materials management, sales and
credit control, budgetary and internal control systems, etc.

© The Institute of Chartered Accountants of India

 Some of the issues examined in comprehensive audit are:
(i) How does the overall capital cost of the project compare with the approved planned costs?
Were there any substantial increases and, if so, what are these and whether there is evidence
of extravagance or unnecessary expenditure?
(ii) Have the planned production or operational outputs been achieved? Has there been under -
utilisation of installed capacity or shortfall in performance and, if so, what has caused it?
(iii) Has the planned rate of return been achieved?
(iv) Are the systems of project formulation and execution sound? Are there inadequacies? What
has been the effect on the gestation period and capital cost?
(v) Are cost control measures adequate and are there inefficiencies, wastages in raw materials
consumption, etc.?
(vi) Are the purchase policies adequate? Or have they led to piling up of inventory resulting in
redundancy in stores and spares?
(vii) Does the enterprise have research and development programmes? What has been the
performance in adopting new processes, technologies, improving profits and in reducing costs
through technological progress?
(viii) If the enterprise has an adequate system of repairs and maintenance?
(ix) Are procedures effective and economical?
(x) Is there any poor or insufficient or inefficient project planning?
(b) Liability of Auditor: “It is the auditor’s responsibility to audit the statement of accounts and
prepare tax returns on the basis of books of accounts produced before him. Also if he is satisfied
with the books and documents produced to him, he can give his opinion on the basis of those
documents only by exercising requisite skill and care and observing the laid down audit procedure.
In the instant case, Income tax Officer observed some irregularities during the assessment
proceeding of M/s Dim Ltd. Therefore, he started investigation of books of accounts audited and
signed by Mr. O, a practicing Chartered Accountant. While going through the books, he found that
M/s Dim Ltd. Used to maintain two sets of Books of Accounts, one is the official set and ot her is
covering all the transactions. Income Tax Department filed a complaint with the ICAI saying Mr. O
had negligently performed his duties.
Mr. O, the auditor was not under a duty to prepare books of accounts of assessee and he should,
of course, neither suggest nor assist in the preparations of false accounts. He is responsible for
the books produced before him for audit. He completed his audit work with official set of books
only.
In this situation, as Mr. O, performed the auditing with due skill and diligence; and, therefore, no
question of negligence arises. It is the duty of the Department to himself investigate the truth and
correctness of the accounts of the assessee.
(c) Agreement on Audit Engagement Terms: As per SA 210, “Agreeing the Terms of Audit
Engagements”, the auditor shall agree the terms of the audit engagement with management or those
charged with governance, as appropriate.
Subject to prescribed details under Law or Regulations, the agreed terms of the audit engagement
shall be recorded in an audit engagement letter or other suitable form of written agreement and
shall include:
(i) The objective and scope of the audit of the financial statements;
(ii) The responsibilities of the auditor;
(iii) The responsibilities of management;
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 (iv) Identification of the applicable financial reporting framework for the 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.
In the given scenario, NEW Limited appointed Mr. N, Mr. E and Mr. W, as its joint auditors for the
year 2021-22 and issued engagement letter to all of them. The engagement letter contains the
details on objective and scope of audit, responsibilities of auditor, identification of framework
applicable and reference to expected form and content of report from all three joint auditors.
However, engagement letter issued by NEW Ltd. does not specify the responsibilities of
management, whereas as per SA 210, it should also specify responsibilities of management.
OR
(c) Evaluating the professional judgment exercised by the auditor: It is also important for the
Technical Reviewer (hereinafter referred as TR) to understand that “professional judgment”, as
defined in SA 200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing” is an integral concept in the context of an audit and
application of SAs in real life audit scenarios. SA 200 defines professional judgment as “the
application of relevant training, knowledge and experience, within the context provided by auditing,
accounting and ethical standards, in making informed decisions about the course of action that is
appropriate in the circumstances of the audit engagement.”
The concept of “professional judgment” underscores the fact that Standards, particularly,
Standards on Auditing are written to lay down the fundamental principles that would apply to an
audit situation. Hence, no Standard can have straight jacketed application/solutions for all audit
scenarios. Above all, the Standards on Auditing issued by the Institute of Chartered Accountants
of India are principle based rather than rule based. Hence, almost all the SAs envisage exercise of
professional judgment by the auditor in their application in real life audit scen arios.
The TR would need to appreciate that the exercise of professional judgment in any particular case
is based on the facts and circumstances that are known to the auditor as at the time of exercising
that professional judgment. Normally, exercise of professional judgement by an auditor is preceded
by consultation on the relevant matters both within the engagement team and between the
engagement team and others at the appropriate level within or outside the firm.
In evaluating the professional judgment exercised by the auditor, the TR should consider
the following factors:
• whether the judgment reached reflects a due consideration and application of the relevant
auditing and accounting principles; and
• whether the judgment is appropriate in the light of, and consistent with, the facts and
circumstances that were known to the auditor up to the date of the auditor’s report. Hence,
the TR and the QR Team should not, under any circumstance, use “hindsight” (i.e. perception
or retrospection) in their evaluation of exercise of professional judgment by the auditor.
Since the auditor needs to exercise professional judgment throughout the audit, the latter also
needs to be appropriately documented. Hence, the TR can expect to find such audit documentation
as a part of the audit engagement file. It is important to note that professional judgment cannot be
used by an auditor as a justification for decisions that are not otherwise supported by the facts and
circumstances of the engagement or sufficient appropriate audit evidence.

© The Institute of Chartered Accountants of India

 Test Series: October, 2022
MOCK TEST PAPER - 2
FINAL COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
All MCQs are compulsory
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100
DIVISION A – MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. CA. A, the auditor of XYZ Limited resigned from the post due to his personal reasons. CA. B was
appointed as the subsequent auditor of the company by the Board of Directors. During the conclusion
of the audit for the FY, should CA. B mention about CA. A ’s resignation in the Companies (Auditor’s
Report) Order 2020?
(a) Yes. As per clause (xviii) of para 3 of CARO, CA. B should report the resignation of CA. A and
state if he has taken into consideration the issues or objections raised by CA. A.
(b) No. Since the resignation of CA. A is due to his own personal reason, the same need not be
reported under CARO.
(c) Yes. As per clause (xxi) of para 1 of CARO, CA. B should report the resignation of CA. A and state
if he has taken into consideration the issues or objections raised by CA. A.
(d) No. CARO 2020 does not state any requirements to report resignation of auditor. However, the
same needs to be mentioned by CA. B in the Audit Report under Other Matter Paragraph, as per
SA 706.
2. A small concern has approached CA. Ajeet Nath for audit of accounts for year 2021-22. It later on
transpired that preparation of accounts of the concern was outsourced to a third party which was
engaged in preparation of books of this concern on a cloud server and was also prepari ng financial
statements. The discussion amongst partners regarding agreeing to audit engagement remained
inconclusive. Which of the following statements is MOST APPROPRIATE regarding agreeing to audit
engagement of small concern?
(a) The management is responsible for preparation of books and financial statements. If management
is not willing to acknowledge it, audit engagement should not be accepted.
(b) The third party has prepared the books and financial statements. It should be acknowledged by
third party and then audit engagement should be accepted.
(c) It is implied that management is responsible for preparation of books and financial statements. No
express acknowledgment from management is necessary. Hence, audit engagement should be
accepted.
(d) The management as well as third party should acknowledge joint responsibility for preparation of
books and financial statements. Only then, audit engagement should be accepted.
3. You have been given an assignment of audit of IT department of a PSU. A checklist was handed over
to you which contained many questions such as,
 Are separate user-names and passwords assigned to individual users?
 Are periodical changes of passwords ensured?
 Are external (offsite) data backups maintained at a place outside the premises?
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 The type of audit being conducted is likely to be:
(a) Comprehensive audit.
(b) Propriety audit.
(c) Compliance audit.
(d) Financial audit.
4. JIN Ltd. which is based in Mumbai, is in the business of manufacturing leather products since 1995 and
wants to acquire OM Leathers Private Limited, which is based in Pune and engaged in the business of
selling leather products manufactured by different companies. Before acquisition JIN Ltd. wants to get
a due diligence review to be done of OM Leathers. JIN Ltd. appointed S & S Associates for conducting
overall due diligence of OM Leathers. During review, the accountant asked OM Leathers to provide
financial projections of the company for next five years, but OM leathers refused to provide the same
and claimed that financial projections are not part of due diligence review.
Whether the objection raised by the management of OM Leathers is correct? Give reason.
(a) The objection raised by OM Leathers is correct, as due diligence doesn’t include review of financial
projections.
(b) The objection raised by OM Leathers is not correct, as due diligence refers to an examination of a
potential investment to confirm all material facts of the prospective business which a company
wants to acquire and financial projection is a part of same.
(c) The objection raised by OM Leathers is correct, as reviewer cannot comment on financial
projections in his report.
(d) The objection raised by OM Leathers is not correct, as the target company cannot refuse in
providing any information required by the reviewer.
5. Employees of SIDHA Ltd. have to travel frequently for business purposes, so the company entered into
a contract with SIDHACHAL Travels Ltd. for managing booking, cancellation and other services required
by their employees. As per contract terms, SIDHACHAL travels has to raise its monthly bills for the
tickets booked or cancelled during the period and the same are paid by SIDHA Ltd. within 18 days of
the bill date. The bills raised by SIDHACHAL travels were of huge amount, so the management of SIDHA
Ltd. decided to get an audit conducted of the process followed for booking/ cancellation of tickets and
verify the accuracy of bills raised by the travel agency. Which audit do you feel the management should
opt for?
(a) Internal audit, as it relates to examining the operational efficiency of the organisation.
(b) Management audit, as it is an audit desired by the management.
(c) Performance audit, so as to assess the performance of the SIDHACHAL travels appointed by the
organisation.
(d) Operational audit, as it is the audit for the management and involves verifying the effectiveness,
efficiency and economy of operations done by the SIDHACHAL travels for the organisation.
6. 50:50 test determination is popularly used in :
(a) Banking Company.
(b) Insurance Company.
(c) NBFC Company.
(d) Stock Trading Company.

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7. Chandana Private Limited is engaged in trading of parts of machineries used in boiler plants. Company
has seen growth of 58% in the sales and management expecting similar growth in next 3 financial years
and is planning to onboard new dealers in order to achieve management goal. Purchase department
also expects to develop new suppliers in order to meet customer demands.
Internal auditor of the company has identified frequent changes in the bank account and other master
details of suppliers. At this expansion planning phase, company has no defined control to provid e
assurance on said supplier master changes. Management agreed to develop the process of monthly
detailed review of supplier master changes done in supplier master by Finance assistant in order to
ensure authorized changes in supplier master.
One of the members from the Management would like to know that above controls falls under which
category:
(a) Automated control.
(b) Preventive control.
(c) Detective control.
(d) Compensating control.
8 Which of the following statements is correct regarding submission of Statutory branch audit report and
LFAR of branch signed by the branch Auditor CA. Mahaveer?
(a) Statutory branch audit report is to be submitted to Statutory Central auditors and LFAR is to be
submitted to head office of bank directly.
(b) Statutory branch audit report is to be submitted to Statutory Central auditors and LFAR is to be
submitted to RBI directly.
(c) Statutory branch audit report as well as LFAR are to be submitted to Statut ory Central auditors.
(d) Statutory branch audit report as well as LFAR are to be submitted to head office directly as
appointment was made by Head office.
9. The following table shows a summary of identified misstatements:
Profit & Loss Balance Sheet
` (in Lakh) ` (in Lakh)
1. Accumulated depreciation 20
Depreciation 20
Incorrectly calculated depreciation on a straight-line basis
2. Bad debt expense 45
Allowance for doubtful debt 45
Identified risk over bad debts based on ageing profile of the trade receivables balance
Overall materiality for this audit was calculated and agreed to be ` 50 lakh. Which of the following
scenarios would be the best approach to be taken by the audit team and most likely outcome?
(a) The audit team does not need to communicate this summary of identified misstatements to
management, as individually the misstatements are not material.
(b) The audit team should ask a member of the accounts team to make journal entries to correct the
misstatements identified immediately, without notifying senior management.
(c) The audit senior communicates all the identified misstatements to the appropriate level of
management of the entity on a timely manner. Management does not see that the accumulated
misstatements would lead to the financial statements being materially misstated and therefore,
request them to be uncorrected and noted in the written representation.

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 (d) The audit senior communicates all the identified misstatements to the appropriate level of
management of the entity on a timely manner. Then management can assess the findings and
confirm they are in agreement. Assuming management agrees, they will be requested to make the
necessary corrections.
10 CA. Ansh, the auditor of Rajul Limited, a company in which Government of Puducherry holds 49% & a
Central PSU holds 51% of the shares, resigned from the post on 1st June 2021 due to his personal
reasons. CA. Babu was appointed as the subsequent auditor of the company by the board of directors
on 16th June 2021. One of the shareholders came to know about this information and contended that
this appointment is not valid as per the provisions of Companies Act. Is the contention of the shareholder,
right? If so, why?
(a) No. The appointment of shareholder is valid since the appointment is made within 30 days from
the date of resignation of CA. Ansh.
(b) Yes. The appointment of shareholder is not valid. Since the appointment is made within 30 days
from the date of resignation of CA. Ansh, it should have been done by the shareholders and not
the board of directors. Board of directors can make the appointment only i f no auditor is appointed
even beyond 60 days.
(c) Yes. Since the appointment is made within 30 days from the date of resignation of CA. Ansh, it
should have been done by C&AG and not by the Board of directors. Board of Directors can make
the appointment only if no auditor is appointed even beyond 30 days.
(d) Yes. The appointment of shareholder is not valid. Since the appointment is made within 30 days
from the date of resignation of CA. Ansh, it should have been done by the shareholders and not
the board of directors. Board of directors can make the appointment only if no auditor is appointed
even beyond 30 days. (10 x 1 = 10 Marks)
Questions (11-20) carry 2 Marks each
MCQ 11. -15.
Integrated Case Scenario 1
CA. Kamlesh Dutta was appointed as the engagement partner on behalf of Dutta & Associates for conducting
the statutory audit for 3rd consecutive year of Pramat Limited, an unlisted public company, with a turnover of
` 35 crore during F.Y. 2019-20.
From F.Y. 2020-21 onwards, Pramat Limited had voluntarily adopted to prepare its financial statements as
per Division II of Schedule III of the Companies Act, 2013, due to which Dutta & Associates had revised the
terms of audit engagement for the current audit engagement. As per the revised terms, it was decided that
the auditor’s report on the financial statements will incorporate a paragraph in accordance with SA 706,
drawing users’ attention to the additional disclosures. Moreover, it was decided that management will also
present appropriate disclosures in Financial Statement with respect to this change.
While auditing the entity, CA. Kamlesh came across a business policy of Pramat Limited that required to
invest some portion of its money earned in its business in securities of different blue-chip companies and due
to this reason, almost 55% of Pramat Limited’s total assets consisted of such investments. These securities
transactions were handled by its broker company, River Securities Private Limited (RSPL). RSPL was also
performing necessary investment account reconciliations and was also preparing the MTM gain and loss
calculation for the entity. Pramat Limited used to rely upon the calculations performed by RSPL and based
on that they pass the MTM entry for their current investments every month. Pramat Limited were relying on
the controls present in RSPL for the preparation of this entry. They also listed controls present in RSPL in
their Risk Control Matrix as key controls.
The engagement quality reviewer, CA. Tushar, recommended CA. Kamlesh to obtain a Type 2 report from
the management of RSPL to which CA. Kamlesh said that it was not required to do so as management was
already comfortable with the controls present in RSPL.

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Further while conducting the audit, CA. Kamlesh observed that investments in certain securities were sold at
a price less than at which they were acquired and he didn’t report on such matter as per Section 143(1) of
the Companies Act, 2013, without even considering to inquire into the propriety aspect of the same.
CA. Kamlesh made the following observations while examining the financial statements prepared by the
company as per Division II of Schedule III of the Companies Act, 2013, for the first time: -
(1) Other non-operating income and expenses related to it were shown separately in the statement of Profit
and Loss.
(2) Trade payables (payable after 12 months) and Deferred tax liabilities were shown directly under the
head “Non-Current Liabilities”.
While finalizing the audit report, CA. Kamlesh prepared a letter containing key important points to be
communicated to Those Charged with the Governance and Audit Committee of the entity. This letter was
prepared in addition to the audit report. The audit team was of the view that for the above-mentioned letter
the audit team is required to generate UDIN.
On the basis of the abovementioned facts, you are required to answer the following MCQs:
Multiple Choice Questions (5 questions of 2 Marks each):
11. While finalizing the audit report CA. Kamlesh decided to present the early adoption of IND AS under the
“Other Matter Paragraph” as in the auditor’s judgment, is relevant to users’ understanding of the audit,
the auditor’s responsibilities or the auditor’s report. Kindly guide CA. Kamlesh with respect to correct
reporting in the Audit Report as per SA 706:
(a) No disclosure is required as it is voluntary adoption of Division II of Schedule III of the Companies
Act, 2013.
(b) The Audit team should report the change in the “Emphasis of Matter Paragraph” because, in the
auditor’s judgment, it is of such importance that it is fundamental to users’ understanding of the
financial statements.
(c) The Audit team should report the change in the “Other Matter Paragraph” b ecause, in the auditor’s
judgment, it is of such importance that it is fundamental to users’ understanding of the financial
statements.
(d) The Audit team should qualify as per SA 705 the said change as it was not required to be
implemented and this will create unnecessary confusion for the read.
12. CA. Kamlesh ’s risk assessment includes an expectation that controls at the service organization are
operating effectively and he contended that there was no requirement to obtain a Type 2 report. Kindly
guide CA. Kamlesh with respect to the requirement of SA 402
(a) CA. Kamlesh ’s contention is correct as Management has comfort over the controls at service
organization for the transactions and activities which are processed there.
(b) When the user auditor’s risk assessment includes an expectation that controls at the service
organization are operating effectively, the user auditor shall obtain audit evidence about the
operating effectiveness of those controls which may include by obtaining Type 2 report.
(c) It depends upon the auditor’s judgment and the recommendation of the engagement quality
reviewer is not binding upon Audit team. As a result, CA. Kamlesh ’s decision will be considered
correct and appropriate.
(d) As no services are outsourced to the broker company and hence there is no need to obtain the
type 2 report.

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13. Whether it is justifiable that CA. Kamlesh didn’t report on the matter with respect to sale of investments
even without inquiring for the same?
(a) No, as at least CA. Kamlesh should have inquired into to such a propriety matter in order to satisfy
that such sales were bona-fide.
(b) Yes, as it is not mandatory for the auditor to report on the matters prescribed under the said section.
(c) No, he should have at least consulted CA. Tushar before doing so.
(d) Yes, as the relevant clause for the reporting is not applicable in case of Pramat Limited .
14. Identify the errors, if any, in the preparation of financial statements by the company as per Division II of
Schedule III of the Companies Act, 2013, from the observations made by CA. Kamlesh.
(a) Other non-operating income should have been shown by netting off the expenses related to it and
trade payables and Deferred tax liabilities should be shown under the sub -heading ‘Financial
Liabilities’ under the head ‘Non-current liabilities’.
(b) Trade payables and Deferred tax liabilities should be shown under t he sub-heading ‘Financial
Liabilities’ under the head ‘Non-current liabilities’.
(c) Other non-operating income should have been shown by netting off the expenses related to it and
trade payables should be shown under the sub-heading ‘Financial Liabilities’ under the head ‘Non-
current liabilities’.
(d) Trade payables should be shown under the sub-heading ‘Financial Liabilities’ under the head ‘Non-
current liabilities’.
15. CA. Kamlesh was not sure with respect to the UDIN requirement for the letter to Those Charged with
Governance containing important audit topics and findings for discussion. Kindly guide CA. Kamlesh
with respect to UDIN requirements for this letter.
(a) Separate UDINs are to be generated for the Statutory audit report and Letter to Those Ch arged
with Governance.
(b) UDIN is only required for the Statutory Audit Report, but it is not required for the communication
performed by Auditor as per SA 260 and SA 265.
(c) One single UDIN is required to be generated for all items for this Client. UDINs are required to be
generated Client wise instead of report-wise.
(d) One single UDIN will be generated for the whole year for this engagement which may include
various communication by auditor to management and Those Charged with Governance.
MCQ 16. -20.
Integrated Case Scenario 2
KKML & Associates was appointed statutory auditor for FY 2021-22 of AMPL Limited (a steel & Iron
manufacturing company and NSE-listed company) for the first time. CA. Kush was engagement partner for
this assignment. Last year, it was audited by Ananya & Company Chartered Accountants. Ananya & Company
charged ` 7,00,000 for the statutory audit for FY 2020-2021. Over and above that, Ananya & Company raised
bills for overtime and out-of-pocket expense of ` 1,50,000. AMPL Limited paid ` 7,00,000 to Ananya &
Company but raised a dispute over the calculation of overtime. As per AMPL Limited, the overtime on account
of additional work as recalculated along with OPE should be ` 95,000/- and the same was paid on a day
before proposing the appointment of CA. Kush as a Statutory Auditor. This OPE was accounted only to the
extent of ` 80,000 on a provisional basis in books of accounts for FY 2020-21.
CA. Kush before accepting the appointment, communicated with Ananya & Company, as to why he should
not accept the appointment as a Statutory Auditor for AMPL Limited. Ananya & Company replied on the same
day stating the reason for not accepting the appointment as there were pending audit fees of ` 55,000/-
(1,50,000 – 95,000) for FY 2020-21. After analysing the whole situation CA. Kush communicated with Ananya
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& Company that this was a case of disputed audit fees, and he cannot decline acceptance of the appointment
on this basis. Later, CA. Kush accepted the appointment.
Moreover, while proposing the appointment of CA. Kush, AMPL Limited issued a general notice to pass a
resolution at AGM for the appointment of CA. Kush. The same was passed and a copy of the resolution and
the notice were served to Ananya & Company after the AGM. This resolution was proposed by the Audit
Committee consisting of 7 Directors i.e. Mr. Ram, Mr. Shyam, Mrs. Shweta, Mrs. Komal, Mrs. Jaya, Mrs.
Prabha and Mr. Anand. Out of these, Mr. Shyam, Mrs. Shweta (Chairperson of the Audit Committee) and
Mrs. Komal were not independent directors. There was no change in this during the whole FY 2021 -22.
CA. Akash, the Engagement Quality Control Reviewer, insisted CA. Kush analyse whether the opening
balances reflect the application of appropriate accounting policies. CA. Kush contented that he is not required
to verify as he is already testing for closing balances which contain opening balances and that will give
comfort over the application of accounting policies.
During the year, Mr. Shyam entered into an arrangement with the company wherein the company will transfer
the residential flat (originally purchased by the company in his name) to Mr. Shyam for ` 4 Crore (originally
purchased at ` 2 Crore and having FMV ` 4 Crore). Instead of consideration, the company will create a long-
term loan due from Mr. Shyam in the books of accounts at ` 3 Crore and for the rest (` 1 Crore) of the
amount, Mr. Shyam will provide Plant and Machinery to the company. No reporting or further disclosures
were made by the company for this transaction as this was at an arm’s length price.
On the basis of the abovementioned facts, you are required to answer the following MCQs:
Multiple Choice Questions (5 questions of 2 Marks each):
16. Ananya & Company raised the contention that the appointment of CA. Kush is inappropriate as there
were outstanding audit fees of ` 55,000 and he should not have accepted the appointment as Statutory
Auditor. Considering the above scenario kindly guide CA. Kush on whether he should have declined the
appointment on grounds of pending audit Fees
(a) As per section 141 of the Companies Act, 2013, if another auditor other than the retiring auditor is
getting appointed as Statutory Auditor in AGM then should not accept the appointment till the time
the previous auditor’s audit fees are paid in full.
(b) As per section 139 read with Rule 3, if another auditor other than the retiring auditor is getting
appointed as Statutory Auditor in AGM then he should not accept the appointment till if the previous
auditor’s audit fees are outstanding for a period of 180 days or more.
(c) CA. Kush can accept a position as auditor previously held by another chartered accountant or a
certified auditor i.e., Ananya & Company who has been issued a certificate under the Restricted
Certificate Rules, 1932 without first communicating with him in writing.
(d) CA. Kush can accept the appointment as statutory auditor as the pending fees are disputed fees
and this would not constitute valid professional reasons on account of which an audit should not
be accepted by the member to whom it is offered.
17. Ananya & Company contended that they were not given special notice and hence the appointment of
CA. Kush is invalid. Considering the above scenario kindly guide CA. Kush on what course of action he
should have adopted in the current case.
(a) Clause (9) of Part I of the First Schedule to Chartered Accountants Act, 1949 provides that a
member in practice shall be deemed to be guilty of professional misconduct if he accepts an
appointment as auditor of a Company without first ascertaining from it whether the requir ements of
Sections 139 and 140 of the Companies Act, 2013 and hence CA. Kush is guilty of professional
misconduct and his appointment is invalid.
(b) Clause (8) of Part I of the First Schedule to Chartered Accountants Act, 1949 provides that a
member in practice shall be deemed to be guilty of professional misconduct if he accepts an
appointment as auditor of a Company without first ascertaining from it whether the requirements of
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 Sections 139 and 140 of the Companies Act, 2013 and hence CA. Kush is guilty of professional
misconduct and his appointment is invalid.
(c) As per section 140(4) of the Companies Act, 2013, the company is required to share the general
resolution and notice of appointment of another auditor once the resolution is passed in AGM.
Hence, CA. Kush’s appointment is valid and hence is not required to perform anything further.
(d) CA. Kush before getting appointed communicated with the previous auditor which was sufficient
and equivalent to special notice. Hence, the contention of Ananya & company is incorrect.
18. Whether contention of CA. Akash, the Engagement Quality Control Reviewer regarding analysis of the
opening balances is correct. Kindly guide CA. Kush with the correct course of action as per SA 510.
(a) The auditor shall obtain sufficient appropriate audit evidence about whether the accounting policies
reflected in the opening balances have been consistently applied in the current period’s financial
statements, and whether changes in the accounting policies have been properly accounted for and
adequately presented and disclosed in accordance with the applicable financial reporting
framework.
(b) The auditor shall obtain sufficient appropriate audit evidence about whether the material accounting
policies reflected in the closing balances have been consistently applied in the current period’s
financial statements when there is a material change.
(c) If the auditor has identified misstatement in the drafting of accounting policies in the current period,
then he shall obtain sufficient appropriate audit evidence about whether the accounting policies
reflected in the opening balances were appropriately drafted and applied.
(d) The auditor is not required to obtain sufficient appropriate audit evidence about whether the
accounting policies reflected in the opening balances have been consistently applied in the current
period’s financial statements, and whether changes in the accounting policies have been properly
accounted for and adequately presented and disclosed in accordance with the applicable financial
reporting framework.
19. In the current case, Audit Committee of AMPL Limited is consisting of 7 Directors i.e. Mr. Ram,
Mr. Shyam, Mrs. Shweta, Mrs. Komal, Mrs. Jaya, Mrs. Prabha and Mr. Anand. Out of these, Mr. Shyam,
Mrs. Shweta (Chairperson of the Audit Committee) and Mrs. Komal were not independent directors.
Chief Compliance Officer of the company raised an issue that the company has not complied with SEBI
LODR Regulations. He also, insisted CA. Kush focus on this while performing the audit. You are required
to verify the compliance with SEBI LODR Regulations based on the above-mentioned scenario. Kindly
select the appropriate option from below depicting the correct provision of SEBI LODR regulation with
respect to the Audit Committee:
(a) As per Regulation 17 of SEBI LODR Regulation, the audit committee shall have a minimum of two
directors as members. At least one-third of the members of the audit committee shall be
independent directors and the Chairperson of the audit committee shall be an independent director.
Thus, contention of Chief Compliance Officer is correct.
(b) As per Regulation 18 of SEBI LODR Regulation, the audit committee shall have a minimum of five
directors as members. At least one-third of the members of the audit committee shall be
independent directors and the chairperson of the audit committee can be a non -independent
director provided not more than one-third of directors shall be executive directors. Thus, contention
of Chief Compliance Officer is not correct.
(c) As per Regulation 19 of SEBI LODR Regulation, the audit committee shall have a minimum of five
directors as members. At least one-third of the members of the audit committee shall be non-
executive directors and the chairperson of the audit committee shall be an independent director. If
the chairperson is an executive director, then not more than one-third of directors shall be executive
directors. Thus, contention of Chief Compliance Officer is correct.

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 (d) As per Regulation 18 of SEBI LODR Regulation, the audit committee shall have a minimum of three
directors as members. At least two-thirds of the members of the audit committee shall be
independent directors and the Chairperson of the audit committee shall be an independent director.
Thus, contention of Chief Compliance Officer is correct.
20. CA. Kush was perplexed concerning reporting a transaction entered between Mr. Shyam and the
Company for the transfer of the Immovable Property. You are being the Engagement Quality Control
Reviewer, kindly guide CA. Kush concerning the appropriate reporting of the said transaction as per
CARO 2020.
(a) As per para 3(xv) of CARO 2020, Auditor is required to report whether the company has entered
into any non-cash transactions with directors or persons connected with him and if so, whether the
provisions of section 192 of the Companies Act have been complied with.
(b) As per para 3(xiv) of CARO 2020, Auditor is required to report whether the company has entered
into any non-cash transactions, other than being at arm’s length price, with directors or persons
connected with him and if so, whether the provisions of section 192 of Companie s Act have been
complied with.
(c) As per para 3(ix) of CARO 2020, Auditor is required to report 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.
(d). As per para 3(ix) of CARO 2020, Auditor is required to report whether the company has revalued
its Property, Plant and Equipment (including Right of Use assets) or intangible assets or both during
the year and, if so, whether the revaluation is based on the valuation by a Registered Valuer;
specify the amount of change, if the change is 10% or more in the aggregate of the net carrying
value of each class of Property, Plant and Equipment or intangible assets. (10 x 2 = 20 Marks)

Division B- Descriptive Questions-70 Marks

Question No. 1 is compulsory.
Attempt any four questions from the Rest.
1. (a) CA.K is appointed statutory auditor of SEEK INDIA LTD under Companies Act, 2013 for the first
time. The company is preparing its accounts keeping in view applicable requirements of Division II
of Schedule III of Companies Act, 2013. On scrutiny of financial statements of company put up for
audit, it was noticed that notes to accounts show ageing of trade payables as per amended
requirements of Schedule III of the Companies Act, 2013.
The ageing schedule forming part of notes is as under: -
Outstanding for following periods from due date of payment (` In crore)
Particulars Less than 1 1-2 years 2-3 years More than Total
year 3 years
MSME NIL NIL NIL NIL NIL
Others 2 4 3 1 10
Disputed dues-MSME NIL NIL NIL NIL NIL
Disputed dues-others NIL NIL NIL NIL NIL
Besides above, current ratio, debt-equity ratio, trade payables turnover ratio and net profit ratio
disclosed in notes to accounts have slipped drastically as compared to last year and from standard
norms. Most of the key financial ratios are in red. There is no other relevant information concerning
above in notes to accounts.

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 Further, on reviewing bank statement of cash credit limit (against hypothecation of paid stocks), it
was noticed that there is no debit transaction in the month of March,2022. On inquiry, he came to
know that stock audit of company was conducted in the month of January,2022 and stock auditors
have commented vide their report dated 25.2.2022 that company had negative drawing power due
to high creditors. Accordingly, the bankers have refused further debits in cash credit account from
start of March,2022. There is no information in this respect in financial statements and notes to
accounts.
Discuss how CA K should deal with above for reporting in his audit report under the Companies
Act, 2013. (5 Marks)
(b) BREW Ltd., FMCG Company having its tea gardens in northeastern states of the country is
exclusively dealing in blending, processing, packing and selling of various brands of Tea. During
the year under audit, the company entered into joint venture for purchasing Tea Gardens in Sri
Lanka and Kenya. M/s PM & Associates are the statutory auditors of the company for the financial
year 2021-22. During the course of audit, the audit team was unable to obtain sufficient appropriate
evidence about a single element of the consolidated financial statement being Joint venture
investment in Dharma Ltd. representing over 91% of the group’s net assets having both material
and pervasive possible effect to the consolidated financial statements. The group’s invest ment in
Dharma Ltd. is carried at ` 115 crore in the group’s consolidated balance sheet.
Draft the opinion paragraph and basis of opinion paragraph to be included in the Independent
Auditor’s report. (5 Marks)
(c) Difficult Books Limited is engaged in manufacturing of active pharmaceutical ingredients. Due to
change in laws and regulations, every company engaged in manufacturing in active pharmaceutical
ingredients would now require production capacity license which will restrict the production of
companies. Management of the company assessed the impact of the change in law over the
financial position of company and appropriately disclosed the same in the financial statement.
Audit Team of the company evaluated management's disclosure and found it appropriate and
sufficient. However, considering the said matter as most important and fundamental to users
understanding regarding financial statement the audit team decided to disclose the same in Other
Matter Paragraph.
You as an Engagement Partner are required to guide the Audit Team with respect to reporting of
the said matter in Audit Report. (4 Marks)
2. (a) The Engagement Partner of the audit team of High Inventory Limited assessed that the inventory
is material with respect to the audit of the financial statement for the current period. Upon inquiring
with the management, the Engagement Partner identified that the management will be performing
an annual physical inventory count at all the warehouses where the entity stores and maintains its
inventory. Moreover, management confirmed in its written representation that they will be
performing a 100% physical count of inventory for the current period.
As a result, the engagement Partner decided not to perform any physical count of inventory as it
will be a duplication of the work. Moreover, he decided that the written representation from
management stating “the inventory exists and is in appropriate physical condition” will be sufficient
and appropriate with respect to audit evidence to conclude that the inventory balance in the
financial statement is free from any material misstatement.
In the light of SA 501, evaluate whether the decision taken by the Engagement Partner is
appropriate or not. (5 Marks)
(b) You are part of engagement team conducting statutory audit of a branch of nationalized bank.
During the course of audit, it has come to your notice that there are large number o f cash credit
accounts in the branch. Many of the cash credit accounts are only partially utilized during
substantial part of year. However, in the month of March, the accounts are fully utilized. On further

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 scrutiny, it is observed that these account holders have made fixed deposits from these utilized
amounts at the end of year. These deposits have been liquidated in first week of April of next
financial year.Comment upon how this situation would be dealt by you as a statutory branch
auditor? (4 Marks)
(c) CA Praful has recently qualified and has obtained certificate of practice. In the initial years, it is
taking time to set up his clientele base. He is also conducting audit of few entities. Simultaneously,
he plans to provide coaching to CA students online taking advantage of his fresh reservoir of
knowledge. Therefore, he advertises his classes on various social media platforms. Comment with
reference to the Chartered Accountants Act, 1949, and Schedules thereto. (5 Marks)
3. (a) Generating and preparing meaningful information from raw system data using processes, tools,
and techniques is known as Data Analytics and the data analytics methods used in an audit are
known as Computer Assisted Auditing Techniques or CAATs.” You are required to give illustration
of a suggested approach to get the benefit from the use of CAATs. (5 Marks)
(b) An American company engaged in the business of manufacturing and distribution of industrial
gases, is interested in acquiring a listed Indian Company having a market share of 51% and assets
over ` 1000 Crore. It requests you to conduct "Due Diligence" of assets of this listed Indian
Company to find out, if any of the assets is overvalued. List down the areas of due diligence
exercise to find out overvalued assets. (5 Marks)
(c) Gautam Ltd. is engaged in the manufacturing of textile products having an annual capacity of
producing 2,30,000 units of garments. Gautam Ltd. is covered under the provisions of Goods and
Service Tax Law with an applicable rate of 12%. During the financial year 2021-2022, Gautam Ltd.
received a demand notice of ` 17.00 Lacs pertaining to the F.Y 2015-16 when the provisions of
Central Excise Act were applicable. Gautam Ltd. deposited the demand amount after discussing
with its legal department. Comment whether a tax auditor of Gautam Ltd.is required to report the
same. (4 Marks)
4. (a) Arihant Ltd. is into the business of trading of dolls since 2004. The company was performing well
till year 2015 and after that sales started showing downward trend. The Company had borrowed
working capital funds from LP Bank Ltd. On 17.10.2021, account of the borrower was classified
as NPA. Bank appointed forensic auditor, to identify, if any diversion of funds is there or not.
Forensic auditor confirmed the diversion of funds. Matter went to the court of law and company
was asked to recast its financial statements for the last 6 years. Management contended that
Companies Act, 2013 does not allow recasting for more than five preceding financial years. Do you
agree with the views of the management? (5 Marks)
(b) Vishudh Sagar & Co. Chartered Accountants have been auditors of JIN Ltd (a listed entity) for the
last 8 financial years. CA. Manidhari, partner of the firm, has been handling the audit assignment
very well since the appointment. The audit work of CA. Manidhari and his team is reviewed by a
senior partner CA. Mahendra Sagar to assure that audit is performed in accordance with
professional standards and regulatory and legal requirements. CA. Mahendra was out of India for
some personal reasons, so this year CA. Kushal, who is relatively less experienced team member,
has been asked to review the audit work. In your opinion, what areas CA. Kushal should consider
at the time of review. List any four areas and also comment whether firm is complying with
Standard on Quality Control or not. (5 Marks)
(c) CA. Vasu started his practice from August 15, 2021. On 16th August 2021, one female candidate
approached him for articleship. In addition to monthly stipend, CA. Vasu also offered her 2 % profits
of his CA firm. She agreed to take both 2 % profits of the CA firm and stipend as per the rate
prescribed by the ICAI. The Institute of Chartered Accountants of India sent a letter to CA. Vasu
objecting the payment of 2 % profits. CA. Vasu replies to the ICAI stating that he is paying 2 %
profits of his firm over and above the stipend to help the articled clerk as the financial position of

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 the articled clerk is very weak. Is CA. Vasu liable to professional misconduct? Comment with
reference to the Chartered Accountants Act, 1949, and Schedules thereto. (4 Marks)
5. (a) ABC Pvt Ltd was involved in the business of manufacturing pipes and holdings. For financial year
2020-21 the company had the following turnover from its various segments and product:
Segment Name Turnover Profit
Steel / Iron Pipe Manufacturing 140 Crore 10 Crore
Holdings and Civil Structure Accessories 25 Crore 50 Lakh
PVC / Yellow Pipe Manufacturing 65 Crore 8 Crore
During Financial Year 2021-22, the company’s performance was considerably lower compared to
FY 2020-21 due to competition and high prices. Turnover and Profit of the company for FY
2021-22 is given hereunder:
Segment Name Turnover Profit
Steel / Iron Pipe Manufacturing 60 Crore 2 Crore
Holdings and Civil Structure Accessories 15 Crore 35 Lakh
PVC / Yellow Pipe Manufacturing 35 Crore 3 Crore
The company was fully financed through its own capital during both years. Kindly assess whether
the company was required to appoint internal auditor as per section 138 read with Rule 13 of the
Companies (Accounts) Rules, 2014 for FY 2021-22. (4 Marks)
(b) GYAN & Co. is the statutory auditor of KUNTHU NBFC Ltd. While planning the audit procedures to
be done during the audit of entity, there was a difference of opinion between CA. Matigyan and his
partner CA. Shrutgyan. CA. Shrutgyan is of the opinion that evaluation of internal control system
and verification of registration with RBI should not be the part of audit procedure, as it is the part
of internal audit only. Is the contention of CA. Shrutgyan correct? Also state what broad areas
should mandatorily become part of the audit procedure of GYAN & Co. for conducting the audit of
KUNTHU NBFC Ltd.? (6 Marks)
(c) CA. Prakash, a practicing Chartered Accountant issued a certificate of circulation of a periodical
without going into the most elementary details of how the circulation of a periodical was being
maintained i.e., by not looking into the financial records, bank statements or bank pass books, by
not examining evidence of actual payment of printer’s bills and by not caring to ascertain how ma ny
copies were sold and paid for. Is CA. Prakash liable to professional misconduct? Comment with
reference to the Chartered Accountants Act, 1949, and Schedules thereto. (4 Marks)
6. (a) CA Vardhman has been appointed as an auditor of Life Reliable Insurance Ltd. He observed that
few insurance policies have been sold by the company in the last month of the financial year ending
31st March, 2022. While recognizing income in the income statement of the company, it is the
responsibility of CA Vardhman to make an assessment of the reasonability of the risk pattern
managed by the management.
Also, it is to be ensured by him that Life Reliable Insurance Ltd. should not issue policies, if the
risk is not established before the closure of the F.Y. 2021-22.
Indicate the circumstances when the company should not issue the policy documents . (5 Marks)
(b) T Ltd. is holding 68% share of B Ltd, 51% share of C Ltd. RS & Co. Chartered Accountants are the
statutory auditors of T Ltd. MN & Co. Chartered Accountants are the statutory auditors of B Ltd.
and C Ltd. MN & Co have qualified the report of B Ltd. due to material discrepancies in standalone
financial statement. While framing the opinion on Consolidated Financial Statement of T Ltd., RS
& Co. (Principal Auditor) have ignored the qualification of B Ltd. considering it not material at Group
Level. Comment. (5 Marks)
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 (c) During the course of the audit of Tirthankara Limited, CA. Shreyansh Manager in the audit team
identified that there is significant risk in lease transactions due to complex cross -border sale and
lease back arrangements. This significant risk or risk of material misstatement was not identified
in management's risk assessment process. Upon various inquiries with Management regarding
their risk assessment process, it was identified and concluded by the audit team that the
management's risk assessment process is not effective to identify all the significant risks.
CA. Shreyansh decided that this in combination with other potential deficiencies in internal control
constitutes significant deficiencies in internal control and hence, is required to be communicated
to those charged with governance. However, the engagement partner had a different view
regarding the audit of Tirthankara Limited. According to him, the only matter that is identified and
poses significant deficiencies due to their magnitude is only required to be communicated. Matters
of potential misstatements that are not actual misstatements cannot be termed as significant
deficiencies.
You are required to guide CA. Shreyansh with respect to examples of matters that the auditor may
consider in determining whether a deficiency or combination of deficiencies in internal control
constitutes a significant deficiency. (4 Marks)
OR
CA. Vimal wants to apply in the empanelment of peer reviewer. He was into employment till 2012
since then he shifted from industry and started his own practice. Below is his experience and
employment record from 1995 to 2012.
Name of Company Designation From To Date
Date
Parshav Ltd Project Implementation Manager 1-4-1995 31-3-1998
Suparshava Ltd Financial Reporting Senior Manager 1-4-1998 31-3-2007
(Assisting in Audits)
Parasnath Ltd Project & Improvement Director 1-4-2007 31-3-2012
Own Practice – Sole Audit & Taxation 1-4-2012 31-3-2022
Prop
Kindly assess whether CA. Vimal can apply and is qualified to get admitted in the empanelment of
Peer Reviewer.

13

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 Test Series: October, 2022
MOCK TEST PAPER - 2
FINAL COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS
DIVISION A - MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. (a)
2. (a)
3. (a)
4. (b)
5. (d)
6. (c)
7. (c)
8. (c)
9. (d)
10. (c)
Questions (11-20) carry 2 Marks each
11. (b)
12. (b)
13. (d)
14. (c)
15. (b)
16. (d)
17. (a)
18. (a)
19. (d)
20. (a)
DIVISION B - DESCRIPTIVE QUESTIONS (70 Marks)
1. (a) In the given situation, it is clear from the ageing schedule that company is not able to pay its
creditors on time. Outstanding to creditors for a period of 1 year or more account for 80% of total
dues to the creditors of the company from due date of payment. Most of key financial ratios are
adverse.
Further, bankers have refused further debits in cash credit account due to negative drawing power
from March 2022. Cash credit loans are repayable on demand. There is no other information or
disclosure available how the company plans to run its business without bank finance.
1

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 All the above factors are indicators that a material uncertainty exists that may cast a significant
doubt on the company’s ability to continue as going concern. There is no express disclosure of this
fact in financial statements.
Therefore, it is a situation where material uncertainty exists which has cast a significant doubt on
company’s ability to continue as going concern in accordance with SA 570, “Going Concern”.
Keeping in view above the fact that although a material uncertainty exists casting a significant
doubt on the ability of company to continue as going concern, adequate disclosure of material
uncertainty is not made in financial statements, CA K shall give qualified or adverse opinion in
accordance with SA-705, “Modifications to the Opinion in the Independent Auditor’s Report”.
(b) M/s PM & Associates are unable to obtain sufficient appropriate audit evidence about the financial
information of a joint venture investment that represents over 91% of the group’s net assets. The
possible effects of this inability to obtain sufficient appropriate audit evidence are both material and
pervasive to the consolidated financial statements. Therefore, the statutory auditor should issue a
disclaimer of opinion.
The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of Opinion
paragraph is as under:
Disclaimer of Opinion
We were engaged to audit the accompanying consolidated financial statements of BREW Ltd.,
(hereinafter referred to as the “Holding Company”) and its subsidiaries (the Holding Company and
its subsidiaries together referred to as “the Group), which comprise the consolidated balance sheet
as at March 31, 2022, the consolidated statement of Profit and Loss, (consolidated statement of
changes in equity) and consolidated statement of cash flows for the year then ended, and notes to
the consolidated financial statements, including a summary of significant accounting policies
(hereinafter referred to as the “Consolidated Financial Statements”).
We do not express an opinion on the accompanying consolidated financial statements of the Group.
Because of the significance of the matter described in the Basis for Disclaimer of Opinion section
of our report, we have not been able to obtain sufficient appropriate audit evidence to provide a
basis for an audit opinion on these consolidated financial statements.
Basis for Disclaimer of Opinion
The Group’s investment in its joint venture Dharma Ltd. Company is carried at ` 115 crore on the
Group’s consolidated balance sheet, which represents over 91% of the Group’s net assets as at
March 31, 2022. We were not allowed access to the management and the auditors of Dharma Ltd.
Company, including Dharma Ltd.’s auditors’ audit documentation. As a result, we were unable to
determine whether any adjustments were necessary in respect of the Group’s proportional share
of Dharma Ltd.’s assets that it controls jointly, its proportional share of Dharma Ltd.’s liabilities for
which it is jointly responsible, its proportional share of Dharma Ltd.’s income and expenses for the
year, (and the elements making up the consolidated statement of changes in equity) and the
consolidated cash flow statement.
(c) As per SA 706, “Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor’s Report” if the auditor considers it necessary to draw users’ attention to a matter presented
or disclosed in the financial statements that, in the auditor’s judgment, is of such importance t hat
it is fundamental to users’ understanding of the financial statements, the auditor shall include an
Emphasis of Matter paragraph in the auditor’s report provided:

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 (i) The auditor would not be required to modify the opinion in accordance with SA 705 as a result
of the matter; and
(ii) When SA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the auditor’s report.
In the instant case, since Difficult Books Limited is engaged in manufacturing of active
pharmaceutical ingredients, would now require production capacity license which will restrict the
production of companies, due to change in laws and regulations. Management of the Difficult Books
Limited assessed the impact of the change in law over the financial position of company and
appropriately disclosed the same in the financial statement.
Audit team of the Difficult Books Limited evaluated management's disclosure and found it
appropriate and sufficient. However, considering the said matter as most importan t and
fundamental to users understanding regarding financial statement the audit team decided to
disclose the same.
The said matter is already disclosed and presented appropriately in financial statement and is of
such importance that is fundamental to the users understanding of the financial statement and
hence, it required to be disclosed under Emphasis of Matter paragraph.
Therefore, decision of audit team to disclose the same in Other Matter Paragraph is not in order, it
should be disclosed in Emphasis of Matter Paragraph.
2. (a) As per SA 501,” Audit Evidence - Specific Considerations for Selected Items”, when inventory is
material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence
regarding the existence and condition of inventory by:
i. Attendance at physical inventory counting, unless impracticable, to
1. Evaluate management’s instructions and procedures for recording and cont rolling the
results of the entity’s physical inventory counting.
2. Observe the performance of management’s count procedures.
3. Inspect the inventory; and.
4. Perform test counts; and
ii. Performing audit procedures over the entity’s final inventory records to determine whether
they accurately reflect actual inventory count results
Attendance at physical inventory counting involves:
i. Inspecting the inventory to ascertain its existence and evaluate its condition and perform test
counts.
ii. Observing compliance with management’s instructions and the performance of procedures
for recording and controlling the results of the physical inventory count; and
iii. Obtaining audit evidence as to the reliability of management’s count procedures.
Hence in the given case, the approach of Engagement Partner is not appropriate as when inventory
is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence
regarding the existence and condition of inventory. This should be done by performing various
audit procedures which also includes attending physical count, observing the count, inspecting the
inventory and reperforming physical counts.

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 (b) In the given case, many of the cash credit accounts in the branch of a nationalized bank are only
partially utilized during substantial part of year. However, in the month of March, the accounts are
fully utilized. On further scrutiny, it is observed that these account holders have made fixed deposits
from these utilized amounts at the end of year. These deposits have been liquidated in first week
of April of next financial year.
This is an example of window dressing. The branch is resorting to window dressing by artificially
boosting its advances and deposits. Utilization of advances and placing of fixed deposits at end of
year in branch and again liquidation of deposits early next year indicate that branch is resort ing to
window dressing to inflate its advances as well as deposits artificially.
The auditor has to verify whether the unavailed portion of the credit facilities (overdraft, cash credit)
are used to boost the loans and deposits which might tantamount to window dressing.
The relevant regulatory guidelines also prohibit such type of practices and these might involve
penal action in terms of Banking Regulation Act, 1949.
The same needs to be suitably reported in audit report and commented in LFAR also. In a ppropriate
cases, making a suitable qualification in the main audit report has also to be considered
(c) Regulation 190A of Chartered Accountants Regulations, 1988 provides that a chartered accountant
in practice shall not engage in any business or occupation other than the profession of accountancy
except with the permission granted in accordance with a resolution of the Council.
The Council has passed a resolution under Regulation 190A granting general permission for private
tutorship and part time tutorship under coaching organization of the Institute. Such general
permission is subject to the condition that direct teaching hours devoted to such activities taken
together should not exceed 25 hours a week in order to be able to perform attest functions.
However, Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949 states
that Chartered Accountant in practice shall be deemed to be guilty of professional misconduct, if
he solicits clients or professional work either directly or indirectly by circular, advertisement,
personal communication or interview or by any other means;
Further, an advertisement of online coaching activities through social media platforms amounts to
indirect solicitation as well as solicitation by another means and is, therefore, violative of Clause
6 of Part I of the First Schedule to Chartered Accountants Act, 1949.
Therefore, although a member in practice can engage in private tutorship subject to Council
Guidelines but he cannot advertise by any means for coaching activities as it amounts to indirect
solicitation of clients and professional work.
In the given case, CA Praful is providing coaching to CA students online and also advertising his
classes on various social media platforms. In view of above, CA. Praful is guilty of professional
misconduct under Clause (6) of Part I of First Schedule to the Chartered Accountants Act 1949 for
advertising his classes on various social media platforms.
3. (a) Generating and preparing meaningful information from raw system data using processes,
tools, and techniques is known as Data Analytics.
The data analytics methods used in an audit are known as Computer Assisted Auditing Techniques
or CAATs. There are several steps that should be followed to achieve success with CAATs and
any of the supporting tools. A suggested approach to benefit from the use of CAATs is given in the
illustration below:
• Understand Business Environment including IT
4

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 • Define the Objectives and Criteria
• Identify Source and Format of Data
• Extract Data
• Verify the Completeness and Accuracy of Extracted Data
• Apply Criteria on Data Obtained
• Validate and Confirm Results
• Report and Document Results and Conclusions [SA 230]
(b) An American company which is manufacturing and distributing industrial gases is looking forward
to acquire an Indian company having 51% market share and assets beyond ` 1000 crores. Areas
to be covered as a part of due diligence exercise to find out over valued assets would be as under:
1. Uncollected/uncollectable receivables.
2. Obsolete, slow non-moving inventories or inventories valued above NRV; huge inventories of
packing materials etc. with name of company.
3. Underused or obsolete Plant and Machinery and their spares; asset values which have been
impaired due to sudden fall in market value etc.
4. Assets carried at much more than current market value due to capitalization of
expenditure/foreign exchange fluctuation, or capitalization of expenditure mainly in the na ture
of revenue.
5. Litigated assets and property.
6. Investments carried at cost though realizable value is much lower.
7. Investments carrying a very low rate of income / return.
8. Infructuous project expenditure/deferred revenue expenditure etc.
9. Group Company balances under reconciliation etc.
10. Intangibles of no value.
(c) Gautam Ltd. is a manufacturer of textile products and is covered under GST Law. During financial
year 2021-2022 Gautam Ltd. has received a demand notice of 17 lakh which pertains to financial
year 2015-2016 when the Central Excise Act was prevalent.
As a tax auditor of Gautam Ltd., reporting would be under Clause 41 which is given hereunder:
“Please furnish the details of demand raised or refund issued during the previous year under any
tax laws other than Income Tax Act, 1961 and Wealth tax Act, 1957 along with details of relevant
proceedings. “
It may be noted that even though the demand/refund order is issued during the previous year, it
may pertain to a period other than the relevant previous year. In such cases also, reporting has to
be done under this clause. If there is any adjustment of refund against any demand, the auditor
shall also report the same under this clause.
In this case, liability is of excise duty i.e. under Central Excise Act, other than Income Tax Act and
Wealth Tax Act, thus this clause gets attracted and the reporting has to be done as per format:

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 S No. Name of Demand/ Date of Financial year Amount of Adjustment of Remarks
the Refund demand to which the demand/raised refund
Applicable Order raised/refund demand/refund /refund issued against
Act no., if any issued relates demand, if
any

4. (a) Recasting of financial statements - Re-opening of accounts on Court’s or Tribunal’s orders:

Section 130 of the Companies Act, 2013 states that a company shall not re-open its books of
account and not recast its financial statements, unless an application in this regard is made by the
Central Government, the Income-tax authorities, the Securities and Exchange Board of India
(SEBI), any other statutory regulatory body or authority or any person concerned and an order is
made by a court of competent jurisdiction or the Tribunal to the effect that —
(i) the relevant earlier accounts were prepared in a fraudulent manner; or
(ii) the affairs of the company were mismanaged during the relevant period, casting a doubt on
the reliability of financial statements.
The Order for reopening of accounts not to be made beyond eight financial years immediately
preceding the current financial year unless and until Government has, under Section 128(5), issued
a direction for keeping books of account longer than 8 years, reopening of accounts can be made
for such longer period.
However, a notice shall be given by the Court or Tribunal in this regard and shall take into
consideration the representations, if any.
Keeping in view above, the contention of the Arihant Ltd. that the Companies Act, 2013 does not
allow recasting for more than five preceding financial years is incorrect.
(b) Compliance with Standard on Quality Control on review of audit work - As per SQC 1,
“Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information, and
Other Assurance and Related Services Engagements”, review responsibilities are determined on
the basis that more experienced engagement team members, including the engagement partner,
review work performed by less experienced team members. An engagement quality control review
for audits of financial statements of listed entities includes considering the following:
(i) The work has been performed in accordance with professional standards and regulatory and
legal requirements;
(ii) Significant matters have been raised for further consideration;
(iii) Appropriate consultations have taken place and the resulting conclusions have been
documented and implemented;
(iv) There is a need to revise the nature, timing and extent of work performed;
(v) The work performed supports the conclusions reached and is appropriately documented;
(vi) The evidence obtained is sufficient and appropriate to support the report; and
(vii) The objectives of the engagement procedures have been achieved.
The firm should establish policies and procedures:

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 (i) Setting out criteria for determining the need for safeguards to reduce the familiarity threat to
an acceptable level when using the same senior personnel on an assurance engagement over
a long period of time; and
(ii) For all audits of financial statements of listed entities, requiring the rotation of the engagement
partner after a specified period in compliance with the Code.
The familiarity threat is particularly relevant in the context of financial statement audits of lis ted
entities. For these audits, the engagement partner should be rotated after a pre -defined period,
normally not more than seven years.
From the facts given in the question and from the above stated paras of SQC 1, it can be concluded
that firm is not complying with SQC 1 as Engagement Partner Manidhari is continuing for more
than 7 years.
(c) Sharing Fees with an Articled Clerk: As per Clause (2) of Part I of First Schedule to the Chartered
Accountants Act 1949, a Chartered Accountant in practice shall be deemed to be guilty of
professional misconduct if he pays or allows or agrees to pay or allow, directly or indirectly, any
share, commission or brokerage in the fees or profits of his professional business, to any person
other than a member of the Institute or a partner or a retired partner or the legal representative of
a deceased partner, or a member of any other professional body or with such other persons having
such qualification as may be prescribed, for the purpose of rendering such professional s ervices
from time to time in or outside India.
In view of the above, the objections of the Institute of Chartered Accountants of India, as given in
the case, are correct and reply of CA. Vasu, stating that he is paying 2% profits of his firm over and
above the stipend to help the articled clerk as the position of the articled clerk is weak, is not
tenable.
Hence, CA. Vasu is guilty of professional misconduct in terms of Clause (2) of Part I of First
Schedule to the Chartered Accountants Act 1949.
5. (a) As per section 138 of the Companies Act, 2013, such class or classes of companies as may be
prescribed shall be required to appoint an internal auditor, who shall either be a chartered
accountant or a cost accountant, or such other professional as may be decided by the Board to
conduct an internal audit of the functions and activities of the company.
As per Rule 13 of the Companies (Accounts) Rules, 2014, the following class of companies shall
be required to appoint an internal auditor which may be either an individual or a partnership firm or
a body corporate, namely:
• every listed company.
• every unlisted public company having-
o paid up share capital of fifty crore rupees or more during the preceding financial year; or
o turnover of two hundred crore rupees or more during the preceding financial year; or
o outstanding loans or borrowings from banks or public financial institutions exceeding one
hundred crore rupees or more at any point of time during the preceding financial year;
or
o outstanding deposits of twenty-five crore rupees or more at any point of time during the
preceding financial year; and
• every private company having-
o turnover of two hundred crore rupees or more during the preceding financial year; or
7

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 o outstanding loans or borrowings from banks or public financial institutions exceeding one
hundred crore rupees or more at any point time during the preceding financial year:
In the current scenario, the company is a private limited company with having turnover of ₹ 230
Crore in FY 2020-21 and ₹ 110 Crore in FY 2021-22. As per Rule 13, every private company with
a turnover of two hundred crore rupees or more during the preceding financial year must appoint
an internal auditor who may be either an individual, a partnership firm or a body corporate. Hence,
ABC Pvt Ltd is required to appoint Internal Audit for FY 2021-22.
(b) Following are broad areas that should be mandatorily part of the audit procedure for
conducting the audit of NBFC:
(1) Ascertaining the Business of the Company - The first step in carrying out the audit of a
NBFC is to scan through the Memorandum and Articles of Association of the company, so as
to acquaint oneself with the type of business that the company is engaged into.
The task of ascertaining the principal business activity of any NBFC is of paramount
importance since the very classification of a company as a NBFC and its further classification
would all depend upon its principal business activity. Based on the classification of a
company, it will be required to comply with the provisions relating to limits on acceptance of
public deposits as contained in the NBFC Public Deposit Directions.
(2) Evaluation of Internal Control System - An auditor should gain an understanding of the
accounting system and related internal controls adopted by the NBFC to determine the nature,
timing and extent of his audit procedures. An auditor should also ascertain whether th e
internal controls put in place by the NBFC are adequate and are being effectively followed.
In particular, an auditor should review the effectiveness of the system of recovery prevalent
at the NBFC. He should ascertain whether the NBFC has an effective system of periodical
review of advances in place which would facilitate effective monitoring and follow up. The
absence of a periodical review system could result in non-detection of sticky advances at their
very inception which may ultimately result in the NBFC having an alarmingly high level of
NPAs.
(3) Registration with the RBI - Section 45-IA of the RBI Act, 1934, has made it incumbent on
the part of all NBFCs to comply with registration requirements and have minimum net owned
funds. An auditor should obtain a copy of the certificate of registration granted by the RBI or
in case the certificate of registration has not been granted, a copy of the application form filed
with the RBI for registration. It may particularly be noted that NBFCs incorporated af ter 9th
January, 1997 are not entitled to commence business without first obtaining a registration
certificate from the RBI. An auditor should, therefore, verify whether the dual conditions
relating to registration with the RBI and maintenance of minimum net owned funds have been
duly complied with by the concerned NBFC. The auditor should ascertain whether investment
in prescribed liquid assets have been made and whether quarterly returns as mentioned
above have been regularly filed with the RBI by the concerned NBFC.
(4) The auditors must ascertain whether the company properly classified as per the requirements
of various regulations. In case, the NBFC has not been classified by the RBI, the classification
of a company will have to be determined after a careful consideration of various factors such
as particulars of earlier registration granted, if any, particulars furnished in the application
form for registration, company’s Memorandum of Association and its financial results.
(5) NBFC Prudential Norms Directions - Check compliance with prudential norms
encompassing income recognition, income from investments, accounting standards,
accounting for investments, asset classification, provisioning for bad and doubtful debts,
capital adequacy norms, prohibition on granting of loans by a NBFC against its own shares,

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 prohibition on loans and investments for failure to repay public deposits and norms for
concentration of credit/investments.
In the given situation, GYAN & Co., is the statutory auditor of KUNTHU NBF C Ltd. While
planning the audit procedures to be done during the audit of entity, there was difference of
opinion between Matigyan and his partner Shrutgyan regarding evaluation of internal control
and verification of registration with RBI.
As discussed above NBFCs are not entitled to commence business without first obtaining a
registration certificate from the RBI. An auditor should, therefore, verify whether the dual
conditions relating to registration with the RBI and maintenance of minimum net owned funds
have been duly complied with by the concerned NBFC. Further, auditor should gain an
understanding of the accounting system and related internal controls adopted by the NBFC
to determine the nature, timing and extent of his audit procedures. An auditor should also
ascertain whether the internal controls put in place by the NBFC are adequate and are being
effectively followed.
Accordingly, contention of Mr. Shrutgyan regarding evaluation of internal control system and
verification of registration with RBI should not be part of the audit procedure as it is part of
internal audits only, is not correct.
(c) Failure to Obtain Information: Clause (8) of Part I of Second Schedule to the Chartered
Accountants Act, 1949 states that if a Chartered Accountant in practice fails to obtain sufficient
information to warrant the expression of an opinion or his exceptions are sufficient material to
negate the expression of an opinion, the chartered accountant shall be deemed to be guilty of a
professional misconduct.
In the instant case Mr. Prakash, a practicing Chartered Accountant issued a certificate of circulation
of a periodical without going into the most elementary details of how the circulation of a periodical
was being maintained i.e., by not looking into the financial records, bank stateme nts or bank pass
books, by not examining evidence of actual payment of printer’s bills and by not caring to ascertain
how many copies were sold and paid for.
The chartered accountant should not express his opinion before obtaining the required data and
information. As an auditor, Mr. Prakash ought to have verified the basic records to ensure the
correctness of circulation figures.
Conclusion: Thus, in the present case CA. Prakash will be held guilty of professional misconduct
as per Clause (8) of Part I of Second Schedule to the Chartered Accountants Act, 1949.
6 (a) The auditor should ensure that premium in respect of risks incepting during the relevant accounting
year has been accounted as premium income of that year on the basis of premium revenue
recognition. The auditor, as part of his audit procedures, should make an assessment of the
reasonability of the risk pattern established by the management. The auditor, CA Vardhman
appointed as an auditor of Life Reliable Insurance Ltd. should ensure that policy documents have
not been issued, in case:
(i) Premium had not been collected at all;
(ii) Premium had been collected but the relevant cheques have been dishonoured; (refer Cheque
Dishonoured Book);
(iii) premium had not immediately been collected due to furnishing of a bank guarantee or cash
deposit but either the deposit or guarantee had fallen short or has expired or the premium had
been collected beyond the stipulated time limit (i.e., there is a shortfall in bank guarantee
account or cash deposit account of the insured);

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 (iv) premium had not been collected due to risk cover being increased or where stipulated limits
have been exhausted in respect of open declaration policies (i.e., where premium has accrued
but has not been received); and
(v) instalments of premium have not been collected in time in respect of certain categories of
policies, e.g., marine-cum-erection policies where facility has been granted for premium being
paid in instalments (such facility is normally available subject to certain conditions, e.g., that
the first equated instalment is more by 5 per cent of the total premium payable by instalments).
(vi) Premium collected but policies not issued for long periods of time.
(vii) Whether the premium received during the year but pertaining to risk commencing in the
following year has been accounted for under the head ‘Premium Received in Advance’ and
has been disclosed separately.
(b) In carrying out the audit of the standalone financial statements, the computation of materiality for
the purpose of issuing an opinion on the standalone financial statements of each component would
be done component-wise on a standalone basis. However, with regard to determination of
materiality during the audit of consolidated financial statements (CFS), the auditor should consider
the following:
• The auditor is required to compute the materiality for the group as a whole. This materiality
should be used to assess the appropriateness of the consolidation adjustments (i.e.
permanent consolidation adjustments and current period consolidation adjustments)
• The parent auditor can also use the materiality computed on the group level to determine
whether the component's financial statements are material to the group to determine whether
they should scope in additional components, and consider using the work of other auditors as
applicable.
• The principal auditor also computes materiality for each component and communicates to the
component auditor, if he believes is required for true and fair view on CFS.
• The principal auditor also obtains certain confirmations from component auditor like
independence, code of ethics, certain information required for consolidation and disclosure
requirements etc.
However, while considering the observations (for instance modification and /or emphasis of matter
in accordance with SA 705/706) of the component auditor in his report on the standalone financial
statements, the principles of SA 600 needs to be considered., The parent auditor should comply
with the requirements of SA 600, “Using the Work of Another Auditor”. Therefore, the concept of
materiality would be considered while considering the observations of the component auditor.
Hence RS & Co. cannot ignore the qualification of B Ltd. while framing the opinion on consolidated
financial statements of T Ltd.
(c) As per SA 265, “Communicating Deficiencies in Internal Control to Those Charged with
Governance and Management”, significant deficiency in internal control is defined as a deficiency
or combination of deficiencies in internal control that, in the auditor’s professional judgment, is of
sufficient importance to merit the attention of those charged with governance. Also, the significance
of a deficiency or a combination of deficiencies in internal control depends not only on whether a
misstatement has actually occurred but also on the likelihood that a misstatement could occur and
the potential magnitude of the misstatement. Significant deficiencies may therefore exist even
though the auditor has not identified misstatements during the audit.

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 Examples of matters that the auditor may consider in determining whether a deficiency or
combination of deficiencies in internal control constitutes a significant deficiency include:
• 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.
• The financial statement amounts exposed to the deficiencies.
• The volume of activity that has occurred or could occur in the account balance or class of
transactions exposed to the deficiency or deficiencies.
OR
(c) As per Peer Review Statement,
1. A Peer Reviewer shall: -
(a) Shall be a member in practice with at least 7 years of audit experience.
(b) In case a member has moved from industry to practice and is currently in practice he
should have at least 10 years of audit experience in industry and at least 3 years audit
experience in practice.
(c) Should have undergone the requisite training and cleared the requisite test for Peer
Review as prescribed by the Board.
2 A member on being appointed as a Reviewer shall be required to furnish -
(a) a declaration as prescribed by the Board, at the time of Empanelment as a Peer
Reviewer.
(b) a Declaration of Confidentiality as per Annexure A to this Statement while giving consent
for appointment as a Peer Reviewer.
3. A member shall not be eligible for being appointed as a Reviewer of a Practice Unit, if -
(i) any disciplinary action / proceeding is pending against him;
(ii) he has been found guilty of professional or other misconduct by the Council or the Board
of Discipline or the Disciplinary Committee at any time
(iii) he has been convicted by a competent court whether within or outside India, of an
offence involving moral turpitude and punishable with imprisonment,
(iv) he or his partners have any obligation or conflict of interest in the Practice Unit.
(v) He has undergone training/articleship under any of the partner of Practice Unit.
4. A Reviewer shall not accept any professional assignment from the Practice Unit for a period
of next two years from the date of appointment. Further, he should not have accepted any
professional assignment from the Practice Unit for a period of two years before the date of
appointment as reviewer of that Practice Unit.
In the current scenario, CA. Vimal was in employment for a period from 1-4-95 to 31-3-12 i.e., 17
years. Out of which, he was having audit experience for 9 years. However, he is in practice since
10 years i.e. 2012 to 2022. Hence, he will be eligible for Peer Reviewer by virtue of the condition
stipulating that a Peer Reviewer shall be a member in practice with at least 7 years of audit
experience.

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 Test Series: March-2023
MOCK TEST PAPER -I
FINAL COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
All MCQs are compulsory
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100
DIVISION A – MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. Swami & Co LLP is a firm of Chartered Accountants. The firm has 8 Partners. The firm has a good
portfolio of clients for statutory audits, but the same clients had some other firms as their tax auditors.
In the current year (FY 2021-22), many existing clients for whom Swami & Co LLP happens to be the
statutory auditor have requested the firm to carry out their tax audits as well. The firm is expecting the
no of tax audits to increase significantly this year. One of the partners of the firm has also raised a point
that the firm can accepts tax audits up to a maximum limit. However, other partners are of the strong
view that limits on audits is applicable in case of statutory audits and not for tax audits. This needs to
be decided as soon as possible so that the appointment formalities can also be completed.
You are requested to advise the firm in this matter.
a. There is no limit on no of tax audits in case of LLP.
b. All the partners of the firm can collectively sign 360 tax audit reports.
c. All the partners of the firm can collectively sign 480 tax audit reports.
d. All the partners of the firm can collectively sign 360 tax audit reports. However, one partner can
individually sign maximum 60 tax audit reports.
2. Bahu Subahu Co. LLP is an old firm of Chartered Accountants with Bahu and Subahu as the audit
partners. The firm has various statutory audit and internal audit engagements which are looked after by
Bahu and Subahu respectively. In the previous year ended 31 March 2022, one of the audit
engagements of the firm was picked up for peer review and peer reviewer raised various observations
regarding the audit documentation. Some of the information regarding audits were missing from the
audit files as per the observation of the peer reviewer.
Bahu and Subahu are in the process of establishing a robust mechanism for audit documentation so
that the same is available for a long duration and would lead to audit efficiencies also in the future years.
Bahu and Subahu would like to understand the period for which audit documentation should be
maintained by them as per the Standard on Auditing 230. Please advise.
a. 10 years.
b. 9 years.
c 8 years.
d. 7 years.
3. Shripal Ltd is in the business of manufacturing of tiles and sanitaryware. The company has a large
inventory every year. Annual turnover of the company is INR 3600 crore. The company has 9 plants
across India. The management of the company carries out physical verification of inventory every year
at the time of reporting date. During the year ended 31 March 2022, it was found by the management
that the inventory sheets of 31 March 2021 did not include five pages containing details of inventory
worth INR 29.5 crore. Management has included this inventory in the valuation of inventory as of
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 31 March 2022. Management has also explained that considering the size of the company this may
happen at times as the inventory is huge and lying at various locations. Moreover, the amount of the
inventory is insignificant if considered as a percentage of revenue or inventory. State how you will deal
with this matter as an auditor in the accounts of the company (towards substantive audit procedures and
excluding the impact on auditor’s assessment under Internal Financial Control Framework) for the year
ended 31 March 2022.
a. Since the matter is not relevant/ material to current period figures, no reporting in respect of this
matter would be required in the auditors’ report for the year ended 31 March 2022.
b. Management should restate the financials to adjust the error. Otherwise, auditor may modify his
opinion on current year's financial statements considering the materiality.
c. Considering the matter is not relevant/ material to current period figures, the management may
include a note in the financial statements and basis that no reporting in respect of this matter would
be required in the auditors’ report for the year ended 31 March 2022.
d. Include an emphasis of matter because of the effects or possible effects of the error in the auditors’
report for the year ended 31 March 2022.
4. Shanti Ltd is in the business of construction and infrastructure. The company is listed in India having an
annual turnover of INR 3500 crore. The company has various projects offices/ operations in India and
outside India. The functional currency of the company and its project offices is INR. The company has
five joint ventures and various jointly controlled operations. The company has been audi ted by
Sudarshan & Associates, a firm of Chartered Accountants, since beginning. During the year ended
31 March 2022, new auditors were appointed as the statutory auditors of the company for the audit of
the financial statements for the year ended 31 March 2022. New statutory auditors have raised various
points related to the consolidation procedures followed by the company. Management did not agree to
the observations of the auditors as they have been following this since many years now and there was
no observation of previous auditors in respect of the same. Auditors have highlighted a point that joint
ventures have been consolidated by the company in its standalone financial statements. However,
management has an argument that those are in the nature of its operations and hence to reflect the true
and fair view it would be appropriate to consolidate the same in the standalone financial statements.
Please advise as auditors how would you deal with this matter.
a. Since the matter is related to consolidation, which is more relevant for consolidated financial
statements, hence no reporting in respect of this matter would be required in the auditor’s report
for the year ended 31 March 2022.
b. Auditor should look at the materiality and conservatism principle. Company has included extra
information in the financials which can be considered by the auditors and basis that clean audit
report should be given.
c. Management should restate the financials to adjust the error related to consolidation of joint
ventures in standalone financial statements. Otherwise, auditor may modify his opinion on current
year's financial statements considering the materiality.
d. As per the requirements of IND AS, joint venture if consolidated in standalone financial statements
should not be consolidated again in the consolidated financial statements. Basis that this point
should be dropped by the auditor.
5. ASAUS Ltd is in the business of optics and imaging products. It is a wholly owned subsidiary of Japanese
company, ASU Ltd. ASAUS Ltd has many expatriates (Expats) working in the company whose tenure
range from 2 to 5 years. During the course of audit of financial statements of the company, the statutory
auditors observed that the company has not been deducting and depositing the TDS (tax deducted at
source) on salaries of expats. The auditors assessed that the impact of this can be significant as the
company has many expats and salary amount is significant. Management explained that TDS on salary

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 of expats would lead to unnecessary hassles to the expats and they serve the company only for a short
period. How should the auditors of ASAUS Ltd deal with this matter?
a. Considering this as a statutory non-compliance, the auditor should look at the significance of the
matter and accordingly should report the same in CARO only.
b. Considering this as a statutory non-compliance, the auditor should look at the significance of the
matter and accordingly should consider reporting this in the main report along with CARO.
c. The auditor should agree to the management’s view as the expats are temporary workers and this
may not be convenient for the management.
d Since the matter relates to statutory liability only, the reporting requirements do not arise till the
time this becomes disputed.
6. JIN Ltd issued a prospectus in respect of an IPO which had the auditor’s report on the financial
statements for the year ended 31 March 2022. The issue was fully subscribed.
During this year, there was an abnormal rise in the profits of the company for which i t was found later
on that it was because of manipulated sales in which there was participation of Whole -time director and
other top officials of the company. On discovery of this fact, the company offered to refund all moneys
to the subscribers of the shares and sued the auditors for the damages alleging that the auditors failed
to examine and ascertain any satisfactory explanation for steep increase in the rate of profits and related
accounts.
The company emphasized that the auditor should have proceeded with suspicion and should not have
followed selected verification. The auditors were able to prove that they found internal controls to be
satisfactory and did not find any circumstance to arouse suspicion.
The company was not able to prove that auditors were negligent in performance of their duties. Which
of the following is correct:
a. The stand of the company was correct in this case. Considering the nature of the work, the Auditors
should have proceeded with suspicion and should not have followed selected verification.
b The approach of the auditors looks reasonable in this case. The auditors found internal controls to
be satisfactory and also did not find any circumstance to arouse suspicion and hence they
performed their procedures on the basis of selected verification.
c In the given case, the auditors should have involved various experts along with them to help them
on their audit procedures. Prospectus is one area wherein management involves various experts
and hence the auditors should also have done that. In the given case, by not involving the experts
the auditors did not perform their job in a professional manner. If they had involved experts like
forensic experts etc., the manipulation could have been detected. Hence the auditors should b e
held liable.
d. In case of such type of engagements, the focus is always on the management controls. If the
controls are found to be effective, then an auditor can never be held liable in respect of any
deficiency or misstatement or fraud.
7. MN Associates a chartered accountant firm has been appointed as an auditor of the company for the
financial year 2021-22. It consists of two partners CA. M & CA. N. CA. M is brother of the father of the
finance director of the company. CA. N is an old friend of the finance director of the company.
What kind of ethical threat is associated with appointment of MN Associates as an auditor of RSR Ltd.?
a. Self Interest Threat.
b. Advocacy Threat.
c. Familiarity Threat.
d. Self-Review Threat.
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8. SIDHA Pvt Ltd had turnover of ` 39 crore as at 31 March 2022. The Company had taken a loan of ` 39
crore from various banks and financial institutions during the year 2021 - 2022. These loans were paid
by the Company before 31 March 2022. The Company is of the view that the auditor s’ reporting on
adequacy and operating effectiveness of internal financial controls (IFC) under Section 143(3)(i) of the
Companies Act, 2013 would not be required. The auditors of the Company have a different view. What
should be correct option?
a. The turnover of SIDHA Pvt Ltd is below required threshold and hence IFC will not be applicable.
b. The turnover of SIDHA Pvt Ltd is below required threshold and loan amount was fully paid before
year end i.e., 31 March 2022. Hence IFC will not be applicable.
c. The turnover of SIDHA Pvt Ltd is below required threshold but loan amount was above required
threshold. Irrespective of the fact that loan was outstanding as at 31 March 2022 or not, IFC would
be applicable.
d. In the given case because of the repayment of the loan before year end i.e., 31 March 2022,
applicability of IFC becomes optional.
9. Which of the following is an example of Direct Entity Level Control?
a Ethics policy.
b. Human resource policy.
c. Business performance reviews.
d. Job roles & responsibilities of employees.
10. The Advances Bank Ltd. has sanctioned overdraft limit of ` 42.5 crore to ASG Ltd. on the working capital
of the company as on 31 st March 2020. As per bank norms the drawing power in the overdraft account
need to be reviewed on quarterly basis as per the audited stock statement of the company. As a central
statutory auditor for the year 2021-22, while verifying the advances for the year ending 31st March 2022,
you noticed that the bank has not obtained the stock statement of ASG Ltd. for the two quarters ending
31st December 2021 and 31st March 2022 and no provision of NPA has been made for this account in
the financial statements for the year 2021-22. What will be your decision as a central statutory auditor?
a. Classify the borrower’s account as NPA as the borrower’s financial position cannot be determined
due to non-submission of stock statement.
b. Instruct the bank to obtain the audited stock statement for both the quarters and review the credit
limit accordingly.
c. As per bank norms the drawing power need to be determined on the basis of stock statement and
it was more than three months old as on 31st March 2022, so the outstanding in the account will
be deemed as irregular.
d. You should give a qualificatory note in the audit report as per SA 700. (10 x 1 = 10 Marks)
Questions (11-20) carry 2 Marks each
MCQ 11. -15.
Integrated Case Scenario 1
Sambhav Limited is a listed nationalised bank whose face value per share is ` 100 each having its operation
across India. Sambhav Limited appointed Mr. Dharam, Mr. Paras and Mr. Anant as its central joint auditors
for the year 2021-22. After making sure that all of them are qualified to be appointed as statutory auditor of
the bank, Sambhav Limited issued appointment letter as well as engagement letter to all of them. But Mr.
Dharam was not clear on some point so he requested Sambhav Limited to slightly change the terms of his
engagement. This change will not impact the ultimate opinion on the financial statement. The engagement
letter contains the details on objective and scope of audit, responsibilities of auditor and identification of
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framework applicable. It also contains the reference to expected form and content of report from all three joint
auditors.
During the year Sambhav Limited has acquired another bank called Aadi Limited. While finalising the books
of accounts, some adjustments were made to give the effect of merger. These adjustments were related to
determination of goodwill of `3 crore, determination of amount of minority interest of ` 75 lakh and some
intra-group transaction adjustment of ` 22 lakh were also made. Another adjustment which was made was
harmonization of accounting policies of both Sambhav Limited and Aadi Limited which was of 45 lakh.
While planning the audit, all joint auditors mutually decided that responsibility of verification of cash book will
be entrusted with Mr. Paras. But Mr. Paras failed to detect the fraud committed by the cashier which he could
have detected if he had properly checked the cash book. This fraud was revealed in the special audit which
was conducted on the directions of RBI. Responsibility for verifying compliance with SLR requirement was
entrusted with Mr. Dharam. While performing audit on compliance with SLR requirements Mr. Dharam used
12 odd dates in different months of fiscal year. Mr. Dharam with his professional judgement used the below
mentioned days:
Month Day of month Day
April 3rd Saturday
May 10th Monday
June 16th Wednesday
July 9th Friday
August 27th Friday
September 2nd Thursday
October 29th Friday
November 2nd Tuesday
December 1st Wednesday
January 9th Sunday
February 7th Monday
March 6th Sunday
Mr. Anant was entrusted with responsibility for calculation of Demand and time liability. On 31 st March total
liability stood at ` 250 crore. It includes Margin held for funded facilities of ` 4 crore, credit balance for one
branch of ` 6 crore, adverse balance of nostro Mirror account of ` 3 crore and unadjusted deposit for agency
business of ` 8 crore.
Wife of CA Dharam was also a Chartered Accountant and was actively involved in purchase and sale of
shares. She purchased 500 shares of Shambhav Limited of ` 100 each for ` 9,00,000. All the required
communication were made among the joint auditors and significant matters were discussed with those
charged with governance. At the end, an unmodified report in accordance with SA 700 was issued which was
signed by all three joint auditors.
On the basis of the abovementioned facts, you are required to answer the following MCQs:
Multiple Choice Questions (5 questions of 2 Marks each):
11. List down all the months whose date has been selected inappropriately by CA Dharam for calculation of
SLR compliance?
a January, February and March.
b. July, August and October
c. June, July and October.

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 d. May and November.
12. While calculating SLR compliance of Sambhav Limited, what will be value of demand and time liability
as on 31st March?
a. 246 crore
b. 250 crore.
c. 237 crore.
d. 240 crore.
13. Will CA Dharam be disqualified after his wife purchased 500 shares for ` 9,00,000?
a. Mr. Dharam will be disqualified as an auditor of Sambhav Limited, as his relative owns shares of
more than ` 1,00,000 market value.
b. Mr. Dharam will be not disqualified as an auditor of Sambhav Limited, as his relative owns shares
of less than ` 1,00,000 face value.
c. Mr. Dharam will be not disqualified as an auditor of Sambhav Limited, as his relative owns shares
of less than ` 10,00,000 market value.
d. Mr. Dharam will be disqualified as an auditor of Sambhav Limited, as his relative owns shares in
Sambhav Limited irrespective of amount of investment.
14. Which of the fallowing statement is true?
a. For giving the effect of merger, permanent consolidation adjustment of 397 lakh and current period
consolidation adjustment of 45 lakh was made.
b. For giving the effect of merger, permanent consolidation adjustment of 420 lakh and current period
consolidation adjustment of 22 lakh was made.
c. For giving the effect of merger permanent consolidation adjustment of 442 lakh.
d. For giving the effect of merger, permanent consolidation adjustment of 375 lakh and current period
consolidation adjustment of 67 lakh was made.
15. In the given situation whether audit engagement letter issued by Sambhav Limited?
a. Engagement letter issued specify the identification of framework applicable, whereas as per
SA 210, it should not specify identification of framework applicable.
b. Engagement letter issued doesn’t specify the responsibilities of management, whereas as per
SA 210, it should also specify responsibilities of management.
c. Engagement letter issued specify the expected form of report, whereas as per SA 210 it should not
contain the expected form of report.
d. There was no discrepancy in the engagement letter issued.
MCQ 16. -20.
Integrated Case Scenario 2
POSH Bank of India is a Public Sector Bank founded in the year 1967. The bank has 179 branches all over
India as on 31.03.2022. Total Deposits of the bank on 31.03.2021 was ` 50,000 crore. The Motto of the Bank
is “Royalty lies in Loyalty”. The Statutory Auditors for FY 2021-22 are SAHU & Associates, Chartered
Accountants. The audit manager of the firm while reviewing advances has noticed the following:
(a) The Advance granted to Mr. Ram has been guaranteed by State Government. However, said advance
is overdue since November 2021.
(b) As on 20.04.2022, the ad hoc limit of account of Mr. Shyam has not been reviewed even though 120
days of date of ad hoc sanction were over.

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The above advances have been granted by Meerut Branch. However, this branch is not subject to Concurrent
Audit.
The Bank has also granted Term Loan of ` 20 crore to Sumati Ltd (An Unlisted Company) on 01.02.2022.
The sanction letter read as follows:
“The Facility shall be used for Repayment of Unsecured Loans of Promoters – ` 10 crore and towards
development & construction expenses (Other than Land Cost) of the company’s new office to be situated in
Faridabad, Haryana – ` 10 crore”.
The company has utilized the facility as follows as on 31 st March 2022-
(i) Land Purchased for New Office: ` 4 crore;
(ii) Development and construction Expenses of New Office: ` 11 crore;
(iii) Repayment of Unsecured Loans of Promoters: ` 3 crore;
(iv) Investment in Fixed Deposit: ` 2 crore (Temporarily);
Company’s Total Borrowings from all Banks as on 31 st March 2022 is ` 60 crore.
POSH Bank of India is the parent organization (100% Holding) of POSH General Insurance Co. Ltd. The
Statutory auditors of POSH General Insurance are AK & Co., Chartered Accountants (Firm based in Mumbai).
Brief Financial Information is as under as on 31 st March 2022:
• Value of Assets: ` 700 crore.
• Amount of Liabilities: ` 415 crore.
• Capital: ` 200 crore.
The POSH General Insurance has entered into reinsurance contract with Fair Reinsurance Co. Ltd. against
the risk of fire only. Fair Reinsurance Co. Ltd. is one of the largest reinsurers in India.
Mr. Shri (Partner in SAHU & Associates) also acts as Surveyors and Loss Assessors under Insurance Act,
1938. However, he has not intimated or taken permission from the Council of Institute of Chartered
Accountants of India.
On the basis of the abovementioned facts, you are required to answer the following MCQs:
Multiple Choice Questions (5 questions of 2 Marks each):
16. As Statutory Auditor of Sumati Ltd, identify the aggregate amount which shall be reported under clause
(ix) of Para 3 of CARO, 2020 on account of utilisation of term loans for the purpose other than for which
they were obtained?
a. ` 4 crore.
b. ` 5 crore.
c. ` 7 crore.
d. ` 2 crore.
17. As an audit manager of the firm, advice which advance(s) shall be classified as Non-Performing Asset?
a. Mr. Ram.
b. Mr. Shyam.
c. Both Mr. Ram and Mr. Shyam.
d. Neither Mr. Ram nor Mr. Shyam.
18. Based on above data, state whether POSH General Insurance has maintained adequate solvency
margin u/s 64VA of Insurance Act, 1938? If no, then state what further action will be done?
a. Yes, solvency margin has been maintained therefore no action is requi red.
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 b. No, It shall deemed to be insolvent.
c. No, It shall submit a financial plan to the authority.
d. The requirement of Solvency Margin is not applicable in case of general insurance companies.
19. Whether the acting of Mr. Shri as a Surveyor and Loss Assessor is in the violation of Clause 11 of Part
1 of First Schedule of Chartered Accountants Act, 1949?
a. Yes, as specific permission from the council shall be required.
b. No, as general permission from the council has been granted.
c. No, as specific permission from the council can be obtained at any point of time.
d Yes, as general permission is not granted for above occupation.
20. Identify the type of reinsurance contract between POSH General Insurance and Fair Reinsurance Co.
Ltd.
a. Treaty Reinsurance.
b. Proportional Treaty Reinsurance.
c. Non-Proportional Treaty Reinsurance.
d Facultative Reinsurance.
(10 x 2 = 20 Marks)

Division B- Descriptive Questions-70 Marks

Question No. 1 is compulsory.
Attempt any four questions from the Rest.
1. (a) M/s Prakash & Co., Chartered Accountants were appointed as statutory auditors of JIN Limited for
the financial year 2021-22. During the course of audit, one of the partners CA Prakash observed
that there is misappropriation of assets in the form of theft of entity's inventory and is perpetrated
by employees in relatively small and immaterial amounts. CA Prakash is concerned with the
existence of certain circumstances for increasing the susceptibility of assets to misappropriation.
Guide CA Prakash with respect to risk factors related to misstatements arising from
misappropriation of assets with reference to relevant Standard on Auditing. (5 Marks)
(b) In the course of audit of FIN Limited you observed that processing of accounting data was given to a
third party on account of certain considerations like cost reduction, own computer working to full
capacity. FIN Limited used a service organisation to record transactions and process related data.
As an auditor, what would be your considerations regarding the nature and extent of activities
undertaken by service organisation to determine whether those activities are relevant to the audit
and, if so, to assess their effect on audit risk.
Discuss with reference to relevant Standard on Auditing. (5 Marks)
(c) CA Subhadra is the statutory auditor of SATI Ltd. for the financial year 2021-22. In respect of loans
and advances of ` 95 lakh given to Shripal Pvt. Ltd., the Company has not furnished any agreement
to CA Subhadra and in absence of the same, he is unable to verify the terms of repayment,
chargeability of interest and other terms.
Justify the type of opinion which CA Subhadra should give in such situation. Also, Draft an
appropriate Opinion paragraph and Basis of Opinion paragraph. (4 Marks)
2. (a) It was observed from the modified audit report of the financial statements of Shravasti Ltd. for the
year ended 31st March, 2021 that depreciation of ` 3.95 crore for the year 2020-2021 had been

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 charged off to the Statement of Profit and Loss instead of including it in "carrying value of asset
under construction". State in relation to the audit for the year ended 31 st March 2022, whether
such modification in the previous year's audit report would have any audit implication for the current
year i.e. FY 2021-22 and if yes, how the auditor is required to deal with the same in his audit report
for the current year? (5 Marks)
(b) Seeta Ltd is the Subsidiary Company of Geeta Ltd. Ram & Associates has been appointed as
auditor of Geeta Ltd. for the financial year 2019-20 and Hanuman & Associates has been appointed
as auditor of Seeta Ltd. for the year 2019-20. Explain the role of Ram & Associates and Hanuman
& Associates as auditors of the parent company and subsidiary company respectively. (4 Marks)
(c) Stone Private Limited was engaged in business of manufacture of Cycles. CA. Chandr a was
appointed as a Statutory Auditor of the Company for the financial year 2021 -22. Outing the year
under audit, Stone Private Limited obtained working capital facilities from Royal Bank Limited for
` 10 crore hypothecating the Stock of goods as primary security. On inquiry CA. Chandra was
informed by management that stock statements are furnished periodically to Royal Bank Limited
and the details of submission of quarterly stock statement are as follows:
Period of Stock Stock Value as per Books of Account Stock Value as per quarterly
as at the end of the quarter statement submitted to Royal Bank
(` in crore) Limited as at the end of quarter
(` in crore)
Q1-2021-22 21.50 24.00
Q2-2021-22 24.75 27.00
Q3-2021-22 21.50 24.00
Q4-2021-22 25.25 25.25
The management of Stone Private Limited did not disclose the above variations in Notes to accounts
forming part financial Statements of the Company for the year 2021 -22. The management replied
that there are no variations as on the Balance sheet date and further they are of the view that stock
statement furnished to bank is only a formality and computed arbitrarily only for the purpose of
securing higher drawing power and hence statutory auditors need not be bothered.
Is the contention of the management valid? As a statutory auditor how CA. Chandra should deal with
the same and discuss the disclosure/reporting requirements if any, as per the Companies Act, 2013
and CARO, 2020. (5 Marks)
3. (a) In course of audit of Great Samaritan Bank as at 31 st March, 2022 you observed the following:
(i) In a particular account there was no recovery in the past 18 months. The bank has not applied
the NPA norms as well as income recognition norms to this particular account. When queried
the bank management replied that this account was guaranteed by the cen tral government
and hence these norms were not applicable. The bank has not invoked the guarantee. Please
respond. Would your answer be different if the advance is guaranteed by a State
Government? (4 Marks)
(ii) In the course of audit of Bank, you found that the Bank had sold certain of its non-performing
assets. Mention any two points of audit check that are very relevant to this area of checking.
(2 Marks)
(b) The management of MANIPRABH Limited, a manufacturing unit does not accept the
recommendations for improvements made by the Operational Auditor. Suggest an alternative way
to tackle the hostile management. (4 Marks)
(c) Mr. Nageshwar, a Chartered Accountant in practice has been elected as the treasurer the
Regional Council of the ICAI. The Regional Council had organized an international tour through
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 a tour operator during the year for its members. During the audit of the Regional Council, it
was found that Mr. Nageshwar had received a personal benefit of ` 40,000 from the tour
operator. Comment with reference to the Chartered Accountants Act, 1949, and Schedules thereto.
(4 Marks)
4. (a) Comment on the following in the light of certificate of compliance of conditions of Corporate
Governance to be issued under SEBI (LODR) Regulations 2015, for a listed company (one among
the top 1000 listed companies) where the Board consists of 20 directors with a non-executive
director as its Chairman and further-
(i) One non-executive director has attained the age of 72 years.
(ii) One of the directors is a director in eight other listed entities.
(iii) The managing director is serving as independent director in four listed entities of which one
entity's equity shares are not listed on a Stock exchange.
(iv) One independent director has been serving as independent director in eight listed entities of
which equity shares are listed on a Stock exchange. (4 Marks)
(b) M/s Vrinda Auto, a partnership firm, is engaged in manufacture of automobile spare parts having
factory at Surat. CA Mahaveer was appointed as the Tax Auditor of M/s Vrinda Auto for the
Assessment year 2022-2023. While carrying out the Tax Audit under section 44AB of the Income
Tax Act, 1961. CA Mahaveer observed following:
(i) Interest of ` 50,000 paid to Vendor Ghanshyam who was registered under MSME Act, 2006.
(ii) Interest payment ` 10,000 was incurred in relation to earning exempt interest income from
Tax Relief bonds.
(iii) Sum of ` 1,00,000 was received from Mr. Ghanshyam, for sale of one plant and machinery.
But due to non-compliance of one of the conditions as specified in the contract with
Mr. Ghanshyam, M/s Vrinda Auto forfeited ` 1,00,000 during AY 2022-23 as per forfeiture
clause mentioned in the contract.
Guide CA Mahaveer in reporting the above transactions under the relevant clauses in
Form No. 3CD. (6 Marks)
(c) Mr. Bahubali, a Chartered Accountant in practice, wrote two letters to M/s Shubh Labh Chartered
Accountants a firm of CAs; requesting them to allot him some professional work. As he did not
have a significant practice or clients he also wrote a letter to M/s PQR, a firm of Chartered
Accountants for securing professional work. Mr. Smart, another CA, informed ICAI regarding Mr.
Bahubali 's approach to secure the professional work. Is Mr. Bahubali wrong in soliciting
professional work? Comment with reference to the Chartered Accountants Act, 1949, and
Schedules thereto. (4 Marks)
5. (a) Jambu, Gautam and Vishudh are partners in a firm sharing profits and losses in the ratio 4:3:2.
The partners have agreed to take Mr. Rishabh as a partner with effect from 1st April, 2023 as 1/5th
partner. What are the important steps involved while conducting investigation on behalf of Mr .
Rishabh, the incoming partner? (5 Marks)
(b) Mr. Nemi, a Chartered Accountant in practice, is the auditor of Yuvraj Ltd. He advised the Managing
Director of the company to include ‘orders under negotiation’ in sales, to reflect higher profit and
better financial position for obtaining bank loans in future. Mr. Nemi, thereafter, gave clean reports
on the balance sheet prepared accordingly without examining the accounts. Comment with
reference to the Chartered Accountants Act, 1949, and Schedules thereto. (5 Marks)
(c) While verifying the employee records in a company, it was found that a major portion of the labour
employed was child labour. On questioning the management, the auditor was told that it was

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 outside his scope of the financial audit to look into the compliance with other laws. Comment in
accordance with relevant Standards on Auditing. (4 Marks)
6. (a) "The C & AG may direct the appointed auditor about the manner in which the accounts of the
Government Company are required to be audited and thereupon the auditor so appointed shall
submit a copy of the audit report to the Comptroller and Auditor-General of India”. What are the
relevant sections of the Companies Act, 2013 and steps involved in the audit of Government
Companies? (5 Marks)
(b) As at 31st March 2022 while auditing Secure Insurance Ltd, you observed that a policy has been
issued on 25th March 2022 for fire risk favouring one of the leading corporate houses in the country
without the actual receipt of premium and it was reflected as premium receivable. The company
maintained that it is a usual practice in respect of big customers and the money was collected on
5th April, 2022. You further noticed that there was a fire accident in the premises of the insured on
31st March 2022 and a claim was lodged for the same. The insurance company also made a
provision for claim. Comment. (5 Marks)
(c) During the process of extracting the exception reports, the auditors noted numerous purchase
entries without valid purchase orders. In terms of percentage, about 35% of purchases were made
without valid purchase orders whereas few purchase orders were validated after the actual
purchase. Also, there was no reconciliation between the goods received and the goods ordered.
You are required to briefly explain the audit procedures to address the validity of account balance
level. (4 Marks)
OR
What are the consequences if the Quality Review Board notices major non-compliances with the
requirements of the Standards on Quality Control or Standards on Auditing or Accounting
Standards? (4 Marks)

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 Test Series: March 2023
MOCK TEST PAPER 1
FINAL COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS
DIVISION A - MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. (c)
2. (d)
3. (b)
4. (c)
5. (b)
6. (b)
7. (c)
8. (c)
9. (c)
10. (c)
Questions (11-20) carry 2 Marks each
11. (b)
12. (c)
13. (b)
14. (d)
15. (b)
16. (c)
17. (a)
18. (a)
19. (b)
20. (d)
DIVISION B - DESCRIPTIVE QUESTIONS (70 Marks)
1. (a) Guidance to CA. Prakash with respect to risk factors that relate to misstatements arising
from misappropriation of assets as per SA 240 is:
As per SA 240, “The Auditor’s Responsibilities Relating to Fraud in an audit of Financial
Statements”, misappropriation of assets involves the theft of entity’s assets and is often
perpetrated by employees in relatively small and immaterial amounts. However, it can also involve
management who are usually more able to disguise or conceal misappropriations in ways that are
difficult to detect.
Misappropriation of assets can be accomplished in a variety of ways including stealing physical
assets or intellectual property (for example, stealing inventory for personal use or for sale, stealing
scrap for resale, colluding with a competitor by disclosing technological data in return for payment).

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 Risk factors that relate to misstatements arising from misappropriation of assets are also classified
according to the three conditions generally present when fraud exists: incentives/pressures,
opportunities, and attitudes/rationalization.
Incentives/Pressures
Personal financial obligations may create pressure on management or employees with a ccess to
cash or other assets susceptible to theft to misappropriate those assets.
Adverse relationships between the entity and employees with access to cash or other assets
susceptible to theft may motivate those employees to misappropriate those assets. For example,
adverse relationships may be created by the following:
(i) Known or anticipated future employee layoffs.
(ii) Recent or anticipated changes to employee compensation or benefit plans.
(iii) Promotions, compensation, or other rewards inconsistent with expectations.
Opportunities
Certain characteristics or circumstances may increase the susceptibility of assets to
misappropriation. For example, opportunities to misappropriate assets increase when there are
the following:
(i) Large amounts of cash on hand or processed.
(ii) Inventory items that are small in size, of high value, or in high demand.
(iii) Easily convertible assets, such as bearer bonds, diamonds, or computer chips.
(iv) Fixed assets which are small in size, marketable, or lacking observable identification of
ownership.
Inadequate internal control over assets may increase the susceptibility of misappropriation of those
assets. For example, misappropriation of assets may occur because there is the following:
(i) Inadequate segregation of duties or independent checks.
(ii) Inadequate oversight of senior management expenditures, such as travel and other
reimbursements.
(iii) Inadequate management oversight of employees responsible for assets, for example,
inadequate supervision or monitoring of remote locations.
(iv) Inadequate job applicant screening of employees with access to assets.
(v) Inadequate record keeping with respect to assets.
(vi) inadequate system of authorization and approval of transactions (for example, in purchasing).
(vii) Inadequate physical safeguards over cash, investments, inventory, or fixed assets.
(viii) Lack of complete and timely reconciliations of assets.
(ix) Lack of timely and appropriate documentation of transactions, for example, credits for
merchandise returns.
(x) Lack of mandatory vacations for employees performing key control functions.
(xi) Inadequate management understanding of information technology, which enables information
technology employees to perpetrate a misappropriation.
(xii) Inadequate access controls over automated records, including controls over and review of
computer systems event logs.
Attitudes/Rationalizations
(i) Disregard for the need for monitoring or reducing risks related to misappropriations of assets.
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 (ii) Disregard for internal control over misappropriation of assets by overriding existing controls
or by failing to take appropriate remedial action on known deficiencies in internal control.
(iii) Behaviour indicating displeasure or dissatisfaction with the entity or its treatment of the
employee.
(iv) Changes in behaviour or lifestyle that may indicate assets have been misappropriated.
(v) Tolerance of petty theft.
(b) As per SA 402 “Audit Considerations relating to an Entity using a Service Organization”,
when obtaining an understanding of the user entity in accordance with SA 315, the user
auditor shall obtain an understanding of how a user entity uses the services of a service
organisation in the user entity’s operations, including:
(i) The nature of the services provided by the service organisation and the significance of those
services to the user entity, including the effect thereof on the user entity’s internal control;
(ii) The nature and materiality of the transactions processed or accounts or financial reporting
processes affected by the service organisation;
(iii) The degree of interaction between the activities of the service organisation and those of the
user entity; and
(iv) The nature of the relationship between the user entity and the service organisation, including
the relevant contractual terms for the activities undertaken by the service organization.
"Based on above, the auditor will assess the effect on the audit risk and take necessary steps while
conducting the audit".
(c) In the present case, with respect to loans and advances of ` 95 Lacs given to Shripal Pvt.
Limited, the Company has not furnished any agreement to CA Subhadra. In the absence of such
an agreement, CA Subhadra is unable to verify the terms of repayment, chargeability of interest
and other terms. For an auditor, while verifying any loans and advances, one of the most important
audit evidence is the loan agreement. Therefore, the absence of such document in the present
case, tantamount to a material misstatement in the financial statements of the company. However,
the inability of CA Subhadra to obtain such audit evidence is though material but not pervasive so
as to require him to give a disclaimer of opinion.
Thus, in the present case, CA Subhadra should give a qualified opinion
The relevant extract of the Qualified Opinion Paragraph and Basis for Qualified Opinion paragraph
is as under:
Qualified Opinion
In our opinion and to the best of our information and according to the explanations given to us,
except for the effects of the matter described in the Basis for Qualified Opinion section of our report,
the financial statements of SATI Limited give a true and fair view in conformity with the accounting
principles generally accepted in India, of the state of affairs of the Company as on 31.03.2022 and
profit/ loss for the year ended on that date.
Basis for Qualified Opinion
The Company is unable to furnish the loan agreement with respect to loans and advances of ` 95
Lacs given to Shripal Pvt. Limited. Consequently, in the absence of such an agreement, we are
unable to verify the terms of repayment, chargeability of interest and other terms.
2. (a) Auditor’s responsibility in cases where audit report for an earlier year is qualified is given in
SA 710 “Comparative Information – Corresponding Figures and Comparative Financial
Statements”.

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 As per SA 710, when 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 matter which gave rise to
the modified opinion is resolved and properly accounted for or disclosed in the financial statements
in accordance with the applicable financial reporting framework, the auditor’s opinion on the current
period need not refer to the previous modification.
SA 710 further states that if the auditor’s report on the prior period, as previously issued, included
a qualified opinion and the 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:
Refer to both the current period’s figures and the corresponding figures in the
descriptionofthemattergivingrisetothemodificationwhentheeffectsorpossible effects of the matter on
the current period’s figures are material; or
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.
In the instant case, if Shravasti Ltd. does not correct the treatment of depreciation to the extent of
rupees 3.95 crore for previous year, the auditor will have to modify his report for both current and
previous year’s figures as mentioned above. If, however, the figures and provisions are corrected,
the auditor need not consider to the earlier year’s modification.
(b) Role of Auditor in case of Parent Company and Subsidiary Company: As per SA 600 “Using
the Work of Another Auditor”, there should be sufficient liaison between the principal auditor
(hereinafter referred as auditor of Parent Company and the other auditor (hereinafter referred as
auditor of Subsidiary Company).
Role of Principal Auditor (Ram & Associates- Auditor of Parent Company):
(i) It is necessary to issue written communication(s) as a principal auditor to the other auditor.
(ii) The principal auditor should advise the other auditor of any matters that come to his attention that
he thinks may have an important bearing on the other auditor’s work.
(iii) When considered necessary by him, the principal auditor may require the other auditor to answer
a detailed questionnaire regarding matters on which the principal auditor requires information for
discharging his duties.
Role of Other Auditor (Hanuman & Associates- Auditor of Subsidiary Company):
(i) The other auditor, knowing the context in which his work is to be used by the principal auditor,
should co-ordinate with the principal auditor. For example, by bringing to the principal auditor’s
immediate attention to any significant findings requiring to be dealt with at entity level, adhering to
the time-table for audit of the component, etc.
(ii) He should ensure compliance with the relevant statutory requirements.
(iii) The other auditor should respond to the questionnaire sent by Principal Auditor on a timely basis.
(b) As per clause (vii) of point Y of Schedule III to the Companies Act, 2013 - Division I - Financial
Statements for a company whose financial statements are required to comply with the Companies
(Accounting Standard) Rules, 2006, “where the company has borrowings from banks or financial
institutions on the basis of security of current assets, it shall 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.

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 Further, as per para 3(ii) (b) of CARO 2020, the auditor is required to report whether during any point of
time of the year, the company has been sanctioned working capital limits in excess of 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.
The above clause requires CA Chandra to comment on whether during any point of time of the year, the
company has been sanctioned working capital limits in excess of ` 5 crores in aggregate. Stone (P) Ltd.
has been sanctioned working capital facilities/limit of ` 10 crores which is apparently in excess of ` 5
crores.
Secondly, whether the quarterly returns filed by the Stone (P) Ltd. company with Royal Bank Ltd. are in
agreement with the book of accounts of the company.
According to the data given in the instant situation, it is clear that there are variatio ns in Quarter 1,
Quarter 2 & Quarter 3 requiring reporting under this clause because of difference in stock value as per
Book of Accounts & Stock Value as per Quarterly returns submitted to Royal Bank Ltd.
Therefore, Contention of the management is not valid.
CA. Chandra should report the differences as per the Companies Act, 2013 and CARO 2020 as follows:
Stock value as per Stock value as per Variation
Book Accounts quarterly statement
(` in Crore) Submitted to Royal
Bank Ltd. (` in Crore)
Q-1 21.50 24.00 Excess reporting of stock to Bank by
2.50 crore
Q-2 24.75 27.00 Excess reporting of stock to Bank by
2.25 Crore
Q-3 21.50 24.00 Excess reporting of stock to bank by
2.50 crore
3. (a) (i) Government Guaranteed Advance: If a government guaranteed advance becomes NPA,
then for the purpose of income recognition, interest on such advance should not to be taken
to income unless interest is realized. However, for purpose of asset classification, credit
facility backed by Central Government Guarantee, though overdue, can be treated as NPA
only when the Central Government repudiates its guarantee, when invoked.
Since the bank has not invoked the guarantee, the question of repudiation does not arise.
Hence the bank is correct to the extent of not applying the NPA norms for provisioning
purpose. But this exemption is not available in respect of income recognition norms. Hence
the income to the extent not recovered should be reversed.
The situation would be different if the advance is guaranteed by State Government because
this exception is not applicable for State Government Guaranteed advances, where advance
is to be considered NPA if it remains overdue for more than 90 days.
In case the bank has not invoked the Central Government Guarantee though the amount is
overdue for long, the reasoning for the same should be taken and duly reported in LFAR.
(ii) In case of Sale of NPA by Bank, the auditor should examine
(1) the policy laid down by the Board of Directors in this regard relating to procedures,
valuation and delegation of powers.
(2) only such NPA has been sold which has remained NPA in the books of the bank for at
least 2 years.

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 (3) the assets have been sold “without recourse’ only.
(4) subsequent to the sale of the NPA, the bank does not assume any legal, operational or
any other type of risk relating to the sold NPAs.
(5) the NPA has been sold at cash basis only.
(6) on the sale of the NPA, the same has been removed from the books of the account.
(7) the short fall in the net book value has been charged to the profit and loss account.
(8) where the sale is for a value higher than the NBV, no profit is recognised and the excess
provision has not been reversed but retained to meet the shortfall/ loss because sale of
other non-performing financial assets.
(b) Alternative Way to Tackle the Hostile Management: While conducting the operational audit the
auditor has to come across many irregularities and areas where improvement can be made and
therefore, he gives his suggestions and recommendations.
These suggestions and recommendations for improvements may not be accepted by the hostile
managers and in effect there may be cold war between the operational auditor and the managers.
This would defeat the very purpose of the operational audit.
The Participative Approach comes to the help of the auditor. In this approach the auditor discusses
the ideas for improvements with those managers that have to implement them and make them feel
that they have participated in the recommendations made for improvements. By soliciting the views
of the operating personnel, the operational audit becomes a co-operative enterprise.
This participative approach encourages the auditee to develop a friendly attitude towards the
auditors and look forward to their guidance in a more receptive fashion. When the participative
method is adopted then the resistance to change becomes minimal, feelings of hostility disappear
and gives room for feelings of mutual trust. Team spirit is developed. The auditors and the auditee
together try to achieve the common goal.
The proposed recommendations are discussed with the auditee and modifications as may be
agreed upon are incorporated in the operational audit report. With this attitude of the auditor it
becomes absolutely easy to implement the proposed suggestions as the auditee themse lves take
initiative for implementing and the auditor does not have to force any change on the auditee.
Hence, the Operational Auditor of Amazon Manufacturing Unit should adopt the above-mentioned
participative approach to tackle the hostile management of Amazon.
(c) Section 21 of the Chartered Accountants Act, 1949 provides that a member is liable for
disciplinary action if he is guilty of any professional or “Other Misconduct.” Other misconduct has
been defined in part IV of the First Schedule and part III of the Second Schedule. These provisions
empower the Council to inquire into any misconduct of a member even it does not arise out of his
professional work. This is considered necessary because a chartered accountant is expected to
maintain the highest standards of integrity even in his personal affairs and any deviation from these
standards, even in his non-professional work, would expose him to disciplinary action. The Council
has also laid down that among other things “misappropriation by an office-bearer of a Regional
Council of the Institute of a large amount and utilization thereof for his personal use” would
amount to “other misconduct”.
In the instant case, receipt of personal benefit of ` 40,000 from the tour operator by Mr.
Nageshwar for organising an international tour as treasurer of a Regional Council of the Institute
would amount to other misconduct as per section 21. Therefore, Mr. Nageshwar would be held
guilty for other misconduct.
4 (a) (i) One non-executive director has attained the age of 72 years: The auditor should ensure
that no listed entity shall appoint a person or continue the directorship of any person as a non -
executive director who has attained the age of seventy-five years. In the given situation, there
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 is no violation of LODR 2015 for Non-executive director who has attained the age of 72
years.
(ii) One of the Directors is a Director in eight other Listed Entities: As per LODR 2015, a
person shall not be a director in more than seven listed entities. In the given situation, there
is non-compliance as one of the directors is director in eight other listed entities which is
exceeding the prescribed limit of seven entities.
(iii) The Managing Director is serving as Independent Director in Four listed entities of
which one entity’s equity shares are not listed on a Stock Exchange: Any person who is
serving as a whole-time director / managing director in any listed entity shall serve as an
independent director in not more than three listed entities. For the purpose of above-
mentioned provision, the count for the number of listed entities on which a person is a director
/ independent director shall be only those whose equity shares are listed on a stock exchange.
In the given situation, Managing Director has been serving as Independent Director in four
listed entities of which one entity’s Equity Shares are not listed on a stock exchange. So, it is
not exceeding the prescribed limit of three entities, hence there is no violation of LODR 2015.
(iv) One Independent Director has been serving as Independent Director in Eight Listed
Entities of which Equity Shares are listed on a Stock Exchange: A person shall not serve
as an independent director in more than seven listed entities in case its Equity Shares are
listed on a Stock Exchange. It may be noted that the count for the number of listed entities on
which a person is a director / independent director shall be only those whose equity shares
are listed on a stock exchange.
In the given situation, there is non-compliance as one of the Independent Director has been
serving as Independent Director in eight listed entities which is exceeding the pr escribed limit
of seven entities.
(b) (i) As per Clause 22 of Form 3CD of the Income Tax Act, 1961, the tax auditor is required to
state the amount of interest inadmissible under section 23 of the Micro, Small and Medium
Enterprises Development Act, 2006. Section 23 of the MSME Act lays down that an interest
payable or paid by the buyer, in accordance with the provisions of this Act, shall not be allowed
as a deduction for the purposes of the computation of income under the Income Tax Act,1961.
Accordingly, the CA. Mahaveer is required to report the payment of interest of ` 50,000 to
Vendor Ghanshyam who was registered under MSME Act, 2006 under clause 22 of Form 3CD
of the Income Tax Act, 1961.
(ii) As per Clause 21(h) of Form 3CD of the Income Tax Act, 1961, the tax auditor is required to
report about the amount of deduction inadmissible in terms of section 14A Income Tax Act,
1961, in respect of the expenditure incurred in relation to income which does not form part of
the total income.
Therefore, CA. Mahaveer, the auditor is required to scrutinize expense accounts particularly
interest account to check whether there is included any expense which is relatable to exempt
income. He is also required to note down the amount and mention against the clause.
Thus, in the given situation, CA. Mahaveer is required to report the same as per clause 21 (h)
of Form 3CD of the Income Tax Act, 1961.
(iii) As per Clause 29(A) of Form 3CD of the Income Tax Act, 1961 of the Income Tax Act, 1961,
the auditor is required to report,
(a) whether any amount is to be included as income chargeable under the head ‘income from
other sources’ as referred to in clause (ix) of sub section (2) of section 56 the Income Tax Act,
1961.
(b) If yes, to provide the nature of income and amount thereof.

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 The auditor is also required to obtain a certificate from the assessee regarding all such advances
received towards transfer of capital assets which have forfeited during the year and ex amine
whether any amount of such advances has been written back during the year and examine the
basis of such write back to determine whether such write back was on account of an act of
forfeiture. Further, the auditor is also required to verify the terms of contract to check the conditions
to forfeit of such advance and such conditions have occurred, then should verify whether the
amount has been actually forfeited.
Thus, same is required to be reported under clause 29(A) of Form 3CD of the Income Tax Act,
1961.
(c) Securing Professional Work: Clause (6) of Part I of the First Schedule to the Chartered
Accountants Act, 1949 states that a Chartered Accountant in practice shall be deemed to be guilty
of misconduct if he solicits clients or professional work either directly or indirectly by a circular,
advertisement, personal communication or interview or by any other means. Provided that nothing
herein contained shall be construed as preventing or prohibiting a ny Chartered Accountant from
applying or requesting for or inviting or securing professional work from another chartered
accountant in practice.
Such a restraint has been put so that the members maintain their independence of judgment and
may be able to command respect from their prospective clients.
Conclusion: In the given case, Mr. Bahubali, wrote letters only to other Chartered Accountants,
M/s Shubh Labh and M/s PQR requesting them to allot some professional work to him, which is
not prohibited under Clause (6) as explained above. Thus, Mr. Bahubali, has not committed any
professional misconduct by soliciting professional work.
5. (a) Steps involved while conducting investigation on behalf of an incoming partner: The general
approach of the investigating accountant in this type of investigation would be more or less similar,
irrespective of the nature of business of the firm-manufacturing, trading or rendering a service.
Primarily, an incoming partner would be interested to know whether the terms offered to him are
reasonable having regard to the nature of the business, profit records, capital distribution, personal
capability of the existing partners, socio-economic setting, etc., and whether he would be capable
of deriving continuing benefit in the shape of return on capital to be contributed and remuneration
for services to be rendered, which can be justified by the overall economic conditions prevailing
and other considerations considering his own personality and achievements. In addition, he would
be interested to ascertain whether the capital to be contributed by him would be safe and applied
usefully.
Broadly, the steps involved are the following:
(i) Ascertainment of the history of the inception and growth of the firm.
(ii) Study of the provisions of the deed of partnership, particularly for composition of partners, their
capital contribution, drawing rights, retirement benefits, job allocation, financial management,
goodwill, etc.
(iii) Scrutiny of the record of profitability of the firm’s business over a suitable number of years, with
usual adjustments that are necessary in ascertaining the true record of business profits. Particular
attention should, however, be paid to the nature of partners’ remuneration, which may be
excessive or inadequate in relation to the nature and profitability of the business, qualification and
expertise of the partners and such other factors as may be relevant.
(iv) Examination of the asset and liability position to determine the tangible asset backing for the
partner’s investment, appraisal of the value of intangibles like goodwill, know how, patents, etc.
impending liabilities including contingent liabilities and those for pending tax assessment. In case
of firms rendering services, the question of tangible asset backing usually is not important,

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 provided the firm’s profit record, business coverage and standing of the partners are of the
acceptable order.
(v) Position of orders at hand and the range and quality of clientele should be thoroughly examined,
which the firm is presently operating.
(vi) Position and terms of loan finance would call for careful scrutiny to assess its usefulness and
implication for the overall financial position; reason for its absence should be studied.
(vii) It would be interesting to study the composition and quality of key personnel employed by the firm
and any likelihood of their leaving the organisation in the near future.
(viii) Various important contractual and legal obligations should be ascertained and their nature studied.
It may be the case that the firm has standing agreement with the employees as regards salary and
wages, bonus, gratuity and other incidental benefits. Full import of such standing agreements
would be gauged before a final decision is reached.
(ix) Reasons for the offer of admission to a new partner should be ascertained and it should be
determined whether the same synchronises with the retirement of any senior partner whose
association may have had considerable bearing on the firm’s success.
(x) Appraisal of the record of capital employed and the rate of return. It is necessary to have a
comparison with alternative business avenues for investments and evaluation of possible results
on a changed capital and organisation structure, if any, envisaged along with the admission of the
partner.
(xi) It would be useful to have a first hand knowledge about the specialisation, if any, attained by the
firm in any of its activities.
(xii) Manner of computation of goodwill on admission as also on retirement, if any, should be
ascertained.
(xiii) Whether any special clause exists in the deed of partnership to allow admission in future of a new
partner, who may be specified, on concessional terms.
(xiv) Whether the incomplete contracts which will be transferred to the reconstituted firm will be a liability
or a loss.
It would always be worthwhile to remember that, in a partnership, personal considerations count
predominantly over other considerations and assessment of standing of the firm, standing and
reliability of other partners, their personal reputation and the goodwill enjoyed by the
products/services are important.
On the basis of the broad frame of considerations as given above, the investi gating accountant
should devise his own considerations in each case which may be quite diverse. Additional
considerations may come up in the case of service-rendering firms where profit and business
record, goodwill of the firm and of individual partners would assume greater significance.
Again, in the case of industrial firms, the network of customers, their scatter, size, etc., would be
relevant for consideration.
(b) Grossly Negligent and Bringing Disrepute to the Institute: Clause (7) of Part I of the Second
Schedule to the Chartered Accountants Act, 1949 states that a Chartered Accountant in practice
shall be deemed to be guilty of professional misconduct if he does not exercise due diligence, or
is grossly negligent in the conduct of his professional duties.
Furthermore, Clause (2) of Part IV of the First Schedule to the said Act states that a member of the
Institute, whether in practice or not, shall be deemed to be guilty of other misconduct, if he, in the
opinion of the Council, brings disrepute to the profession or the Institute as a result of his action
whether or not related to his professional work.

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 In the given case, Mr. Nemi, a Chartered Accountant in practice, is grossly negligence in conduct
of his professional duties by issuing clean reports on the balance sheet without examining the
accounts. Further, he has also brought disrepute to the profession by advising unethical practice
to the managing director of the company. Therefore, Mr. Nemi will be held guilty for professional
and other misconduct under abovementioned Clauses to the Chartered Accountants Act, 1949.
(c) Compliance with Other Laws: As per SA 250, “Consideration of Laws and Regulations in an Audit
of Financial Statements”, the auditor shall obtain sufficient appropriate audit evidence regarding
compliance with the provisions of those laws and regulations generally recognised to have a direct
effect on the determination of material amounts and disclosures in the financial statements
including tax and labour laws.
Further, non-compliance with other laws and regulations may result in fines, litigation or other
consequences for the entity, the costs of which may need to be provided for in the financial
statements, but are not considered to have a direct effect on the financial statements.
In the instant case, major portion of the labour employed in the company was child labour. While
questioning by auditor, reply of the management that it was outside his scope of financial audit to
look into the compliance with other laws is not acceptable as it may have a material effect on
financial statements.
Thus, auditor should ensure the disclosure of above fact and provision for the cost of fines, litigation
or other consequences for the entity. In case if the auditor concludes that non -compliance has a
material effect on the financial statements and has not been adequately reflected in the financial
statements, the auditor shall express a qualified or adverse opinion on the financial statement as
per SA 705 “Modifications to the Opinion in the Independent Auditor’s Report”.
6 (a) The following steps are involved in the audit of government companies:
(i) Appointment of Auditors under Section 139(5) and 139(7) read with section 143(5) of
the Companies Act, 2013 - Statutory auditors of Government Companies are appointed or
re-appointed by the C&AG. There is thus, a departure from the practice in vogue in the case
of private sector companies where appointment or re-appointment of the auditors and their
remuneration are decided by the members at the annual general meetings. In the case of
government companies, though the appointment of statutory auditors is done by the C&AG,
the remuneration is left to the individual companies to decide based on certain guidelines
given by the C&AG in this regard.
(ii) The C&AG may direct the appointed auditor on the manner in which the accounts of the
Government company are required to be audited and the auditor so appointed has to submit
a copy of the audit report to the Comptroller and Auditor-General of India. The report, among
other things, includes the directions, if any, issued by the C&AG, the action taken thereon and
its impact on the accounts and financial statement of the company.
The report under section 143(5) is in addition to the reports issued by the Statutory Auditors
under various other clauses of section 143.
(iii) Supplementary audit under section 143(6)(a) of the Companies Act, 2013 -The
Comptroller and Auditor-General of India shall within 60 days from the date of receipt of the
audit report have a right to conduct a supplementary audit of the financial statements of the
government company by such person or persons as he may authorize in this beha lf and for
the purposes of such audit, require information or additional information to be furnished to
any person or persons, so authorised, on such matters, by such person or persons, and in
such form, as the C&AG may direct.
(iv) Comment upon or supplement such Audit Report under section 143(6)(b) of the
Companies Act, 2013 - Any comments given by the C&AG upon, or in supplement to, the
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 audit report issued by the statutory auditors shall be sent by the company to every person
entitled to copies of audited financial statements under sub-section (1) of section 136 of
the said Act i.e. every member of the company, to every trustee for the debenture -holder of
any debentures issued by the company, and to all persons other than such member or trustee,
being the person so entitled and also be placed before the annual general meeting of the
company at the same time and in the same manner as the audit report.
(v) Test audit under section 143(7) of the Companies Act, 2013 -Without prejudice to the
provisions relating to audit and auditor, the C&AG may, in case of any compan y covered
under sub-section (5) or sub-section (7) of section 139 of the said Act, if he considers
necessary, by an order, cause test audit to be conducted of the accounts of such company
and the provisions of section 19A of the Comptroller and Auditor-General's (Duties,
Powers and Conditions of Service) Act, 1971, shall apply to the report of such test audit.
(b) Provision for Claim: No risk can be assumed by the insurer unless the premium is received.
According to section 64VB of the Insurance Act, 1938, no insurer should assume any risk in India
in respect of any insurance business on which premium is ordinarily payable in India unless and
until the premium payable is received or is guaranteed to be paid by such person in such manner
and within such time, as may be prescribed, or unless and until deposit of such amount, as may
be prescribed, is made in advance in the prescribed manner. The premium receipt of insurance
companies carrying on general insurance business normally arise out of three sources, viz .,
premium received from direct business, premium received from reinsurance business and the
share of co-insurance premium.
In view of the above, the insurance company is not liable to pay the claim and hence no provision
for claim is required.
(c) In the given scenario, the auditors noted numerous purchase entries without valid purchase
orders during the process of extracting the exception reports. Further, in terms of percentage, about
35% of purchases were made without valid purchase orders and also few purchase orders were
validated after the actual purchase. Also there was no reconciliation between the goods received
and the goods ordered.
Audit Procedures: The following procedures may address the validity of the account balance:
• Make a selection of the purchases, review correspondence with the vendors, purchase
requisitions (internal document) and reconciliations of their accounts.
• Review Vendor listing along with the ageing details. Follow up the material amounts paid
before the normal credit period and analyse the reasons for exceptions.
• Meet with the company's Purchase officer and obtain responses to our inquiries regarding the
purchases made without purchase orders.
• Discuss the summary of such issues with the client.
OR
(c) The actions that the Board may take, based upon consideration of recommendations of the Q uality
Review Group, include one or more of the following: -
(a) Make recommendations to the Council of ICAI u/s 28B(a) of Chartered Accountants Act, 1949
for referring the case to the Director (Discipline) of the Institute for consideration and
necessary action under the Chartered Accountants Act, 1949.
(b) Issue advisory and guidance to the AFUR u/s 28B(c) of Chartered Accountants Act, 1949 for
improvement in the quality of services and adherence to various statutory and other regulatory
requirements. A copy of such advisory may also be sent to the ICAI for information.
(c) Inform the details of the non-compliance to the regulatory bod(y)/ies relevant to the entity as
may be decided by the Board.
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 (d) Intimate the AFUR as to the findings of the Report as well as action initiated as above.
(e) In case of review arising out of a reference received from a regulatory body, inform the results
of review and the details of action taken to the concerned regulatory body.
(f) Consider the matter complete and inform the AFUR accordingly.

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 Test Series: April, 2023
MOCK TEST PAPER - 2
FINAL COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
All MCQs are compulsory.
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100
DIVISION A – MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. You are the internal auditor of Fair Bank Limited for the year 2022-23 and the bank maintains all the
data on computer. You are instructed by your senior to verify the loan against fixed deposits of the Agra
branch. As per the scope of audit, you need to ensure that proper lien has been marked on all the fixed
deposits against which loan has been issued. Which of the following procedure you will follow for the
same:
(a) Ensure that all the fixed deposit receipts, against which the loan has been sanctioned, are
discharged in favour of bank and check that the lien is marked in the computer software .
(b) Ensure that all the fixed deposit receipts are attached along with the approved loan documents.
(c) Discuss the process followed for lien marking with the branch manager.
(d) Ensure that all the fixed deposit receipts, against which the loan has been sanctioned, are
discharged in favour of bank, check that the lien is marked in the computer software and the fixed
deposit should be kept separately with the branch manager.
2. M/s ABC & Co., Chartered Accountants have been approached by PQR Ltd., a com pany engaged in
iron and steel manufacturing industry. The company has been facing following operational issues:
(1) Penal interest for delayed payments to the overseas vendors despite having enough cash flows;
and
(2) Despite having regular production and enough inventory, delays in shipping the final goods to the
customers leading to its deteriorating vendor rating.
As a partner of M/s ABC & Co., through detailed discussion with the Senior Manager of PQR Ltd., you
have concluded that all these delays are because of long decision-making cycles in the company. The
company approaches you to advise the type of audit it should get done:
(a) Internal audit.
(b) Management audit.
(c) Operational audit.
(d) Audit is not required.
3. While conducting the current year audit of Finco Ltd, the auditor obtains audit evidence that a material
misstatement exists in the prior period financial statements. This misstatement was related to
recognition of research and development expenditure. The provisions of Ind AS 38 Intangible Assets
relating to capitalisation of development expenditure was not applied properly. On this, unmodified
opinion had been previously issued. The current auditor verified that the misstatement had not been

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 dealt with as required under Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors.
Accordingly, the current auditor will:
(a) Express a qualified or an adverse opinion in the auditor’s report on the current period financial
statements modified with respect to the corresponding figures included therein.
(b) Express an unmodified opinion in the auditor’s report on the current period financial statements
since it was related to the prior year.
(c) Express a qualified opinion in the auditor’s report on the current period financial statements,
modified with respect to the corresponding figures included therein.
(d) Express an adverse opinion in the auditor’s report on the current period financial statements,
modified with respect to the corresponding figures included therein.
4. XYZ Private Limited uses ERP software for all business processes. The application is hosted in cloud
and is maintained by a third party. Statutory Auditor is not confident about the risk management process
in the third party organization and requests for audit access to such data centre. The request was
declined and management informed that the third party is ISO certified and audit on controls at Service
Organisation is regularly being conducted. What the auditor should do?
(a) Do not ask for anything else since the Third Party is ISO certified.
(b) Insist on conducting audit in the Third Party.
(c) Take the ISO certificate.
(d) Take the Service Organisation control audit report to review.
5. Section 130 re-opening of accounts on Court’s or Tribunal’s orders: of the Companies Act, 2013 states
that a company shall not re-open its books of account and not recast its financial statements, unless an
application in this regard is made by the Central Government, the Income-tax authorities, the Securities
and Exchange Board of India (SEBI), any other statutory regulatory body or authority or any person
concerned and an order is made by a court of competent jurisdiction or the Tribunal to the effect that
Muni Ltd. has an annual turnover of ` 375 crore and has been into losses for the last 2 years. The
operations of the company are good. Due to some technology changes, the company started facing
competition and hence, started incurring losses. The company plans to revive in the next 1 -2 years with
the improvements in its processes. During the year ended 31 st March, 2023, the management of the
company came across certain transactions relating to the financial year ended 31 st March 2022 which
were erroneously missed to be accounted for. This would result into losses and hence, the management
is considering to take this to the right financial year and for that purpose to re -open its accounts for the
financial year ended 31 st March 2022. Please advise.
(a) The position of the management is correct.
(b) The action of the management is correct, however, the reason behind reopening the accounts of
last year does not seem to be correct.
(c) The action of the management would have been correct had it been advised by the auditors of the
company and for the same management should have taken approval from SEBI.
(d) The action of the management is not correct.
6. Chandra Ltd. is a company engaged in the manufacture of iron and steel bars. VP & Associates are the
statutory auditors of Chandra Ltd. for the FY 2022-23. During the course of audit, CA Vikash, the
engagement partner, found that the Company’s financing arrangements have expired, and the amount
outstanding was payable on March 31, 2023. The Company has been unable to re -negotiate or obtain
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 replacement financing and is considering filing for bankruptcy. These events indicate a material uncertainty
that may cast significant doubt on the Company’s ability to continue as a going concern and therefore it
may be unable to realize its assets and discharge its liabilities in the normal course of business. The
financial statements (and notes thereto) do not disclose this fact. What opinion should CA Vikash express
in the case of Chandra Ltd.?
(a) Unmodified opinion.
(b) Qualified opinion.
(c) Adverse opinion.
(d) Disclaimer of opinion.
7. As per the Quality Review Board, the term technical standards in the context of Chartered Accountants
Rules 2006, includes which among the following?
(a) ICDS notified under Income Tax Act, 1961.
(b) Accounting standards notified under Companies Act, 2013.
(c) Guidance notes on accounting and auditing matters issued by C&AG.
(d) Notifications/ Directions issued on accounting and auditing matters issued by RBI/ SEBI/ other
regulatory bodies.
8. Which among the following are the skills to be possessed by M/s ABC & Associates as forensic
accountants?
(a) Criminology and evidence gathering.
(b) Confidence and curiosity.
(c) Discretion and creativity.
(d) Inquisitiveness and persistence.
9. You are the audit senior in charge of the audit of Swadhyay Co. and have been informed by your audit
manager that during the current year a fraud occurred at the client. A payroll clerk sets up fictitious
employees and the wages were paid into the clerk’s own bank account. This clerk has subsequently left
the company, but the audit manager is concerned that additional frauds have ta ken place in the wages
department. Which of the following audit procedures would be undertaken during the audit of wages as
a result of the manager’s assessment of the increased risk of fraud?
(1) Discuss with the payroll manager the nature of the payroll fraud, how it occurred and the financial
impact of amounts incorrectly paid into the payroll clerk’s bank account.
(2) Review the supporting documentation to confirm the total of the fraudulent payments made and
assess the materiality of this misstatement.
(3) Review and test the internal controls surrounding setting up of and payments to new joiners to
assess whether further frauds may have occurred.
(4) Review the legal action taken by the management against the payroll clerk who was involved in
the fraud and see whether he is punished for his actions.
(a) Audit procedures 1,2,3.
(b) Audit procedures 2,3,4.
(c) Audit procedures 1,3,4.
(d) Audit procedures 1,2,4.
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10. In case of audits of unlisted corporate entities, other information section is require d in auditor’s report
when at the date of auditor’s report:
(a) Auditor has obtained some or all of the other information.
(b) Auditor has obtained all of the other information.
(c) Auditor has obtained or expects to obtain the other information.
(d) Auditor has obtained some of the other information. (10 x 1 = 10 Marks)
Questions (11-20) carry 2 Marks each
MCQ 11. -15.
Integrated Case Scenario 1
M/s Sudharma & Associates have been appointed as the statutory auditors of Veer Ltd. for the FY 2022-23.
Veer Ltd. is a listed company dealing in the manufacture of iron and steel bars and it is among the top 1000
listed entities. FY 2022-23 is the first year after the incorporation of the company. The company has duly
complied with the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements)
Regulations 2015.
When the audit was started, the management of Veer Ltd. discussed with Mr. Sudharma (the engagement
partner) about the strong internal control system of the company. The management discussed about the
whistle blowing policy of the company, the HR policies, company code of conduct and ethics policies.
Mr. Sudharma was told that the audit team can rely on the information provided to them and the entity level
controls without any second thought. The management advised the auditor not to waste time in checking the
direct entity level controls and instead to concentrate on indirect entity level controls during their conduct of
audit. Further Veer Ltd. has constituted its qualified Audit Committee and a Risk Management Committee as
per the relevant regulations. Since FY 2022-23 was the first year after incorporation of the company, the
meetings of both the committees were held twice during the year based on the company’s requirement where
all the company’s important matters were duly discussed.
Further, while conducting the audit, the auditor found that a Management Discussion and Analysi s Report is
a part of the Directors Report. With respect to the non-financial information like industry structure and
development, opportunities and threats, the auditor was asked by the management to verify those particular
facts and to comment on the same.
Since FY 2022-23 is the first year after the incorporation of Veer Ltd., the company is in the process of
exploring the market and venturing towards its expansion plans. The management will be approaching the
banks for the purpose of raising funds for its projects. The management accordingly, requested the auditor
to mention in their audit report or the compliance certificate about the entity’s future viability. Further, in one
of the meetings of Audit Committee conducted during the FY 2022-23, the internal control system and
auditor’s report of Veer Ltd. were discussed. Mr. Sudharma was also present at the meeting and the Audit
Committee called for the comments of Mr. Sudharma, if any. Certain important decisions regarding the
changes in the internal control system were duly taken by majority voting.
On the basis of the abovementioned facts, you are required to answer the following MCQs:
Multiple Choice Questions (5 questions of 2 Marks each):
11. What should be Mr. Sudharma’s audit plan regarding the checking of direct entity level controls and
indirect entity level controls after considering the management’s advise?
(a) Mr. Sudharma should check the indirect entity level controls in detail and he can skip the checking
of direct entity level controls as the company has a strong internal control system.
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 (b) Mr. Sudharma should check the direct entity level controls in detail and he can skip the checking
of indirect entity level controls as the company has a strong internal control system.
(c) Mr. Sudharma should evaluate and understand both direct entity level controls and indirect entity
level controls and should accordingly decide the nature, timing, extent of audit procedures.
(d) Mr. Sudharma should check the indirect entity level controls in detail as it relates the business
process and account balance and contribute indirectly to the effective operation of direct ELC.
Thus, he can skip the checking of direct entity level controls.
12. Is the company justified in holding meeting of its Audit Committee and Risk management Committee
twice in the FY 2022-23?
(a) Yes, the company is justified as the meetings of both the committees were held as per the
company’s requirement and the important matters were duly discussed and conducting a meeting
involves expense and when all the matters were discussed in two meetings it is wise on the part of
the company that they did not hold more meetings.
(b) No, the company is not justified in holding two meetings of both the committees as the Audit
Committee should meet at least four times in a year and Risk management committee can meet
once in a year.
(c) The company is not justified in holding two meetings of the Audit Committee as an audit committee
should meet at least four times in a year; however, the company is justified in holding two meetings
of Risk management committee.
(d) The company is justified as it is at the discretion of the Board of Directors to hold the meetings of
the various committees of the company as per the company’s requirement to discuss the matters.
13. With respect to the meeting of Audit Committee attended by Mr. Sudharma, what all rights can be
exercised by Mr. Sudharma?
(a) Mr. Sudharma has right to be heard and to vote in the meeting of Audit Committee of Veer Ltd.
when it considers the auditor’s report.
(b) Mr. Sudharma has right to vote in the meeting of Audit Committee of Veer Ltd. when it considers
the auditor’s report.
(c) Mr. Sudharma, being statutory auditor does not have right to be heard and to vote in the meeting
of Audit Committee of Veer Ltd. even if it considers the auditor’s report. Such rights vest with the
internal auditors of the company.
(d) Mr. Sudharma has right to be heard in the meeting of Audit Committee of Veer Ltd. when it
considers the auditor’s report but shall not have right to vote.
14. What is the responsibility of M/s Sudharma & Associates so far as the Management Discussion and
analysis report of Veer Ltd. is concerned?
(a) M/s Sudharma & Associates should verify and comment on the non financial information reflected
in the Management Discussion and analysis report as it forms the part of the Boards Report.
(b) M/s Sudharma & Associates should verify the non financial information reflected in the
Management Discussion and analysis report as it forms the part of the Boards Report and can take
expert opinion for analysing and commenting on the same.
(c) M/s Sudharma & Associates is required to review the compliance with the disclosure requirement
and need not verify the facts related to the non financial information reflected in the Management
Discussion and analysis report.
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 (d) M/s Sudharma & Associates can verify and comment on the non financial information reflected in
the Management Discussion and Analysis Report provided additional fees for such work is given
by the management.
15. What should M/s Sudharma & Associates do with respect to the management’s request to the auditor
regarding mentioning about company’s future viability?
(a) M/s Sudharma & Associates can mention about the company’s future viability in its compliance
certificate as auditor’s report is not an assurance as to future viability of the entity.
(b) M/s Sudharma & Associates can mention about the company’s future viability in its audit report as
compliance certificate is not an assurance as to future viability of the entity.
(c) M/s Sudharma & Associates cannot mention about the company’s future viability in its compliance
certificate or auditor’s report as both the documents are not an assurance as to future viability of
the entity.
(d) M/s Sudharma & Associates can mention about the company’s future viability in either its
compliance certificate or auditor’s report as both the documents act as an assurance as to future
viability of the entity.
MCQ 16. -20.
Integrated Case Scenario 2
Sidharth Ltd. is one of the leading companies in the cement manufacturing industry. Right from its
incorporation, it has been a subsidiary of Girnar Ltd. The total shareholding of Girnar Ltd. includes the
following:
• The Government of Tamilnadu and Government of Lakshadweep each hold 18% of the paid-up share
capital,
• The Government of Goa’s share is 15.5%.
On 27th August 2022, Mr. Jambu, the auditor of Sidharth Ltd. had resigned from his post, citing personal
reasons. He had forgotten to inform about his resignation to the concerned authorities. The casual vacancy
which was created by the outgoing auditor was filled up with the appointment of Maniprabh & Co. Chartered
Accountants as statutory auditors of Sidharth Ltd. However, few shareholders of the company raised certain
objections, which was later settled without any problems. As a part of the terms and conditions of appointment
as auditors, Maniprabh & Co. agreed to do the following:
• Charge fees at 7% of the paid-up capital plus 0.1% of net profit of the company (however, Mr. Jambu
had agreed to charge only ` 45,000/-),
• Select and recruit personnel, conduct training programmes for and on behalf of Sidharth Ltd.
The company was having an annual turnover of ` 1020 crore, and hence it was also liable to tax audit under
section 44 AB of Income Tax Act, 1961.
During the current financial year, Sidharth Ltd. had changed its method of accounting compared to the
previous financial year and had reported a closing stock of raw material amounting to ` 2 lakh only as on 31st
March 2023. Also, the company had borrowed a sum of ` 10 crore equally from two public sector banks and
two Non-Banking Financial Companies. It had also repaid few deposits amounting to ` 75 lakh to the deposit
holders through electronic mode.
As far as Maniprabh & Co. Chartered accountants are concerned, Mr. Eshan, who is one of the partners of
the firm (NOTE- Mr. Eshan does not sign the financials of Sidharth Ltd.) had borrowed a sum of ` 3.91 lakh
from Girnar Ltd. He had also purchased goods worth ` 1.07 lakh from the company which was in ordinary
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course of business, at arm’s length price. Both the sum borrowed and the cost of the goods bought are not
yet paid by Mr. Eshan. Another partner of the firm, Mr. Shantinath, who is also responsible for signing the
financials statements of Sidharth Ltd. was also engaged in the teaching profession during his free time approx
3 to 4 hours weekly.
Upon hearing about the efficient services provided by Maniprabh & Co. Chartered accountants, they were
approached by XYZ Cooperative Society to act as their statutory auditor for the upcoming financial years.
The firm agreed to the offer and had the following options in mind with respect to the fees to be charged from
them:
(i) To charge fees as percentage of Net Profits, or
(ii) To charge fees of ` 501/-.
On the basis of the abovementioned facts, you are required to answer the following MCQs:
Multiple Choice Questions (5 questions of 2 Marks each):
16. To whom should have Mr. Jambu informed about his resignation? What could be the possible
consequence for his non-compliance?
(a) He should have informed the registrar and Sidharth Ltd. As a consequence of his failure, he is
liable to a penalty not exceeding ` 2 lakh.
(b) He should have informed the registrar alone. As a consequence of his failure, he is liable to a
penalty not less than ` 50,000/-.
(c) He should have informed the registrar and Maniprabh & Co. As a consequence of his failure, he is
liable to a fine of ` 500 per day for each day of failure.
(d) He should have informed the registrar & comptroller and auditor general. As a consequence of his
failure, he is liable to a fine of ` 45,000/-.
17. With respect to the acts carried out by Mr. Eshan, the partner of the audit firm, what can you infer about
the appointment of Maniprabh & Co. as auditors of Sidharth Ltd.?
(a) It is valid since the indebtedness is within prescribed limits.
(b) It is not valid since the indebtedness exceeds prescribed limit of ` 1 lakh.
(c) It is valid since Mr. Eshan is not signing the financials of Sidharth Ltd.
(d) It is valid since the indebtedness is not with Sidharth Ltd.
18. Which among the below are permitted as per Chartered Accounts Act, 1949?
(i) Charge fees at 7% of the paid-up capital plus 0.1% of net profit of the company.
(ii) Select and recruit personnel, conduct training programmes for and on behalf of Sidharth Ltd.
(iii) Mr. Shantinath, one of the partners who is responsible to sign the financials of Sidharth Ltd. was
into teaching profession during his free time approx 3 to 4 hours weekly.
(a) (i) & (ii).
(b) (iii) only.
(c) (ii) & (iii).
(d) (i), (ii) & (iii).

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19. With respect to the fees to be charged for its new assignment, which option can be opted by
Maniprabh & Co.?
(i) To charge fees as percentage of Net Profits, or
(ii) To charge fees of ` 501/-.
(a) (i) Only.
(b) (ii) Only.
(c) Either (i) or (ii).
(d) Neither (i) nor (ii).
20. Among the below transactions which were undertaken by Sidharth Ltd., which needs to be reported by
the auditors under fiscal laws?
(i) ` 10 crore loan taken, which is exceeding the limit specified u/s 269 SS of Income tax Act.
(ii) Changed its method of accounting from the previous financial year.
(iii) Repayment of deposits of ` 75 lakh, which is exceeding limit specified u/s 269 T of Income tax Act.
(iv) Reporting of Closing stock of raw material worth ` 2 lakh only.
(a) (i), (iii) & (iv).
(b) (ii) & (iv).
(c) (i) & (iii).
(d) (i), (ii), (iii) & (iv). (10 x 2 = 20 Marks)

Division B- Descriptive Questions-70 Marks

Question No. 1 is compulsory.
Attempt any four questions from the Rest.
1. (a) Shreyansh & Co., Chartered Accountants, have been appointed Statutory Auditors of Mani Ltd. for
the financial year 2022-23. The audit team has completed the audit and is in the process of
preparing audit report Management of the company has also prepared draft annual report.
Audit in-charge was going through the draft annual report and observed that the company has
included an item in its Annual Report indicating downward trend in market prices of key
commodities/raw material as compared to previous year. However, the actual profit margin of the
company as reported in financial statements has gone in the reverse direction. Audit Manager
discussed this issue with partner of the firm who in reply said that auditors are not covered with
such disclosures made by the management in its annual report, it being the responsibility of the
management.
Do you think that the partner is correct in his approach on this issue. Discuss with reference to
relevant Standard on Auditing the Auditor's duties with regard to reporting. (5 Marks)
(b) M/s. Abhinandan & Co. was appointed as an auditor of Nandan Limited, a company operating its
business in telecom sector. As per spectrum allocation agreement with Government, N andan
Limited is required to pay certain percentage of its annual revenue as license fee. Nandan Limited
paid the license fee on its core business for last two years. At the end of third year, the
communication was received from Government that it needs to pay agreed percentage on its total
revenues and not only on core business revenues. Matter was disputed and went to court of law.
On prudence basis, Nandan Limited made a provision on estimated business in its books of
accounts of agreed percentage on non-core business receipts also. The amount of provision was
8

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 of such huge amount that the Nandan Limited's profit and loss account for that quarter reflected
loss due to that provision. How you as an auditor can evaluate this accounting estimate which
involves significant risk and what if Management has not addressed the effects of estimation
uncertainty on provision made? (4 Marks)
(c) In the financial year 2022-23, Saaransh Ltd. faced an extraordinary event (earthquake), which
destroyed a lot of business activity of the company. These circumstances indicate material
uncertainty on the company’s ability to continue as going concern. Due to such event it may not be
possible for the company to realize its assets or pay off the liabilities during the regular course of
its business. The financial statement and notes to the financial statements of the company do not
disclose this fact. What kind of opinion should the statutory auditor of Saaransh Ltd. issue in such
circumstances and why? Also, draft the opinion and basis for opinion para for the same.
(5 Marks)
2. (a) JIN Ltd., at its annual general meeting, appointed Mr. J, Mr. I and Mr. N as joint auditors to conduct
audit for the financial year 2022-23. For the valuation of gratuity scheme of the company, Mr. J,
Mr. I and Mr. N wanted to refer their own known Actuaries. Due to difference of opinion, all the joint
auditors consulted their respective Actuaries. Subsequently, major difference was found in the
actuarial reports. However, Mr. J agreed to Mr. I’s actuary report, though, Mr. N did not. Mr. J
contends that Mr. I’s actuary report shall be considered in audit report due to majority of votes .
Now, Mr. N is in dilemma. Explain the responsibility of auditors, in case, report made by Mr. I’s
actuary, later on, was found faulty. (5 Marks)
(b) The volatility, unpredictability and pace of fast changes that exists in the automated environment
today is far greater than in the past and consequently it throws more risk to business which requires
them to have a need to continuously manage such risks. State various risks which an enterprise
may have to face and manage. (4 Marks)
(c) CA Vasu, a newly qualified professional with certificate of practice, approached CA Anant, the
auditor of his father's company Crest Ltd., to allow him to have some practical and professional
knowledge and experience in his firm before he can set up his own professional prac tice. CA Anant
allowed him to sit in his office for 6 month and allotted a small chamber with other office
infrastructure facility. In the course of his association with CA Anant' s office, he used to provide
tax consultancy independently to the client of the firm and also filed few IT returns and represented
himself before various tax authorities on behalf of the firm although no documents were signed by
him. During his association in CA Anant's office, he did not get any salary or share of profit or
commission but only re-imbursement of usual expenses like conveyance, telephone etc. was made
to him. After the end of the agreed period, he was given a lump sum amount of ` 2,00,000 by
CA Anant for his association out of gratitude. Give your comments with reference to the Chartered
Accountants Act, 1949 and Schedules thereto. (5 Marks)
3. (a) You have been appointed to carry out the audit of Paradise Life Insurance Company Ltd. for the year
2022-23. During the course of audit, you observed that the commission payable to agents constituted
a major expense in operating expenses of the Company. Enumerate the audit concerns that address
to the assertions required for the Auditor to ensure the continued existence of internal control as well
as fairness of the amounts in accounting of commission payable to agents. (5 Marks)
(b) Mr. Nemi is a contractor dealing in food catering, flower decorating and light decorating activities.
He has received contract in respect of food catering and flower decorating from one NG O for
holding Annual Talent evening event to celebrate completion of 15 years of their establishment.
For the said event Mr. Nemi has received in cash ` 1,85,000 for food catering and ` 1,25,000 for
flower decoration. As a tax auditor how would you deal and report on the above? (5 Marks)
(c) Vishal, a practicing Chartered Accountant issued a certificate of circulation of a periodical without
going into the most elementary details of how the circulation of a periodical was being maintained
i.e. by not looking into the financial records, bank statements or bank pass books, by not examining
9

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 evidence of actual payment of printer’s bills and by not caring to ascertain how many copies were
sold and paid for. Give your comments with reference to the Chartered Accountants Act, 1949 and
Schedules thereto. (4 Marks)
4. (a) Chandanbala Ltd. had 5 subsidiaries as at 31st March, 2023 and the investments in subsidiaries
are considered as long term and valued at cost. Two of the subsidiaries had their net worth eroded
as at 31st March 2023 and the prospects of their recovery are very bleak and the other three
subsidiaries are doing exceptionally well. The company did not provide for the decline in the value
of investments in two subsidiaries because the overall investment portfolio in subsidiaries did not
suffer any decline as the other three subsidiaries are doing exceptionally well. Comment in view of
relevant IND-AS. (5 Marks)
(b) CA Nabhiray is conducting the statutory audit of Hastinapur Ltd., a non-banking financial company.
It has branches in various parts of India. The company with a focus on housing finance, has
outstanding non-convertible debentures worth ` 170 crore. The company reportedly missed
interest payments of ` 17 crore on its debts because of inadequate liquidity. As a result, Hastinapur
Ltd. faced a series of downgrades by rating agencies on its debts over the past two months. Rating
was cut to D from A4 implying that the company was in default or expected to be in default soon.
What aspects CA Nabhiray should look into in relation to the activity of mobilization of public
deposits (particularly in relation to downgrading of credit facilities) by Hastinapur Ltd? (5 Marks)
(c) Mr. Sheetal is a practicing chartered accountant. Due to natural calamities and misfortune during
the year 2021, he lost almost all of his wealth and became undischarged insolvent. After a few
court hearings, finally, in the year 2023, he was declared discharged insolvent and obtained a
certificate from the court stating that his insolvency was caused by misfortune without an y
misconduct on his part. You are required to comment on the above situation with reference to the
Chartered Accountants Act, 1949 and Schedules thereto, (especially from the point of section 8:
Entry of name in Register of Members). (4 Marks)
5. (a) Sudarshan Ltd. is a company engaged in the business of manufacture of spare parts. Prakash &
Associates are the statutory auditors of the company for the FY 2022-23. During the course of
audit, CA Prakash noticed that the company had a major customer, namely, Korean Mart from
South Korea. Owing to an outbreak of war and subsequent destruction leading to government ban
on import and export in South Korea, the demand from Korean Mart for the products of Sudarshan
Ltd. ended for an unforeseeable time period. When discussed with the management, CA Prakash
was told that the company is in the process of identifying new customers for their products. CA
Prakash understands that though the use of going concern assumption is appropriate but a material
uncertainty exists with respect to the identification of new customers. This fact is duly reflected in
the financial statements of Sudarshan Ltd. for the FY 2022-23. How should CA Prakash deal with
this matter in the auditor’s report for the FY 2022-23? (5 Marks)
(b) CA. Bharat has appeared before the Income Tax Authorities as an authorized representative of his
Auditee and submitted a false declaration to the Income Tax Authorities. Comment. (3 Marks)
(c) CA. Rajul is acting as Credit manager in branch of DFC Bank Limited. A company has approached
the branch for a request to sanction credit facilities worth `10 crore for meeting usual business
requirements. It is a prospective new client. She checks past history of the company, back ground
of promoters & directors, shareholding pattern and nature of business. Assessment of financial
results of past years and future projections is also undertaken. She also carries out SWOT analysis
of the company.
Besides, assessment of net worth of directors is also undertaken. Status of CIBIL score and
position of name of promoters/directors in RBI defaulter list is also verified.
She also makes discreet inquiries from few clients of the branch engaged in similar line of activity
regarding credit worthiness of company, its promoters and directors.
Based on above:
10

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 (i) Identify activity being performed by CA Rajul and discuss its nature.
(ii) Would your answer be different if this activity was to be performed by a person not qualified
as a Chartered Accountant? Can a non-CA perform such activity? State reason.
(iii) Name any three other areas where identified activity can be undertaken. (6 Marks)
6. (a) C & AG appointed a chartered accountant firm to conduct Performance audit of OM Ltd., a PSU of
Govt. of India. The firm conducted the audit with a view to check all the expenses of the unit are in
conformity with the public interest and publicly accepted customs. The audit report submitted by
audit firm was rejected by C&AG. Give your opinion on the action of C&AG. (5 Marks)
(b) You are auditing a small bank branch with staff strength of the manager, cashier and three other
staff S1, S2 and S3. Among allocation of work for other areas, S1 who is a peon also opens all the
mail and forwards it to the concerned person. He does not have a signature book so as to check
the signatures on important communications. S2 has possession of all bank forms (e.g. cheque
books, demand draft/pay order books, travellers’ cheques, foreign currency cards etc.). He
maintains a record meticulously which you have test checked also. However, no one among staff
regularly checks that. You are informed that being a small branch with shortage of manpower, it
is not possible to always check the work and records. Give your comments. (5 Marks)
(c) You are appointed as an auditor of Moksh Ltd., a company engaged in export of agricultural
equipment. During the course of audit, your audit team informed you regarding non-deduction of
TDS on huge payments made to legal counsel of Moksh Ltd. You want to alert your team on the
possibility of non-compliance with Laws and Regulations by Moksh Ltd. Help your audit team in
identifying any other indications of non-compliance with Laws and Regulations particularly related
to payments made by the company. (4 Marks)
OR
Secretarial staff of the Quality Review Board (QRB) is in the process of preparing a panel for
submission to Board to enable it to initiate reviews of the quality of audit services provided by
members of ICAI. The draft panel has been prepared by Mr. Paras, a junior staff in QRB secretariat
and it has moved up in hierarchy for vetting by a senior staff, Mr. Suparas, before being put up in
the upcoming meeting of Quality review board for its consideration.
The draft panel contains details of following entities audited by different audit firms: -
Name of Listing Sector Paid up Annual O/s loans Name of
entity status capital* turnover* & audit firm
deposits*
PQR Ltd. Listed in Manufacturing 1000 5000 750 GPR & Co.
BSE, NSE
and NYSE
X Insurance Unlisted Health 250 1500 400 DS & Co.
Ltd. insurance
AB Banking Unlisted Banking 400 900 300 PS & Co.
Co.
AAZ Ltd. Unlisted Manufacturing 200 800 200 CT & Co.
* Figures are of immediately preceding year and are in ` Crore.
Is the inclusion of names of audit firms of corresponding entities in the draft panel to be put up
before QRB appropriate? Guide Mr. Suparas.

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 Test Series: April 2023
MOCK TEST PAPER 2
FINAL COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS
DIVISION A - MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. (a)
2. (b)
3. (d)
4. (d)
5. (d)
6. (c)
7. (b)
8. (a)
9. (a)
10. (a)
Questions (11-20) carry 2 Marks each
11. (c)
12. (c)
13. (d)
14. (c)
15. (c)
16. (d)
17. (a)
18. (c)
19. (c)
20. (b)
DIVISION B - DESCRIPTIVE QUESTIONS (70 Marks)
1. (a) Responding When the Auditor Concludes That a Material Misstatement of the Other
Information Exists: As per SA 720, “The Auditor’s Responsibility in Relation to Other
Information”, descriptions of trends in market prices of key commodities or raw materials is an
example of amounts or other Items that may be Included in the other information.
The auditor’s discussion with management about a material inconsistency (or other information
that appears to be materially misstated) may include requesting management to provide support
for the basis of management’s statements in the other information. Based on management’s further
information or explanations, the auditor may be satisfied that the other information is not materially
misstated. For example, management explanations may indicate reasonable and sufficient grounds
for valid differences of judgment.

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 Auditor’s duties with regard to reporting in the given case are given hereunder:
As per SA 720, “The Auditor’s Responsibility in Relation to Other Information”, if the auditor
concludes that a material misstatement of the other information exists, the auditor shall request
management to correct the other information. If management:
(i) Agrees to make the correction, the auditor shall determine that the correction has been made;
or
(ii) Refuses to make the correction, the auditor shall communicate the matter with those charged
with governance and request that the correction be made.
Contention of the partner of the firm that auditors are not concerned with such disclosures made
by the management in its annual report, is incorrect.
(b) In the given case, Abhinandan & Co. was appointed as an auditor of Nandan Ltd., operating in
Telecom sector. The Company paid the license fee on its core business revenue whereas
Government required it to pay on non-core business receipts as well. Consequently, the amount of
provision was of such a huge amount that Nandan Ltd.’s profit and loss account reflected a loss
due to that provision. As an auditor evaluation would be done as under:
For accounting estimates that give rise to significant risks, in addition to other substantive
procedures performed to meet the requirements of SA 330, the auditor shall evaluate the following:
(i) How management has considered alternative assumptions or outcomes, and why it has rejected
them, or how management has otherwise addressed estimation uncertainty in making the
accounting estimate.
(ii) Whether the significant assumptions used by management are reasonable.
(iii) Where relevant to the reasonableness of the significant assumptions used by management or the
appropriate application of the applicable financial reporting framework, management’s intent to
carry out specific courses of action and its ability to do so.
(iv) If, in the auditor’s judgment, management has not adequately addressed the effects of estimation
uncertainty on the accounting estimates that give rise to significant risks, the auditor shall, if
considered necessary, develop a range with which to evaluate the reasonableness of the
accounting estimate.
(c) In the present case, there exists a material uncertainty that cast a significant doubt on the
company’s ability to continue as going concern and the same is not disclosed in the financial
statements of Saaransh Ltd.
As such, the financial statements of Saaransh Ltd. for the FY 2022-23 are materially misstated and
the effect of the misstatement is so material and pervasive on the financial statements that giving
only a qualified opinion will be insufficient and therefore the statutory auditor of Saaransh Ltd.
should issue an adverse opinion.
The relevant extract of the Adverse Opinion Paragraph and Basis for Adverse Opinion paragraph
is as under:
Adverse Opinion
In our opinion, because of the omission of the information mentioned in the Basis for Adverse
Opinion section of our report, the accompanying financial statements do not present fairly, the
financial position of Saaransh Ltd. as at March 31, 2023, and of its financial performance and its
cash flows for the year then ended in accordance with the Accounting Standards issued by the
Institute of Chartered Accountants of India.
Basis for Adverse Opinion
Saaransh Ltd. has faced an extraordinary event (earthquake), which destroyed a lot of business
activity of the company. Due to such event, it may not be possible for the company to realize its

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 assets or pay off the liabilities during the regular course of its business. This situation indicates
that a material uncertainty exists that may cast significant doubt on the Company’s ability to
continue as a going concern. The financial statement and notes to the financial statements of the
company do not disclose this fact.
2. (a) Using the work of an Auditor’s Expert: As per SA 620 “Using the Work of an Auditor’s Expert”,
the expertise of an expert may be required in the actuarial calculation of liabilities associated with
insurance contracts or employee benefit plans etc., however, the auditor has sole responsibilit y for
the audit opinion expressed, and that responsibility is not reduced by the auditor’s use of the work
of an auditor’s expert.
The auditor shall evaluate the adequacy of the auditor’s expert’s work for the auditor’s purposes,
including the relevance and reasonableness of that expert’s findings or conclusions, and their
consistency with other audit evidence as per SA 500.
Further, in view of SA 620, if the expert’s work involves use of significant assumptions and
methods, then the relevance and reasonableness of those assumptions and methods must be
ensured by the auditor and if the expert’s work involves the use of source data that is significant to
that expert’s work, the relevance, completeness, and accuracy of that source data in the
circumstances must be verified by the auditor.
In the instant case, Mr. J, Mr. I and Mr. N, jointly appointed as auditors of JIN Ltd., referred their
own known Actuaries for valuation of gratuity scheme. Actuaries are an auditor’s expert as per SA
620. Mr. Y’s referred actuary has provided the gratuity valuation report, which later on was found
faulty. Further, Mr. N is not in agreement with this report, therefore, he submitted a separate audit
report specifically for such gratuity valuation.
In such situation, it was duty of Mr. J, Mr. I and Mr. N, before using the gratuity valuation report of
Actuary, to ensure the relevance and reasonableness of assumptions and methods used. They
were also required to examine the relevance, completeness and accuracy of source data used for
such report before expressing their opinion.
Mr. J, and Mr. I will be held responsible for gross negligence and using such faulty report without
examining the adequacy of expert actuary’s work whereas Mr. N will not be held liable for the same
due to separate opinion expressed by him.
(b) Various Risk: Businesses today operate in a dynamic environment. The volatility, unpredictability
and pace of changes that exist in the business environment today is far greater than in the past.
Some of the reasons for this dynamic environment include globalization, use of technolo gy, new
regulatory requirements, etc. Because of this dynamic environment the associated risks to
business have also increased and companies have a need to continuously manage risks.
Examples of risks include:
• Market Risks;
• Regulatory & Compliance Risks;
• Technology & Security Risks;
• Financial Reporting Risks;
• Operational Risks;
• Credit Risk;
• Business Partner Risk;
• Product or Project Risk;
• Environmental Risks.

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 (c) Clause (1) of Part I of the First Schedule to the Chartered Accountants Act, 1949 states that a
chartered accountant in practice shall be deemed to be guilty of professional misconduct if he
allows any person to practice in his name as a chartered accountant unless such person is also a
chartered accountant in practice and is in partnership with or employed by him.
The above clause is intended to safeguard the public against unqualified accountant practicing
under the cover of qualified accountants. It ensures that the work of the accountant will be carried
out by a Chartered Accountant who may be his partner, or his employee and would work under his
control and supervision.
In the instant case, CA Anant allowed CA Vasu (who is a newly qualified CA professional with
COP) to sit in his office for 6 months, and allowed him to provide tax consultancy independently to
his firm’s clients, filing of some IT Returns. He also allowed him to appear before various tax
authorities on behalf of his firm. CA Vasu was only reimbursed with his usual expenses and was
not paid any salary or share of profit for the same. However, after the end of agreed period he was
given a lump-sums of ` 2,00,000 for his association out of gratitude.
Thus, in the present case CA. Anant will be held guilty of professional misconduct as per Clause
(1) of Part I of First Schedule to the Chartered Accountants Act, 1949 as he allowed CA Vasu to
practice in his name as Chartered accountant and CA Vasu is neither in partnership nor in
employment with CA. Anant.
3. (a) Commission payable to Agents: Insurance business is generally solicited by the Insurance
agents. The remuneration of agent is paid by way of commission which is calculated by applying
percentage to premium collected by him. Agency commission contributes towards significant
portion of expenses incurred by the Insurance Commission. Commission is payable towards
generation of new business and towards settlement of renewal premium.
Role of Auditor: The Auditor during his review of Commission paid to Agents should mainly
consider the following:
Review the system established by the Insurer with respect to calculation of commission to
eligible agents accurately and processing the same in timely manner.
Review the commission payment system is in sync with the premium collection system.
Check whether commission paid is within the limit prescribed under Insurance Act.
Check whether commission is clawed-back on the cancelled policies.
(b) Section 269ST provides that no person shall receive sum of ` 2 lakh or more a) in aggregate from
a person in a day; or b) in respect of a single transaction; or c) in respect of transactions relating
to one event or occasion from a person otherwise than by an account payee cheque or an account
payee demand draft or by use of electronic clearing system through a bank account.
Further, the tax auditor has the responsibility to verify the compliance with the provisions of 269T
of the Income Tax Act.
Furthermore, the tax auditor is required to report under Clause 31 (ba) particulars of each receipt
in an amount exceeding the limit specified in section 269ST, in aggregate from a person in a day
or in respect of a single transaction or in respect of transactions relating to one event or occasion
from a person, during the previous year, where such receipt is otherwise than by a chequ e or bank
draft or use of electronic clearing system through a bank account:-
(i) Name, address and Permanent Account Number (if available with the assessee) of the payer;
(ii) Nature of transaction;
(iii) Amount of receipt (in `);
(iv) Date of receipt;

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 In the present case, Mr. Nemi, contractor dealing in food catering, flower decorating and light
decorating activities, received in cash ` 1,85,000 for food catering and ` 1,25,000 for flower
decoration from one NGO for holding one event, by way of cash which is exceeding prescribed
amount of ` 2,00,000. Thus, tax auditor is required to report the same in compliance with Clause
31 (ba) of Form 3CD.
(c) Failure to Obtain Information: Clause (8) of Part I of Second Schedule to the Chartered
Accountants Act, 1949 states that if a Chartered Accountant in practice fails to obtain sufficient
information to warrant the expression of an opinion or his exceptions are sufficient material to
negate the expression of an opinion, the chartered accountant shall be de emed to be guilty of a
professional misconduct.
In the instant case Mr. Vishal, a practicing Chartered Accountant issued a certificate of circulation
of a periodical without going into the most elementary details of how the circulation of a periodical
was being maintained i.e., by not looking into the financial records, bank statements or bank pass
books, by not examining evidence of actual payment of printer’s bills and by not caring to ascertain
how many copies were sold and paid for.
The chartered accountant should not express his opinion before obtaining the required data and
information. As an auditor, Mr. Vishal ought to have verified the basic records to ensure the
correctness of circulation figures.
Conclusion: Thus, in the present case Mr. Vishal will be held guilty of professional misconduct as
per Clause (8) of Part I of Second Schedule to the Chartered Accountants Act, 1949.
4. (a) As per Para 10 of Ind AS-27 on “Separate Financial Statements”, notified under the Companies
(Indian Accounting Standards) Rules, 2015, as amended from time to time, when an entity prepares
separate financial statements, it shall account for investments in subsidiaries, joint ventures and
associates either at cost or in accordance with Ind AS 109.
In the given situation, Chandanbala Ltd. has valued the investments in subsidiaries at cost.
Ind AS 36 “Impairment” deals with impairment of investments in subsidiaries accounted for at
cost under Ind AS 27. As per Para 9 of Ind AS 36, an entity shall assess at the end of each
reporting period whether there is any indication that an asset may be impaired. If any such
indication exists, the entity shall estimate the recoverable amount of the asset. It implies that
impairment indicators for investment in subsidiaries is to be assessed by Chandanbala Ltd.
individually for each investment and not as group of investment.
As provided, net worth of two of the subsidiaries of Chandanbala Ltd. have been eroded by 31st
March 2023 and chances of recovery is bleak. This implies that the indicators of impairment in
value of investment in those two subsidiaries exist on reporting date.
Therefore, Chandanbala Ltd. should provide for the impairment in the value of investment in those
two subsidiaries despite of the fact that the investments in other three subsidiaries did not suffer
any impairment.
(b) CA Nabhiray has to ascertain whether the company has complied with the following aspects
in relation to the activity of mobilization of public deposits:-
i. The ceiling on quantum of public deposits has been linked to its credit rating as given by an
approved credit rating agency. In the event of a upgrading/downgrading of credit rating, the
auditor should bear in mind that the NBFC will have to increase/reduc e its public deposits in
accordance with the revised credit rating assigned to it within a specified time frame and
should ensure that the NBFC has informed about the same to the RBI inwriting.

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 ii. In the event of downgrading of credit rating below the minimum specified investment grade,
a non-banking financial company, being an investment and credit company or a factor, shall
regularise the excess deposit as provided hereunder:
a. with immediate effect, stop accepting fresh public deposits and renewing existing deposits;
b. all existing deposits shall run off to maturity; and
c. report the position within 15 working days, to the concerned Regional Office of the RBI where
the NBFC is registered.
d. No matured public deposit shall be renewed without the express and voluntary consent of
the depositor.
(c) Mr. Sheetal was discharged insolvent: Disabilities for the Purpose of Membership : Section 8
of the Chartered Accountants Act, 1949 enumerates the circumstances under which a person is
debarred from having his name entered in or borne on the Register of Members, If he, being a
discharged insolvent, has not obtained from the court a certificate stating that his insolvency was
caused by misfortune without any misconduct on his part. Here it may be noted that a person who
has been removed from membership for a specified period shall not be entitled to have his name
entered in the Register until the expiry of such period.
In addition, failure on the part of a person to disclose the fact that he suffers from any one of the
disabilities would constitute professional misconduct. The name of the person, who is found to
have been subject at any time to any of the disabilities discussed in section 8, can be removed
from the Register of Members by the Council.
In the given case, it is clearly stated that Mr. Sheetal was discharged insolvent, and he has also
obtained from the court a certificate stating that his insolvency was caused by misfortune without
any misconduct on his part. Hence, Mr. Sheetal has not violated the provisions of Section 8, and
he is not debarred from having his name entered in the Register of Members.
5. (a) As per SA 570, “Going Concern”, loss of a major market or a key customer is one of the operating
indicators that may cast significant doubt on the company’s ability to continue as a going concern.
In the present case, Sudarshan Ltd. has a key customer in South Korea from which the demand
for its products has ended on account of outbreak of war, subsequent destruction and government
ban on import and export in South Korea. Further, the company has not yet identified new
customers and is in the process of doing the same. As such, the identification of new customer is
a material uncertainty that cast a significant doubt on the company’s ability to contin ue as a going
concern.
However, this matter is duly disclosed by the management of Sudarshan Ltd. in the financial
statements for the year ended 31.03.2023.
As such, considering that the going concern assumption is appropriate but a material uncertainty
exists with respect to identification of new customer, CA Prakash should:
(1) Express an unmodified opinion and
(2) Include in his audit report, a separate section under the heading “Material Uncertainty
Related to Going Concern” to:
(i) Draw attention to the note in the financial statements that discloses the matters and
(ii) 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.
Thus, CA Prakash should deal with this matter in his auditor’s report in the above-mentioned
manner.

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 (b) False Declaration as Authorized Representative: In connection with proceedings under the
Income Tax Act 1961, a Chartered Accountant often acts as the authorised representative of his
clients and attends before an Income Tax Authority or the appellate tribunal.
Any person who acts or induces, in any manner another person to make and deliver to the Income
Tax Authorities a false account, statement, or declaration, relating to any income chargeable to tax
which he knows to be false or does not believe to be true will be liable under section 278 of the
Income Tax Act 1961.
Further, in case of submission of any information which is false and which the Chartered
Accountant either knows or believes to be false or untrue, he would be liable to rigorous
imprisonment which may extend to seven years (in other cases two years) and/or to a fine.
In the instant case, Mr. Bharat, a chartered accountant has appeared before the Income Tax
Authorities as the authorized representative of his client and delivered a false declaration, thus, he
would be liable under section 278 of the Income Tax Act, 1961.
(c) (i) The activity described in the situation is Due diligence. Due diligence is a measure of
prudence activity, or assiduity, as is properly to be expected from, and ordinarily exercised
by, a reasonable and prudent person under the particular circumstance, not measured by any
absolute standard but depending upon the relative facts of the case. It involves a careful study
of financial and non-financial possibilities. It implies a general duty to take care in any
transaction.
Due diligence is a process of investigation, performed by investors, into the details of a
potential investment such as an examination of operations and management and the
verification of material facts. It entails conducting inquiries for the purpose of timely, sufficient
and accurate disclosure of all material statements/information or documents, which may
influence the outcome of the transaction. Due diligence involves a careful study of the financial
as well as non-financial possibilities for successful implementation of restructuring plans.
Due diligence involves an analysis carried out before acquiring a controlling interest in a
company to determine that the conditions of the business conform with what has been
presented about the target business. Also, due diligence can apply to recommendation for an
investment or advancing a loan/credit.
(ii) There would be no difference in answer if above activity was to be performed by a person
who is not a Chartered Accountant. The activity would remain due diligence. Due diligence
can be performed by any person. It is not necessary that due diligence can only be carried
out by a Chartered Accountant. As due diligence involves exercise of prudence and general
duty to take care in any transaction, it can be undertaken by any person.
(iii) The areas where due diligence may be undertaken are: -
(1) Corporate restructuring.
(2) Venture capital financing.
(3) Public offerings.
6. (a) In the given scenario, C&AG appointed a chartered accountant firm to conduct Performance Audit
of OM Ltd., a PSU of Government of India. The firm conducted audit with a view to check all the
expenses of the unit are in conformity to the public interest and publicly accepted customs which
is not Performance Audit.
A performance audit is an objective and systematic examination of evidence for the purpose of
providing an independent assessment of the performance of a government organization, program,
activity, or function in order to provide information to improve public accou ntability and facilitate
decision-making by parties with responsibility to oversee or initiate corrective action.

© The Institute of Chartered Accountants of India

 Performance audit in PSUs is conducted by the C&AG (Supreme Audit Institutions) through various
subordinate offices of Indian Audit and Accounts Department (IAAD). In conducting performance
audit, the subordinate offices are guided by manual and auditing standards prescribed by C&AG.
Therefore, the objectives of performance auditing are evaluation of economy, efficiency, and
effectiveness of policy, programmes, organization and management. It also promotes
accountability by assisting those charged with governance and oversight responsibilities to improve
performance; and transparency by affording taxpayers, those targeted by government policies and
other stakeholders an insight into the management and outcomes of different government activities.
Performance auditing focuses on areas in which it can add value which have the greatest potential
for development. It provides constructive incentives for the responsible parties to take appropriate
action.
Regulations on Audit and Accounts issued by C&AG lay down that the responsibility for the
development of measurable objectives and performance indicators as also the systems of
measurement rests with the Government departments or Heads of entities. They are also required
to define intermediate and final outputs and outcomes in measurable and monitorable terms,
standardise the unit cost of delivery and benchmark quality of outputs and outcomes.
Thus, rejection of audit report (submitted by audit firm) by C&AG is in order as audit with a view to
mere check all the expenses of the unit are in conformity to the public interest and publicly accepted
customs done by audit firm is not performance audit in all aspects.
(b) Banks are required to implement and maintain a system of internal controls for mitigating risks,
maintain good governance and to meet the regulatory requirements. Given below are examples of
internal controls that are violated in the given situation:
In the instant case, S1 who is a peon opens all the mail and forwards it to the concerned person.
Further, he does not have a signature book so as to check the signatures on important
communications is not in accordance with implementation and maintenance of general internal
control. As the mail should be opened by a responsible officer. Signatures on all the letters and
advices received from other branches of the bank or its correspondence should be checked by an
officer with the signature book.
All bank forms (e.g. Cheque books, demand draft/pay order books, travelers’ cheques, foreign
currency cards etc.) should be kept in the possession of an officer, and another responsible officer
should verify the issuance and stock of such stationery. In the given case, S2 has possession of
all bank forms (e.g. cheque books, demand draft/pay order books, travelers’ cheques, foreign
currency cards etc.). He maintains a record meticulously which were also verified on test check
basis.
Further, contention of bank that being a small branch with shortage of manpower they are not able
to check the work and records on regular basis, is not tenable as such lapses in internal control
pose risk of fraud.
The auditor should report the same in his report accordingly.
(c) Indications of Non-Compliance with Laws and Regulations : As per SA 250, “Consideration
of Laws and Regulations in an Audit of Financial Statements”, when the auditor becomes
aware of the existence of, or information about, the following matters, it may be an indication of
non-compliance with laws and regulations:
(1) Payment of fines or penalties.
(2) Payments for unspecified services or loans to consultants, related parties, employees or
government employees.
(3) Sales commissions or agent’s fees that appear excessive in relation to those ordinarily paid
by the entity or in its industry or to the services actually received.
8

© The Institute of Chartered Accountants of India

 (4) Purchasing at prices significantly above or below market price.
(5) Unusual payments in cash, purchases in the form of cashiers’ cheques payable to bearer or
transfers to numbered bank accounts.
(6) Unusual payments towards legal and retainership fees.
(7) Unusual transactions with companies registered in tax havens.
(8) Payments for goods or services made other than to the country from which the goods or
services originated.
(9) Payments without proper exchange control documentation.
OR
Rule 3 (1) of National Financial Reporting Authority Rules, 2018 inter alia, provides that the
Authority (NFRA) shall have power to monitor and enforce compliance with accounting standards
and auditing standards, oversee the quality of service under sub-section (2) of section 132 or
undertake investigation under sub-section (4) of such section of the auditors of the following class
of companies and bodies corporate, namely: -
(a) companies whose securities are listed on any stock exchange in India or outside India;
(b) unlisted public companies having paid-up capital of not less than rupees five hundred crores
or having annual turnover of not less than rupees one thousand crores or having, in
aggregate, outstanding loans, debentures and deposits of not less than rupees five hundred
crores as on the 31 st March of immediately preceding financial year;
(c) insurance companies, banking companies, companies engaged in the generation or supply
of electricity, companies governed by any special Act for the time being in force or bodies
corporate incorporated by an Act in accordance with clauses (b), (c), (d), (e) and (f) of sub -
section (4) of section 1 of the Act;
(d) any body corporate or company or person, or any class of bodies corporate or companies or
persons, on a reference made to the Authority by the Central Government in public interest;
and
(e) a body corporate incorporated or registered outside India, which is a subsidiary or associate
company of any company or body corporate incorporated or registered in India as referred to
in clauses (a) to (d), if the income or net-worth of such subsidiary or associate company
exceeds twenty percent of the consolidated income or consolidated net-worth of such
company or the body corporate, as the case may be, referred to in clauses (a) to (d).
The Ministry of Corporate Affairs has vide their letter dated 30th January, 2019, has clarified to the
Quality Review Board that in view of Sec.132 (2) of the Companies Act, 2013 r/w Rule 9(4) of
NFRA Rules, 2018, the issue of QRB reviewing audits of the companies/bodies corporate specified
under Rule 3 of the NFRA Rules, 2018 will only arise in case a reference is so made to QRB by
NFRA, and not otherwise.
Considering the above, in the case of auditors of PQR Ltd., X insurance Ltd. and AB banking
Company, NFRA has power to oversee quality of services of these audit firms. However, QRB can
undertake review of the quality of services of auditors of AAZ Ltd.
Therefore, inclusion of names of auditors of PQR Ltd., X insurance Ltd. and AB banking Company
in the draft panel for consideration by QRB is not proper.
Only the inclusion of the name of the auditor of AAZ Ltd in the draft panel is proper.

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Test Series: September-2023

MOCK TEST PAPER -I
FINAL COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
All MCQs are compulsory
Question No. 1 is compulsory.
Attempt any four questions from the Rest.
Time Allowed – 3 Hours Maximum Marks – 100
DIVISION A – MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. Mr. R, (friend of Mr. P) a CA in practice invited Mr. P to set up a ‘Network Firm’ along with 2 more friends.
All the four auditors agreed to the same and decided to start a network firm by the name M/s RP & Co.
However, one of the auditors suggested that they cannot use the term ‘& Co.’ and it needs to be changed.
But Mr. R informed that there is no such Regulation regarding the firm’s name. Which among the name
shall be suitable to the newly started ‘Network Firm’, in accordance with the provisions of Chartered
Accountants Act and Regulation?
(a) RP and Co.
(b) RP & Associates.
(c) RP and Networks.
(d) RP & Affiliates.
2. During the conduct of audit, it was found that the management has intentionally made material
misstatements in the several items of the financial statements to deceive the users of the financial
statements, to reduce the pressures of meeting market expectations and to increase the reputation of
the company. What would be the implications on the auditor’s report if no adjustments are made to the
financial statements regarding the misstatements made by the management?
(a) The auditor would issue a qualified audit opinion stating that ‘except for’ these matters the financial
statements are fairly presented. The auditor should also include a ‘Basis for Qualified Opinion’
paragraph below the opinion paragraph.
(b) The auditor would issue an adverse audit opinion stating that ‘except for’ these matters the financial
statements are fairly presented. The auditor should also include a ‘Basis for Qualified Opinion’
paragraph below the opinion paragraph.
(c) The auditor would issue an adverse audit opinion stating that financial statements ‘do not give a
true and fair view’. The auditor should also include a ‘Basis for Adverse Opinion’ paragraph below
the opinion paragraph.
(d) The auditor would issue an adverse audit opinion stating that financial statements ‘do not give a
true and fair view’. The auditor should also include a ‘Basis for Qualified Opinion’ paragraph below
the opinion paragraph.
3. The audit team has obtained the following results from the trade receivables circulari sation of Nemi Co
for the year ended 31 March 2023.

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Customer Balance as per Balance as per Comment

sales ledger customer confirmation
₹ ₹
AM Co. 2,25,000 2,25,000
AN Co. 3,50,000 2,75,000 Invoice raised on 29 March 2023
AO Co. 6,20,000 4,80,000 Payment made on 30 March 2023
AP Co. 5,35,000 5,35,000 A balance of ₹ 45,000 is currently being
disputed by AP Co.
AR Co. 1,78,000 No reply
Which of the following statements in relation to the results of the trade receivables circularisation is
TRUE?
(a) No further audit procedures need to be carried out in relation to the outstanding balances with
AM Co. and AP Co.
(b) The difference in relation to AN Co. represents a timing difference and should be agreed to a pre -
year-end invoice.
(c) The difference in relation to AO Co. represents a timing difference and should be agreed to pre -
year-end bank statements.
(d) Due to the non-reply, the balance with AR Co. cannot be verified and a different customer balance
should be selected and circularised.
4. The management of Prabhu Ltd. has developed a strong internal control in its accounting system in
such a way that the work of one person is reviewed by another. Since no individual employee is allowed
to handle a task alone from the beginning to the end, the chances of early detection of frauds and errors
are high. CA. Viharsh has been appointed as an auditor of the company for current Financial Year
2022-23. Before starting the audit, she wants to evaluate the internal control system of Prabhu Ltd. To
facilitate the accumulation of the information necessary for the proper review and evaluation of internal
controls, CA. Viharsh decided to use internal control questionnaire to know and assimilate the system
and evaluate the same. Which of the following questions need not be framed under internal control
questionnaire relating to purchases?
(a) Are authorized signatories for purchases limited to elected officials?
(b) Are payments approved only on original invoices?
(c) Does authorized officials thoroughly review the documents before signing cheques?
(d) Are monthly bank reconciliations implemented for each and every bank account of the company?
5. 50:50 test determination is popularly used in:
(a) Banking Company.
(b) Insurance Company.
(c) Non-Banking Financial Company.
(d) Stock Trading Company.
6. You have been given an assignment of audit of IT department of a PSU. A checklist was handed over to
you which contained many questions such as,
 Are separate usernames and passwords assigned to individual users?
 Are periodical changes of passwords ensured?
 Are external (offsite) data backups maintained at a place outside the premises?
The type of audit being conducted is likely to be:

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(a) Comprehensive audit.

(b) Propriety audit.
(c) Compliance audit.
(d) Financial audit.
7. Suvrat & Co. Chartered Accountants, mainly into statutory audit and tax audit, is now exploring the areas
of due diligence and investigation assignments. During the course of due diligence, an articled assistant
enquires to the principal whether it is required to verify the letter of comfort given by the target company
to a bank. You are required to guide the articled assistant regarding whether letter of comfort given to
banks by the target company needs to be reviewed as part of the financial due dilig ence. Choose the
correct reasoning from below?
(a) Yes, the objective of due diligence exercise will be to look specifically for any hidden liabilities or
over-valued assets and since, letter of comfort given to banks is a hidden liability, it should be
reviewed.
(b) Yes, letter of comfort given to banks is a guarantee and will be disclosed in the notes to accounts
of the financial statements and calls for verification and review.
(c) No, due diligence involves the review of only disclosed assets and liabilities of the target company
and hence, letter of comfort does not call for review.
(d) No, letter of comfort does not involve financial implications and hence it need not be reviewed as
part of financial due diligence.
8. Mr. Ishwar was appointed as statutory auditor of a Chennai-based listed company New Limited. For the
financial year 2022-23, Mr. Ishwar had signed limited review reports for each quarter, till the quarter
ended on 31st December 2022. Owing to his personal commitments and increased workload, he
tendered his resignation to New Limited on 30th January 2023 and asked the company to appoint
another auditor to issue an audit report for the remaining quarter and the FY 2022-23 as a whole. But
the management of the company did not accept the same.
Is the management of New Limited right in asking Mr. Ishwar to issue audit report for the last quarter
and the FY 2022-23 as a whole, despite his resignation? What could be the reason for the same?
(a) No, only if the auditor resigns after 45 days from the end of a quarter, he is obligated to issue audit
report for such quarter. There is no provision regarding issue of audit report for the financial year
as a whole.
(b) Yes, if the auditor resigns within 45 days from the end of a quarter, he is obligated to issue audit
report for such quarter.
(c) No, only if the auditor resigns after 45 days from the end of a quarter, he is obligated to issue audit
report for such quarter. However, he is obligated to issue an audit report for the financial year as a
whole if he resigns during the last quarter.
(d) Yes, Mr. Ishwar is responsible to issue audit report for the last quarter as well as FY 2022-23 since,
he was the one who had issued the same for the first 3 quarters. He is also obligated to issue audit
report for the financial year as a whole if he resigns during the last quarter.
9. CA. Dayalu was statutory auditor of Safety Limited. It was an insurance company having fire, and marine
insurance products. In case of marine insurance, it had a risk of nearly ₹ 100- 120 crore and in case of
fire insurance, 70% of its fire insurance premium was received from Star Hotels. Safety Ltd has a policy
that in case of marine insurance, it will not hold risk of more than ₹ 50 crore, hence Safety Ltd signed a
contract for 5 years with Help Ltd, which was involved in the business of reinsurance, t o cede risk above
₹ 50 crore for 40% of marine insurance premium. What is the type of treaty that Safety Limited has
signed with Help Limited for reinsuring its marine business?
(a) Surplus proportional treaty reinsurance.
(b) Quota share proportional treaty reinsurance.

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(c) Facultative reinsurance.

(d) Non-proportional treaty reinsurance.
10. Speak Ltd. is showing a commission expense of ₹ 2 crore during the month of October 2023. The auditor
has made an effort to understand the business process that makes up this financial statement line item
as to how it is initiated, recorded, approved, posted and reported. During this exercise, he finds that
there is a difference of ₹ 1,50,000/- in the commission recorded as per the Sanchar Software (source)
and commission as reflected in SAP accounts (destination).
What is the kind of risk assessment carried out by the auditor in the given case?
(a) It is an evaluation of risks and controls at process level.
(b) It is a direct entity level control evaluation.
(c) It is an indirect entity level control evaluation.
(d) There is no risk assessment as such carried out by the auditor. (10 x 1 = 10 Marks)
Questions (11-20) carry 2 Marks each
MCQ 11. - 15.
Integrated Case Scenario 1
CA Paras is in the midst of conducting statutory audit for the year 2022-23 of “Meto Chemicals Limited”, a
listed company. He is collating information required for reporting under CARO, 2020 from management. Audit
procedures as are necessary in the circumstances will be performed on the information so obtained. The
company’s revenue from sale of products is ₹15,000 crore. During the course of this exercise, he obtained
the following information: -
[A] The management has provided the following details of dues that have not been deposited on 31st March, 2023
on account of disputes: -

Name of Nature of Forum where Period to Amount Amount Other

Statute dues the dispute which the involved unpaid comments
is pending amount (₹ in crore) (₹ in
relates crore)
Income-tax Act, Income tax CIT (Appeals) AY 2018-19 50.00 50.00
1961
Income-tax Act, Income tax ITAT AY 2014-15 10.00 10.00 Demand
1961 stayed by
ITAT pending
completion of
hearing by
the Tribunal
EPF Act PF Hon’ble High FY 2017-18 0.10 0.10
contribution Court of
Rajasthan
Municipal Property tax Hon’ble High FY 2015-16 0.15 0.15
Corporation Act Court of
Rajasthan
The company has already made a provision of ₹10 crore in its financial statements considering the likely outcome
of ongoing matters under dispute at ITAT. However, no provision has been made in respect of income tax matters
pending before CIT(Appeals), PF contribution matter and property tax matter pending before Hon’ble High Court.

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[B] The following information is available from financial statements / records of the company. (₹ in crore)
Non-Current assets As at 31/03/23 As at 31/03/22
Property, Plant and Equipment 3,500 4,000
Right-of-use assets 750 700
Intangible assets 42 40

Values stated above are as per gross block.

Right-of-use assets consist of leases where the company has obtained the right-of-use asset under lease
agreement in accordance with Ind AS 116.
[C] Meto Chemicals Limited produces goods for which the Central Government has specified maintenance of cost
records. Besides, cost audit has also been mandated under section 148(2) of the Companies Act. The cost auditor
has already examined cost records and issued the cost audit report.
[D] During the course of audit, CA Paras has found that physical verification of inventories of the company
has been conducted during the year by management. The following is a summary of inventory as per physical
verification conducted by management vis-à-vis its books of account as at the year-end: -
(Amount ₹ in crores)
Particulars As per physical verification As per books of account
Raw material 1,000 1,020
Work-in-progress 200 220
Finished goods 2,000 2,290
Stores and spares 150 120.
Total 3,350 3,650

[E] During the course of audit, he is informed by management that two supervisory employees have been
dismissed from service due to fraud of ₹ 25 lakh committed by them during the year 2022-23. The amount
has also been subsequently recovered from them during the year itself.
On the basis of the abovementioned facts, you are required to answer the following MCQs:
Multiple Choice Questions (5 questions of 2 Marks each):
11. Select the correct statement relating to reporting of statutory dues which have not been deposited on
account of disputes under clause 3(vii)(b) of CARO, 2020?
(a) Only matters relating to income tax pending before CIT (Appeals) and PF contribution matter
pending before Hon’ble High Court need to be reported.
(b) Only Income tax matter pending before ITAT needs to be reported.
(c) All the four matters for which information has been provided in the fact pattern need to be reported.
(d) Income tax matter pending before CIT (Appeals), PF contribution matter and property tax matter
pending before Hon’ble High Court need to be reported, matter pending with ITAT does not require
reporting.
12. Identify the correct statement relating to reporting duties of the auditor under clause 3(i) of CARO, 2020
with regard to:
(a) It is the duty of the auditor to report whether company is maintaining proper records showing full
particulars, including quantitative details and situation of Property, Plant and Equipment. Similarly,

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there is a duty to report on whether company is maintaining proper records showing full particulars
of intangible assets. However, this duty does not extend to reporting on maintenance of records
for Right-of-use assets.
Further, auditor has to report on whether Property, Plant and Equipment have been physically
verified by management at reasonable intervals. This duty to report on physical verification by
management does not extend to Right-of-use assets.
(b) It is the duty of the auditor to report whether company is maintaining proper records showing full
particulars, including quantitative details and situation of Property, Plant and Equipment. This duty
also applies to reporting on maintenance of records for Right-of-use assets and intangible assets.
Further, auditor has to report on whether Property, Plant and Equipment have been physically
verified by management at reasonable intervals. This duty to report on physical verification by
management also extends to Right-of-use assets.
(c) It is the duty of the auditor to report whether company is maintaining proper records showing full
particulars, including quantitative details and situation of Property, Plant and Equipment. This duty
does not extend to reporting on maintenance of records for Right-of-use assets and intangible
assets.
Further, auditor has to report on whether Property, Plant and Equipment have been physically
verified by management at reasonable intervals. This duty to report on physical verification by
management does not extend to Right-of-use assets.
(d) It is the duty of the auditor to report whether company is maintaining proper records showing full
particulars, including quantitative details and situation of Property, Plant and Equipment. This duty
also applies to reporting on maintenance of records for Right-of-use assets and intangible assets.
Further, auditor has to report on whether Property, Plant and Equipment have been physically
verified by management at reasonable intervals. However, this duty to report on physical
verification by management does not extend to Right-of-use assets.
13. As regards cost records is concerned, which of the following statement is correct regarding reporting
under clause 3(vi) of CARO, 2020?
(a) The auditor is required to report whether prescribed cost accounts and cost records have been so
made and maintained.
(b) The auditor is not required to report on maintenance of cost accounts and cost records since cost
auditor has already issued the cost audit report. In such situations, the auditor does not have any
duty to report under CARO, 2020.
(c) The auditor is required to examine the cost audit report as well as take into account any
qualifications therein and report them under clause 3(vi) of CARO, 2020. However, his duty to
report on maintenance of cost accounts and cost records does not exist anymore.
(d) The auditor has a duty to report on cost accounts (or cost statements) only. The clause does not
require the auditor to comment on maintenance of cost records (e.g. cost records relating to
materials, labour, overheads) where specified by the Central Government.
14. Considering the values of inventories arrived upon physical verification conducted by management vis -
à-vis values reflected in its books of account, select the correct option for instance in the case study to
be reported by the auditor on inventories under clause 3(ii)(a) of CARO, 2020?
(a) Differences in all classes of inventories (raw material, work-in-progress, finished goods and stores
and spares) should be reported irrespective of the materiality and the auditor should also comment
on whether they have been properly dealt with in the books of account.

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(b) There is no instance to be reported in the given case since the difference between the total value
of inventories as per books and physical verification is less than 10%.
(c) To report differences in the value of work-in-progress, finished goods and stores and spares since
the difference in each class of inventory is 10% or more (based on value after adjustments). The
auditor should also comment on whether they have been properly dealt with in the books of
account.
(d) To report differences in the value of finished goods and stores and spares since the difference in
each class of inventory is more than 10% (based on value as per books of accounts). The auditor
should also comment on whether they have been properly dealt with in the books of account.
15. Should the fraud described in para [E] of the case be reported by the auditor under clause 3(ix)(a) of
CARO, 2020?
(a) There is no duty to report since the amount involved is less than ₹1 crore.
(b) It is a fraud on the company and the auditor should report the nature of fraud and amount involved.
The duty to report the fraud under this clause is irrespective of the amount involved.
(c) The requirement to report the fraud does not apply in the current situation since the fraud was not
discovered by the auditor.
(d) The requirement to report the fraud does not apply in the current situation since the amount has
been fully recovered during the year from the employees who committed the fraud.
MCQ 16. - 20.
Integrated Case Scenario 2
CA. Subhadra is conducting statutory audit of a branch of FNB Bank. The branch is having deposits of ₹ 450
crore and advances of ₹300 crore respectively reflected in its financial statements as on 31 st March 2023.
While performing audit procedures, she noticed the following: -
[1] While reviewing advances of the branch, she came across the following particulars of two cash credit
accounts: - (₹ in crore)
Name of Sanctioned Value of Value of Net worth of Net worth of
borrower Limit primary collateral borrower guarantors
security security
KT Fab 10.00 20.00 15.00 5.00 3.00
PM Decor 15.00 25.00 12.00 7.50 5.00
Following further information is also available in respect of above noted accounts: -
Information pertaining to KT Fab (₹ in crore)
As on Drawing power Outstanding balances
31.12.2022 9.00 9.61
31.01.2023 9.25 9.55
28.02.2023 9.50 9.60
31.03.2023 9.50 9.75
The outstanding balance in the account has remained more than ₹9.50 crore beginning from 31 st December,
2022 till 31st March, 2023 on all days.

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Information pertaining to PM Décor (₹ in crore)

As on Drawing power Outstanding balances
31.12.2022 12.00 12.50
31.01.2023 12.50 12.25
28.02.2023 12.50 12.40
31.03.2023 12.50 12.50

Both units are working and their financial position is satisfactory. The branch has classified both accounts as
Standard Assets.
[2] On reviewing “Statement of Accounts classified as NPA” as on 31.03.23, she finds that an education loan
was granted to son of Mr. X, a customer of bank, for pursuing short duration technical higher studies abroad
for ₹50.00 lakh sometime back repayable in 5 years. The loan was granted against security of residential
house of Mr. X, valuing ₹60.00 lakh assessed by bank’s empanelled valuer. However, the name of bank’s
empanelled valuer has now been removed due to certain irregularities. Later, value of residential house got
reassessed from another valuer and he gave a report reflecting realisable value of residential house for
₹20.00 lakh. Meanwhile, the instalments in education loan account are overdue for 110 days as on 31 st
March, 2023. The account was classified as standard asset till last year i.e.,31 st March, 2022.
[3] While verifying deposits of the branch, she noticed that inoperative accounts for less than 10 years are to
the tune of ₹5 crore reflected in the balance sheet of the branch. She plans to focus her audit procedures on
this segment too. One of her team members has suggested the following audit procedures in this regard:
• Verifying whether there exists a system of informing customers on accounts turning inoperative.
• Identification of cases where there is significant reduction in balances as compared to last year.
• Testing debits in inoperative accounts.
• Verifying auto activation of inoperative accounts.
[4] While gathering information to be included in LFAR, she comes across some cases of advance accounts
which became non-performing within a relatively short span of time. The details of few such identified
accounts are as under:
Account name Sanctioned amount Nature of facility Date of first Date of renewal
(₹ in crore) sanction
ABC Industries 1.00 Cash credit 15/05/22 Not applicable
XY Pvt. Ltd. 0.50 Cash credit 01/07/22 Not applicable
SK & Sons 1.50 Cash credit 04/04/21 04/04/22
DK Creations 0.75 Term loan 01/10/22 Not applicable
[5] The branch also sends substantial number of Inland outward bills for collection. The bank has a system
under which account of customer on whose behalf bill has been sent for collection is credited only after the
bill has been actually collected from the drawee either by the bank itself or through its agents. One of her
team members has jotted following audit procedures for Inland outward bills sent for collection: -
• Verification of outward bills for collection as on closing date.
• Verification of accrual of commission income in respect of bills outstanding as on closing date.
• Verification of accrual of charges in account of customer on whose behalf bill was sent for recovery
where bill has been returned unpaid.
On the basis of the abovementioned facts, you are required to answer the following MCQs:

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Multiple Choice Questions (5 questions of 2 Marks each):

16. Keeping in view information stated in respect of two borrower accounts at para [1] of case scenario,
which of the following statement is correct?
(a) The classification made by branch is not proper. Both accounts should be classified as non -
performing assets.
(b) The classification made by branch is not proper. Borrower account of KT Fab should be classified
as Standard asset. However, borrower account of PM Décor should be classified as non -performing
asset.
(c) The classification made by branch is not proper. Borrower account of KT Fab should be classified
as non-performing asset. However, borrower account of PM Décor should be classified as Standard
asset.
(d) The classification made by branch is proper.
17. Considering issue relating to education loan described in para [1] of case scenario, how should it be
classified in books of branch as on 31 st March, 2023?
(a) Sub-standard asset.
(b) Doubtful asset.
(c) SMA.
(d) Loss asset.
18. As discussed in para [3] of case scenario, one of team members has suggested certain audit procedures
described in case scenario for verification of inoperative accounts. Which of audit procedure(s)/
combination of procedures are relevant in such a situation?
(a) Identification of cases where there is significant reduction in balances as compared to last year,
testing debits in inoperative accounts and verifying auto-activation of inoperative accounts.
(b) Verifying whether there exists a system of informing customers on account turning inoperative,
identification of cases where there is significant reduction in balances as compared to last year
and verifying auto activation of inoperative accounts.
(c) Verifying whether there exists a system of informing customers on account turning inoperative,
testing debits in inoperative accounts and verifying auto activation of inoperative accounts.
(d) Verifying whether there exists a system of informing customers on account turning inoperative,
identification of cases where there is significant reduction in balances as compared to last year
and testing debits in inoperative accounts.
19. Quick mortality cases are required to be stated in LFAR by statutory branch auditor. With reference to
the particulars in para [4] above, which of the following statement is correct?
(a) All the four cases reflected in the table in para [4] are quick mortality cases. Quick mortality cases
are indicative of shortcomings in credit appraisal.
(b) Only the case of DK creations is in nature of quick mortality case. Quick mortality cases are
indicative of shortcomings in credit appraisal.
(c) Cases of ABC Industries, XY Pvt Ltd and DK creations are in nature of quick mortality cases. Quick
mortality cases are indicative of shortcomings in credit appraisal.
(d) Cases of XY Pvt Ltd and DK creations are in nature of quick mortality cases. Quick mortality cases
are indicative of shortcomings in credit disbursement.
20. One of her team members has planned certain audit procedures described in case scenario at para [5]
for verification of Inland outward bills for collection. Which of the following audit
procedure(s)/combination of procedures are likely to be relevant in such situation?
(a) To verify bills for collection on closing date.

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(b) To verify bills for collection on closing date and verification of accrual of commission in respect of
bills outstanding as on closing date.
(c) To verify accrual of charges in account of customer on whose behalf bill was sent for recovery
where bill has been returned unpaid.
(d) To verify accrual of commission in respect of bills outstanding as on closing date and verification
of accrual of charges in the account of customer on whose behalf bill was sent for recovery where
bill has been returned unpaid.
(10 x 2 = 20 Marks)

Division B- Descriptive Questions-70 Marks

Question No. 1 is compulsory.
Attempt any four questions from the Rest.
1. (a) Sujit & Co., Chartered Accountants, have been appointed as Statutory Auditors of Anand Mills Ltd.
for FY 2022-23. The audit team has completed the audit and is in the process of preparing the
audit report. The Management of the company has also prepared a draft annual report. While
reviewing the company's draft annual report, the auditor observed a section that stated a decline
in market prices for essential products compared to the previous year. Surprisi ngly, the financial
statements indicated that the company's profit margin had actually increased. The audit Man ager
discussed this issue with the firm's partner, who replied that the auditors are not responsible for
disclosures made by management in the annual report. Do you think that the partner is correct in
his approach to this issue? Discuss with reference to the relevant Standard s on Auditing the
Auditor's duties with regard to reporting. (5 Marks)
(b) CA Ragini is offered an appointment to act as Engagement Quality Control Reviewer (EQCR) for
the audit of the financial year 2022-23 of XPM Limited, a listed company operating from a small
town. She is also based in the same town and was not engaged previously to conduct an audit of
a listed entity. She accepts the appointment to act as ECQR. She performs the review by ticking a
Yes/No checklist and signing on some of the working papers prepared by the engagement team.
The audit file does not contain any material misstatement which shows that the work of EQCR is
separate from the work of the engagement team. Do you agree with the approach adopted by
EQCR? Comment. (5 Marks)
(c) ABC Ltd. appointed Mr. Anand for the actuarial calculation of liabilities associated with insurance
contracts and employee benefit plans. These calculations and valuations are then adopted by
management in preparing the financial statements. Kindly guide Mr Sushil, the statutory auditor of
ABC Ltd, on the use of information prepared by management's appointed expert as audit evidence.
Also, explain Mr. Sushil the matters that can impact the nature, timing and extent of audit
procedures regarding information to be used as audit evidence which has been prepared using the
work of a management’s expert. (4 Marks)
2. (a) Mr. Sunil was appointed statutory Auditor of M. Autotech Limited after Mr. Ram resigned from the
position of auditor on 31-07-2022 for the financial year 22-23. Mr. Sunil received the appointment
letter duly signed by the Board of Directors and a resolution of the Audit Committee recommending
the name of Mr. Sunil to the Board. Mr. Sunil received the letter of appointment on 31 -07-2022,
which he accepted on 01-08-2022. On 15-08-2022, Mr. Sunil fixed a meeting with Mr. Ram to
understand the reasons for his resignation and any concerns he should be aware of about the
company. Prior to this, Mr. Sunil had not communicated with Mr. Ram. The Board of M Autotech
Limited filed ADT-1 with the registrar on 31-08-2022.
Mr. Sunil, after performing the audit, issued his audit report on 31-05-2023. The registrar, after
issuance of the audit report, suo moto initiated an inquiry regarding the appointment of Mr. Sunil
as the auditor of the company. After the inquiry, Registrar issued a report to ICAI wherein it was

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mentioned that Mr Sunil should be held guilty of professional misconduct. You are required to guide
Mr. Sunil with respect to the recommendation of the registrar for him being guilty of professional
misconduct. (5 Marks)
(b) Namo Limited wants to acquire a unit of Sidha Limited. Namo Limited is uncertain about the future
viability of the unit under consideration. You are appointed to investigate economic and financial
position of the unit. What are the factors that you shall consider while studying the economic and
financial position of the business? (4 Marks)
(c) Super Non-Bank Limited, a “Systemically Important Non-Deposit Taking Non-Banking Financial
Company”, was operating appropriately till the start of COVID-19 Pandemic. Due to unforeseen
conditions during the Pandemic and after that, the operating revenue of the NBFC started
decreasing. Following were the position of Net Owned Funds of the company during the last 4
financial years:
Financial Year Net Owned Funds
FY19-20 ₹ 15 Crore
FY20-21 ₹ 6 Crore
FY21-22 ₹ 4 Crore
FY22-23 ₹ 1.5 Crore
Super Non-Bank Limited appointed Mr Shyam as their statutory auditor for the FY 22-23. Mr Shyam
identified that the Net Owned Funds of the company have been less than ₹ 2 Crore since June 2022.
Kindly guide Mr Shyam with respect to his reporting requirements as per relevant NBFC provisions.
(5 Marks)
3. (a) CA Smriti is conducting tax audit of one of her clients viz. CB International, a proprietorship firm,
engaged in the export of goods having a turnover of ₹.12 crore during the financial year 2022-23.
The said client was availing packing credit facility of ₹1.00 crore from a nationalized bank for
meeting its export commitments. Of late, the client was facing financial difficulties as ready
shipments had been put on hold by major buyers in US due to the prevailing recession in North
America. Recognising genuine business difficulties, the bank had restructured packing credit
facilities into working capital term loan during the year 2022-23.
However, the interest unpaid in packing credit facility during the year 22-23 amounting to ₹6 lakh
was converted into a Funded Interest Term Loan (FITL) by the bank. The interest of ₹ 4 lakh was
paid during the year 2022-23 on restructured working capital term loan. The interest of ₹10 lakh is
duly reflected in the profit & loss a/c of the client. No interest is chargeable by the bank on FITL.
The client would file his return of income in September 2023 immediately after completion of tax
audit. The monthly instalments in FITL are going to commence from January, 2024. Discuss the
implications of above situation for CA Smriti while conducting tax audit for the financial year 2022-
23 (AY 2023-24). (5 Marks)
(b) You are appointed as an auditor of Jashan Limited, a listed company which is a main supplier to
the USA building and construction market. With a turnover of ₹ 3.9 billion, the company operates
through 13 business units and has nearly 167 branches across the country. As an auditor, how will
you draft the report in the following cases:
(i) When the Component(s) Auditor Reports on Financial Statements under an Accounting
Framework different than that of the Parent?
(ii) When the Component(s) Auditor Reports under an Auditing Framework different than that of
the Parent? (4 Marks)
(c) Advances generally constitute the major part of the assets of the bank. There are substantial
number of borrowers to whom a variety of advances are granted. The audit of advances requires
major attention from the auditors. As an expert in bank audit, you a re required to briefly discuss
the area of focus and suggested audit procedures regarding the evaluation of internal controls over
advances, substantive audit procedures and recoverability of advances. (5 Marks)

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4. (a) Mr. Samyak, a newly qualified Chartered Accountant, started his practice and sought clients
through telephone calls from his family and friends, almost all of them employed in one or the other
retail trade business. One of his friends Mr. Darshan gave him an idea to start online servic es and
give stock certifications to traders with Cash Credit Limits in Banks. Mr. Samyak started a website
with colourful catchy designs and shared the website address on all his social media posts and
stories and tagged 40 traders of his local community with the caption “Simple Online Stock
Certification Services”. Besides, Mr. Samyak entered into an agreement with a Digital Marketer to
give him 8% commission on each service procured through him. Discuss if the actions of Mr.
Samyak are valid in the light of the Professional Ethics and various pronouncements and guidelines
issued by ICAI. (4 Marks)
(b) As a part of the listing process, Sun Ltd. prepared and issued its prospectus to the public. The top
executives thought that pending litigation against the company (which would cause a cash outflow
of ` 1.25 crore) may affect the demand for share applications. Due to this, they omitted the fact,
for the well-being of the company. Mr. A, who was well aware of this matter had authorised himself
to be named in the prospectus as a director. However, Mr. A was a little reluctant, so he informed
and agreed that he shall become such director after an interval of some time. Unfortunately, after
a few days, but before joining of Mr. A as director, this matter got leaked and several subscribers
sustained losses. Mr. A is now defending himself stating that he is currently not holding the
director's post hence no action can be taken against him. Analyse and Comment on the situation.
(5 Marks)
(c) CA Rajul has been appointed as Management Auditor of XYZ Ltd. The principal reason for her
appointment is that current managerial decisions are not up to the mark, especially in relation to
investments made by the Company. The Company is going to make huge investments in one of
the ventures identified. Management Auditor was required to ensure that systems and procedures
of Company are working effectively and meeting the requirements. What aspects should be
considered by CA Rajul to determine that the systems and procedures are meeting current
requirements? (5 Marks)
5. (a) Mr. Rishabh, in the course of audit of PQ Limited, wants to perform external confirmation
procedures to obtain audit evidence. Guide Mr. Rishabh, listing out the factors that may assist him
in determining whether external confirmation procedures are to be performed as substantive audit
procedures. (5 Marks)
(b) Long Age Foundations Ltd. (LAF), a pharmaceutical company, collected the data from some
hospitals and their experts tried to understand medical needs of elderly people. After complete
study, their experts developed an application where LAF will provide complete health care after
charging a nominal amount from the customers, if customers download this application in their
mobile phones. CA P in his audit has used data analytics method also known as Computer Assisted
Audit Techniques. Give illustrations of suggested approach to get the benefit from the use of
CAATs. (5 Marks)
(c) One of the independent directors sought information regarding the appointment of internal auditors
for following Group Companies in accordance with the Companies Act, 2013 of which certain
Financial Information are given below:
Figures are in ` crore and correspond to the previous year.

Name Nature Equity Share Turnover Loan from Public Deposits

Capital Bank and PFI
AADI Ltd. Listed 100 190 50 24
AJIT Ltd. Unlisted 60 190 50 24
Public
NEMI Ltd. Unlisted 60 190 50 -
Private

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You are required to evaluate the requirements of the Companies Act, 2013 regarding the
appointment of internal Auditors for the Group Companies. Discuss. (4 Marks)
6. (a) One of the objectives of Internal control relating to the accounting system is that all transactions
are promptly recorded in an appropriate manner to permit the preparation of financial information
and to maintain accountability of assets. To achieve this objective, certain matters should be
ensured by accounting controls. List down matters to be ensured by accounting controls.
(5 Marks)
(b) CA S has been appointed as Statutory Auditor of SRT Ltd. for the financial year
2022-2023. The Company while preparing financial statements for the year under audit prepared
one additional profit and loss account that disclosed specific items of expenditure and included the
same as an appendix to the financial statements. CA. S has not been able to understand this as
the additional profit and loss account is not covered under the applicable financial reporting
framework. Guide him as to how he should deal with this issue while reporting on the financial
statements of SRT Ltd. (5 Marks)
(c) While auditing financial statements of Bharat Insurance Company Limited for year 2022 -23, it is
noticed by CA X, engagement partner, that company has significant presence in two hill states.
These hill states were rocked by natural disasters including floods and landslides during the year
gone by resulting in a large number of claims including motor vehicle claims and property claims.
A large number of claims arising out of these two hill states were lodged during the year. However,
magnitude of natural disasters was so huge that the possibility of claims being reported after close
of year 2022-23 cannot be ruled out. Further, there is a distinct possibility that losses may exceed
initial estimates. How should CA X proceed in such a scenario while performing audit of company
for the year 2022-23? (4 Marks)
OR
M/s. SR & Associates is one of the three firms shortlisted by ARG Cooperative Bank for the
assignment of Statutory Audit for the FY 2022-2023. Bank mailed the list of branches to the audit
firms along with the maximum fee per branch and asked them to submit the quotations. SR &
Associates responded to the bank and submitted their quotation. Comment with reference to the
provisions of the Chartered Accountants Act, 1949 and Schedules thereto. (4 Marks)

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Test Series: September, 2023

MOCK TEST PAPER - I
FINAL COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS
DIVISION A - MCQs (30 Marks)
Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. (d)
2. (b)
3. (b)
4. (d)
5. (c)
6. (c)
7. (a)
8. (d)
9. (a)
10. (a)
11. (c)
12. (b)
13. (a)
14. (c)
15. (b)
16. (c)
17. (b)
18. (d)
19. (c)
20. (c)
DIVISION B - DESCRIPTIVE QUESTIONS (70 Marks)
1. (a) Auditor’s responsibilities as to Other Information included in Annual Report: SA 720, "The
Auditor's Responsibilities Relating to Other Information", delineates the responsibilities of auditors
in regard to other information, which can pertain to financial or non-financial matters and is
encompassed within an organisation's annual report. This encompasses documentation of market
trends pertaining to significant products and quantities or other items that may be included in the
other information.
The auditor’s discussion with management about a material inconsistency (or other information
that appears to be materially misstated) may include requesting management to provide support
for the basis of management’s statements in the other information. Based on management’s further
information or explanations, the auditor may be satisfied that the other information is not materially
misstated. For example, management explanations may indicate reasonable and sufficient grounds
for valid differences of judgment.

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Auditor’s duties with regard to reporting: If the auditor concludes that a material misstatement
of the other information exists, the auditor shall request management to correct the other
information. If management:
(i) Agrees to make the correction, the auditor shall determine that the correction has been made; or
(ii) Refuses to make the correction, the auditor shall communicate the matter with those charged with
governance and request that the correction be made.
In the given situation, Sujit & Co., Chartered Accountants, have been appointed as Statutory
Auditors of Anand Mills Ltd. The auditor, while reviewing the company’s draft annual report, has
observed a section mentioning about a decline in market prices for essential products compared
to previous year and financial statements indicated that company’s profit margin has increased.
Considering the requirements of SA 720 as stated above, it can be concluded that contention of
firm’s partner, that auditors are not responsible for disclosures made by management, is not
correct. Accordingly, partner is not correct in his approach to this issue.
(b) As per SQC 1 engagement quality control reviewer can be a partner, other person in the firm
(member of ICAI), suitably qualified external person, or a team made up of such individuals, with
sufficient and appropriate experience and authority to objectively evaluate, before the report is
issued, the significant judgments the engagement team made and the conclusions they reached in
formulating the report.
It also states that the engagement quality control reviewer for an audit of the financial statements
of a listed entity is an individual with sufficient and appropriate experience and authority to act as
an audit engagement partner on audits of financial statements of listed entities.
In addition, the work of EQCR involves objective evaluation of the significant judgments made by
the engagement team and ensuring that the conclusions reached by the team in formulating audit
report are appropriate. It is necessary for EQCR to have the requisite technical expertise and
experience to enable her to perform the assigned role of evaluating the work of engagement team
so that any possible misstatement can be avoided. Without ensuring the appropriate technical
expertise and experience, the whole purpose of EQCR is defeated. Therefore, it was not
appropriate for her to accept appointment as ECQR for listed entity.
Further, SA 220 states that the engagement quality control reviewer shall document, for the audit
engagement reviewed, that the procedures required by the firm’s policies on engagement quality
control review have been performed. It also states that it shall also be documented that the reviewer
is not aware of any unresolved matters that would cause the reviewer to believe that the significant
judgments the engagement team made and the conclusions they reached were not appropriate.
In the given situation, CA Ragini is offered an appointment to act as Engagement Quality Control
Reviewer (EQCR) for the audit of the financial year 2022-23 of XPM Limited, a listed company
operating from a small town. She has accepted the appointment and performed the review by
ticking a Yes / No checklist and signing on some of the working papers prepared by the engagement
team.
In the instant case, there are no working papers to show that evaluation has been done by EQCR
on conclusions reached by engagement team. Mere ticking of a Yes/No checklist and signing on
some working papers of engagement team shows that no such evaluation and review of work
performed by engagement team has been made by EQCR. Therefore, her approach was not proper
in performing work of EQCR.
(c) As per SA 500, “Audit Evidence”, when information to be used as audit evidence has been prepared
using the work of a management 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;

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(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.
Further, the nature, timing and extent of audit procedures in relation to the requirement relating to
information to be used as audit evidence prepared using the work of a management’s expert may
be affected by such matters as:
(i) The nature and complexity of the matter to which the management’s expert relates.
(ii) The risks of material misstatement in the matter.
(iii) The availability of alternative sources of audit evidence.
(iv) The nature, scope and objectives of the management’s expert’s work.
(v) Whether the management’s expert is employed by the entity or is a party engaged by it to provide
relevant services.
(vi) The extent to which management can exercise control or influence over the work of the
management’s expert.
(vii) Whether the management’s expert is subject to technical performance standards or other
professional or industry requirements.
(viii) The nature and extent of any controls within the entity over the management’s expert’s work.
2. (a) A member in practice shall be held guilty of professional misconduct as per clause 9 of Part I of
the First Schedule where he accepts an appointment as auditor of a company without first
ascertaining from it whether the requirements of Section 225 of the Companies Act, 1956 (1 of
1956), in respect of such appointment have been duly complied with (corresponding to section 139
and 140 of Companies Act, 2013).
Clause (9) of Part I of the First Schedule to Chartered Accountants Act, 1949 pro vides that a
member in practice shall be deemed to be guilty of professional misconduct if he accepts an
appointment as auditor of a Company without first ascertaining from it whether the requirements of
Sections 139 and 140 of the Companies Act, 2013, in respect of such appointment have been duly
complied with. Under this clause, it is obligatory for the incoming auditor to ascertain from the
Company that the appropriate procedure in the matter of his appointment has been duly complied
with so that no shareholder or retiring auditor may, at a later date, challenge the validity of such
appointment.
As per section 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor
shall in the case of a company other than a company whose accounts are subject to audit by an
auditor appointed by the Comptroller and Auditor-General of India, be filled by the Board of
Directors within thirty days, but if such casual vacancy is as a result of the resignation of an auditor,
such appointment shall also be approved by the company at a general meeting convened within
three months of the recommendation of the Board and he shall hold the office till the conclusion of
the next annual general meeting.
Also, before such appointment is made, the written consent of the auditor to such appointment and
a certificate from him or it that the appointment, if made, shall be in accordance with the conditions
as may be prescribed shall be obtained from the auditor. Provided also that the certificate shall
also indicate whether the auditor satisfies the criteria provided in section 141. Also, that the
company shall inform the auditor concerned of his or his appointment and also file a notice of such
appointment with the Registrar within fifteen days of the meeting in which the auditor is appointed.
Also, a member in practice shall be held guilty of professional misconduct as per clause 8 of
Part I of the First Schedule where he accepts a position as auditor previously held by another
Chartered Accountant without first communicating with him in writing.

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In the current case, Mr. Sunil was appointed statutory Auditor of M. Autotech Limited after Mr. Ram
resigned from the position of auditor on 31-07-2022 for the financial year 2022-23. Mr. Sunil
received the appointment letter duly signed by the Board of Directors. Mr. Sunil received the letter
of appointment on 31-07-2022, which he accepted on 01-08-2022. On 15-08-2022, Mr. Sunil fixed
a meeting with Mr. Ram to understand the reasons for his resignation and any concerns he should
be aware of about the company. Prior to this, no communication happened between Mr. Sunil and
Mr. Ram. The Board of M. Autotech Limited filed ADT-1 with the registrar on 31-08-2022.
Hence, Mr. Sunil did not verify whether the requirement of section 139 of the Companies Act, 2013
has been complied with or not, as in the current case, there was no approval by the company at a
general meeting convened within three months of the recommendation of the Board. Under Section
139(8), approval by a company at general meeting as discussed above is mandatory requirement.
Therefore, he has not ascertained from company whether requirements of section 139 and 140 of
Companies Act, 2013 have been complied with. Moreover, Mr. Sunil did not communicate with a
retiring auditor in such a manner as to retain in their hands positive evidence of the delivery of the
communication to the outgoing/previous auditor.
Therefore, Mr. Sunil is guilty of professional misconduct both under clause 8 and 9 of First Schedule
to Chartered Accountants Act, 1949.
(b) For studying the economic and financial position of the business, the following should be
considered:
(i) The adequacy or otherwise of fixed and working capital. Are these sufficient for the growth of
the business?
(ii) What will be the trend of the sales and profits in the future? Establishing the trend of sales,
product-wise and area-wise will ordinarily help in drawing a conclusion on whether the trend
will be maintained in the future.
(iii) Whether the profit which the business could be expected to maintain in the future would yield
an adequate return on the capital employed?
(iv) Whether the business is operating at its 100 percent capacity or improvements can be made
to reach at full productivity?
(c) In exercise of the powers conferred under clause (b) of sub-section (1) of section 45–IA of the RBI
Act and all the powers enabling it in that behalf, the Bank hereby specifies two hundred lakh ru pees
as the Net Owned Fund (NOF) required for a non-banking financial company to commence or carry
on the business of non-banking financial institution, except wherever otherwise a specific
requirement as to NOF is prescribed by the Bank.
It will be incumbent upon such NBFCs, the NOF of which currently falls below ₹200 lakh, to submit
a statutory auditor's certificate certifying compliance with the prescribed levels by the end of the
period as given above.
NBFCs failing to achieve the prescribed level within the stipulated period shall not be eligible to
hold the CoR as NBFCs. Every non-banking financial company shall submit a certificate from its
Statutory Auditor that it is engaged in the business of a non-banking financial institution requiring
it to hold a Certificate of Registration under Section 45-IA of the RBI Act and is eligible to hold it. A
certificate from the Statutory Auditor in this regard with reference to the position of the company
as at end of the financial year ended March 31 may be submitted to the Regional Office of the
Department of Non-Banking Supervision under whose jurisdiction the non-banking financial
company is registered, within one month from the date of finalization of the balan ce sheet and in
any case not later than December 30 th of that year. The format of the Statutory Auditor’s Certificate
(SAC) to be submitted by NBFCs has been issued vide DNBS. PPD.02/66.15.001/2016 -17 Master
Direction- Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016.

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Hence, in the current case, it is the responsibility of the Statutory Auditor, i.e., Mr. Shyam, to report
where NOF has fallen below ₹ 200 Lakhs.
3. (a) Section 43B (e) states that a deduction otherwise allowable under the Income-tax Act, 1961 in
respect of any sum payable by the assessee as interest on any loan or advances from a scheduled
bank or a co-operative bank in accordance with the terms and conditions of the agreement
governing such loan or advances, shall be allowed (irrespective of the previous year in which the
liability to pay such sum was incurred by the assessee according to the method of accounting
regularly employed by him) only in computing the income referred to in section 28 of that previous
year in which such sum is actually paid by him.
Explanation 3D to section 43B clarifies that a deduction of any sum, being interest payable under
clause (e) of this section, shall be allowed if such interest has been actually paid and any interest
referred to in that clause which has been converted into a loan or advance or debenture or any
other instrument by which the liability to pay is deferred to a future date shall not be deemed to
have been actually paid.
Proviso to section 43B states that in case any sum which is actually paid by the assessee on or
before the due date applicable in his case for furnishing the return of income under section 139(1)
in respect of the previous year in which the liability to pay such sum was incurred and the evidence
of such payment is furnished by the assessee along with such return, provisions of section 43B
shall not be applicable.
In the given situation, bank has converted interest debited in packing credit facility amounting to
` 6 lakh to FITL. Therefore, as on 31 st March, 2023, entire interest of ` 6 lacs debited by bank
remained unpaid. Further, instalments of FITL are to commence from January, 2024 well past due
date for filing income tax return for assessee.
Therefore, she should report interest of ` 6 lakh under clause 26 of Form 3CD. The liability to pay
` 6 lakh was incurred during the year. However, the same has not been paid on or before due date
of return of income of client as instalments are to commence from January, 2024. The client would
file return of income in September, 2023 and by that date, no amount out of FITL is to be paid.
Interest on restructured facilities amounting to ` 4 lakh was paid in year 2022-23 itself. It has,
therefore, no reporting implications.
(b) (I) When the Component(s) Auditor Reports on Financial Statements under an Accounting
Framework Different than that of the Parent: The parent may have components located in
multiple geographies outside India applying an accounting framework (GAAP) that is different
than that of the parent in preparing its financial statements. Foreig n components prepare
financial statements under different financial reporting frameworks, which may be a well -
known framework (such as US GAAP or IFRS) or the local GAAP of the jurisdiction of the
component. Local component auditors may be unable to report on financial statements
prepared using the parent’s GAAP because of their unfamiliarity with such GAAP.
When a component’s financial statements are prepared under an accounting framework that
is different than that of the framework used by the parent in preparing group’s consolidated
financial statements, the parent’s management perform a conversion of the component ’s
audited financial statements from the framework used by the component to the framework
under which the consolidated financial statements are prepared. The conversion adjustments
are audited by the principal auditor to ensure that the financial information of the component(s)
is suitable and appropriate for the purposes of consolidation.
A component may alternatively prepare financial statements on the basis of the parent’s
accounting policies, as outlined in the group accounting manual, to facilitate the preparation
of the group’s consolidated financial statements. The group accounting manual would
normally contain all accounting policies, including relevant disclosure requirements, which are

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consistent with the requirements of the financial reporting framework under which the group’s
consolidated financial statements are prepared. The local component auditor can then audit
and issue an audit report on the components financial statements prepared in accordance
with “group accounting policies”. When applying the approach of using group accounting
policies as the financial accounting framework for components to report under, the
principal/parent auditors should perform procedures necessary to determine compliance of
the group accounting policies with the GAAP applicable to the parent’s financial statements.
This ensures that the information prepared under the requirements of the group accounting
policies will be directly usable and relevant for the preparation of consolidated financial
statements by the parent entity, eliminating the need for auditing by the auditor, the differences
between the basis used for the component’s financial statements and that of the consolidated
financial statements. The Principal auditor can then decide whether or not to rely on the
components’ audit report and make reference to it in the auditor’s report on the consolidated
financial statements.
(II) When the Component(s) Auditor Reports under an Auditing Framework Different than that of
the Parent: Normally, audits of financial statements, including consolidated financial
statements, are performed under auditing standards generally accepted in India ( “Indian
GAAS”). In order to maintain consistency of the auditing framework and to enable the parent
auditor to rely and refer to the other auditor’s audit report in their audit report on the
consolidated financial statements, the components’ financial statements should also be
audited under a framework that corresponds to Indian GAAS.
(c) Audit Procedures -In carrying out audit of advances, the auditor is primarily concerned with
obtaining evidence about the following:
Area of Focus Suggested Audit Procedure
Evaluation of Internal • Examine loan documentation.
Controls over Advances
• Examine the validity of the recorded amounts.
• Examine the existence, enforceability and valuation of the
security.
• Ensure compliance with the terms of sanction and end use of
funds.
• Ensure compliance with Loan Policy of Bank as well as RBI
norms including appropriate classification and provisioning
• Review the operation of the accounts.
Substantive Audit • Check that the advances represent amount due to the bank.
Procedures
• Verify that the advances are disclosed, classified and
described in accordance with recognised accounting policies
and practices and relevant statutory and regulatory
requirements.
• Check that appropriate provisions towards advances have
been made as per the RBI norms, Accounting Standards and
generally accepted accounting practices.
• Examine all large advances while other advances may be
examined on a sample basis.
• Verify completeness and accuracy of interest being charged.

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• Ensure that there are no unrecorded advances.

• Check that the stated basis of valuation of advances is
appropriate and properly applied, and that the recoverability
of advances is recognised in their valuation.
• Check whether the amounts included in the balance sheet
are outstanding as on the date of balance sheet.
• Verify completeness and accuracy of interest being charged.
Recoverability of Advances • Review periodic statements submitted by the borrowers
indicating the extent of compliance with terms and conditions.
• Review latest financial statements of borrowers.
• Review reports on inspection of security.
• Review Auditors’ reports in the case of borrowers enjoying
aggregate credit limits of Rupees 10 lakh or above for
working capital from the banking system.

4. (a) As per Clause (6) of Part I of the First Schedule of the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he solicits
clients or professional work either directly or indirectly by circular, advertisement, personal
communication or interview or by any other means.
Mr. Samyak is wrong in seeking clients through family and friends. Creating a website is not a non-
compliance provided it is in line with the guidelines issued by the Institute in this regard. One of
the guidelines is that the website should not be in push mode. Further, mentioning of clients’ names
is also prohibited as per the Guidelines.
In the given situation, Mr. Samyak shared the website address on his all social media posts and
stories and tagged 40 traders of his local community with the caption “Simple Online Stock
Certification Services” mentioning his current clients as well. This is in complete contravention of
the guidelines on the website issued by the ICAI.
Thus, Mr. Samyak would be held guilty of professional misconduct under clause 6 of Part 1 of First
Schedule of the Chartered Accountants Act, 1949.
(b) Damages for negligence: Civil liability for mis-statement in prospectus under section 35 of the
Companies Act, 2013, includes where a person has subscribed for securities of a company acting
on any statement included, or the inclusion or omission of any matter, in the prospectus which is
misleading and has sustained any loss or damage as a consequence thereo f, the company and
every person who has authorised himself to be named and is named in the prospectus as a director
of the company or has agreed to become such director either immediately or after an interval of
time shall, without prejudice to any punishment to which any person may be liable under section
36, be liable to pay compensation to every person who has sustained such loss or damage.
Notwithstanding anything contained in this section, where it is proved that a prospectus has been
issued with intent to defraud the applicants for the securities of a company or any other person or
for any fraudulent purpose, every person referred to in subsection (1) shall be personally
responsible, without any limitation of liability, for all or any of the losses or damages that may have
been incurred by any person who subscribed to the securities on the basis of such prospectus.
Further, as per section 447 of the Companies Act, 2013, without prejudice to any liability including
repayment of any debt under this Act or any other law for the time being in force, any person who
is found to be guilty of fraud [involving an amount of at least ten lakh rupees or one percent of the
turnover of the company, whichever is lower] shall be punishable with imprisonment for a term
which shall not be less than six months but which may extend to ten years and shall also be liable
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to fine which shall not be less than the amount involved in the fraud, but which may extend to three
times the amount involved in the fraud. It may be noted that where the fraud in question involves
public interest, the term of imprisonment shall not be less than three years.
Hence, in this case, Mr. A is liable for punishment even though he is currently not a director in the
company as per section 35 of the Companies Act, 2013. He shall be liable to punishment as per
section 447 discussed above as he was aware of the litigation against the company which may
cause outflow of ` 1.25 crore which may affect the demand for share application and had also
authorised himself to be named in the prospectus as director.
(c) Aspects to be considered by Management auditor to determine that the systems and
procedures are meeting current requirements -
CA Rajul should proceed as under:
The evaluation of a system or a procedure includes three separate considerations. First, is the
system or procedure meeting all the current requirements? Second, is it operating effectively? And
third, what is the degree of effectiveness?
To determine whether the system or procedure is meeting current requirements, the
following among other things should be considered:
1. Is the system or procedure designed to promote the achievement of the company’s objectives,
and is it accomplished effectively?
2. Does the system or procedure operate within the framework of the organisational structure?
3. Does the system or procedure adequately provide methods of control in order to obtain
maximum performance with the least expenditure of time and effort?
4. Do the routines designated in the system or procedures indicate performance in a logical
sequence?
5. Does the system or procedure provide the means for effective coordination between one
department and another?
6. Have all required functions been established?
7. Has the necessary authority been designated to carry out responsibilities?
8. Can any changes be made to improve effectiveness?
The important thing is to make sure that the system or procedure is designed to meet the desired
results.
5. (a) Factors that may assist Mr. Rishabh, the auditor in determining whether external
confirmation procedures are to be performed as substantive audit procedures include:
(i) The confirming party’s knowledge of the subject matter – responses may be more reliable if
provided by a person at the confirming party who has the requisite knowledge about the
information being confirmed.
(ii) The ability or willingness of the intended confirming party to respond – for example, the
confirming party:
- May not accept responsibility for responding to a confirmation request;
- May consider responding too costly or time consuming;
- May have concerns about the potential legal liability resulting from responding;
- May account for transactions in different currencies; or
- May operate in an environment where responding to confirmation requests is not a
significant aspect of day-to-day operations.

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In such situations, confirming parties may not respond, may respond in a casual manner or may
attempt to restrict the reliance placed on the response.
(iii) The objectivity of the intended confirming party – if the confirming party is a related party of the
entity, responses to confirmation requests may be less reliable.
(b) The data analytics methods used in an audit are known as Computer Assisted Auditing
Techniques or CAATs. There are several steps that should be followed to achieve success with
CAATs and any of the supporting tools. A suggested approach to benefit from the use of CAATs is
as given below:
- Understand Business Environment including IT.
- Define the objectives and criteria.
- Identify source and format of data.
- Extract Data.
- Verify the completeness and Accuracy of Extracted data.
- Apply Criteria on data obtained.
- Validate and confirm results.
- Report and document results and conclusions (SA 230).
(c) Applicability of Provisions of Internal Audit: As per section 138 of the Companies Act, 2013,
following class of companies (prescribed in Rule 13 of Companies (Accounts) Rules, 2014) shall
be required to appoint an internal auditor or a firm of internal auditors, namely: -
(A) every listed company;
(B) every unlisted public company having-
(1) paid up share capital of fifty crore rupees or more during the preceding financial year; or
(2) turnover of two hundred crore rupees or more during the preceding financial year; or
(3) outstanding loans or borrowings from banks or public financial institutions exceeding one
hundred crore rupees or more at any point of time during the preceding financial year;
or
(4) outstanding deposits of twenty five crore rupees or more at any point of time during the
preceding financial year; and
(C) every private company having-
(1) turnover of two hundred crore rupees or more during the preceding financial year; or
(2) outstanding loans or borrowings from banks or public financial institutions exceeding one
hundred crore rupees or more at any point of time during the preceding financial year.
In the given case, AADI Ltd. is a listed company. As per section 138 of the Companies Act, 2013,
every listed company is required to appoint an internal auditor or a firm of internal auditors. Thus,
in view of the above, AADI Ltd. is required to appoint an internal auditor.
Further, AJIT Ltd. is unlisted public company. The company is having ` 60 crore as equity share
capital which is exceeding the prescribed limit of rupees fifty crore as per section 138. Thus, AJIT
Ltd. is required to appoint an internal auditor as per section 138 of the Companies Act, 2013.
NEMI Ltd. is unlisted private company and having ` 60 crore as equity share capital, ` 190 crore
as turnover and ` 50 crore loan from Bank and PFI. In view of provisions of section 138 of the
Companies Act, 2013 discussed above, all the limits are below the prescribed limit for a private
company. Therefore, NEMI Ltd. is not required to appoint an internal auditor.

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It can be concluded that AADI Ltd. and AJIT Ltd. is required to appoint the internal auditor as per
the provisions of the Companies Act, 2013 whereas NEMI Ltd. is not required to do the same.
6. (a) Matters to be ensured by accounting controls -Basic Accounting Control Objectives: The
basic accounting control objectives which are sought to be achieved by any accounting control
system are -
(i) Transactions are executed in accordance with management’s general or specific
authorisation;
(ii) Transactions and other events are real & promptly/timely recorded at correct amounts;
(iii) Transactions should be classified in appropriate accounts and in the appropriate period to
which it relates;
(iv) Transactions are properly posted.
(v) Transactions should be recorded in a manner so as to facilitate preparation of financial
statements in accordance with applicable accounting standards, other accounting policies and
practices and relevant statutory requirements;
(vi) Transactions are properly disclosed.
(vii) Recording of transactions should facilitate maintaining accountability for assets;
(vii) Assets and records are required to be protected from unauthorised access, use or disposition;
(ix) Records of assets, such as sufficient description of the assets (to facilitate identification, its
location should also be maintained, so that the assets could be physically verified periodically.
(x) Transactions are properly summarised.
(b) If supplementary information that is not required by the applicable financial repor ting framework is
presented with the audited financial statements, the auditor shall evaluate whether, in the auditor’s
professional judgment, supplementary information is nevertheless an integral part of the financial
statements due to its nature or how it is presented. When it is an integral part of the financial
statements, the supplementary information shall be covered by the auditor’s opinion.
If supplementary information that is not required by the applicable financial reporting framework is
not considered an integral part of the audited financial statements, the auditor shall evaluate
whether such supplementary information is presented in a way that sufficiently and clearly
differentiates it from the audited financial statements. If this is not the case, then the auditor shall
ask management to change how the unaudited supplementary information is presented.
If management refuses to do so, the auditor shall identify the unaudited supplementary information
and explain in the auditor’s report that such supplementary information has not been audited.
When an additional profit and loss account that discloses specific items of expenditure is disclosed
as a separate schedule, included as an appendix to the financial statements, the auditor may
consider this to be supplementary information that can be clearly differentiated from the financial
statements.
Thus, additional profit and loss account is not considered an integral part of the audited financial
statements and the auditor shall evaluate that supplementary information is presented in a way
that sufficiently and clearly differentiates it from the audited financial statements.
(c) In the given situation, due to magnitude of natural disasters, there is possibility of claim cases
which have been incurred but not reported and cases where claims have been reported but not
enough reported.
For the claim cases which have been incurred but not reported and cases where claims have been
reported but not enough reported, auditor should direct audit procedures to verify that these cases
have been captured by the actuary appointed by the company. Calculation of IBNR and IBNER is
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done by appointed actuary of the insurance company based on probability weighted estimations
and statistical models approved by the Actuarial Standards.
The actuarial valuation of liability in respect of claims Incurred But Not Reported (IBNR) and those
Incurred But Not Enough Reported (IBNER) as at March 31, 2023, as certified by the Company’s
appointed Actuary should be gone through and a certificate should be obtained from actuary
regarding claim amounts and related liability. Further, he should check records for subsequent
periods to ascertain that adequate provision has been created for such claims. Besides, for claims
already reported during the year, it should be verified that claim provision is backed by surveyor’s
immediate loss advice/estimate of liability for the company.
OR
(c) Provisions of the Chartered Accountants Act, 1949 and Schedules thereto -
As per Clause (6) of Part I of First Schedule to the Chartered Accountants Act, 1949, a Chartered
Accountant in practice will be deemed to be guilty of professional misconduct if he solicits clients
or professional work either directly or indirectly by circular, advertisement, personal communication
or interview or by any other means.
Provided that nothing herein contained shall be construed as preventing or prohibiting -
(i) Any Chartered Accountant from applying or requesting for or inviting or securing professional work
from another chartered accountant in practice; or
(ii) A member from responding to tenders or enquiries issued by various users of professional services
or organisations from time to time and securing professional work as a consequence.
However, as per the guideline issued by the Council of the Institute of Chartered Accountants of
India, a member of the Institute in practice shall not respond to any tender issued by an organisation
or user of professional services in areas of services which are exclusively reserved for chartered
accountants, such as audit and attestation services.
However, such restriction shall not be applicable where minimum fee of the assignm ent is
prescribed in the tender document itself or where the areas are open to other professionals along
with the Chartered Accountants.
In the given case of ARG Cooperative Bank, Bank mailed the list of branches to the audit firms
along with maximum fees per branch, in response to which M/s. SR & Associates responded and
submitted their quotation.
Keeping in view the facts, clause 6 and guideline issued by the council, it can be concluded that
M/s. SR & Associates is guilty of Professional misconduct.

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Test Series: October 2023

MOCK TEST PAPER - 2
FINAL COURSE: GROUP I
PAPER-3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
All MCQs are Compulsory.
Question No.1 is compulsory.
Attempt any four questions from the rest.
Time Allowed- 3 hours Maximum Marks-100
Division-A-MCQs (30 Marks)
Question nos. (1-10) carry 1 Mark each and Question nos. (11-20) carry 2 Marks each.
1. CA Mridul has been appointed as statutory auditor of PQT Limited, a reputed listed company engaged
in the manufacturing of electronic products, in accordance with provisions of the Companies Act, 2013.
Currently, he is also actively involved in advising the government in favour of proposed legislation likely
to be introduced in one of the coming sessions of Parliament to attract inve stments and cutting-edge
technology in the electronic products sector on behalf of his client. He has participated in TV
programmes on the matter, written articles in business papers on the subject, and given key suggestions
to the government in this regard. In all public appearances and statements, he has openly stated the
fact of being associated with PQT Limited in the capacity of auditor. Which of the following statements
is likely to be correct in this regard?
(a) The described situation can involve self-interest threats to the independence of the auditor.
(b) The described situation can involve familiarity threats to the independence of the auditor.
(c) The described situation can involve advocacy threats to the independence of the auditor.
(d) The described situation can involve self-review threats to the independence of the auditor.
2. CA Aarti is in the midst of performing audit procedures in the month of March 2023 for conducting a
statutory audit of “Tess Products Private Limited” engaged in manufacturing of footwear products for the
year 2022-23. The turnover of the company as per profit and loss account for the immediately preceding
financial year is ` 35 crores. In the last week of March 2023, she gathered that the turnover of the
company during the year 2022-23 would also be just nearing ` 35 crores. The company is also registered
as a “Small Enterprise” under the Micro, Small and Medium Enterprises Development Act, 2006.
Its present paid-up share capital is `3.50 crores, which has remained unchanged for the past few years.
Besides, it is availing and utilizing a working capital credit facility of ` 2 crores from a bank during all
these years, including the year 2022-23. The company has acquired all shares of a company based in
Hong Kong during the year 2022-23. She wants to be sure about the applicability or otherwise of CARO
2020 for suitably planning and directing her audit procedures for year 2022 -23. Identify likely correct
statement in this regard:
(a) Reporting under CARO, 2020 would not be applicable as it is a small company.
(b) Reporting under CARO, 2020 would not be applicable as it is registered as a small enterprise under
Micro, Small and Medium Enterprises Act, 2006.
(c) Reporting under CARO, 2020 would be applicable as it is not a small company.
(d) Reporting under CARO, 2020 would not be applicable as it meets certain threshold criteria
prescribed for private companies.

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3. COBIT is________________________________
(a) best practice IT governance and management framework published by Information Systems Audit
and Control Association (ISACA). It provides the required tools, resources and guidelines that are
relevant to IT governance, risk, compliance and information security.
(b) one of the most popular frameworks for improving critical infrastructure cyber security published
by National Institute of Standards and Technology (NIST).
(c) the most widely adopted information security standard for the payments card industry issued by
Payment Card Industry Security Standards Council (PCI SSC).
(d) set of best practice processes and procedures for IT services management in a company like
change management, incident management, problem management, IT operations and IT asset
management in accordance with ISO 20000.
4. Mr. C, auditor of a listed company, DEX Limited, signed its audit report on 21.8.2021. The regulator
called the audit file in connection with some proceedings on 20.7.2022. He submitted audit files in the
form of editable Excel files without any security feature on 10.8.2022. It later transpired that the audit
file was modified between 20.7.2022 and 10.8.2022 by deleting certain information and adding fresh
information in its place. Which of the following statements is likely to be correct in this regard?
(a) Audit file was required to be assembled by 21.8.2021. Modification in the audit file after 21.8.2021
was generally not permissible.
(b) Audit file was required to be assembled by 21.8.2021. Modification in the audit file before 20.7.2022
was generally permissible.
(c) Audit file was required to be assembled by 20.10.2021. Modification in the audit file before
20.7.2022 was generally permissible.
(d) Audit file was required to be assembled by 20.10.2021. Modification in the audit file after
20.10.2021 was generally not permissible except in certain exceptional circumstances.
5. NOP Ltd. is a joint venture of Central Government and a private company and is engaged in the business
of distribution of electricity in Chennai. The Central Government holds 51% shares of the company. The
company is acknowledged for its consumer-friendly practices. Initially it was completely owned by the
Government and was running into significant losses but after the joint venture, the aggregate technical
and commercial losses of the company showed a record decline. The operations of the company have
improved significantly as claimed by the management of the company. The C&AG wants to conduct the
performance audit of one of the departments of the company through a subordinate office of Indian Audit
and Accounts Department. For this purpose, the audit programme has also been finalized and the
Accountant General has intimated the company that the audit would start within a day’s time. The
company is concerned because the programme which has been received from the Accountant General
is quite detailed and would involve significant time. Further the management of the company is quite
surprised as to why this audit should be conducted as this is not a company subject to such types of
audits as per law. The management of the company would like to have your inputs in respect of this
matter. Please guide.
(a) The notice for such type of audit should give reasonable time to the management to prepare
themselves. Further it should not be a detailed audit requiring significant time of the company.
(b) The C&AG may conduct such type of audits in respect of NOP Ltd. which would get covered in this
criteria, however, the notice for conducting such type of audit should give reasonable time to the
management to prepare themselves.
(c) In case of a joint venture such type of audit cannot be performed as per the Companies Act, 2013.
The company should write to the Registrar of Companies in respect of this matter and till that time
no audit can be started.

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(d) In case of a joint venture such type of audit cannot be performed as per the Companies Act, 2013.
Further wherever this is applicable that is only for a small period of time. The company should write
to the Ministry of Corporate Affairs in respect of this matter.
6. CA Madhur is conducting a tax audit of PMD products, a proprietary concern of Mr. P. The turnover of
the firm for the financial year 2022-23 is `15 crores. Mr. P while filing his income tax return for the
financial year 2021-22, had opted for a new tax regime having special rates by filing form no.10IE before
the due date of filing the return of income. While e-filing form 3CB-3CD for the financial year 2022-23
(AY 2023-24) on behalf of a client, which of the following statements is correct and in accordance with
law?
(a) He is required to state in Form 3CD whether the assessee has opted for taxation under section
115BAC of the Income Tax Act, 1961, along with the date of filing form no.10IE and its
acknowledgement number under clause 8A.
(b) He is required to state in Form 3CD whether the assessee has opted for taxation under section
115BAC of the Income Tax Act, 1961, under clause 8A.
(c) He is not required to state this fact in Form 3CD as the assessee had opted for taxation under
section 115BAC in the financial year 2021-22.
(d) He is not required to state this fact in Form 3CD as there does not exist any reporting requirement
in this regard. It has to be only stated in the income tax return to be filed by the assessee.
7. CA X is part of the engagement team conducting statutory audit of “Happy Insurance Limited” engaged
in the general insurance business. The company has underwritten substantial fire insurance policies
covering fire and allied risks like flood, inundation, storm, etc. Therefore, CA X is focusing on audit
procedures relevant to the fire department of the company. Which of the follo wing is not likely to be a
relevant audit procedure in this respect?
(a) Verification and processing of Free Look Cancellation (FLC) requests within Turnaround time (TAT)
for fire insurance policies.
(b) Reviewing report of actuary for claims under fire insurance policies issued.
(c) Verifying compliance with provisions of section 64VB of the Insurance Act, 1938, in case of reported
fire claims.
(d) Verification of commission paid to agents on fire insurance business.
8. X, Y and Z are joint auditors of a company engaged in manufacturing of chemicals. They have developed
a joint audit plan and identified common areas. Besides, they have also identified and allocated work by
signing work allocation documents among themselves. Verification of tr ade receivables was allocated
to Z. Which of the following statements is in accordance with relevant SA in this regard?
(a) X and Y should necessarily review work performed by Z to ascertain whether work has been
actually performed in accordance with Standards on Auditing.
(b) X and Y should perform tests to ascertain whether work has been actually performed in accordance
with Standards on Auditing.
(c) X and Y are entitled to assume that Z has actually performed work in accordance with Standards
on Auditing.
(d) X and Y are not entitled to assume that Z shall bring to their notice significant observations relevant
to responsibilities noticed during the course of the audit.
9. CA P, as part of a statutory audit exercise, is testing a company's internal controls over purchase orders
it places for acquiring capital assets. The company places huge orders for the acquisition of capital
assets every year, keeping in view the nature of its business and corresponding requirements. While
testing controls in a sample of purchase orders for the acquisition of capital assets, he failed to notice a

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lack of adherence to certain established parameters for placing such orders. The above situation is
indicative of _______
(a) Sampling risk.
(b) Non-sampling risk.
(c) Control risk.
(d) Inherent risk.
10. “Performance materiality” means the amount or amounts set by the auditor at ____ than materiality for
the financial statements as a whole to reduce to an appropriately low level the probability that the
aggregate of uncorrected and undetected misstatements _________ materiality for the financial
statements as a whole.
(a) higher, exceeds.
(b) less, exceeds.
(c) less, falls below.
(d) higher, falls below. (10 x 1 = 10 Marks)
Questions (11-20) carry 2 Marks each.
MCQs 11-15
Integrated Case Scenario 1
SED & Associates, a firm of auditors, received an offer letter dated 15 th July 2022 to conduct audit of BTM
Limited (a listed company) engaged in manufacturing of cement for the first time from year 2022 -23 onwards.
The audit was accepted by the firm on the basis of offer letter designating it as “Engagement Letter”. The
partners of firm have not felt the necessity to keep documents to show that firm has complied with
requirements of section 141(3)(d) of Companies Act, 2013. CA E, engagement partner of SED & Associates,
is conducting audit of aforementioned company. The company was incurring losses since last few years and
it had resulted in erosion in substantial part of its net worth. It had negative working capital and was
substantially debt-ridden.
The company had only one plant located in Madhya Pradesh. The plant was found to be in working condition
during the course of audit. The Majority of fixed assets of the company were located at this very plant. The
engagement partner was also informed during the audit that physical verification of Property, Plant and
Equipment (PPE) was carried out by management during the year. However, the internal auditor had pointed
out in one of its reports during the year that management did not physically verify Property, Plant and
Equipment items. Having experience as an engagement partner in cement industry, he was of the view that
the valuation of PPE was less than the value recorded in books of accounts. However, no such
assessment/work was made during the audit.
During the year, the company defaulted in repayment of its loans to the bank and the credit facilities of the
company were classified as NPA by the concerned bank. One note forming part of “ Notes to Accounts” in
financial statements on this matter presented for audit states as follows: -
"The company has not provided for interest on the loan taken from the bank to the extent that the same has
remained unpaid as the loan accounts have been classified as NPA by the lender bank and the management
is in the final stage of settlement of the liability. Interest, if any, will be recorded in the books when it will be
crystallized after settlement/agreement with the lender bank."
Considering the prevailing situation, future plans provided by the management and applying professional
Judgment, it has been decided to include an “Emphasis of Matter” paragraph in the auditor’s report relating
to going concern matters. It is felt that this matter is of such importance that it is fundamental to users’
understanding of financial statements. The management has also included this matter in Notes to Accounts.
However, he has not felt the need for evaluation of future plans provided by management.
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During the audit for the year 2022-23, management was requested vide letter dated 20 th May 2023 to provide
all the information regarding contingent liabilities and credentials for logging in income tax portal, GST portal
and other significant online portals. However, management had failed to provide such information, including
login credentials, despite the engagement partner’s request.
Therefore, it was decided to sign the audit report on the basis of the information available up to the date of
signing of the audit report.
On the basis of the above case scenario, you are required to answer the following MCQs.
Multiple Choice Questions (5 Questions of 2 Marks each):
11. The case scenario describes the acceptance of the audit of the aforementioned company by SED &
Associates. Which of the following statements is likely to be most appropriate in this regard?
(a) It was proper for auditors to accept an audit of the company on the basis of an offer letter
designated as an engagement letter. Further, there is no necessity to keep documents to show
compliance with requirements of section 141(3)(d) of Companies Act, 20 13 so long as there is no
violation in respect of these requirements.
(b) It was improper for auditors to accept audit of the company on the basis of offer letter designated
as engagement letter. It is necessary to accept audit on basis of separate engagem ent letter.
However, there is no necessity to keep documents to show compliance with requirements of section
141(3)(d) of Companies Act, 2013 so long as there is no violation in respect of these requirements.
(c) It was improper for auditors to accept audit of the company on the basis of an offer letter designated
as an engagement letter. It is necessary to accept the audit on the basis of a separate engagement
letter. There is a necessity to keep documents to show compliance with the requirements of sectio n
141(3)(d) of the Companies Act, 2013.
(d) It was proper for auditors to accept an audit of a company on the basis of an offer letter designated
as an engagement letter. However, there is the necessity to keep documents to show compliance
with the requirements of section 141(3)(d) of the Companies Act, 2013.
12. What should be an appropriate course of action for the auditors in respect of PPE considering the
situation described in this respect in the case scenario?
(a) The auditor should not attach much importance to the internal auditor’s observations as he has
found the plant of the company to be in working condition with its major assets intact. Howe ver, it
should be evaluated whether impairment testing has been performed considering the company’s
circumstances.
(b) The auditor should determine what modifications to audit procedures are necessary to resolve
inconsistencies between the internal auditor’s report and evidence obtained by him and its effect
on other aspects of the audit. However, no evaluation of impairment testing is necessary,
considering the company’s circumstances.
(c) The auditor should determine what modifications to audit procedures are necessary to resolve
inconsistencies between the internal auditor’s report and evidence obtained by him and its effect
on other aspects of the audit. Further, evaluation of impairment testing is necessary considering
the company’s circumstances.
(d) The auditor should not attach much importance to the internal auditor’s observations as he has
found the plant of the company to be in working condition with its major assets intact. Further,
evaluation of impairment testing is not necessary considering the company’s circumstances.

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13. The Company has not recognised interest costs on its borrowings as loan accounts have turned NPA
during the year under consideration. Which of the following statements is most appropriate in this
context?
(a) The policy followed by management is in contravention of applicable accounting standards to be
followed by the company.
(b) The policy followed by management is in accordance with established norms due to the
classification of loan accounts as NPA by the concerned bank. As banks do not recognise interest
income on NPA accounts, mirror treatment is applicable to the company in question.
(c) The policy followed by management is in accordance with established norms as negotiations are
underway with bankers. Interest would be recognised on NPA borrowings upon crystallisation of
final settlement with bankers.
(d) The policy followed by management is in contravention of guidelines issued by the Reserve Bank
of India.
14. The auditor has decided to include “Emphasis of Matter” (EOM) paragraph in auditor’s report relating to
going concern matters. Which of following statements is true in this regard?
(a) EOM paragraph can be included in auditor’s report depending upon auditor’s professional judgment
and evaluation of management’s plans without maintaining documentation in this regard.
(b) EOM paragraph can be included in auditor’s report because going concern matter is fundamental
to users understanding of financial statements However, no separate evaluation of management’s
plans is required.
(c) 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”.
(d) If adequate disclosure about the material uncertainty is made in the financial statements, the
auditor shall express a modified opinion and the auditor’s report shall include a separate section
under the heading “Material Uncertainty Related to Going Concern”.
15. Considering the matter of not providing information regarding contingent liabilities, including login
credentials by the company as described, which of the following statements is most appropriate? Ignore
all other matters stated from Q no.12 to 14 while answering this part.
(a) The auditor should express unmodified opinion.
(b) The auditor should request management again to provide such information and must determine
whether it is possible to perform alternate audit procedures to obtain sufficient appropriate audit
evidence. In case of failure to obtain such evidence, implications for audit report should be
considered.
(c) The auditor should take written representation from management stating that all such liabilities
have been reflected in accordance with SA 580 and unmodified opinion should be expressed.
(d) The auditor’s responsibility is fulfilled on commenting appropriately regarding non-furnishing of
required information by management regarding disputed statutory dues under clause 3(vii)(b) of
CARO, 2020.
MCQs 16-20
Integrated Case Scenario 2
ABC Limited is a manufacturing company having three manufacturing facilities in India and ranked within top
500 listed companies on stock exchanges in India. Company marked turnover of INR 15,000 crore and profit
before tax of INR 2,000 crore during FY 2022-23. Company has not accepted any deposits from public since
incorporation of the company. Mr. A is the promoter and Chief Executive Officer of the company. Mr. B, son

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of Mr. A, is a company's non-executive director and holds a graduate degree from IIT Bombay and a post -
graduate degree from IIM Ahmedabad.
During the audit, it was discovered that the company had acquired two subsidiaries, Maan Ltd. which deals
in copper manufacturing and Dhan Ltd. which deals in paper manufacturing. Maan Ltd. and Dhan Ltd. are
audited by M/s XYZ & Associates. ABC Ltd. prepared the consolidated financial statements for the current
financial year under Indian Accounting Standards, which includes the financial statements of subsidiary Maan
Ltd. However, the financial statements of Dhan Ltd. were not consolidated as the company has not yet been
able to determine the fair values of certain material assets and liabilities of Dhan Ltd. as on the acquisition
date. This acquisition is accounted for as an investment in the books of ABC Ltd. Had the company
consolidated the financial statements of both subsidiaries, there would have been a mater ial impact on
important elements of the financial statements. Also, the financial statements of ABC Ltd. for the current
financial year include the corresponding figures (without consolidation) of the previous financial year, i.e.,
FY 2021-22.
Also, one of the directors of the Company did not give a declaration to the Company under section 164(2) of
the Companies Act 2013 as of 31st March 2023. The auditors of the Company completed their audit of the
financial statements and were awaiting this declaration. But the management was of the view that they would
not be able to receive this declaration. All other directors had given the required declarations and the auditors
had also verified that.
On the basis of the abovementioned facts, you are required to ans wer the following MCQs:
16. Select best course of action to ensure compliance with Section 177 of Companies Act 2013 in relation
to establishing vigil mechanism where directors and employees can report genuine concerns.
(a) ABC Limited is a listed company. Therefore, ABC Limited is required to establish vigil mechanism
where directors and employees can report genuine concerns.
(b) Vigil mechanism is applicable to government companies only. Therefore, ABC Limited is not
required to establish vigil mechanism where directors and employees can report genuine concerns.
(c) As per Section 177 of the Companies Act 2013, it is not mandatory to establish a vigil mechanism
where directors and employees can report genuine concerns. Therefore, ABC Limited may or ma y
not require establishing a vigil mechanism where directors and employees can report genuine
concerns.
(d) ABC Limited is a listed company but has not accepted deposits from the public from the date of
incorporation. Therefore, ABC Limited is not required to establish a vigil mechanism where
directors and employees can report genuine concerns.
17. As of April 1, 2023, the Board of Directors would like to appoint Mr. B as Chairperson of ABC Limited.
You are requested to provide assistance to ABC Limited to determine compliance with the Securities
and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations.
(a) Where the chairperson of the board of directors is a non-executive director, at least one-third of
the board of directors shall comprise independent directors and where the listed entity does not
have a regular non-executive chairperson, at least half of the board of directors shall comprise of
independent directors. Hence, after appointing Mr. B as Chairperson of ABC L imited, at least one-
third of the board of directors shall comprise independent directors.
(b) Where the regular non-executive chairperson is a promoter of the listed entity or is related to any
promoter or person occupying management positions at the level of the board of directors or at
one level below the board of directors, at least half of the board of directors of the listed entity shall
consist of independent directors. Hence, after appointing Mr. B as Chairperson of ABC Limited, at
least half of the board of directors shall comprise independent directors.
(c) Mr. B is not eligible to be appointed as Chairperson of the company, as he is not an independent
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(d) Mr. B is not eligible to be appointed as Chairperson of the company, as he is a relative of the
company's Chief Executive Officer.
18. With respect to the non-consolidation of financial statements of Dhan Ltd. with the financial statements
of ABC Ltd., how should the auditor deal with the same in their audit report?
(a) The auditor should give a disclaimer of opinion.
(b) The auditor should give an adverse opinion if the impact is material and pervasive in his audit
report.
(c) The auditor should mention this fact in the emphasis of matter paragraph.
(d) The auditor should mention this fact in other matter paragraph.
19. With respect to the corresponding figures of the financial year 2021-22 in the current year financial
statements, what is the auditor’s reporting responsibility for the same?
(a) The auditor’s opinion should refer to each period for which the financial statements are presented.
(b) The auditors need to report on the current year's financials only be it comparative or corresponding
figures.
(c) The auditor’s opinion shall not refer to the corresponding figures except if the previous period audit
report is other than an unqualified opinion or the auditor has sufficient evidence that a material
misstatement exists in the financial statement of the prior period which was not addressed earlier.
(d) The auditor has no reporting responsibility for the financial statements of any year other than the
current financial year for which they have been appointed.
20. How should the auditors of the company should deal with the matter related to non -receipt of declaration
under section 164(2) of the Companies Act, 2013?
(a) Auditors may perform alternate procedures in respect of non-receipt of declaration under section
164(2) of the Companies Act.
(b) If the auditors have been able to verify that all directors except one have given the required
declarations as per the Companies Act, then it should be ignored by the auditors on the basis of
materiality.
(c) There is no reporting implication due to non-receipt of declaration under section 164(2) of the
Companies Act from just one director. Accordingly, the auditors should issue clean report in respect
of this matter, however, the auditors should insist the management to provide this declaration later
on.
(d) Auditors would need to report this matter in their Independent Auditor’s Report.
Division-B-Descriptive Questions-70 Marks
Question No.1 is compulsory.
Attempt any four questions from the rest.
1. (a) While conducting a statutory audit of “Hope Solutions Limited”, CA Y has assessed the risk of
material misstatement to be low at the financial statement level and at the assertion level due to a
stable, established and relatively less risky business and extremely satisfactory internal controls
operating in the company. However, despite the low assessed risk of material misstatement, he
chooses to send external confirmation requests to third parties for confirmation of certain material
contracts entered into with them by the company. By doing so, he intends to obtain evidence
regarding certain assertions contained in the financial statements of the company. Do you think his
approach is in accordance with Standards on Auditing? Justify your answer with reasons.
(5 Marks)

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(b) Certain news reports published in media have indicated that whistle-blower complaints are on the
rise in listed companies, particularly in merger & amalgamation transactions (M&A). The legal
framework under the Companies Act, 2013 and SEBI LODR regulations also contain requirements
to be followed by a listed company regarding whistle-blower complaints.
CA Sagar is an auditor of a listed company. The company has received during the year some
“anonymous complaints” relating to its merger transactions. Elaborating legal requirements relating
to whistle-blower complaints in listed companies, discuss how he should proceed to perform
procedures regarding such “anonymous complaints” received during the year. Does any reporting
duty of auditor relating to whistle-blower complaints under the Companies Act, 2013 exist?
(5 Marks)
(c) SA 315 requires the auditor to document key elements of understanding obtain ed regarding each
of its internal control components, sources of information from which such understanding was
obtained and risk assessment procedures performed.
While conducting statutory audit of MPT Limited, a listed company, CA Z has understood vario us
IT controls relating to data centre and network operations, system software acquisition, change
and maintenance, program change, access security and application system acquisition,
development and maintenance operating in the company. Besides, he has al so gained knowledge
of application controls designed to ensure the integrity of accounting records.
Which one of the internal control components of the company is referred to in the above
description? Besides activities gathered from the above description, give examples of any other
two activities relevant for an audit included in the above identified “component of internal control”
of the company. (4 Marks)
2. (a) MZE Limited is engaged in the manufacturing and export of ready-made garments. The company
has lost overseas buyers to Asian competitors with lower raw materials and labour costs. As a
result, MZE Limited has lost out on a significant chunk of export orders, and the trend has become
more pronounced in the year 2022-23. Further, the US economic recession caused delays in the
company's overseas payments, leading to the company being unable to keep its loan repayment
commitments with bankers. Further, the company has not been able to pay its creditors on time.
Even statutory dues payable by the company are either not paid or being paid after a gap of 5 -6
months, leading to extra costs. Due to declining revenue, the company cannot cover its fixed costs
and has begun laying off employees.
Considering all these circumstances, CA P doubts the company's ability to continue as a going
concern while conducting the statutory audit for the year 2022-23. He is studying management’s
assessment of the company’s ability to continue as a going concern by studying projected
profitability statements for the next two years containing turnover, expenses and profits estimates.
Comment on the above situation with specific reference to audit procedures being performed by
CA P in context of relevant Standards on Auditing. (5 Marks)
(b) CA X is conducting concurrent audit of a branch of MNB Bank (a nationalised bank) in industrial
hub of Pune. It is a CBS branch, and its advances are to the tune of about ` 500 crores. The branch
has borrowers / customers with cash credit, term loans, and export credit facilities, including pre -
shipment and post-shipment credits. Some customers in the branch are importers who regularly
get letters of credit issued to foreign suppliers. During tenure of Mr. X as concurrent auditor, fresh
credit facilities under aforesaid segments are being sanctioned every month to new customers.
The branch is also considering requests of its existing customers for enhancements / fresh
requirements in line with established norms.
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As a result of the above, the staff of the advances department in the branch is always on its toes.
The previous regular inspection of the branch (not pertaining to CA X’s tenure) had pointed out
huge revenue leakage in advances of the branch, raising alarm bells in the Zonal Office and
Inspection Department. Keeping in view the above situation, CA X is taking steps to ensure that
there is no revenue leakage in advances of the branch and recoveries are made on the spot in
case such leakages are detected. Discuss any five areas in this regard where concurrent auditor’s
audit procedures should be focused. (5 Marks)
(c) ABC & Associates are conducting audit of consolidated financial statements of “Crazy Paints
Limited” for year 2022-23. The consolidated financial statements consist of financial statements of
parent company and its five subsidiaries (audited by component auditors). While drafting audit
report in respect of consolidated financial statements under Companies Act, 2013, how firm should
proceed to deal with issue of reporting under CARO, 2020? (4 Marks)
3. (a) CA Ragini is offered appointment to act as Engagement Quality Control Reviewer (EQCR) for the
audit of financial year 2022-23 of XPM Limited, a listed company operating from a small town. She
is also based in the same town and was not engaged previously to conduct audit of a listed entity.
She accepts the appointment to act as EQCR. She performs the review by ticking a “Yes / No”
checklist and signing on some of working papers prepared by engagement team. The audit file
does not contain any material which shows that the work of EQCR is separate from the work of the
engagement team. Do you agree with the approach adopted by EQCR? By commenting on issues
involved in the above situation, discuss whether she can be held guilty of professional misconduct.
(5 Marks)
(b) CA T was appointed by Fair Insurance Company for a Forensic Accounting assignment with respect
to the calculation of claim amount on the basis of information and d etails received from the
surveyor. Suggest the general step-by-step process of Forensic Accounting which may be
undertaken by CA T in this situation. (5 Marks)
(c) CA X has issued report in Form 29B under the Income-tax Act, 1961 wrongly computing “book
profits” of a company for financial year 2021-22. He has signed the said form hurriedly without
ascertaining the required adjustments to be made for arriving at the “book profits” of the company.
Subsequently, the company’s ITR was picked up for scrutiny under the faceless assessment
scheme on 29.6.23, and the matter came to light of tax authorities. Which fundamental principle of
professional ethics is violated in this situation? Also, discuss the liability of CA X, if any, under t he
Income Tax Act in this respect. (4 Marks)
4. (a) The Comptroller & Auditor General of India plays a key role in functioning of financial committees
of Parliament and state legislatures. Therefore, he has come to be recognized as a friend,
philosopher and guide of committees. Discuss how such a role is ensured in practice. Also, briefly
discuss the functions of “Estimates Committee” of Parliament. (5 Marks)
(b) ZOB Limited is planning to be listed. The management of company has pulled up its socks and
decided to implement “Enterprise Risk Management Program” for identifying and assessing various
risks. Differentiating scope of such a program from internal control framework, discuss what does
“Risk Assessment Process” is likely to include in such a program. Also identify any two such widely
available ERM frameworks. (5 Marks)
(c) CA W is tax auditor of WHT Pharma Limited for financial year 2022-23. During the course of audit,
it is noticed that pharma company has provided free medicine samples to doctor employees of 50
hospitals during period from 1 st August 2022 to 31 st March 2023. In this regard, the company has
selected a specialist doctor in each hospital. Value of free samples of drug manufactured by the
pharma company provided to each selected specialist doctor in every hospital is ` 50,000/- during
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this period. Discuss how CA W should proceed in this matter while conducting tax audit of the
company. (4 Marks)
5. (a) Suhana, a CA final student, is part of engagement team conducting audit of CMM Finance Limited,
a listed NBFC. While going through THE audit programme, she notices that it contains instructions
for verification of following matters among other things in relation to disclosure requirements of
Schedule III of Companies Act, 2013:
(i) Verification regarding disclosure of any of item of income or expenditu re which exceeds 1%
of revenue from operations or `10 lakhs whichever is higher.
(ii) Verification of disclosure regarding Return on Capital Employed Ratio, return on Equity Ratio
and net profit ratio.
Discuss whether above instructions for similar matters need revision by engagement partner in this
situation. If so, elaborate on revision required along with reasons. (5 Marks)
(b) While conducting audit of RAC Limited, CA R has discovered a misstatement in the financial
statements of a company due to non-write off of a huge trade receivable with an outstanding
amount of ` 2 crores. The party in question has fled from India and is now absconding. After
reviewing the audit evidence, it was concluded by the auditor that there is no possibility of
recovering the outstanding debt. Despite the matter being brought to the attention of the
management, they have refused to correct the misstatement. As a result, the financial statements
of the company show a profit before tax of ` 1 crore, which is incorrect due to the management's
refusal to correct the aforementioned misstatement. Materiality has been determined for financial
statements @ 5% of profit before tax. Comment as regards to type of opinion to be given by CA R
in above situation on the basis of provided information. (5 Marks)
(c) CA D is serving as Vice-President (finance) of TM Industries, a firm. A huge claim lodged by firm
for `20 crores with an insurance company was just paid for `2 crores. Aggrieved by it, management
of TM Industries has decided to go in for arbitration proceedings under Arbitration and Conciliation
Act, 1996. Unaware of lawyers dealing in this field, management requests CA D to help them find
out a suitable lawyer. Being a smart person, CA D has links with one such lawyer. His
understanding with arbitration lawyer was to receive 25% of fees agreed between lawyer and client
by way of commission. Comment whether CA D is guilty of professional conduct. (4 Marks)
6. (a) CA Tushar is engagement partner conducting audit of consolidated financial statements of a group
which includes parent entity and its 3 subsidiaries. The standalone financial statements of its
subsidiaries are audited by component auditors. He is considering accepting such appointment.
What specific considerations have to be kept in mind by him before accepting appointment as
principal auditor of the group?
After acceptance, he is in quandary with regard to determination of materiality during audit of
consolidated financial statements. What specific considerations have to be kept in mind while
determining materiality during audit of above group? (5 Marks)
(b) JJJ & Associates, an audit firm working mainly in field of statutory audits, has been selected by
Quality Review Board (QRB) for review. During review, it has been found that Audit Firm Under
Review (AFUR) has not maintained quality of audits of selected companies as evidenced from their
respective audit files. AFUR has not complied with requirements of SA 501 and SA 505 in these
cases. Further, in these cases, companies had not complied with accounting standards as required
by law and AFUR has issued clean audit reports. Dwell upon functions of QRB in this regard.
(5 Marks)
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(c) Consider the following statement:

“The internal auditor of a company shall be free from any undue influences which force him to
deviate from the truth. He shall be independent.”
Is above statement proper? If so, how independence of internal auditor can be established?
(4 Marks)
OR
Mr. Raj, a practicing Chartered Accountant was ordered to surrender his certificate of practice and
he was suspended for two years for accepting the appointment as an auditor of a company without
ascertaining the requirements of section 139 and 140 read with section 141 of Companies Act,
2013. During the period of suspension, Mr. Raj, designating himself as Data Privacy consultant,
did the work of filing Data Privacy related returns and made appearance as a consultant before
various related authorities in other capacity other than Chartered Accountant in Practice. He
contended that there is nothing wrong in it as he, like any other consultant, could take such wor k
and his engagement as such in no way violate the order of suspension inflicted on him.
Kindly guide Mr. Raj whether can he appear before various Data Privacy related authorities when
he is under period of suspension in light of section 6 of the Chartered Accountants Act, 1949.
(4 Marks)

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Test Series: October, 2023

MOCK TEST PAPER - 2
FINAL COURSE: GROUP I
PAPER-3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
SUGGESTED ANSWERS/HINTS

DIVISION A - MCQs (30 Marks)

Questions no. (1-10) carry 1 Mark each and Questions no. 11-20 carry 2 Marks each.
1. (c)
2. (c)
3. (a)
4. (d)
5. (b)
6. (b)
7. (a)
8. (c)
9. (b)
10. (b)
11. (c)
12. (c)
13. (a)
14. (c)
15. (b)
16. (a)
17. (b)
18. (b)
19. (c)
20. (d)
DIVISION B - DESCRIPTIVE QUESTIONS (70 Marks)
1. (a) SA 330 states that irrespective of the assessed risk of material misstatement, the auditor shall
design and perform substantive procedures for each material class of transactions, account
balance and disclosure. In the given situation, the auditor has assessed the risk of material
misstatement to be low. However, despite such assessment, substantive procedures have to be
performed.
SA 330 further states that the auditor shall consider whether external confirmation procedures are
to be performed as substantive audit procedures. External confirmation procedures frequently are
relevant when addressing assertions associated with account balances and their elements but
need not be restricted to these items. For example, the auditor may request external confirma tion
of the terms of agreements, contracts, or transactions between an entity and other parties.

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Despite the low assessed risk of material misstatement, substantive procedures have to be
performed due to the following reasons: -
(i) The auditor’s assessment of risk is judgmental and so may not identify all risks of material
misstatement and
(ii) there are inherent limitations to internal control, including management override.
It is also in accordance with the spirit of professional skepticism. Therefore, as discussed above,
the approach of CA Y is in accordance with Standards on Auditing.
(b) Section 177(9) of the Companies Act 2013 requires every listed company and certain other classes
of companies to establish a vigil mechanism for their directors and employees to report their
genuine concerns or grievances. The vigil mechanism under section 177(9) of the Act shall provide
for adequate safeguards against victimisation of persons who use such a mechanism and make
provisions for direct access to the Chairperson of the Audit Committee in appropriate or exceptional
cases.
Regulation 4(2)(d) of the SEBI LODR Regulations also mandates all listed entities to devise an
effective vigil mechanism/whistleblower policy enabling stakeholders, including individual
employees and their representative bodies, to communicate their concerns about illegal or
unethical practices freely. Regulation 46(2)(e) of SEBI LODR Regulations requires a listed
company to disseminate on its website details of the establishment of a vig il mechanism/
whistleblower policy. Further, the role of the audit committee also includes reviewing the functioning
of the whistleblower mechanism.
Where the establishment of whistle blower mechanism is mandated by law, the auditor should
check whether the company has an ethics/whistleblower/ hotline process with adequate procedures
to handle anonymous complaints (received from inside and outside the company) and to accept
confidential submission of concerns about questionable accounting, internal control, or auditing
matters.
The auditor is required to consider every complaint received by the company, including anonymous
complaints, while deciding the nature, timing and extent of audit procedures. The auditor should
also evaluate whether whistleblower complaints are investigated and resolved by the company
appropriately and timely.
Further, there exists a reporting duty of the auditor under para 3(xi)(c) under CARO, 2020, to state
whether the auditor has considered whistle-blower complaints, if any, received during the year by
the company.
(c) CA Z has gained an understanding of various IT controls operating in the company including
General IT controls and application controls. Such activities form part of “control activities”, which
is one of the components of internal control of an organization.
Control activities are the policies and procedures that help ensure management directives are
carried out. Control activities, whether within IT or manual systems, have various objectives and
are applied at various organisational and functional levels. Examples of specific control activities
include those relating to the following:
Performance reviews
These control activities include reviews and analyses of actual performance versus budgets,
forecasts, and prior period performance; relating different sets of data – operating or financial – to
one another, together with analyses of the relationships and investigative and corrective actions;
comparing internal data with external sources of information; and rev iew of functional or activity
performance.

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Physical controls
Controls that encompass:
• The physical security of assets, including adequate safeguards such as secured facilities over
access to assets and records.
• The periodic counting and comparison with amounts shown on control records (for example,
comparing the results of cash, security and inventory counts with accounting records).
2. (a) The indicated events or conditions in MZE Limited may cast significant doubt on ability of company
to continue as going concern. SA 570 requires that 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.
In the given situation, the auditor is studying management’s assessment of the company’s ability
to continue as going concern, including its future plan of action containing projected profitability
statements for the next two years containing estimates of turnover, expenses and profits. However,
as required in SA 570, auditor’s procedures should focus on cash flow forecast and not on future
profit projections. It is quite possible that a company may continue to carry on as a going concern
so long as it can meet its liabilities. Therefore, analysing the projected profitability statements
alone is insufficient to support the conclusion on the going conc ern assumption followed by the
company.
Therefore, the auditor should require management to prepare a cash flow forecast in the given
circumstances. The auditor should then analyse the cash flow forecast in the evaluation of
management’s future plan of action. It includes: -
(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
Further, some major overseas payments of the company are stuck up. It is quite possible that the
timing of cash inflows on account of these payments may affect the situation. The auditor would
have to evaluate the reliability of data for preparation for such a forecast and its underlying
assumptions. He should perform procedures to obtain evidence regarding assumptions and timing
of cash inflows and outflows like any restructuring undertaken by bankers providing relief to the
company, future sales and consequent cash realization in downturn conditions, w illingness of
creditors to provide credit in such a situation, incurring of expenditures to keep the company afloat.
All these assumptions underlying such cash flow forecasts need to be challenged and examined.
(b) The major areas to plug revenue leakage where concurrent auditor should focus audit procedures
include: -
(i) Verifying rates of interest as per terms of sanction in sanction letter vis-à-vis those fed in CBS
as well as the calculation of interest through product rate sheets generated by CBS t o satisfy
that interest has been charged on all the performing accounts and interest rates charged are
in accordance with the bank’s internal regulations, directives of the RBI and agreements with
the respective borrowers.
(ii) Verification of renewal charges in respect of existing customers enjoying cash credit and
export credit facilities. Similarly, for fresh borrowers, proposal processing charges, including
upfront fees for term loan, needs to be verified in accordance with Bank’s circulars to ensure
that all charges are debited at time of release of facilities to new customers. These charges
also need to be levied proportionately in respect of customers whose credit facilities have
been enhanced.

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(iii) Verification of penal charges for non-submission of stock statements on due dates in case
borrowers availing cash credit and export credit facilities consisting of pre -shipment credit
facilities.
(iv) Verification of commission /charges in case of letter of credit has been issued to importers in
accordance with the Bank’s circulars.
(v) As the branch has also granted export credit facilities in the nature of post -shipment credit
facilities, verification of commission/charges on export bills purchased is required.
(c) CARO, 2020 specifically provides that it shall not apply to the auditor’s report on consolidated
financial statements except clause (xxi) of paragraph 3. This means that the auditor will need to
give a CARO report on the consolidated financial statements with respect to clause 3(xxi) of the
Order only. Thus, the auditor is not required to report on rest of the clauses of paragraph 3.
Clause 3(xxi) of CARO 2020 requires the auditor to state whether there have been any
qualifications or adverse remarks by the respective auditors in the Companie s (Auditor’s Report)
Order (CARO) reports of the companies included in the consolidated financial statements. If yes,
indicate the details of the companies and the paragraph numbers of the CARO report containing
the qualifications or adverse remarks.
Therefore, it requires the auditor to provide details of the companies and the paragraph numbers
of the respective CARO report containing the qualifications or adverse remarks only. Reporting
under this is only required for those entities included in the consolidated financial statements to
whom CARO 2020 is applicable.
3. (a) SQC 1 states that the engagement quality control reviewer is a partner, other person in the firm
(member of ICAI), a suitably qualified external person, or a team made up of such indivi duals with
sufficient and appropriate experience and authority to evaluate objectively, before the report is
issued, the significant judgments the engagement team made and the conclusions they reached in
formulating the report.
It also states that the engagement quality control reviewer for an audit of the financial statements
of a listed entity is an individual with sufficient and appropriate experience and authority to act as
an audit engagement partner on audits of financial statements of listed entitie s.
Further, the work of EQCR involves objective evaluation of the significant judgments made by the
engagement team and ensuring that the conclusions reached by the team in formulating audit
reports are appropriate. It is necessary for EQCR to have the requisite technical expertise and
experience to enable her to perform the assigned role of evaluating the work of the engagement
team so that any possible misstatement can be avoided. Without ensuring the appropriate technical
expertise and experience, the whole purpose of EQCR is defeated. Therefore, it was not
appropriate for her to accept an appointment as ECQR for the listed entity.
Further, SA 220 states that the engagement quality control reviewer shall document, for the audit
engagement reviewed, that the procedures required by the firm’s policies on engagement quality
control review have been performed. It also states that it shall also be documented that the reviewer
is not aware of any unresolved matters that would cause the reviewer to believe that the significant
judgments the engagement team made and the conclusions they reached were not appropriate.
In the given situation, there are no working papers to show that EQCR has done an evaluation on
conclusions reached by the engagement team. Mere ticking of a Yes/No checklist and signing on
some working papers of the engagement team shows that EQCR has made no such evaluation
and review of work performed by the engagement team. Therefore, her approach was not proper
in performing the work of EQCR.
As CA Ragini has allowed the issuance of an audit report of the company without carrying out due
procedures as discussed above, she is guilty of professional misconduct under clauses 8 and 9 of
Part I of the Second Schedule to Chartered Accountants Act, 1949. Under Clause 8, a Chartered
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Accountant is held guilty of professional misconduct in case of failure to obtain sufficient

information which is necessary for the expression of an opinion, or its exceptions are sufficiently
material to negate the expression of an opinion.
Clause 9 is applicable in case of failure to invite attention to any material departure from the
generally accepted procedure of audit applicable to the circumstances. Therefore, she is guilty of
professional misconduct, as discussed above.
(b) Each Forensic Accounting assignment is unique. Accordingly, the actual approach adopted and
the procedures performed will be specific to it. However, in general, many Forensic Accounting
assignments will include the steps detailed below.
Step 1. Initialization
It is vital to clarify and remove all doubts as to the real motive, purpose and utility of the assignment.
It is helpful to meet the client to obtain an understanding of the important facts, players and issues
at hand. A conflict check should be carried out as soon as the relevant parties are established. It
is often useful to carry out a preliminary investigation prior to the development of a detailed plan of
action. This will allow subsequent planning to be based upon a more complete understanding of
the issues.
Step 2. Develop Plan
This plan will take into account the knowledge gained by meeting with the client and carrying out
the initial investigation and will set out the objectives to be achieved and the methodology to be
utilized to accomplish them.
Step 3. Obtain Relevant Evidence
Depending on the nature of the case, this may involve locating documents, economic information,
assets, a person or company, another expert or proof of the occurrence of an event. In order to
gather detailed evidence, the investigator must understand the specific type of fraud that has been
carried out, and how the fraud has been committed. The evidence should be sufficient to ultimately
prove the identity of the fraudster(s), the mechanics of the fraud scheme, and the amou nt of
financial loss suffered. It is important that the investigating team is skilled in collecting evidence
that can be used in a court case within the stipulated time period, and in keeping a clear chain of
custody until the evidence is presented in court. If any evidence is inconclusive or there are gaps
in the chain of custody, then the evidence may be challenged in court, or even become
inadmissible. Investigators must be alert to documents being falsified, damaged or destroyed by
the suspect(s).
Step 4. Perform the analysis
The actual analysis performed will be dependent upon the nature of the assignment and may
involve:
• calculating economic damages;
• summarizing a large number of transactions;
• performing a tracing of assets;
• performing present value calculations utilizing appropriate discount rates;
• performing a regression or sensitivity analysis;
• utilizing a computerized application such as a spread sheet, data base or computer model;
and
• utilizing charts and graphics to explain the analysis.

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Step 5. Reporting
Issuing an report is the final step of a forensic accounting. Accountant / Investigators will include
information detailing the fraudulent activity, if any has been found. The c lient will expect a report
containing the findings of the investigation, including a summary of evidence, a conclusion as to
the amount of loss suffered as a result of the fraud and to identify those involved in fraud. The
report may include sections on the nature of the assignment, scope of the investigation, approach
utilized, limitations of scope and findings and/or opinions. The report will include schedules and
graphics necessary to properly support and explain the findings.
The report will also discuss how the fraudster set up the fraud scheme, and which controls, if any,
were circumvented. It is also likely that the investigative team will recommend improvements to
controls within the organization to prevent any similar frauds occurring in the futur e.
Step 6. Court proceedings
The investigation is likely to lead to legal proceedings against the suspect, and members of the
investigative team will probably be involved in any resultant court case. The evidence gathered
during the investigation will need to be presented at court, and team members may be called to
court to describe the evidence they have gathered and to explain how the suspect was identified.
(c) The principle of integrity 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.
Under Section 271 J of the Income Tax Act, if an accountant, merchant banker or registered valuer
furnishes incorrect information in a report or certificate under any provisions of the Act or rules
made thereunder, the assessing officer or Commissioner (Appeals) during the course of any
proceedings under the Income Tax Act may direct him to pay a penalty of Rs.10000/- for each such
certificate or report. Therefore, he can be liable to a penalty of Rs.10000/ - for wrong certification.
4. (a) The Comptroller & Auditor General of India plays a key role in the functioning of the financial
committees of Parliament and the State Legislatures. He has come to be recognised as a 'friend,
philosopher and guide' of the Committees. It is ensured as follows: -
(i) His reports generally form the basis of the Committees' working, although they are not
precluded from examining issues not brought out in his reports
(ii) He scrutinises the notes which the Ministries submit to the Committees and helps the
Committees to check the correctness of submissions to the Committees and facts and figures
in their draft reports
(iii) The financial Committees present their report to the Parliament/ State Legislature with their
observations and recommendations.
The various Ministries / Department of the Government are required to inform the Committees
of the action taken by them on the recommendations of the Committees (which are generally
accepted) and the Committees present Action Taken Reports to Parliament / Legislature
(iv) In respect of those audit reports, which could not be discussed in detail by the committees’,
written answers are obtained from the Department / Ministry concerned and are sometimes
incorporated in the Reports presented to the Parliament / State Legislature.

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This ensures that the audit reports are not taken lightly by the Government, even if the entire report
is not deliberated upon by the Committee.
The functions of “Estimates Committee” are: -
(i) to report what economies, improvements in organization, efficiency or administrative reform,
consistent with the policy underlying the estimates may be effected
(ii) to suggest alternative policies
(iii) to examine whether the money is well laid out within the limit and
(iv) to suggest the form in which the estimates shall be presented to Parliament.
(b) The scope of an Enterprise Risk Management program is much broader th an an internal control
framework and encompasses both internal and external factors that are relevant to business
strategy, governance, business process and transaction and activity level. The focus of an internal
control framework is primarily around financial reporting, operations and compliance risks
associated with an account balance, business process, transaction and activity level, which form a
sub-set of the overall enterprise risks.
This Enterprise Risk Management – Integrated Framework expands on internal control providing a
more robust and extensive focus on the broader subject of enterprise risk management. While it is
not intended to and does not replace the internal control framework, but rather incorporates the
internal control framework within it, companies may decide to look to this enterprise risk
management framework both to satisfy their internal control needs and to move toward a fuller risk
management process.
One of the most critical components of Enterprise Risk Management is the risk a ssessment
process. The risk assessment process involves considerations for: -
• Risk identification
• Assessment criteria including qualitative and quantitative factors
• Definition of key performance and risk indicators;
• Risk appetite
• Risk scores, scales and maps
• Assess risks
• Use of data & metrics
• Prioritise risk
• Benchmarking
Two most widely used ERM frameworks are: -
COSO Enterprise Risk Management – Integrated Framework developed by the Committee of
Sponsoring Organisations (COSO) to address the changes in business environment.
ISO 31000 Risk Management standard published by the International Organization for
Standardization. It is a risk Management standard published by the International Organization for
Standardization and provides guidelines on managing risk faced by organizations. The application
of these guidelines can be customized to any organization and its context.
(c) Section 194 R of Income Tax Act mandates that a person responsible for providing any benefit or
perquisite to a resident to deduct tax at source @ 10% of the value or aggregate of such benefit or
perquisite before providing such benefit or perquisite. The benefit or perquisite may or may not be
convertible into money but should arise either from carrying out of business, or from exercising a
profession by such resident. This deduction is not required to be made if the value or aggregate of
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value of the benefit or perquisite provided or likely to be provided to the resident during the financial
year does not exceed twenty thousand rupees.
In the given situation, a pharma company has provided free medicine samples worth Rs.50000/ -
to employee doctors of hospitals. The TDS under section 194R of the Act is required to be deducted
by the company in the hands of the hospital as the benefit/prerequisite is provided to the doctor on
account of him being an employee of the hospital. Thus, the benefit/prerequisite is provided to the
hospital in substance. A threshold of twenty thousand rupees of section 194R of the Act is also
required to be seen with respect to the recipient entity.
Therefore, it should be verified that pharma company has deducted tax at source in hands of every
hospital @ 10% as the benefit/perquisite is provided to each specialist doctor on account of his
being employee of hospital. In case, company has not deducted TDS on above transactions, same
should be reported under clause 21b specifying date of payment, nature of payment, name of
payee and required details.
5. (a) The above instructions are not proper and these do not pertain to Division III of Schedule III
applicable to NBFCs. Rather, such requirements are applicable for companies for which Division II
of Schedule III is applicable. Hence, these should be revised in accordance with similar
requirements applicable to listed NBFCs for whom Division III of Schedule III is applicable.
The similar disclosure requirements for a listed NBFC under Division III of Schedule III are as
follows: -
(i) Any item of other income or other expenditure which exceeds 1% of total income
(ii) Disclosure of the following ratios: -
• Capital to risks-weighted assets ratio (CRAR)
• Tier I CRAR
• Tier II CRAR
• Liquidity coverage ratio
(b) SA 705 states that the auditor shall modify the opinion in the auditor’s report when:
(a) The auditor concludes that, based on the audit evidence obtained, the financial statements
as a whole are not free from material misstatement or
(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the
financial statements as a whole are free from material misstatement.
In the given situation, auditor has obtained evidence in relation to non-recoverability of outstanding
trade receivable.
SA 705 further states that 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.
In this scenario, the uncorrected misstatement stands at 200% of the profit before tax, while the
materiality has been determined at 5% of the profit before tax. Hence, this misstatement should be
considered as material. Additionally, if such a substantial amount is written off, it would significantly
impact the financial position of the company. As a result, losses would have to be reported instead
of profits. Taking the above factors into consideration, this misstatement should be classified as
both material and pervasive. Therefore, adverse opinion needs to be expressed in accordance with
the requirements of SA 705.
(c) Part II of First Schedule of Chartered Accountants Act, 1949 deals with professional misconduct in
relation to members of Institute in service. Clause 2 of Part II of First Schedule to Chartered
Accountants Act states that a member of the Institute (other than a member in practice) shall be

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deemed to be guilty of professional misconduct, if he being an employee o f any company, firm or

person accepts or agrees to accept any part of fees, profits or gains from a lawyer, a chartered
accountant or broker engaged by such Company, firm or person or agent or customer of such
Company, firm or person by way of commission or gratification.
Therefore, CA D is guilty of professional misconduct as discussed above.
6. (a) SA 600 requires auditor should consider whether the auditor's own participation is sufficient to be
able to act as the principal auditor. For this purpose, the auditor would consider: -
(i) the materiality of the portion of the financial information which the principal auditor audits
(ii) the principal auditor's degree of knowledge regarding the business of the components
(iii) the risk of material misstatements in the financial information of the components audited by
the other auditor and
(iv) the performance of additional procedures as set out in SA 600 regarding the components
audited by other auditor resulting in the principal auditor having significant participation in
such audit.
With regard to determination of materiality during the audit of consolidated financial statements
(CFS), the auditor should consider the following: -
• The auditor is required to compute the materiality for the group as a whole. This materiality
should be used to assess the appropriateness of the consolidation adjustments (i.e.,
permanent consolidation adjustments and current period consolidation adjustments) that are
made by the management in the preparation of CFS.
• The parent auditor can also use materiality computed on the group level to determine whether
the component's financial statements are material to the group to determine whether they
should scope in additional components and consider using the work of other auditors as
applicable.
• While considering the observations (for instance, modification and /or emphasis of
matter/other matter in accordance with SA 705/706) of the component auditor in his report on
the standalone financial statements, the parent auditor should comply with the requireme nts
of SA 600 “Using the Work of Another Auditor”.
(b) Central Government has constituted a Quality Review Board as an independent body under the
Chartered Accountants Act, 1949 to review the quality of services provided by the Chartered
Accountants in India including audit services.
Accordingly, u/s 28B of the Chartered Accountants Act, 1949, the Board shall perform the following
functions, namely: -
(a) to make recommendations to the Council with regard to the quality of services provided by
the members of the Institute
(b) to review the quality of services provided by the members of the Institute including audit
services
(c) to guide the members of the Institute to improve the quality of services and adher ence to the
various statutory and other regulatory requirements and
(d) to forward cases of non-compliance with various statutory and regulatory requirements by the
members of the Institute or firms, noticed by it during the course of its reviews, to the
Disciplinary Directorate for its examination.
In the given situation, AUFR has not performed audits of selected companies qualitatively and has
failed to perform audits in accordance with Standards on Auditing, Further, it has issued clean

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reports despite non-adherence to accounting standards by respective companies. Therefore, QRB

is empowered to act on the lines mentioned above in respect of AUFR.
(c) The Internal Auditor shall be free from any undue influences which force him to deviate from the
truth. This independence shall be not only in mind but also in appearance. Also, the internal auditor
shall resist any undue pressure or interference in establishing the scope of the assignments or the
manner in which these are conducted and reported, in case these deviate from set objectives. The
independence of the internal audit function and the Internal Auditor within the organization is a vital
aspect of maintaining effective corporate governance. It is important to ensure that the internal
audit function is free from any undue influence or pressure that may affect its ability to provide
impartial and objective assessments of the organization's operations, risks, and controls.
Therefore, the given statement is proper.
To establish the independence of the Internal auditor, several factors need to be considered.
Firstly, the overall organizational structure of key personnel plays a crucial role. The Internal auditor
should be positioned in a way that allows them to operate independently and objectively. This
includes having direct access to the Audit Committee, Board of Directors, and other senior
executives. Secondly, the reporting line of the Chief Internal Auditor is an important consideration.
The Chief Internal Auditor should report to the highest level of authority within the organization,
such as the CEO or the Board of Directors. This ensures that the Internal auditor has the necessary
authority and support to carry out their responsibilities effectively. Finally, the powers and authority
derived from superiors further establish the independence of the Internal auditor. The Internal
auditor should have the necessary resources, budget, and support to conduct their work without
any undue influence or pressure from senior executives or other stakeholders.
OR
Section 6 of the Chartered Accountants Act, 1949 provides that: -
i. No member of the Institute shall be entitled to practise whether in India or elsewhere unless
he has obtained from the Council a certificate of practice:
It may be noted that this provision is not applicable to any person who, immediately before
the commencement of this Act, has been in practice as a registered accountant or a holder of
a restricted certificate until one month has elapsed from the date of the first meeting of the
Council.
ii. Every such member shall pay such annual fee for his certificate as may be determined, by
notification, by the Council.
iii. The certificate of practice obtained under sub-section (1) may be cancelled by the Council
under such circumstances as may be prescribed.
Once the person concerned becomes a member of the Institute, he is bound by the provisions of
the Chartered Accountants Act and its Regulations. If and when he appears before the Income -tax
Tribunal as an Income-tax representative after having become a member of the Institute, he could
so appear only in his capacity as a Chartered Accountant and a member of the Institute. Having,
as it were, brought himself within the jurisdiction of the Chartered Accountants Act and its
Regulations, he could not set them at naught by contending that even though he continues to be a
member of the Institute and has been punished by suspension from practice as a member, he
would be entitled, in substance, to practice in some other capacity.
In the current case, Mr. Raj, designating himself as Data Privacy consultant, did the work of filing
Data Privacy related returns and made appearance as a consultant before various related
authorities in other capacity other than Chartered Accountant in Practice. As a result, h e is not
appearing in the capacity of Chartered Accountant in Practice and hence he is not violating the
suspension order.

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