Subject – Audit & Ethics Std – CA Inter

Time – 3 Hr. Total Marks – 100

MOCK TEST 2 (Set B)
IMPORTANT INSTRUCTIONS:
(1) The question paper comprises two parts, Part I and Part II. Part I comprises Multiple Choice Questions (MCQs).
Part II comprises questions which require descriptive type answers.
(2) Part I - 30 marks Comprises 15 MCQ all are compulsory to solve.
(3) Part II - 70 Marks comprises 6 questions. Answer to Question No. 1 which is compulsory and any 4 out of the
remaining 6 questions.
PART – I (30 MARKS)
MULTIPLE CHOICE QUESTIONS (MCQs)

Ø Case Scenario 1:
Hill Ltd., a company engaged in the business of trekking essentials, appointed CA Gagan as the Statutory Auditor for the
year. Due to the large volume of transactions of the company, the audit engagement team of CA Gagan realized that it
would not be feasible to audit each transaction separately during the financial year under audit. Therefore, Engagement
Partner decided to apply following audit sampling techniques:
•Random number tables were used for selection of sample for power, telephone, and fuel charges.
•No structured method of sampling was used for office stationery.
•Transactions exceeding Rs. 8,000 were selected for travel expenses.
•The first 200 sales invoices from the sales book for the month of July were selected for sales.
Mr. Kush, one of the team members, compared the salary expenses incurred by the company during the current
year with those of the previous five years. He noticed a significant percentage increase in the expenses. This
unusual increase raised doubts in his mind. He decided to compare such an increase in salary expenses with the
increase in the number of employees.
The company is having warehouse at 2 locations. CA Gagan is planning to attend the physical inventory count
process. The inventory includes finished products such as trekking jackets, bags, shoes etc., and raw materials like
leather, cloth, chemicals, etc. Some of the inventory is also held by a third party.
Based on the above given scenario answer the following questions 1 to 5: [5 x 2 = 10 Marks]

1. Which of the sampling techniques were used for the following transactions:
(i) Power, telephone and fuel charges;
(ii) Office Stationery;
(iii) Travel expenses; and
(iv) Sales.
(Answer in the given order)
a) Random sampling, Systematic sampling, Monetary unit sampling, Block sampling.
b) Systematic sampling, Random sampling, Block sampling, Haphazard sampling.
 c) Random sampling, Haphazard sampling, Monetary unit sampling and Block sampling.
d) Random sampling, Haphazard sampling, Monetary unit sampling and Systematic sampling.

2. Which audit procedure was Mr. Kush intended to perform by comparing salary expenses?
a) Test of details.
b) Test of balances.
c) Test of control.
d) Substantive analytical procedure.

3. Which of the following is not part of CA Gagan’s responsibility with respect to the inventories held by the third
parties?
a) CA Gagan should request confirmation from the third party regarding the quantity and condition of the
inventory held by them.
b) A Gagan should perform an independent valuation of the inventory based solely on the company’s internal
records.
c) CA Gagan should request the third party to allow him to physically inspect the inventories held by them.
d) CA Gagan should review the terms of the agreement between the company and the third party to
understand the responsibilities related to inventory management.

4. Which of the following is not included in an audit programme normally?

a) Extent of checking
b) Date of checking
c) Nature or type of procedure
d) Planning of risk assessment procedures

5. Which of the following is TRUE about Engagement Standards?

a) Engagement standards ensure proper rights to practitioners in course of performance of their duties.
b) Engagement standards ensure preparation and presentation of financial statements in a standardized
manner.
c) Engagement standards ensure uniformity by practitioners in course of performance of their duties.
d) Engagement standards ensure savings in resources of clients.

Ø Case Scenario 2:
M/s AB & Company is a firm of Chartered Accountants based in Mumbai. Mr A and Mr B are the Partners of the
Firm. The Firm is engaged in various assignments including Audits. The Partners are taking a summary of their
work in order to prepare themselves to finalize the Audit and issue the Audit Report to the clients. You are
requested to go through the following and answer the questions that follow:
• During the Audit of M/s Persistent & Co, Mr A found out that the Firm has changed the method of
Depreciation from WDV to SLM but has not given the retrospective effect. Mr A has calculated the
Difference of Depreciation but M/s Persistent & Co has stated that they don’t want to change the Financial
Statements and if Auditor persists they may give the effect in the next Financial Year.
 • During the Audit of M/s Dubious Brothers, Mr B observed that the Firm had a very large amount of Cash
Sales and there were no details of the Customers to whom the sale was made. Further, Cash generated
was not even deposited into bank regularly. When Mr B asked the Firm to give him an opportunity to
count Cash, the Manager of the Firm said that the Cash is with the Owner and it cannot be made available
to the Auditor for the checking purpose. The Manager also declined to give an opportunity for stock
verification to Mr B.
• During the Audit of M/s Honest & Associates, Mr A came to know that the Firm has changed its method
of Valuation of Stock. This change has a material impact on the Financial Statement of the Firm. The Firm
has made relevant disclosures in the Financial Statements and has given proper accounting treatment to
this exercise.
Based on the above given scenario answer the following questions 6 to 10: [5 x 2 = 10 Marks]

6) In case of M/s Persistent & Company, what would be an ideal Audit Opinion?
(a) Unmodified (b) Qualified (c) Adverse (d) Disclaimer

7) In case of M/s Dubious Brothers, what Audit Opinion should the Auditor give?
(a) Qualified (b) Adverse (c) Disclaimer (d) Unmodified
8) According to you, what would be appropriate course to take in case of M/s Honest & Associates?
(a) Issue Qualified Opinion
(b) Issue Adverse Opinion
(c) Mention the fact of change in method in Emphasis of Matter Paragraph
(d) Issue Disclaimer of Opinion

9) When the Auditor, after conclusion of an Audit exercise, is of the opinion that there are material
misstatements in the Financial Statements, but they are not pervasive, then what should an Auditor do?
(a) Issue Unmodified Opinion (b) Issue Qualified Opinion
(c) Issue Disclaimer of Opinion (d) Mention it in Emphasis of Matter Paragraph

10) When the Auditor concludes that the financial statements are prepared, in all material respects, in accordance
with the applicable financial reporting framework, Auditor shall give:
(a) Modified Opinion (b) Qualified Opinion (c) Disclaimer of Opinion (d) Unmodified Opinion

Ø Case Scenario 3:
Sun Private Limited is a newly formed private limited company, engaged in the manufacturing of solar panels.
Company has appointed M/s M&S Associates, a Partnership Firm of Mr. Meticulous and Mr. Sincere - as their
First Auditors. M/s M&S Associates accepted the assignment and Mr. Meticulous being the engagement Partner,
started their Audit.
During the course of Audit, Mr. Meticulous asked the Management for name of the companies operating in
similar business so that they can compare the Company’s Figures. During this procedure, Mr. Meticulous found
that the Gross Margin of the Company is lower than the Industry Standard / Fellow Companies. He prepared an
Interim Report dealing with this matter and asked the Management about the reasons for this deviation.
Management asked him to give all the working along with the Working Papers as they believed it is the
Company’s Property. Mr. Meticulous advised them that he can provide working but cannot give them the
working papers as they are the property of the Firm.
Management agreed to that and asked Mr. Meticulous to go into detail and tell him the reasons for lower Gross
 Margin to which he agreed. During the detailed audit, Mr. Meticulous came to know about the fact that the
company dispatched its solar panels to its Distributors on Delivery Challans and once the goods were accepted,
Sales bills were raised. Checking each Challan against Sales Invoices, Mr. Meticulous found that there were many
challans for which no Invoices were raised and thus Sales was grossly understated and there was no mechanism
where unbilled Challans were recorded or tracked. Company employed a person to reconcile all the Challans and
prepared a list where Bills are yet to be sent to the Customers. In addition, Company was also asked to seek
Confirmation of Balances from all its customers. The Management assured Mr. Meticulous that Inventories are
physically verified and hence there will be no impact on them.
Based on the above given scenario answer the following questions 11 to 15: [5 x 2 = 10 Marks]

11) Mr. Meticulous asked about other Companies, he was intending to perform which audit procedure?
(a) Analytical Procedures (b) Substantive Procedures
(c) Random Sampling (d) Statistical Sampling

12) What was the initial procedure carried on by Mr Meticulous?

(a) Trend Analysis (b) Ratio Analysis (c) Statistical Modelling (d) Random Sampling

13) Who has the right to retain the audit working papers of the Company in current case?
(a) Audit Committee (b) Board of Directors (c) Auditor (d) Chairman of the Audit Committee

14) When Mr. Meticulous decided to go in detail checking of Sales, which Audit Procedure he applied to obtain the
evidence?
(a) Test of Transactions (b) Test of Balances (c) Both (a) and (b) (d) Analytical Procedures

15) The impact of the exercise carried on by the Company for unbilled challans will have an impact on
(a) Gross Receipts and Debtors (b) Gross Receipts and Inventory
(c) Debtors (d) Inventory

PART – II (70 MARKS)

Question No. 1 which is compulsory and any 4 out of the remaining 6 questions.
Q.1.
(a) Satranga Foods Private Limited is engaged in manufacturing of pickles. The auditors of the company have
planned audit procedures in respect of recognition of revenues of the company. Despite that, there is a
possibility that misstatements in revenue recognition are not identified by planned audit procedures. Identify
and explain that particular risk in detail. [4 Marks]

(b) Discuss the reporting requirements as per CARO, 2020, regarding:

(i) Statutory Dues
(ii) Transactions with Related Parties [3 Marks]

(c) M/s TP & Co., a firm of Chartered Accountants, is auditor of KSR Ltd. for many years. KSR Ltd. has diversified
their business into newer areas during the last year. The senior member of the audit team handed over the
standard audit programme of earlier years to the audit assistants and instructed them to follow the same. The
assistants are conducting the audit accordingly. Whether the attitude of the audit assistants is justified or they
are required to keep an open mind? Guide them. [4 Marks]
(d) Mr. D an auditor, while auditing ACE Ltd., identified certain misstatements in relation to particular class of
transactions and account balances. He had communicated same to those charged with governance and also
taken written representation for the same. State the audit documentation required by the auditor regarding
misstatements identified during the audit. [3 Marks]

Q.2.
(a) CA Jignesh Desai is in midst of audit of a company. The company is fairly large one and has a well -functioning
internal audit department. While considering sending out external confirmation requests to trade receivables
outstanding as on date of financial statements, he has delegated the process of choosing trade receivables,
designing requests and receiving responses from customers to internal audit department. The responses are
also received on the mail id of internal audit department. Is approach of CA Jignesh Desai proper? [4 Marks]

(b) Kriti, a CA student, has joined articles in a reputed audit firm. She considers audit engagement to be an
“assurance engagement”. Her understanding is that audit engagement is the only kind of assurance engagement
in which practitioner gives a written assurance report in appropriate form. However, her friend Somaya, does
not agree with her. She is of the view that assurance engagements are not restricted to audit alone. Besides,
Somaya also thinks that assurance engagements can also relate to matters other than historical financial
information. Whose view appears to be correct? State with reasons. [4 Marks]

(c) Mr. Z, at the time of appointment as an independent director in EF Ltd. a listed company, came to know that the
Companies Act, 2013 has placed a greater emphasis on the effective implementation and reporting on internal
controls for a listed Company. He wants to know the responsibilities as casted under Companies Act, 2013 with
regards to Internal Financial Control for (1) Directors (2) Independent directors and Audit committee as per
section 134(5)(e), 149(8) & 177(4) (vii) respectively of the Companies Act, 2013. [3 Marks]

(d) Mr. L is a principal auditor of OP Ltd. There are several divisions of OP Ltd. that are audited by other auditors.
State the procedures Mr. L should ordinarily perform to obtain sufficient and appropriate audit evidence that
the work of other auditors is adequate for the principal auditor's purpose in the context of this assignment.
[3 Marks]

Q.3.
(a) CA E is auditor of LM Ltd. Before commencing with current year's audit, he initiated planning for the audit. Planning
includes the need to consider certain matters, prior to the identification and assessment of the risk of material
misstatements. Enumerate such matters. [4 Marks]

(b) PQ & Co. want to diversify its business and for that purpose they want to raise money by issuing shares to the
general public. The face value of the shares is ` 100 but the directors of the company propose to issue the
shares at a discounted rate of ` 95/- so as to receive more response.
The statutory auditor, however, objects to the same as it is not allowed as per the Companies Act, 2013. State
the provisions of Section 53 of the Companies Act, 2013 with reference to shares issued at a discount and the
consequences where the company fails to comply with the provisions of this section.
Mention the purposes for which Securities Premium Account can be used ? [6 Marks]

(c) MNB bank advanced certain loans guaranteed by government. State the prudential norms for asset classification
and income recognition of such loans. [4 Marks]
Q.4.
(a) CA Q is the engagement partner for the audit of a Departmental store. As a part of the risk assessment
procedure, he wants to make inquiries of the management and others within the entity. What kind of
information can the auditor get by inquiring from the following?
(i) Internal audit personnel
(ii) In-house legal counsel
(iii) Marketing or sales personnel
(iv) Information systems personnel [4 Marks]

(b) PD & Co., Chartered Accountants, were appointed as the statutory auditors of MR Limited for the
financial year 2023-24. MR Limited included the following clause in the appointment letter to the
auditors: "The Auditor shall be responsible for detecting the frauds that may happen in the company
during the financial year 2023-24.”
The auditor objected to inclusion of such a clause in the appointment letter. Discuss in the light of
scope of audit. [4 Marks]

(c) The auditor of a company is having concerns about following of going concern basis of accounting
followed by management for preparation of financial statements. It asks the management to justify
preparation of financial statements. However, management is not willing to make its assessment and
share with auditor. What are implications for auditor’s report in such a scenario? [6 Marks]

Q.5.
(a) As a Statutory Auditor of the company list out audit procedure required to be undertaken for the
recognition of following other income:
(i) Interest income from fixed deposit
(ii) Dividend income
(iii) Gain/(loss) on sale of investment in mutual funds. [4 Marks]

(b) CA P is conducting stock audit of a borrower availing cash credit facility of ` 100 lacs from branch of a
bank. The cash credit facility is against security of paid stocks and debtors up to 90 days. Margin
stipulated is 25% for stocks and 40% for debtors. Following further information is available as on
31.12.22:
Value of stocks ` 125 lacs
Value of stocks (fully damaged) included in above 5 lacs
Value of debtors 50 lacs
Value of debtors exceeding 90 days included in above 10 lacs
Value of creditors for goods 50 lacs

Is Drawing Power computed by CA P for ` 82.50 lacs proper? [4 Marks]

(c) Local Fund Audit Wing of a State of a State Government has appointed you to audit the accounts of
 one of the Local body governed by it. As an auditor, what will be your reporting areas? [3 Marks]

(d) Knowledge of the Client’s business is one of the important principles in developing an overall audit plan. In
fact, without adequate knowledge of client’s business, a proper audit is not possible. As per SA-315,
“Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and Its
Environment”, the auditor shall obtain an understanding of the relevant industry, regulatory and other
external factors including the applicable financial reporting framework. Substantiate with the help of
examples. [3 Marks]

Q.6.
(a) Section 77 of Multi-State Cooperative Societies Act, 2002 states that the Central Government may at
any time by order direct that a special audit of the Multi-State Co-Operative Society’s accounts for such
period or periods as may be specified in the order, shall be conducted. Further, it may by the same or
a different order appoint either a Chartered Accountant or the Multi-State Co-Operative Society’s
auditor himself to conduct special audit. Under which circumstances such power can be exercised by
the Central Government? [4 Marks]

OR

(a) Sanskar Foundation is a Non-Governmental Organisation (NGO) for orphan children. They have
received voluntary contribution of ` 50 lacs from the promoters, specifying that ` 20 lacs are towards
the Corpus contribution and ` 30 lacs are towards Revolving fund. Explain the terms "Corpus
contribution" and "Revolving fund" [4 Marks]

(b) A Chartered accountant is conducting audit of a client for last two years. Before proceeding to start
audit for next year, he notices that there is substantial change in management. Besides, client has
ventured into areas of business activity which were not present at time of accepting initial audit
engagement. Discuss responsibility of auditor in this regard in context of SA 210. [4 Marks]

(c) A muti-speciality hospital has come up in your city. You are appointed as auditor for first year. Discuss,
any four, broad areas to be kept in mind while conducting audit of accounts of such a newly opened
multi-speciality hospital. [3 Marks]

(d) JK Ltd. has opened a new manufacturing unit and for that they want plant & machinery. Since the
capital outflow will be huge, they are considering of taking it on lease. They have approached several
parties and have shortlisted one of them who is ready to give the plant on lease for 11 years, which is
approximately the estimated economic life of the asset. As per the agreement, JK Ltd. will bear the
insurance and maintenance expenses of the asset. Which kind of lease agreement have JK Ltd. entered
into and what is the ownership status, the accounting treatment and the tax benefits of the same?
[3 Marks]

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