Audit Sample Paper and Suggested Answer

AFA
FINAL COURSE – FAST (Part) Paper – 3: Advanced Auditing,

Test Series – Paper 1 Assurance and Professional Ethics
Total No. of Questions in Part I – 20 Maximum Marks – 30
Total No. of Questions in Part II – 6 Maximum Marks – 70
Total No. of Pages – 34
GENERAL INSTRUCTIONS TO CANDIDATES
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Multiple Choice Questions (MCQs).
3. Part II comprises questions which require descriptive type answers.
4. Ensure that you receive the question paper relating to both the parts. If you have
not received both, bring it to the notice of the Institute.
5. Answers to MCQs in Part I are to be mentioned in the first page of your answer
copy. Students need to only mention their choice of correct option like (a) or (b) or
so. No explanations or reasonings are required for MCQs.
6. Answers to descriptive questions in Part 2 should be given from the next page of
your answer sheet
7. Student should mention their Name, Batch, Course (CA Inter / Final), Subject
Name, Date of Test and Test Code as given on top of this sheet on the first
page before answering the MCQs.
8. Once the test is complete, student need to scan the answer sheet and make single
pdf file for all the pages and email it to [email protected] and
[email protected] with Subject Line – Answers Sheet for Test (Code) and
Your Name.
9. Duration of the examination is 1.5 hours. You will be required to upload the
answer sheets on the same date / time of test as defined in your live class else the
answer sheet will not be evaluated. In such case you should do a self-evaluation
using the suggested answer which will be posted in the same folder after one day
of the date of test.
10. The FAST examiner team will check the copy and give the marks alongwith
feedbacks for your improvements. We take utmost care in checking however being
subjective in nature the checking may differ from examiner to examiner.
11. Candidate are advised not to cheat and have self-discipline as these tests are
preparing you better for your real exams and hence realistic assessment will help
you take corrective actions at the right time.
12. FAST reserves the right to display any answers or answer sheets or share with
other students for your benefits without any prior written or express consent.
13. You suggestions on the test paper or evaluation or else can be shared at
[email protected]
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PART 1
1. 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 preparing 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. 1
2. 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?
www.fasttestseries.com APA
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 Are external (offsite) data backups maintained at a place outside the
premises?
The type of audit being conducted is likely to be:
a) Comprehensive audit. b) Propriety audit.
c) Compliance audit. d) Financial audit. 1
3. 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. 1
www.fasttestseries.com APA P.T.O.

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4. CA Kamal is the statutory auditor of Auto Cover 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 ` 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 ` 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 such 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 Auto cover Ltd. 1
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5. Preparation of 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.
(c) The auditor 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. 1
6. 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.
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.
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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. 1
7. 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. 1
8. 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 100 lakh Employees’ Remuneration
employees and Welfare Benefits
Account
Reimbursement of premium in 20 lakh Employees’ Remuneration
respect of employees’ health and Welfare Benefits
cover Account
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Training and non-training 30 lakh Employees’ Remuneration
expenses incurred for employees and Welfare Benefits
Account
Expenses incurred towards 10 lakh Employees’ Remuneration
medical treatment of employees and Welfare Benefits
not having health cover Account
Incentives paid to employees of 40 lakh Commission account
the 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. 1

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9. 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;
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. 1
10. The notes to the account statement of Nemi Ltd. Shows the break-up of
accounts payable for the financial year 2020-21 as follows:
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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. 1
MCQ (11-15)
While preparing the financial statement for the year ended on 31 March 2022,
ABC Limited, a listed entity, provided the below information:
(in ` Lakhs)
Particulars Note As on As on
No 31.03.2022 31.03.2021
Equity and Liabilities
Current liabilities
(a) Financial Liabilities

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(i) Trade Payables: - 10
(A) total outstanding dues of micro 300
enterprises and small enterprises; and
(B) total outstanding dues of creditors other 210
than micro enterprises and small
enterprises.
(ii) Other financial liabilities (other than
those specified in item (c)
Note 10: Ageing of Trade Payables

Particulars Ageing of Trade Payables
Ageing Less 3-5 More Total Non- MSME Total
than Years than 5 MSME Trade Trade
3 Year Years 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
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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 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”
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 We have relied upon the
auditor identified that the trade payables assessment performed by the
balance includes ` 100 lakh payable to management with respect to the
the intercompany which is aged more litigation and disputed Trade

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than 3 years. Payables Balance.
Upon Inquiry with management, it was
identified the same amount is not paid Moreover, the amount is not
on account of a dispute with respect to material and hence no further
commercial terms. procedure other than obtaining
However, no such amount was management representation was
outstanding as receivable in the performed on the said balance.
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.
Multiple Choice Questions

11. In the given situation whether Mr. A will be held guilty of professional
Misconduct.
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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. 2
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. 2

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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. 2
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
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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 the 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 modify 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
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.

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(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. 2
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.
(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.
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(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. 2
MCQ. 16-20
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

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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 & 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
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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:
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.

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(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
requirements 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 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.
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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

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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
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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.
(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

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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 Companies 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.
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PART 2
DESCRIPTIVE QUESTIONS
1. Question paper comprises 6 questions. Answer Question No. 1 which is
compulsory and any 4 out of the remaining 5 questions
2. Working notes should form part of the answer.
3. Answers to the questions are to be given only in English except in the case of
candidates who have opted for Hindi Medium. If a candidate has not opted
for Hindi Medium, his/her answers in Hindi will not be evaluated.
4. Maximum Mark 70
1.
(A) 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 ` 40,000 crores with profits of ` 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 2022,
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
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management did not agree with revenue recognition to be shown as key
audit matter in the audit report. Comment. 5
(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 of 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 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? 5
(C) The audit report of Kolsi (P) Ltd. for F.Y. 2021-22 was issued by Bishnoi &
Co. on 25th July, 2022. However, a case was filed against Kolsi (P) Ltd. on
4th August, 2022, with the Civil Court, with respect to an incident caused in
its factory on 17th January, 2022, the outcome of which may result in paying
heavy penalty by Kolsi (P) Ltd.
Mr. Raj Bishnoi, the partner of Bishnoi & Co., discussed the said matter
with the management and it was determined to amend the financial
statements for F.Y. 2021-22. Further, Mr. Raj inquired how the management
intended to address the said matter in the financial statements to which he
was told that the said matter was going to be disclosed as a “Contingent
Liability for a Court case” to the foot note in the balance sheet with no
additional disclosures.
The management told Mr. Raj that such disclosure was enough as he would
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further going a description of the said court case and its outcome in the
‘Emphasis of Matter’ paragraph in his amended audit report.
In the context of aforesaid case scenario, please answer the following
questions:-
(a) Whether Mr. Raj on behalf of Bishnoi & Co., has properly adhered to
his responsibilities in accordance with SA 560, on becoming aware of
the court case filed against Kolsi (P) Ltd.?
(b) Whether the contention of management of Kolsi (P) Ltd. is valid with
respect to the disclosure of the court case in the financial statements? 4
2.
(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. 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

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(B) In an automated environment, the data stored and processed in systems can
be used to get various insights into the way business operates. This data can
be useful for preparation of management information system (MIS) reports
and electronic dashboards that give a highlevel snapshot of business
performance. In view of above you are required to briefly discuss the
meaning of data analytics and example of such data analytics techniques. 5
(C) 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? 4
3.
(A) PQS & Associates are one of the joint auditors of KNO Bank for the year
2022 -23. While auditing KNO Bank, they are analysing industry data
relating to NPAs in select public sector banks as part of risk assessment
procedures:-
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Name of Gross NPAs Net NPAs (in Ratio of Net NPAs

Bank (in ` crore) ` crore) to Net advances
BBI Bank 55,000 13,000 1.72%
DAB Bank 45,000 10,000 2.34%
CNI Bank 55,000 18,000 2.65%
KNO Bank 28,000 6,500 3.97%
BRB Bank 35,000 8,800 2.27%
In the above context, what do you understand by “Gross NPAs” and “Net
NPAs” as on reporting date in the context of financial statements of a
Bank? As an auditor of KNO Bank, what inference would you draw by
comparing the “Ratio of net NPAs to net advances” with other public sector
banks? 4
(B) A Ltd. holds the ownership of 10% of voting power and control over the
composition of Board of Directors of B Ltd. While planning the statutory
audit of A Ltd., what factors would be considered by you as the statutory
auditors of A Ltd for the audit of its consolidated financial statements
prepared under Ind AS? 5
(C) Mr. S is a practising chartered accountant based out of Chennai. During the
weekends, he involved himself in equity research and used to advise his
friends, relatives and other known people who are not his clients. Apart
from this, he was also involved as a paper-setter for Accountancy subject in
the school in which he studied. He also owned agricultural land and was
doing agriculture during his free time. During the year 20X1, heavy losses
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were incurred in agricultural activity due to natural calamities and
misfortune, and he lost almost all of his wealth and became undischarged
insolvent. After a few court hearings, finally, in the year 20X3, he was
declared discharged insolvent and obtained a certificate from the court
stating that his insolvency was caused by misfortune without any
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). 5
4.
(A) The Comptroller and Auditor General of India has appointed a chartered
accountant firm to conduct the comprehensive audit of Metro Company
Limited (a listed government company) which is handling the Metro project
of the metropolitan city for the period ending 31-03-2022. The work to be
conducted under Project A handled by the Metro 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 A regarding the understatement of the
Current liabilities and Capital work in progress by ` 84.68 crore. Explain
some of the matters to be undertaken by the chartered accountant firm
while conducting the comprehensive audit of Metro Company Limited. 5
(B) MF Ltd., engaged in the manufacturing of various products in its factory, is

concerned with shortage in production and there arose suspicion of
inventory fraud. You are appointed by MF Ltd. to evaluate the options for
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verifying the process to reveal fraud and the corrective action to be taken.
As an investigating accountant what will be your areas of verification and
the procedure to be followed for verification of defalcation of inventory? 5
(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 Turnover Loan from Public
Share Bank and Deposits
Capital PFI
AADI Listed 100 190 50 24
Ltd.
AJIT Ltd. Unlisted 60 190 50 24
Public
NEMI Unlisted 60 190 50 -
Ltd. Private
You are required to evaluate the requirements of the Companies Act, 2013
regarding the appointment of internal Auditors for the Group Companies.
Discuss. 4

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5.
(A) CA. Aditya Jain is auditor of a listed company. He is also required to carry
out quarterly review of financial statements of company in terms of
regulatory requirements. He is already well-versed with business of
company and has deep understanding of the company. Discuss, any five
procedures, by which he can update his understanding of the company for
carrying out quarterly review. 5
(B) Mr. Arjun was appointed as the engagement partner on behalf of Bhism &
Co., a Chartered Accountant Firm, for conducting statutory audit
assignment of Sinwar Ltd., unlisted public company.
Mr. Brijesh, one of the senior engagement team members, was given the
responsibility to audit the matters as per the requirements of CARO, 2020
and in that connection, he made the following observations, that may be
relevant for reporting as per the said Order:-
Sr. Observations
No.
(a) One of the Plant and Equipment taken on a lease (‘right of use’
asset) by Sinwar Ltd. was revalued based on the valuation by a
registered valuer and the net carrying value of Plant and Equipment
in aggregate was changed from ` 4 crore to ` 4.45 crore.
(b) During the year under consideration, cash credit limit of ` 5.5 crore
was sanctioned to Sinwar Ltd. by DMC Bank based on the security
of current assets which was reduced to ` 4.5 crore after 6 months.
In this connection, quarterly returns have been filed by the company
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with the DMC bank which are in agreement with Books of
Accounts.
You are required to examine the contention of Mr. Brijesh regarding
reporting of the above observations in accordance with CARO 2020. 5
(C) 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 - 1.5% Aug 2021 - 1.7%
Sep 2021 - 1.4% Oct 2021 - 4.1% 4
6.
(A) 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

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(B) Ayurda Ltd.is a fast-growing and award-winning SaaS software company
which is headquartered in Mumbai. It also has offices in the UK and
provides cloud-based professional services automation (PSA) software
solutions to professional services organizations around the world. They want
to engage you to provide an assurance report for one of its major clients over
the controls it operates as a service organisation. Can you provide such an
assurance report? 4
(C) KDK 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 nationalized bank. KDK 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
(1)
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AUDIT PAPER
FINAL COURSE – FAST (Part) Test Series – Paper 1 Paper – 3: Advanced Auditing,
Assurance and Professional Ethics
Total No. of Questions in Part I – 20 Maximum Marks - 30
Total No. of Questions in Part II – 6 Maximum Marks - 70
Total No. of Pages - 06
GENERAL INSTRUCTIONS TO CANDIDATES

1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Multiple Choice Questions (MCQs).
3. Part II comprises questions which require descriptive type answers.
4. Ensure that you receive the question paper relating to both the parts. If you have not received
both, bring it to the notice of the Institute.
5. Answers to MCQs in Part I are to be mentioned in the first page of your answer copy. Students
need to only mention their choice of correct option like (a) or (b) or so. No explanations or
reasonings are required for MCQs.
6. Answers to descriptive questions in Part 2 should be given from the next page of your answer
sheet
7. Student should mention their Name, Batch, Course (CA Inter / Final), Subject Name, Date
of Test and Test Code as given on top of this sheet on the first page before answering the
MCQs.
8. Once the test is complete, student need to scan the answer sheet and make single pdf file for all
the pages and email it to [email protected] and [email protected] with
Subject Line – Answers Sheet for Test (Code) and Your Name.
9. Duration of the examination is 1.5 hours. You will be required to upload the answer sheets on
the same date / time of test as defined in your live class else the answer sheet will not be
evaluated. In such case you should do a self evaluation using the suggested answer which will
be posted in the same folder after one day of the date of test.
10. The FAST examiner team will check the copy and give the marks alongwith feedbacks for your
improvements. We take utmost care in checking however being subjective in nature the
checking may differ from examiner to examiner.
11. Candidate are advised not to cheat and have self discipline as these tests are preparing you
better for your real exams and hence realistic assessment will help you take corrective actions
at the right time.
12. FAST reserves the right to display any answers or answer sheets or share with other students
for your benefits without any prior written or express consent.
13. You suggestions on the test paper or evaluation or else can be shared at [email protected]
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PART 1
Q 1. 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 preparing 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. (1 Mark)
Ans. (a)
Q 2. 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?
The type of audit being conducted is likely to be:
a) Comprehensive audit. b) Propriety audit.
c) Compliance audit. d) Financial audit. (1 Mark)
Ans. (c)
Q 3. 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. (1 Mark)
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Ans. (b)
Q 4. CA Kamal is the statutory auditor of Auto Cover 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 ` 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 ` 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 such 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 Auto cover Ltd. (1 Mark)
Ans. (b)
Q 5. Preparation of 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.
(c) The auditor 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. (1 Mark)
Ans. (c)
Q 6. 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.
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. (1 Mark)
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Ans. (b)
Q 7. 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. (1 Markl)
Ans. (c)
Q 8. 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 of 20 lakh Employees’ Remuneration and Welfare
employees’ health cover Benefits Account
Training and non-training expenses incurred for 30 lakh Employees’ Remuneration and Welfare
employees Benefits Account
Expenses incurred towards medical treatment of 10 lakh Employees’ Remuneration and Welfare
employees not having health cover Benefits Account
Incentives paid to employees of the company 40 lakh Commission account
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. (1 Mark)
Ans. (b)
Q 9. 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;
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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. (1 Mark)
Ans. (b)
Q 10. 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. (1 Mark)
Ans. (c)
MCQ (11-15)
While preparing the financial statement for the year ended on 31 March 2022, ABC Limited, a listed entity, provided the
below information:
(in ` Lakhs)
Particulars Note No As on As on
31.03.2022 31.03.2021
Equity and Liabilities
Current liabilities
(a) Financial Liabilities
(i) Trade Payables: - 10
(A) total outstanding dues of micro enterprises and small 300
enterprises; and
(B) total outstanding dues of creditors other than micro 210
enterprises and small enterprises.
(ii) Other financial liabilities (other than those specified in item (c)
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Note 10: Ageing of Trade Payables

Particulars Ageing of Trade Payables (` in Lakhs)
Ageing Less than 3-5 More than Total Non- MSME Trade MSME Total Trade
3 Year Years 5 Years Payables Trade 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 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”
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 identified that the We have relied upon the assessment
trade payables balance includes ` 100 lakh payable to the performed by the management with respect
intercompany which is aged more than 3 years. to the litigation and disputed Trade Payables
Upon Inquiry with management, it was identified the same Balance.
amount is not paid on account of a dispute with respect to
commercial terms. Moreover, the amount is not material and
However, no such amount was outstanding as receivable in the hence no further procedure other than
accounts statement shared by Intercompany. The amount was obtaining management representation was
already written off by such an Intercompany in past years. performed on the said balance.
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.
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Multiple Choice Questions

Q 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.
(2 Marks)
Ans. (a)
Q 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. (2 Marks)
Ans. (c)
Q 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.
(2 Marks)
Ans. (c)
Q 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
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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 the 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 modify 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.
(2 Marks)
Ans. (a)
Q 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.
(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. (2 Marks)
Ans. (b)
MCQ. 16-20
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
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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 & 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:
Q 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.
Ans. (d)

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Q 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 requirements 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 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.
Ans. (a)
Q 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.
Ans. (a)
Q 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
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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.
(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.
Ans. (d)
Q 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 Companies 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.
Ans. (a)

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PART 2
DESCRIPTIVE QUESTIONS
1. Question paper comprises 6 questions. Answer Question No. 1 which is compulsory and any 4 out of
the remaining 5 questions
2. Working notes should form part of the answer.
3. Answers to the questions are to be given only in English except in the case of candidates who have
opted for Hindi Medium. If a candidate has not opted for Hindi Medium, his/her answers in Hindi will not
be evaluated.
4. Maximum Mark 70
Q 1.
(A) 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 ` 40,000 crores with profits of ` 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 2022, 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. (5 Marks)
ANS.
(i) 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.
(ii) Determination of KAM
The auditor shall determine, from the matters communicated with TCWG, those matters that required
significant auditor attention in performing the audit. In making this determination, the auditor shall
take into account the following:
 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”.
 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.
 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.
(iii) 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.
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 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.
(iv) Conclusion:-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.
(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 of 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 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?
(5 Marks)
Ans.
(i) 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.
(ii) 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.
(iii) Audit Procedure & Reporting–
 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 appropriate
cases, making a suitable qualification in the main audit report has also to be considered
(C) The audit report of Kolsi (P) Ltd. for F.Y. 2021-22 was issued by Bishnoi & Co. on 25th July, 2022. However, a case
was filed against Kolsi (P) Ltd. on 4th August, 2022, with the Civil Court, with respect to an incident caused in its
factory on 17th January, 2022, the outcome of which may result in paying heavy penalty by Kolsi (P) Ltd.
Mr. Raj Bishnoi, the partner of Bishnoi & Co., discussed the said matter with the management and it was
determined to amend the financial statements for F.Y. 2021-22. Further, Mr. Raj inquired how the management
intended to address the said matter in the financial statements to which he was told that the said matter was
going to be disclosed as a “Contingent Liability for a Court case” to the foot note in the balance sheet with no
additional disclosures.
The management told Mr. Raj that such disclosure was enough as he would further going a description of the said
court case and its outcome in the ‘Emphasis of Matter’ paragraph in his amended audit report.
In the context of aforesaid case scenario, please answer the following questions:-
(a) Whether Mr. Raj on behalf of Bishnoi & Co., has properly adhered to his responsibilities in accordance
with SA 560, on becoming aware of the court case filed against Kolsi (P) Ltd.?
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(b) Whether the contention of management of Kolsi (P) Ltd. is valid with respect to the disclosure of the
court case in the financial statements? (4 Marks)
Ans.
(a) Auditor’s responsibility in case of Subsequent Event
(i) Provision:-As per SA 560, ‘Subsequent Events’, the auditor has no obligation to perform any audit
procedures regarding the financial statements after the date of the auditor’s report. However, when,
after the date of the auditor’s report but before the date the financial statements are issued, a fact
becomes known to the auditor that, had it been known to the auditor at the date of the auditor’s
report, may have caused the auditor to amend the auditor’s report, the auditor shall:
(1) Discuss the matter with management and, where appropriate, those charged with governance.
(2) Determine whether the financial statements need amendment and, if so,
(3) Inquire how management intends to address the matter in the financial statements.
(ii) In the given case:- On becoming aware of the court case filed against Kolsi (P) Ltd., Mr. Raj
discussed the said matter with the management and it was determined to amend the financial
statements. Also, he inquired how the management intended to address the said matter in the
financial statements.
(iii) Conclusion/Comment
 However, If management does not take the necessary steps to ensure that anyone in receipt of
the previously issued financial statements is informed of the situation and does not amend the
financial statements in circumstances where Mr. Raj (hereinafter referred as ‘the auditor’)
believes they need to be amended,
 The auditor shall notify management and, those charged with governance (unless all of those
charged with governance are involved in managing the entity), that the auditor will seek to
prevent future reliance on the auditor’s report.
 If despite such notification the management or those charged with governance do not take these
necessary steps, the auditor shall take appropriate action to seek to prevent reliance on the
auditor’s report in accordance with SA 560.
(b) Disclosure of the court case in the financial statements
(i) Provision:-As per SA 706, ‘Emphasis of Matter Paragraphs and Other Matter Paragraphs in the
Independent Auditor’s Report’, an Emphasis of Matter paragraph is not a substitute for:
(a) A modified opinion in accordance with SA 705 (Revised) when required by the circumstances
of a specific audit engagement;
(b) Disclosures in the financial statements that the applicable financial reporting framework
requires management to make, or that are otherwise necessary to achieve fair presentation; or
(c) Reporting in accordance with SA 570 (Revised) when a material uncertainty exists relating to
events or conditions that may cast significant doubt on an entity’s ability to continue as a going
concern.
(ii) In the given case:- The management of Kolsi (P) Ltd. has presumed that as the auditor was going to
provide a description of the said court case and its outcome in the ‘Emphasis of Matter’ paragraph
in his amended audit report, there was no further need for it to provide additional disclosures about
the court case in the financial statements.
(iii) Conclusion:-The said contention of management of Kolsi (P) Ltd. is not valid as ‘Emphasis of

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Matter’ paragraph cannot be used as a substitute for disclosures required to be made in the financial
statements as per the applicable financial reporting framework or that is otherwise necessary to
achieve fair presentation, which is the responsibility of the management.
Q 2.
(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. 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)
Ans.
(i) Provision: -As per section 27 of the Chartered Accountants Act, 1949, if a chartered accountant in
practice has more than one office in India; each one of these offices should be in the separate charge of a
member of the Institute.
(ii) 2nd office Exemption:- There is however an exemption for the above
• If the second office is located in the same premises, in which the first office is located; or
• The second office is located in the same city, in which the first office is located; or
• The second office is located within a distance of 50 kms from the municipal limits of a city, in which
the first office is located.
(iii) Hill area Exemption: - 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 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 should also be sent to the
office of the Institute by registered post.
(iv) 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.
(v) Conclusion: -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 manner. 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) In an automated environment, the data stored and processed in systems can be used to get various insights into
the way business operates. This data can be useful for preparation of management information system (MIS)
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reports and electronic dashboards that give a highlevel snapshot of business performance. In view of above you
are required to briefly discuss the meaning of data analytics and example of such data analytics techniques.
(5 Marks)
Ans.
Refer All points of EMERGING TECHNOLOGIES IN AUDIT
(C) 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?
(4 Marks)
Ans.
(i) 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.
(ii) 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.
(iii) While reviewing the work performed by less experienced members of the engagement team, both the
more experienced Reviewers should consider whether:
1. The work has been performed in accordance with professional standards and regulatory and legal
requirements.
2. Significant matters have been raised for further consideration.
3. Appropriate consultations have taken place and the resulting conclusions have been documented and
implemented.
4. There is a need to revise the nature, timing and extent of work performed.
5. The work performed supports the conclusions reached and is appropriately documented.
6. The evidence obtained is sufficient and appropriate to support the report; and
7. The objectives of the engagement procedures have been achieved
Q 3.
(A) PQS & Associates are one of the joint auditors of KNO Bank for the year 2022 -23. While auditing KNO Bank, they
are analysing industry data relating to NPAs in select public sector banks as part of risk assessment procedures:-
Name of Bank Gross NPAs Net NPAs Ratio of Net NPAs
(in ` crore) (in ` crore) to Net advances
BBI Bank 55,000 13,000 1.72%
DAB Bank 45,000 10,000 2.34%
CNI Bank 55,000 18,000 2.65%
KNO Bank 28,000 6,500 3.97%

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BRB Bank 35,000 8,800 2.27%
In the above context, what do you understand by “Gross NPAs” and “Net NPAs” as on reporting date in the
context of financial statements of a Bank? As an auditor of KNO Bank, what inference would you draw by
comparing the “Ratio of net NPAs to net advances” with other public sector banks? (4 Marks)
Ans.
Gross NPAs represent opening balances of NPAs as increased by fresh NPAs during the year and reduced by
upgradations, recoveries and write-offs during the year.
Net NPAs are arrived at after deducting amounts on account of the total provision held against NPAs/ balance in
the interest suspense account to park accrued interest on NPAs and certain other adjustments.
The Net NPAs to Net advances ratio is higher in the case of KNO Bank as compared to other public sector banks.
It shows that there is a risk that the bank could not have made the required provisions in accordance with RBI
guidelines. A higher net NPAs to Net advances ratio indicates the probability and risk of under-provisioning.
Keeping in view the above, audit procedures have to be tailored towards the examination and verification of this
crucial area.
(B) A Ltd. holds the ownership of 10% of voting power and control over the composition of Board of Directors of B
Ltd. While planning the statutory audit of A Ltd., what factors would be considered by you as the statutory
auditors of A Ltd for the audit of its consolidated financial statements prepared under Ind AS? (5 Marks)
Ans.
(i) Analysis of the case:
 In this case, A Ltd. holds only 10 percent of the voting power but has control over the composition
of the Board of Directors of B Ltd.
 In such a case, A Ltd shall be considered as a parent of B Ltd and, therefore, it would consolidate B
Ltd in its consolidated financial statements as a subsidiary.
(ii) Audit procedure:

 Obtain understanding:- The auditor should make plan, among other things, for the understanding of
accounting policies of the A Ltd and B Ltd and determining and programming the nature, timing,
and extent of the audit procedures to be performed etc.
 As per Ind-as-110/AS-21:- The auditor should verify A Ltd’s management’s assessment of having
control in B Ltd despite having only 10% voting power as per the requirements of Ind AS 110/AS-
21.
 Control over Board:- Auditor would need to verify as to how A Ltd controls the composition of the
Board of Directors or corresponding governing body of B Ltd.
 There can be various means by which such kind of control can be established.
 In this regard, the auditor may verify: the minutes of Board meetings, shareholder agreement
entered into by the parent, agreements with B Ltd to which the parent might have provided any
technology or know how, enforcement of statute, etc.
 Adjustments as per Ind-AS/AS-The auditor should verify that the adjustments warranted by Ind
AS 110/AS-21 have been made wherever required and have been properly authorised by the
management of the parent. The preparation of consolidated financial statements gives rise to
permanent consolidation adjustments and current period consolidation adjustments.
 IndAS-24/AS-18:- The duties of an auditor with regard to reporting of transactions with any other
related parties as required by IndAS-24/AS-18are given in SA 550 on Related Parties
 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. A person or other entity
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that has control or significant influence, directly or indirectly through one or more intermediaries,
over the reporting entity are considered as Related Party.
(iii) Conclusion:- In forming an opinion on the financial statements:
 The auditor shall evaluate whether the identified related party relationships and transactions have
been appropriately accounted for and disclosed in accordance with Ind AS 110/AS-21 and
Schedule III and
 Whether the effects of the related party relationships and transactions prevent the financial
statements from achieving
 True and fair presentation (for fair presentation frameworks) or
 Cause the financial statements to be misleading (for compliance frameworks).
(C) Mr. S is a practising chartered accountant based out of Chennai. During the weekends, he involved himself in
equity research and used to advise his friends, relatives and other known people who are not his clients. Apart
from this, he was also involved as a paper-setter for Accountancy subject in the school in which he studied. He
also owned agricultural land and was doing agriculture during his free time. During the year 20X1, heavy losses
were incurred in agricultural activity due to natural calamities and misfortune, and he lost almost all of his
wealth and became undischarged insolvent. After a few court hearings, finally, in the year 20X3, he was declared
discharged insolvent and obtained a certificate from the court stating that his insolvency was caused by
misfortune without any 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). (5 Marks)
Ans.
Given situation can be visualised in following parts:
(A) Mr S used to involve himself in equity research and used to advise his friends, relatives and other known
people: As per the recent decisions taken by the Ethical Standards Board of ICAI, a Chartered Accountant in
practice may be an equity research adviser, but he cannot publish a retail report, as it would amount to
other business or occupation.
In the given case, though Mr S is involved in doing equity research and in advising people, it is clear that he
does not publish any retail report of his research. Hence, this act of Mr S shall not make him guilty of
professional misconduct.
(B) Mr S is involved in paper-setting for the Accountancy subject in the school where he studied. He also owns
agricultural land and does agriculture activities: As per Clause 11 of Part I of First Schedule of Chartered
Accountants Act and regulation 190A of Chartered Accountants Regulations, 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.
Further, Regulation 190A mentions the 'Permissions granted Generally' to engage in a certain category of
occupations, for which no specific permission of Council is required. Those cases include:
- Valuation of papers, acting as paper-setter, head examiner or a moderator, for any examination.
- Owning agricultural land and carrying out agricultural activities.
Therefore, in the given case, the activities of Mr S as a paper-setter and involvement in agricultural activities
do not make him guilty of professional misconduct.
(C) Mr. S 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
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aforementioned 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 S 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 S has not violated the provisions of Section 8, and he is not debarred from having his name
entered in the Register of Members.
Q 4.
(A) The Comptroller and Auditor General of India has appointed a chartered accountant firm to conduct the
comprehensive audit of Metro Company Limited (a listed government company) which is handling the Metro
project of the metropolitan city for the period ending 31-03-2022. The work to be conducted under Project A
handled by the Metro 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 A regarding the understatement of the Current liabilities and Capital work in progress by
` 84.68 crore. Explain some of the matters to be undertaken by the chartered accountant firm while conducting
the comprehensive audit of Metro Company Limited. (5 Marks)
Ans.
(i) A CA Firm has been appointed to conduct comprehensive audit of Metro 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 liabilities and CWIP by ` 84.68 crore.
(ii) The matters to be undertaken by the CA firm while conducting the comprehensive audit of Metro
Company Limited: Some of the broad areas are listed below:
a) 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?
b) 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?
c) Has the planned rate of return been achieved?
d) 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?
SJ’s Comment:-
Though question is specific to solar power manufacturer, the suggested answer is generic in nature.
(B) MF Ltd., engaged in the manufacturing of various products in its factory, is concerned with shortage in
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production and there arose suspicion of inventory fraud. You are appointed by MF Ltd. to evaluate the options
for verifying the process to reveal fraud and the corrective action to be taken. As an investigating accountant
what will be your areas of verification and the procedure to be followed for verification of defalcation of
inventory? (5 Marks)
Ans.
Areas of verification and the procedure to be followed for verification of defalcation of inventory
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) Stock records may be manipulated by employees who have committed theft so that book quantities tally
with the actual quantities of stocks in hand.
(iv) Inflating the quantities issued for production is another way of defalcating raw materials and store items.
(v) Stocks actually dispatched but not entered in sales/ debtor’s account.
Verification procedure:
(i) The first step towards verification 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.
(ii) Verify all the receipts and issues of inventory recorded in the Inventory Book 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.
(iii) Afterwards, the shortages observed on physical verification of inventory should be reconciled with the
discrepancies observed on checking the books in the manner mentioned above.
(iv) 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 which 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 production in
the past. 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.
(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
Capital Bank and PFI Deposits
AADI Ltd. Listed 100 190 50 24
AJIT Ltd. Unlisted Public 60 190 50 24
NEMI Ltd. Unlisted Private 60 190 50 -
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)
Ans.
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Applicability of Provisions of Internal Audit:
(i) Provision:-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.
(ii) Analysis of the cases:
 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.
 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.
(iii) Conclusion:- 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.
Q 5.
(A) CA. Aditya Jain is auditor of a listed company. He is also required to carry out quarterly review of financial
statements of company in terms of regulatory requirements. He is already well-versed with business of company
and has deep understanding of the company. Discuss, any five procedures, by which he can update his
understanding of the company for carrying out quarterly review. (5 Marks)
Ans.
Refer All points of Understanding the Entity and its Environment including its Internal Control
(B) Mr. Arjun was appointed as the engagement partner on behalf of Bhism & Co., a Chartered Accountant Firm, for
conducting statutory audit assignment of Sinwar Ltd., unlisted public company.
Mr. Brijesh, one of the senior engagement team members, was given the responsibility to audit the matters as per
the requirements of CARO, 2020 and in that connection, he made the following observations, that may be relevant
for reporting as per the said Order:-
Sr. No. Observations
(a) One of the Plant and Equipment taken on a lease (‘right of use’ asset) by Sinwar Ltd. was revalued
based on the valuation by a registered valuer and the net carrying value of Plant and Equipment in
aggregate was changed from ` 4 crore to ` 4.45 crore.
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(b) During the year under consideration, cash credit limit of ` 5.5 crore was sanctioned to Sinwar Ltd. by
DMC Bank based on the security of current assets which was reduced to ` 4.5 crore after 6 months. In
this connection, quarterly returns have been filed by the company with the DMC bank which are in
agreement with Books of Accounts.
You are required to examine the contention of Mr. Brijesh regarding reporting of the above observations in
accordance with CARO 2020. (5 Marks)
Ans.
Matters to be reported by Mr. Brijesh as per CARO, 2020 are as follows:
(a) According to Clause (i) (d) of Para 3 of CARO 2020
• The 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;
• In the given situation:- Sinwar Ltd. has revalued one of the Plant and Equipment taken on a lease
(‘right of use’ asset) based on the valuation by a registered valuer. The amount of change in the value of
such Plant and Equipment is ` 45 lakh. As the net carrying value of Plant and Equipment in aggregate was
changed from ` 4 crore to ` 4.45 crore i.e. change was 10% or more.
• Conclusion:-Thus, the auditor is required to report the amount of change of ` 45 lakh in accordance
with Clause (i)(d) of Para 3 of CARO 2020.
(b) As per Clause (ii) (b) of Para 3 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;
• In the instant case:- Sinwar Ltd. has been sanctioned a cash credit limit of ` 5.5 crore by DMC Bank
during the year under consideration, which is exceeding the prescribed limit of ` 5 crore based on the
security of current assets. Further, quarterly returns have also been filed by the company with the
DMC bank in this connection which is in agreement with Books of Accounts.
• Conclusion - In view of the above, the auditor is required to report the same in accordance with
Clause (ii) (b) of Para 3 of CARO, 2020
(C) 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 - 1.5% Aug 2021 - 1.7%
Sep 2021 - 1.4% Oct 2021 - 4.1% (4 Marks)
Ans.
Audit Plan to inquire causes of abnormal wastage of raw material:
Before planning for detailed investigation, the auditor is required to understand the manufacturing operations
from the initial stage of purchase of materials, issue of material, consumption of material and conversions into
finished goods.
To locate the reasons for the abnormal wastage, the audit plan may include the following:
(i) Obtain a list of raw materials used in the production process mentioning therein the names and detailed
characteristics of each raw material.

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(ii) Ascertain the basis of computation of normal wastage figures and its consistency as compared to
previous months.
(iii) Obtain internal control reports in respect of manufacturing costs incurred with reference to
predetermined standards or budgets.
(iv) Examine the stock records so as to determine the raw material purchased, material issued to production.
(v) Examine the production records so as to determine the material received from the stores and actual
material consumed in the production and waste produced in the production process.
(vi) Study the Maintenance Programme of machinery to ensure that the machinery does not consume more
raw material and quality of goods manufacture is not of sub-standard nature.
(vii) Employees training ascertain whether employees engaged in production are properly trained and
working efficiently.
(viii) Examine inventory controls in respect of storage, pilferage, issues etc.
(ix) Obtain a statement showing break up of wastage figures in storage, handling and production for the
period under reference and compare the results of the analysis for each of the month.
(x) Consider the existence of following situations that may also cause the abnormal wastage:
 Purchase of poor quality of raw materials.
 Machinery breakdown or power failure.
 High rate of rejections of finished goods
 Deterioration of raw material lying in godowns
 Abnormal wastages in storage and handling.
 Commencing new production line.
Q 6.
(A) 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)
Ans.
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.
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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.
(B) Ayurda Ltd.is a fast-growing and award-winning SaaS software company which is headquartered in Mumbai. It
also has offices in the UK and provides cloud-based professional services automation (PSA) software solutions to
professional services organizations around the world. They want to engage you to provide an assurance report
for one of its major clients over the controls it operates as a service organisation. Can you provide such an
assurance report? (4 Marks)
Ans.
Refer All points of SAE 3402 Assurance Reports on Controls at a Service Organisation
(C) KDK 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 nationalized bank. KDK 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)
Ans.
Investigation of hidden liabilities and overvalued assets
(a) In order to investigate hidden liabilities, the auditor should pay his attention to the following areas:
1. The company may not show any show cause notices which have not matured into demands, as
contingent liabilities. These may be material and important
2. The company may have given “Letters of Comfort” to banks and Financial Institutions. Since these
are not “guarantees”, these may not be disclosed in the Balance sheet of the target company
3. The Company may have sold some subsidiaries/businesses and may have agreed to take over and
indemnify all liabilities and contingent liabilities of the same prior to the date of transfer. These
may not be reflected in the books of accounts of the company
4. Product and other liability claims; warranty liabilities; product returns/discounts; liquidated
damages for late deliveries etc. and all litigation.
5. Tax liabilities under direct and indirect taxes
6. Long pending sales tax assessments
7. Pending final assessments of customs duty where provisional assessment only has been completed
8. Agreement to buy back shares sold at a stated price
9. Future lease liabilities
10. Environmental problems/claims/third party claims
11. Unfunded gratuity/superannuation/leave salary liabilities; incorrect gratuity valuations
12. Huge labour claims under negotiation when the labour wage agreement has already expired
13. Contingent liabilities not shown in books.
(b) Overvalued assets: The auditor shall have to specifically examine the following areas:
a. Uncollected / uncollectable receivables.

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b. Obsolete, slow non-moving inventories or inventories valued above NRV; huge inventories of
packing materials etc. with name of company.
c. Underused or obsolete Plant and Machinery and their spares; asset values which have been impaired
due to sudden fall in market value etc.
d. 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.
e. Litigated asset & property.
f. Investment carried at cost though realisable value much lower.
g. Investments carrying a very low rate of income / return.
h. Infructuous project expenditure / deferred revenue expenditure.
i. Group company balance under reconciliation etc.
j. Intangibles of no value.
SJ’S ANALYSIS
 This is a repetitive question in exams
 Many times, Institute has asked either about Hidden Liabilities or Overvalued Assets
 Therefore, students have to focus on learning these points as the chances of asking question in the exams
is very high
 Hidden liabilities are generally the liabilities which are intentionally hidden by the target company in
order to decive the acquirer
 Over valuation of the asset on the other hand depict the good financial position of the entity where
actually it is worse than those that are shown.

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AFA

FINAL COURSE – FAST (Part) Paper – 3: Advanced Auditing,

2. You have been given an assignment of audit of it department of a PSU. A

3. JIN ltd. which is based in Mumbai, is in the business of manufacturing

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CA Kamal noticed both the material discrepancies just before the

7. The acceptable detection risk needs to be ______ in order to reduce the

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From the abovementioned groups, CA. Vardhman picked up different

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Note 10: Ageing of Trade Payables

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Multiple Choice Questions

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14. Whether the reporting performed by Mr. A related to intercompany trade

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18. Whether contention of CA. Akash, the Engagement Quality Control

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19. In the current case, Audit Committee of AMPL Limited is consisting of 7

20. CA. Kush was perplexed concerning reporting a transaction entered

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Name of Gross NPAs Net NPAs (in Ratio of Net NPAs

(B) MF Ltd., engaged in the manufacturing of various products in its factory, is

(C) One of the independent directors sought information regarding the

Figures are in ` crore and correspond to the previous year

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(C) Darshan Ltd. is a manufacturing company, provided following details of

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GENERAL INSTRUCTIONS TO CANDIDATES

Particulars ` Included in which account?

Note 10: Ageing of Trade Payables

Multiple Choice Questions

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(ii) Audit procedure:

Figures are in ` crore and correspond to the previous year

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