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CA Final | CA Inter | CA IPCC | CA Foundation Online Test Series

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AUDITING & ETHICS Duration: 180

Details: Full Test 1 Marks: 100

Instructions:

 All the questions are compulsory

 Properly mention test number and page number on your answer sheet, Try to upload sheets in
arranged manner.
 In case of multiple choice questions, mention option number only Working notes are
compulsory wherever required in support of your solution
 Do not copy any solution from any material. Attempt as much as you know to fairly judge your
performance.

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Case Study 1

1.1 (b) (ii) Occurrence, (iii) Cutoff, and (iv) Completeness

Reason:

Occurrence: "The employee benefit expenses recorded in the books were actually incurred
during the relevant period."

Completeness: "The expenses in respect of all personnel have been accounted for."

Cutoff: "The expenses recognised during the period are pertaining to the current accounting
period."

Measurement was not explicitly mentioned in the given points.

1.2 (c) No. The amount should not be recognised as a liability. It should be disclosed in the
notes to accounts.

Reason:

As per accounting standards, dividends should be recognized as a liability only when they are
declared. Since the dividend was declared on 15.04.2023, which is after the 2022-23 financial
year, it should not be recognized as a liability in the 2022-23 financial statements. Instead, it
should be disclosed in the notes to accounts as a subsequent event.

1.3 (a) As per SA 505, confirmation should be directly obtained by the auditor. Further, for all
significant account balances as on the Balance sheet date confirmations should necessarily be
collected and for the smaller outstanding balances, random sampling could be performed.

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1.4 (b) Rights and obligation

Reason:

If some invoices for the assets are not in the company's name, it raises questions about
whether the company has the right to these assets, which relates to the "Rights and
obligations" assertion.

1.5 (d) Earmarked balances with banks (e.g.: unpaid dividend)

Reason:

Earmarked balances, such as unpaid dividends, are typically not classified as cash and cash
equivalents due to restrictions on their use. They should be separately disclosed, usually under
"Other bank balances" or a similar heading.

(2×5= 10 Marks)

Case Study 2

2.1 Answer: (c) Withdraw from the audit engagement where possible under applicable law or
regulation and determine whether there is any obligation, either contractual or otherwise, to
report the circumstances to other parties, such as those charged with governance, owners, or
regulators.

Reason:

If the auditor is unable to agree to a change in the terms of the audit engagement and is not
permitted by management to continue the original audit engagement, the auditor should
consider withdrawing from the engagement where possible under applicable law or regulation.
Additionally, the auditor should assess whether there is any obligation, either contractual or
otherwise, to report the circumstances to other relevant parties, such as those charged with

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governance, owners, or regulators. This ensures transparency and compliance with professional
and legal responsibilities. Simply mentioning the fact in the audit report without taking
appropriate actions may not be sufficient to address the situation or fulfill the auditor's
responsibilities.

2.2 Answer: (d) Superseded drafts of working papers and financial statements.

Reason:

Audit documentation serves as the primary record of the audit process, supporting the
auditor's conclusions and procedures. It should be clear, concise, and organized for easy review
and understanding.

Audit programs outline the planned audit procedures for each area of the financial statements.
They are crucial for ensuring a comprehensive and efficient audit.

Emails concerning significant matters can document important discussions and decisions made
during the audit. They can also serve as evidence of communication with management or other
stakeholders.

Letters of confirmation and representation are used to obtain external evidence supporting the
accuracy and completeness of the financial statements. They are essential for certain audit
procedures.

Superseded drafts of working papers and financial statements are not considered permanent
audit documentation. They may contain errors or incomplete information and can be confusing
or misleading if not properly discarded.

Therefore, while all the other options listed are essential components of audit documentation,
superseded drafts should not be retained as they do not represent the final conclusions and
procedures of the audit.

Here are some additional points to consider:

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Audit documentation should be retained for a specified period depending on the relevant
professional standards and regulations.

Electronic audit documentation should be secure and accessible to authorized personnel only.

Proper documentation practices are essential for maintaining audit quality and protecting the
auditor from legal liability.

2.3 Answer: (c) President/Governor.

Reason:

Article 151 of the Indian Constitution states that the reports of the Comptroller and Auditor
General (C&AG) relating to the accounts of the Union or of the States shall be submitted to the
President, or the Governor of the State, who shall cause them to be laid before the House of
Parliament or the Legislature of the State, respectively.

So, the reports are submitted to the constitutional head (President for the Union and Governor
for the State), and they are responsible for causing these reports to be laid before the
respective legislative bodies. Options (a) Prime Minister/Chief Minister and (b) Union Finance
Minister are not correct in this context as the constitutional responsibility lies with the
President/Governor.

2.4 Answer: (a) Statement 1 is correct.

Reason:

Statement 1: Article 150 of the Constitution provides that the accounts of the Union and of the
States shall be kept in such form as the President may, on the advice of the Comptroller and
Auditor General (C&AG), prescribe. This statement is correct. The C&AG has a significant role in
the audit and accounting processes as prescribed by the Constitution.

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Statement 2: The second statement is not correct. The Comptroller and Auditor General (C&AG)
does have the authority to audit the accounts, including stores and inventory, of any office or
department of the Union or of a State. The C&AG is responsible for auditing government
expenditures and ensuring transparency and accountability in the financial affairs of the
government.

Therefore, the correct answer is (a) Statement 1 is correct.

(2×4= 8 Marks)

Case Study 3

3.1 (c) Both Statements 1 & 2 are correct.

Reason:

Application controls are designed to ensure the completeness, accuracy, and validity of
transactions and data processing. These controls can be both manual and automated and
function at the business process level (e.g., controls over sales, payroll).

General IT Controls (GITCs) are overarching controls that apply to the overall IT environment,
including mainframe, miniframe, and end-user environments, to support the proper functioning
of automated application controls.

3.2 c) Data Analytics.

Reason:

Data analytics refers to the use of processes, tools, and techniques to examine large datasets to
draw meaningful insights. In the context of audits, data analytics helps auditors evaluate trends,
patterns, and anomalies in large amounts of data.

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While Computer Assisted Audit Techniques (CAATs) are also used in audits, they are more
specific to performing tasks like data extraction or sampling and don't encompass all data
analysis processes.

3.3 (c) Applying inquiry in combination with inspection gives the least effective and least
efficient audit evidence.

Reason:

Inquiry and inspection are valuable methods used by auditors. Combining inquiry (asking
questions) with inspection (examining documents) generally provides stronger audit evidence,
not the "least effective and least efficient" as stated in option (c).

Reperformance is considered effective but can be time-consuming and may not be the most
efficient method.

The use of inquiry alone can be limited in reliability, so combining it with other methods often
enhances the strength of audit evidence.

The use of audit tests is, indeed, a matter of professional judgment of the auditor.

(2×3= 6 Marks)

GENERAL MCQ

1. (b) It provides reasonable assurance meaning a high level of assurance.

Reason:

An audit of financial statements provides reasonable assurance, which is considered a high

level of assurance. However, it is not absolute assurance, meaning it does not guarantee that

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the financial statements are free from all material misstatements, but provides sufficient
confidence that they are fairly presented.

2. (c) Both Housing loan as well as car loan should be classified as "Non-Performing Assets" in
accordance with RBI norms on asset classification.

Reason:

The housing loan, being overdue for 120 days, exceeds the 90-day threshold and should be
classified as an NPA.

Although the car loan is only overdue for 60 days (which alone wouldn't qualify it as an NPA),
the principle of borrower-wise classification comes into play.

Since the borrower has one loan (housing loan) classified as an NPA, all other loans to the same
borrower (including the car loan) should also be classified as NPAs, regardless of their individual
repayment status.

This approach ensures a comprehensive risk assessment of the borrower and prevents any
potential underestimation of credit risk in the bank's portfolio.

Options (a), (b), and (d) are incorrect because they don't adhere to the borrower-wise
classification principle and don't accurately reflect the RBI's asset classification norms in this
scenario.

3. (b) C&AG

Reason:

As per the provisions of the Companies Act, 2013, the Comptroller and Auditor General of India
(C&AG) is empowered to conduct a supplementary audit of government companies. This audit
is conducted in addition to the statutory audit performed by auditors appointed by the C&AG.

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The purpose of the supplementary audit is to ensure the accuracy and completeness of the
statutory audit.

(2×3= 6 Marks)

Division B

Ans-1(a) Maintaining professional skepticism throughout audit is necessary if auditor is to

reduce risks of overlooking unusual circumstances and using inappropriate assumptions in
determining the nature, time and extent of audit procedures and evaluating results thereof.

In the given situation, revenue from operations of the company have increased from ₹ 80
crores to ₹100 crores despite its operations being affected by fire for about two months.
Further, despite loss of inventories to the tune of ₹ 5 crores, financial statements reflect
increase in net profit before tax from 7.5% in year 2022-23 to 10% in year 2023-24. Thus,
approach of CA D lacks professional skepticism.

In spite of these unusual circumstances, the auditor has decided to rely upon same tests of
details as performed in the previous years. The nature and extent of audit procedures need to
be suitably altered considering changed circumstances. He may include substantive analytical
procedures to analyse variations and seek necessary explanations from management. In case of
doubt about the reliability of information or indications of possible fraud, Standards on Auditing
require auditor to determine what modifications or additions to audit procedures are necessary
to resolve the matter. CA D, the auditor of a listed company, shall document the overall audit
strategy, the audit plan and any significant changes made during the audit engagement to the
overall audit strategy or the audit plan, and the reasons for such changes.

(4 Marks)

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Ans-1(b) As per SA 580, “Written Representations”, the date of the written representations
shall be as near as practicable to, but not after, the date of the auditor’s report on the financial
statements. The written representations shall be for all financial statements and period(s)
referred to in the auditor’s report.

Furthermore, because the auditor is concerned with events occurring up to the date of the
auditor’s report that may require adjustment to or disclosure in the financial statements, the
written representations are dated as near as practicable to, but not after, the date of the
auditor’s report on the financial statements.

The written representations are for all periods referred to in the auditor’s report because
management needs to reaffirm that the written representations it previously made with
respect to the prior periods remain appropriate.

Situations may arise where current management were not present during all periods referred
to in the auditor’s report. Such persons may assert that they are not in a position to provide
some or all of the written representations because they were not in place during the period.
This fact, however, does not diminish such persons’ responsibilities for the financial statements
as a whole. Accordingly, the requirement for the auditor to request from them written
representations that cover the whole of the relevant period(s) still applies. In view of above,
management is required to provide the written representation for all the periods even when
current management were not present during all periods referred to in the auditor’s report.

(4 Marks)

Ans-1(c) Three examples of assurance engagements are as under :-

(i) Audit of financial statements

An audit of financial statements provides reasonable assurance about whether the financial
statements as a whole are free from material misstatement, whether due to fraud or error,
thereby enabling the auditor to express an opinion on whether the financial statements are

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prepared, in all material respects, in accordance with an applicable financial reporting
framework.

(ii) Review of financial statements

Review provides lower level of assurance than audit. Further, review involves fewer procedures
and gathers sufficient appropriate evidence on the basis of which limited conclusions can be
drawn up.

(iii) Examination of prospective financial information

In assurance reports involving prospective financial information, the practitioner obtains

sufficient appropriate evidence to the effect that management’s assumptions on which the
prospective financial information is based are not unreasonable, the prospective financial
information is properly prepared on the basis of the assumptions and it is properly presented
and all material assumptions are adequately disclosed. Such type of assurance engagement
provides a moderate assurance.

(3 Marks)

Ans-1(d) Consider the factors that, in the auditor’s professional judgment, are significant in
directing the engagement team’s efforts: The auditor needs to direct efforts of engagement
team towards matters that in his professional judgment are significant. Preliminary
identification of material classes of transactions, account balances and disclosures help auditor
in establishing overall audit strategy. More energies need to be devoted to significant matters
to obtain desired outcomes. Few examples are listed as under: -

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

(ii) Significant industry developments such as changes in industry regulations and new reporting
requirements.

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

(iv) Other significant relevant developments, such as changes in the legal environment affecting
the entity.

(3 Marks)

Ans-2 (a) (i) When the auditor includes an Emphasis of Matter (EOM) paragraph in the
auditor’s report, the auditor shall:-

(a) include the paragraph within a separate section of the auditor’s report with an appropriate
heading that includes the term “Emphasis of Matter”

(b) include in the paragraph a clear reference to the matter being emphasized and to where
relevant disclosures that fully describe the matter can be found in the financial statements. The
paragraph shall refer only to information presented or disclosed in the financial statements and

(c) indicate that the auditor’s opinion is not modified in respect of the matter emphasized.

(ii) Examples of circumstances where the auditor may consider it necessary to include an
Emphasis of Matter (EOM) paragraph are:

 An uncertainty relating to the future outcome of exceptional litigation or regulatory action.

 A significant subsequent event that occurs between the date of the financial statements and
the date of the auditor’s report.
 Early application (where permitted) of a new accounting standard that has a material effect
on the financial statements.
 A major catastrophe that has had, or continues to have, a significant effect on the entity’s
financial position.

(4 Marks)

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Ans-2 (b) Advances generally constitute the major part of the assets of the bank. There are
large number of borrowers to whom variety of advances are granted. The audit of advances
requires the major attention from the auditors.
In carrying out audit of advances, the auditor is primarily concerned with obtaining evidence
about the following:
a. Amounts included in balance sheet in respect of advances are outstanding at the date of the
balance sheet.
b. Advances represent amount due to the bank.
c. Amounts due to the bank are appropriately supported by Loan documents and other
documents as applicable to the nature of advances.
d. There are no unrecorded advances.
e. The stated basis of valuation of advances is appropriate and properly applied, and that the
recoverability of advances is recognised in their valuation.
f. The advances are disclosed, classified and described in accordance with recognised
accounting policies and practices and relevant statutory and regulatory requirements.
g. Appropriate provisions towards advances have been made as per the RBI norms, Accounting
Standards and generally accepted accounting practices.
The auditor can obtain sufficient appropriate audit evidence about advances by study and
evaluation of internal controls relating to advances, and by:
• examining the validity of the recorded amounts;
• examining loan documentation;
• reviewing the operation of the accounts;
• examining the existence, enforceability and valuation of the security;
• checking compliance with RBI norms including appropriate classification and provisioning; and
• carrying out appropriate analytical procedures.
In carrying out his substantive procedures, the auditor should examine all large advances while
other advances may be examined on a sampling basis. The accounts identified to be problem
accounts however need to be examined in detail unless the amount involved is insignificant.

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Advances which are sanctioned during the year or which are adversely commented by RBI
inspection team, concurrent auditors, bank’s internal inspection, etc. should generally be
included in the auditor’s review.

(4 Marks)

Ans-2 (c) The controls that are put in place to mitigate the IT risks and to maintain the
confidentiality, integrity, availability and security of data are General IT Controls, Application
Controls and IT-Dependent Controls.
(i) General IT Controls: “General IT controls are policies and procedures that relate to many
applications and support the effective functioning of application controls. They apply to
mainframe, miniframe, and end-user environment. General IT controls that maintain the
integrity of information and security of data commonly include controls over the following:” (SA
315)
• Data centre and network operations;
• System software acquisition, change and maintenance
• Program change;
• Access security;
• Application system acquisition, development, and maintenance (Business Applications).
These are IT controls generally implemented to mitigate the IT specific risks and applied
commonly across multiple IT systems, applications and business processes. Hence, General IT
controls are known as “pervasive” controls or “indirect” controls.
(ii) Application Controls: Application controls include both automated and manual controls that
operate at a business process level. Automated Application controls are embedded into IT
applications viz., ERPs and help in ensuring the completeness, accuracy and integrity of data in
those systems. Examples of automated applications include edit checks and validation of input
data, sequence number checks, user limit checks, reasonableness checks, mandatory data
fields.

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(iii) IT dependent Controls: IT dependent controls are basically manual controls that make use
of some form of data or information or report produced from IT systems and applications. In
this case, even though the control is performed manually, the design and effectiveness of such
controls depends on the reliability of source data. Due to the inherent dependency on IT, the
effectiveness and reliability of automated application controls and IT dependent controls
require the General IT controls to be effective.

(3 Marks)

Ans-2 (d) “Date the financial statements are issued” reflects the date on which the auditor’s
report and audited financial statements are made available to the third parties. The date the
financial statements are issued generally depends on the regulatory environment of the entity.
In some circumstances, the date the financial statements are issued may be the date that they
are filed with a regulatory authority. Since audited financial statements cannot be issued
without an auditor’s report, the date that the audited financial statements are issued must not
only be at or later than the date of the auditor’s report but must also be at or later than the
date the auditor’s report is provided to the entity.
Therefore, “date the financial statements are issued” can be later than date of providing
auditor’s report to the entity.

(3 Marks)

Ans-3 (a) As per SA 220, for audits of financial statements of listed entities, and those other
audit engagements, if any, for which the firm has determined that an engagement quality
control review is required, the engagement partner shall:
(i) Determine that an engagement quality control reviewer has been appointed.
(ii) Discuss significant matters arising during the audit engagement, including those identified
during the engagement quality control review, with the engagement quality control reviewer.
(iii) Not date the auditor’s report until the completion of the engagement quality control
review.

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(iv) If differences of opinion arise within the engagement team, with those consulted or, where
applicable, between the engagement partner and the engagement quality control reviewer, the
engagement team shall follow the firm’s policies and procedures for dealing with and resolving
differences of opinion.

(4 Marks)

Ans-3 (b) Misstatement refers to a difference between the amount, classification, presentation,
or disclosure of a reported financial statement item and the amount, classification,
presentation, or disclosure that is required for the item to be in accordance with the applicable
financial reporting framework.

In the given situation, there is a difference in amount to be recorded as well as in disclosure of a

financial statement item from what is required in accordance with applicable financial reporting
framework. The company should have recorded gross amount of dividend and interest
amounting to ₹ 2.00 lakhs and ₹ 3.00 lakhs respectively in its financial statements in accordance
with AS 13. Therefore, amount recorded under head “Other income” should have been for ₹ 10
lakhs (2 lakhs+3 lakhs+5 lakhs).

Further, in accordance with disclosure requirements of Schedule III of the Companies Act, 2013,
other income shall be classified in the above situation as: -

(a) Interest Income of ₹ 3 lakhs

(b) Dividend Income of ₹ 2 lakhs

(c) Net gain on sale of investments of ₹ 5 lakhs

Few examples of misstatements are:

 Charging of an item of capital expenditure to revenue or vice-versa.

 Difference in disclosure of a financial statement item vis-à-vis its requirement in applicable
financial reporting framework.

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 Selection or application of inappropriate accounting policies.
 Difference in accounting estimate of a financial statement item vis-à-vis its appropriateness in
applicable financial reporting framework.
 Intentional booking of fake expenses in statement of profit and loss.
 Overstating of receivables in the financial statements by not writing off irrecoverable debts.
 Overstating or understating inventories.

Ans-3(c) The RBI issued a Circular relating to implementation of recommendations of

Committee on Legal Aspects of Bank Frauds applicable to all scheduled commercial banks
(excluding Regional Rural Banks). Regarding liability of accounting and auditing profession, the
said circular provided as under:

“If an accounting professional, whether in the course of internal or external audit or in the
process of institutional audit finds anything susceptible to be fraud or fraudulent activity or act
of excess power or smell any foul play in any transaction, he should refer the matter to the
regulator. Any deliberate failure on the part of the auditor should render himself liable for
action”.

As per the above requirement, the member shall be required to report the kind of matters
stated in the circular to RBI.

Auditor should also consider the provisions of SA 250, “Consideration of Laws and Regulations
in an Audit of Financial Statements”. The said Standard explains that the duty of confidentiality
is over-ridden by statute, law or courts.

SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements“

states that an auditor conducting an audit in accordance with SAs is responsible for obtaining
reasonable assurance that the financial statements taken as a whole are free from material
misstatement, whether caused by fraud or error.

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It must be noted that auditor is not expected to look into each and every transaction but to
evaluate the system as a whole. Therefore, if the auditor while performing his normal duties
comes across any instance, he should report the matter to the RBI in addition to
Chairman/Managing Director/Chief Executive of the concerned bank.

(4 MARKS)

Ans-3(d) Opinion Paragraph of Audit Report: In the instant case, M/s Hary Ltd. acquired 55%
shares in M/s Sam Ltd. and the company did not prepare the consolidated financial statements
because on the date of acquisition the fair value of certain assets and liabilities has not been
ascertained. Therefore, accounting is done on estimate basis only which is not correct as the
financial statements are materially misstated due to non-consolidation of subsidiary. The
material misstatement is deemed to be pervasive to the consolidated financial statements.
Thus, the auditor shall express an adverse opinion when the auditor, having obtained sufficient
appropriate audit evidences, concludes that misstatements, individually or in the aggregate, are
both material and pervasive to the financial statements.

Adverse Opinion

In our opinion and to the best of our information and according to the explanations given to us,
because of the significance of the matter discussed in the Basis for Adverse Opinion section of
our report, the accompanying consolidated financial statements do not give a true and fair view
in conformity with the accounting principles generally accepted in India, of their consolidated
state of affairs of the Group, its associates and jointly controlled entities, as at March 31, 2019,
of its consolidated profit/loss, (consolidated position of changes in equity) and the consolidated
cash flows for the year then ended.

Basis for Adverse Opinion is given below:

As explained in Note X, the M/s Hary Ltd. has not consolidated subsidiary M/s Sam Ltd. that the
M/s Hary Ltd acquired during 2018 because it has not yet been able to determine the fair

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values of certain of the subsidiary’s material assets and liabilities at the acquisition date. This
investment is therefore accounted for on an estimate basis. Under the accounting principles
generally accepted in India, the Group should have consolidated this subsidiary and accounted
for the acquisition based on provisional amounts. Had M/s Sam Ltd. been consolidated, many
elements in the accompanying consolidated financial statements would have been materially
affected. The effects on the consolidated financial statements of the failure to consolidate have
not been determined.

(3 Marks)

Ans-4(a) According to Section 53 of the Companies Act, 2013,

(1) a company shall not issue shares at a discount, except in the case of an issue of sweat equity
shares given under Section 54 of the Companies Act, 2013.
(2) any share issued by a company at a discounted price shall be void. Notwithstanding anything
contained in above sub-sections (1) and (2), a company may issue shares at a discount to its
creditors when its debt is converted into shares in pursuance of any statutory resolution plan or
debt restructuring scheme in accordance with any guidelines or directions or regulations
specified by the Reserve Bank of India under the Reserve Bank of India Act, 1934 or the Banking
(Regulation) Act, 1949.
(3) Where any company fails to comply with the provisions of this section, such company and
every officer who is in default shall be liable to a penalty which may extend to an amount equal
to the amount raised through the issue of shares at a discount or five lakh rupees, whichever is
less, and the company shall also be liable to refund all monies received with interest at the rate
of twelve per cent. Per annum from the date of issue of such shares to the persons to whom
such shares have been issued.

(4 Marks)

Ans-4(b) Inspection of Multi-State Co-operative societies under Section 79

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1. When: The Central Registrar may, on a request from

(i) Federal co-operative to which a Multi-State Co-operative society is affiliated or a creditor or

(ii) Not less than one-third of the members of the board or

(iii) Not less than one-fifth of the total number of members of a Multi-State co-operative
society

2. How: By general or special order in writing in this behalf inspect or direct any person
authorized by him by order in writing in this behalf to make an inspection into the constitution,
working and financial condition of a Multi-State co-operative society.

3. Opportunity of Being heard: No inspection shall be made unless a notice of not less than
fifteen days has been given to the multi-state co-operative society.

4. Powers available: The Central Registrar or the person authorized by him shall have the
following powers:

(a) He shall at all times have access to all books, accounts, papers, vouchers, securities, stock
and other property of that society and may, in the event of serious irregularities discovered
during inspection, take them into custody and shall have power to verify the cash balance of

the society and subject to the general or special order of the central registrar to call a meeting
of the society where such general meeting is, in his opinion necessary.

(b) Every officer or member of a Multi-State Co-operative society shall furnish such information
with regard to the working of the society as the central registrar or the person making such
inspection may require.

5. Inspection Report: A copy of the report of inspection under this section shall be
communicated to the Multi-State Co-operative society within a period of three months from
the date of completion of such inspection.

(4 MARKS)

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Ans-4(c) In the audit process, evidence serves as the foundation for forming opinions on the
accuracy of financial assertions. The selection of the most appropriate evidence is a critical
aspect of ensuring the reliability of an audit. Here are the different types of evidence that
auditors commonly consider:

 Documentary Examination
 Physical Examination
 Statements and Explanation of Management, Officials, and Employees
 Statements and Explanations of Third Parties
 Arithmetical Calculations by the Auditor
 State of Internal Controls and Internal Checks
 Inter-relationship of Various Accounting Data
 Subsidiary and Memorandum Records
 Minutes
 Subsequent Action by the Client and by Others

The auditor, however, has to place appropriate weight on each piece of evidence and
accordingly should prescribe the priority of verification. It is true that in all cases one procedure
may not bring the highest satisfaction and it may be dangerous for the auditor to ignore any
evidence that is available. By the word “available”, we do not mean that the evidence available
with the client is the only available evidence. The auditor should know what normally should be
available in the context of the transaction having regard to the circumstances and usage.

(3 Marks)

Ans-4(d) Considerations to determine Key Audit Matters:

As per SA 701 “Communicating Key Audit matters in the Independent Auditor’s Report” Key
Audit Matters are those matters that, in the auditor’s professional judgment, were of most

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significance in the audit of the F.S. of the current period. Key audit matters are selected from
matters communicated with TCWG.

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 consider the following:

(a) Areas of higher assessed RMM, or significant risks identified in accordance with SA 315;
(b) Significant auditor judgments relating to areas in the F.S. that involved significant
management judgment, including accounting estimates that have been identified as having
high estimation uncertainty.
(c) The effect on the audit of significant events or transactions that occurred during the period.
The auditor shall determine which of the matters so determined above were of most
significance in the audit of the F.S. of the current period and therefore are the key audit
matters.
(3 Marks)

Ans-5(a) As per SA 610, “Using the Work of Internal Auditors”, coordination between the
external auditor and the internal audit function is effective when, for example;

(i) Discussions take place at appropriate intervals throughout the period.

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

(4 Marks)

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Ans-5(b) Nature of Audit Planning- A Continuous and iterative process: Planning includes the
need to consider, prior to the auditor’s identification and assessment of the risks of material
misstatement, such matters as: -
1. The analytical procedures to be applied as risk assessment procedures.
2. Obtaining a general understanding of the legal and regulatory framework applicable to the
entity and how the entity is complying with that framework.
3. The determination of materiality.
4. The involvement of experts.
5. The performance of other risk assessment procedures.

(4 Marks)

Ans-5(c) Audit of borrower client of bank carried out at bank’s request to verify borrower’s
current assets- Stock audit

Statutory right of a creditor to adjust debit balance in debtor’s account against any credit
balance lying in another account of debtor- Set-off

Creation of security in a bank branch by mere delivery of title deeds by a prospective borrower
of funds- Equitable Mortgage

(3 Marks)

Ans-5(d) SA 260 "Communication with Those Charged with Governance”

Objectives of auditor in accordance with SA 260: -
(a) To communicate clearly with those charged with governance the responsibilities of the
auditor in relation to the financial statement audit, and an overview of the planned scope and
timing of the audit;
(b) To obtain from those charged with governance information relevant to the audit;

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(c) To provide those charged with governance with timely observations arising from the audit
that are significant and relevant to their responsibility to oversee the financial reporting process
and
(d) To promote effective two-way communication between the auditor and those charged with
governance.

(3 Marks)

Ans-6(a) It is a common understanding that the value of fixed assets/ PPE depreciates due to
efflux of time, use and obsolescence. The diminution of the value represents an item of cost to
the entity for earning revenue during a given period. Unless this cost in the form of
depreciation is charged to the accounts, the profit or loss would not be correctly ascertained,
and the values of PPE would be shown at higher amounts. Therefore, such verification is
significant.
Audit procedures that the auditor should follow to verify that the PPE items have been valued
appropriately as per generally accepted accounting policies and practices are: -
• Verify that the entity has charged depreciation on all items of PPE unless any item of PPE is
non- depreciable like freehold land
• Assess that the depreciation method used reflects the pattern in which the asset’s future
economic benefits are expected to be consumed by the entity. It could be Straight line method,
diminishing value method, unit of production method, as applicable.
• The auditor should also verify whether the management has done an impairment assessment
to determine whether an item of property, plant and equipment is impaired as per the
requirements of AS 28 Impairment of Assets.

(4 Marks)

OR

Ans-6(a) A contribution made towards the capital or the corpus of an NGO is known as corpus
contribution. The donors are generally required to specify whether the donation/grant given by

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him shall form part of the corpus of the NGO. Such contributions are generally given with
reference to the total funds required by an NGO.
The objective of a contribution or grant towards a Revolving Fund is to rotate the amount by
giving temporary loans from the fund to other NGO or beneficiaries for their projects and then
recover the loan so as to give temporary loans again and so on. However, any interest earned
from the beneficiary on such temporary loans from the revolving fund could be either added
back to the fund or credited to the Income and Expenditure Account depending on restrictions
laid down by the authority providing the contribution (for the revolving fund) or by the rules
and regulations laid down by the concerned NGO in this regard.

(4 Marks)

Ans-6 (b) (SA) 299 (Revised), “Joint Audit of Financial Statements” which lays down the
principles for effective conduct of joint audit to achieve the overall objectives of the auditor as
laid down in SA 200 “Overall Objectives of the Independent Auditor and the conduct of an audit
in accordance with Standards on Auditing”. This Standard deals with the special considerations
in carrying out audit by joint auditors. It requires that–
(i) Engagement partners and key members from both audit firms should be actively involved in
planning the audit.
(ii) Joint auditors should collaboratively set an overall audit strategy, determining the scope,
timing, and direction of the audit, guiding the development of the audit plan.
(iii) Before starting the audit, joint auditors must develop a comprehensive joint audit plan,
addressing:
 Division of audit areas (common and specific allotted areas).
 Reporting objectives.
 Communication of significant factors.
 Consideration of preliminary engagement activities.
 Identification of necessary resources.

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(iv) Each joint auditor should individually assess the risks of material misstatement and
communicate their findings to other joint auditors.
(v) Joint auditors should discuss and document the nature, timing, and extent of audit
procedures for both common and specific allotted areas.
(vi) Joint auditors must obtain common engagement and management representation letters to
ensure a unified understanding.
(vii) The work allocation document, detailing the responsibilities of each joint auditor, should be
signed by all auditors and communicated to those charged with governance.
By following these steps, the joint auditors can ensure effective collaboration and coordination,
meeting the requirements of SA 299 (Revised) for a successful joint audit of XYZ Company.

(4 Marks)

Ans-6 (c) Pilfering is one of the greatest problems in any hotel and the importance of internal
control cannot be undermined. It is the responsibility of management to introduce controls
which will minimize the leakage as far as possible. Evidence of their success is provided by the
preparation of regular perhaps weekly, trading accounts for each sales point and a detailed
scrutiny of the resulting profit percentages, with any deviation from the anticipated form being
investigated. The auditor should obtain these regular trading accounts for the period under
review, examine them and obtain explanations for any apparent deviations.
The auditor should verify a few restaurant bills by reference to K.O.T.s (Kitchen Order Tickets)
or basic record. This would enable the auditor to ensure that controls regarding revenue cycle
are in order.
The auditor should satisfy himself that all taxes collected from occupants on food and
occupation have been paid over to the proper authorities. If the internal control in a hotel is
weak or perhaps breaks down, then a very serious problem exists for the auditor. As a result of
the transient nature of many of his clients’ records, the auditor must rely to a very large extent
on the gross margin shown by the accounts. As a result, the scope of his audit tests will

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necessarily be increased and, in the event of a material margin discrepancy being unexplained,
he will have to consider qualifying his audit report.
(3 marks)

Ans-6 (d) Inherent limitations of audit: The process of audit suffers from certain inbuilt
limitations due to which an auditor cannot obtain an absolute assurance that financial
statements are free from misstatement due to fraud or error. These fundamental limitations
arise due to the following factors: -
(1) Nature of financial reporting: Preparation of financial statements involves making many
judgments by management. These judgments may involve subjective decisions or a degree of
uncertainty. Therefore, auditor may not be able to obtain absolute assurance that financial
statements are free from material misstatements due to frauds or errors.
(2) Nature of Audit procedures: The auditor carries out his work by obtaining audit evidence
through performance of audit procedures. However, there are practical and legal limitations on
ability of auditor to obtain audit evidence. For example, an auditor does not test all transactions
and balances. He forms his opinion only by testing samples. It is an example of practical
limitation on auditor’s ability to obtain audit evidence.
Management may not provide complete information as requested by auditor. There is no way
by which auditor can force management to provide complete information as may be requested
by auditor. In case he is not provided with required information, he can only report. It is an
example of legal limitation on auditor’s ability to obtain audit evidence. Further, fraud may
involve sophisticated and carefully organized schemes.
(3) Not in nature of investigation: Audit is not an official investigation. Hence, auditor cannot
obtain absolute assurance that financial statements are free from material misstatements due
to frauds or errors.
(4) Timeliness of financial reporting and decrease in relevance of information over time: The
relevance of information decreases over time and auditor cannot verify each and every matter.
Therefore, a balance has to be struck between reliability of information and cost of obtaining it.

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(5) Future events: Future events or conditions may affect an entity adversely. Adverse events
may seriously affect ability of an entity to continue its business. The business may cease to exist
in future due to change in market conditions, emergence of new business models or products
or due to onset of some adverse events.

(3 Marks)

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