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Mock Test Paper- Series II

FINAL COURSE: GROUP II

PAPER-3 ADVANCED AUDITING AND PROFESSIONAL ETHICS

SUGGESTED ANSWER TO Division A CASE SCENARIO BASED MCQS (30 Marks)

Case Scenario 1
Answer 1: (a) The auditor may presume that criteria applied by the Board of
Trustees in the preparation of the abridged financial statements are acceptable.

Reason: Since the criteria are prescribed by SEBI, the auditor can presume their
acceptability as they are based on a regulatory framework that ensures proper
preparation and presentation of abridged financial statements.

Answer 2: (c) It should be stated in the auditor's report that abridged FS have
been compared with the related information in the audited FS to determine
whether the abridged FS with or can be recalculated from the related information
in the audited FS.

Reason: This ensures compliance with SA 810, which requires the auditor to
clearly state that the abridged financial statements are consistent with or can be
reconciled to the audited financial statements. This is crucial for the users to
understand the reliability of abridged financial statements.

Answer 3: (b) Our responsibility is to express an opinion on the Abridged

financial statements based on our procedures, which were conducted in
accordance with Standard on Auditing (SA) 810, "Engagements to Report on
Summary FS" issued by the Institute of Chartered Accountants of India.

Reason: This is the most appropriate para under 'Auditor’s Responsibility,'

aligning with the requirements of SA 810. It emphasizes that the auditor’s work is
conducted in accordance with the standard specifically designed for reporting on
summary financial statements. (3 MCQ *2 Marks= 6Marks)

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Case Scenario 2

Answer 4: c) Such activities are required to be performed in respect of an audit

engagement in accordance with SA 220, and these preliminary engagement
activities form part of planning an audit in accordance with SA 300.

Reason: SA 220 deals with quality control, and these activities align with the
planning phase under SA 300.

Answer 5: a) The understanding of the company’s risk management policy is

required by the auditor. It may help the auditor in identifying risks of material
misstatement that management failed to identify.

Reason: The risk management policy is relevant for identifying material

misstatements that could affect the audit.

Answer 6: d) Seeking confirmation letters from bankers regarding outstanding

balances.

Reason: This procedure is related to audit evidence rather than understanding

the company, making it unrelated in this context.
(3 MCQ *2 Marks= 6Marks)

Case Scenario 3

Answer 7: (C)
Reason: Since 80% of revenue is generated through cash sales and sufficient audit
evidence could not be obtained due to lack of proper systems and internal
controls, the auditor is unable to form an opinion. This results in a disclaimer of
opinion being issued, and the audit report statement is modified accordingly as
per SA 705.

Answer 8: (C)
Reason: The litigation liability is significant but not pervasive, leading to non-
disclosure of a material contingent liability in the financial statements. A qualified
opinion is appropriate, highlighting the issue while not invalidating the financial
statements entirely.

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Answer9: (D)
Reason: The export receivable of ₹3 crore is non-recoverable, yet it remains
included in the financial statements. This creates a material and pervasive
misstatement that necessitates an adverse opinion.

Answer10: (C)
Reason: As per SA 570, a separate paragraph on ‘Material Uncertainty Related to
Going Concern’ should be included in the audit report, rather than using an
Emphasis of Matter paragraph. This highlights the uncertainty appropriately while
maintaining an unmodified opinion.
(4MCQ*2 Marks= 8 Marks)

Case Scenario 4

Answer 11: d) Drafting performance audit programs for post-merger entities

Reason: Performance audit programs are related to operational reviews, not
financial due diligence.

Answer 12: b) Demand working papers from a tax consultant for independent
assessment
Reason: Independent assessment ensures unbiased evaluation and transparency

Answer 13: c) Conducting a variance analysis between budgeted and actual costs
Reason: Performance audits focus on assessing efficiency and effectiveness. A
variance analysis Helps identify deviations from budgeted expenditures, which is
critical to evaluate the Optimal use of public funds and detect potential
inefficiencies.

Answer 14: c) Efficiency and effectiveness of resource utilization in government

funded projects
Reason: Performance audits by the C&AG focus on operational efficiency,
especially in public-funded projects.

Answer 15: b) Due diligence will be considered incomplete and may affect the
initial decided price
Reason: Lack of promoter information can lead to incomplete due diligence and
necessitate adjustments to the transaction (5MCQ*2 Marks= 10 Marks)

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Division B – Answers to Descriptive Question

(70 Marks)

1(a). Engagement Quality Control Review (EQCR):

As per SQC 1, 'Quality Control for Firms that Perform Audit and Reviews of
Historical Financial Information, and other Assurance and Related Services
Engagements', the review does not reduce the responsibilities of the engagement
partner. Hence, the contention of CA P that after engagement quality control
review by CA R, his responsibility will be reduced, is not correct.

Aspects to be considered while performing EQCR for audit of F.S.:

CA R needs to consider the following aspects while performing EQCR for audit of
financial statements (F.S.) of ABC Ltd.:

(1) The engagement team’s evaluation of the firm’s independence in relation to

the specific engagement.

(2) Significant risks identified during the engagement and the responses to those
risks.

(3) Judgments made, particularly with respect to materiality and significant risks.

(4) Whether appropriate consultation has taken place on matters involving

differences of opinion or other difficult or contentious matters, and the
conclusions arising from those consultations.

(5) The significance and disposition of corrected and uncorrected misstatements

identified during the engagement.

(6) The matters to be communicated to management and those charged with

governance and, where applicable, other parties such as regulatory bodies.

(7) Whether working papers selected for review reflect the work performed in
relation to the significant judgments and support the conclusions reached.

(8) The appropriateness of the report to be issued. (5 Marks)

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1(b)Drafting of Opinion Paragraph and Basis of Opinion Paragraph:

M/s GN & Associates are unable to obtain SAAE about the financial information of
a joint venture investment that represents over 90% of the group’s net assets. The
possible effects of this inability to obtain sufficient appropriate audit evidence are
both material and pervasive to the consolidated financial statements. Therefore,
the statutory auditor should issue a disclaimer of opinion.

Relevant extract of Disclaimer of Opinion and Basis for Disclaimer of Opinion

paragraph is as under:

Disclaimer of Opinion
We were engaged to audit the accompanying consolidated financial statements of
Tea Ltd., FMCG Company (hereinafter referred to as the “Holding Company”) and
its subsidiaries (the Holding Company and its subsidiaries together referred to as
“the Group”), which comprise the consolidated balance sheet as on March 31,
2024, the consolidated statement of Profit and Loss, (consolidated statement of
changes in equity) and consolidated statement of cash flows for the year then
ended, and notes to the consolidated financial statements, including a summary of
significant accounting policies (hereinafter referred to as the “Consolidated
Financial Statements”). We do not express an opinion on the accompanying
consolidated financial statements of the Group. Because of the significance of the
matter described in the Basis for Disclaimer of Opinion section of our report, we
have not been able to obtain sufficient appropriate audit evidence to provide a
basis for an audit opinion on these consolidated financial statements.

Basis for Disclaimer of Opinion

Group’s investment in its joint venture Kali Ltd. Company is carried at ₹ 100
crores on the Group’s consolidated balance sheet, which represents over 90% of
the Group’s net assets as on March 31, 2024. We were not allowed access to the
management of Kali Ltd. and the auditors of XYZ Company, XYZ Company’s
auditors’ audit documentation. As a result, we were unable to determine whether
any adjustments might be necessary in respect of the Group’s proportionate share
of Kali Ltd.’s assets and liabilities, proportional share of Kali Ltd.’s profit or loss,
and other comprehensive income, and the carrying value of the Group’s
investment in Kali Ltd. Consequently, we were unable to determine whether any
adjustments might be required to the consolidated financial statements.
(5 Marks )

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1(c) Emphasis of Matter Paragraph:

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.

In the given case, the management of Rare (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.
The said contention of management of Rare (P) Ltd. is not valid as 'Emphasis of
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. (4 Marks )

2(a) Factors to be taken into consideration related to financial reporting in case of

user entities using services of Service Organisation:

- SA 402 “Audit Considerations relating to an Entity Using a Service Organisation”

deals with the user auditor’s responsibility to obtain sufficient appropriate audit
evidence when a user entity uses the services of one or more service
organizations’.

- Services provided by a service organisation are relevant to the audit of a user

entity’s financial statements when those services, and the controls over them, are
part of the user entity’s information system, including related business processes,
relevant to financial reporting.

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- Although most controls at the service organisation are likely to relate to financial
reporting, there may be other controls that may also be relevant to the audit, such
as controls over the safeguarding of assets.

- A service organisation’s services are part of a user entity’s information system,

including related business processes, relevant to financial reporting if these
services affect any of the following:

(a) The classes of transactions in the user entity’s operations that are significant to
the user entity’s financial statements;

(b) The procedures, within both information technology (IT) and manual systems,
by which the user entity’s transactions are initiated, recorded, processed,
corrected as necessary, transferred to the general ledger and reported in the
financial statements;

(c) The related accounting records, either in electronic or manual form,

supporting information and specific accounts in the user entity’s financial
statements that are used to initiate, record, process and report the user entity’s
transactions; this includes the correction of incorrect information and how
information is transferred to the general ledger;

(d) How the user entity’s information system captures events and conditions,
other than transactions, that are significant to the financial statements;
(5 Marks)

2(b)Signing of Tax Audit Report:

As per Chapter VI of Council General Guidelines, 2008, a member of the Institute in
practice shall not accept, in a financial year, more than the “specified number of
tax audit assignments” u/s 44AB of the Income-tax Act, 1961.

In the case of a firm of CAs in practice, the “specified number of tax audit
assignments” shall be construed as the specified number of tax audit assignments
for every partner of the firm.

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The specified number of tax audit assignments in the case of firm of CAs in
practice is 60 tax audit assignments per partner in the firm, in a financial year,
whether in respect of corporate or non-corporate assessees.

The audits conducted under Sections 44AD, 44AE, 44AF of the Income-tax Act,
1961 shall not be taken into account for the purpose of reckoning the “specified
number of tax audit assignments”.

It is further clarified by the Council of ICAI that tax audit report accepted by the
firm of Chartered Accountants can be signed by any partner on the behalf of the
firm.

In the present case, there are three partners in the firm and hence the firm can
accept 180 tax audit assignment and any partner can sign the tax audit report on
the behalf of the firm. Firm has accepted 170 tax audit assignments other than the
audit under section 44AD.
Conclusion: No Misconduct arises on part of Firm or partners.
(5 Marks)

2(c) The factors responsible for high employee attrition rate are as under:

1. Job Stress & work-life imbalance

2. Wrong policies of the Management
3. Unbearable behavior of Senior Staff
4. Safety factors
5. Limited opportunities for promotion
6. Low monetary benefits
7. Lack of labor welfare schemes
8. Whether the organization has properly qualified and experienced personnel for
the various levels of work?
9. Is the number of people employed at various work centers excessive or
inadequate?
10. Does the organization provide facilities for staff training so that employees
and workers keep themselves abreast of current techniques and practices?
(4 Marks)

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3 (a) Checklists that are to be covered in the management representation:

1. All off-balance sheet transactions have been accounted for in the books of
account as and when such transaction has taken place.

2. All off-balance sheet transactions have been entered into after following due
procedure laid down.

3. All off-balance sheet transactions are supported by the underlying documents.

4. All year-end contingent liabilities have been disclosed.

5. The disclosed contingent liabilities do not include any crystallised liabilities

which are of the nature of loss/expense and which, therefore, require creation of a
provision/ adjustment in the financial statements.

6. The estimated amounts of financial effect of the contingent liabilities are based
on the best estimates in terms of AS 29, including consideration of the possibility
of any reimbursement.

7. In case of guarantees issued on behalf of the bank’s directors, the bank has
taken appropriate steps to ensure that adequate and effective arrangements have
been made so that the commitments would be met out of the party’s own
resources and that the bank will not be called upon to grant any loan or advances
to meet the liability consequent upon the invocation of the said guarantee(s) and
that no violation of Sec. 20 of the Banking Regulation Act, 1949 has arisen on
account of such guarantee.

8. Such contingent liabilities which have not been disclosed on account of the fact
that the possibility of their outcome is remote include the management’s
justification for reaching such a decision in respect of those contingent liabilities.
(5 Marks)

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3 (b) (i) Auditor’s duties to obtain evidences regarding existence and condition of
inventory: SA 501 “Audit Evidence – Specific Considerations for Specific Items”,
requires from the auditor that when inventory is material to the financial
statements, he shall obtain sufficient appropriate audit evidence regarding the
existence and condition of inventory by:

(a) Attendance at physical inventory counting, unless impracticable, to:

(i) Evaluate management’s instructions and procedures for recording and

controlling the results of the entity’s physical inventory counting;
(ii) Observe the performance of management’s count procedures;
(iii) Inspect the inventory; and
(iv) Perform test counts.

(b)Performing audit procedures over the entity’s final inventory records to

determine whether they accurately reflect actual inventory count results.

Auditor’s procedures in case of impractical situations:

- In some cases, attendance at physical inventory counting may be impracticable.

This may be due to factors such as the nature and location of the inventory, for
example, where inventory is held in a location that may pose threats to the safety
of the auditor.

- Where attendance is impracticable, alternative audit procedures, for example,

inspection of documentation of the subsequent sale of specific inventory items
acquired or purchased prior to the physical inventory counting, may provide SAAE
about the existence and condition of inventory.

- In some cases, though, it may not be possible to obtain SAAE regarding the
existence and condition of inventory by performing alternative audit procedures.
In such cases, SA 705 requires auditor to modify the opinion in the auditor’s
report as a result of the scope limitation.
(5 Marks)

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3(c) Delegation of Certification work:

• As per clause 12 of Part I of the First Schedule of the Chartered Accountants Act,
1949, a Chartered Accountant in practice is deemed to be guilty of professional
misconduct “if he allows a person not being a member of the Institute in practice
or a member not being his partner to sign on his behalf or on behalf of his firm,
any balance sheet, profit and loss account, report or financial statements”.

• In this case CA ‘K’ proprietor of M/s K & Co., went abroad and delegated the
authority to another Chartered Accountant Mr. Y, his employee, for taking care of
routine matters of his office.

• The Council has clarified that the power to sign routine documents on which a
professional opinion or authentication is not required to be expressed, may be
delegated and such delegation will not attract provisions of clause 12. Examples of
such instances are issue of audit queries, asking for information or issue of
questionnaire, attending to routine matters in tax practice etc.

Conclusion:
(i) Issuance of Net Worth Certificate to a client for furnishing to Bank by
Mr. ‘Y’ is not a routine matter and requires professional skills. Thus,
CA ‘K’ is guilty of professional misconduct under clause 12 of Part I of
First Schedule of the Chartered Accountants Act, 1949.
(ii) Attending GST proceedings for a client as authorized representative
before GST Authorities falls within routine work, hence Mr. ‘Y’, an
employee of M/s K & Co. can attend to routine matter in tax practice,
without rendering CA ‘K’ guilty of misconduct. (4 Marks)

4(a) Circulating Information Contained in Own Website:

As per Clause (6) of Part I of the First Schedule to the Chartered Accountants Act,
1949, a Chartered Accountant in practice is deemed to be guilty of professional
misconduct if he solicits clients or professional work either directly or indirectly
by circular, advertisement, personal communication or interview or by any other
means.
However, the guidelines approved by the Council of the Institute of Chartered
Accountants of India permit creation of own website by a chartered accountant in

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his or his firm name and no standard format or restriction on colours is there.
Hence there is no misconduct as per Clause (6) of Part I of the First Schedule to the
Chartered Accountants Act, 1949.
The chartered accountant or firm, as per guidelines, should ensure that none of
the information contained in the website be circulated on their own or through E-
mail or by any other mode except on a specific “Pull” request. Mr. Vineet has
circulated information contained in website through e-mail to public at large.
Therefore, he is guilty of professional misconduct under Clause (6) of Part I of
First Schedule-to the said Act.

Nature of assignments handled:

The nature of assignments handled (to be displayable only on specific “Pull”
request). Names of clients and fee charged cannot be given without such
requirement from any of the regulator. Mr. Vineet has displayed nature of
assignments handled along with name of clients without such requirement from
regulator. Therefore, he is guilty of professional misconduct under Clause (6) of
Part I of First Schedule to the said Act.
The website address of member be obtained on annual basis in annual form
required to be filed by the member while paying fee and the same be taken as
entry on record. Thus, guilty of professional misconduct. (5 Marks)

4(b) As per SRS 4410 'Compilation Engagement', if, in the course of the
compilation engagement, the practitioner becomes aware that the records,
documents, explanations or other information, including significant judgments,
provided by management for the compilation engagement are incomplete,
inaccurate or otherwise unsatisfactory, the practitioner shall bring that to the
attention of management and request the additional or corrected information.

If the practitioner is unable to complete the engagement because management has

failed to provide records, documents, explanations or other information, including
significant judgments, as requested, the practitioner shall withdraw from the
engagement and inform management and TCWG of the reasons for withdrawing.
If the practitioner becomes aware during the course of the engagement that:
(a) The compiled financial information does not adequately refer to or describe
the applicable FRF;
(b) Amendments to the compiled financial information are required for the
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financial information not to be materially misstated; or

(c) The compiled financial information is otherwise misleading. The practitioner

shall propose the appropriate amendments to management.

If management declines, or does not permit the practitioner to make the proposed
amendments to the compiled financial information, the practitioner shall
withdraw from the engagement and inform management and TCWG of the reasons
for withdrawing. (5 Marks)

4(c) • Sustainability reporting is an organization’s practice of reporting publicly

on its economic, environmental, and/or social impacts, and hence its contributions
– positive or negative – towards the goal of sustainable development.

• Info. that companies provide about their performance to the outside world on a
regular basis in a structured way.

• Comprehensive mechanism of measuring and disclosing sustainability data with

performance indicators & management disclosures.

Expected Benefits of Sustainability Reporting:

• Help stakeholders to understand organizations' performance vis a vis
sustainability and impacts. • Such reporting can help entities to focus on long-term
value creation, by addressing environmental, social, and governance (ESG) issues.

• Since investors are increasingly recognizing that environmental and social issues
provide both risks and opportunities in respect of their investments, they can use
ESG performance of companies to make investment decisions.

• Investing in social and environmental issues will not only improve own business
continuity of companies but also put them in a better position with their B2B
(Business to Business) customers. (4 marks)

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5(a) Circumstances when the practitioner shall not accept a review

engagement:

SRE 2400 “Engagements to Review Historical Financial Statements” deals with the
practitioner’s responsibilities when engaged to perform a review of historical
financial statements, when the practitioner is not the auditor of the entity’s F.S.
Accordingly, unless required by law or regulation, the practitioner shall not accept
a review engagement if:

(a) The practitioner is not satisfied:

(i) That there is a rational purpose for the engagement; or

(ii) That a review engagement would be appropriate in the circumstances;

(b) The practitioner has reason to believe that relevant ethical requirements,
including independence, will not be satisfied;

(c) The practitioner’s preliminary understanding of the engagement

circumstances indicates that information needed to perform the review
engagement is likely to be unavailable or unreliable;

(d) The practitioner has cause to doubt management’s integrity such that it is
likely to affect proper performance of the review; or

(e) Management or TCWG impose a limitation on the scope of the practitioner’s

work in the terms of a proposed review engagement such that the practitioner
believes the limitation will result in the practitioner disclaiming a conclusion on
the financial statements. (5 Marks)

5(b) Auditor’s duties in case of exclusion of subsidiaries/associates in

consolidation:

- As per Ind AS 110, there is no exemption for ‘temporary control’, or “for

operation under severe long-term funds transfer restrictions” and consolidation is
mandatory for Ind AS compliant F.S.

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- As per Sec. 129(3) of the Companies Act, 2013 read with Rule 6 of Companies
(Accounts) Rules, 2014, a company having subsidiary which is not required to
prepare Consolidated F.S. under the applicable ASs, it shall be sufficient if the
company complies with provisions on Consolidated F.S. provided in Schedule III of
the Act.
- In the given case, Parent Ltd. has acquired 51% shares of Child Ltd. during the
year ending 31.3.2023 and sold 20% shares during the year 2023-24. Parent Ltd.
did not consolidate the financial statements of Child Ltd. for the year ending
31.3.2023 and 31.3.2024.

Conclusion: Intention of Parent Ltd. is quite clear that the control in Child Ltd. is
temporary as the former company disposed off the acquired shares in the next
year of its purchase. Parent Ltd. is required to prepare its financial statements in
accordance with Ind AS as exemption for ‘temporary control’, or “for operation
under severe long-term funds transfer restrictions” is not allowable under Ind AS
110. As per Para 20 of Ind AS 110, “Consolidation of an investee shall begin from
the date the investor obtains control of the investee and cease when the investor
loses control of the investee”. (5 Marks)

5(c) Negligence in performance of duties:

• As per Clause 7 of Part I of Second Schedule to the Chartered Accountants Act,

1949, a CA in practice shall be guilty of professional misconduct if does not
exercise due diligence, or is grossly negligent in the conduct of his professional
duties.

• To conduct stock audit, ascertainment of existence and physical condition of

stocks, cross tallying the stock with Stock statement submitted by bank borrower,
correct classification of stocks for valuation purpose etc. is essential. Further
submitting stock audit report without physically verifying the stock amounts to
gross negligence.

• As per Clause 8 of Part I of Second Schedule, a CA in practice will be deemed to

be guilty of professional misconduct if he fails to obtain sufficient information
which is necessary for expression of an opinion or its exceptions are sufficiently
material to negate the expression of an opinion.
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• In the present case, Mr. Z, did not exercise due diligence and is grossly negligent
in the conduct of his professional duties as instead of visiting the site where the
stock was lying, the firm relied on the Management Information Systems report
along with inspections reports and photographs of Stock taken by the employees
of DEF Ltd.

Conclusion: Nam & Co. is guilty of professional misconduct as per Clauses 7 and 8
of Part I of Second Schedule of CA Act, 1949 due to the reason that stock audit is
being done without examination of related records, failure to exercise due
diligence and failure to obtain necessary information. . (4 Marks)

6(a) As per Para 3(ix)(a) of CARO, 2020, auditors of a company are required to
comment in their report whether the company has defaulted in repayment of
loans or other borrowings or in the payment of interest thereon to any lender; if
yes, the period and amount of default are to be reported as per the format below:

Nature of Name of Amount not Whether No. of days

borrowing, lender* paid on due principal or delay or
including debt date interest unpaid
securities Remarks, if
any
*Lender-wise
details to be
provided in
case of
defaults
to banks,
financial
institutions
and
Government.

In the given case, the company Gautam Limited defaulted in payment of the
principal amount of the loan due of ₹1000 crore on 30 June 2022 and the interest
instalment of ₹100 crore. The said default continued till the end of the year and on
8 April 2023, a restructuring agreement was signed by the banks and company for
restructuring the outstanding loan.
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Moreover, no disclosure was provided by the company with respect to the said
matter.
Conclusion: Auditor is required to report under Clause (ix) of Para 3 of CARO,
2020, i.e., whether the company has defaulted in repayment of loans or other
borrowings or in the payment of interest thereon to any lender, if yes, then
provide the details of the period and the amount of default.
Also, the auditor needs to consider the impact of such non-disclosure and the
noncompliance with the FRF and accordingly the auditor needs to either issue a
qualified opinion or an adverse opinion as per SA 705. (5 Marks)

6(b) Types of IT dependencies:

(a) Automated Controls: Automated controls are designed in IT environment to

enforce business rules. For example: Purchase order approval through-
• Format checks (e.g., only a particular date format is accepted),
• Existence checks (e.g., Duplicate customer number cannot exist),
and/or
• Reasonableness checks (e.g., maximum payment amount)

(b) Reports: System generated reports (e.g. Customer Ageing Report) are used for
execution of manual control, including business performance reviews, or may be
the source of entity information used by auditor while selecting items for testing,
performing substantive tests of details or a substantive analytical procedure.

(c) Calculations: Accounting procedures performed by IT system instead of a

person. For example, calculation of depreciation, charging interest in delayed
payments, etc.

(d) Security: Security including segregation of duties is enabled by IT environment

to restrict access to information.

(e) Interfaces: Programmed logic that transfer data from one IT system to another.
For example, an interface may be programmed to transfer data from a payroll
subledger to the general ledger. (5 Marks)

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6(c) CA Nadar has to ascertain whether the company has complied with the
following aspects in relation to the activity of mobilization of public deposits:

- Ceiling on quantum of public deposits has been linked to its credit rating as given
by an approved credit rating agency.

- Obtain a copy of the credit rating assigned and check whether the public deposits
accepted are in accordance with the level of credit rating assigned to it.

- In the event of upgrading/downgrading of credit rating, NBFC will have to

increase/reduce its public deposits as per revised credit rating assigned to it
within a specified time frame & should ensure that NBFC has informed about the
same to RBI in writing.

- In the event of downgrading of credit rating below Minimum specified

investment grade, a NBFC, being an investment & credit company or factor, shall
regularise excess deposit as provided hereunder:

- With immediate effect, stop accepting fresh public deposits & renewing existing
deposits.

- All existing deposits shall run off to maturity; and

- Report the position within 15 working days, to the concerned Regional Office of
RBI where NBFC is registered.

Provided no matured public deposit shall be renewed without the express and
voluntary consent of the depositor. (4 Marks)

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Or

6(c) Allowing Others to use firm’s name:

• As per Clause (1) of Part 1 of First Schedule to the Chartered Accountants Act,
1949, a CA in Practice is deemed to be guilty of professional Misconduct if he
allows any person to practice in his name as a Chartered Accountant, unless such
person is also a Chartered Accountant in practice, and is in partnership with, or
employed by himself.

• The above clause is intended to safeguard the public against unqualified

accountant practicing under the cover of qualified accountants. It clause ensures
that the work of the accountant will be carried out by a Chartered Accountant who
may be his partner, or his employee and would work under his control and
supervision.

• In the present case, CA Pant allowed Mr. Sant, another Chartered Accountant,
holding Certificate of Practice to practice in his firm for a period of 6 months,
whereas Mr. Sant is not a partner or employee. Further after expiry of six months,
Mr. Pant also gives Mr. Sant a lump sum amount of ₹ 3,00,000 for his association
out of gratitude.

Conclusion: Mr. Pant will be guilty of professional misconduct by virtue of Clause

1 of Part 1 of First Schedule as he allows another person to practice in his firm
name, whereas other person (Mr. Sant) is neither a partner nor an employee.
(4 Marks)

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