Test Series: April, 2019

MOCK TEST PAPER - 2

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

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

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

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

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 specific dubious practices are required to be looked into by the auditor. Areas of propriety audit
under the provisions of Section 143(1) may be following:
(i) Whether the terms on which secured loans and secured advances have been made are
prejudicial to the interests of the company or its members”: It may be appreciated that
the terms of loans include such matters as security, interest, repayment period and other
business considerations. The auditor has to inquire whether the terms are such that they can
be adjudged as prejudicial to the legitimate interest of the company or of its shareholders.
This is a process of judging a situation by reference to certain objective standards or
reasonableness whether the terms entered into are prejudicial or not, not only to the company
but also to the shareholders.
(ii) Whether transactions of the company which are represented merely by book entries
are prejudicial to the interests of the company: This proposition has got to be inquired into
by reference to the effects of the book entries, unsupported by transactions, on the legitimate
interests of the company. The auditor has to exercise his judgment based on certain objective
standards. It is also possible that some transactions may not adversely affect the interests of
the company. The auditor has to judiciously consider what does and does not constitute the
interest of the company.
(iii) Whether investment of companies, other than a banking or an investment company, in
the form of shares, debentures and other securities have been sold at a price lower
than the cost: Apparently, this is a matter of verification by the auditor. The intention,
however, is not known whether loss has occurred due to the sale. The auditor is required to
inquire into circumstances of sale of investments that resulted in loss. Obviously, the duty
cast on him is propriety based, i.e., reasonableness of the decision to sell at a loss. It involves
exercise of judgment having regard to the circumstances in which the company was placed
at the time of making the sale.
(iv) Whether loans and advances made by the company have been shown as deposits.
Again, considering the propriety element, rationalizing the proper disclosure of loans
and advance given by company is made:
(v) Whether personal expenses have been charged to revenue: It is an accepted principle
that expenses which are not business expenses should not be charged to revenue. The effect
of charging personal expenses to the business is to distort the profitability of the company
and to secure a personal gain at the cost of the company. Obviously, propriety is involved in
this; charging personal expenses to business account is highly improper and abusive hence
this provision.
(vi) In case it is stated in the books and papers of the company that shares have been
allotted for cash, whether cash has actually been received in respect of such allotmen t,
and if no cash actually received, whether the position in books of account and balance
sheet so stated is correct, regular and not misleading: A control has been set up to verify
the receipt of cash in case of allotment of shares for cash. Further, if c ash is not received, the
books of accounts and statement of affairs shows the true picture.
(c) Government Guaranteed Advance: If a government guaranteed advance becomes NPA, then for
the purpose of income recognition, interest on such advance should not to be taken to income
unless interest is realized. However, for purpose of asset classification, credit facility backed by
Central Government Guarantee, though overdue, can be treated as NPA only when the Central
Government repudiates its guarantee, when invoked.
Since the bank has not revoked the guarantee, the question of repudiation does not arise. Hence
the bank is correct to the extent of not applying the NPA norms for provisioning purpose. But this
exemption is not available in respect of income recognition norms. Hence the income to the extent
not recovered should be reversed.
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 The situation would be different if the advance is guaranteed by State Government because this
exception is not applicable for State Government Guaranteed advances, where advance is to be
considered NPA if it remains overdue for more than 90 days.
In case the bank has not invoked the Central Government Guarantee though the amount is overdue
for long, the reasoning for the same should be taken and duly reported in LFAR.
4. (a) According to SA-200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit
in Accordance with Standards on Auditing”, the Audit Risk is a risk that Auditor will issue an
inappropriate opinion while Financial Statements are materially misstated.
Audit Risk, has two components: Risk of material Misstatement and Detection Risk. The
relationship can be defined as follows.
Audit Risk = Risk of material Misstatement X Detection Risk
Risk of material Misstatement: - Risk of Material Misstatement is anticipated risk that a material
Misstatement may exist in Financial Statement before start of the Audit. It has two components
Inherent risk and Control risk. The relationship can be defined as
Risk of material Misstatement = Inherent risk X control risk
Inherent risk: it is a susceptibility of an assertion about account balance; class of transaction,
disclosure towards misstatements which may be either individually or collectively with other
Misstatement becomes material before considering any related internal control which is 40% in the
given case.
Control risk: it is a risk that there may be chances of material Misstatement even if there is a control
applied by the management and it has prevented defalcation to 75%.
Hence, control risk is 25% (100%-75%)
Risk of material Misstatement: Inherent risk X control risk i.e. 40% X 25 % = 10%
Chances of material Misstatement are reduced to 10% by the internal control applied by
management.
Detection risk: It is a risk that a material Misstatement remained undetected even if all Audit
procedures applied, Detection Risk is 100-60 = 40%
In the given case, overall Audit Risk can be reduced up to 4% as follows:
Audit Risk: Risk of Material Misstatement X Detection Risk = 10X 40% = 4%
(b) Compliance of conditions of Corporate Governance in case of Listed Company: As per Listing
Obligation and Disclosure Requirements Regulations 2015, depending upon the facts and
circumstances, some situations may require an adverse or qualified statement or a disclosure
without necessarily making it a subject matter of qualification in the Auditors’ Certificate, in respect
of compliance of requirements of corporate governance for example:
(i) The Audit Committee shall meet at least four times in a year and not more than one hundred
and twenty days shall lapse between two meetings. The number of days between the
meetings held on 1.9.2017 and 3.01.2018 is more than 120 days. Hence it is a non -
compliance and would require qualification in certificate of corporate governance
(ii) Since the Chairman is the non-executive director, there should be 1/3 rd of directors (rounded
to next integer) to be independent. In this case, 4 directors need to be independent. Any
vacancy during shortfall of independent directorship should be filled within next 3 months or
before the start of next meeting, whichever is later. In the instant case, since the independent
director was appointed after lapse of 3 months (i.e. on 1.9.2017) and after next first meeting
1/6/2017, there is default which would require qualification in certificate on corporate
governance.
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 (iii) Chairman shall be present at Annual General Meeting to answer shareholder queries. In the
given scenario, Chairman of Audit Committee did not attend the Annual General Meeting held
on 14/09/2017 which is not in order/compliance.
(iv) The Audit Committee shall mandatorily review the Internal audit reports relating to internal
control weaknesses as per Part C (B) of Schedule II and the auditor should ascertain from
the minutes book of the Audit Committee and other sources like agenda papers, etc. whether
the Audit Committee has reviewed the above-mentioned information. In the given situation,
the agenda of Audit Committee did not deliberate or take note of serious irregularity mention
in Internal Audit Report which is again not in compliance of conditions of Corporate
Governance and warrant audit qualification in certificate on corporate governance.
(v) The auditor should ascertain whether, throughout the reporting period, the Board of Directors
comprises an optimum combination of executive and non-executive directors, with at least
one-woman director. Therefore, there should be at least one-woman director. In the given
situation there is no woman director which is again not in compliance.
(c) As per SA 610 Using the Work of Internal Auditor, the external auditor (Statutory Auditor) shall not
use internal auditors to provide direct assistance to perform procedures that:
(a) Involve making significant judgments in the audit;
(b) Relate to higher assessed risks of material misstatement where the judgment required in
performing the relevant audit procedures or evaluating the audit evidence gathered is more
than limited;
(c) Relate to work with which the internal auditors have been involved and which has already
been, or will be, reported to management or those charged with governance by the internal
audit function; or
(d) Relate to decisions the external auditor makes in accordance with this SA regarding the
internal audit function and the use of its work or direct assistance.
In the given case where the valuation of accounts receivable is assessed as an area of higher risk,
the statutory auditor could assign the checking of the accuracy of the aging to an internal auditor
providing direct assistance. However, because the evaluation of the adequacy of the provision
based on the aging would involve more than limited judgment, it would not be appropriate to assign
that latter procedure to an internal auditor providing direct assistance.
5. (a) As per SA 210 Agreeing the Terms of Audit Engagements The auditor shall agree the terms of the
audit engagement with management or those charged with governance, as appropriate.
The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other
suitable form of written agreement and shall include:
(i) The objective and scope of the audit of the financial statements;
(ii) The responsibilities of the auditor;
(iii) The responsibilities of management;
(iv) Identification of the applicable financial reporting framework for the preparation of the financial
statements; and
(v) Reference to the expected form and content of any reports to be issued by the auditor and a
statement that there may be circumstances in which a report may differ from its expected form
and content.

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 (b) In the instant case Operational Due Diligence is required to confirm that the business plan provided
is achievable with the existing facilities plus the capital expenditure outlined in the business plan.
Contents of a Due Diligence Report: Briefly, the contents of a due diligence report can be
discussed under:
 Terms of reference and scope of verification.
 Objective of due diligence.
 Brief history of the company including shareholding pattern.
 Assessment of management structure.
 Assessment of financial liabilities with special emphasis on Interlocking investments and
financial obligations with group/associates companies, amounts receivables subj ect to
litigation, any other likely liability which is not provided for in the books of account.
 Assessment of valuation of assets including comments on properties, terms of leases, lien
and encumbrances including status of charges, liens, mortgages, assets and properties of the
company.
 Assessment of operating results.
 Assessment of taxation and statutory liabilities.
 Assessment of possible liabilities on account of litigation and legal proceedings against the
company and suggestion on ways and means including affidavits, indemnities, to be executed
to cover unforeseen and undetected contingent liabilities.
 Assessment of net worth.
 Suggestions on various aspects to be taken care of before and after the proposed merger /
acquisition.
 Status of franchises, license and patents.
Finally, an executive summary may be prepared highlighting the significant areas.
(c) (i) Clause 16(c) of Form 3CD: A tax auditor has to report under clause 16(c) of Form 3CD on
any escalation claim accepted during the previous year and not credited to the profit and loss
account under clause 16(c) of Form 3CD.
The escalation claim accepted during the year would normally mean “accepted during the
relevant previous year”. If such amount are not credited to Profit and Loss Account the fact
should be reported. The system of accounting followed in respect of this particular item may
also be brought out in appropriate cases. If the assessee is following cash basis of accounting
with reference to this item, it should be clearly brought out since acceptance of claims during
the relevant previous year without actual receipt has no significance in cases where cash
method of accounting is followed.
Escalation claims should normally arise pursuant to a contract (including contracts entered
into in earlier years), if so permitted by the contract. Only those claims to which the other party
has signified unconditional acceptance could constitute accepted claims. Mere making claims
by the assessee or claims under negotiations cannot constitute accepted claims. After
ascertaining the relevant factors as outlined above, a decision whether to report or not, can
be taken.
(ii) The following is an illustrative list of capital receipts which, if not credited to the profit and loss
account, are to be stated under clause 16(e) of Form 3CD-
(a) Capital subsidy received in the form of Government grants, which are in the nature of
promoters’ contribution i.e., they are given with reference to the total investment of the

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

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

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

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