CHAPTER 1

NATURE, OBJECTIVE AND SCOPE OF AUDIT

QUESTIONS WITH ANSWERS
Question 1
“An audit is independent examination of financial information of any entity, whether profit oriented or
not, and irrespective of its size or legal form, when such an examination is conducted with a view to
expressing an opinion thereon.”
Explain stating clearly how the person conducting this task should take care to ensure that financial
statements would not mislead anybody. [MTP - Oct. 19]
OR
The person conducting audit should take care to ensure that financial statements would not mislead
anybody. Explain stating clearly the meaning of Auditing. [RTP – May 20, MTP – Oct. 21]
Answer
Meaning of Audit:
“An audit is independent examination of financial information of any entity, whether profit oriented or
not, and irrespective of its size or legal form, when such an examination is conducted with a view to
expressing an opinion thereon.” From this definition, following main points emerge:
1. Audit is independent examination of financial information.
2. Audit may be carried out of all entities, may be profit oriented or not and irrespective of its size or
legal form. For example, listed company engaged in business and Sec. 8 company which is a non-profit
organisation, both are required to get the accounts audited under Companies Act, 2013.
3. The objective of the audit is to express an opinion on the financial statements.
Points to be ensured that F.S. not misted anybody:
Auditor engaged to perform the task of performing audit need to ensure the following:
a) Ledger balances agree with the entries made in the book of account.
b) Sufficient and Appropriate evidences are available for entries made in books of account.
c) All transactions are being recorded in books of account, i.e. there is no omission.
d) Information contained in the financial statements is clear and unambiguous.
e) Amounts shown in financial statements are properly classified, described and disclosures are made in
conformity with applicable Accounting Standards.
f) Financial statements reflect true and fair view of financial results and financial position.
Question 2

The objective of an audit of financial statements, prepared within a framework of recognized accounting
policies and practices and relevant statutory requirements, if any, is to enable an auditor to express an
opinion on such financial statements.
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Or
State the objectives of Audit according to SA 200. [RTP – May 20]
Answer
Objectives of Audit:
(a) The objective of an audit of financial statements, prepared within a framework of recognized
accounting policies and practices and relevant statutory requirements, if any, is to enable an auditor
to express an opinion on such financial statements.
(b) The auditor’s opinion helps determination of the true and fair view of the financial position and
operating results of an enterprise.
(c) The user, however, should not assume that the auditor’s opinion is an assurance as to the future
viability of the enterprise or the efficiency or effectiveness with which management has conducted
the affairs of the enterprise.
(d) Auditor should review and assess the conclusions drawn from the audit evidence obtained and
from his knowledge of business of the entity as the basis for the expression of his opinion on the
financial information.
Question 3
List the points that merit consideration in regard to scope of audit.
Answer
Points to be considered in determining Scope of Audit:
1. Audit should cover the examination of all aspects of an entity relevant to financial statements.
2. Auditor should assess the sufficiency and appropriateness of the information contained in the
accounting records and other source data. For this purpose, auditor should
a) Evaluate accounting systems and internal controls,
b) Perform necessary tests, enquiries and other verification procedure of accounting transactions and
account balances.
3. To determine whether the information is properly disclosed in the financial statements, audit may
involve
a) Comparing the financial statements with the underlying records.
b) Considering the judgments used by management in preparing the financial statements.
4. Auditor is not expected to perform duties which fall outside the scope of his competence.
5. Limitations, if any, on the scope of audit that impair the auditor's ability to express an unmodified
opinion should be set out in his report.
Question 4
State briefly six important aspects to be considered by an auditor while conducting an audit.

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Or
State the matters which the statutory auditor should look into before framing an opinion on accounts on
finalization of audit of accounts. Discuss overall audit approach.
Or
State the principal aspects to be covered in an audit concerning financial statement of account.
[Nov. 15, 5 Marks]
GST & Co., a firm of Chartered Accountants has been appointed to audit the accounts of XYZ Ltd. The
partner wanted to cover principal aspects while conducting its audit of financial statements. Advise those
principal aspects. [RTP - May 18]
Or
Discuss: Principal aspects to be considered by an auditor while conducting an audit of final statements of
accounts. [May 18, 5 Marks]
Or
SWM is proprietorship firm engaged in the manufacturing of different kind of yarns. It sells its finished
products both in the domestic as well as in the international market. The company is making total turnover
of ` 30 crores. It has also availed cash credit limit of ` 3 crores from Dena Bank. In the year 2021-22.
Proprietor of the firm is worried about the financial position of the company and is under the impression
that since he is out of India, therefore firm might not run well. He approaches an Internal Auditor about
as to what would be covered in Audit. Advise regarding principal aspects (any four) to be covered in
getting accounts audited. [MTP - March 19]
Answer
Aspects to be covered in Audit:
1. Examination of Accounting System & Internal Control
 To ascertain whether it is appropriate for the business and helps in proper recording of all the
transactions.
 To determine the Nature, Timing and Extent (NTE) of Audit Procedures to be performed.
2. Reviewing the system & procedures
 To find out whether they are adequate and comprehensive.
3. Vouching of the transactions
 To ensure authenticity and validity of transactions.
 To check the arithmetical accuracy of the books of account.
 To ascertain proper distinction into capital and revenue items.
4. Verification of Assets & Liabilities
 To ensure existence and valuation of the assets and liabilities appearing in the balance sheet.

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5. Statutory Compliances
 In case of entities governed by some law, rules or regulations, for example in case of audit of
a company incorporated under Companies Act, 2013.
6. Expression of Opinion
 On true and fair view of state of Affairs as reflected by Balance Sheet.
 On true and fair view of Financial Results as reflected by Statement of Profit and Loss.
 On true and fair view of Cash Flows as reflected by Cash Flow Statement.
7. Reporting on Other matters
 As required by the law governing the entity.
Question 5
The duties of the auditor are limited to verification of the arithmetical accuracy of the books of the
accounts. Comment.
Answer
Auditor’s Duties:
Statement that duties of the auditor are limited to verification of the arithmetical accuracy of the books of
the accounts is not correct, as besides ensuring the arithmetical accuracy of the books of the accounts,
auditor is also supposed to cover a number of other aspects in the audit.
Aspects to be covered in the audit in addition to verification of arithmetical accuracy: Refer Question 4.
Question 6
Discuss the types of audits required under law. [Nov. 11, 5 Marks]
Answer
Audit required under law:
a) Companies governed by the Companies Act, 2013;
b) Banking companies governed by the Banking Regulation Act, 1949;
c) Electricity supply companies governed by the Electricity Supply Act, 1948;
d) Co-operative societies registered under the Co-operative Societies Act, 1912;
e) Public and charitable trusts registered under various Religious and Endowment Acts;
f) Corporations set up under an Act of Parliament or State Legislature such as the LIC of India.
g) Specified entities under various sections of the Income-tax Act, 1961.
Question 7
What is the importance of having the accounts audited by independent professional auditors?
[May 01, 8 Marks]
Or
What are the advantages of Independent audit? [May 12, 8 Marks]
Or
Discuss the following: Advantages of Independent Auditor. [May 15, 5 Marks]

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Or
RAG is proprietorship firm engaged in the manufacturing of textile and handloom products. It sells its
finished products both in the domestic as well as in the international market. The company is making total
turnover of ` 30 crores. It has also availed cash credit limit of ` 5 crores from Canara Bank. In the year
2021-22, proprietor of the firm is worried about the financial position of the company and is under the
impression that since he is out of India, therefore firm might run into losses. He approaches a CA about
advantages of getting his accounts audited throughout the year so that he may not suffer due to accounting
weaknesses. Advise regarding advantages of getting accounts audited. [MTP – March 18, Oct. 18]
Or
The chief utility of audit lies in reliable financial statements on the basis of which the state of affairs may
be easy to understand. Apart from this obvious utility, there are other advantages of audit. Some or all of
these are of considerable value even to those enterprise and organisations where audit is not compulsory.
Explain. [RTP – Nov. 18]
Answer
Advantage of Audit of Financial Statement:
1. Protect the interest of fund providers: It safeguards the financial interests of persons who are not
associated with the management of the organisation e.g. partners or shareholders.
2. Moral check on employees: It acts as a moral check on employees from committing defalcations or
embezzlement.
3. Settlement of Taxes, etc.: Auditing statements of accounts are helpful in settling of taxes, negotiating
loans and for determining the purchase consideration for a business.
4. Settlement of Trade Disputes: Audited statements are useful for settling trade disputes for higher
wages or bonus.
5. Detection of Wastages: Audited statements also help in detection of wastages and losses and shows
the different ways by which these might be checked especially those that occurred due to absence or
inadequacy of internal checks or internal control measures.
6. Proper maintenance of books of account: Independent audit ascertains whether the necessary books
of account and allied records have been properly kept and helps the client in making good deficiencies
or inadequacies in this respect.
7. Appraisal of controls: As an appraisal function, audit reviews the existence and operations of various
controls in the organisations and reports weaknesses, inadequacies etc.
8. Admission/retirement of Partner: Audited accounts are of great help in the settlement of accounts at
the time of admission or death of the partner.
9. Grant of License: Government may require audited and certified statements before it gives assistance
or issues the license for a particular trade.

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Question 8
Discuss Limitations of audit. [May 11, 8 Marks]
Or
“The process of auditing is such that it suffers from certain limitations”. Discuss.
Or
ABC Ltd. requested the auditor to provide for absolute assurance in respect of its ten branches scattered
in Mumbai and confirm that financial statements are free from material misstatements due to fraud or
error. Advise.
Or
The auditor is not expected to, and cannot, reduce audit risk to zero and cannot therefore obtain absolute
assurance that the financial statements are free from material misstatement due to fraud or error. This is
because there are inherent limitations of an audit. Explain. [RTP – Nov. 18]
Answer
Inherent Limitations of Audit:
As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in accordance
with Standards on Auditing” the auditor is not expected to, and cannot, reduce audit risk to zero and
cannot therefore obtain absolute assurance that the financial statements are free from material
misstatement due to fraud or error. This is because there are inherent limitations of an audit, which result
in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion
being persuasive rather than conclusive. The inherent limitations of an audit arise from:
1. The Nature of Financial Reporting
 The preparation of financial statements involves judgment by management in applying the
requirements of the entity’s applicable FRF to the facts and circumstances of the entity.
Consequently, some financial statement items are subject to an inherent level of variability
which cannot be eliminated by the application of additional auditing procedures.
2. Nature of Audit Procedures
There are practical and legal limitations on the auditor’s ability to obtain audit evidence. For
example:
 Management & others do not provide complete information intentionally/unintentionally.
 Audit procedures used to gather audit evidence may be ineffective against fraud detection.
 Audit is not an official investigation into alleged wrongdoings.
3. Timeliness of Financial Reporting & the Balance between Benefit & Cost
 User expectation that the auditor will form an opinion on the F. S. within a reasonable period
of time and at a reasonable cost.
 It results into use of Test checking and putting most of efforts over the areas having risk of
material misstatement with corresponding less efforts in other areas.

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4. Other Matters that Affect the Limitations of an Audit

In the case of certain assertions or subject matters, the potential effects of the limitations on the
auditor’s ability to detect material misstatements are particularly significant. Such assertions or
subject matters include:
a. Fraud, particularly fraud involving senior management or collusion.
b. The existence and completeness of related party relationships and transactions.
c. The occurrence of non-compliance with laws and regulations.
d. Future events or conditions that may cause an entity to cease to continue as a going concern.
Question 9
There are practical and legal limitations on the auditor’s ability to obtain audit evidence. Explain with
examples. [RTP – May 20, MTP – Oct. 20, RTP – Nov. 21]
Answer
Audit limitations as to the nature of audit procedures:
There are practical and legal limitations on the auditor's ability to obtain audit evidence. For example
1. There is the possibility that management or others may not provide, intentionally or unintentionally,
the complete information that is relevant to the preparation and presentation of the financial
statements or that has been requested by the auditor.
2. Fraud may involve sophisticated and carefully organised schemes designed to conceal it. Therefore,
audit procedures used to gather audit evidence may be ineffective for detecting an intentional
misstatement that involves, for example, collusion to falsify documentation which may cause the
auditor to believe that audit evidence is valid when it is not. The auditor is neither trained as nor
expected to be an expert in the authentication of documents.
3. An audit is not an official investigation into alleged wrong doing. Accordingly, the auditor is not given
specific legal powers, such as the power of search, which may be necessary for such an investigation.
Question 10
In case of certain subject matters, limitations on the auditor's ability to detect material misstatements are
particularly significant. Explain such assertions or subject matters. [RTP – May 20, July 21, 3 Marks]
Answer
Other Matters that Affect the Limitations of an Audit
In the case of certain assertions or subject matters, the potential effects of the limitations on the auditor's
ability to detect material misstatements are particularly significant. Such assertions or subject matters
include:
a) Fraud, particularly fraud involving senior management or collusion.
b) The existence and completeness of related party relationships and transactions.
c) The occurrence of non-compliance with laws and regulations.
d) Future events or conditions that may cause an entity to cease to continue as a going concern.

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Question 11
DEF & Co. Chartered Accountants successfully carried out the audit of Shree Garments for the financial
year 2021-22. After the completion of the audit, there were found material misstatements due to fraud in
the financial statements which were not noticed and reported by the auditor. Management alleges that it
is failure on the part of auditor. Comment. [MTP – Oct. 20]
Answer
Management allegation as to auditor’s failure to detect material misstatements:
As per SA 200 “Overall Objectives of the Independent Auditor and the Conduct of an Audit in accordance
with Standards on Auditing” the auditor is not expected to, and cannot, reduce audit risk to zero and
cannot therefore obtain absolute assurance that the financial statements are free from material
misstatement due to fraud or error. This is because there are inherent limitations of an audit, which result
in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion
being persuasive rather than conclusive.
As per SA - 240, the responsibility for the prevention and detection of fraud and error rests with
management through the implementation of an adequate system of internal control. Such a system reduces
but does not eliminate the possibility of fraud and error. Auditor’s responsibility for failure to detect fraud
and error can arise only due to proven negligence.
The relevant provisions in this regard are:
(a) In forming his opinion, the auditor carries out procedures designed to obtain evidence that will
provide reasonable assurance that the financial information is properly stated in all material
respects.
(b) Due to the inherent limitations of an audit there is a possibility that material misstatements of the
financial information resulting from fraud or error may not be detected. An auditor cannot be
charged for non-adherence of basic principles in the following circumstances:
 Subsequent discovery of material misstatement of the financial information resulting from fraud
or error;
 Failure to disclose the affairs of the company kept out of books and concealed from him.
Unless it is proved that procedures undertaken by auditor in the circumstances are inadequate and
improper.
Thus, if any misstatement has been detected after the completion of the audit, the same by itself cannot
mean that the auditor did not perform his duty properly.
If the auditor can prove with the help of his papers (documentation) that he has followed adequate
procedures necessary for the proper conduct of an audit, he cannot be held responsible for the same.

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Question 12
The matter of difficulty time, or cost involved is not in itself a valid basis for the auditor to omit an audit
procedure for which there is no alternative or to be satisfied with audit evidence that is less than
persuasive, Explain. [RTP - May 18]
Answer
Omission of Audit procedure due to difficulty, time or cost constraint:
 The matter of difficulty time, or cost involved is not in itself a valid basis for the auditor to omit an
audit procedure which there is no alternative or to be satisfied with audit evidence that is less than
persuasive.
 Appropriate planning assists in making sufficient time and resources available for the conduct of the
audit. Notwithstanding this, the relevance of information, and thereby its value, tends to diminish over
time and there is a balance to be struck between the reliability of information and its cost.
 There is an expectation by users of financial statements that the auditor will form an opinion on the
financial statements within a reasonable period of time and at a reasonable cost, recognising that it is
impracticable to address all information that may exist or to pursue every matter exhaustively on the
assumption that information is in error or fraudulent until proved otherwise.
Question 13
The relationship between auditing and law is very close one. Discuss. [MTP - Oct. 19]
Answer
Relationship of Auditing and Law:
 Auditing involves examination of various transactions from the view point of whether or not these
have been properly entered into as per the requirements of law, in particular, when an entity is
governed by any law, for example companies.
 It necessitates that an auditor should have a good knowledge of business and corporate laws affecting
the entity. He should be familiar with the law of contracts, negotiable instruments, etc.
 In analysing the impact of various transactions particularly from the accounting aspect, an auditor
ought to have a good knowledge about the direct as well as indirect tax laws.
Question 14
Discuss the following: The discipline of behavioural science is closely linked with the subject of auditing.
[Nov. 13, 5 Marks]
Answer
Relationship of Auditing with behavioural science:
The discipline of behavioural science is closely linked with the subject of auditing. The knowledge of
human behaviour is indeed very essential for an auditor so as to effectively discharge his duties, because
of below mentioned aspects:

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 While performing audit, auditor is required to interact with a lot of people in the organisation.
 Management auditor is expected to deal with human beings rather than financial figures.
 One of the basic elements in designing the internal control system is personnel.
 Internal control system in an organisation cannot work until and unless the people who are working
in the organisation are competent and honest.
Question 15

“Discipline of Statistics and Mathematics has come closer quite to auditing”. Explain.
Answer
Relationship of Auditing with Statistics and Mathematics:
 While performing audit, auditor examines the transaction on test checking basis, wherein auditor is
required to select the samples.
 Discipline of statistics plays an important role as the auditor is also expected to have the knowledge of
statistical sampling so as to arrive at meaningful conclusions.
 The knowledge of mathematics is also required on the part of auditor particularly at the time of
verification of inventories.
Question 16

Both accounting and auditing are closely related with each other. Explain. [RTP – Nov. 20]
Answer
Relationship between accounting and auditing:
 Accounting and auditing are closely related with each other as auditing reviews the financial
statements which are nothing but a result of the overall accounting process.
 Auditing begins when accounting ends.
 It requires that the auditor must have a thorough and sound knowledge of generally accepted
principles of accounting before he can review the financial statements.
Question 17

The objective of the IAASB is to serve the public interest by setting high quality auditing standards and
by facilitating the convergence of international and national standards, thereby enhancing the quality and
uniformity of practice throughout the world and strengthening public confidence in the global auditing
and assurance profession. State how this objective is achieved. [MTP – March 18, March 19]
Or
The IAASB functions as an independent standard-setting body under the auspices of IFAC. Explain stating
the objective of IAASB and also how it achieves those objectives. [RTP – May 19]

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Answer
Role of International Auditing & Assurance Standard Board (IAASB)
The IAASB functions as an independent standard-setting body under the auspices of IFAC. The objective
of the IAASB is to serve the public interest by setting high quality auditing standards and by facilitating
the convergence of international and national standards, thereby enhancing the quality and uniformity of
practice throughout the world and strengthening public confidence in the global auditing and assurance
profession. The IAASB achieves this objective by:
a. Establishing high quality auditing standards and guidance for financial statement audits that are
generally accepted and recognized by investors, auditors, governments, banking regulators,
securities regulators and other key stakeholders across the world;
b. Establishing high quality standards and guidance for other types of assurance services on both
financial and non-financial matters;
c. Establishing high quality standards and guidance for other related services;
d. Establishing high quality standards for quality control covering the scope of services addressed by
the IAASB; and
e. Publishing other pronouncements on auditing and assurance matters, thereby advancing public
understanding of the roles and responsibility of professional auditors and assurance service
providers.
Question 18
Explain the Auditing Standard setting process of AASB of ICAI.
Answer
Auditing Standards Setting Process:
The Auditing and Assurance Standards Board (AASB) of the Institute formulates the auditing standards.
The steps followed in formulating auditing standards are:
1. AASB identifies the areas where auditing standards need to be formulated and the priority in regard
to their selection.
2. In the preparation of the auditing standards, the Board is normally, assisted by study groups
comprising of a cross section of members of the Institute.
3. On the basis of the work of the study groups, an Exposure Draft of the proposed auditing standard is
prepared by the Board and issued for comments of the members.
4. After taking into the comments received, the draft of the proposed auditing standard is finalized by
the Board and submitted to the Council of the Institute.
5. The Council considers the final draft of the proposed auditing standard and, if necessary, modifies the
same in consultation with the Board. The auditing standard is then issued under the authority of the
Council.
6. While formulating the auditing standards, the Board also takes into consideration the applicable laws,
customs, usages and business environment in the country.

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Question 19
What are the objectives and functions of Auditing and Assurance Standard Board (AASB)? Explain.
[May 15, 6 Marks]
Answer
Objectives and Functions of AASB:
1. To review the existing and emerging auditing practices worldwide and identify areas in which
Standards on Quality Control, Engagement Standards and Statements on Auditing need to be
developed.
2. To formulate Engagement Standards, Standards on Quality Control and Statements on Auditing so
that these may be issued under the authority of the Council of the Institute.
3. To review the existing Standards and Statements on Auditing to assess their relevance in the changed
conditions and to undertake their revision, if necessary.
4. To develop Guidance Notes on issues arising out of any Standard, auditing issues pertaining to any
specific industry or on generic issues, so that those may be issued under the authority of the Council
of the Institute.
5. To review the existing Guidance Notes to assess their relevance in the changed circumstances and to
undertake their revision, if necessary.
6. To formulate General Clarifications, where necessary, on issues arising from Standards.
7. To formulate and issue Technical Guides, Practice Manuals, Studies and other papers under its own
authority for guidance of professional accountants in the cases felt appropriate by the Board.
Question 20
Discuss the following: Standards collectively known as the Engagement Standards issued by AASB under
the authority of Council of ICAI. [May 12, 5 Marks]
Or
State the Standards issued by AASB which are collectively known as engagement standards.
[Nov. 15, 4 Marks]
Answer
Engagement Standards issued by AASB:
Preface to Standards on Quality Control, Auditing, Review, Other Assurance and Related Service
categorises the Standards based on the nature of service being provided by a member. It, therefore,
introduces an umbrella concept of Engagement Standards. The term “Engagement Standards” comprises
the following Standards:
1. Standards on Auditing (SAs): These standards are to be applied in the audit of historical financial
information.
2. Standards on Review Engagements (SREs): These standards are to be applied in the review of
historical financial information.

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3. Standards on Assurance Engagements (SAEs): These standards are to be applied in assurance

engagements, engagements dealing with subject matter other than historical financial information.
4. Standards on Related Services (SRRs): These standards are to be applied to engagements involving
application of agreed upon procedures to information and other related services such as compilation
engagements.
Question 21
Discuss the following: “Statements” and “Guidance Notes” of ICAI – Whether mandatory or
recommendatory. [May 14, 5 Marks]
Answer
Statement and Guidance Notes - Level of authority and degree of compliance:
Statements Guidance Notes
Purpose Statements are issued with a view to Guidance Notes are designed to provide
securing compliance by members on guidance to members on matters which
matters which in the opinion of the council may arise in the course of their professional
of the institute are critical for the proper work and on which they may desire
discharge of their functions. assistance.
Compliance Compliance is Mandatory in Nature. Compliance is recommendatory in nature.
Examples  Preface on Standards on Quality  Guidance Note on Audit of Inventories.
Control. Auditing, Review, Other  Guidance Note on Audit of
Assurance and related Services. Investments.
Level of 1. Examine whether ‘Statements’ relating 1. Examine whether the recommendations
Authority/ to accounting matters are complied in a guidance note relating to an
Duties of with in the presentation of F.S. In the accounting matter have been followed or
Members event of any deviation from such not. If the same have not been followed,
‘Statements’, to make adequate consider whether keeping in view the
disclosures in their audit reports so that circumstances of the case, a disclosure in
the users of F.S. may be aware of such his report is necessary.
deviations.
2. Ensure that the ‘Statements’ relating to 2. Follow recommendations in a guidance
auditing matters, are followed in the note relating to auditing except where he
audit of financial information covered is satisfied that in the circumstances of
by their audit reports. If, for any reason, the case, it may not be necessary to do so.
a member, has not been able to perform
an audit in accordance with such
‘Statements’ his report should draw
attention to the material departures
there from.

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Question 22
State briefly the Qualities of Auditors. [Nov. 04, 4 Marks]
Or
Lord Justice Lindley in the course of the judgment in the famous London & General Bank case had
succinctly summed up the overall view of what an auditor should be as regards the personal qualities.
Explain stating also the qualities of Auditor. [RTP – May 19, MTP – Oct. 21]
Or
Lord Justice Lindley in the course of the judgment in the famous London & General Bank case had
succinctly summed up the overall view of what an auditor should be as regards the personal qualities. He
said, “An auditor must be honest that is, he must not certify what he does not believe to be true and must
take reasonable care and skill before he believes that what he certifies is true”. Explain stating clearly the
qualities of an auditor. [MTP – March 21]
Answer
Qualities of Auditors:
(A) Technical Qualities: Auditor must have sound knowledge of followings:
1. Accountancy - its principles, procedures, techniques and standards (AS).
2. Auditing - its principles, procedures, techniques and standards (SA).
3. Direct and Indirect Taxation Laws.
4. General Principles of Law of contracts and partnership.
5. Corporate Laws.
6. Client Nature of Business.
(B) Personal Qualities: Apart from the technical qualities, the auditor should also possess certain personal
qualities mentioned below:
1. Objectivity, Integrity and Independence.
2. Confidentiality of client information.
3. Effective Communication skills.
4. Tactful approach in dealing with clients.
5. Clear headedness and commonsense.
6. Reliability and trust.
Question 23

The firm’s system of quality control should include policies and procedures addressing each element.
Explain. [RTP - Nov. 18, MTP – Oct. 19]

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Answer
Elements of a System of Quality Control:
As per SQC 1 “Quality Control for Firms that perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements”, the firm’s system of quality
control should include policies and procedures addressing each of the following elements:
a) Leadership responsibilities for quality within the firm.
b) Ethical requirements.
c) Acceptance and continuance of client relationships and specific engagements.
d) Human resources.
e) Engagement performance.
f) Monitoring.
g) The quality control policies and procedures should be documented and communicated to the firm’s
personnel.
Question 24
As per SA 220, the engagement partner shall take responsibility for the overall quality on each audit
engagement to which that partner is assigned. While taking responsibility for the overall quality on each
audit engagement, analyse and explain the emphasis of the actions of the engagement partner and
appropriate messages to the other members of the engagement team. Also define engagement partner.
[MTP - Aug. 18]
Or
The engagement partner shall take the responsibility for the overall quality on each audit engagement to
which that partner is assigned. Discuss with reference to SA 220 “Quality Control for an audit of financial
statement”. [Nov. 19, 3 Marks]
Or
As per SA 220 “Quality Control for an Audit of Financial Statements”, the engagement partner shall take
responsibility for the overall quality on each audit engagement to which that partner is assigned. Explain
clearly stating the meaning of engagement partner and also the actions of the engagement partner and
appropriate messages to the other members of the engagement team, in taking responsibility for the
overall quality on each audit engagement. [RTP – Nov. 20]
Answer
Leadership Responsibilities for Quality on Audits:
As per SA 220 "Quality Control for an Audit of Financial Statements" the engagement partner shall take
responsibility for the overall quality on each audit engagement to which that partner is assigned. As a part
of this responsibility Engagement Partner should emphasizes the following to the Engagement Team (ET):

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 Compliance with professional standards and legal requirements.

 Compliance with firm’s Quality Control Policies and Procedures as applicable.
 Issuance of appropriate audit report.
 Ability to raise concerns without fear.
 Quality is essential & indispensable in engagement performance.
Meaning of Engagement Partner:
The partner or other person in the firm who is a member of the Institute of Chartered Accountants of India
and is in full time practice and is responsible for the engagement and its performance, and for the report
that is issued on behalf of the firm, and who, where required, has the appropriate authority from a
professional, legal or regulatory body.
Question 25
Comment as an auditor on the following situations: Mr. X, a partner in X & Co., a firm of a Chartered
Accountants, died on 31-3-2020 after completing routine audit work of XYZ Company Ltd. Mr. Y another
partner of the firm of Chartered Accountants signed the financial statements of XYZ Company Ltd.,
without reviewing the finalization work done by the assistants. [Nov. 10, 5 Marks]
Answer
Review of Work performed by others:
 As per SA 220, “Quality Control for an Audit of Financial Statements”, The engagement partner shall
take responsibility for reviews being performed in accordance with the firm’s review policies and
procedures. Review procedures consists of the considerations, whether,
1. The work has been performed in accordance with professional standards and regulatory and legal
requirements;
2. Significant matters have been raised for further consideration;
3. Appropriate consultations have taken place and the resulting conclusions have been documented
and implemented;
4. The work performed supports the conclusions reached and is appropriately documented;
5. The evidence obtained is sufficient and appropriate to support the auditor's report; and
6. The objectives of the engagement procedures have been achieved.
 When the auditor delegates work to assistants or uses work performed by other auditors/experts he
will continue to be responsible for forming and expressing his opinion on the financial statements.
However, he will be entitled to rely on the work performed by others, provided he exercises adequate
skill and care and is not aware of any reason to believe that he should not have so relied.
 The auditor should carefully direct, supervise and review work delegated to assistants. He should
obtain reasonable assurance that work performed by other auditors/experts and assistants is adequate
for his purpose.

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 In the instant case, Mr. X, a partner of the firm had completed routine audit work and died on 31 March,
2017. Mr. Y another partner of the firm has signed the financial statement of XYZ Company Ltd.,
without reviewing the finalization work done by the assistants. Mr. Y will be fully responsible for
negligence, he cannot take the shelter that Mr. X had done the work.
Conclusion: Mr. Y has negligently performed his duties.

Question 26

Mention any four information which assists the auditor in accepting and continuing of relationship with
the client as per SA 220. [May 15, 5 Marks]
Or
As per SA 220, “Quality Control for an Audit of Financial Statements” the auditor should obtain
information considered necessary in the circumstances before accepting an engagement with a new client,
when deciding whether to continue an existing engagement and when considering acceptance of a new
engagement with an existing client. Explain. [RTP – May 18]
Or
CA Raj, an engagement partner wants to take decision, regarding acceptance and continuance of an audit
engagement. Which information, he should obtain before accepting an engagement? [May 19, 3 Marks]
Or
As per SA 220, “Quality Control for an Audit of Financial Statements” the auditor should obtain
information considered necessary in the circumstances before accepting an engagement with a new client.
Explain stating clearly the information that would assist the auditor in accepting and continuing of
relationship with the client. [MTP – Nov. 21]
Answer
Information assisting auditor in accepting and continuing of relationship with the client:
As per SA 220 “Quality Control for an Audit of F.S.” the information which assists the auditor in accepting
and continuing of relationship with the client may include the following:
1. The Integrity of the principal owners, key management and TCWG of the entity;
2. Competency of engagement team to perform the audit engagement and availability of necessary
capabilities, including time and resources;
3. Compliance with relevant ethical requirements by firm and the engagement team; and
4. Significant matters that have arisen during the current or previous audit engagement, and their
implications for continuing the relationship.

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Question 27
The firm should establish policies and procedures designed to provide it with reasonable assurance that
the policies and procedures relating to the system of quality control are relevant, adequate, operating
effectively and complied with in practice. Such policies and procedures should include an ongoing
consideration and evaluation of the firm’s system of quality control, including a periodic inspection of a
selection of completed engagements. Explain in the above context the purpose of monitoring compliance
with quality control policies and procedures. [RTP – Nov. 19, Nov. 20]
Answer
Purpose of monitoring compliance with quality control policies and procedures:
 As per SQC 1 “Quality Control for Firms that perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements”, the firm should establish
policies and procedures designed to provide it with reasonable assurance that the policies and
procedures relating to the system of quality control are relevant, adequate, operating effectively and
complied with in practice.
 Such policies and procedures should include an ongoing consideration and evaluation of the firm’s
system of quality control, including a periodic inspection of a selection of completed engagement.
 The purpose of monitoring compliance with quality control policies and procedures is to provide an
evaluation of:
a) Adherence to professional standards and regulatory and legal requirements;
b) Whether the quality control system has been appropriately designed and effectively implemented; &
c) Whether the firm’s quality control policies and procedures have been appropriately applied, so that
reports that are issued by the firm or engagement partners are appropriate in the circumstances.
Question 28

Through its policies and procedures, the firm seeks to establish consistency in the quality of engagement
performance. This is often accomplished through written or electronic manuals, software tools or other
forms of standardized documentation, and industry or subject matter specific guidance materials. Explain
the matters to be addressed in this context. [RTP – May 21]
Answer
Matters to be addressed in Policies and Procedures to establish consistency in quality of engagement
performance:
The firm should establish policies and procedures designed to provide it with reasonable assurance that
engagements are performed in accordance with professional standards and regulatory and legal
requirements, and that the firm or the engagement partner issues reports that are appropriate in the
circumstances
Through its policies and procedures, the firm seeks to establish consistency in the quality of engagement
performance. This is often accomplished through written or electronic manuals, software tools or other
forms of standardized documentation, and industry or subject matter-specific guidance materials.

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Matters addressed include the following:

a) How engagement teams are briefed on the engagement to obtain an understanding of the objectives of
their work.
b) Processes for complying with applicable engagement standards.
c) Processes of engagement supervision, staff training and coaching.
d) Methods of reviewing the work performed, the significant judgments made and the form of being
issued.
e) Appropriate documentation of the work performed and of the timing and extent of the review.
f) Processes to keep all policies and procedures current.
Question 29
The firm should establish policies and procedures designed to provide it with reasonable assurance that
it has sufficient personnel with the capabilities, competence, and commitment to ethical principles. Discuss
the personnel issues addressed by such policies and procedures. Also explain how addressing the
personnel issues would empower the firm. [RTP – Nov. 21]
Answer
Personnel issues addressed by Quality Control policies and procedures:
 As per SQC 1, the firm should establish policies and procedures designed to provide it with reasonable
assurance that it has sufficient personnel with the capabilities, competence, and commitment to ethical
principles necessary to perform its engagements in accordance with professional standards and
regulatory and legal requirements, and to enable the firm or engagement partners to issue reports that
are appropriate in the circumstances.
 Such policies and procedures address the following personnel issues:
a) Recruitment;
b) Performance evaluation;
c) Capabilities;
d) Competence;
e) Career development;
f) Promotion;
g) Compensation; and
h) Estimation of personnel needs.
Addressing these issues enables the firm to ascertain the number and characteristics of the individuals
required for the firm's engagements. The firm's recruitment processes include procedures that help the
firm select individuals of integrity as well as the capacity to develop the capabilities and competence
necessary to perform the firm's work.

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Question 30
“Independence of auditors must not only exist in fact, but should also appear to exist to all reason able
persons”. Discuss highlighting the advantages of an independent audit.
Or
Write short note on: Auditor's Independence. [May 07, 4 Marks]
Answer
Concept of Independent Audit:
As per Note of the ICAI on “Independence of Auditors” independence implies that the judgment of a
person is not subordinate to the wishes or directions of another person who might have engaged him.
“Independence of auditors must not only exist in fact, but should also appear to exist to all reasonable
persons”. The auditor has to conduct himself in such a way that no reasonable person, can doubt his
objectivity and integrity. In fact, the word independent as a prefix in audit in itself enshrines the concept
of independence of an auditor and it is thus, considered fundamental concept in the theory of auditing.
The relationship between the auditor and the client should be such that firstly, he himself is satisfied about
his client and then it is understood by others that the independence of the auditor is not affected.
Advantages of Independent Audit: Refer Question 7.
Question 31
The Code of Ethics for Professional Accountants, prepared by the International Federation of Accountants
(IFAC) identifies five types of threats. Explain.
Or
The auditor be straightforward, honest and sincere in his approach to his professional work. He must be
fair and must not allow prejudice or bias to override his objectivity. He should maintain an impartial
attitude and both be and appear to be free of any interest which might be regarded as being incompatible
with integrity and objectivity. Many different circumstances, or combination of circumstances, may be
relevant and accordingly it is impossible to define every situation that creates threats to independence and
specify the appropriate mitigating action that should be taken. In addition, the nature of assurance
engagements may differ and consequently different threats may exist requiring the application of different
safeguards.
Explain stating clearly the five types of threats as contained in Code of Ethics for Professional Accountants,
prepared by the International Federation of Accountants (IFAC). [MTP – Oct. 18]
Or
Write a note on “Self-review threats”. [RTP – Nov. 19]
Or
Familiarity threats are self-evident, and occur when auditors form relationships with the client where they
end up being too sympathetic to the client’s interests. Explain. [MTP – April 19]

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Answer
Threats to Independence:
1. Self-interest threats
It may occur as a result of the financial or other interests of a professional accountant or of a relative.
Examples are:
 Direct or indirect financial interest in a client,
 Loan or guarantee to or from the concerned client,
 Undue dependence on a client’s fees,
 Close business relationship with an audit client,
 Potential employment with the client, and
 Contingent fees for the audit engagement.
2. Self-review threats
It may occur when a previous judgment needs to be re-evaluated by the professional accountant
responsible for that judgment. Instances where such threats may arise are:
a) when an auditor having recently been a director or senior officer of the company, and
b) when auditors perform services that are themselves subject matters of audit.
3. Advocacy threats
It may occur when a professional accountant promotes a position or opinion to the point that
subsequent objectivity may be compromised.
For example, an auditor during with shares or securities of the audited company, or becomes the
client’s advocate in litigation and third-party disputes.
4. Familiarity threats
It may occur when, because of a relationship, a professional accountant becomes too sympathetic to
the interests of others. This can occur in many ways:
1. Close relative of the audit team working in a senior position in the client company.
2. Former partner of the audit firm being a director or senior employee of the client.
3. Long associates between specific auditors and their specific client counterparts, and
4. Acceptance of significant gifts or hospitality from the client company, its directors or employees.
5. Intimidation threats
 It may occur when a professional accountant may be deterred from acting objectively by threats,
actual or perceived.
Question 32
The Chartered Accountant has a responsibility to remain independent by taking into account the context
in which they practice, the threats to independence and the safeguards available to eliminate the threats.
State the guiding principles in this regard. [RTP-Nov. 19, MTP-May 20, April 21, RTP – May 21]

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Or
Describe the guiding principles which the auditor should take into account which serves as the safeguards
to eliminate the threats to independence. [Nov. 20, 4 Marks]
Or
Discuss few guiding principles which are behind safeguards to eliminate threats to auditor’s
independence. [RTP – Nov. 20]
Answer
Safeguards to Independent
(a) Auditors should always be and appears to be independent of the entities that they are auditing.
(b) Auditor should abide himself with the key fundamental principles are integrity, objectivity and
professional skepticism.
(c) Auditor should consider threats to impendence before accepting any audit assignment.
(d) In case of existence of any threats to independence, auditor should not accept the engagement or
put in place safeguards that eliminate them.
(e) If necessary safeguards cannot be put in place due to circumstances, auditor should withdraw.
Question 33
Explain the Overall Objectives of Independent auditor.
Answer
Overall Objectives of Independent Auditor:
SA 200 “Overall Objectives of the Independent Auditor and Conduct of Audit in accordance with SAs”
states that in conducting an audit of financial statements, the overall objectives of the auditor are:
a) To obtain reasonable assurance about whether the F.S. 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 F.S.
are prepared, in all material respects, in accordance with an applicable FRF, and
b) To report on the F.S. and communicate as required by the SAs, in accordance with the auditor’s
findings.
c) In all cases when reasonable assurance cannot be obtained and a qualified opinion in the auditor’s
report is insufficient, the SAs require that the auditor disclaim an opinion or withdraw from the
engagement.
Question 34
Comment on the following: “The Auditor shall comply with relevant ethical requirements including
independence”. [MTP – April 19]
Or
Discuss prerequisites and fundamental principles to be possessed by an auditor. [May 11, 8 Marks]

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Or
Relevant ethical requirements ordinarily comprise the Code of Ethics for Professional Accountants related
to an audit of financial statements. Discuss with reference to those fundamental principles of professional
ethics. [RTP – May 19]
Or
The auditor shall comply with relevant ethical requirements, including those pertaining to independence,
relating to financial statement audit engagements. Relevant ethical requirements ordinarily comprise the
Code of Ethics for Professional Accountants (IESBA Code) related to an audit of financial statements. The
Code establishes the fundamental principles of professional ethics relevant to the auditor when
conducting an audit of financial statements. Explain. [MTP – May 20]
Or
Explain the fundamental principles of professional ethics relevant to the auditor when conducting an audit
of financial statements in accordance with Code of Ethics issued by ICAI. [Jan. 21, 4 Marks]
Answer
Compliance of Ethical requirements
a) As per SA 200 “Overall Objectives of the Independent Auditor and Conduct of Audit in accordance
with SAs” the auditor shall comply with relevant ethical requirements, including independence.
b) Relevant ethical requirements ordinarily comprise the Code of Ethics issued by the ICAI. The
fundamental principles are:
 Integrity;
 Objectivity;
 Professional competence and due care;
 Confidentiality; and
 Professional behaviour.
c) Independence comprises both independence of mind and independence of appearance.
d) Independence enhances the auditor’s ability to act with integrity to be objective and to maintain an
attitude of professional skepticism.
Question 35
SA 200 requires that the auditor shall and perform an audit with professional skepticism. Explain the
statement.
Or
Discuss with reference to SAs: The auditor is responsible for maintaining an attitude of professional
skepticism throughout the audit. Do you agree with the statement? [May 14, 6 Marks]
Or

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The auditor shall plan and perform an audit with professional skepticism recognizing that circumstances
may exist that cause the financial statement to be materially misstated. Discuss any four examples of
professional skepticism. [Nov. 19, 4 Marks]
Or
Professional skepticism refers to an attitude that includes a questioning mind, being alert to conditions
which may indicate possible misstatement due to error or fraud, and a critical assessment of audit
evidence. The auditor shall plan and perform an audit with professional skepticism recognising that
circumstances may exist that cause the financial statements to be materially misstated. Explain giving
examples. [RTP – Nov. 20]
Answer
Professional Skepticism:
a) SA 200 “Overall Objectives of the Independent Auditor and Conduct of Audit in accordance with SAs”
requires that the auditor shall plan and perform an audit with professional skepticism.
b) Meaning of Professional Skepticism: An attitude that includes a questioning mind, being alert to
conditions which may indicate possible misstatement due to error or fraud, and a critical assessment
of audit evidence.
c) Professional Skepticism Reduces risk of:
 Overlooking unusual circumstances.
 Over generalizing when drawing conclusions from audit observations.
 Using inappropriate assumptions in determining N, T, E of audit procedures & evaluating the
results thereof.
d) Professional skepticism includes being alter to:
 Contradictory audit evidence.
 Questions on reliability of documents.
 Conditions indicating possible frauds.
 Circumstances suggesting need for audit procedures in addition to those suggested in SAs.
Question 36
Comment on the following: “The auditor shall exercise professional judgment in planning and performing
an audit of financial statements”.
Or
“Professional judgment is essential to the proper conduct of an audit.” Discuss. [Nov. 18, 5 Marks]
Answer
Professional Judgment:
a) SA 200 “Overall Objectives of the Independent Auditor and Conduct of Audit in accordance with
SAs” requires that the auditor shall exercise professional judgment in planning and performing an
audit of financial statements.
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b) Meaning of Professional Judgment: The application of relevant training, knowledge and experience,
within the context provided by auditing, accounting and ethical standards, in making informed
decisions about the courses of action that are appropriate in the circumstances of the audit engagement.
c) Exercise of professional judgment depends on facts & circumstances known to the auditor.
d) Professional Judgment is to be exercised throughout the audit and to be appropriately documented.
e) Professional Judgment is important when deciding about:
 Materiality & audit risk.
 NTE of audit procedures.
 Evaluating sufficiency & appropriateness of audit procedures.
 Evaluating management judgment in applying applicable FRF.
 Drawing conclusions based on audit evidence.
Question 37
“Independence of mind and independent in appearance are interlinked perspective of Independence of
auditors.” Explain. [May 19, 3 Marks]
Or
There are two interlinked perspectives of independence of auditors, one, independence of mind; and two,
independence in appearance. Explain. [MTP – Oct. 20]
Answer
Independence of Auditors:
 As per SA 200 “Overall Objectives of the Independent Auditor and Conduct of Audit in accordance
with SAs” the auditor shall comply with relevant ethical requirements, including independence.
 Independence comprises both independence of mind and independence of appearance.
 In the case of an audit engagement it is in the public interest and, therefore, required by the Code of
Ethics, that the auditor be independent of the entity subject to the audit. The Code describes
independence as comprising both independence of mind and independence in appearance.
 The auditor’s independence from the entity safeguards the auditor’s ability to form an audit opinion
without being affected by influences that might compromise that opinion.
 Independence of mind implies the state of mind that permits the provision of an opinion without being
affected by influences allowing an individual to act with integrity, and exercise objectivity and
professional skepticism.
 Independence in appearance implies the avoidance of facts and circumstances that are so significant
that a third party would reasonably conclude an auditor’s integrity, objectivity or professional
skepticism had been compromised.
 Independence enhances the auditor’s ability to act with integrity, to be objective and to maintain an
attitude of professional skepticism.
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Question 38
What is an audit engagement letter? What are the principal contents of audit engagement letter?
Or
What is the purpose of a Letter of Engagement? What are the important contents of a Letter of
Engagement? [May 17, 6 Marks]
Answer
Purposes of letter of engagement:
SA 210 “Agreeing the terms of Audit Engagement” deals with the auditor’s responsibilities in agreeing
the terms of the audit engagement with management and TCWG.
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:
 The objective and scope of the audit of the F.S.;
 The responsibilities of the auditor;
 The responsibilities of management;
 Identification of the applicable FRF for the preparation of the F.S.; and
 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.
So the main purpose of letter of engagement is to ensure a common understanding of the terms of audit
engagement between the auditor and management and TCWG.
Question 39
Write short note on: Preconditions of an audit.
Or
Discuss preconditions for an audit as per SA 210. Explain how would an auditor proceed to establish the
presence of pre conditions for an audit. [RTP – May 21]
Answer
Preconditions for an Audit:
As per SA 210 “Agreeing the terms of Audit Engagement” before accepting an audit engagement
auditor is required to ensure existence of preconditions.
Accordingly, Pre-conditions to be examined are:
a) Determine whether the financial reporting framework to be applied in the preparation of the financial
statements is acceptable; and
b) Obtain the agreement of management that it acknowledges and understands its responsibilities for
followings:
(i) The preparation of the F.S. in accordance with the applicable FRF.

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(ii) Exercising necessary internal control to enable the preparation of F.S. that are free from material
misstatement, whether due to fraud or error.
(iii) To provide the auditor with:
 Access to all relevant information such as records, documentation and other matters;
 Additional information that the auditor may request from management for the purpose of the
audit; and
 Unrestricted access to persons within the entity from whom the auditor determines it
necessary to obtain audit evidence.
Question 40
Comment on the following: “It is not mandatory to send a new engagement letter in recurring audit, but
sometimes it becomes mandatory to send new letter”. Explain those situations where new engagement
letter is to be sent. [Nov. 11, 5 Marks]
Or
Indicate the factors which make it appropriate for an auditor to send a new engagement letter for a
recurring audit. [Nov. 14, 5 Marks]
Or
‘P’ an auditor decides not to send a new engagement letter to G Ltd. every year. Whether he is right in his
approach. State the circumstances where sending new engagement letter, would be appropriate.
[Nov. 15, 5 Marks]
Or
On recurring audits, the auditor shall assess whether circumstances require the terms of the audit
engagement to be revised and whether there is a need to remind the entity of the existing terms of the
audit engagement. The auditor may decide not to send a new audit engagement letter or other written
agreement each period. Explain the factors an auditor considers to be appropriate to revise the terms of
the audit engagement or to remind the entity of existing terms. [RTP – May 21]
Answer
Engagement Letter in case of Recurring Audit:
SA 210 “Agreeing the Terms of Audit Engagement” provides that in case of recurring audits, the auditor
shall assess whether circumstances require revision in terms of the audit engagement and whether there
is a need to remind the entity of the existing terms of the audit engagement.
The auditor may decide not to send a new audit engagement letter or other written agreement each period.
However, the following factors may make it appropriate to revise the terms of the audit engagement or to
remind the entity of existing terms:

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1. Any indication that the entity misunderstands the objective and scope of the audit.
2. Any revised or special terms of the audit engagement.
3. A recent change of senior management.
4. A significant change in ownership.
5. A significant change in nature or size of the entity's business.
6. A change in legal or regulatory requirements.
7. A change in the financial reporting framework adopted in the preparation of the F.S.
8. A change in other reporting requirements.
Question 41
X, a Chartered Accountant was engaged by PQR & Co. Ltd. for auditing their accounts. He sent his letter
of engagement to the Board of Directors, which was accepted by the Company. In the course of audit of
the company, the auditor was unable to obtain appropriate sufficient audit evidence regarding receivables.
The client requested for a change in the terms of engagement. Offer your comments in this regard.
[Nov. 09, 5 Marks]
Or
“An auditor who before the completion of the engagement is requested to change the engagement to one
which provides a lower level of assurance should consider the appropriateness of doing so”. Discuss.
Answer
Acceptance of Changes in terms of engagement:
SA 210 “Agreeing the terms of Audit Engagement” deals with the auditor’s responsibilities in agreeing
the terms of the audit engagement with management and TCWG.
a) The auditor shall not agree to a change in the terms of the audit engagement where there is no
reasonable justification for doing so.
b) If, prior to completing the audit engagement, the auditor is requested to change the audit engagement
to an engagement that conveys a lower level of assurance, the auditor shall determine whether there
is reasonable justification for doing so.
c) If the terms of the audit engagement are changed, the auditor and management shall agree on and
record the new terms of the engagement in an engagement letter or other suitable form of written
agreement.
d) If the auditor is unable to agree to a change of the terms of the audit engagement and is not permitted
by management to continue the original audit engagement, the auditor shall:
 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 TCWG, owners or regulators.

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Question 42
An auditor who, before the completion of the engagement, is requested to change the engagement to one
which provides a lower level of assurance, should consider the appropriateness of doing so. Explain
stating the factors based on which client can request the auditor to change the engagement. [RTP-Nov. 19]
Answer
Factors based on which client can request the auditor to change the engagement:
SA 210 “Agreeing the terms of Audit Engagement” deals with the auditor’s responsibilities in agreeing
the terms of the audit engagement with management and TCWG. Accordingly:
 A request from the entity for the auditor to change the terms of the audit engagement may result from
a) A change in circumstances affecting the need for the service,
b) A misunderstanding as to the nature of an audit as originally requested or
c) A restriction on the scope of the audit engagement, whether imposed by management or caused
by other circumstances.
 The auditor; considers the justification given for the request, particularly the implications of a
restriction on the scope of the audit engagement.
 If the auditor concludes that there is reasonable justification to change the audit engagement to a
review or a related service, the audit work performed to the date of change may be relevant to the
changed engagement; however, the work required to be performed and the report to be issued would
be those appropriate to the revised engagement.

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 CHAPTER 2

AUDIT STRATEGY, AUDIT PLANNING &

AUDIT PROGRAMME
QUESTIONS WITH ANSWERS
Question 1
“The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely
manner. Plans should be based on knowledge of the client’s business”. Discuss stating clearly the broad
points you would be covering in framing plan to conduct audit in an efficient and effective manner.
[MTP-March 18, March 19]
OR
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins
shortly after (or in connection with) the completion of the previous audit and continued until the
completion of the current audit engagement. Discuss stating clearly the broad points you would be
covering in framing plan to conduct audit in an efficient and effective manner. [MTP-Oct. 18]
OR
The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely
manner. Plans should be based on knowledge of the client’s business. Explain. [RTP-Nov. 18]
OR
Plans should be made to cover acquiring knowledge of the client’s accounting systems, policies and
internal control procedures. Explain. [RTP-Nov. 19]
OR
“The auditor should plan his work to enable him to conduct an effective audit in an efficient and timely
manner.” Explain stating the matters to be covered in plans. [MTP-March 21]
Answer
Points to be covered in framing audit plan
 Planning in auditing encompasses developing an overall plan for the expected scope and conduct of
the audit and developing an audit programme showing the nature, timing and extent (NTE) of audit
procedures.
 The audit planning is necessary to conduct an effective audit in an efficient and timely manner.
 SA 300 “Planning an Audit of Financial Statements” deals with the auditor’s responsibility to plan an
audit of financial statements.
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 Plans should be made to cover, among other things:

a) Acquiring knowledge of the client’s accounting systems, policies and internal control procedures;
b) Establishing the expected degree of reliance to be placed on internal control;
c) Determining and programming the nature, timing and extent of the audit procedures to be
performed; and
d) Coordinating the work to be performed.
Question 2
Write short note on: Usefulness of careful and adequate audit planning.
OR
Surya and Chand Ltd. is a manufacturing company engaged in the production of miscellaneous electrical
goods. Trilochan and Co. has been appointed as the auditors to carry out its audit. Auditor thinks that
Planning an audit would involve establishing the overall audit strategy for the engagement and
developing an audit plan. Also, Adequate planning benefits the audit of financial statements in several
ways. Analyse and Advise explaining the benefits of adequate planning. [RTP-May 18]
OR
“An adequate planning benefits the audit of financial statements.” Discuss. [Nov. 18, 5 Marks]
OR
Explain the benefits of planning in the audit of financial statements. [RTP-May 19]
OR
Engagement partner of Audit Firm MRC AND COMPANY thinks that Planning an audit would involve
establishing the overall audit strategy for the engagement and developing an audit plan. Also, Adequate
planning would benefit the audit of financial statements in several ways. Analyse explaining the benefits
of adequate planning. [RTP-Nov. 19]
OR
Planning an audit involves establishing the overall audit strategy for the engagement and developing an
audit plan. Adequate planning benefits the audit of financial statements in several ways. Explain clearly
those ways. [RTP-Nov. 21]
Answer
Usefulness of Careful and Adequate Audit Planning
(i) To ensure that appropriate attention is devoted to important areas of the audit: This is done
through formal written audit plan, laying down the objectives and the procedures to be followed
in order to meet those objectives.
(ii) To facilitate review: Work should be delegated to staff with the appropriate level of experience. All
work should be properly supervised and reviewed by a senior member of staff.
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(iii) To ensure that potential problems are identified: The auditor must ensure that resources are
directed towards material/high risk areas.
(iv) To assist in the proper assignment of work: This may be to members of the audit team or to experts
or other auditors. It helps the audit to proceed in a timely and efficient
(v) Coordination of work done by auditors of components and experts.
Question 3
In performing an audit of financial statements, the auditor shall have or obtain knowledge of the business.
Explain in the light of SA 315. [May 04, 8 Marks, MTP-Oct. 19]
OR
State the matters to be considered for acquiring knowledge of the business of the client by the auditor.
[May 05, 6 Marks]
OR
Write short note on: Knowledge of Client’s Business. [May 09, 5 Marks]
OR
‘Knowledge of Client business’ is one of the important principles in developing an overall audit plan.
Explain. [Nov. 17, 6 Marks]
OR
Without adequate knowledge of client’s business, a proper audit is not possible. It is one of the important
principles in developing an overall audit plan. Explain in context with relevant SA, knowledge to be
obtained by the auditor in establishing overall plan.
Also explain how such an understanding would be helpful to the auditor. [RTP-May 21]
Answer
Knowledge of Client’s Business:
Knowledge of client’s business is one of the important principles in developing an overall audit plan. In
fact, without adequate knowledge of client’s business, a proper audit is not possible.
As per SA 315 “Identifying and Assessing the Risk of Material Misstatements through understanding the
entity and its environment” auditor is required to obtain an understanding of following as a part of risk
assessment procedures:
(a) Industry, regulatory and other external factors including applicable financial reporting framework.
(b) The nature of the entity, including
 Its operations;
 Its ownership and governance structures;
 The types of investments that the entity is making and plan to make; &
 The way that the entity is structured and how it is financed.
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(c) The entity’s selection and application of accounting policies, including the reasons for changes thereto.
(d) The entity’s objectives and strategies, and those related business risks that may result in risks of
material misstatement.
(e) The measurement and review of the entity’s financial performance.
Question 4
Knowledge of the Client's business is one of the important principles in developing an overall audit plan.
In fact without adequate knowledge of client's business, a proper audit is not possible. As per SA-315,
“Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity and Its
Environment”, the auditor shall obtain an understanding of the relevant industry regulatory and other
external factors including the applicable financial reporting framework Substantiate with the help of
examples. [RTP-May 20]
Answer
Examples of industry, regulatory and other external factors including the applicable FRF:
1) The competitive environment, including demand, capacity, product and price competition as well as
cyclical or seasonal activity.
2) Supplier and customer relationships, such as types of suppliers and customers (eg. related parties,
unified buying groups) and the related contracts with those entities.
3) Technological developments, such as those related to the entity's products, energy supply and cost.
4) The effect of regulation on entity operations.
Question 5
“The Nature, timing and extent of the direction and supervision of engagement team members and review
of their work vary depending on many factors.” Explain. [RTP-Nov. 21]
OR
The auditor shall plan the nature, timing and extent of direction and supervision of engagement team
members and the review of their work. Explain the factors due to which above varies.
[MTP-May 20, RTP-Nov. 20]
Answer
Planning the Direction and Supervision of Engagement Team:
 As per SA 300 "Planning an Audit of Financial Statements” the auditor shall plan the nature, timing
and extent of direction and supervision of engagement team members and the review of their work.
 The nature, timing and extent of the direction and supervision of engagement team members and
review of their work vary depending on many factors, including:
(a) The size and complexity of the entity.
(b) The area of the audit.
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(c) The assessed risks of material misstatement (for example, an increase in the assessed risk of
material misstatement for a given area of the audit ordinarily requires a corresponding
increase in the extent and timeliness of direction and supervision of engagement team
members, and a more detailed review of their work).
(d) The capabilities and competence of the individual team members performing the audit
work.
Question 6
"Planning is not a discrete phase of an audit, but rather a continual and iterative process". Discuss.
Or
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often
begins shortly after the completion of the previous audit and continues until the completion of the
current audit engagement. Analyse and Explain. [RTP-Nov. 19]
Or
Planning is not a discrete phase of an audit, but rather a continual and iterative process that often
begins shortly after the completion of the previous audit and continues until the completion of
the current audit engagement. Planning includes the need to consider certain matters prior to
the auditor's identification and assessment of the risks of material misstatement. Explain clearly
stating those matters also. [RTP-May 21]
Answer
Planning - a continuous process:
Planning is not a discrete phase of an audit but rather a continuous process. It often begins shortly
after (or in connection with) the completion of the previous audit and continues until the completion
of the current audit engagement.
Planning, however, includes consideration of the timing of certain activities and audit procedures that
need to be completed prior to the performance of further audit procedures. For example, planning
includes the need to consider, prior to the auditor's identification and assessment of the risks of
material misstatement, such matters as:
 The analytical procedures to be applied as risk assessment procedures.
 Obtaining a general understanding of the legal and regulatory framework applicable to the entity and
how the entity is complying with that framework.
 The determination of materiality.
 The involvement of experts.
 The performance of other risk assessment procedures.

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Question 7
The auditor shall update and change the overall audit strategy and the audit plan as necessary during the
course of the audit. Explain. [RTP-Nov. 18]
Or
As a result of unexpected events, changes in conditions, or the audit evidence obtained from the
results of audit procedures, the auditor may need to modify the overall audit strategy and audit
plan. Explain. [RTP-Nov. 19]
Or
Plans should be further developed and revised as necessary during the course of the audit. Explain.
[RTP-May 20]
Answer
Changes to Planning decisions:
 The auditor shall update and change the overall audit strategy and the audit plan as necessary
during the course of the audit. The auditor may need to modify the overall audit strategy and
audit plan as a result of:
1) unexpected events,
2) changes in conditions, or
3) the audit evidence obtained from the results of audit procedures.
 Based on the revised consideration of assessed risks, auditor need to modify the nature, timing
and extent of further audit procedures. This may be the case when information comes to the
auditor's attention that differs significantly from the information available when the auditor
planned the audit procedures. For example, audit evidence obtained through the performance
of substantive procedures may contradict the audit evidence obtained through tests of controls.
Question 8
The auditor 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. Explain. [MTP-Aug. 18, RTP-Nov. 18, Nov. 20]
Answer
Documentation of Audit Plan:
 The auditor shall document:
(a) The overall audit strategy;
(b) The audit plan; and
(c) Any significant changes made during the audit engagement to the overall audit strategy or
the audit plan, and the reasons for such changes.
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 Documentation of the overall audit strategy is a record of the key decisions considered necessary
to properly plan the audit and to communicate significant matters to the engagement team.
 Documentation of the audit plan is a record of the planned NTE of RAPs and FAPs at the assertion
level in response to the assessed risks. It also serves as a record of the proper planning of the
audit procedures that can be reviewed and approved prior to their performance.
 Record of the significant changes to the overall audit strategy and the audit plan, and resulting
changes to the planned NTE of audit procedures, explains why the significant changes were
made, and the overall strategy and audit plan finally adopted for the audit.
Examples of Audit Documentation:
(a) Summary of discussions with the entity's key decision makers.
(b) Documentation of audit committee pre-approval of services, where required.
(c) Audit documentation access letters.
(d) Other communications or agreements with management or TCWG regarding the scope, or changes in
scope, of services.
(e) Auditor's report on the entity's financial statements.
(f) Other reports as specified in the engagement agreement.
Question 9
Write short note on: Factors to be considered in the development of overall audit plan.
Or
A & Co. was appointed as auditor of Great Airways Ltd. As the audit partner what factors shall be
considered in the development of overall audit plan?
Or
M & Co. was appointed as auditor of IGI Ltd. As an auditor what are the factors that would be considered
in the development of overall audit plan? [May 18, 5 Marks, MTP-April 19]
Or
Your firm has been appointed as an auditor to audit the accounts of an auto parts manufacturer,
ABC Ltd. Elucidate the matters to be considered by an auditor in developing his overall plan for the
expected scope and conduct of audit. [MTP-Oct. 20]
Answer
Factors to be considered in development of overall Plan:
 Terms of his engagement and any statutory responsibilities.
 Nature and timing of reports or other communications.
 Applicable Legal or Statutory requirements.

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 Accounting policies adopted by the clients and changes, if any, in those policies.
 The effects of new accounting and auditing pronouncement on the audit.
 Identification of significant audit areas.
 Setting of materiality levels for the audit purpose.
 Conditions requiring special attention such as the possibility of material error or fraud or
involvement of parties in whom directors or persons who are substantial owners of the entity
are interested and with whom transactions are likely.
 Degree of reliance to be placed on the accounting system and internal control.
 Possible rotation of emphasis on specific audit areas.
 Nature and extent of audit evidence to be obtained.
 Work of the internal auditors and the extent of reliance on their work, if any in the audit.
 Involvement of other auditors in the audit of subsidiaries or branches of the client and involvement of
experts.
 Allocation of works to be undertaken between joint auditors-and the procedures for its control
and review.
 Establishing and coordinating staffing requirements.
Question 10
Documentation of audit plan serves as a record of the planned nature, timing and extent of risk
assessment procedures and further audit procedures at the assertion level in response to the assessed
risks. What all activities in the planning phase should form part of auditor's documentation? State
with examples. [July 21, 4 Marks]
Answer
Documentation of Audit Plan:
The documentation of the audit plan is a record of the planned nature, timing and extent of risk
assessment procedures and further audit procedures at the assertion level in response to the
assessed risks.
Examples of audit documentation: The following things should form part of auditor's documentation:
1) A summary of discussions with the entity's key decision makers.
2) Documentation of audit committee pre-approval of services, where required.
3) Audit documentation access letters.
4) Other communications or agreements with management or those charged with governance regarding
the scope, or changes in scope, of our services.
5) Auditor's report on the entity's financial statements.
6) Other reports as specified in the engagement agreement (e.g., debt covenant compliance letter).

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Question 11

The process of establishing the overall audit strategy assists the auditor to determine certain matters with
respect of team resource. Explain those matters.
Or
Auditor of ABC Ltd. is worried as to management of key resources to be employed to conduct audit.
How the audit strategy would be helpful to the auditor?
Or
The engagement partner of AST AND ASSOCIATES, firm of Chartered Accountants appointed as
auditor of Fabric India Ltd is considering as to management of key resources to be employed to
conduct audit. Discuss how overall audit strategy would assist the auditor. [MTP- March 18]
Or
Describe how the process of establishing the overall audit strategy assists the auditor in marshalling his
human resources. [May 19, 4 Marks]
Or
Overall audit strategy sets the scope, timing and direction of the audit, and guides the development
of the more detailed audit plan. The process of establishing the overall audit strategy assists the
auditor to determine such matters as for example - the resources to deploy for specific audit areas,
such as the use of appropriately experienced team members for high risk areas or the involvement
of experts on complex matters. Explain the other three such matters. [RTP- May 20]
Answer
Benefits of Audit Strategy:
1. Employment of Qualitative Resources:
Audit strategy helps in deploying the appropriate resources for specific audit areas, such as the use of
experienced team members for high risk areas or the involvement of experts on complex matters.
2. Allocation of Quantity of Resources:
Audit strategy helps in allocating the appropriate number of resources to specific audit areas, such as
the number of team members assigned to observe the inventory count at material locations, the extent
of review of other auditors' work in the case of group audits, or the audit budget in hours to allocate
to high risk areas.
3. Timing of Deployment of Resources:
Audit strategy helps in determining the timing of deploying the resources, such as whether at an
interim audit stage or at key cut-off dates.

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4. Management of Resources:
Audit strategy helps in managing, directing, supervising the resources, such as when team briefing
and debriefing meetings are expected to be held, how engagement partner and manager reviews are
expected to take place (for example, on-site or off-site), and whether to complete engagement quality
control reviews.
Question 12
The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit,
and that guides the development of the audit plan.
Discuss stating the process of establishing the overall audit strategy that would assist the auditor to
determine key matters. [RTP- Nov. 18]
Answer
Process of establishing the overall audit strategy:
 The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the
audit, and that guides the development of the audit plan.
 The process of establishing the overall audit strategy assists the auditor to determine, subject to the
completion of the auditor's risk assessment procedures, such matters as:
1) The resources to deploy for specific audit areas, such as the use of appropriately experienced team
members for high risk areas or the involvement of experts on complex matters;
2) The amount of resources to allocate to specific audit areas, such as the number of team members
assigned to observe the inventory count at material locations, the extent of review of other auditors'
work in the case of group audits, or the audit budget in hours to allocate to high risk areas;
3) When these resources are to be deployed, such as whether at an interim audit stage or at key cut-
off dates; and
4) How such resources are managed, directed and supervised, such as when team briefing and
debriefing meetings are expected to be held, how engagement partner and manager reviews are
expected to take place (for example, on-site or off-site), and whether to complete engagement
quality control reviews.
Question 13
Comment on the following in relation to SAs: Auditor shall establish an overall strategy that sets the scope,
timing and direction of the audit, and that guides the development of the audit plan. [May 11, 5 Marks]
Or
Discuss the factors the auditor will consider while establishing the overall strategy.
Or

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"In establishing the overall audit strategy, the auditor shall, among other considerations, ascertain the
nature, timing and extent of resources necessary to perform the engagement" Explain those considerations
in detail. [MTP- Oct. 21]
Answer
Establishment of Audit Strategy:
(a) SA 300 "Planning an Audit of Financial Statements" requires that the auditor shall establish an overall
audit strategy that sets the scope, timing and direction of the audit, and that guides the development
of the audit plan.
(b) In establishing the overall audit strategy, the auditor shall:
1) Identify the characteristics of the engagement that define its scope;
2) Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature
of the communications required;
3) Consider the factors that are significant in directing the engagement team's efforts;
4) Consider the results of preliminary engagement activities and, where applicable, whether
knowledge gained on other engagements performed by the engagement partner for the entity is
relevant; and
5) Ascertain the NTE of procedures necessary to perform.
Question 14
Discuss the relationship between overall audit strategy and audit plan.
Or
"Once the overall audit strategy has been established, an audit plan can be developed to address the
various matters identified in the overall audit strategy". Discuss.
Or
The establishment of the overall audit strategy and the detailed audit plan are closely inter-related.
Explain. [MTP- March 19]
Answer
Relationship between the Overall Audit Strategy and the Audit Plan:
 Audit strategy and audit plan are inter-related to each other because change in one would result into
change in the other.
 The audit strategy is prepared before the audit plan. The audit plan contains more details than the
overall audit strategy.
 The audit strategy provides the guidelines for developing the audit plan. Once the overall audit
strategy has been established, an audit plan can be developed to address the various matters identified
in the overall audit strategy.
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 Audit strategy establishes the scope, timing and direction of the audit and thereby works as basis for
developing a detailed audit plan.
 Detailed audit plan would include the nature, timing and extent of the audit procedures so as to obtain
sufficient appropriate audit evidence.
Question 15
In establishing overall audit strategy, the auditor shall ascertain the reporting objectives of the engagement
to plan the timing of the audit and the nature of the communications required. Elucidate those cases by
which auditor can ascertain the reporting objectives of the engagement.
[Nov. 19, 4 Marks, MTP- Nov. 21]
Answer
Cases by which by which auditor can ascertain the reporting objectives of the engagement:
As per SA 300 "Planning an Audit of Financial Statements" the auditor shall establish an overall audit
strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit
plan. In establishing the overall audit strategy, the auditor shall, among other ascertain the reporting
objectives of the engagement to plan the timing of the audit. Various cases through which auditor can
ascertain the reporting objectives of the engagement are:
1. The entity's time-table for reporting, such as at interim and final stages.
2. The organization of meetings with management and those charged with
3. Governance to discuss the nature, timing and extent of the audit work.
4. The discussion with management and those charged with governance regarding the expected type and
timing of reports to be issued and other communications, both written and oral, including the auditor's
report, management letters and communications to those charged with governance.
5. The discussion with management regarding the expected communications on the status of audit
work throughout the engagement.
Question 16
Write short note on: Audit Programme. [Nov. 06, 4 Marks]
Or
An audit programme is a detailed plan of applying the audit procedure in the given circumstance for
accomplishing the audit objectives". Discuss.
Answer
Audit Programme:
 An Audit programme is a detailed plan of work, prepared by the auditor for carrying out an audit.
 It is comprised of a set of techniques and procedures, which the auditor plans to apply in the given
audit for forming an opinion about the client's statement of account.

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 It not only constitutes the plan of the work but also provides a basis for the supervision and control of
the audit work.
 The programme may also contain the audit objectives for each audit step.
 It should be sufficient in detail to serve as a set of instructions to the audit staff involved in the audit
and also as a means to control the proper execution of the work.
Advantages of Audit Programme:
1) It provides guidance and instructions on the work to be carried out e.g. manner of picking up
transactions for sample test.
2) It provides a clear record of the work to be carried out by the individual staff assigned on the audit.
3) The progress of audit work can be reviewed by the audit managers or the partners.
4) Chances of duplication of work are eliminated.
5) Chances of overlooking the important areas of audit are also eliminated.
6) Evidence of work done is available when the auditor is to defend his performance against charge
of negligence.
7) It serves as a guide for audits to be carried out in the succeeding year.
Question 17
Explain the significant points auditor would consider while developing an audit programme.
[RTP- May 19]
Or
List out the points that should be kept in mind by the auditor for the purpose of constructing an audit
programme. [May 19, 3 Marks]
Or
Discuss the points to be considered by auditor for the purpose of constructing an audit programme.
[Nov. 19, 4 Marks]
Answer
Points to be considered in constructing Audit Programme:
For the purpose of programme construction, the following points should be kept in mind:
1) Be within the scope and limitation of the assignment.
2) Determine the evidence reasonably available and identify the best evidence for deriving the necessary
assurance.
3) Only those techniques and procedures which are useful in accomplishing the verification purpose
should be applied.
4) Consideration of all possibilities of errors and fraud.
5) Co-ordinate the procedures to be applied to related items.
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Question 18
Evidence is the very basis for formulation of opinion and an audit programme is designed to provide for
that by prescribing procedures and techniques.
Analyse and explain with the help of example of evidence in respect of Sales. [RTP- May 20]
Answer
Audit Programme- Designed to provide Audit Evidence:
 Evidence is the very basis for formulation of opinion and an audit programme is designed to provide
for that by prescribing procedures and techniques.
 What is best evidence for testing the accuracy of any assertion is a matter of expert knowledge and
experience. This is the primary task before the auditor when he draws up the audit programme.
 Transactions are varied in nature and impact; procedures to be prescribed depend on prior knowledge
of what evidence is reasonably available in respect of each transaction.
 Example, sales are evidenced by:
1) Invoices raised by the client;
2) Price list;
3) Forwarding notes to client;
4) Inventory-issue records;
5) Sales managers' advice to the inventory section;
6) Acknowledgements of the receipt of goods by the customers; and collection of money against
sales by the client.
Question 19
Discuss the following: Despite of several disadvantages, audit programme is required to start an audit.
[Nov. 13, 5 Marks]
Or
How does an audit programme help to plan and perform the audit?
Answer
Requirement of Audit Programme:
The audit programme is required to start an audit due to the following considerations:
1) The audit programme lists down areas of audit before commencement.
2) Audit programme covers the audit timings and hence it becomes a schedule of audit plan.
3) Audit programme allocates the work among the staff members and thereby fixes a responsibility over
them.
4) It specifies the procedures to be performed during the audit.
5) Audit programme acts as a check list during the performance of audit.
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6) The working papers of the audit staff can be reviewed against the audit programme to evaluate
the performance before reporting on the financial statements.
7) It also works as a basis for billing the clients for the time and manpower involved in the audit.
Question 20
Arpana Hospitals Ltd having Gross Professional Charges of ` 50 crores is engaged in providing health
care services. STP & Co., a firm of auditors is appointed as its auditors.
Advise what special points to be kept in mind for the purpose of construction of an Audit programme.
Explain. [RTP- May 18]
Answer
Points to be considered in constructing Audit Programme:
For the purpose of programme construction, the following points should be kept in mind:
1) Be within the scope and limitation of the assignment.
2) Determine the evidence reasonably available and identify the best evidence for deriving the necessary
assurance.
3) Only those techniques and procedures which are useful in accomplishing the verification purpose
should be applied.
4) Consideration of all possibilities of errors and fraud.
5) Co-ordinate the procedures to be applied to related items.
Question 21
"The utility of the audit programme can be retained and enhanced only by keeping the programme and
also the client's operations and internal control under periodic review so that inadequacies or
redundancies of the programme may be removed". Explain. [RTP- May 19]
Answer
Periodic Review of The Audit Programme
 Periodic review of the audit programme is required to assess whether the same continues to be
adequate for obtaining requisite knowledge and evidence about the transactions. If periodic review is
not done, any change in the business policy of the client may not be adequately known,
and consequently, audit work may be carried on, on the basis of an obsolete programme and,
for this negligence, the whole audit may be held as negligently conducted and the auditor may
have to face legal consequences.
 It was held in the case of Pacific Acceptance Corporation Ltd. v. Forsyth and Others, that if the audit
programme for the audit of a branch of a financing house, drawn up a number of years ago, fails to
take into consideration that the previous policy of financing of a vehicle has been changed to financing
of real estate acquisition, the whole audit conducted thereunder would be entirely misdirected and
may even result into nothing more than a farce.
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 The utility of the audit programme can be retained and enhanced only by keeping the programme as
also the client's operations and internal control under periodic review so that inadequacies or
redundancies of the programme may be removed. However, as a basic feature, audit programme not
only lists the tasks to be carried out but also contains a few relevant instructions, like the extent of
checking, the sampling plan, etc.
Question 22
What are the disadvantages of the use of an Audit Programme? [May 07, 4 Marks]
Or
Write short note on: Disadvantages of the use of an Audit Programme. [May 12, 4 Marks]
Answer
Disadvantages of Audit Programme:
a) The audit work tends to become mechanical and monotonous, unless the audit objectives for each step
are clear to the person/staff deployed.
b) The audit work may be partially accomplished but may give an impression that the audit has been
fully done if the programme does not record evidence of performing the work.
c) If the client's system of business line has changed but the programme has not been tailored to the
changes, it may fail to serve the intended purpose and an audit failure may result.
d) The initiative of the audit staff is dampened if the programme is to be rigidly followed.
e) The clients staff may become aware of the scope of audit as per programme and this may provide
them an opportunity for manipulation of records or for committing fraud since they become
aware about the auditor's approach.
Question 23
Evolving one audit programme applicable to all audit engagements under all circumstances is not
practicable. Explain [RTP-May 18, May 19, Nov. 20]
Answer
Uniform Audit Programme applicable to all audit assignments:
Evolving one audit programme applicable to all audit engagements under all circumstances is not
practicable due to following reasons:
 Businesses vary in nature, size and composition;
 Work which is suitable to one business may not be suitable to others;
 Efficiency and operation of internal controls and the exact nature of the service to be rendered by the
auditor differs from assignment to assignment.
However, it is an essential requirement that audit programme, specify in detail, the nature of work to be
done so that no time will be wasted on matters not pertinent to the engagement and any special matter or
any specific situation can be taken care of.
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Question 24
You have been appointed as an auditor of a health care service provider. Briefly discuss the special
points that should be kept in mind as an auditor for developing an audit programme. [July 21, 4 Marks]
Answer
Points to be kept in mind while developing Audit programme:
1) Written Audit Programme: Audit programme should be in written form setting forth the techniques
and procedures that are needed to implement the audit plan.
2) Audit Objective: Programme should contain the audit objectives for each area and should have
sufficient details to serve as a set of instructions to the assistants involved in the audit and as a means
to control the proper execution of the work.
3) Reliance on Internal Controls: In preparing the audit programme, the auditor need to conclude the
extent to be placed on internal controls so as to conduct the audit in an effective and efficient way.
4) Timings of execution of Audit Procedures: Auditor normally has flexibility in deciding when to
perform audit procedures. However, in some cases, the auditor may have no discretion as to timing,
for example, verification of cash balance at year end, observing physical count procedures when
conducted by client.
5) Audit Planning: Audit planning ideally commences at the conclusion of the previous year’s audit, and
along with the related programme, it should be reconsidered for modification as the audit progresses.
Question 25
Explain concept of materiality and factors which act as guiding factors to this concept. [Nov. 09, 6 Marks]
Or
State the factors which are to be considered in determining materiality. [Nov. 15, 4 Marks]
Answer
Concept of Materiality:
 SA 320 on "Materiality in Planning and Performing an Audit" lays down the standard on the concept
of materiality and its relationship with audit risk. As per SA 320 information is material if its mis-
statement (i.e. omission or erroneous statement) could influence the economic decisions of users taken
on the basis of the financial information.
 The concept of materiality recognises that some matters, either individually or in the aggregate, are
relatively important for true and fair presentation of financial information in conformity with
recognised accounting policies and practices.
 The auditor considers materiality at both the overall financial information level and in relation to
individual account balances and classes of transactions. The concept of materiality recognises that
some matters, either individually or in the aggregate, are relatively important for true and
fair presentation of financial information in conformity with recognised accounting policies
and practices.

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 CA ARVIND DUBEY

Factors influencing materiality: Materiality may be influenced by

1. Legal and regulatory requirements, non-compliance of which may have a significant bearing on the
financial information, and
2. Considerations which may have a significant bearing on the financial information, and
3. Considerations relating to individual account balances and relationships.
These factors may result in different levels of materiality depending on the matter being audited.
Question 26

State the factors which are to be considered in determining materiality. [Nov. 15, 4 Marks]
Answer
Factors influencing materiality:
Refer Answer of Question 25.
Question 27

Write short note on: Materiality and Audit Risk. [Nov. 14, 4 Marks]
Answer
Materiality and Audit Risk:
SA 320 on "Materiality in Planning and Performing an Audit” lays down the standard on the concept of
materiality and its relationship with audit risk. Accordingly,
 In conducting an audit of financial statements, the overall objectives of the auditor are to obtain
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 prepared, in all material respects, in accordance with an
applicable financial reporting framework; and to report on the financial statements, and communicate
as required by the SAs, in accordance with the auditor's findings.
 The auditor obtains reasonable assurance by obtaining sufficient appropriate audit evidence to reduce
audit risk to an acceptably low level.
 Audit risk is the risk that the auditor expresses an inappropriate audit opinion when the financial
statements are materially misstated.
 Audit risk is a function of the risks of material misstatement and detection risk. Materiality and audit
risk are considered throughout the audit, in particular, when:
(a) Identifying and assessing the risks of material misstatement;
(b) Determining the nature, timing and extent of further audit procedures; and
(c) Evaluating the effect of uncorrected misstatements, if any, on the financial statements and in
forming the opinion in the auditor's report

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 CA ARVIND DUBEY

Question 28
Write short note on: Factors affecting the identification of an appropriate benchmark in determining
materiality.
Or
Mr. X was appointed as the auditor of M/s Easy Go Ltd. and intends to apply the concept of materiality
for the financial statements as a whole. Please guide him as to the factors that may affect the identification
of an appropriate benchmark for this purpose.
Or
"Determining materiality involves the exercise of professional judgment". Discuss stating the factors
that may affect the identification of an appropriate benchmark. Also give examples. [RTP-May 18]
Or
With reference to SA 320 indicate the factors which may affect the identification of an appropriate
benchmark in determining materiality for the financial statements as a whole. [Nov. 15, 5 Marks]
Or
With reference to SA 320 "Materiality in planning and performing an audit" Indicate the factors
which may effect the identification of an appropriate benchmark while determining materiality for the
financial statements as a whole. [Nov. 20, 4 Marks]
Answer
Factors affecting identification of appropriate benchmark as per SA 320:
Determining materiality involves the exercise of professional judgment. A percentage is often applied to
a chosen benchmark as a starting point in determining materiality for the financial statements as a whole.
Factors that may affect the identification of an appropriate benchmark include the following:
1. The elements of the financial statements (for example, assets, liabilities, equity, revenue, expenses);
2. Whether there are items on which the attention of the users of the particular entity's financial
statements tends to be focused (for example, for the purpose of evaluating financial performance
users may tend to focus on profit, revenue or net assets);
3. The nature of the entity, where the entity is at in its life cycle, and the industry and economic
environment in which the entity operates;
4. The entity's ownership structure and the way it is financed (for example, if an entity is financed solely
by debt rather than equity, users may put more emphasis on assets, and claims on them, than on the
entity's earnings); and
5. The relative volatility of the benchmark.
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Question 29
As an auditor of RST Ltd. Mr. P applied the concept of materiality for the financial statements as a whole.
On the basis of obtaining additional information of significant contractual arrangements that draw
attention to a particular aspect of a company's business, he wants to re-evaluate the materiality concept.
Please guide him.
Or
Materiality for the financial statements as a whole may need to be revised as a result of a change in
circumstances that occurred during the audit. Explain with the help of example. [MTP- Oct. 19]
Answer
Revision as the Audit Progresses
 SA 320 on "Materiality in Planning and Performing an Audit" lays down the standard on the concept
of materiality.
 As per SA 320, auditor shall revise materiality for the financial statements as a whole (and, if applicable,
the materiality level or levels for particular classes of transactions, account balances or disclosures) 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 that a lower materiality for the financial statements as a whole (and, if
applicable, materiality level or levels for particular classes of transactions, account balances or
disclosures) than that initially determined is appropriate, the auditor shall determine whether it is
necessary to revise performance materiality, and whether the nature, timing and extent of the further
audit procedures remain appropriate.
Example: If during the audit it appears as though actual financial results are likely to be substantially
different from the anticipated period end financial results that were used initially to determine materiality
for the financial statements as a whole, the auditor revises that materiality.
Question 30
Write short note on: Audit Planning and Materiality. [May 13, 4 Marks]
Answer
Audit Planning and Materiality:
 Materiality is an important consideration for an auditor to evaluate whether the financial statements
reflect a true or fair view or not. SA 320 on "Materiality in Planning and Performing an Audit" requires
that an auditor should consider materiality and its relationship with audit risk while conducting an
audit.
 When planning the audit, the auditor considers what would make the financial information materially
misstated. The auditor's preliminary assessment of materiality related to specific account balances and
classes of transactions helps the auditor decide such questions as what items to examine and whether
to use sampling and analytical procedures.

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 CA ARVIND DUBEY

 This enables the auditor to select audit procedures that, in combination, can be expected to support the
audit opinion at an acceptably low degree of audit risk.
 It may be noted that the auditor's assessment of materiality and audit risk may be different at the time
of initially planning of the audit as against at the time of evaluating the results of audit procedures.
Question 31
The auditor's determination of materiality is a matter of professional judgment, and is affected by the
auditor's perception of the financial information needs of users of the financial statements. In this context,
explain the auditor's assumptions about users of the financial statements. [RTP - May 21]
Answer
Auditor's assumptions about users of the financial statements:
The auditor's determination of materiality is a matter of professional judgment, and is affected by the
auditor's perception of the financial information needs of users of the financial statements. In this context,
it is reasonable for the auditor to assume that users:
(i) Have a reasonable knowledge of business and economic activities and accounting and a willingness
to study the information in the financial statements with reasonable diligence;
(ii) Understand that financial statements are prepared, presented and audited to levels of materiality;
(iii) Recognize the uncertainties inherent in the measurement of amounts based on the use of estimates,
judgment and the consideration of future events; and
(iv) Make reasonable economic decisions on the basis of the information in the financial statements.
Question 32
Financial reporting frameworks often discuss the concept of materiality in the context of the preparation
and presentation of financial statements. Explain. [RTP - May 21]
Answer
Concept of materiality in the context of the preparation and presentation of F.S.:
Financial reporting frameworks often discuss the concept of materiality in the context of the preparation
and presentation of financial statements. Although financial reporting frameworks may discuss
materiality in different terms, they generally explain that:
1. Misstatements, including omissions, are considered to be material if they, individually or in the
aggregate, could reasonably be expected to influence the economic decisions of users taken on the basis
of the financial statements;
2. Judgments about materiality are made in the light of surrounding circumstances, and are affected by
the size or nature of a misstatement, or a combination of both; and
3. Judgments about matters that are material to users of the financial statements are based on a
consideration of the common financial information needs of users as a group. The possible effect of
misstatements on specific individual users, whose needs may vary widely, is not considered.
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Question 33
What could be considered material for all situations cannot be defined precisely and an amount or
transaction material in one situation may not be material in other situation. Explain. [RTP-Nov.21]
Answer
Concept of Materiality:
 SA 320 "Materiality in Planning and Performing an Audit" requires the auditor to consider materiality
and its relationship with audit risk while conducting an audit. When planning the audit, the auditor
considers what would make the financial information materially misstated.
 The auditor's preliminary assessment of materiality related to specific account balances and classes of
transactions helps the auditor decide such questions as what items to examine and whether to use
sampling and analytical procedures. This enables the auditor to select audit procedures that, in
combination, can be expected to support the audit opinion at an acceptably low degree of audit risk.
 It may be noted that the auditor's assessment of materiality and audit risk may be different at the time
of initially planning of the audit as against at the time of evaluating the results of audit procedures. At
the planning stage, the auditor needs to consider the materiality for the financial statements as a whole.
The auditor has to carry out a preliminary identification of significant components and material classes
of transactions, account balances and disclosure which he plans to examine.
 What could be considered material for all situations cannot be defined precisely and an amount or
transaction material in one situation may not be material in other situation. For example, ` 5,000 may
be material for a small entity, but even ` 5,00,000 may not be material for a large entity.

TOPPER’S CLASES 22 QUESTION BANK FOR CHAPTER-2

 CHAPTER 3

AUDIT DOCUMENTATION & AUDIT EVIDENCE

QUESTIONS WITH ANSWERS
Question 1
Define audit documentation. Also give some examples.
OR
Write short note on: Audit working papers. [May 10, 5 Marks]
Answer
Audit documentation
SA 230 “Audit Documentation” defines the term as “Record of audit procedures performed, relevant audit
evidence obtained and the conclusions the auditor reached”.
Examples of audit documentation:
Audit documentation may be recorded on paper or on electronic or other media. Examples of audit
documentation include:
 Audit programmes.
 Analyses.
 Issues memoranda.
 Summaries of significant matters.
 Letters of confirmation and representation.
 Checklists.
 Correspondence (including e-mail) concerning significant matters.
The auditor may include abstracts or copies of the entity’s records (for example, significant and specific
contracts and agreements) as part of audit documentation. Audit documentation, however, is not a
substitute for the entity’s accounting records.
Question 2
Comment on the following in relation to SAs: “Audit documentation serves a number of additional
purposes”. [May 11, 5 Marks]
OR
Audit documentation serves a number of purposes. Explain with reference to SA 230. [May 15, 6 Marks]
OR
Audit documentation provides evidence of the auditor’s basis for a conclusion about the achievement of
the overall objectives of the auditor and evidence that the audit was planned and performed in accordance
with SAs and applicable legal and regulatory requirements. Explain stating clearly purpose of audit
documentation. [MTP – Aug. 18]
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OR
Audit documentation serves a number of purposes. List such purposes. [MTP - March 21]
OR
A new team member of GSR & Co., the auditors of Esteem Limited, was of the view that Audit
Documentation would not serve any purpose at any stage of Audit. Explain. [RTP – May 21]
Answer
Purposes of audit documentation
SA 230 “Audit Documentation” deals with the auditor’s responsibility to prepare audit documentation for
an audit of financial statements. As per SA 230, Audit Documentation serves a number of purposes,
including the following:
1. Assisting the engagement team to plan and perform the audit.
2. Assisting members of the engagement team responsible for supervision to direct and supervise the
audit, and to discharge their review responsibilities.
3. Enabling the engagement team to be accountable for its work.
4. Retaining a record of matters of continuing significance to future audits.
5. Enabling the conduct of quality control reviews and inspections.
6. Enabling the conduct of external inspections in accordance with applicable legal, regulatory or other
requirements.
Question 3
Audit documentation provides evidence of the auditor’s basis for a conclusion about the achievement of
the overall objectives of the auditor. Explain clearly stating the nature and purpose of Audit
Documentation. [MTP-Oct. 18]
OR
What do you mean by Audit Documentation? Also explain the nature and purpose of audit
documentation. [RTP-May 19]
OR
Discuss the meaning and nature of Audit Documentation. [RTP-Nov. 19]
Answer
Meaning of Audit Documentation: Refer Answer of Question 1.
Nature of Audit Documentation: SA 230 “Audit Documentation” deals with the auditor’s responsibility
to prepare audit documentation for an audit of financial statements. As per SA 230, the Auditor is required
to prepare documentation that provides:
(a) A sufficient and appropriate record of the basis for the auditor’s report; and
(b) Evidence that the audit was planned and performed in accordance with SAs and applicable and other
regulatory requirements.
Purposes of Audit Documentation: Refer Answer of Question 2.

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Question 4
Judging the significance of a matter requires an objective analysis of the facts and circumstances.
Documentation of the professional judgments made, where significant, serves to explain the auditor’s
conclusions and to reinforce the quality of the judgment. Explain with the help of examples.
[RTP-May 19]
OR
An important factor in determining the form, content and extent of audit documentation of significant
matters is the extent of professional judgments exercised in performing the work and evaluating the
results. Explain stating clearly the examples of significant matters. [RTP-Nov. 20]
Answer
Documentation of Significant Matters and Related Significant Professional Judgments:
Judging the significance of a matter requires an objective analysis of the facts and circumstances. Examples
of significant matters include:
1) Matters that give rise to significant risks (as defined in SA 315).
2) Results of audit procedures indicating (a) that the financial statements could be materially misstated,
or (b) a need to revise the auditor’s previous assessment of the risks of material misstatement and the
auditor’s responses to those risks.
3) Circumstances that cause the auditor significant difficulty in applying necessary audit procedures.
4) Findings that could result in a modification to the audit opinion or the inclusion of an Emphasis of
Matter paragraph in the auditor’s report.
Documentation of the professional judgments made, where significant, serves to explain the auditor’s
conclusions and to reinforce the quality of the judgment. Such matters are of particular interest to those
responsible for reviewing audit documentation, including those carrying out subsequent audits, when
reviewing matters of continuing significance.
Examples of circumstances in which it is appropriate to prepare audit documentation relating to the
use of professional judgment:
 The rationale for the auditor’s conclusion when a requirement provides that the auditor ‘shall consider’
certain information or factors, and that consideration is significant in the context of the particular
engagement.
 The basis for the auditor’s conclusion on the reasonableness of areas of subjective judgments (for
example, the reasonableness of significant accounting estimates).
 The basis for the auditor’s conclusions about the authenticity of a document when further investigation
(such as making appropriate use of an expert or of confirmation procedures) is undertaken in response
to conditions identified during the audit that caused the auditor to believe that the document may not
be authentic.

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Question 5
“Audit documentation summary may facilitate effective and efficient reviews and inspections of the audit
documentation, particularly for large and complex audits”. Explain.
OR
“Completion Memorandum” is helpful as part of the audit documentation. Explain. [May 19, 3 Marks]
Answer
Completion memorandum (audit documentation summary):
SA 230 “Audit Documentation” defines the term as “Record of audit procedures performed, relevant audit
evidence obtained and the conclusions the auditor reached”. Accordingly, auditor may consider it helpful
to prepare and retain as part of the audit documentation a summary (known as a completion
memorandum) that describes:
(a) The significant matters identified during the audit and
(b) How they were addressed.
Such a summary may facilitate effective and efficient reviews and inspections of the audit documentation,
particularly for large and complex audits.
Preparation of such a summary may assist the auditor’s consideration of the significant matters. Further;
the preparation of such a summary may assist the auditor’s consideration of the significant matters.
It may also help the auditor to consider whether; in light of the audit procedures performed and
conclusions reached, there is any individual relevant SA objective that the auditor has not met or is unable
to meet that would prevent the auditor from achieving the auditor’s overall objective.
Question 6
Discuss with reference to SAs: Factors effecting form, contents and extent of audit documentation.
[May 13, 5 Marks, MTP – April 19]
Or
The Form, content and extent of audit documents depends on certain factors. Explain with reference to SA
230. [Nov. 15, 4 Marks]
Or
The form, content and extent of audit documentation depend on factors such as the size and complexity
of the entity, the nature of the audit procedures to be performed etc. Explain in detail. [RTP-Nov. 18]
Answer
Factors affecting form, content and extent of Audit Documentation:
SA 230 “Audit Documentation” deals with the auditor’s responsibility to prepare audit documentation for
an audit of financial statements. Accordingly, the various factors that may affect form, content and extent
of audit documentation are following:

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1. The size and complexity of the entity.

2. The nature of the audit procedures to be performed.
3. The identified risks of material misstatement.
4. The significance of the audit evidence obtained.
5. The nature and extent of exceptions identified.
6. The need to document a conclusion or the basis for a conclusion not readily determinable from the
documentation of the work performed or audit evidence obtained.
7. The audit methodology and tools used.
Question 7

R.K & Company is the auditor of PQR Company Ltd. The Managing Director of the Company demands
copies of the working papers from the auditors. Are the auditors bound to oblige the Managing Director?
[Nov. 10, 4 Marks]
Answer
Ownership and custody of working papers:
 As per SA 230, “Audit Documentation” working papers are the property of the auditor. The auditor
may, at his discretion, make portions of or extracts of his working papers available to his client.
 In the present case, the managing director of the company demands copies of the working papers from
the auditor. Managing director has no right over the working papers of the auditors.
Conclusion: Managing Director of the company has no right over working papers of the auditor.
However, the auditor may, at his discretion, make portion of or extracts of his working papers available
to his company.
Question 8

The auditor shall assemble the audit documentation in an audit file and complete the administrative
process of assembling the final audit file on a timely basis after the date of the auditor’s report. Discuss.
[MTP-March 18, March 19]
Or
SQC 1 requires firms to establish policies and procedures for the timely completion of the assembly of
audit files. Explain. [RTP-Nov. 19]
Or
Briefly explain the policies and procedures of assembling the final audit file on a timely basis after the date
of auditor’s report under SQC-1. [Nov. 19, 3 Marks]

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Answer
Assembly of Final Audit File:
SA 230 “Audit Documentation” defines audit file as one or more folders or other storage media, in physical
or electronic form, containing the records that comprise the audit documentation for a specific
engagement.
Requirements of Audit File:
 The auditor shall assemble the audit documentation in an audit file and complete the administrative
process of assembling the final audit file on a timely basis after the date of the auditor’s report. (within
60 days as per SQC 1).
 The completion of the assembly of the final audit file after the date of the auditor’s report is an
administrative process that does not involve the performance of new audit procedures of new audit
procedures or the drawing of new conclusions.
 Changes may, however, he made to the audit documentation during the final assembly process if they
are administrative in nature. Examples of such changes include:
1. Deleting or discarding superseded documentation.
2. Sorting, collating and cross referencing working papers.
3. Signing off on completion checklists relating to the file assembly process.
4. Documenting audit evidence that the auditor has obtained, discussed and agreed with the relevant
members of the engagement team before the date of the auditor’s report.
 After the assembly the auditor shall not delete audit documentation before the end of its retention
period.
Question 9
Give some examples of circumstances in which it is appropriate in prepare audit documentation relating
to the use of professional judgment where the matters and judgments are significant. [MTP – Oct. 20]
Answer
Refer Answer of Question 4.
Question 10
The working papers of the branch auditor are also the property of the Principal Auditor and Management
of the Company, so they have right to access them. State the relevant SA and comment. [MTP – March 21]
Answer
Ownership of Working Papers:
 As per SA 230 “Audit Documentation”, working papers are the property of the auditors. He may at
his discretion, make available portions or extracts from his working paper to his client. The auditor
should adopt reasonable procedures for custody and confidentiality of his working papers.

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 An auditor is not required to provide the management/clients or other auditors’ access to his working
papers. Main auditor of the company does not have right of access to the working papers of the branch
auditor.
 In the case of a company, the main auditor has to consider the report of the branch auditor and has a
right to seek clarification and to visit the branch but cannot ask for the copy of working paper and
therefore, the branch auditor is under no compulsion to give photocopies of his working paper to the
principal auditor.
Conclusion: From the above discussion, it can be concluded that working papers of the branch auditor are
his property only and neither the Principal auditor not management has right to access that. Therefore,
statement given in the question is incorrect.
Question 11

While documenting the nature, timing and extent of audit procedures performed in case of audit of PQR
Ltd., explain the important matters its auditor should record. [RTP – May 21]
Answer
Matters to be recorded while documenting NTE of Audit procedures performed:
In documenting the nature, timing and extent of audit procedures performed, the auditor of PQR Ltd.
shall record:
(i) The identifying characteristics of the specific items or matters tested;
(ii) Who performed the audit work and the date such work was completed; and
(iii) Who reviewed the audit work performed and the date and extent of such review.
Question 12

Audit documentation provides evidence that the audit complies with SAs. However, it is neither necessary
nor practicable for the auditor to document every matter considered. Further, it is unnecessary for the
auditor to document separately compliance with matters for which compliance is demonstrated by
documents included within the audit file. Explain giving examples. [MTP – Oct. 21]
Answer
Significance of Audit documentation in providing evidence that audit complies with SAs:
 Audit documentation provides evidence that the audit complies with SAs. However, it is neither
necessary nor practicable for the auditor to document every matter considered, or professional
judgment made, in an audit. Further, it is unnecessary for the auditor to document separately (as in a
checklist, for example) compliance with matters for which compliance is demonstrated by documents
included within the audit file.
 Examples in support of abovementioned statement are:

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(1) The existence of an adequately documented audit plan demonstrates that the auditor has planned
the audit.
(2) The existence of a signed engagement letter in the audit file demonstrates that the auditor has
agreed the terms of the audit engagement with management, or where appropriate, TCWG.
(3) An auditor’s report containing an appropriately qualified opinion demonstrates that the auditor
has complied with the requirement to express a qualified opinion under the circumstances
specified in the SAs.
 In relation to requirements that apply generally throughout the audit, there may be a number of ways
in which compliance with them may be demonstrated within the audit file. For example, there may be
no single way in which the auditor’s professional skepticism is documented. But the audit
documentation may nevertheless provide evidence of the auditor’s exercise of professional skepticism
in accordance with SAs. Such evidence may include specific procedures performed to corroborate
management’s responses to the auditor’s inquiries.
 Similarly, that the engagement partner has taken responsibility for the direction, supervision and
performance of the audit in compliance with the SAs may be evidenced in a number of ways within
the audit documentation.
This may include documentation of the engagement partner’s timely involvement in aspects of the
audit, such as participation in the team discussion required by SA 315.
Question 13

Audit evidence includes both information contained in the accounting records underlying the financial
statements and other information. Discuss. [RTP – May 18]
Or
Auditing is a logical process. An auditor is called upon to assess the actualities of the situation, review the
statements of account and give an expert opinion about the truth and fairness of such accounts. This he
cannot do unless he has examined the financial statements objectively. He needs evidence to obtain
information for arriving at his judgment. Discuss explaining clearly the detailed meaning of audit
evidence. [RTP – Nov. 19]
Answer
Audit Evidence
Auditing is a logical process. An auditor is called upon to assess the actualities of the situation, review the
statements of account and give an expert opinion about the truth and fairness of such accounts. This he
cannot do unless he has examined the financial statements objectively. Auditor required audit evidences
to obtain information for arriving at his judgment.

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Meaning of Audit Evidence:

 SA 500 “Audit Evidence” defines audit evidence as information used by the auditor in arriving at the
conclusions on which the auditor’s opinion is based.
 Audit evidence includes both information contained in the accounting records underlying the financial
statements and information obtained from other sources.
 Accounting records include the records of initial accounting entries and supporting records, such as
checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers,
journal entries and other adjustments to the financial statements that are not reflected in journal entries;
and records such as work sheets and spreadsheets supporting cost allocations, computations,
reconciliations and disclosures.
 Other information which the auditor may use as audit evidence includes, for example minutes of the
meetings, written confirmations from trade receivables and trade payables, manuals containing details
of internal control, annual reports etc. A combination of tests of accounting records and other
information is generally used by the auditor to support his opinion on the financial statements.
Question 14

Most of the auditor’s work in forming the auditor’s opinion consists of obtaining and evaluating audit
evidence. Explain. [RTP – Nov. 18]
Or
Audit evidence is necessary to support the auditor’s opinion and report. It is cumulative in nature and is
primarily obtained from audit procedures performed during the course of the audit. Most of the auditor’s
work in forming the auditor’s opinion consists of obtaining and evaluating audit evidence. Explain.
[RTP- Nov. 19]
Answer
Obtaining and Evaluating Audit Evidence:
 SA 500 “Audit Evidence” defines audit evidence as information used by the auditor in arriving at the
conclusions on which the auditor’s opinion is based.
 Audit evidence includes both information contained in the accounting records underlying the financial
statements and information obtained from other sources.
 Accounting records include the records of initial accounting entries and supporting records, such as
checks and records of electronic fund transfers; invoices; contracts; the general and subsidiary ledgers,
journal entries and other adjustments to financial statements that are not reflected in journal entries;
and records such as work sheets and spreadsheets supporting cost allocations, computations,
reconciliations and disclosures.

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 Other information which the auditor may use as audit evidence includes, for example minutes of the
meeting, written confirmation from trade receivables and trade payables, manuals containing details
of internal control, annual reports etc. A combination of tests of accounting records and other
information is generally used by the auditor to support his opinion on the financial statements.
 As per SA 500 “Audit Evidence” audit procedures performed to collect audit evidences include the
following:
(a) Risk assessment Procedures
(b) Further Audit procedures: It comprises of
1. Test of Controls, and
2. Substantive Procedures: consists of:
 Tests of Details,
 Substantive Analytical Procedures
 Audit procedures to obtain audit evidence also include inspective, observation, confirmation,
recalculation, re-performance and analytical procedures, often in some combination, in addition to
inquiry.
Question 15
What do you mean by sufficient appropriate audit evidence? State various factors that help the auditor to
ascertain as to what is sufficient appropriate audit evidence. [Nov. 10, 6 Marks]
Or
State various factors that help the auditor to ascertain as to what is sufficient and appropriate audit
evidence. [Nov. 17, 4 Marks]
Or
The quantity of audit evidence needed is affected by the auditor’s assessment of the risks of misstatement.
Auditor’s judgment as to sufficiency may be affected by few factors. Explain. [RTP – May 18]
Or
The quantity of audit evidence needed is affected by the auditor’s assessment of the risks of misstatement
(the higher the assessed risks, the more audit evidence is likely to be required) and also by the quality of
such audit evidence (the higher the quality, the less may be required). Obtaining more audit evidence,
however, may not compensate for its poor quality. Analyse and explain stating clearly the factors affecting
the auditor’s judgment as to sufficiency of audit evidence. [RTP – May 19]
Or
Sufficiency is the measure of the quantity of audit evidence. The quantity of audit evidence needed is
affected by the auditor’s assessment of the risks of misstatement and also by the quality of such audit
evidence. Obtaining more audit evidence, however, may not compensate for its poor quality. Explain also
stating the factors affecting auditor’s judgment as to sufficiency of audit evidence. [RTP – Nov. 20]

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Answer
Sufficient appropriate audit evidence:
SA 500 defines audit evidence as information used by the auditor is arriving at the conclusion on which
the auditor’s opinion is based. The auditor shall design and perform audit procedures that are appropriate
in the circumstances for the purpose of obtaining sufficient appropriate audit evidence.
Sufficiency: It refers to the quantity of audit evidence. It is affected by the auditor’s assessment of the risks
of material misstatement and also by the quality of such audit evidence.
Appropriateness: It refers to the measure of the quality of audit evidence. That is its relevance and its
reliability in providing support for the conclusion on which the auditor’s opinion is based.
Factors affecting Sufficiency and Appropriateness:
(a) The degree of risk of misstatement which may be affected by factors such as:
 The nature of the item;
 The adequacy of internal control;
 The nature of size of the business carried on by the entity;
 Situation which may exert an unusual influence on management;
 The financial position of the entity.
(b) The materiality of the item.
(c) The experience gained during previous audits.
(d) The results of auditing procedures, including fraud and errors which may have been found.
(e) The type of information available.
(f) The trend indicated by accounting ratios and analysis.
Question 16
What are the audit procedures to obtain audit evidence? Mention the same in brief.
Or
Explain the tests of controls and substantive procedures as audit procedures of obtaining sufficient
appropriate audit evidence for forming an audit opinion.
Or
Write short note on: Substantive procedures. [May 10, 5 Marks, Nov. 14, 4 Marks]
Answer
Audit procedures to obtain Audit Evidence:
As per SA 500 “Audit Evidence” audit procedures required to obtain audit evidence:
1. Risk assessment procedures
 SA 315 defines risk assessment procedures as audit procedures performed to obtain understanding
of the entity and its environment including the entity internal control, to identify and assess the
risk of material misstatement whether due to fraud or error at the financial statement and assertion
level.

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 Components of risk assessment procedures comprises of inquiries, observation, inspection and

analytical procedures.
2. Further audit procedures: comprises of Test of Controls and Substantive Procedures.
(A) Tests of controls: SA 330 defines tests of controls as audit procedures designed to evaluate the
operating effectiveness of controls in preventing, or detecting and correcting, material
misstatements at the assertion level.
Components of tests of controls generally comprises of inspection
(B) Substantive procedures: SA 330 defines substantive procedures as audit procedures designed to
detect the material misstatements at the assertion level.
 Substantive procedures comprise of tests of details and substantive analytical procedures.
 Tests of details may be performed through inspection of documents, inquiry, external
confirmations, recalculations etc.
 Substantive analytical procedures involve consideration of relationships among financial as
well as non-financial data and consideration of comparison with prior period data, anticipated
results or industry averages.
Question 17

“The nature and timing of the audit procedures to be used may be affected by the fact that some of the
accounting data and other information may be available only in electronic form or only at certain points
or periods in time”. Explain. [RTP- Nov. 20]
Answer
Factors affecting nature and timing of Audit Procedure:
As per SA 500 “Audit Evidence” audit procedures performed to collect audit evidences include the
following:
(a) Risk Assessment Procedures
(b) Further Audit procedures: It comprises of
1. Test of Controls, and
2. Substantive Procedures: consists of
 Tests of Details,
 Substantive Analytical Procedures
Nature and timing of audit procedures affected by
 Availability of audit evidence in electronic form only
 Availability of audit evidence at certain points/periods in time.

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For example, source documents, such as purchase orders and invoices, may exist only in electronic
form when an entity uses electronic commerce, or may be discarded after scanning when an entity
uses image processing systems to facilitate storage and reference.
Certain electronic information may not be retrievable after a specified period of time, for example,
if files are changed and if backup files do not exist. Accordingly, the auditor may find it necessary
as a result of an entity's data retention policies to request retention of some information for the
auditor's review or to perform audit procedures at a time when the information is available.
Question 18
Explain various methods to obtain audit evidence. [May 11, 8 Marks]
Or
Write short note on: Methods to obtain audit evidence.
Or
Mr. A was appointed statutory auditor of P Ltd. but he was not able to gather the sufficient audit
evidences. Discuss how he should proceed to gather more audit evidences. [Nov. 15, 6 Marks]
Answer
Methods to obtain audit evidence:
As per SA 500 “Audit Evidence” the following methods can be used by the auditor for the purpose of
obtaining audit evidence:
a) Inspection: It involves examining records or documents, whether internal or external, in paper form,
electronic form, or other media, or a physical examination of an asset.
b) Observation: It consists of looking at a process or procedure being performed by others, for example,
the auditor's observation of inventory counting by the entity's personnel.
c) External confirmation: It represents audit evidence obtained by the auditor as a direct written
response to the auditor from a third party (the confirming party), in paper form, or by electronic or
other medium.
d) Recalculation: It consists of checking mathematical accuracy of documents or records. It may be
performed manually or electronically.
e) Re-performance: It involves the auditor's independent execution of procedures or controls that were
originally performed as part of the entity's internal control.
f) Analytical procedures: It consists of evaluations of financial information made by a study of
relationships among both financial and non-financial data.
g) Inquiry: It consists of seeking information of knowledgeable persons, both financial and non-financial,
within the entity or outside the entity.

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Question 19
Discuss the following: Inquiry is one of the audit procedure to obtain audit evidence. [May 13, 5 Marks]
Or
Evaluating responses to inquiries is an integral part of the inquiry process. Explain. [RTP-May 18]
Answer
Inquiry as audit procedure to obtain audit evidence:
 As per SA 500 "Audit Evidence" auditor may obtain audit evidences by performing a number of
methods including the inquiry. Inquiry consists of seeking information of knowledgeable persons,
both financial and non-financial, within the entity or outside the entity.
 Inquiry is used extensively throughout the audit in addition to other audit procedures.
 Inquiries may range from formal written inquiries to informal oral inquiries. However in case oral
inquiries, the auditor may consider it necessary to obtain written representations from management
and, where appropriate, TCWG to confirm responses to such inquiries.
 Evaluating responses to inquiries is an integral part of the inquiry process.
 Responses to inquiries may provide the auditor with information not previously possessed or with
corroborative audit evidence. Alternatively, responses might provide information that differs
significantly from other information that the auditor has obtained. In some cases, responses to inquiries
provide a basis for the auditor to modify or perform additional audit procedures.
Question 20
Distinguish between: Internal Evidence and External Evidence. [Nov. 08, 6 Marks]
Answer
Internal Evidence vs. External Evidence:
Internal Evidence External Evidence
Meaning Internal evidence is one that has been External evidence is one which originates
created within the client's organization. from outside the client's organisation.
Examples Examples are: Duplicate sales invoice, For example: purchase invoice, forwarding
Minute books, inventory reports etc. note, confirmations, bank statement, lease
agreement etc.
Reliability Generally, less reliable vis-a-vis External Generally, more reliable vis-a-vis Internal
Evidence Evidence

Question 21
Discuss the principles which are useful in assessing the reliability of audit evidence.
Or
Write short note on following: Reliability of audit Evidence. [Nov. 11, 4 Marks]
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Or
Discuss the following: The reliability of audit evidence is influenced by its source, sample size and
selection of items for testing. [Nov. 13, 5 Marks]
Or
With reference to SA 500, “Audit Evidence”, discuss the different sources and their reliability, of
audit evidence. [May 17, 6 Marks]
Or
"Even when information to be used as audit evidence is obtained from sources external to the entity,
circumstances may exist that could affect its reliability". Explain. Also state clearly generalisations
about the reliability of audit evidence. [RTP-May 18]
Answer
Reliability of Audit Evidence:
As per SA 500 "Audit Evidence" reliability of audit evidence is guided by following principles:
a) The reliability of audit evidence is increased when it is obtained from independent sources
outside the entity.
b) The reliability of audit evidence that is generated internally is increased when the related
controls, imposed by the entity are effective.
c) Audit evidence obtained directly by the auditor is more reliable than audit evidence obtained
indirectly.
d) Audit evidence in documentary form, whether paper, electronic, or other medium, is more
reliable than evidence obtained orally.
e) Audit evidence provided by original documents is more reliable than audit evidence provided
by photocopies, or documents that have been filmed, digitised or otherwise transformed into
electronic form, the reliability of which may depend on the controls over their preparation and
maintenance.
Question 22

When information to be used as audit evidence has been prepared using the work of a management's
expert and having regard to the significance of expert's work for the auditor's purposes, explain the
considerations auditor would consider for the purposes of his audit. [RTP - May 21]
Answer
Considerations while using work of Management Expert:
When information to be used as audit evidence has been prepared using the work of a management's
expert, the auditor shall, to the extent necessary, having regard to the significance of that expert's work for
the auditor's purposes:

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(i) Evaluate the competence, capabilities and objectivity of that expert;

(ii) Obtain an understanding of the work of that expert; and
(iii) Evaluate the appropriateness of that expert's work as audit evidence for the relevant assertion.
Question 23
In the course of audit of SMP Limited for the financial year ended 31st March, 2022 you have observed as
an auditor that the company has provided a sum ` 20 Lakhs in the books of account as Gratuity payable
to employees based on certificate obtained from an actuary. Give your comments with reference to the
Standard on Auditing. [MTP-Nov.21]
Answer
Evaluation of appropriateness of work of Management's Expert:
 In the given case, SMP Limited has provided a sum of ` 20 lakhs in the books of account as gratuity
payable on the basis of certificate obtained from an actuary. The liability towards gratuity payable to
the employees at the time of cessation of service should be ascertained and provided for in the accounts
when the employees are in service, it is an ascertained present liability accruing over the period of
service but payable upon cessation of service.
 The auditor should check the quantification of the gratuity liability. He should ascertain whether the
same had been actuarially determined. The auditor should treat the actuary as managements' expert
and conduct procedures relevant to checking the opinion of an expert in accordance with SA 500.
 As per SA 500, ''Audit Evidence", when information to be used as audit evidence has been prepared
using the work of a management's expert, the auditor shall, to the extent necessary, having regard to
the significance of that expert's work for the auditor's purposes:
1. Evaluate the competence, capabilities and objectivity of that expert;
2. Obtain an understanding of the work of that expert; and
3. Evaluate the appropriateness of that expert's work as audit evidence for the relevant assertion.
Question 24

A higher level of assurance may be sought about the operating effectiveness of controls when the approach
adopted consists primarily of tests of controls, in particular where it is not possible or practicable to obtain
sufficient appropriate audit evidence only from substantive procedures. Explain. [RTP-Nov.18]
Or
A higher level of assurance may be sought about the operating effectiveness of controls when the approach
adopted consists primarily of tests of controls. Explain and also state when will the auditor design and
perform tests of controls to obtain sufficient appropriate audit evidence as to the operating effectiveness
of relevant controls. [RTP-Nov. 20]

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Answer
Performing Test of controls:
 As per SA 330 "Responses to Assessed Risks" tests of controls may be defined as audit procedure
designed to evaluate the operating effectiveness of controls in preventing, or detecting and correcting,
material misstatements at the assertion level.
 The auditor shall design and perform tests of controls to obtain sufficient appropriate audit evidence
as to the operating effectiveness of relevant controls when:
a) He expects that the controls are operating effectively, or
b) Substantive procedures alone cannot provide sufficient appropriate audit evidence at the assertion
level.
 In designing and performing tests of controls, the auditor shall:
a) Perform other audit procedures in combination with inquiry to obtain audit evidence about the
operating effectiveness of the controls, including:
(i) How the controls were applied at relevant times during the audit.
(ii) The consistency with which they are applied.
(iii) By whom or by what means they were applied.
b) Determine whether the controls to be tested depend upon other controls (indirect controls) and if
so, whether it is necessary to obtain audit evidence supporting the effective operation of those
indirect controls.
Question 25
Write short note on: Factors warranting re-testing of internal controls.
Answer
Factors warranting re-test of controls:
As per SA 330 on “The Auditor's Responses to Assessed Risks”, if the auditor plans to use audit evidence
from a previous audit about the operating effectiveness of specific controls, he shall establish the
continuing relevance of that evidence by obtaining audit evidence about whether significant changes in
those controls have occurred subsequent to the previous audit.
The auditor’s decision on whether to rely on audit evidence obtained in previous audits for control is a
matter of professional judgment.
Factors that may warrant a re-test of controls are:
1. A deficient control environment.
2. Deficient monitoring of controls.
3. A significant manual element to the relevant controls.
4. Personnel changes that significantly affect the application of the control.
5. Changing circumstances that indicate the need for changes in the control.
6. Deficient general IT-controls.

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Question 26
Irrespective of the assessed risks of material misstatement, the auditor shall design and perform
substantive procedures for each material class of transactions, account balance, and disclosure. Analyse
and explain. [RTP-Nov. 18]
Or
“A multinational Co. wants to appoint you to carry the statutory audit.” Discuss with reference to SA 330
the substantive procedures to be performed to assess the risk of material misstatement. [Nov. 18, 6 Marks]
Answer
Substantive Procedure to be performed to assess the risk of material misstatement:
Substantive procedures are audit procedure designed to detect material misstatements at the assertion
level. Substantive procedures comprise:
(i) Tests of details (of classes of transactions, account balances, and disclosures), and
(ii) Substantive analytical procedures.
SA 330 "Responses to Assessed Risks" deals with the auditor's responsibility to design and implement
responses to the risks of material misstatements identified and assessed by the auditor in accordance with
SA 315. Accordingly,
 Irrespective of the assessed risks of material misstatement, the auditor shall design and perform
substantive procedures for each material class of transactions, account balance, and disclosure.
 Depending on the circumstances, the auditor may determine that:
(i) Performing only substantive analytical procedures will be sufficient to reduce audit risk to
an acceptably low level. For example, where the auditor's assessment of risk is supported
by audit evidence from tests of controls.
(ii) Only tests of details are appropriate.
(iii) A combination of substantive analytical procedures and tests of details are most responsive to
the assessed risks.
 Substantive analytical procedures are generally more applicable to large volumes of transactions that
tend to be predictable over time.
 Because the assessment of the risk of material misstatement takes account of internal control, the extent
of substantive procedures may need to be increased when the results from tests of controls are
unsatisfactory. However, increasing the extent of an audit procedure is appropriate only if the audit
procedure itself is relevant to the specific risk.
 In designing tests of details, the extent of testing is ordinarily thought of in terms of the sample size.
Note: Question asked in Nov. 18 seems to be drafted wrongly, as Substantive procedures are performed
as a response to risk of material misstatement. To assess risk of material misstatement, procedures
performed are known as Risk Assessment Procedures and covered by SA 315.

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Question 27
"External confirmation procedures frequently are relevant when addressing assertions associated with
account balances and their elements, but need not be restricted to these items." Explain.
Or
Point out any eight areas where external confirmation used as an audit evidence. [May 15, 4 Marks]
Answer
Areas where external confirmations may be used:
As per SA 330 “Responses to Assessed Risks” External confirmation procedures frequently are relevant
when addressing assertions associated with account balances and their elements, but need not be restricted
to these items. For example, the auditor may request external confirmation of the terms of agreements,
contracts, or transactions between an entity and other parties.
Other situations where external confirmation procedures may provide relevant audit evidence in
responding to assessed risks of material misstatement include:
1. Bank balances and other information relevant to banking relationships.
2. Accounts receivable balances and terms.
3. Inventories held by third parties at bonded warehouses for processing or on consignment.
4. Property title deeds held by lawyers or financiers for safe custody or as security.
5. Investments held for safekeeping by third parties, or purchased from stockbrokers but not
delivered at the balance sheet date.
6. Amounts due to lenders, including relevant terms of repayment and restrictive covenants.
7. Accounts payable balances and terms.
Question 28
“When deviations from controls upon which the auditor intends to rely are detected, the auditor shall
make specific inquiries to understand these matters and their potential consequences”. Explain.
Or
XYZ & Associates, Chartered Accountants, while evaluating the operating effectiveness of internal
controls, detects deviation from controls. In such a situation, state the specific inquiries to be made by an
auditor to understand these matters and their potential consequences. [May 18, 5 Marks, MTP-March 21]
Answer
Specific inquiries by auditor when deviations from controls are detected
As per SA 330 "Responses to Assessed Risks", when deviations from controls upon which the auditor
intends to rely are detected, the auditor shall make specific inquiries to understand these matters and their
potential consequences, and shall determine whether:
a) The test of controls that have been performed provide an appropriate basis for reliance on the controls;
b) Additional test of controls is necessary; or
c) The potential risks of misstatement need to be addressed using substantive procedures.
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Question 29
State the factors that may assist the auditor in determining whether external confirmation procedures are
to be performed as substantive audit procedures.
Answer
Factors that may assist in determining use of external confirmations as substantive audit procedures:
As per SA 330 "Responses to Assessed Risks" factors that may assist the auditor in determining whether
external confirmation procedures are to be External Confirmations performed as substantive audit
procedures include:
1. The confirming party's knowledge of the subject matter: Responses may be more reliable if provided
by a person at the confirming party who has the requisite knowledge about the information being
confirmed.
2. The ability or willingness of the intended confirming party to respond: For example, the confirming
party:
 May not accept responsibility for responding to a confirmation request;
 May consider responding too costly or time consuming;
 May have concerns about the potential legal liability resulting from responding;
 May account for transactions in different currencies; or
 May operate in an environment where responding to confirmation requests is not a significant
aspect of day-to-day operations.
In such situations, confirming parties may not respond, may respond in a casual manner or may
attempt to restrict the reliance placed on the response.
3. The objectivity of the intended confirming party: If the confirming party is a related party of the
entity, responses to confirmation requests may be less reliable.
Question 30
Discuss the various points which auditor needs to consider in determining whether it is appropriate to use
audit evidence about operating effectiveness of controls obtained in previous audit, and if so, the length
of the time period that may elapsed before retesting. [Nov. 19, 4 Marks]
Answer
Considerations in determining appropriateness of using audit evidence about operating effectiveness
of controls obtained in previous audit:
SA 330 "Responses to Assessed Risks" deals with the auditor's responsibility to design and implement
responses to the risks of material misstatements identified and assessed by the auditor in accordance with
SA 315. Accordingly, in determining whether it is appropriate to use audit evidence about the operating
effectiveness of controls obtained in previous audits, and, if so, the length of the time period that may
elapse before retesting a control, the auditor shall consider the following:

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a) The effectiveness of other elements of internal control, including the control environment, the entity's
monitoring of controls, and the entity's risk assessment process;
b) The risks arising from the characteristics of the control, including whether it is manual or automated;
c) The effectiveness of general IT-controls;
d) The effectiveness of the control and its application by the entity, including the nature and extent of
deviations in the application of the control noted in previous audits, and whether there have been
personnel changes that significantly affect the application of the control;
e) Whether the lack of a change in a particular control poses a risk due to changing circumstances; and
f) The risks of material misstatement and the extent of reliance on the control.
Question 31
When more persuasive audit evidence is needed regarding the effectiveness of a control, it may be
appropriate to increase the extent of testing of the control as well as the degree of reliance on controls.
Discuss the matters the auditor may consider in determining the extent of test of controls. [RTP-Nov. 20]
Answer
Matters to be considered in determining the extent of test of controls.
When more persuasive audit evidence is needed regarding the effectiveness of a control, it may be
appropriate to increase the extent of testing of the control as well as the degree of reliance on controls.
Matters the auditor may consider in determining the extent of test of controls include the following:
1. The frequency of the performance of the control by the entity during the period.
2. The length of time during the audit period that the auditor is relying on the operating effectiveness of
the control.
3. The expected rate of deviation from a control.
4. The relevance and reliability of the audit evidence to be obtained regarding the operating effectiveness
of the control at the assertion level.
5. The extent to which audit evidence is obtained from tests of other controls related to the assertion.
Question 32
Explain clearly meaning of Management Representation and objective of the auditor regarding written
representation.
Or
Explain clearly objective of the auditor regarding written representation. [RTP-Nov.19]
Or
Audit evidence is all the information used by the auditor in arriving at the conclusions on which the audit
opinion is based. Written representations are necessary information that the auditor requires in connection
with the audit of the entity's financial statements. Accordingly, similar to responses to inquiries, written
representations are audit evidence. Explain stating clearly objectives of the auditor regarding written
representation. [RTP-May 20]

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Or
Explain the objectives of the auditor regarding written representations. [Jan. 21, 3 Marks, MTP-Nov. 21]
Answer
Written Representation:
 SA 580 "Written Representation" defines the term as a written statement by management provided to
the auditor to confirm certain matters or to support other audit evidence.
 Written representations in this context do not include financial statements, the assertions therein or
supporting books and records.
 Written representations are necessary information that the auditor requires in connection with the
audit, hence they are recognised as audit evidence as a response to inquiries.
 Although written representations provide necessary audit evidence, they do not provide sufficient
appropriate audit evidence on their own about any of the matters with which they deal.
 Auditor requires the written representation from the management to support other audit evidence
relevant to the Financial Statements or specific assertions in the Financial Statements.
Objective of Auditor regarding Written representation:
a) To obtain written representations from management that management believes that it has fulfilled the
fundamental responsibilities that constitute the premise on which an audit is conducted;
b) To support other audit evidence relevant to the financial statements or specific assertions in the
financial statements by means of written representations, if determined necessary by the auditor or
required by other SAs; and
c) To respond appropriately to written representations provided by management or if management does
not provide the written representations requested by the auditor.
Question 33

“Although written representations provide necessary audit evidence yet they do not provide sufficient
appropriate audit evidence on their own about any of the matters with which they deal”. Discuss.
Answer
Meaning and nature of written representations:
Refer Answer of Question 32.
Question 34

The auditor P of PAR and Co., a firm of Chartered Accountants is conducting audit of AB Industries
Ltd. The auditor requests management to provide Banker's certificate in support of Fixed deposits
whereas management provides only written representation on the matter.
Analyse how would you deal as an auditor. [RTP-May 18]

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Answer
Management Representation:
 SA 580 "Written Representation" defines the term as a written statement by management provided to
the auditor to confirm certain matters or to support other audit evidence.
 Although written representations provide necessary audit evidence, they do not provide sufficient
appropriate audit evidence on their own about any of the matters with which they deal. Furthermore,
the fact that management has provided reliable written representations does not affect the nature or
extent of other audit evidence that the auditor obtains about the fulfilment of management's
responsibilities, or about specific assertions.
 In the present case, auditor requests management to provide Banker's certificate in support of Fixed
deposits whereas management provides only written representation on the matter.
Conclusion: Auditor would further request the management to provide him with the Banker's certificate
in support of fixed deposits held by the company.
Question 35
Discuss with reference to SAs: What do you mean by "Written Representations"? As an auditor, how
would you deal if management does not provide requested written representations? [May 14, 5 Marks]
Answer
Meaning of written representation:
Refer Answer of Question 32.
Auditor’s duties if management refuses to provide written representation:
If the management does not provide one or more of the requested written representation, the auditor shall:
1. Discuss the matter with management and
2. Re-evaluate the reliability and integrity of management.
3. Take appropriate action including the determining the possible effect on the opinion.
4. Under these circumstances the auditor shall issue a disclaimer of opinion.
Question 36
Explain the procedures to be performed by auditor to obtain sufficient and appropriate audit evidence
regarding the existence and condition of inventory.
Or
How would an auditor proceed to obtain sufficient appropriate audit evidence regarding the existence
and condition of inventory? Also, state reporting requirements in this respect.
Or
ABC Ltd is engaged in manufacturing of different type of yarns. On-going through its financial statements
for the past years, it is observed that inventory is material to the financial statements.

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You as an auditor of the company wanted to obtain sufficient appropriate audit evidence regarding the
existence and condition of the inventory as appearing in the financial statements. Discuss, how would you
proceed as an auditor. [MTP-March 18, Aug. 18, Oct.18, March 19, May 20]
Answer
Procedure to be performed to obtain sufficient and appropriate evidence regarding existence and
condition of inventory:
SA 501 “Audit Evidence - Specific Considerations for selected items” deals with specific considerations by
the auditor in obtaining sufficient and appropriate audit evidence, with respect to certain aspects of
inventory, litigation and claims, and segment information in an audit of financial statements.
Accordingly, when inventory is material to the F.S., the auditor shall obtain sufficient appropriate audit
evidence regarding the existence and condition of inventory by:
a) Attendance at physical inventory counting, unless impracticable, to:
 Evaluate management instructions & procedures for recording & controlling the results of the
entity's physical inventory counting;
 Observe the performance of management's count procedures;
 Inspect the inventory;
 Perform test counts;
b) Performing audit procedures over the entity's final inventory records to determine whether they
accurately reflect actual inventory count results.
Question 37
Explain clearly the examples of matters relevant in planning attendance at physical inventory counting.
[RTP-May 20]
Answer
Matters relevant in planning attendance at physical inventory counting:
1) Nature of inventory.
2) Stages of completion of work in progress.
3) The risks of material misstatement related to inventory.
4) The nature of the internal control related to inventory.
5) Whether adequate procedures are expected to be established and proper instructions issued for
physical inventory counting.
6) The timing of physical inventory counting.
7) Whether the entity maintains a perpetual inventory system.
8) The locations at which inventory is held, including the materiality of the inventory and the risks of
material misstatement at different locations, in deciding at which locations attendance is appropriate.
9) Whether the assistance of an auditor's expert is needed.

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Question 38
Explain the auditor’s procedures w.r.t. determination of existence and condition of inventory under the
following circumstances:
a) Inventory count conducted at a date other than balance sheet.
b) To attend the inventory is impracticable.
Answer
Auditor's procedures w.r.t. determination of existence and condition of inventory:
SA 501 "Audit Evidence - Specific Considerations for selected items" deals with specific considerations by
the auditor in obtaining sufficient and appropriate audit evidence, with respect to certain aspects of
inventory, litigation and claims, and segment information in an audit of financial statements.
Inventory count conducted a date other than balance sheet: If physical inventory counting is conducted
at a date other than the date of the financial statements, the auditor shall, in addition to the general
procedures, perform audit procedures to obtain audit evidence about whether changes in inventory
between the count date and the date of the financial statements are properly recorded.
To attend the inventory is impracticable:
 If attendance at physical inventory counting is impracticable, the auditor shall perform alternative
audit procedures to obtain sufficient appropriate audit evidence regarding the existence and condition
of inventory.
 If it is not possible to do so, the auditor shall modify the opinion in the auditor’s report in accordance
with SA 705.
Question 39
“P India” Ltd. is a manufacturer of various sports products. The company is having several cases of
litigation pending in courts. The auditor wanted to identify litigation and claims, which may give rise to
risk of material misstatements. Suggest the audit procedures in the given case.
[May 19, 4 Marks, MTP-May 20, April 21]
Answer
Audit Procedure for identifying litigation and claim:
SA 501 “Audit Evidence - Specific Considerations for selected items” deals with specific considerations by
the auditor in obtaining sufficient and appropriate audit evidence, with respect to certain aspects of
inventory, litigation and claims, and segment information in an audit of financial statements.
Accordingly,
 The auditor shall design and perform audit procedures in order to identify litigation and claims
involving the entity which may give rise to a risk of material misstatement, including:
(a) Inquiry of management and, where applicable, others within the entity, including in-house legal
counsel;
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(b) Reviewing minutes of meetings of those charged with governance and correspondence between
the entity and its external legal counsel; and
(c) Reviewing legal expense accounts.

 If the auditor assesses a risk of material misstatement regarding litigation or claims that have been
identified, or when audit procedures performed indicate that other material litigation or claims may
exist, the auditor shall, in addition to the procedures required by other SAs, seek direct communication
with the entity’s external legal counsel. If law, regulation or the respective legal professional body
prohibits the entity's external legal counsel from communicating directly with the auditor, the auditor
shall perform alternative audit procedures.

 The auditor shall modify the opinion in the auditor's report in accordance with SA 705, if:
a) management refuses to give the auditor permission to communicate or meet with the entity's
external legal counsel, or the entity's external legal counsel refuses to respond appropriately to the
letter of inquiry, or is prohibited from responding; and
b) the auditor is unable to obtain sufficient appropriate audit evidence by performing alternative
audit procedures.
Question 40

TRM Ltd. is a company engaged in manufacture of beauty products. It has hair care segment, skin
care segment and kids’ beauty products. The auditor wants to obtain sufficient appropriate audit
evidence regarding the presentation and disclosure of segment information in accordance with the
applicable financial reporting framework. Suggest the audit procedures in the given case.
[MTP - March 21]
Answer
Audit procedures to obtain evidences regarding presentation and disclosure of segment information:
The auditor shall obtain sufficient appropriate audit evidence regarding the presentation and disclosure
of segment information in accordance with the applicable financial reporting framework by:
(1) Obtaining an understanding of the methods used by management in determining segment
information. Further,
(i) Evaluating whether such methods are likely to result in disclosure in accordance with the
applicable financial reporting framework; and
(ii) Where appropriate, testing the application of such methods; and
(2) Performing analytical procedures or other audit procedures appropriate in the circumstances.

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Question 41
Define the following:
(i) Positive confirmation request
(ii) Negative confirmation request
(iii) Non-response
(iv) Exception
Answer
Definition of various terms:
SA 505 “External Confirmations” defines the various terms as follows:
(i) Positive confirmation request: A request that the confirming party respond directly to the auditor
indicating whether the confirming party agrees or disagrees with the information in the request, or
providing the requested information.
(ii) Negative confirmation request: A request that the confirming party respond directly to the auditor
only if the confirming party disagrees with the information provided in the request.
(iii) Non-response: A failure of the confirming party to respond, or fully respond, to a positive
confirmation request, or a confirmation request returned undelivered.
(iv) Exception: A response that indicates a difference between information requested to be confirmed, or
contained in the entity's records, and information provided by the confirming party.
Question 42
What is meant by external confirmation? Mention four situations where external confirmation may be
useful for auditors.
Or
Explain the process of External Confirmation. Give some examples where external confirmation may be
used as audit evidence. [Nov. 11, 8 Marks]
Answer
External confirmation:
SA 505 "External Conformation" deals with the auditor's use of external confirmation procedures to obtain
audit evidence.
Meaning of External Conformation: SA 505 defined external confirmation as Audit evidence obtained as
a direct written response to the auditor from a third party (the confirming party), in paper form, or by
electronic or other medium. External Confirmation is of two types:
1. Positive Confirmation request: A request that the confirming party respond directly to the auditor
indicating whether the confirming party agrees or disagrees with the information in the request, or
providing the requested information.

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2. Negative Confirmation request: A request that the confirming party respond directly to the auditor
only if the confirming party disagrees with the information provided in the request.
Process of obtaining External Confirmation:
(a) Determining the information to be confirmed or requested: It may be with respect to
 Account balances & their elements.
 Terms of agreements/contracts/transactions.
(b) Selecting the appropriate confirming party
(c) Designing the confirmation requests: It also includes determining that requests are properly
addressed, and contain return information for responses to be sent directly to the auditor.
(d) Sending the requests, including follow-up requests when applicable, to the confirming party.
Situations where External Confirmation may be used: Refer answer of Question 27.
Question 43
When using external confirmation procedures, the auditor shall maintain control over external
confirmation requests including sending the requests, including follow-up requests when applicable, to
the confirming party. Explain the other points as to when using external confirmation procedures, the
auditor would be required to maintain control over external confirmation requests. [RTP-May 20]
Answer
Control over External Confirmation requests:
As per SA 505 “External Confirmations” when using external confirmation procedures, the auditor shall
maintain control over external confirmation requests, including:
a) Determining the information to be confirmed or requested;
b) Selecting the appropriate confirming party;
c) Designing the confirmation requests, including determining that requests are properly addressed and
contain return information for responses to be sent directly to the auditor; and
d) Sending the requests, including follow-up requests when applicable, to the confirming party.
Question 44
What are the factors to be considered while designing a confirmation request? [Nov. 12, 8 Marks]
Answer
Factors to be considered while designing a confirmation request:
SA 505 “External Confirmation” deals with the auditor's use of external confirmation procedures to obtain
audit evidence. Accordingly, while designing a confirmation request auditor should consider the
following factors:
(i) Assertion being addressed.
(ii) Specific identified Risk of Material Misstatement.

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(iii) Layout & presentation of request.

(iv) Prior experience on the audit.
(v) Method of communication.
(vi) Management authorisation/encouragement to Confirming Party to respond to auditor.
(vii) Ability of Confirming Party to provide/confirm requested information.
Question 45
While conducting the audit of Amrit Ltd., the auditor A of ABC and Associates, Chartered Accountants
observes that there are a large number of trade receivables standing in the books of account as on 31 st
March. The auditor wanted to send confirmation request to a few large trade receivables but
the management refused the auditor to send confirmation request. How would the auditor proceed?
[Nov. 20, 4 Marks]
Answer
Management refusal to allow auditor to send confirmation request:
 SA 505, “External Confirmations”, establishes standards on the auditor's use of external confirmation
as a means of obtaining audit evidence. It requires that the auditor should employ external
confirmation procedures in consultation with the management.
 The auditor may come across certain situations in which the management may request him not to seek
external confirmation from certain parties because of some reasons, for example, due to a dispute with
the particular creditor or debtor.
 In such cases, if management refuses to allow the auditor to send a confirmation request, the auditor
shall:
1. Inquire as to management's reasons for the refusal, and seek audit evidence as to their validity and
reasonableness;
2. Evaluate the implications of management's refusal on the auditor's assessment of the relevant risks
of material misstatement, including the risk of fraud, and on the nature, timing and extent of other
audit procedures; and
3. Perform alternative audit procedures designed to obtain relevant and reliable audit evidence.
 If the auditor concludes that management's refusal to allow the auditor to send a confirmation request
is unreasonable, or the auditor is unable to obtain relevant and reliable audit evidence
from alternative audit procedures, the auditor shall communicate with TCWG in accordance with SA
260. The auditor also shall determine the implications for the audit and the auditor's opinion in
accordance with SA 705.
 The auditor should also ask the management to submit its request in a written form, detailing therein
the reasons for such a request.

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Question 46
Write short note on: Reliability of external confirmations. [Nov. 10, 4 Marks]
Answer
Reliability of external confirmations:
As per SA 505 “External Confirmation”, the reliability of external confirmations depends among other
factors, upon the application of appropriate procedures by the auditor in designing the external
confirmation request, performing the external confirmation procedures, and evaluating the results of the
external confirmation procedures. The factors that affect the reliability of confirmations include:
a) The control which the auditor exercises over confirmation request and responses;
b) The character of respondents; and
c) Any restrictions included in the response or imposed by the management.
If the auditor determines that a response to a confirmation request is not reliable, the auditor shall evaluate
the implications on the assessment of the relevant risks of material misstatement, including the risk of
fraud, and on the related nature, timing and extent of other audit procedures.
Question 47
CA Rohit is appointed as an auditor of Grace Ltd., he wants to design a suitable Confirmation request
letter for a few debtors of Grace Ltd. As a senior auditor of the firm, explain to him with reference to SA
505 “External Confirmation” all the conditions that should be present to use Negative Confirmation
requests as the sole substantive audit procedure to address an assessed risk of material misstatement at
the assertion level. [July 21, 4 Marks]
Answer
Conditions that should be present to use Negative Confirmation requests as the sole substantive audit
procedure to address an assessed risk of material misstatement at the assertion level:
Negative confirmations provide less persuasive audit evidence than positive confirmations. Accordingly,
the auditor shall not use negative confirmation requests as the sole substantive audit procedure to address
an assessed risk of material misstatement at the assertion level unless all of the following are present:
a) The auditor has assessed the risk of material misstatement as low and has obtained sufficient
appropriate audit evidence regarding the operating effectiveness of controls relevant to the assertion;
b) The population of items subject to negative confirmation procedures comprises a large number of
small, homogeneous, account balances, transactions or conditions;
c) A very low exception rate is expected; and
d) The auditor is not aware of circumstances or conditions that would cause recipients of negative
confirmation requests to disregard such requests.

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Question 48
Write short note on: Initial audit engagement. [May 12, 4 Marks]
Answer
Initial audit engagements:
As per SA 510 “Initial Audit Engagements - Opening Balances”, initial audit engagement is an engagement
in which either:
(i) The financial statements for the prior period were not audited; or
(ii) The financial statements for the prior period were audited by a predecessor auditor.
Audit Procedures in case of Initial Audit Engagement: Refer Question 50.
Question 49
Discuss the objective of Auditor with respect to Opening balances - in conducting an initial audit
engagement.
Answer
Objectives of Auditor w.r.t. Opening balances in case of Initial audit engagement:
As per SA 510 “Initial Audit Engagements- Opening Balances”, the objective of the Auditor while
conducting an initial audit engagement with respect to opening balances is to obtain sufficient appropriate
audit evidence so that the-
(i) Opening balances of the preceding period have been correctly brought forward to the current period;
(ii) Opening balances do not contain any misstatement that materially affect the current period's
financial statements; and
(iii) Appropriate accounting policies reflected in the opening balances have been consistently applied in
the current period's financial statements, or changes thereto are properly accounted for and
adequately presented and disclosed in accordance with the applicable financial reporting
framework.
Question 50
What are the audit procedures to be followed by a statutory auditor in the audit of opening balances if the
financial statements for the preceding year were audited by another auditor?
Or
Discuss with reference to SA '510' Initial Audit Engagements – “Opening Balances”, the procedures the
auditor should undertake in respect of opening balances for a new audit engagement. [May 17, 5 Marks]
Answer
Audit procedures for verification of opening balances in case of initial audit engagement:
As per SA 510 “Initial Audit Engagements-Opening Balances”, while verifying the opening balances in
case of initial audit engagement, auditor need to perform following procedures:

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 The auditor shall read the most recent financial statements, if any, and the predecessor auditor's report
thereon, if any, for information relevant to opening balances, including disclosures.
 The auditor shall obtain sufficient appropriate audit evidence about whether the opening balances
contain misstatements that materially affect the current period's F.S. by:
a) Determining whether the prior period's closing balances have been correctly brought forward to
the current period or, when appropriate, any adjustments have been disclosed as prior period items
in the current year's Statement of Profit and Loss;
b) Determining whether the opening balances reflect the application of appropriate accounting
policies; and
c) Performing one or more of the following:
 Where the prior year F.S. were audited, perusing the copies of the audited F.S. including the
other relevant documents relating to the prior period F.S.;
 Evaluating whether audit procedures performed in the current period provide evidence
relevant to the opening balances; or
 Performing specific audit procedures to obtain evidence regarding the opening balances.
 If the auditor obtains audit evidence that the opening balances contain misstatements that could
materially affect the current period's F.S., the auditor shall perform such additional audit procedures
as are appropriate in the circumstances to determine the effect on the current period's F.S.
 If the auditor concludes that such misstatements exist in the current period's F.S., the auditor shall
communicate the misstatements with the appropriate level of management and TCWG in accordance
with SA 450.
Question 51
M/s Pankaj & Associates, Chartered Accountants, have been appointed as an auditor of ABC Limited. CA
Pankaj did not apply any audit procedures regarding opening balances. He argued that since financial
statements were audited by the predecessor auditor therefore he is not required to verify them. Is CA
Pankaj correct in his approach? [Nov. 18, 5 Marks]
Answer
Auditor's procedures w.r.t. Opening balances in case of Initial audit engagement:
 As per SA 510 “Initial Audit Engagements-Opening Balances”, in case of initial audit engagement
auditor shall obtain sufficient appropriate audit evidence about whether the opening balances contain
misstatements that materially affect the current period's F.S. by:
a) Determining whether the prior period's closing balances have been correctly brought forward to
the current period or, when appropriate, any adjustments have been disclosed as prior period items
in the current year's Statement of Profit and Loss;

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b) Determining whether the opening balances reflect the application of appropriate accounting
policies; and
c) Performing one or more of the following:
(i) Where the prior year F.S. were audited, perusing the copies of the audited F.S. including
the other relevant documents relating to the prior period F.S.;
(ii) Evaluating whether audit procedures performed in the current period provide evidence
relevant to the opening balances; or
(iii) Performing specific audit procedures to obtain evidence regarding the opening balances.
 In the present case, Mis Pankaj & Associates, Chartered Accountants, have been appointed as an
auditor of ABC Limited. CA Pankaj did not apply any audit procedures regarding opening balances.
He argued that since financial statements were audited by the predecessor auditor therefore, he is not
required to verify them.
Conclusion: Approach of Mr. Pankaj is not correct. He needs to apply the procedures as stated in SA 510.
Question 52
Auditors of Mis Tender India (P) Ltd. were changed for the accounting year 2021-22. The closing inventory
of the company as on 31.3.2021 amounting to ` 100 lacs continued as it is and became closing inventory as
on 31.3.2022. The auditors of the company propose to exclude from their audit programme the audit of
closing inventory ` 100 lacs on the understanding that it pertains to the preceding year which was audited
by another auditor. [MTP-Oct. 19]
Answer
Verification of Inventory:
 As per SA 510 “Initial Audit Engagements - Opening Balances”, in conducting an initial audit
engagement, the objective of the auditor with respect to opening balances is to obtain sufficient
appropriate audit evidence about whether-
(i) Opening balances contain misstatements that materially affect the current period's financial
statements; and
(ii) Appropriate accounting policies reflected in the opening balances have been consistently
applied in the current period's financial statements, or changes thereto are properly accounted
for and adequately presented and disclosed in accordance with the applicable financial
reporting framework.
 When the financial statements for the preceding period were audited by predecessor auditor, the
current auditor may be able to obtain sufficient appropriate audit evidence regarding opening balances
by perusing the copies of the audited financial statements including the other relevant documents
relating to the prior period financial statements such as supporting schedules to the audited financial

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statements. Ordinarily, the current auditor can place reliance on the closing balances contained in the
financial statements for the preceding period, except when during the performance of audit
procedures for the current period the possibility of misstatements in opening balances is indicated.
 General principles governing verification of assets require that the auditor should confirm that assets
have been correctly valued as on the Balance Sheet date.
 The contention of the management that the inventory has not undergone any change cannot be
accepted, it forms part of normal duties of auditor to ensure that the figures on which he is expressing
opinion are correct and properly valued. Moreover, it is also quite likely that the inventory lying as it
is might have deteriorated and the same need to be examined. The auditor is advised not to exclude
the audit of closing inventory from his audit programme.
Question 53
The nature of related party relationships and transactions may, in some circumstances, give rise to higher
risks of material misstatement of the financial statements than transactions with unrelated parties. Explain
with the help of at least three examples. [RTP-May 20]
Answer
Nature of Related Party Relationships & Transactions:
Many related party transactions are in the normal course of business. In such circumstances, they may
carry no higher risk of material misstatement of the financial statements than similar transactions with
unrelated parties.
However, the nature of related party relationships and transactions may, in some circumstances, give rise
to higher risks of material misstatement of the financial statements than transactions with unrelated
parties. For example:
a) Related parties may operate through an extensive and complex range of relationships and structures,
with a corresponding increase in the complexity of related party transactions.
b) Information systems may be ineffective at identifying or summarizing transactions and outstanding
balances between an entity and its related parties.
c) Related party transactions may not be conducted under normal market terms and conditions; for
example, some related party transactions may be conducted with no exchange of consideration.
Question 54
Explain the responsibilities of auditor in relation to related parties.
Or
There are specific accounting and disclosure requirements for related party relationships, transactions and
balances to enable users of the financial statements to understand their nature and effects on the financial
statements. Analyse and explain stating the responsibility of auditor in this regard.
[RTP-May 19, Nov. 20]
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Answer
Responsibilities of auditor in relation to related parties:
SA 550 “Related Parties” deals with the auditor's responsibilities regarding related party relationships and
transactions when performing an audit of financial statements. Accordingly,
 Many financial reporting frameworks establish specific accounting and disclosure requirements for
related party relationships, transactions and balances to enable users of the financial statements to
understand their nature and effects on the-financial statements.
 Where the applicable FRF establishes such requirements, the auditor has a responsibility to perform
audit procedures to identify, assess and respond to the RMM arising from the entity's failure to
appropriately account for or disclose related party relationships, transactions or balances in accordance
with the requirements of the framework.
 Even if the applicable FRF establishes minimal or no related party requirements, the auditor
nevertheless needs to obtain an understanding of the entity's related party relationships and
transactions sufficient to be able to conclude whether the financial statements, insofar as they are
affected by those relationships and transactions:
a) achieve a true and fair presentation; or
b) are not misleading.
 In addition, an understanding of the entity's related party relationships and transactions is relevant to
the auditor's evaluation of whether one or more fraud risk factors are present as required by SA 240
because fraud may be more easily committed through related parties.
 Owing to the inherent limitations of an audit, there is an unavoidable risk that some material
misstatements of the financial statements may not be detected, even though the audit is properly
planned and performed in accordance with the SAs. In the context of related parties, the potential
effects of inherent limitations on the auditor's ability to detect material misstatements are
greater for such reasons as the following:
a) Management may be unaware of the existence of all related party relationships and transactions,
particularly if the applicable financial reporting framework does not establish related party
requirements.
b) Related party relationships may present a greater opportunity for collusion, concealment or
manipulation by management.
 Planning and performing the audit with professional skepticism as required by SA 200 is therefore
particularly important in this context, given the potential for undisclosed related party relationships
and transactions.
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Question 55
Write short note on: Identification of significant related party transaction outside business.
[Nov. 13, 4 Marks]
Or
Discuss the following: With reference to SA 550 Identification of significant related party transaction
outside the entity's normal course of business. [May 16, 5 Marks]
Answer
Identification of Significant Related Party Transaction outside business:
SA 550 “Related Parties” deals with the auditor's responsibilities regarding related party relationships and
transactions when performing an audit of financial statements. Accordingly, for identified significant
related party transactions outside the entity's normal course of business, the auditor shall:
a) Inspect underlying contracts/agreements and evaluate whether:
 Business rationale (or lack thereof) suggests that transactions entered to engage in fraudulent
financial reporting or to conceal misappropriation of assets.
 Terms of transactions consistent with management's explanations.
 Transactions appropriately accounted for/disclosed in accordance with FRF.
b) Obtain evidence that transactions have been appropriately authorised & approved.
Question 56
The auditor has a responsibility to perform audit procedures to identify, assess and respond to the risks
of material misstatement arising from the entity's failure to appropriately account for related party
relationships, transactions or balances.
During the audit, the auditor should maintain alertness for related party information while reviewing
records and documents. He may inspect the records or documents that may provide information about
related party relationships and transactions. Explain in detail with examples. [RTP-Nov.21]
Answer
Inspection of Records or documents to obtain information about related party relationship and
transactions:
During the audit, the auditor should maintain alertness for related party information while reviewing
records and documents. He may inspect the following records or documents that may provide
information about related party relationships and transactions, for example:
1) Entity income tax returns.
2) Information supplied by the entity to regulatory authorities.
3) Shareholder registers to identify the entity's principal shareholders.
4) Statements of conflicts of interest from management and those charged with governance.

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5) Records of the entity's investments and those of its pension plans.

6) Contracts and agreements with key management or those charged with governance.
7) Significant contracts and agreements not in the entity's ordinary course of business.
8) Specific invoices and correspondence from the entity's professional advisors.
9) Life insurance policies acquired by the entity.
10) Significant contracts re-negotiated by the entity during the period.
11) Internal auditors' reports.
12) Documents associated with the entity's filings with a securities regulator e.g., prospectus.
Question 57
Discuss the concept of “True and Fair”. [May 05, 8 Marks, Nov. 12, 6 Marks]
Answer
True and fair view:
 The concept of “true and fair” is a fundamental concept in auditing. The phrase “true and fair” in the
auditor's report signifies that the auditor is required to express his opinion as to whether the state of
affairs and the results of the entity as ascertained by him in the course of his audit are truly and fairly
represented in the accounts under audit.
 What constitutes “true and fair” has not been defined in the legislation.
 Sec. 128(1) of Companies Act, 2013 provides that every company shall prepare and keep at its
registered office books of account and other relevant books and papers and financial statement for
every financial year which gives a true and fair view of the state of the affairs of the company.
 Sec. 129(1) of Companies Act, 2013 provides that the financial statements shall give a true and fair view
of the state of affairs of the company or companies, comply with the accounting standards notified
under section 133 and shall be in the form or forms as may be provided for different class or classes of
companies in Schedule III.
 Sec. 143(2) of Companies Act, 2013 requires the auditor to make a report to the members of the
company indicating therein that, to the best of his information and knowledge, the accounts and
financial statements give a true and fair view of the state of the company's affairs as at the end of its
financial year & profit or loss & cash flow for the year & other matters as may be prescribed.
In specific terms to ensure truth and fairness, auditor is required to examine the accounts with a view to
verify that all assets and liabilities, income and expenses are stated at the amounts which are in accordance
with accounting principles and policies and no material item has been omitted.
Question 58
What constitutes true and fair view is a matter of auditor's judgment, but some specific points must be
seen by the auditor to ensure true and fair view.

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Or
What constitutes a ‘true and fair’ view, is the matter of an auditor's judgment in the particular
circumstances of a case. In order to ensure 'true and fair' view, auditor has to review certain points.
Mention any such 5 (five) points in brief. [May 18, 5 Marks]
Answer
Specific points to be seen to ensure true and fair view:
The concept of "true and fair" is a fundamental concept in auditing. The phrase "true and fair" in the
auditor's report signifies that the auditor is required to express his opinion as to whether the state of affairs
and the results of the entity as ascertained by him in the course of his audit are truly and fairly represented
in the accounts under audit.
What constitutes "true and fair" has not been defined in the legislation. In specific terms to ensure truth
and fairness, an auditor has to see that:
a) the assets are neither undervalued or overvalued;
b) no material asset is omitted;
c) the charge on assets, if any, is disclosed;
d) material liabilities should not be omitted, and liabilities are neither undervalued or overvalued;
e) accounting policies have been followed consistently;
f) all unusual, exceptional, non-recurring items have been disclosed separately;
g) accounts have been drawn as per requirement of Schedule III to the Companies Act; and
h) the accounts have been drawn in compliance to the relevant AS.
In case of deviation from AS, disclosure should be made of the reasons for such deviation and financial
effects, if any arising due to such deviation.
Question 59
Write short note on: Subsequent Events.
Or
Explain the meaning of term "Subsequent Events" as used in SA 560. Should all types of subsequent events
be considered by the auditor in attest functions? [May 12, 8 Marks]
Answer
Subsequent Events:
SA 560 “Subsequent Events” defined the term as:
a) Events occurring between the date of the financial statements and the date of the auditor report, and
b) Facts that become known to the auditor after the date of the auditor's report.
Consideration of subsequent events by the auditor:
In respect of subsequent events, auditor is required to consider the followings:

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 Obtain sufficient appropriate audit evidence about whether events occurring between the date of the
financial statements and the date of the auditor's report that require adjustment of, or disclosure in,
the financial statements as per the requirement of AS-4 "Events Occurring after the Balance Sheet Date"
are appropriately reflected in those financial statements; and
 Respond appropriately to facts that become known to the auditor after the date of the auditor's report,
that, had they been known to the auditor at that date, may have caused the auditor to amend the
auditor's report.
Question 60
“The auditor should consider the effect of subsequent events on the financial statements and auditor's
report according to SA 560”. Comment. [MTP-Oct-19]
Or
The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence that
all events occurring between the date of the financial statements and the date of the auditor's report that
require adjustment of, or disclosure in, the financial statements have been identified. Explain.
[RTP-May 19]
Or
The auditor shall perform audit procedures designed to obtain sufficient appropriate audit evidence that
all events occurring between the date of the financial statements and the date of the auditor's report, that
requires adjustment of, or disclosure in, the financial statements have been identified. With reference to
SA 560, what are the audit procedures included in the auditor's risk assessment? [July 21, 4 Marks]
Answer
Consideration of Effect of subsequent events:
SA 560 “Subsequent Events” requires the auditor to obtain sufficient appropriate audit evidence about
whether events occurring between the date of the financial statements and the date of the auditor's report
that require adjustment of, or disclosure in, the financial statements are appropriately reflected in those
financial statements. For this purpose, auditor shall perform the following:
a) Obtain an understanding of the procedures through which management has identified subsequent
events.
b) Inquiring of management as to occurrence of Subsequent events which affect the financial statements.
c) Read minutes of management meetings that have been held after the date of the financial statements.
d) Read the entity's latest subsequent interim financial statements, if any.
e) If auditor identifies events that require adjustment or disclosure in the financial statements, the auditor
should determine whether each such event is appropriately reflected in the financial statements.

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f) The auditor shall request the management to provide a "Written Representation" that all events
occurring subsequent to the date of the financial statements and requires adjustment or disclosure have
been adjusted or disclosed.
Question 61
The auditor has no obligation to perform any audit procedures regarding the financial statements after the
date of the auditor's report. However, when, after the date of the auditor's report but before the date the
financial statements are issued, a fact becomes known to the auditor that, had it been known to the auditor
at the date of the auditor's report, may have caused the auditor to amend the auditor's report. Explain the
auditor's obligation in the above situation. [RTP-May 20, MTP-Nov. 21]
Answer
Audit Procedures regarding Facts Which Become Known to the Auditor After the Date of the Auditor's
Report but Before the Date the F.S. are Issued:
As per SA 560 "Subsequent Events" the auditor has no obligation to perform any audit procedures
regarding the financial statements after the date of the auditor's report. However, when, after the date of
the auditor's report but before the date the financial statements are issued, a fact becomes known to the
auditor that, had it been known to the auditor at the date of the auditor's report, may have caused the
auditor to amend the auditor's report, the auditor shall:
a) Discuss the matter with management and, where appropriate, those charged with governance,
b) Determine whether the financial statements need amendment and, if so,
c) Inquire how management intends to address the matter in the financial statements.
Question 62
Enquiry from management is helpful for auditor to evaluate subsequent events. Discuss specific enquiries
in reference of SA 560, which might have effect on the financial statements. [Nov. 14, 5 Marks]
Or
In the context of SA 560 "Subsequent events", state specific enquiries on matters by an auditor which may
have effect on Financial Statements. [Nov. 17, 5 Marks]
Answer
Specific enquiries to be conducted in reference to SA 560:
SA 560 "Subsequent Events" requires the auditor to obtain sufficient & appropriate audit evidence to
ensure that events which require adjustments or disclosure in the financial statements have been
identified. For this purpose, auditor is required to inquire the management as to occurrence of Subsequent
events which affect the financial statements. Specific inquiries as specified by SA 560 include the following:
1. Whether new commitments, borrowings or guarantees have been entered into.
2. Whether sales or acquisitions of assets have occurred or are planned.

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3. Whether there have been increases in capital or issuance of debt instruments, such as the issue of new
shares or debentures, or an agreement to merge or liquidate has been made or is planned.
4. Whether any assets have been appropriated by government or destroyed, for example, by fire or flood.
5. Whether there have been any developments regarding contingencies.
6. Whether any unusual accounting adjustments have been made or are contemplated.
7. Whether any events have occurred or are likely to occur that will bring into question the
appropriateness of accounting policies used in the financial statements, as would be the case, for
example, if such events call into question the validity of the going concern assumption.
8. Whether any events have occurred that are relevant to the measurement of estimates or provisions
made in the financial statements.
9. Whether any events have occurred that are relevant to the recoverability of assets.
Question 63
SA 560, "Subsequent Events" deals with the auditor's responsibilities relating to subsequent events in an
audit of financial statements. Financial statements may be affected by certain events that occur after the
date of the financial statements. Many financial reporting frameworks specifically refer to such events.
Explain those events and also define subsequent events. [RTP-Nov.21]
Answer
Subsequent Events:
SA 560, "Subsequent Events" deals with the auditor's responsibilities relating to subsequent events in an
audit of financial statements. Financial statements may be affected by certain events that occur after the
date of the financial statements. Many financial reporting frameworks specifically refer to such events.
Such financial reporting frameworks ordinarily identify two types of events:
a) Those that provide evidence of conditions that existed at the date of the financial statements; and
b) Those that provide evidence of conditions that-arose after the date of the financial statements.
SA 700 explains that the date of the auditor's report informs the reader that the auditor has considered the
effect of events and transactions of which the auditor becomes aware and that occurred up to that date.
Subsequent events refer to events occurring between the date of the financial statements and the date of
the auditor's report, and facts that become known to the auditor after the date of the auditor's report.
Question 64
On the basis of which assumption, the financial statements of a company are prepared. Explain. Also
describe the objectives of the auditor regarding going concern. [RTP-May 19]
Or
When the use of the going concern basis of accounting is appropriate, assets and liabilities are recorded
on the basis that the entity will be able to realize its assets and discharge its liabilities in the normal course
of business. Explain stating also the objective of the auditor regarding going concern. [RTP-Nov.19]

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Answer
Going Concern Basis of Accounting
As per AS-l "Disclosure of Accounting Policies, financial statements are prepared on the basis of three
assumptions (i) Going Concern (ii) consistency and (iii) Accrual. Under the going concern basis of
accounting, the financial statements are prepared on the assumption that the entity is a going concern and
will continue its operations for the foreseeable future. When the use of the going concern basis of
accounting is appropriate, assets and liabilities are recorded on the basis that the entity will be able to
realize its assets and discharge its liabilities in the normal course of business.
Objectives of the auditor: As per SA 570 "Going Concern", objectives of the auditor regarding going
concern are:
a) To obtain written representations from management and, where appropriate, those charged with
governance that they believe that they have fulfilled their responsibility for the preparation of the
financial statements and for the completeness of the information provided to the auditor;
b) To support other audit evidence relevant to the financial statements or specific assertions in the
financial statements by means of written representations, if determined necessary by the auditor or
required by other SAs; and
c) To respond appropriately to written representations provided by management and, where
appropriate, those charged with governance, or if management or, where appropriate, those charged
with governance do not provide the written representations requested by the auditor.
Question 65
Write short note on: Procedures to be performed by the auditor in expressing opinion on 'going concern'
assumption. [Nov. 10, 4 Marks]
Or
Explain with reference to relevant SA: Appropriateness of going concern assumption.
Answer
Procedures to be performed in expressing opinion on going concern assumption:
SA 570 "Going Concern" deals with the auditor's responsibility with respect to management's use of the
going concern assumption in the preparation and presentation of the financial statements. As per SA 570,
auditor may perform the following procedures for this purpose:
1. Analysing and discussing cash flow, profit and other relevant forecasts with management.
2. Analysing and discussing the entity's latest available interim financial statements.
3. Reading the terms of debentures and loan agreements and determining whether any have been
breached.
4. Reading minutes of the meetings of shareholders, those charged with governance and relevant
committees for reference to financing difficulties.
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5. Inquiring of the entity's legal counsel regarding the existence of litigation and claims and the
reasonableness of management's assessments of their outcome and the estimate of their financial
implications.
6. Confirming the existence, legality and enforceability of arrangements to provide or maintain financial
support with related and third parties and assessing the financial ability of such parties to provide
additional funds.
7. Evaluating the entity's plans to deal with unfilled customer orders.
8. Performing audit procedures regarding subsequent events to identify those that either mitigate or
otherwise affect the entity's ability to continue as a going concern.
9. Confirming the existence, terms and adequacy of borrowing facilities.
10. Obtaining and reviewing reports of regulatory actions.
11. Determining the adequacy of support for any planned disposals of assets.
Question 66
Explain going concern assumption with reference to SA 570. State some financial events or conditions that
may case doubt about going concern assumption. [May 12, 8 Marks]
Or
Give examples of financial events or conditions that, individually or collectively, may cast significant
doubt on the entity's ability to continue as a going concern. [RTP-Nov.21]
Answer
Financial Indicators to be considered for evaluation of Going Concern Assumption:
SA 570 "Going Concern" deals with the auditor's responsibility in the audit of financial statements with
respect to management's use of the going concern assumption in the preparation and presentation of the
financial statements. As per SA 570, financial indicators to be considered for evaluation of going concern
are listed below:
1. Net liability or net current liability position.
2. Fixed-term borrowings approaching maturity without realistic prospects of renewal or repayment; or
excessive reliance on short-term borrowings to finance long-term assets.
3. Indications of withdrawal of financial support by creditors.
4. Negative operating cash flows indicated by historical or prospective financial statements.
5. Adverse key financial ratios.
6. Substantial operating losses or significant deterioration in the value of assets used to generate cash
flows.
7. Arrears or discontinuance of dividends.
8. Inability to pay creditors on due dates.

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9. Inability to comply with the terms of loan agreements.

10. Change from credit to cash-on-delivery transactions with suppliers.
11. Inability to obtain financing for essential new product development or other essential investments.
Question 67

Discuss with reference to SAs: Operating conditions that may cast doubt going concern assumption.
[May 14, 5 Marks]
Answer
Operating conditions that may cast doubt going concern assumption:
SA 570 "Going Concern" deals with the auditor's responsibility in the audit of financial statements with
respect to management's use of the going concern assumption in the preparation and presentation of the
financial statements. As per SA 570, operating conditions that may cast doubt going concern assumption
are listed below:
1. Management intentions to liquidate the entity or to cease operations.
2. Loss of key management without replacement.
3. Loss of a major market, key customer(s), franchise, license, or principal supplier(s).
4. Labour difficulties.
5. Shortages of important supplies.
6. Emergence of a highly successful competitor.
Question 68

Management's assessment of the entity's ability to continue as a going concern involves making a
judgment about inherently uncertain future outcomes of events or conditions. What are relevant factors to
that judgment? [Jan. 21, 4 Marks]
Answer
Factors relevant to Management Assessment of Going Concern:
Management's assessment of the entity's ability to continue as a going concern involves making a
judgment, at a particular point in time, about inherently uncertain future outcomes of events or conditions.
The following factors are relevant to that judgment:
 The degree of uncertainty associated with the outcome of an event or condition increases significantly
the further into the future an event or condition or the outcome occurs. For that reason, most financial
reporting frameworks that require an explicit management assessment specify the period for which
management is required to take into account all available information.
 The size and complexity of the entity, the nature and condition of its business and the degree to which
it is affected by external factors affect the judgment regarding the outcome of events or conditions.

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 Any judgment about the future is based on information available at the time at which the judgment is
made. Subsequent events may result in outcomes that are inconsistent with judgments that were
reasonable at the time they were made.
Question 69
When performing risk assessment procedures as required by SA 315, the auditor shall consider whether
events or conditions exist that may cast significant doubt on the entity's ability to continue as a going
concern. In so doing, the auditor has determined that management of XYZ Ltd has already performed a
preliminary assessment of the entity's ability to continue as a going concern. Explain how would auditor
of XYZ Ltd proceed in the above case.
Also explain how would the auditor proceed if such an assessment has not yet been performed by the
management. [RTP - May 21]
Answer
Auditor's procedures while assessing going concern basis of accounting:
When performing risk assessment procedures as required by SA 315, the auditor shall consider whether
events or conditions exist that may cast significant doubt on the entity's ability to continue as a going
concern.
In so doing, the auditor shall determine whether management has already performed a preliminary
assessment of the entity's ability to continue as a going concern, and:
 If such an assessment has been performed, the auditor shall discuss the assessment with management
and determine whether management has identified events or conditions that, individually or
collectively, may cast significant doubt on the entity's ability to continue as a going concern and, if so,
management's plans to address them; or
 If such an assessment has not yet been performed, the auditor shall discuss with management the basis
for the intended use of the going concern basis of accounting, and inquire of management whether
events or conditions exist that, individually or collectively, may cast significant doubt on the entity's
ability to continue as a going concern.
Question 70
As described in SA 200, the potential effects of inherent limitations on the auditor's ability to detect
material misstatements are greater for future events or conditions that may cause an entity to cease to
continue as a going concern. Explain stating the auditor's responsibilities with regard to going concern.
[RTP - May 21]
Answer
Auditor's responsibilities with regard to going concern:
The auditor's responsibilities with regard to going concern are:

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1. To obtain sufficient appropriate audit evidence regarding, and conclude on, the appropriateness of
management's use of the going concern basis of accounting in the preparation of the financial
statements, and
2. To conclude, based on the audit evidence obtained, whether a material uncertainty exists about the
entity's ability to continue as a going concern.
However, as described in SA 200, the potential effects of inherent limitations on the auditor’s ability to
detect material misstatements are greater for future events or conditions that may cause an entity to cease
to continue as a going concern. The auditor cannot predict such future events or conditions. Accordingly,
the absence of any reference to a material uncertainty about the entity ‘s ability to continue as a going
concern in an auditor's report cannot be viewed as a guarantee as to the entity's ability to continue as a
going concern.
Question 71
While doing audit of ABC Pvt. Ltd., on the basis of sufficient and appropriate evidence, auditor comes to
a conclusion that use of the Going Concern Basis of Accounting is appropriate, but a material uncertainty
exists. Discuss the implications for auditor's report if:
a) Adequate Disclosure of a Material Uncertainty is Made in the Financial Statements.
b) Adequate Disclosure of a Material Uncertainty is Not Made in the Financial Statements.
[RTP-Nov.211
Answer
Use of the Going Concern Basis of Accounting is Appropriate but a Material Uncertainty Exists
The identification of a material uncertainty is a matter that is important to users' understanding of the
financial statements. The use of a separate section with a heading that includes reference to the fact that a
material uncertainty related to going concern exists alerts users to this circumstance:
(a) Adequate Disclosure of a Material Uncertainty is Made in the Financial Statements:
If adequate disclosure about the material uncertainty is made in the financial statements, the auditor
shall express an unmodified opinion and the auditor's report shall include a separate section under the
heading "Material Uncertainty Related to Going Concern."
(b) Adequate Disclosure of a Material Uncertainty is Not Made in the Financial Statements
If adequate disclosure about the material uncertainty is not made in the financial statements, the
auditor shall:
(i) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705; and
(ii) In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a material
uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going
concern and that the financial statements do not adequately disclose this matter.

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 CHAPTER 4

RISK ASSESSMENT AND INTERNAL CONTROL

QUESTIONS WITH ANSWERS
Question 1
The assessment of risks is a matter of professional judgment. Explain stating clearly what is not included
in Audit Risk? [MTP-Aug. 18]
Answer
Assessment of Audit Risk
 Audit Risk is the risk that the auditor gives an inappropriate audit opinion when the financial
statements are materially misstated. Thus, it is the risk that the auditor may fail to express an
appropriate opinion in an audit assignment.
 SA 315 “Identifying and Assessing Risk of Material Misstatements through understanding the Entity
and its Environment” provides guidance on identifying and assessing the risks of material
misstatements at the financial statement level and assertion levels.
Risks not forming part of Audit Risk:
 Audit risk does not include the risk that the auditor might express an opinion that the financial
statements are materially misstated when they are not. This risk is ordinarily insignificant.
 Audit risk is a technical term related to the process of auditing; it does not refer to the auditor’s
business risks such as loss from litigation, adverse publicity, or other events arising in connection with
the audit of financial statements.
Question 2
“Risk of material misstatement consists of two components”. Explain clearly defining risk of material
misstatement.
Answer
Components of risk of material misstatements:
Audit Risk may be defined as the risk that the auditor gives an inappropriate audit opinion when the
financial statements are materially misstated. Thus, it is the risk that the auditor may fail to express an
appropriate opinion in an audit assignment. Audit Risk has three components: Inherent Risk, Control Risk
and Detection Risk. Inherent Risk and Control Risk are collectively known as Risk of Material
Misstatement.
SA 315 “Identifying and Assessing Risk of Material Misstatements through understanding the Entity and
its Environment” provides guidance on identifying and assessing the risks of material misstatements at
the financial statement level and assertion levels.
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Inherent Risk:
 Inherent Risk is the susceptibility of an account balance or class of transaction to a material
misstatement, assuming that there were no internal controls.
 To assess inherent risk, the auditor should evaluate numerous factors, having regard to his experience
of the entity from previous audit engagements of the entity, controls established by management to
compensate for a high level of inherent risk, and his knowledge of any significant changes which might
have taken place since his last assessment.
Control Risk:
 The risk that a misstatement that could occur in an assertion about a class of transaction, account
balance or disclosure and that could be material, either individually or when aggregated with other
misstatements, will not be prevented, or detected and corrected, on a timely basis by the entity’s
internal control.
 Control Risk is the risk that material misstatement will not be prevented or detected and corrected on
a timely basis by the internal control system.
Question 3

“The SAs do not ordinarily refer to inherent risk and control risk separately, but rather to a combined
assessment of the “risks of material misstatement”. Explain. [RTP-Nov. 19]
Answer
Risk of material misstatement: Refer Answer of Question 2.
Question 4

When auditor identifies deficiencies and report on internal controls, he determines the significant financial
statement assertions that are affected by the ineffective controls in order to evaluate the effect on control
risk assessment and strategy for the audit of the financial statements. Explain. [RTP-May 20]
Answer
Control risk assessment when control deficiencies are identified:
 When auditor identifies deficiencies and report on internal controls, he determines the significant
financial statement assertions that are affected by the ineffective controls in order to evaluate the effect
on control risk assessment and strategy for the audit of the financial statements.
 When control deficiencies are identified and auditor identifies and tests more than one control for each
relevant assertion, auditor evaluates control risk considering all of the controls, auditor has tested. If
auditor determines that they support a ‘rely on controls’ risk assessment, or if compensating controls
are identified, tested and evaluated to be effective, he may conclude that the ‘rely on controls’ is still
appropriate. Otherwise we change our controls risk assessment to ‘not rely on controls.’

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 When a deficiency relates to an ineffective control that is the only control identified for an assertion,
he review risk assessment to ‘not rely on controls’ for associated assertions, as no other controls have
been identified that mitigate the risk related to the assertion. If the deficiency relates to one WCGW
(what can go wrong) out of several WCGW’s, he can ‘rely on controls’ but performs additional
substantive procedures to adequately address the risks related to the deficiency.
Question 5

Discuss in brief the types of audit risks and inter relationship of components of audit risk.
[Nov. 14, 4 Marks]
Answer
Types of Audit Risk:
Risk that the auditor may express an inappropriate audit opinion when the financial statements are
materially misstated, is known as audit risk. It is a function of the risks of material misstatement and
detection risk.
(i) Risk of Material Misstatements: The risk that the financial statements are materially misstated prior
to audit. This consists of two components: Inherent Risk and Control Risk.
(a) Inherent Risk: The susceptibility of an assertion about a class of transaction, account balance or
disclosure to a misstatement that could be material, either individually or when aggregated with
other misstatements, before consideration of any related controls.
(b) Control Risk: The risk that a misstatement that could occur in an assertion about a class of
transaction, account balance or disclosure and that could be material, either individually or when
aggregated with other misstatements, will not be presented, or detected and corrected, on a timely
basis by the entity’s internal control.
(ii) Detection Risk: The risk that the procedures performed by the auditor to reduce audit risk to an
acceptably low level will not detect a misstatement that exists and that could be material, either
individually or when aggregated with other misstatements.
Relationship between Components of Audit Risk:
(a) Inherent Risk and Control Risk:
Management often reacts to inherent risk situations by designing accounting and internal control
systems to prevent or detect and correct misstatements and therefore, in many cases, inherent risk and
control risk are highly interrelated. In such situations, if the auditor attempts to assess inherent and
control risks separately, there is a possibility of inappropriate risk assessment.
As a result, audit risk may be more appropriately determined in such situations by making a combined
assessment of inherent and Control Risk as Risk of Material Misstatement (RMM).

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(b) Relationship between RMM and Detection Risk:

There is no inverse relationship between detection risk and the combined level of inherent and control
risks. When inherent and control risks are high, acceptable detection risk needs to be low to reduce
audit risk to an acceptably low level. When inherent and control risks are low, an auditor can accept a
higher detection risk and still reduce audit risk to an acceptably low level.
Question 6

Explain the inherent risk with reference to the relevant standard on auditing.
Or
Write short note on: Inherent Risk. [Nov. 12, 4 Marks]
Answer
Inherent Risk:
SA 200 “Overall Objectives of Independent Auditor and Conduct of audit in accordance with Standards
on Auditing” defines inherent risk as the susceptibility of an assertion about a class of transaction, account
balance or disclosure to a misstatement that could be material, either individually or when aggregated
with other misstatements, before consideration of any related controls.
Standards on Auditing do not ordinarily refer to inherent risk separately, but rather to a combined
assessment of inherent risk and control risk as “Risks of Material Misstatement”.
As per SA 315 “Identifying and Assessing the Risk of Material Misstatement through Understanding the
Entity and its Environment”, auditor is required to assess the risk of material misstatement be performing
the following procedure:
(i) Identify risks throughout the process of obtaining an understanding of the entity and its environment.
(ii) Assess the identified risks, and evaluate whether they relate more pervasively to the financial
statements as a whole and potentially affect many assertions.
(iii) Relate the identified risks to what can go wrong at the assertion level, and
(iv) Consider the likelihood of misstatement.
As per SA 330 “The Auditor’s responses to Assessed Risks”, while designing the further audit procedures
to be performed, the auditor shall consider the reasons for the assessment given to the risk of material
misstatement at the assertion level for the likelihood of material misstatement due to the particular
characteristics of the relevant class of transactions, account balance, or disclosure (i.e., the inherent risk)
and obtain more persuasive audit evidence the higher the auditor’s assessment of risk.
Question 7

Doing a statutory audit is full of risk. Narrate the factors which causes the risk.

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Answer
Factors causes the Audit Risk:
The risk that the auditor expresses an inappropriate audit opinion when the financial statements are
materially misstated. Audit risk is a function of the risks of material misstatement (RMM) and detection
risk. RMM comprises of Inherent Risk and Control Risk. Various factors which causes different types of
risks are given below:
1. Inherent Risk: Inherent risk arises on account of nature of financial reporting & auditing. Entire
process of auditing is based on the assessment of judgments made by the management of the entity as
well as evaluation of internal controls.
2. Control Risk: Control Risk arises on account of Inherent limitation of internal control. Internal control
can provide only reasonable, but not absolute, assurance on account of several inherent limitations
such as potential for human error, possibility of circumstances of control through collusion, etc.
3. Detection Risk: Detection risk arises on account of judgement on part of auditor, test nature of audit
and nature of audit evidences collected. The auditor’s work involves exercise of judgment in many
areas like deciding the extent of audit procedures and assessing the reasonableness of the judgments
and estimates made by management in preparing the financial statements. The auditor normally relies
upon persuasive evidence rather than conclusive evidence. Even in circumstances where conclusive
evidence is available, the cost of obtaining such an evidence may far exceed the benefits.
Question 8
Discuss the following: Weaknesses in the design of the internal control system and non-compliance with
identified control procedures amongst other conditions or events which increase the risk of fraud or error.
Or
Mention briefly the conditions or events, which increase the risk of fraud or error leading to material
misstatement in financial statements.
Answer
Conditions or events which increase the risk of fraud or error:
While planning and performing an audit, the auditor should consider the risk of material misstatements
that may be caused due to fraud or error. Various conditions and events that may increase risk of fraud or
error are:
1. Weaknesses in the design of internal control systems and non-compliance with the laid down control
procedures.
2. Doubts about the integrity or competence of the management.
3. Unusual pressures within the entity.
4. Unusual transactions such as transactions with related parties, exercise payment for certain services to
lawyers, etc.

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5. Problems in obtaining sufficient and appropriate audit evidence, e.g., inadequate documentation,
significant differences between the figures as per the accounting records and confirmation received
from third parties, etc.
Question 9
What factors are to be considered by an auditor while making control risk assessment?
[Nov. 20, 3 Marks]
Answer
Factors to be considered by an auditor while making control risk assessments:
While making control risk assessments, auditor shall consider the followings:
 The control environment’s influence over internal control. A control environment that supports the
prevention, and detection and correction, of material misstatements allows greater confidence in the
reliability of internal control and audit evidence generated within the entity. However, it does not
guarantee the effectiveness of specific controls.
 Evaluations of the related IT processes that support application and IT-dependent manual controls.
 Testing approach over significant class of transactions and disclosure processes.
 Expectation of the operating effectiveness of controls based on the understanding of entity’s processes.
Question 10
“Risk of material misstatement at the assertion level for classes of transactions, account balances and
disclosures need to be considered”. Explain stating the different categories of assertions used by the
auditor.
Answer
Assertions used by auditor about account balances at the period end:
 SA 315 “Identifying and Assessing Risk of Material Misstatements through understanding the Entity
and its Environment” requires the auditor to identify and assess the risks of material misstatement,
whether due to fraud or error at the financial statement and assertion levels.
 Risks of material misstatement at the assertion level for classes of transactions, account balances and
disclosures need to be considered because such consideration directly assists in determining the
nature, timing, and extent of further audit procedures at the assertion level necessary to obtain
sufficient appropriate audit evidence.
 Assertions used by auditor with respect to transactions occurred during the year are
1. Occurrence - transactions that have been recorded have occurred during the year.
2. Completeness - transactions have been recorded completely.
3. Accuracy - transactions have been recorded accurately.
4. Cut-off - transactions have been recorded in correct accounting period.
5. Classification - transactions have been properly classified into capital and revenue.

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 Assertions used by auditor with respect to account balances at the period end are:
1. Existence - assets and liabilities shown in the balance sheet exists.
2. Rights and obligations - rights of the entity have been shown as assets and the obligation have
been shown as liabilities.
3. Completeness - assets and liabilities have been recorded completely.
4. Valuation and allocation - assets and liabilities are included in the financial statements at
appropriate amounts and any allocation adjustments are appropriately recorded.
 Assertions used by auditor with respect to Presentation and Disclosure are:
1. Occurrence and Rights and obligations - disclosed transactions have occurred and belong to the
entity.
2. Completeness - disclosures in the financial statements are complete.
3. Classification and understandability - financial information is appropriately presented and
disclosures are clearly expressed.
4. Accuracy and Valuation - financial and other information are disclosed fairly and at appropriate
amounts.
Question 11
Write short note on: Assertion about balance at the end of the reporting period. [May 13, 4 Marks]
Or
Discuss the following: The assertions used by auditor to consider potential misstatements about account
balances at the period end. [Nov. 15, 5 Marks]
Answer
Assertions used by auditor about account balances at the period end:
 SA 315 “Identifying and Assessing Risk of Material Misstatements through understanding the Entity
and its Environment” requires the auditor to identify and assess the risks of material misstatement,
whether due to fraud or error, at the financial statement and assertion levels.
 Risks of material misstatement at the assertion level for classes of transactions, account balances, and
disclosures need to be considered because such consideration directly assists in determining the
nature, timing, and extent of further audit procedures at the assertion level necessary to obtain
sufficient appropriate audit evidence.
 Assertions used by auditor with respect to account balances at the period end are:
1. Existence – assets and liabilities shown in the balance sheet exists.
2. Rights and obligations - rights of the entity have been shown as assets and the obligations have
been shown as labilities
3. Completeness - assets and liabilities have been recorded completely.
4. Valuation and allocation - assets and tables are included in the financial statements at appropriate
amounts and any allocation adjustments are appropriately recorded.
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Question 12
In the context of SA 315, state the assertions used by auditor to consider the different types of potential
mis-statements that may occur w.r.t. classes of transactions and events for period under audit.
[Nov. 17, 4 Marks]
Answer
Assertions used by auditor to consider the potential misstatement: Refer Answer of Question 10.
Question 13
Write short note on: Assertions used by auditor to consider potential misstatements about presentation
and disclosure at the period end.
Answer
Assertions used by auditor to consider the potential misstatement about presentation and disclosure:
Refer Answer of Question 10.
Question 14
The auditor shall identify and assess the risks of material misstatement at both levels to provide a basis
for designing and performing further audit procedures. For the purpose of identifying and assessing the
risks of material misstatement the auditor shall Identify risks, assess the identified risks, relate the
identified risks and consider the likelihood of misstatement.
Explain the above in detail. [MTP - Oct. 18]
Or
For the purpose of identifying and assessing the risks of material misstatement, the auditor shall identify
risks throughout the process of obtaining an understanding of the entity and its environment. Explain in
detail along with other relevant points. [RTP – Nov. 20]
Answer
Identifying and assessing the risks of material misstatement:
 The auditor shall identity and assess the risks of material misstatement at:
(A) the financial statement level
(B) the assertion level for classes of transactions, account balances, and disclosures to provide a basis
for designing and performing further audit procedures
 For the purpose of Identifying and assessing the risks of material misstatement, the auditor shall:
(a) Identify risks throughout the process of obtaining an understanding of the entity and its
environment, including relevant controls that relate to the risks, and by considering the classes of
transactions, account balances, and disclosures in the financial statements;
(b) Assess the identified risks and evaluate whether they relate more pervasively to the financial
statements as a whole and potentially affect many assertions;

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(c) Relate the identified risks to what can go wrong at the assertion level, taking account of relevant
controls that the auditor intends to test; and
(d) Consider the likelihood of misstatement, including the possibility of multiple misstatements, and
whether the potential misstatement is of a magnitude that could result in a material misstatements.
Question 15
Discuss what is included in risk assessment procedures to obtain audit evidence about the design and
implementation of relevant controls. [RTP - May 18]
Answer
Risk Assessment procedure:
SA 315 “Identifying and Assessing Risk of Material Misstatements through understanding the Entity and
its Environment” defines the term Risk Assessment procedure as audit procedures performed to obtain
an understanding of the entity and its environment, including the entity's internal control, to identify and
assess the risks of material misstatement, whether due to fraud or error, at the financial statement and
assertion levels.
Risk Assessment Procedure includes the following:
a) Inquiries of management, and of others within the entity: Much of the information is obtained by
the auditor’s through inquiry from management and others. However, the auditor may also obtain
information, or a different perspective in identifying risks of material misstatement, through inquiries
of others within the entity and other employees with different levels of authority.
b) Analytical procedures: Analytical procedures may help identify the existence of unusual transactions
or events, and amounts, ratios, and trends that might indicate matters that have audit implications.
c) Observation and inspection: Observation and inspection may support inquiries of management
and others, and may also provide information about the entity and its environment.
Question 16
Obtaining an understanding of the entity and its environment, including the entity's internal control, is a
continuous, dynamic process of gathering, updating and analysing information throughout the audit.
Analyse and explain giving examples. [RTP - May 20]
Answer
Understanding of the Entity - a continuous process:
Obtaining an understanding of the entity and its environment, including the entity's internal control, is a
continuous, dynamic process of gathering, updating and analysing information throughout the audit. The
understanding establishes a frame of reference within which the auditor plans the audit and exercises
professional judgment throughout the audit, for example, when:
1. Assessing risks of material misstatement of the financial statements;

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2. Determining materiality in accordance with SA 320;

3. Considering the appropriateness of the selection and application of accounting policies;
4. Identifying areas where special audit consideration may be necessary, for example, related party
transactions, the appropriateness of management's use of the going concern assumption, or
considering the business purpose of transactions;
5. Developing expectations for use when performing analytical procedures;
6. Evaluating the sufficiency and appropriateness of audit evidence obtained, such as the
appropriateness of assumptions and of management's oral and written representations.
Question 17
The auditor may exercise his judgment to identify which risks are significant risks. Explain the above in
the context of SA 315. [May 15, 6 Marks]
Or
As part of the risk assessment, the auditor shall determine whether any of the risks identified are, in the
auditor's judgment, a significant risk.
In exercising judgment as to which risks are significant risks, state the factors which shall be considered
by the auditor.
Explain the above in context of SA-315. [RTP - May 18]
Or
Significant risks often relate to significant non-routine transactions or judgmental matters. Non- routine
transactions are transactions that are unusual, due to either size or nature, and that therefore occur
infrequently. Judgmental matters may include the development of accounting estimates for which there is
significant measurement uncertainty.
In context of significant risk, explain the factors to be considered by the auditor in exercising judgment as
to which risks are significant risks. [RTP - Nov. 21]
Answer
Identification of significant risks:
As per SA 315 “Identifying and Assessing Risk of Material Misstatements through understanding the
Entity and its Environment” the auditor shall determine whether any of the risks identified are, in the
auditor’s judgment, a significant risk. In exercising this judgment, the auditor shall exclude the effects of
identified controls related to the risk. In exercising judgment as to which risks are significant risks, the
auditor shall consider the following:
1. Whether the risk is a risk of fraud;
2. Whether the risk is related to recent significant economic, accounting, or other developments;
3. The complexity of transactions;

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4. Whether the risk involves significant transactions with related parties;

5. The degree of subjectivity in the measurement of financial information; and
6. Whether the risk involves significant unusual transactions.
Question 18
Name the assertions for the following audit procedures:
1. Year-end inventory verification.
2. Depreciation has been properly charges on all assets.
3. The title deeds of the lands disclosed in the balance sheet are held in the name of the company.
4. All liabilities are properly recorded in the financial statements.
5. Related party transactions are shown properly. [May 18, 5 Marks, MTP - April 21]
Answer
Name of Assertions for different audit procedures:
1. Existence and Condition
2. Allocation and Valuation
3. Ownership and Rights and obligations
4. Completeness
5. Presentation and Disclosure.
Question 19
State assertions that are implied in the extract of financial statement given below:
(`) (`)
Plant & Machinery (at Cost) 4,00,000
Less: Depreciation:
Up to Previous year 1,40,000
For the year 26,000 1,66,000
2,34,000

(i) Indicate assertions in respect of transactions and events for the period relating to Fixed Assets.
(ii) State specific assertions relating to the above extract of financial statement.
[MTP - April 19, March 21]
Answer
(i) Assertions in respect of transactions and events for the period: Refer Answer of Question 9.
(ii) Specific assertions:
1) The firm owns the plant and machinery;
2) The historical cost of plant and machinery is ` 4 lacs;
3) The plant and machinery physically exist;
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4) The asset is being utilised in the business of the company productively;

5) Total charge of depreciation on this asset is ` 1,66,000 to date on which ` 26,000 relates to the year
in respect of which the accounts are drawn up; and
6) The amount of depreciation has been calculated on recognised basis and the calculation is correct.
Question 20
The risks of material misstatement may exist at the financial statement level and assertion level. Explain
the two levels. [RTP - Nov. 20]
Answer
Risk of Material Misstatement:
The risks of material misstatement may exist at two levels:
(i) The overall financial statement level: Risks of material misstatement at the overall financial statement
level refer to risks of material misstatement that relate pervasively to the financial statements as a
whole and potentially affect many assertions.
(ii) The assertion level for classes of transactions, account balances, and disclosures: Risks of material
misstatement at the assertion level are assessed in order to determine the nature, timing, and extent of
further audit procedures necessary to obtain sufficient appropriate audit evidence. This evidence
enables the auditor to express an opinion on the financial statements at an acceptably low level of audit
risk.
Question 21
Much of the information obtained by the auditor's inquiries is obtained from management and those
responsible for financial reporting. However, the auditor may also obtain information, or a different
perspective in identifying risks of material misstatement, through inquiries of others within the entity and
other employees with different levels of authority.
Explain with the help of examples. [RTP - Nov. 20]
Answer
Inquiries of management, and of others within the entity:
Much of the information is obtained by the auditor's through inquiry from management and others.
However, the auditor may also obtain information, or a different perspective in identifying risks of
material misstatement, through inquiries of others within the entity and other employees with different
levels of authority.
For example:
1. Inquiries directed towards TCWG may help the auditor understand the environment in which the
financial statements are prepared.
2. Inquiries directed toward internal audit personnel may provide information about internal audit
procedures performed during the year relating to the design and effectiveness of the entity’s internal
control and whether management has satisfactorily responded to findings from those procedures.
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3. Inquiries of employees involved in initiating, processing or recording complex or unusual transactions

may help the auditor to evaluate the appropriateness of the selection and application of certain
accounting policies.
4. Inquiries directed toward in-house legal counsel may provide information about such matters as
litigation, compliance with laws and regulations, knowledge of fraud or suspected fraud affecting the
entity.
5. Inquiries directed towards marketing or sales personnel may provide information about changes in
the entity's marketing strategies, sales trends, or contractual arrangements with its customers.
Question 22

Analytical procedures performed as risk assessment procedures may identify aspects of the entity of which
the auditor was unaware and may assist in assessing the risks of material misstatement in order to provide
a basis for designing and implementing responses to the assessed risks. Explain in detail. [RTP - Nov. 20]
Answer
Use of Analytical Procedures as Risk Assessment Procedures:
 Analytical procedures performed as risk assessment procedures may identity aspects of the entity of
which the auditor was unaware and may assist in assessing the risks of material misstatement in order
to provide a basis for designing and implementing responses to the assessed risks. Analytical
procedures performed as risk assessment procedures may include both financial and non-financial
information, for example, the relationship between sales and square footage of selling space or volume
of goods sold.
 Analytical procedures may help identify the existence of unusual transactions or events, and amounts,
ratios, and trends that might indicate matters that have audit implications.
 Unusual or unexpected relationships that are identified may assist the auditor in identifying risks of
material misstatement, especially risks of material misstatement due to fraud.
 However, when such analytical procedures use data aggregated at a high level, the results of those
analytical procedures only provide a broad initial indication about whether a material misstatement
may exist. Accordingly, in such cases, consideration of other information that has been gathered when
identifying the risks of material misstatement together with the results of such analytical procedures
may assist the auditor in understanding and evaluating the results of the analytical procedures.
Question 23

CA L is in the process of finalizing his Risk Assessment Procedures of Effluent Limited which include
observation and inspection that may support inquiries of management and others. Discuss few examples
of audit procedures which include observation or inspection of the entity's operations. [July 21, 3 Marks]

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Answer
Examples of audit procedures which include observation or inspection of the entity's operations:
Observation and inspection may support inquiries of management and others, and may also provide
information about the entity and its environment.
Examples of such audit procedures include observation or inspection of the following:
1) Documents (such as business plans and strategies), records, and internal control manuals.
2) Reports prepared by management (such as quarterly management reports and interim financial
statements) and TCWG (such as minutes of board of directors' meetings).
3) The entity's premises and plant facilities.
Question 24

Risks of material misstatement may be greater for significant non-routine transactions arising from matters
such as complex calculations. Also, risks of material misstatement may be greater for significant
judgmental matters that require the development of accounting estimates, arising from matters such as
accounting principles for accounting estimates may be subject to differing interpretation etc. Explain in
detail. [RTP - Nov.21]
Answer
Risks of Material Misstatement - Greater for Significant Non-Routine Transactions:
Risks of material misstatement may be greater for significant non-routine transactions arising from matters
such as the following:
 Greater management intervention to specify the accounting treatment.
 Greater manual intervention for data collection and processing.
 Complex calculations or accounting principles.
 The nature of non-routine transactions, which may make it difficult for the entity to implement
effective controls over the risks.
Risks of material misstatement - Greater for Significant Judgmental Matters:
Risks of material misstatement may be greater for significant judgmental matters that require the
development of accounting estimates, arising from matters such as the following:
 Accounting principles for accounting estimates or revenue recognition may be subject to differing
interpretation.
 Required judgment may be subjective or complex, or require assumptions about the effects of future
events, for example, judgment about fair value.
Question 25

Explain the concept of Internal Control. Also state the objectives of Internal Control.

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Answer
Internal Control:
SA 315 “Identifying and Assessing the Risk of Material Misstatement through Understanding the Entity
and its environment” defines internal control as the process designed, implemented and maintained by
TCWG, management and other personnel to provide reasonable assurance about the achievement of an
entity's objectives with regard to
1. Reliability of financial reporting,
2. Effectiveness and efficiency of operations,
3. Safeguarding of assets, and
4. Compliance with applicable laws and regulations.
Objectives of Internal Control:
a) Transactions are executed in accordance with managements general or specific authorization;
b) All transactions are promptly recorded in the correct amount in the appropriate accounts and in the
accounting period in which executed so as to permit preparation of financial information within a
framework of recognized accounting policies and practices and relevant statutory requirements, if any,
and to maintain accountability for assets;
c) Assets are safeguarded from unauthorized access, use or disposition; and
d) The recorded assets are compared with the existing assets at reasonable intervals and appropriate
action is taken with regard to any differences.
Question 26

Internal control over safeguarding of assets against unauthorized acquisition, use, or disposition may
include controls relating to both financial reporting and operations objectives. Explain stating clearly the
objectives of Internal Control. [RTP - May 20]
Answer
Internal Control over safeguarding of assets:
Internal control over safeguarding of assets against unauthorized acquisition, use, or disposition may
include controls relating to both financial reporting and operations objectives. The auditor’s consideration
of such controls is generally limited to those relevant to the reliability of financial reporting. For example,
use of access controls, such as passwords, that limit access to the data and programs that process cash
disbursements may be relevant to a financial statement audit. Conversely, safeguarding controls relating
to operations objectives, such as controls to prevent the excessive use of materials in production, generally
are not relevant to a financial statement audit.
Objectives of Internal Control: Refer answer of Question 25.
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Question 27
Explain inherent limitations of internal control system. [Nov. 13, 8 Marks, May 15, 5 Marks]
Or
Internal Control System can provide only reasonable but not absolute assurance that its objective relating
to prevention and detection of errors/frauds, safeguarding of assets etc., are achieved. Briefly explain the
inherent limitations that the system suffers.
Or
Briefly discuss the limitations of internal control. [May 18, 6 Marks, MTP – April 19]
Answer
Inherent Limitations of Internal Control:
1. Management's consideration that a control should be cost-effective.
2. The fact that the most controls do not tend to be directed at transactions of unusual nature.
3. Potential for human error.
4. Possibility of circumvention of controls through collusion with parties outside the entity or with
employees of entity.
5. Possibility that a person responsible for exercising control could abuse that authority.
6. Possibility that procedures may become inadequate due to changes in conditions and compliance with
procedures may deteriorate.
7. Manipulations by management with respect to transactions or estimates and judgments required in
the preparation of financial statements.
Question 28
What is Internal Control? Explain various components of internal control.
Or
The division of internal control into five components provides a useful framework for auditors to consider
how different aspects of an entity's internal control may affect the audit. Mention those components of
internal control. [MTP - Oct. 20]
Answer
Meaning of internal control:
Internal Control may be defined as the process designed, implemented and maintained by TCWG,
management and other personnel to provide reasonable assurance about the achievement of an entity's
objectives with regard to
 Reliability of financial reporting,
 Effectiveness and efficiency of operations,
 Safeguarding of assets, and
 Compliance with applicable laws and regulations.

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Components of internal control: It includes the followings:

a) Control Environment: The control environment includes the governance and management functions
and the attitudes, awareness, and actions of those charged with governance and management
concerning the entity's internal control and its importance in the entity. The control environment sets
the tone of an organization, influencing the control consciousness of its people.
b) Risk Assessment Process: The entity's risk assessment process forms the basis for how management
determines the risks to be managed. If that process is appropriate to the circumstances, including the
nature, size and complexity of the entity, it assists the auditor in identifying risks of material
misstatement. Whether the entity's risk assessment process is appropriate to the circumstances is a
matter of judgment.
c) Information System: The information system relevant to financial reporting objectives, which includes
the accounting system, consists of the procedures and records designed and established to:
 Initiate, record, process, and report entity transactions;
 Resolve incorrect processing of transactions;
 Process and account for system overrides or bypasses to controls;
 Transfer information from transaction processing systems to the general ledger;
 Capture information relevant to financial reporting for events and conditions other than
transactions, such as the depreciation and amortisation of assets; and
 Ensure information required to be disclosed by the applicable FRF is accumulated, record
processed, summarized and appropriately reported in the F.S.
d) Control Activities relevant to Audit: Control activities are the policies and procedures that help ensure
that management directives are carried out. Control activities, whether within IT or manual systems,
have various objectives and are applied at various organisational and functional levels.
e) Monitoring of Controls: Monitoring of controls is a process to assess the effectiveness of internal
control performance over time. It involves assessing the effectiveness of controls on a timely basis and
taking necessary corrective actions.
Question 29
“The auditor shall obtain an understanding of the control environment”. Explain stating what is included
in control environment.
Or
The auditor of XYZ Ltd, engaged in FMCG (Fast Moving Consumable Goods) obtains an understanding
of the control environment. As part of obtaining this understanding, the auditor evaluates whether:
(i) Management has created and maintained a culture of honesty and ethical behaviour; and
(ii) The strengths in the control environment elements collectively provide an appropriate foundation for
the other components of internal control.
Advise what is included in control environment. Also explain the elements of control environment.
[MTP - March 18, RTP - May 18, MTP - Aug. 18, March 19, May 20, RTP - Nov. 19]

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Answer
Elements of Control Environment:
The control environment includes
 The governance and management functions and
 The attitudes, awareness, and actions of those charged with governance and management concerning
the entity's internal control and its importance in the entity.
The control environment sets the tone of an organization, influencing the control consciousness of its
people.
Control environment includes the following elements:
(1) Communication and enforcement of integrity and ethical values: These are essential elements that
influence the effectiveness of the design, administration and monitoring of controls.
(2) Commitment to competence: Matters such as management's consideration of the competence levels
for particular jobs and how those levels translate into requisite skills and knowledge.
(3) Participation by those charged with governance: Attributes of those charged with governance such
as:
 Their independence from management.
 Their experience and stature.
 The extent of their involvement and the information they receive, and the scrutiny of activities.
 The appropriateness of their actions, including the degree to which difficult questions are raised
and pursued with management, and their interaction with internal and external auditors.
(4) Management's philosophy and operating style: Characteristics such as management's:
 Approach to taking and managing business risks.
 Attitudes and actions toward financial reporting.
 Attitudes toward information processing and accounting functions and personnel.
(5) Organisational structure: The framework within which an entity's activities for achieving its objectives
are planned, executed, controlled, and reviewed.
(6) Assignment of authority and responsibility: Matters such as how authority and responsibility for
operating activities are assigned and how reporting relationships and authorisation hierarchies are
established.
(7) Human resource policies and practices: Policies and practices that relate to, for example, recruitment,
orientation, training, evaluation, counselling, promotion, compensation, and remedial actions.
Question 30
“The auditor shall obtain an understanding of the major activities that the entity uses to monitor internal
control over financial reporting”. Explain.
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Or
The auditor shall obtain an understanding of major activities that the entity uses to monitor internal control
over financial reporting.
Discuss “Monitoring of control” as a component of Internal control. [Nov. 20, 4 Marks]
Answer
Monitoring of controls:
Auditor shall obtain an understanding of the major activities that the entity uses to monitor internal control
over financial reporting. Following point merit consideration in this regard:
a) Monitoring of controls is a process to assess the effectiveness of internal control performance over time.
b) It involves assessing the effectiveness of controls on a timely basis and taking necessary corrective
actions.
c) Management accomplishes monitoring of controls through ongoing activities, separate evaluations, or
a combination of the two. Ongoing monitoring activities are often built into the normal recurring
activities of an entity and include regular management and supervisory activities.
d) Management's monitoring activities may also include using information from communications from
external parties such as customer complaints and regulator comments that may indicate problems or
highlight areas in need of improvement.
e) Management's monitoring of control is often accomplished by management's or the owner-manager's
close involvement in operations.
Question 31
Auditor GR and Associates have been appointed to conduct audit of PNG Ltd, a manufacturing company
engaged in manufacturing of various food items. While planning an audit, the auditors do not think that
it would be necessary to understand internal controls. Advise the auditor in this regard explaining clearly
the benefits of understanding the internal control. [RTP - May 21]
Answer
Benefits of understanding of Internal Control:
The auditor shall obtain an understanding of internal control relevant to the audit. Although most controls
relevant to the audit are likely to relate to financial reporting, not all controls that relate to financial
reporting are relevant to the audit. It is a matter of the auditor's professional judgment whether a control,
individually or in combination with others, is relevant to the audit.
An understanding of internal control assists the auditor in:
 Identifying types of potential misstatements;
 Identifying factors that affect the risks of material misstatement, and
 Designing the nature, timing, and extent of further audit procedures.

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Question 32
Factors relevant to the auditor's judgment about whether a control, individually or in combination with
others, is relevant to the audit may include such matters as materiality, the significance of the related risk
etc. Explain in detail. [RTP - May 21]
Answer
Factors relevant to the auditor's judgment about whether a control, individually or its combination with
others, is relevant to the audit:
1. Materiality.
2. The significance of the related risk.
3. The size of the entity.
4. The nature of the entity's business, including its organisation and ownership characteristics.
5. The diversity and complexity of the entity's operations.
6. Applicable legal and regulatory requirements.
7. The circumstances and the applicable component of internal control.
8. The nature and complexity of the systems that are part of the entity's internal control, including the
use of service organisations.
9. Whether, and how, a specific control, individually or in combination with others, prevents, or detects
and corrects, material misstatement.
Question 33
The auditor shall obtain an understanding of the information system, including the related business
processes, relevant to financial reporting, including the classes of transactions in the entity’s operations
that are significant to the financial statements, controls surrounding journal entries etc. Explain the other
considerations in this regard. [RTP - May 21]
Answer
Considerations w.r.t. understating of Information Systems:
The auditor shall obtain an understanding of the information system, including the related business
processes, relevant to financial reporting, including the following areas:
a) The classes of transactions in the entity's operations that are significant to the financial statements.
b) The procedures by which those transactions are initiated, recorded, processed, corrected as necessary,
transferred to the general ledger and reported in the financial statements;
c) The related accounting records, supporting information and specific accounts in the financial
statements that are used to initiate, record, process and report transactions;
d) How the information system captures events and conditions that are significant to the financial
statements;
e) The financial reporting process used to prepare the entity's financial statements;
f) Controls surrounding journal entries.
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Question 34
The auditor shall obtain an understanding of control activities relevant to the audit, which the auditor
considers necessary to assess the risks of material misstatement. Explain in detail stating clearly the
meaning of control activities and also discuss control activities that are relevant to the audit.
[RTP - May 21]
Answer
Control Activities:
The auditor shall obtain an understanding of control activities relevant to the audit, which the auditor
considers necessary to assess the risks of material misstatement. An audit requires an understanding of
only those control activities related to significant class of transactions, account balance, and disclosure in
the financial statements and the assertions which the auditor finds relevant in his risk assessment process.
Control activities are the policies and procedures that help ensure that management directives are carried
out. Control activities, whether within IT or manual systems, have various objectives and are applied at
various organisational and functional levels. Examples of specific control activities include those relating
to the following:
a) Authorisation
b) Segregation of Duties
c) Physical Controls
d) Performance Reviews
e) Information processing
Control activities that are relevant to the audit are:
 Control activities that relate to significant risks and those that relate to risks for which substantive
procedures alone do not provide sufficient appropriate audit evidence;
 Those that are considered to be relevant in the judgment of the auditor; or
 As part of the risk assessment, the auditor shall determine whether any of the risks identified are, in
the auditor's judgment, a significant risk.
Question 35
Write a short note on: Narrative record. [Nov. 17, 4 Marks]
Answer
Narrative record:
It is a complete and exhaustive description of the system as found in operation by the auditor. Actual
testing and observation are necessary before such a record can be developed.
It may be recommended in cases where no formal control system in operation and would be more suited
to small business. Disadvantages of narrative records are:

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 To comprehend the system in operation is quite difficult.

 To identify weaknesses or gaps in the system.
 To incorporate changes arising on account of reshuffling of manpower, etc.
Question 36
What is check list? Give few examples of check list instruction.
Answer
Check List:
Check List is a series of instructions and/or questions which a member of the auditing staff must follow
and/or answer. This is an on the job requirement and instructions are framed having regard to the
desirable elements of control.
A few examples of check list instructions are:
 Are tenders invited before placing orders?
 Is the purchase order from standardized?
 Are purchase order forms pre-numbered?
 Are inventory control accounts maintained by appropriate persons?
Question 37
Explain briefly technique of “Internal Control Questionnaire” to facilitate the accumulation of information
necessary for proper evaluation of internal control. [Nov. 10, 4 Marks]
Or
Write short note on: Internal Control Questionnaire. [May 13, 4 Marks]
Answer
Internal Control Questionnaire:
It is a set of questions designed to provide a through view of the state of internal control in an organization.
The questions are generally prepared in sections of distinct control areas like: purchase and creditors, sales
& debtors, inventories, cash & bank, etc.
Evaluation through internal control questionnaire now forms an important part of any properly organised
audit with the following purposes:
 Identification of weaknesses in the internal control system
 Selection of samples in rational manner
 Suitable modifications in audit programmes.
Question 38
Write short note on: Use of Flow Charts in evaluation of internal Control.
[Nov. 13, May 16, 4 Marks]
Or

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A Flow Chart is a graphic presentation of each part of company’s system of internal control. Explain
elaborating each and every aspect about few chart. [RTP – Nov. 18]
Answer
Uses of flow charts in evaluation of internal control:
Flowchart is a graphic presentation of internal controls in the organization and is normally drawn up to
show the controls in each section or sub-section. It provides the most concise and comprehensive way for
reviewing the internal controls and the evaluator’s findings.
A flow chart is a diagram full with lines and symbols and if judicious use of them can be made, it is
probably an effective way of presenting the state of internal controls in the client’s organisation. A properly
drawn up flow chart can provide a next visual picture of the whole activities of the section or department
involving flow of documents and activities. More specifically it can show:
1. At what point a document is raised internally or received from external sources;
2. The number of copies in which a document is raised or received;
3. The intermediate stages set sequentially through which the document and the activity pass;
4. Distribution of the documents to various sections, department or operations;
5. Checking authorization and matching at relevant stages;
6. Filing of the documents; and
7. Final disposal by sending out or destruction.
Question 39
Why tests of controls are performed? Also explain what does they include. [Nov. 15, 4 Marks]
Answer
Tests of controls
After assimilating internal control system, the auditor needs to examine whether and how far the same is
actually in operation. For this purpose, auditor may perform tests of control. Tests of control are performed
to obtain audit evidence about the effectiveness of the
(i) Design of the accounting and internal control systems, that is, whether they are suitably designed to
prevent or detect and correct material misstatements; and
(ii) Operation of the internal controls throughout the period.
Based on the results of the tests of control, the auditor should evaluate whether the internal controls are
designed and operating as contemplated in the preliminary assessment of control risk
Tests of control may include:
(a) Inspection of documents supporting transactions and other events to gain audit evidence that internal
controls have operated property

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(b) Inquiries about and observation of internal controls which leave no audit trail.
(c) Re-performance of internal controls.
(d) Testing of internal controls operating on specific computerized applications.
Question 40

It has been suggested that actual operation of the internal control should be tested by the application of
procedural tests and examination in depth. Explain with the help of example in respect of the procedure
for sales. [RTP - May 20]
Answer
Testing of Internal Control System:
It has been suggested that actual operation of the internal control should be tested by the application of
procedural tests and examination in depth. Procedural tests simply mean testing of the compliance with
the procedures laid down by the management in respect of initiation, authorisation, recording and
documentation of transaction at each stage through which it flows. For example, the procedure for sales
requires the following:
1. Before acceptance of any order the position of inventory of the relevant article should be known to
ascertain whether the order can be executed in time.
2. An advice under the authorisation of the sales manager should be sent to the party placing the order,
internal reference number, and the acceptance of the order. This advice should be prepared on a
standardized form and copy thereof should be forwarded to inventory section to enable it to prepare
for the execution of the order in time.
3. The credit period allowed to the party should be the normal credit period. For any special credit period
a special authorisation of the sales manager would be necessary.
4. The rate at which the order has been accepted and other terms about transport, insurance, etc., should
be clearly specified.
5. Before deciding upon the credit period, a reference should be made to the credit department to know
the creditworthiness of the party and particularly whether the party has honoured its commitments in
the past.
Question 41

“A satisfactory control environment may help reduce the risk of fraud but is not an absolute deterrent for
fraud”. Explain. [May 17, 5 Marks, RTP-May 18]
Or
The existence of a satisfactory control environment can be a positive factor when the auditor assesses the
risks of material misstatement. Analyse and explain. [RTP - May 19]

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Answer
Impact of satisfactory control environment:
 The existence of a satisfactory control environment work as a positive factor when the auditor assesses
the RMM.
 But at the same time, it is to be kept in mind that a satisfactory control environment is not an absolute
deterrent to fraud. Deficiencies in the control environment may undermine the effectiveness of
controls, in particular in relation to fraud.
 As per SA 330, the control environment also influences the nature, timing, and extent of the auditor's
further procedures.
 The control environment in itself does not prevent, or detect and correct, a material misstatement. It
may, however, influence the auditor's evaluation of the effectiveness of other controls (for example,
the monitoring of controls and the operation of specific control activities) and thereby the auditor's
assessment of the risks of material misstatement.
Question 42
So far as the auditor is concerned, the examination and evaluation of the internal control system is an
indispensable part of the overall audit programme. The auditor needs reasonable assurance that the
accounting system is adequate and that all the accounting Information which should be recorded has in
fact been recorded. Internal control normally contributes to such assurance. Explain stating clearly the
benefits of evaluation of internal control to the auditor. [RTP – May 19]
Answer
Benefits of Evaluation of Internal Control to Auditor:
The review of internal controls will enable the auditor to know:
1. Whether errors and frauds are likely to be located in the ordinary course of operations of the business;
2. Whether an adequate internal control system is in use and operating as planned by the management;
3. Whether an effective internal auditing department is operating;
4. Whether any administrative control has a bearing on his work (for example, if the control over worker
recruitment and enrolment is weak, there is a likelihood of dummy names being included in the wages
sheet and this is relevant for the auditor);
5. Whether the controls adequately safeguard the assets;
6. How far and how adequately the management is discharging its function in so far as correct recording
of transactions is concerned;
7. How reliable the reports, records and the certificate to the management can be;
8. The extent and the depth of the examination that he needs to carry out in the different areas of
accounting;

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9. What would be appropriate audit technique and the audit procedure in the given circumstances;
10. What are the areas where control is weak and where it is excessive; and
11. Whether some worthwhile suggestions can be given to improve the control system.
Question 43

While obtaining audit evidence about the effective operation of internal controls, the auditor considers
how they were applied, the consistency with which they were applied during the period and by whom
they were applied. The concept of effective operation recognises that some deviations may have occurred.
Analyse and Explain. [RTP – Nov. 18]
Or
Based on the results of the tests of control, the auditor should evaluate whether the internal controls are
designed and operating as contemplated in the preliminary assessment of control risk. Analyse and
Explain. [RTP – Nov. 19]
Answer
Deviation from internal controls:
 As per SA 330 “Responses to Assessed Risks”, while obtaining audit evidence about the effective
operation of Internal controls, the auditor considers how they were applied, the consistency with
which they were applied during the period and by whom they were applied. The concept of effective
operation recognises that some deviations may have occurred.
 Deviations from prescribed controls may be caused by such factors as
a) Changes in key personnel,
b) Significant seasonal fluctuations in volume of transactions and
c) Human error.
 When deviations are detected the auditor makes specific inquiries regarding these matters,
particularly, the timing of staff changes in key Internal control functions. The auditor then ensures that
the tests of control appropriately cover such a period of change or fluctuation.
 Based on the results of the tests of control, the auditor should evaluate whether the internal controls
are designed and operating as contemplated in the preliminary assessment of control risk.
 The evaluation of deviations may result in the auditor concluding that the assessed level of control risk
needs to be revised. In such cases, the auditor would modify the nature, timing and extent of planned
substantive procedures.
 Before the conclusion of the audit, based on the results of substantive procedures and other audit
evidence obtained by the auditor, the auditor should consider whether the assessment of control risk
is confirmed.

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 It has been suggested that actual operation of the internal control should be tested by the application
of procedural tests and examination in depth. Procedural tests simply mean testing of the compliance
with the procedures laid down by the management in respect of initiation, authorisation, recording
and documentation of transaction at each stage through which it flows.
Question 44
The auditor can formulate his entire audit programme only after he has had a satisfactory understanding
of the internal control systems and their actual operation. Analyse and explain. [RTP - Nov. 18]
Or
The extent and the nature of the audit programme is substantially influenced by the internal control system
in operation. Analyse and explain. [RTP - Nov. 19]
Answer
Requirement of Understanding of Internal Control to formulate entire audit programme:
 The auditor can formulate his entire audit programme only after he has had a satisfactory
understanding of the internal control systems and their actual operation. If he does not care to study
this aspect, it is very likely that his audit programme may become unwieldy and unnecessarily heavy
and the object of the audit may be altogether lost in the mass of entries and vouchers.
 Review of the internal control system will provide the auditor enough time to assimilate the controls
and implications and will enable him to be more objective in the framing of the audit programme.
 Auditor will also be in a position to bring to the notice of the management the weaknesses of the system
and to suggest measures for improvement.
 A proper understanding of the internal control system in its content and working also enables an
auditor to decide upon the appropriate audit procedure to be applied in different areas to be covered
in the audit programme.
 In a situation where the internal controls are considered weak in some areas, the auditor might choose
an auditing procedure or test that otherwise might not be required; he might extend certain tests to
cover a large number of transactions or other items than he otherwise would examine and at times he
may perform additional tests to bring him the necessary satisfaction.
Question 45
What are the specific risks related to internal controls in an IT Environment? [May 16, 5 Marks]
Or
The auditor should understand and consider the risks that may arise from the use of information
technology (IT) Systems. [May 18, 4 Marks]
Or
IT poses specific risks to an entity’s internal control. Explain. [RTP - May 19]

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Or
Which are specific risks to the company’s internal control having IT environment? [May 19, 4 Marks]
Answer
Risk to internal control imposed by IT:
As per SA 315, “Identifying and Assessing Risk of Material Misstatement through understanding the
Entity and its Environment” IT also poses specific risks to an entity’s internal control, including, for
example:
 Reliance on systems or programs that are inaccurately processing data, processing inaccurate data or
both
 Unauthorised access to data that may result in destruction of data or improper changes to data,
including the recording of unauthorized or non-existent transactions, or inaccurate recording of
transactions. Particular risk may arise when multiple users access a common database.
 The possibility of IT personnel gaining access beyond those necessary to perform their assigned duties
thereby breaking down segregation of duties.
 Unauthorised changes to data in Master files.
 Unauthorised changes to systems or programs.
 Failure to make necessary changes to systems or programs.
 In appropriate manual intervention
 Potential loss of data or inability to access data as required.
Question 46
Write short note on: Provisions for applicability of internal audit as per Companies Act, 2013.
[May 16, 4 Marks]
Or
As per Section 138 of the Companies Act, 2013 only listed companies are required to appoint an internal
auditor. [MTP – Oct. 21]
Answer
Provisions for applicability of internal audit:
As per section 138 of Companies Act, 2013 such class or classes of companies as may be prescribed shall
be required to appoint an internal auditor.
As per Rule 13 of Companies (Accounts) Rules, 2014, following companies must appoint Internal Auditor:
(1) Every listed company;
(2) Every unlisted public company having-
 Paid up share capital of 50 crore rupees or more during the preceding financial year; or
 Turnover of 200 crore rupees or more during the preceding financial year; or

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 Outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore
rupees or more at any point of time during the preceding financial year; or
 Outstanding deposits of 2 5 crore rupees or more at any point of time during the preceding financial
year; and
(3) Every private company having-
 Turnover of 200 crore rupees or more during the preceding financial year; or
 Outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore
rupees or more at any point of time during the preceding financial year.
Question 47

JKT (P) Ltd. having ` 40 lacs paid up capital, ` 9.50 crores reserves and turnover of last three consecutive
financial years, immediately preceding the financial year under audit, being ` 49 crores, ` 145 crores and
` 260 crores, but does not have any internal audit system. In view of the management, internal audit system
is not mandatory. Comment.
Answer
Applicability of provisions of internal audit:
As per section 138 of the Companies Act, 2013, read with rule 13 of Companies (Accounts) Rules, 2014
every private company shall be required to appoint an internal auditor or a firm of internal auditors,
having:
(i) turnover of two hundred crore rupees or more during the preceding financial year; or
(ii) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred
crore rupees or more at any point of time during the preceding financial year:
In the instant case, JKT (P) Ltd. is having turnover of ` 260 crores during the preceding financial year
which is more than two hundred crore rupees. Hence, the Company has the statutory liability to appoint
an Internal Auditor and mandatorily conduct internal audit.
Question 48

“MMJ Ltd., an unlisted public company, did not appoint any internal auditor for the financial year ending
on 31st March, 2022. The company had paid up capital of ` 20 crores and reserves of ` 25 crores. Its turnover
for the preceding 3 years were ` 75 crores for the year ended 31st March, 2021, ` 150 crores for March, 2020
and ` 190 crores for March, 2019. The company had availed term loan from the bank of ` 130 crores. The
outstanding balance of the term loan as on 31st March, 2021 is ` 90 crores.”
As an auditor of the company, how would you deal with the above? [Nov. 18, 5 Marks]
Answer
Applicability of Provisions of Internal Audit:

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As per section 138 of the Companies Act, 2013, read with rule 13 of Companies (Accounts) Rules, 2014
every unlisted public company having:
(i) Paid up share capital of 50 crore rupees or more during the preceding financial year; or
(ii) Turnover of 200 crore rupees or more during the preceding financial year; or
(iii) Outstanding loans or borrowings from banks or public financial institutions exceeding 100 crore
rupees or more at any point of time during the preceding financial year; or
(iv) Outstanding deposits of 25 crore rupees or more at any point of time during the preceding financial
year shall be required to appoint an internal auditor or a firm of internal auditors.
In the instant case, company is an unlisted public company, Paid up capital of the company is less than
`50 crores. Turnover for the immediate preceding financial year was ` 75 crores, which is lower than ` 200
Crores. The company had availed term loan from the bank of ` 130 crores. The outstanding balance of the
term loan as on 31st March, 2021 is ` 90 crores.
Conclusion: As the company is having outstanding loan exceeding ` 100 crore at the time when loan was
availed during the immediate preceding year, company has the statutory liability to appoint an Internal
Auditor and mandatorily conduct internal audit. Statutory Auditor need to state the fact in his report as
to non-compliance of Sec. 138.
Question 49
Explain the meaning, objectives and scope of internal audit functions as per SA 610. Also discuss who can
be appointed as Internal Auditor? [RTP - May 19]
Answer
Meaning of Internal Audit Function:
SA 610 “Using the Work of Internal Auditor” internal audit function is a function of an entity that performs
assurance & consulting activities designed to evaluate and improve the effectiveness of the entity's
governance, risk management and internal control processes.
Objective and Scope of Internal Audit Function as per SA 610:
The objectives and scope of internal audit functions typically include assurance and consulting activities
designed to evaluate and improve the effectiveness of the entity's governance processes, risk management
and internal control.
1. Activities Relating to Governance: Internal audit function may assess the governance process in its
accomplishment of objectives on ethics and values, accountability and communicating risk to
appropriate areas of the organization.
2. Activities relating to Risk Management: Internal audit function may assist the entity by identifying
and evaluating significant exposures to risk and contributing to the improvement of risk management
and internal control (including effectiveness of the financial reporting process).

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3. Activities Relating to Internal Control:

 Evaluation of internal control: Internal audit function may be assigned specific responsibility for
reviewing controls, evaluating their operation and recommending improvements thereto.
 Examination of financial and operating information: Internal audit function may be assigned to
review the means used to identify, recognize, measure, classify and report financial and operating
information, and to make specific inquiry into individual items, including detailed testing of
transactions, balances and procedures.
 Review of operating activities: The internal audit function may be assigned to review the
economy, efficiency and effectiveness of operating activities, including non-financial activities of
an entity.
 Review of compliance with laws and regulations: Internal audit function may be assigned to
review compliance with laws, regulations and other external requirements, and with management
policies and directives and other internal requirements.
Persons who can be appointed as internal auditor:
As per Sec. 138 of Companies Act, 2013 read with Rule 13 of Companies (Accounts) Rules, 2014, internal
auditor shall either be a chartered accountant (Whether in Practice or not) or a cost accountant, or such
other professional as may be decided by the Board to conduct internal audit of the functions and activities
of the company. Internal Auditor may or may not be an employee of the company.
Question 50
Board of Directors of MN Ltd. wants to appoint CA B, a practicing Chartered Accountant, as an internal
auditor of the company as they believe that they could not appoint any other person as an internal auditor
other than practicing chartered accountant.
Examine the correctness of the statement of Board of Directors of MN Ltd. with respect to provision of
Companies Act, 2013. [Nov. 19, 3 Marks]
Answer
Eligibility to be appointed as internal auditor:
 As per Sec. 130 of the Companies Act, 2013, internal auditor shall either be a chartered accountant
(Whether in Practice or not) or a cost accountant, or such other professional as may be decided by the
Board to conduct internal audit of the functions and activities of the company.
 Internal Auditor may or may not be an employee of the company.
 Hence, the statements that Board of Directors of MN Ltd. wants to appoint CA B. a practicing
Chartered Accountant, as an internal auditor of the company as they believe that they could not
appoint any other person as an internal auditor other than practicing chartered accountant, is not
correct.

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Question 51
Discuss the objectives and scope of internal audit functions with respect to activities relating to internal
control. [Jan. 21, 3 Marks]
Answer
Refer answer of Question 49.
Question 52
Care Ltd. is an unlisted public limited company. During the financial year 2020-21, the paid-up share
capital of Care Ltd. was INR 50 crore and the turnover was INR 180 crore. During the financial year 2021-
22, the Board of Directors of the company appointed an internal auditor. Whether Care Ltd. is required to
appoint an internal auditor according to the provisions of the Companies Act, 2013? [July 21, 3 Marks]
Answer
Requirement for appointment of internal auditor:
As per Sec. 138 of Companies, Act, 2013 read with Rule 13 of Companies (Accounts) Rules, 2014, unlisted
public company satisfying any of the following condition shall appoint Internal Auditor:
 Paid up share capital of ` 50 crore or more during the preceding financial year; or
 Turnover of ` 200 crore or more during the preceding financial year; or
 Outstanding loans or borrowings from banks or public financial institutions exceeding ` 100 crore or
more at any point of time during the preceding financial year: or
 Outstanding deposits of ` 25 crore or more at any point of time during the preceding financial year.
The paid-up share capital of Care Ltd. for the financial year 2020-21 was ` 50 crore and the turnover was
` 180 crore.
Conclusion: As the paid-up capital is ` 50 Crores during the preceding financial year, Care Ltd. is required
to appoint an internal auditor during the financial year 2021-22.
Question 53
Write a short note on: Meaning of internal financial control and auditor’s responsibilities thereon.
Answer
Meaning of internal financial control:
Sec. 134(5)(e) of Companies Act, 2013 defines the term Internal Financial Control as the policies and
procedures adopted by the company for ensuring the orderly and efficient conduct of its business,
including
 adherence to company's policies,
 the safeguarding of its assets,
 the prevention and detection of frauds and errors,
 the accuracy and completeness of the accounting records, and

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 the timely preparation of reliable financial information.

Rule 8(5) (viii) of the Companies (Accounts) Rules, 2014 requires that the director’s report should contain
details in respect of adequacy of internal financial controls with reference to the financial reporting.
Auditor’s Responsibilities w.r.t. Internal Financial Control:
Clause (i) of Sec. 143 (3) of Companies Act, 2013 requires the company auditor to report whether the
company has adequate internal financial controls with reference to financial statements in place and the
operating effectiveness of such controls.
Auditor is required to express an opinion on the effectiveness of the company’s internal financial controls
over financial reporting. It is carried out along with an audit of the financial statements.
Question 54
Auditor’s reporting on internal financial controls is a requirement specified in the Act and, therefore, will
apply only in case of reporting on financial statements prepared under the Act and reported under section
143. Explain stating clearly the auditor’s responsibility for reporting on internal financial controls over
financial reporting. [RTP - Nov. 18]
Answer
Auditors’ Responsibility for Reporting on Internal Financial Controls over Financial Reporting in India
 Sec. 143(3) (i) of the Companies Act, 2013 requires the auditors’ report to state whether the company
has adequate internal financial controls with reference to financial statements in place and the
operating effectiveness of such controls.
 It may be noted that auditor’s reporting on internal financial controls is a requirement specified in the
Act and, therefore, will apply only in case of reporting on financial statements prepared under the Act
and reported under section 143. Accordingly, reporting on internal financial controls will not be
applicable with respect to interim financial statements, such as quarterly or half-yearly financial
statements, unless such reporting is required under any other law or regulation.
Objectives of an auditor in an audit of internal financial controls over financial reporting: The auditor’s
objective in an audit of internal financial controls over financial reporting is, “to express an opinion on the
effectiveness of the company’s internal financial controls over financial reporting”. It is carried out along
with an audit of the financial statements.
Question 55
Explain how Internal Financial Control and Internal Controls over Financial Reporting differ?
[Jan. 21, 4 Marks]
Or
Explain clearly the difference between Internal Financial Control and Internal Controls over Financial
Reporting. [RTP – Nov. 21]
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Answer
Difference between internal financial control and internal control over financial reporting:
Internal Financial Control: Sec. 134 (5) of Companies Act, 2013 defines the term Internal financial control
as “the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of
its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and
detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely
preparation of reliable financial information.”
Internal Controls over Financial Reporting: It is required when auditors are required to express an
opinion on the effectiveness of an entity’s internal controls over financial reporting, such opinion is in
addition to and distinct from the opinion expressed by the auditor on the financial statements.
Question 56
The auditor's reporting on internal financial control will be applicable with respect to interim financial
statements. Discuss. [MTP - April 21]
Answer
Applicability of auditor's reporting on internal financial control on Interim financial statements:
 Sec. 143(3)(i) of Companies Act, 2013 requires the auditors to state in his report whether the company
has adequate internal financial controls system in place and the operating effectiveness of such
controls.
 It may be noted that auditor's reporting on internal financial controls is a requirement specified in the
Act and, therefore, will apply only in case of reporting on financial statements prepared under the Act
and reported u/s 143.
Conclusion: Reporting on internal financial controls will not be applicable with respect to interim financial
statements, such as quarterly or half-yearly financial statements, unless such reporting is required under
any other law or regulation.
Question 57
Explain the meaning of internal financial controls as per the Companies Act, 2013. Also explain its
objectives. [MTP - Nov. 21]
Answer
Meaning and Objectives of Internal Financial Controls:
 Sec. 134(5) (e) of Companies Act, 2013 defines the meaning of internal financial controls as “the policies
and procedures adopted by the company for ensuring the orderly and efficient conduct of its business,
including adherence to company's policies, the safeguarding of its assets, the prevention and detection
of frauds and errors, the accuracy and completeness of the accounting records, and the timely
preparation of reliable financial Information.”

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 From the above definition, it is clear that internal financial controls are the policies and procedures
adopted by the company for:
a) Ensuring the orderly and efficient conduct of its business, including adherence to company's
policies;
b) The safeguarding of its assets;
c) The prevention and detection of frauds and errors;
d) The accuracy and completeness of the accounting records; and
e) The timely preparation of reliable financial information.
Question 58
Auditor's reporting on internal financial controls is a requirement specified in the Act and, therefore, will
apply only in case of reporting on financial statements prepared under the Act and reported under section
143. Explain in detail quoting specifically the Law in the above context covering each and every aspect.
[RTP - Nov. 21]
Answer
Law relating to Internal Financial Controls:
 Auditor's reporting on internal financial controls is a requirement specified in the Act and, therefore,
will apply only in case of reporting on financial statements prepared under the Act and reported u/s
143. Accordingly, reporting on internal financial controls will not be applicable with respect to interim
financial statements, such as quarterly or half-yearly financial statements, unless such reporting is
required under any other law or regulation.
 The auditor's objective in an audit of internal financial controls over financial reporting is, “to express
an opinion on the effectiveness of the company's internal financial controls over financial reporting.”
It is carried out along with an audit of the financial statements.
 Reporting u/s 143(3) (i) is dependent on the underlying criteria for internal financial controls over
financial reporting adopted by the management. However, any system of internal controls provides
only a reasonable assurance on achievement of the objectives for which it has been established. Also,
the auditor shall use the concept of materiality in determining the extent of testing such controls.
 Rule 8(5) (viii) of the Companies (Accounts) Rules, 2014 requires that the board report of all companies
to state the details in respect of adequacy of internal financial controls with reference to the financial
statements. The inclusion of the matters relating to internal financial controls in the directors
responsibility statement is in addition to the requirement of the directors stating that they have taken
proper and sufficient care for the maintenance of adequate accounting records in accordance with the
provisions of the 2013 Act for safeguarding the assets of the company and for preventing and detecting
fraud and other irregularities.

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 CHAPTER 5

FRAUD AND RESPONSIBILITIES OF

THE AUDITOR
QUESTIONS WITH ANSWERS
Question 1
What do you understand by the term 'Fraud'? Provide its meaning as given under the Standard on
Auditing 240.
Or
Although fraud is a broad legal concept, for the purposes of the SAs, the auditor is concerned with fraud
that causes a material misstatement in the financial statements. Explain. [RTP - May 18]
Answer
Meaning and Nature of Fraud:
SA 240 “The Auditor's Responsibilities relating to Fraud in an Audit of Financial Statements” defines
the term fraud as “an intentional act by one or more individuals among management, TCWG, employees,
or third parties, involving the use of deception to obtain an unjust or illegal advantage”. The auditor is
concerned with fraud that causes a material misstatement in the financial statements.
Two types of intentional misstatements are relevant to the auditor:
 Misstatements resulting from fraudulent financial reporting;
 Misstatements resulting from misappropriation of assets.
Misstatements in the financial statements can arise from either fraud or error, fraud is intentional
and error is unintentional.
Question 2
Fraud, whether fraudulent financial reporting or misappropriation of assets, involves incentive or
pressure to commit fraud, a perceived opportunity to do so and some rationalization of the act. Explain.
[MTP – March 18, Oct. 18, March 19, May 20]
Answer
Fraud Risk Factors:
Fraud, whether fraudulent financial reporting or misappropriation of assets, involves
 Incentive or pressure to commit fraud: It may exist when management is under pressure, from sources
outside or inside the entity, to achieve an expected (and perhaps unrealistic) earnings target or
financial outcome.
 A perceived opportunity to do so: It may exist when an individual believes internal control can be
overridden, for example, because the individual is in a position of trust or has knowledge of specific
weaknesses in internal control.
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 Rationalization of the act: Individuals may be able to rationalize committing a fraudulent act. Some
individuals possess an attitude, character or set of ethical values that allow them knowingly and
intentionally to commit a dishonest act. However, even otherwise honest individuals can commit fraud
in an environment that imposes sufficient pressure on them.
Question 3
“Fraudulent financial reporting involves intentional misstatements including omissions of amounts or
disclosures in financial statements to deceive financial statements users.” Discuss. [MTP - Oct. 19]
Answer
Fraudulent Financial Reporting:
 As per SA 240 “Auditor’s Responsibilities relating to fraud in an audit of financial statements” the
auditor is concerned with fraud that causes a material misstatement in the financial statements.
Misstatement may result from fraudulent financial reporting or from misappropriation of assets.
 Fraudulent financial reporting involves intentional misstatements including omissions of amounts or
disclosures in financial statements to deceive financial statement users. Fraudulent financial reporting
may be accomplished by the following:
a) Manipulation, falsification (including forgery), or alteration of accounting records or supporting
documentation from which the financial statements are prepared.
b) Misrepresentation in or intentional omission from, the financial statements of events, transactions
or other significant information.
c) Intentional misapplication of accounting principles relating to amounts, classification, manner of
presentation, or disclosure.
 Fraudulent financial reporting often involves management override of controls that otherwise may
appear to be operating effectively.
Question 4
Detection of manipulation of accounts with a view to presenting a false state of affairs is a task requiring
great tact and intelligence. Explain stating the objective behind committing such fraud.
[RTP – Nov. 19, MTP – March 21, Oct. 21]
OR
Detection of manipulation of accounts with a view in presenting a false state of affairs is a task requiring
great tact and intelligent because generally management personnel in higher management cadre are
associated with this type of fraud and this is perpetrated in methodical way. Explain why such frauds are
committed. [RTP – Nov. 21]
Answer
Manipulation of Accounts:
Detection of manipulation of accounts with a view to presenting a false state of affairs is a task requiring
great tact and intelligence because generally management personnel in higher management cadre are
associated with this type of fraud and this is perpetrated in methodical way. This type of fraud is generally
committed.
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 To avoid incidence of income-tax or other taxes;

 For declaring a dividend when there are insufficient profits;
 To without declaration of dividend even when there is adequate profit (this is often done to manipulate
the value of shares in stock market to make it possible for selected persons to acquire shares at a lower
cost); and
 For receiving higher remuneration where managerial remuneration is payable by reference to profits.
Question 5

In the course of audit of A Ltd., you suspect that the management has indulged in fraudulent financial
reporting? State the possible sources of such fraudulent financial reporting.
Or
Write short note on: Fraudulent Financial Reporting. [Nov. 15, 4 Marks]
Or
Fraudulent financial reporting often involves management override of controls that otherwise may appear
to be operating effectively. Explain the techniques used to commit fraud by management overriding
controls. [MTP – Oct. 20]
Answer
Fraudulent Financial Reporting:
As per SA 240 “Auditor’s Responsibilities relating to fraud in an audit of financial statements” the auditor
is concerned with fraud that causes a material misstatement in the financial statements. Misstatement may
result from fraudulent financial reporting or from misappropriation of assets.
The various ways in which misstatements may be caused from fraudulent financial reporting are:
1. Recording fictitious journal entries, particularly close to the end of an accounting period, to manipulate
operating results or achieve other objectives.
2. Inappropriately adjusting assumptions and changing judgments used to estimate account balances.
3. Omitting, advancing or delaying recognition in the financial statements of events and transactions that
have occurred during the reporting period.
4. Concealing, or not disclosing, facts that could affect the amounts recorded in the financial statements.
5. Engaging in complex transactions that are structured to misrepresent the financial position or financial
performance of the entity.
6. Altering records and terms related to significant and unusual transactions.
Question 6

“Inadequate internal control over assets may increase the susceptibility of misappropriation of those
assets.” State any three examples of such occurrence of misappropriation of such assets. [Nov. 19, 3 Marks]

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Answer
Misappropriation of Assets:
As per SA 240 “Auditor’s Responsibilities relating to fraud in an audit of financial statements” the auditor
is concerned with fraud that causes a material misstatement in the financial statements. Misstatement may
result from fraudulent reporting or from misappropriation of assets.
Inadequate internal control over assets may also increase the susceptibility of misappropriation of those
assets. For example, misappropriation of assets may occur because there is the following:
(i) Inadequate segregation of duties or independent checks.
(ii) Inadequate oversight of senior management expenditures, such as travel and other reimbursements.
(iii) Inadequate record keeping with respect to assets.
(iv) Inadequate system of authorization and approval of transactions (for example, in purchasing)
(v) Inadequate physical safeguards over cash, investments, inventory, or fixed assets.
(vi) Lack of complete and timely reconciliations of assets.
(vii) Lack of timely and appropriate documentation of transactions, for example, credits for merchandise
returns.
(viii) Lack of mandatory vacations for employees performing key control functions.
(ix) Inadequate management understanding of information technology, which enables information
technology employees to perpetrate a misappropriation.
(x) Inadequate access controls over automated records, including controls over and review of computer
systems event logs.
Question 7
Discuss the different ways in which defalcation of cash may take place. [RTP – May 19]
Answer
Defalcation of cash:
Cash may be defalcated in following ways:
1. Inflating cash payments: by
 Making payments against fictitious vouchers.
 Making payments against vouchers, the amounts whereof have been inflated.
 Manipulating totals of wage by including names of dummy workers in wage rolls.
 Over casting for petty cash expenditure.
2. Suppressing cash receipts: by
 Teeming and Lading
 Adjusting unauthorized rebates, allowances, discounts etc. to customer’ accounts and
misappropriating amount paid by them.

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 Writing off as debts in respect of balances against which cash has already been received but has
been misappropriated.
 Not accounting for cash sales fully.
 Not accounting for miscellaneous receipts e.g. sale of scrap etc.
 Writing down asset values in entirely, selling them subsequently and misappropriating the
proceeds.
3. By casting wrong totals in the cash book.
Question 8
There are many ways for cash defalcation, one of which is by suppressing cash receipts. List out few
techniques of how the receipts are suppressed.
Or
Saburi Yarns Ltd. is engaged in manufacturing and trading of yarns of different types. Its huge amount is
locked up in account receivables. Moreover, Management of Saburi Yarns Ltd. is worried about its internal
Control system over receipts from account receivables and other receipts. Management wants to
understand from you as an auditor few techniques as to how receipts can be suppressed resulting into
frauds and finally incurring losses. [RTP – May 18]
Answer
Suppression of Cash Receipts:
Cash receipts may be suppressed in following ways:
 Teeming and Lading
 Adjusting unauthorized rebates, allowances, discounts etc. to customer’ accounts and
misappropriating amount paid by them.
 Writing off as debts in respect of balances against which cash has already been received but has been
misappropriated.
 Not accounting for cash sales fully.
 Not accounting for miscellaneous receipts e.g. sale of scrap etc.
 Writing down asset values in entirety, selling them subsequently and misappropriating the proceeds.
Question 9

Misappropriation of Assets involves the theft of an entity's assets and is often perpetrated by employees
in relatively small and immaterial amounts. However, it can also involve management who are usually
more able to disguise or conceal misappropriations in ways that are difficult to detect. Misappropriation
of assets can be accomplished in a variety of ways. Analyse and Explain. [RTP - Nov. 18]
Or

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“Theft of an entity's assets is often perpetrated by employees in relatively small and immaterial amounts.”
Explain the various ways in which the same can be accomplished? [Jan. 21, 3 Marks]
Answer
Ways of Misappropriation of Assets:
Misappropriation of Assets involves the theft of an entity's assets and is often perpetrated by employees
in relatively small and immaterial amounts. However, it can also involve management who are usually
more able to disguise or conceal misappropriations in ways that are difficult to detect. Misappropriation
of assets can be accomplished in a variety of ways including:
1. Embezzling receipts (for example, misappropriating collections on accounts receivable or diverting
receipts in respect of written-off accounts to personal bank accounts).
2. Stealing physical assets or intellectual property (for example, stealing inventory for personal use or for
sale, stealing scrap for resale, colluding with a competitor by disclosing technological data in return
for payment).
3. Causing an entity to pay for goods and services not received (for example, payments to fictitious
vendors, kickbacks paid by vendors to the entity's purchasing agents in return for inflating prices,
payments to fictitious employees).
4. Using an entity’s assets for personal use (for example, using the entity’s assets as collateral for a
personal loan or a loan to a related party).
Question 10
Explain any three ways where cash receipts are suppressed. [Jan. 21, 3 Marks]
Answer
Refer Answer of Question 7.
Question 11
Fraud in the form of misappropriation of goods is still more difficult to detect. Explain. [MTP – Nov. 21]
Answer
Misappropriation of Goods
 Fraud in the form of misappropriation of goods is still more difficult to detect; for this, management
has to rely on various measures. Apart from the various requirements of record keeping about the
physical quantities and their periodic checks, there must be rules and procedures for allowing persons
inside the area where goods are kept.
 In addition, there should be external security arrangements to see that no goods are taken out without
proper authority. Goods can be anything in the premises; it may be machinery. It may even be the
daily necessities of the office like stationery. The goods may be removed by subordinate employees or
even by persons quite higher up in the management.

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 Auditors can detect this by undertaking a thorough and strenuous checking of records followed by
physical verification process. Also, by resorting to intelligent ratio analysis, auditors may be able to
form an idea whether such fraud exists.
Question 12
The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not
detecting one resulting from error. Explain. [RTP - Nov. 18]
Answer
Risk associated for non-detection of material misstatements:
SA 240 “Auditor's Responsibilities relating to fraud in an audit of financial statements” requires that the
auditor is responsible for obtaining assurance that the F.S., taken as a whole are free from material
misstatement, whether caused by fraud or error. SA 240 provides the following in relation to risk
associated with non-detection of material misstatements:
 Owing to inherent limitations of an audit there is unavoidable risk that some material misstatements
of the F.S. may not be detected, even though the audit is properly planned and performed in
accordance with the SAs.
 The risk of not detecting a material misstatement resulting from fraud is higher than the risk of not
detecting one resulting from error. This is because fraud may involve sophisticated and carefully
organized schemes designed to conceal it, such as forgery.
 The risk of the auditor not detecting a material misstatement resulting from management fraud is
greater than for employee fraud as management is in a position to directly or indirectly manipulate
accounting records or present fraudulent financial information.
Question 13
While auditing XYZ Ltd, the auditor was told by Mr. Mahesh, the CEO of the company, that he would be
responsible for the fraud & errors, if any, occurring in the books of account of the company. Comment.
Or
Discuss the following: Is detection of fraud and errors duty of an auditor. [May 15, 5 Marks]
Or
Is detection of fraud and error duty of an auditor? [Nov. 17, 6 Marks]
Answer
Auditor's duties in case of material misstatement resulting from management fraud:
a) SA 240 “Auditor's Responsibilities relating to fraud in an audit of financial statements” requires that
the auditor is responsible for obtaining reasonable assurance that the F.S. taken as a whole are free
from material misstatement, whether caused by fraud or error.
b) Management is in a unique position to perpetrate fraud because of management's ability to manipulate
accounting records and prepare fraudulent financial statements by overriding controls.

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c) When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of
professional skepticism throughout the audit.
d) The auditor should recognize the possibility that a material misstatement due to fraud could exist,
notwithstanding his past experience of the honesty and integrity of the entity's management and those
charged with governance.
e) If conditions cause the auditor to believe that a document may not be authentic or that terms in a
document have been modified, the auditor shall investigate further.
f) Where responses to inquiries of management or TCWG are inconsistent, the auditor shall investigate
the inconsistencies.
Conclusion: Detection of fraud and error is not the duty of auditor.
Question 14

Fraud can be committed by management overriding controls using such techniques as engaging in
complex transactions that are structured to misrepresent the financial position or financial performance of
the entity. In view of the above-mentioned circumstances of management fraud, explain briefly duties and
responsibilities of an auditor in case of material misstatement resulting from such Management Fraud.
Answer
Auditor's duties for prevention and detection of fraud:
 An auditor is responsible for obtaining reasonable assurance that the F.S. taken as a whole are free
from material misstatement, whether caused by fraud or error.
 When obtaining reasonable assurance, the auditor is responsible for maintaining an attitude of
professional skepticism throughout the audit.
 The auditor should recognize the possibility that a material misstatement due to fraud could exist,
notwithstanding his past experience of the honesty and integrity of the entity's management and those
charged with governance.
 Unless doubtful situations are present, the auditor may accept records and documents as genuine.
 If conditions cause the auditor to believe that a document may not be authentic or that terms in a
document have been modified, the auditor shall investigate further.
 Where responses to inquiries of management or TCWG are inconsistent, the auditor shall investigate
the inconsistencies.
Procedures when circumstances indicate a Possible Misstatement
When the auditor encounters circumstances that may indicate that there is a material misstatement in the
financial statements resulting from fraud or error, the auditor should perform procedures to determine
whether the financial statements are materially misstated.

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Considering whether an Identified Misstatement may be Indicative of Fraud

When the auditor identifies a misstatement, the auditor should consider whether such a misstatement may
be indicative of fraud.
If there is an indication, the auditor should consider the implications of the misstatement in relation to
other aspects of the audit, particularly the reliability of management representations.
Communication
 If the auditor has identified a fraud or has indication of fraud, the auditor should communicate that
information to management, TCWG and,
 In some circumstances, when so required by the laws and regulations, to regulatory and enforcement
authorities also.
Question 15
You notice a misstatement resulting from fraud or suspected fraud during the audit and conclude that it
is not possible to continue the performance of audit. As a Statutory Auditor, how would you deal?
Or
Explain how would you deal as an auditor if, as a result of a misstatement resulting from fraud or
suspected fraud, you encounter exceptional circumstances that bring into question your ability to continue
performing the audit. [RTP - May 19, Nov. 20]
Or
As an auditor of PQR Ltd, you came across a misstatement resulting from fraud or suspected fraud which
brings into question your ability to continue performing the audit. Explain the courses of actions available
to you. [Nov. 20, 4 Marks]
Answer
Auditor Unable to Complete the Engagement:
If the auditor concludes that it is not possible to continue performing the audit as a result of a misstatement
resulting from fraud or suspected fraud, the auditor should:
 Consider the professional and legal responsibilities applicable in the circumstances, including whether
there is a requirement for the auditor to report to the person or persons who made the audit
appointment or, in some cases, to regulatory authorities;
 Consider the possibility of withdrawing from the engagement; and
 If the auditor withdraws:
a) Discuss with the appropriate level of management and TCWG, the auditor's withdrawal from the
engagement and the reasons for the withdrawal; and
b) Consider whether there is a professional or legal requirement to report to the person or persons
who made the audit appointment or, in some cases, to regulatory authorities, the auditor's
withdrawal from the engagement and the reasons for the withdrawal.
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Question 16
After the completion of statutory audit of ABC Ltd., a fraud was detected at the office of the auditee. The
management of the company alleged that there is a failure on the part of the auditor to detect fraud and
that auditor would be responsible for not detecting fraud in the company. Comment.
Answer
Auditor's responsibility for failure to detect Fraud and Errors:
As per SA-240, the responsibility for the prevention and detection of fraud and error rests with
management through the implementation of an adequate system of internal control. Such a system reduces
but does not eliminate the possibility of fraud and error. Auditor's responsibility for failure to detect fraud
and error can arise only due to proven negligence. The relevant provisions in the regard are:
a) In forming his opinion, the auditor carries out procedures designed to obtain evidence that will
provide reasonable assurance that the financial information is properly stated in all material respects.
b) Due to the inherent limitations of an audit there is a possibility that material misstatements of the
financial information resulting from fraud or error may not be detected. An auditor cannot be charged
for non-adherence of basic principles in the following circumstances:
 Subsequent discovery of material misstatement of the financial information resulting from fraud
or error;
 Failure to disclose the affairs of the company kept out of books and concealed from him.
 Unless it is proved that procedures undertaken by auditor in the circumstances are inadequate and
improper.
Thus if a fraud has been detected after the completion of the audit, or some material misstatement has not
been reported by auditor, the same by itself cannot mean that the auditor did not perform his duty
properly.
If the auditor can prove with the help of his papers (documentation) that he has followed adequate
procedures necessary for the proper conduct of an audit, he cannot be held responsible for the same.
Question 17
The primary responsibility for the prevention and detection of fraud rests with both those charged with
governance of the entity and management. Explain. [RTP – May 21]
Answer
Responsibility for the prevention and detection of fraud:
 The primary responsibility for the prevention and detection of fraud rests with both TCWG of the
entity and management.
 It is important that management, with the oversight of TCWG, place a strong emphasis on fraud
prevention, which may reduce opportunities for fraud to take place, and fraud deterrence, which could

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persuade individuals not to commit fraud because of the likelihood of detection and punishment. This
involves a commitment to creating a culture of honesty and ethical behaviour which can be reinforced
by an active oversight by those charged with governance.
 In exercising oversight responsibility, TCWG consider the potential for override of controls or other
inappropriate influence over the financial reporting process, such as efforts by management to manage
earnings in order to influence the perceptions of analysts as to the entity’s performance and
profitability.
Question 18
Fraud Risk Factors are the events or conditions that indicate an incentive or pressure to commit fraud or
provide an opportunity to commit fraud.
Further, the nature of the industry or the entity’s operations also provides opportunities to engage in
fraudulent financial reporting. List out some of the cases from where these opportunities may arise.
Answer
Examples of Fraud Risk Factors (Opportunities) relating to Misstatements arising from fraudulent
financial reporting:
The nature of the industry or the entity’s operations provides opportunities to engage in fraudulent
financial reporting that can arise from the following:
(a) Significant related-party transactions not in the ordinary course of business.
(b) A strong financial presence or ability to dominate a certain industry sector that allows the entity to
dictate terms or conditions to suppliers or customers that may result in inappropriate or non-arm’s-
length transactions.
(c) Assets, liabilities, revenues, or expenses based on significant estimates that involve subjective
judgments or uncertainties that are difficult to corroborate.
(d) Significant, unusual, or highly complex transactions, especially those close to period end that pose
difficult “substance over form” questions.
(e) Significant operations located or conducted across international borders in jurisdictions where
differing business environments and cultures exist.
(f) Significant bank accounts or subsidiary or branch operations in tax haven jurisdictions for which
there appears to be no clear business justification.
Question 19
With reference to SA 240 give some examples of circumstances that may indicate the possibility that the
financial statements may contain a material misstatement resulting from fraud.
Answer
Conditions or Events which increase the risk of fraud or error:

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As per SA 240 “Auditor's Responsibilities relating to fraud in an audit of financial statements” various
conditions or events which increase the risk of fraud or error leading to material misstatements are
mentioned below:
1. Discrepancies in the Accounting records: It includes the following:
(a) Transactions that are not recorded in a complete or timely manner or are improperly recorded.
(b) Unsupported or unauthorized balances or transactions.
(c) Last-minute adjustments that significantly affect financial results.
(d) Evidence of employees’ access to systems and records inconsistent with that necessary to perform
their authorized duties.
(e) Tips or complaints to the auditor about alleged fraud.
2. Conflicting or missing evidence: It includes the following:
(a) Missing documents.
(b) Documents that appear to have been altered.
(c) Unavailability of other than photocopied or electronically transmitted documents when documents
in original form are expected to exist.
(d) Significant unexplained items on reconciliations.
(e) Inconsistent responses from management or employees arising from inquiries or analytical
procedures.
(f) Unusual discrepancies between the entity’s records and confirmation replies.
(g) Fewer responses to confirmations than anticipated or a greater number of responses than
anticipated.
3. Unusual relationship between the auditor and management: It may include the following:
(a) Undue time pressures imposed by management to resolve complex issues.
(b) Complaints by management about the conduct of the audit, particularly in connection with
auditor’s critical assessment of audit evidence or in the resolution of potential disagreements with
management.
(c) Unusual delays by the entity in providing requested information.
(d) An unwillingness to add or revise disclosures in the financial statements to make them more
complete and understandable.
(e) Unwillingness to address identified weaknesses in internal control.
4. Others: It may include the following:
(a) Unwillingness by management to permit the auditor to meet privately with TCWG.
(b) Accounting policies that appear to be at variance with industry norms.
(c) Frequent changes in accounting estimates that do not appear to result from changed circumstances.

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Question 20
Discrepancies in the accounting records, including transactions that are not recorded in a complete or
timely manner or are improperly recorded as to amount, accounting period, classification, or entity policy
is one of the examples of circumstances that indicate the possibility of fraud. Explain at least four other
such examples relating to discrepancies in the accounting records. [RTP - May 20]
Answer
Refer Answer of Question 19.
Question 21
Write any five circumstances of conflicting or missing evidence that indicate the possibility of fraud.
[Nov. 18, 5 Marks, MTP - April 21]
Answer
Refer Answer of Question 19.
Question 22
Write the circumstances that indicate the possibility of fraud due to problematic or unusual relationship
between the auditor and management. [MTP - April 19]
Answer
Refer Answer of Question 19.
Question 23
List out any three circumstances which induces the management/employee to commit the fraud.
[July 21, 3 Marks]
Answer
Circumstances which induces the management/employee to commit the fraud:
1. Financial obligations/Pressure.
2. Management's unrealistic goals.
3. Dissatisfied Employees or Lack of motivation among employees.
4. Name game (e.g. management using power of authority by asking employees to do something illegal).
5. Opportunity to commit fraud.
Question 24
Auditor of A Ltd. while conducting audit in the course of the performance of his duties as auditor, believes
with reasons that “an offence of fraud involving such amount or amounts as may be prescribed, is being
or has been committed in the company by its officers or employees, the auditor shall report the matter to
the Central Government within such time and in such manner as may be prescribed”. Analyse and also
explain the manner of reporting the matter to the Central Government. [RTP – May 20]

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Or
Explain the manner of Reporting of fraud under Companies Act, 2013.
Or
As per sub-section (12) of section 143 of the Companies Act, 2013, if an auditor of a company in the course
of the performance of his duties as auditor, has reason to believe that an offence of fraud involving such
amount or amounts as may be prescribed, is being or has been committed in the company by its officers
or employees, the auditor shall report the matter to the Central Government within such time and in such
manner as may be prescribed.
In this regard, Rule 13 of the Companies (Audit and Auditors) Rules, 2014 has been prescribed. Sub-rule
(1) of the said rule states that if an auditor of a company, in the course of the performance of his duties as
statutory auditor, has reason to believe that an offence of fraud, which involves or is expected to involve
individually an amount of ` 1 crore or above, is being or has been committed against the company by its
officers or employees, the auditor shall report the matter to the Central Government.
Explain the manner of reporting the matter to the Central Government in the above context.
[RTP – Nov. 20]
Or
Mr. A is appointed as statutory auditor of a company for the Financial Year ended 31st March, 2022. During
the course of audit, it was found that few doubtful transactions had been committed by finance manager
who retired in March, 2022. The fraud was going on since last 2-3 years and the total amount
misappropriated exceeding ` 100 lakhs. As a statutory auditor, what would be reporting responsibilities
of Mr. A? [MTP – March 21]
Answer
Manner of Reporting of Fraud:
Rule 13 of Companies (Audit and Auditors) Rules, 2014 prescribes the manner of Reporting of Frauds as
below:
1) If an auditor of a company, in the course of the performance of his duties as statutory auditor, has
reason to believe that an offence of fraud, which involves or is expected to involve individually an
amount of ` 1 crore or above, is being or has been committed against the company by its officers or
employees, the auditor shall report the matter to the CG.
2) The auditor shall report the matter to the CG as under:
(a) The auditor shall report the matter to the Board or the Audit Committee, as the case may be,
immediately but not later than 2 days of his knowledge of the fraud, seeking their reply or
observations within 45 days;

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(b) On receipt of such reply or observations, the auditor shall forward his report and the reply or
observations of the Board or the Audit Committee along with his comments (on such reply or
observations of the Board or the Audit Committee) to the CG within 15 days from the date of
receipt of such reply or observations;
(c) In case the auditor fails to get any reply or observations from the Board or the Audit Committee
within the stipulated period of 45 days, he shall forward his report to the CG along with a note
containing the details of his report that was earlier forwarded to the Board or the Audit
Committee for which he has not received any reply or observations;
(d) The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by
Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in
confirmation of the same;
(e) The report shall be on the letter-head of the auditor containing postal address, e-mail address
and contact telephone number or mobile number and be signed by the auditor with his seal
and shall indicate his Membership Number; and
(f) The report shall be in the form of a statement as specified in Form ADT-4.
3) In case of a fraud involving amount less than ` l Cr., the auditor shall report the matter to Audit
Committee constituted u/s 177 or to the Board immediately but not later than 2 days of his knowledge
of the fraud and he shall report the matter specifying the following:
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.
4) The following details of each of the fraud reported to the Audit Committee or the Board under sub-
rule (3) during the year shall be disclosed in the Board’s Report:
(a) Nature of fraud with description;
(b) Approximate amount involved;
(c) Parties involved, if remedial action not taken; and
(d) Remedial actions taken.
Question 25
Intelligent Ltd. entered into an agreement with Mr. Intellectual on 15th March, 2021, whereby it agreed to
pay him ` 2 lakhs per month as retainer ship fee for consultation in IT department. However, no amount
was actually paid and ` 24 lakhs were provided in the Statement of Profit and Loss for the year ending on
31st March, 2022. Management of the company uttered that need-based consultation was obtained
throughout the year. However, on investigation, no documentary or other evidence of receipt of such
service was found. As the auditor of Innocent Ltd., what would be your approach?

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Would your approach be different if the amount involved is ` 1 crore or above?

Answer
Reporting of Fraud:
 Sec. 143(12) of Companies Act, 2013 requires that if an auditor of a company in the course of the
performance of his duties as auditor, has reason to believe that an offence of fraud involving such
amount or amounts as may be prescribed, is being or has been committed in the company by its officers
or employees, the auditor shall report the matter to the Central Government within such time and in
such manner as may be prescribed (Rule 13):

 Provided that in case of a fraud involving lesser than the specified amount, the auditor shall report the
matter to the audit committee constituted u/s 177 or to the Board in other cases within such time and
in such manner as may be prescribed:
 Provided further that the companies, whose auditors have reported frauds under this sub-section to
the audit committee or the Board but not reported to the Central Government, shall disclose the details
about such frauds in the Board's report in such manner as may be prescribed.

 If the amount of Fraud appears to be of ` 24 Lacs, reporting not required to Central Government.
However, if the amount involved in the fraud is of ` 1 Cr. or above, auditor approach will be different
as the reporting is required to Central Government.
Time and Manner of Reporting - Rule 13 of Companies (Audit & Auditor’s) Rules, 2014:
Refer Answer of Question 24.
Question 26
The scope of auditor’s inquiry under clause (xi) of paragraph 3 of Companies (Auditor’s Report) Order is
restricted to frauds’ noticed or reported’ during the year. Explain.
Or
The auditor’s requirement to report under clause (xi) of paragraph 3 of the Companies (Auditor’s Report)
Order is restricted to frauds noticed or reported during the year. Explain what auditors may consider for
reporting under this clause? [Nov. 20, 3 Marks]
Or
Where the auditor notices that any fraud by the company or on the company by its officers or employees
has been noticed by or reported during the year, the auditor should, apart from reporting the existence of
fraud, also report under clause (xi) of paragraph 3 of Companies (Auditor’s Report) Order, 2020 the nature
of fraud and amount involved. Explain the considerations an auditor would keep in mind for reporting
under this clause. [RTP – May 21]

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Answer
Reporting of Fraud under CARO, 2020:
 Para 3(xi) of CARO, 2020 requires the auditor to report whether any fraud by the company or any
fraud on the Company has been noticed or reported during the year; if yes, the nature and the amount
involved is to be indicated.
 The scope of auditor’s inquiry under this clause is restricted to frauds ‘noticed or reported’ during the
year.
 The use of the words “noticed or reported” indicates that the management of the company should
have the knowledge about the frauds.
 This clause does not relieve the auditor from his responsibility to consider fraud and error in an audit
of financial statements. In other words, irrespective of the auditor’s comments under this clause, the
auditor is also required to comply with the requirement of SA 240.
 The auditor should obtain written representations from management that:
a) It acknowledges its responsibility for the implementation and operation of accounting and internal
control systems that are designed to prevent and detect fraud and error;
b) It believes the effects of those uncorrected misstatements in financial statements, aggregated by the
auditor during the audit are immaterial, both individually and in the aggregate, to the financial
statements taken as a whole. A summary of such items should be included in or attached to the
written representation;
c) It has disclosed to the auditor all significant facts relating to any frauds or suspected frauds known
to management that may have affected the entity; and
d) It has disclosed to the auditor the results of its assessment of the risk that the financial statements
may be materially misstated as a result of fraud.
 For reporting under this clause, the auditor may consider the following:
a) This clause requires all frauds noticed or reported during the year shall be reported indicating the
nature and amount involved. As specified the fraud by the company or on the company by its
officers or employees are only covered.
b) Of the frauds covered under section 143(12) of the Act, only noticed frauds shall be included here
and not the suspected frauds.
 While reporting under this clause with regard to the nature and the amount involved of the frauds
noticed or reported, the auditor may also consider the principles of materiality outlined in Standards
on Auditing.

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 CHAPTER 6
AUDIT IN AN AUTOMATED ENVIRONMENT
QUESTIONS WITH ANSWERS
Question 1
The fundamental principle of an automated environment is the ability to carry out business with less
manual intervention. Explain. [MTP-March 19]
Or
Explain the meaning of automated environment. Also discuss the key features of an automated
environment. [RTP-May 19]
Answer
Automated Environment:
 Automated environment refers to a business environment where the processes, operations, accounting
and decisions are being carried out by using computer systems – also known as Information Systems
(IS) or Information Technology (IT) systems.
 Fundamental principle of an automated environment is the ability to carry out business with less
manual intervention and more system driven.
 The complexity of a business environment depends on the level of automation i.e., if a business
environment is more automated, it is likely to be more complex. For example, if a company uses an
integrated enterprise resource planning system (ERP) viz., SAP, Oracle etc., then it is considered more
complex to audit. On the other hand, if a company is using an off-the-shelf accounting software, then
it is likely to be less automated and hence less complex environment.
Key features of Automated Environment:
 Faster Business Operations.
 Accuracy in data processing and computation.
 Ability to process large volume of data.
 Integration between business operations.
 Better security and controls.
 Less prone to human errors.
 Provides latest information.
 Connectivity and networking capability.
Question 2
When a business operates in a more automated environment it is likely that we will see several business
functions and activities happening within the systems. Explain stating the points that an auditor should
consider to substantiate the above. [RTP – Nov. 18, Nov. 20]
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Answer
Relevance of IT in business functions and activities:
In an automated environment it is likely that a number of business functions and activities happened
within the systems, for example:
 Computation and Calculations are automatically carried out.
 Accounting entries are posted automatically.
 Business policies and procedures, including internal controls, are applied automatically.
 Reports used in business are produced from systems. Management and other stakeholders rely on
these reports and information produced.
 User access and security are controlled by assigning system roles to users.
Companies derive benefit from the use of IT systems as an enabler to support various business operations
and activities, but at the same time such system also introduce certain new risks, including IT specific risks,
which need to be considered, assessed and addressed by management.
Question 3
Briefly describe the reasons why IT should be considered relevant to an audit of financial statements.
Or
Discuss the situations in which IT will be relevant to an audit. [RTP – May 19]
Or
The auditor’s responsibility includes reporting on Internal Financial Controls over Financial Reporting
which include and understanding IT environment of the company and relevant risks and control. Mention
any three situations where IT will be relevant to an audit. [Nov. 19, 3 Marks]
Answer
Relevance of IT in auditing:
In an automated environment, carrying out audit using traditional substantive audit procedures may be
difficult or even not feasible if the company prepares, records and conducts majority of business activities
through IT systems only.
Auditor is required to obtain an understanding of IT environment of the company and document the same.
While carrying out audit in an automated environment, auditors are required to understand, assess and
respond to such risks that arise from the use of IT systems.
Situations requiring use of IT in Audit:
(a) Increased use of Systems and Application software in Business (for example, use of ERPs).
(b) Increased complexity of business transactions (multiple systems, network of systems).
(c) Technology based business (Telecom, e-Commerce).
(d) High Volume of transactions (Insurance, Banking etc.)
(e) Company Policy (Compliance)
(f) Regulatory requirements – IT Act, 2008.
(g) Requirements of Standards of Auditing – SA 315.
(h) Increases efficiency and effectiveness of audit.

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Question 4
With the increasing adoption of information technology, business today relies on software systems and
applications more than ever. Many of these IT systems generate and process data that is used in the
preparation of financial statements of a company. The auditors also often rely on the data and reports that
are generated from these systems. Explain stating clearly the meaning of Automated environment with
example. [RTP - Nov. 20]
Answer
Concept of Automated Environment:
 With the increasing adoption of information technology, business today relies on software systems
and applications more than ever. Many of these IT systems generate and process data that is used in
the preparation of financial statements of a company.
 Auditors also often rely on the data and reports that are generated from these systems. In this context,
it is critical to understand the IT specific risks that could potentially impact the integrity and reliability
of financial transactions and data flowing through a company's systems.
 An automated environment basically refers to a business environment where the processes,
operations, accounting and even decisions are carried out by using computer systems - also known as
Information Systems (IS) or Information Technology (IT) systems. Nowadays, it is very common to see
computer systems being used in almost every type of business.
Example
Carrying out of banking transactions using ATMs (Automated Teller Machines), or purchasing of tickets
using “apps” on mobile phones, etc. Computer systems enable these transactions at any time and any day.
Question 5

The auditor should consider relevance of IT in an audit of financial statements. Explain giving reasons.
[RTP - Nov. 21]
Answer
Considering relevance of IT in an audit of financial statements:
The auditor should consider relevance of IT in an audit of financial statements for the following reasons:
a) Since auditors rely on the reports and information generated by IT systems, there could be risk in the
IT systems that could have an impact on audit.
b) SA 315 and SA 330 require auditors to understand, assess and respond to risks that arise from the use
of IT systems.
c) By relying on automated controls and using data analytics in an audit, it is possible to increase the
effectiveness and efficiency of the audit process.

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Question 6
Understanding the entity and its automated environment involves understanding how IT department is
organised, IT activities, the IT dependencies, relevant risks and controls.
Explain stating the points that an auditor should consider to obtain an understanding of the company's
automated environment. [RTP - May 18, MTP - Oct. 19]
Or
List any five points that an auditor should consider to obtain an understanding of the company’s
automated environment. [May 18, 5 Marks]
Or
Give some of the points that an auditor should consider to obtain an understanding of the company's
automated environment. [RTP – Nov. 19]
Answer
Understanding of Automated Environment:
As required by SA 315, auditor is required to obtain an understanding of the entity and its environment
as a part of Risk Assessment procedure to identify and assess Risk of Material Misstatements.
While obtain an understanding of the company's automated environment, auditor should consider the
following points:
 Information systems being used (one or more application systems and what they are).
 Their purpose (financial and non-financial).
 Location of IT systems - local v. global.
 Architecture (desktop based, client-server, web application, cloud based).
 Version (functions and risks could vary in different versions of same application).
 Interfaces within systems (in case multiple systems exist).
 In-house v. Packaged.
 Outsourced activities (IT maintenance and support).
 Key persons (CIO, CISO, Administrators).
As required by SA 230, auditor is required to document the understanding of a company automated
environment.
Question 7
“IT poses specific risk to internal control system of an entity”. Comment.
Or
Having obtained an understanding of the IT systems and the automated environment of a company, the
auditor should consider the risks that arise from the use of IT systems. Explain.
[MTP - Aug. 18, RTP - Nov. 19]

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Answer
Risk to internal control imposed by IT:
As per SA 315, “Identifying and Assessing Risk of Material Misstatements through Understanding the
Entity and its Environment” IT poses specific risks to an entity's internal control, including, for example:
(a) Reliance on systems or programs that are inaccurately processing data, processing inaccurate data or
both.
(b) Unauthorised access to data that may result in destruction of data or improper changes to data,
including the recording of unauthorized or non-existent transactions, or inaccurate recording of
transactions. Particular risk may arise when multiple users access a common database.
(c) The possibility of IT personnel gaining access beyond those necessary to perform their assigned duties
thereby breaking down segregation of duties.
(d) Unauthorised changes to data in Master files.
(e) Unauthorised changes to systems or programs.
(f) Failure to make necessary changes to systems or programs.
(g) In appropriate manual intervention.
(h) Potential loss of data or inability to access data as required.
Question 8
Describe how risks in IT systems, if not mitigated, could have an impact on audit.
Or
Discuss the impact of IT related risks on Substantive Audit, Controls and Reporting. [RTP – May 18]
Or
Analysis how risks in the IT system if not mitigated could have an impact on the audit.
[Nov. 20, 3 Marks]
Answer
Impact of IT Related Risks:
When risks in IT systems are not mitigated the audit may be imported as:
 Auditor may not be able rely on the reports, data obtained, automated controls, calculations and
accounting procedures in the IT system.
 Auditor has to perform additional audit work by spending more time and efforts.
 Auditor may have to issue a modified opinion, if necessary.
Impact of IT on substantive tests, controls and reporting:
(a) On Substantive Audit:
 Non-reliance on the data obtained from systems.
 Substantive testing of system data and reports for completeness and accuracy.
 Need of more audit evidences.

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(b) On Controls:
 Non-reliance on automated controls, system calculations and accounting procedures.
 Non-reliance on IT dependent Manual Controls.
 Substantive testing of system data and reports for completeness and accuracy.
 Need of more substantive test audit.
(c) On Reporting:
 Communication to TCWG.
 Modified Audit reports.
Question 9
Write short note on: General IT Controls.
Answer
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, mini frame, and end-user environments. General IT-controls that maintain the
integrity of information and security of data commonly include controls over the following:
1. Data centre and network operations.
2. Program change.
3. Access security.
4. Application system acquisition, development, and maintenance.
Question 10
Describe application controls and give three examples of automated application controls.
Answer
Application Controls:
 Application controls are manual or automated procedures that typically operate at a business process
level and apply to the processing of individual applications.
 Application controls can be preventive or detective in nature and are designed to ensure the integrity
of the accounting records.
 Accordingly, application controls relate to procedures used to initiate, record, process and report
transactions or other financial data. These controls help ensure that transactions occurred, are
authorised, and are completely and accurately recorded and processed.
 Examples of Application controls include the following:
1. Edit checks and Validation of input data,
2. Sequence Number checks.
3. Limit Checks.
4. Reasonable Checks.
5. Mandatory Data Fields.

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Question 11
Identify the controls which are automated, manual or IT dependent manual for the below mentioned
cases?
(i) Price master configured in the sales master can only be edited by authorised personnel in the system.
(ii) Invoice cannot be booked in SAP in case Purchase orders are not approved.
(iii) Inventory ageing report is pulled out from the system based on which provisioning is calculated
after analyzing the future demand by the inventory personnel and approved by the controller.
(iv) All invoices are signed by warehouse personnel before the goods are dispatched to the customer.
(v) Credit limit is assigned to the customer and goods cannot be sold in excess of credit limit configured
in the system.
(vi) All changes to the credit limit is approved manually by sales manager.
(vii) Ageing report is pulled out from SAP based on which provisioning is calculated by accounting
personnel and approved by financial controller.
(viii) PO, GRN (Good received note) and invoice are matched by the system before it is posted in the
financial records.
Answer
Identification of Controls:
(i) Automated control as there is inbuilt control which allows editing in sales master by only authorised
personnel.
(ii) Automated control as there is inbuilt control which doesn’t allow approval of invoice in case of non-
approval of purchase order.
(iii) IT dependent manual control as inventory ageing report is pulled out from the system after which
provides for inventory is manually approved.
(iv) Manual control as sign off is required to be done for the invoice before the dispatch of the goods.
(v) Automated control as there is inbuilt control that doesn’t allow goods to be sold if credit limit
assigned to the customer has been crossed.
(vi) Manual control as sign off is required for every change to the credit limit.
(vii) IT dependent manual control as ageing report is relied upon for calculation of provisioning for
debtors.
(viii) Automated control as PO, GRN and invoice is matched by the system before recording of the invoice
to the vendor account.
Question 12
What are the different testing methods used when auditing in an automated environment? Which is the
most effective and efficient method of testing?

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Or
Generally, applying inquiry in combination with inspection gives the most-effective and efficient audit
evidence. However, which audit test to use, when and in what combination is a matter of professional
judgment. Discuss stating the different ways testing is performed in an automated environment.
[MTP – Oct. 18]
Answer
Testing Methods used while auditing in an Automated Environment:
There are basically four types of audit tests that should be used:
(a) Inquiry
(b) Observation
(c) Inspection
(d) Reperformance
Consideration while selecting testing method:
 Which audit test to use, when and in what combination is a matter of professional judgment and will
vary depending on several factors including risk assessment, control environment, desired level of
evidence required, history of errors/ misstatements, complexity of business, assertions being
addressed, etc.
 Inquiry is the most efficient audit test but it gives least audit evidence. Therefore, inquiry should be
used in combination with other audit testing methods. Inquiry alone is not sufficient.
 Reperformance is most effective as an audit test and gives the best audit evidence. However, it will
be very time consuming and least efficient most of the time.
 Applying inquiry in combination with inspection gives the most effective and efficient audit evidence.
 The auditor should document the nature of test (or combination of tests) applied along with the
judgments in the audit file as required by SA 230.
Question 13
Discuss the different ways testing is performed in an automated environment. [MTP – March 18]
Or
Explain some of the commonly used methods for testing in an automated environment. [RTP – May 20]
Or
Discuss the common methods applied by the auditor when testing in an automated environment is done
by him. [Jan. 21, 4 Marks]
Answer
Commonly used methods for testing in an automated environment:
1. Obtain an understanding of how an automated transaction is processed by doing a walk-through of
one end-to-end transaction using a combination of inquiry, observation and inspection.

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2. Observe how a user processes transaction under different scenarios.

3. Inspect the configuration defined in an application.
4. Inspect the system logs to determine any changes made since last audit testing.
5. Inspect technical manual/user manual of systems and applications.
6. Carry out a test check and observe the error message displayed by the application.
7. Conduct reperformance using raw source data and independently applying formulae, business rules
or validations on the source data using CAATs.
Question 14
Objective of Data Center and Network Operations is to ensure that production systems are processed to
meet financial reporting objectives. Discuss the activities performed by Data Center and Network
operations. Also explain the meaning of General IT Controls in detail. [RTP – May 21]
Answer
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 environments.
General IT controls that maintain the integrity of information and security of data commonly include
controls over the following:”
(i) Data center and network operations
(ii) Program change
(iii) Access security
(iv) 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. Let us now learn about each of the General IT controls in more
detail.
Data Center and Network Operations
Objective: To ensure that production systems are processed to meet financial reporting objectives.
Activities:
1. Overall Management of Computer Operations Activities
2. Batch jobs-preparing scheduling and executing
3. Backups-monitoring, storage & retention
4. Performance Monitoring-operating system, database and networks
5. Recovery from Failures – BCP, DRP

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6. Help Desk Functions – recording, monitoring & tracking

7. Service Level Agreements – monitoring & compliance
8. Documentation – operations manuals, service reports.
Question 15
Briefly describe the reporting requirements of Internal Financial Control.
Answer
Meaning of IFC:
The term Internal Financial Controls means the policies and procedures adopted by the company for
ensuring:
 Orderly and efficient conduct of its business, including adherence to Company’s policies,
 Safeguarding of its assets,
 Prevention and detection of frauds and errors,
 Accuracy and completeness of the accounting records, and
 Timely preparation of reliable financial information.
Reporting Requirements:
(a) Section 134: In the case of a listed company, the Directors’ Responsibility states that directors, have
laid down IFC to be followed by the company and that such controls are adequate and operating
effectively.
(b) Section 143: The auditor’s report should also state whether the company has adequate IFC system in
place and the operating effectiveness of such controls.
(c) Section 177: Audit committee may call for comments of auditors about internal control systems before
their submission to the Board and may also discuss any related issues with the internal and statutory
auditors and the management of the company.
(d) Schedule IV: The independent directors should satisfy themselves on the integrity of financial
information and ensure that financial controls and systems of risk management are robust and
defensible.
(e) Rule 8(5) (viii) of the Companies (Accounts) Rules, 2014: The director’s report should contain details
in respect of adequacy of internal financial controls with reference to the financial reporting.
Question 16
What is Data Analytics? When auditing in an automated environment, auditors can apply the concepts of
data analytics of several aspects of an audit. State those aspects.
Or
In today’s digital age when companies rely on more and more on IT systems and networks to operate
business, the amount of data and information that exists in these systems is enormous. Explain stating
uses of Data analytics. [RTP – Nov. 18, MTP – April 19]
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Or
Data analytics can be used in testing of electronic records and data residing in IT systems using
spreadsheets and specialized audit tools viz., IDEA and ACL to perform check completeness of data and
population that is used in either test of controls or substantive audit tests. Explain in detail stating all the
relevant points. [RTP – May 20, MTP – Oct. 20, RTP – May 21]
Or
While it is true that companies can benefit immensely from the use of data analysis in terms of increased
profitability, better customer service, etc., Analyse various functions that can be performed even by the
auditor also using Data Analytics tools and techniques in the audit process to obtain goods results.
[Nov. 20, 4 Marks]
Answer
Concept of Data Analytics:
 Data analytics is an analytical process by which meaning information is generated and prepared from
raw system data using processes, tools, and techniques.
 In an automated environment, various insights can be extracted from operational, financial, and other
forms of electronic data internal or external to the organization.
 The data so extracted is useful for preparation of management information system (MIS) reports and
electronic dashboards that give a high-level snapshot of business performance.
 The data analytics methods used in an audit are known as Computer Assisted Auditing Techniques
or CAATs.
 Data analytics can be used in testing of electronic records and data residing in IT systems using
spreadsheets and specialized audit tools viz. IDEA and ACL.
Application of Data Analytics:
In an automated environment, auditors can apply the concept of data analytics for several aspects of an
audit including the following:
 Check completeness of data and population that is used in either test of controls or substantive audit
tests.
 Selection of audit samples - random sampling, systematic sampling.
 Re-computation of balances - reconstruction of trial balance from transaction data.
 Reperformance of mathematical calculations - depreciation, bank interest calculation.
 Analysis of journal entries as required by SA 240.
 Fraud investigation.
 Evaluating impact of control deficiencies.
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Question 17
The auditor needs to asses each finding or exception to determine impact on the audit and evaluate if the
exception results in a deficiency in internal control. Explain the statement.
Answer
Assessment of findings:
 The auditor needs to assess each finding or exception to determine impact on the audit and evaluate if
the exception results in a deficiency in internal control.
 As per SA 265, a deficiency in internal control exits if a control is designed, implemented or operated
in such a way that it is unable to prevent, or detect and correct, misstatements in the financial
statements on a timely basis; or the control is missing.
 Evaluation and assessment of audit findings and control deficiencies involves applying professional
judgment that include considerations for quantitative and qualitative measures. Each finding should
be looked at individually and in the aggregate by combining with other findings/deficiencies.
Consideration while assessing the findings:
 Weaknesses identified in IT controls.
 Impact of these weaknesses on overall audit.
 Reporting of deficiencies to management through Management Letter.
 Communicate in writing any significant deficiencies to TCWG as per requirement of SA 260.
Question 18
Forceful Limited is a company dealing in mobile spare parts and having its showrooms in almost all the
states in the country. For FY 2021-22, the company transferred its accounts from manual to computerized
system (SAP). PQR & Co, Chartered Accountants have specialization in the system audit and have been
appointed as the system auditor. PQR & Co, at the end of the audit concludes that there are certain findings
or exceptions in IT environment and IT controls of the company which needs to be assessed and reported.
Mention those points of consideration. [July 21, 3 Marks]
Answer
Consideration while assessing the findings:
At the conclusion of each audit, it is possible that there will be certain findings or exceptions in IT
environment and IT controls of the company that need to be assessed and reported to relevant stakeholders
including management and those charged with governance viz. Board of directors. Audit committee.
Some points to consider are as follows:
1) Are there any weaknesses in IT controls?
2) What is the impact of these weaknesses on overall audit?
3) Report deficiencies to management - Internal Controls Memo or Management Letter.
4) Communicate in writing any significant deficiencies to those Charged with Governance.
The auditor needs to assess each finding or exception to determine impact on the audit and evaluate if the
exception results in a deficiency in internal control.
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Question 19
With respect to audit in an automated environment, explain the following:
a) CAATS
b) Data Analytics
c) Database
d) Information Systems
e) Privileged access [Nov. 18, 5 Marks, MTP - May 20]
Answer
Meaning of Terms used in Automated Environment:
(i) CAATS: Computer Assisted Audit techniques Collection of computer-based tools and techniques that
are used in an audit for analysing data in electronic form to obtain audit evidence.
(ii) Data Analytics: Data analytics is an analytical process by which meaning information is generate and
prepared from raw system data using processes, tools, and techniques.
(iii) Database: A logical sub-system within a larger information system where electronic data stored in a
predefined form and retrieved for use.
(iv) Information Systems: Collection of electronic hardware, software, networks and processes that are
used in a business to carry out operations and transactions.
(v) Privileged access: A type of super user access to information systems that enforces less or no limits on
using that system.
Question 20
With respect to audit in an automated environment, explain the following: (any four)
(i) Data Processing
(ii) ERP (Enterprise Resource Planning)
(iii) General IT control
(iv) Automated
(v) Direct Data change [MTP – March 21]
Answer
Definition of terms used in Automated Environment:
(i) Data Processing: Refers to the systematic recording, storage, retrieval, modification and
transformation of electronic data using information systems.
(ii) ERP (Enterprise Resource Planning): A type of business application software that provides an
integrated platform to automate multiple interrelated business processes and operations.
(iii) General IT Control: Are a type of internal controls that help in mitigating risks that arise to use of
information technology and information systems in a business.

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(iv) Automated: A task or activity that is routinely performed by a computer system and does not require
manual effort.
(v) Direct Data Change: A backend modification that is made directly to data that is stored in a database
bypassing business rules built-in to a business application software.
Question 21
With respect to audit in an automated environment, explain the following: (any four)
(i) Applications
(ii) Control Deficiency
(iii) Data Processing
(iv) Enterprise Resource Planning
(v) Software [MTP – April 21]
Answer
Definition of terms used in Automated Environment:
(i) Applications:
These are computer software programs that provide a medium for recording, storage and retrieval of
business operations or transactions in electronic format.
(ii) Control Deficiency:
It exists when an internal control is either missing or not operating effectively to prevent or detect a
misstatement in a timely manner by management.
(iii) Data Processing:
It refers to the systematic recording, storage, retrieval, modification and transformation of electronic
data using information systems.
(iv) Enterprise Resource Planning:
A type of business application software that provides an integrated platform to automate multiple
interrelated business processes and operations.
(v) Software:
A computer program or a collection of computer programs that provides an interface to a user for
performing a specific activity, task, operation or transaction in electronic form through a computer or
information system.

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 CHAPTER 7

AUDIT SAMPLING
QUESTIONS WITH ANSWERS
Question 1
There is a growing realization that the traditional approach to audit is economically wasteful because all
efforts are directed to check all transactions without exception. Explain. [RTP-Nov. 19]
Answer
Limitations of Traditional Approach
 There is a growing realisation that the traditional approach to audit is economically wasteful because
all efforts are directed to check all transactions without exception.
 Traditional Approach: In traditional approach, more emphasis put on routine checking, which often
is not necessary considering the time and the cost involved. In routine checking auditor considers
detailed checking and vouching of all entries.
 With the passage of time, formal internal controls are being introduced in the management of affairs
of organisations, due to which the possibilities of routine errors and frauds have greatly diminished
and auditors often find extensive routine checking as nothing more than a ritual because it rarely
reveals anything material.
 Risk Based approach: Audit approach, now a days, has undergone considerable changes and the
extent of checking are undergoing a progressive change in favour of more attention towards the
question of principles and controls with a curtailment of non-consequential routine checking.
Question 2
The extent of the checking to be undertaken is primarily a matter of judgment of the auditor.
It is in the interest of the auditor that if he decides to form his opinion on the basis of a part checking, he
should adopt standards and techniques which are widely followed. Explain. [RTP – Nov. 19]
Answer
Adopting Standards while using Sampling:
1. Auditor is required to express his opinion on the true and fair view of financial statements. For this
purpose, auditor is required to decide the extent of checking to be performed. The extent of checking
to be undertaken is primarily a matter of judgment of the auditor, there is nothing statutorily stated
anywhere which specifies what work is to be done, how it is to be done and to what extent.
2. It is also not obligatory that the auditor must adopt the sampling technique.
3. To ensure good and reasonable standard of work, auditor should adopt standards and techniques that
can lead him to an informed professional opinion. On a consideration of this fact, it can be said that it
is in the interest of the auditor that if he decides to form his opinion on the basis of a part checking, he
should adopt standards and techniques which are widely followed and which have a recognised basis.
4. Since statistical theory of sampling is based on a scientific law, it can be relied upon to a greater extent
than any arbitrary technique which lacks in basis and acceptability.
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Question 3
What is the meaning and purposes of sampling? Explain in the light of SA 520 “Audit Sampling”.
[Nov. 06, 8 Marks]
Answer
Meaning and Purpose of Sampling: As per SA 530 “Audit Sampling” Application of audit procedures to
less than 100% of items within a population of audit relevance such that all sampling units have a chance
of selection in order to provide the auditor with a reasonable basis on which to draw conclusions about
the entire population is known as audit sampling.
Sampling is of two types: Statistical and Non-Statistical. Statistical sampling involves Random selection of
the sample items and use of probability theory to evaluate sample results, including measurement of
sampling risk.
Purposes of Sampling:
 As per SA 200 “Overall Objectives of Independent Auditor and conduct of audit in accordance with
SA” the purpose of an audit is to enhance the degree of confidence of intended users in the financial
statements. This is achieved by the expression of an opinion by the auditor on whether the financial
statements are prepared, in all material respects, in accordance with an applicable financial reporting
framework.
 In conducting an audit of financial statements, the overall objective of the auditor is to obtain
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 prepared, in all material respects, in accordance with an
applicable financial reporting framework.
 A complete checking of the transactions is necessarily time consuming and costly and even after
complete checking is done, one may not be sure that no error or fraud exists in the accounts.
 It has been found that necessary audit satisfaction can be obtained by checking a part only because the
part, if suitably selected, is supposed to possess the characteristics of the whole population.
 So, Audit sampling helps the auditor in obtaining reasonable assurance on the basis of examination of
property selected financial items.
Question 4
Write short note on: Statistical and Non-Statistical Sampling.
OR
Whatever may be the approach non-statistical or statistical sampling, the sample must be representative.
Discuss explaining Statistical and Non-Statistical Sampling Approaches. [RTP-May 18]
Answer
Statistical and Non-Statistical Sampling:
An approach to sampling that has the following characteristics:

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1) Random selection of the sample items; and

2) The use of probability theory to evaluate sample results, including measurement of sampling risk.
This method is more scientific, as it involves use of laws of probability. This method has reasonably wide
application where a population consists of a large number of similar items.
Non-Statistical Sampling
 A sampling approach that does not have characteristics of random selection and use of probability
theory is considered as non-statistical sampling.
 In this method, the sample size and its composition are determined on the basis of personal experience
and knowledge of the auditor.
 This method because of its simplicity in operation was in common application for many years.
Whatever may be the approach non-statistical or statistical sampling, the sample must be representative.
It implies that sample must be closely similar to the whole population although not necessarily exactly the
same. The sample must be large enough to provide statistically meaningful results.
Question 5
Write short note on: Advantages of Statistical Sampling. [Nov. 11, May 14, 4 Marks]
OR
Audit testing done through Statistical sampling is more scientific than testing based entirely on the
auditor’s own judgment because it involves use of mathematical laws of probability in determining the
appropriate sample size in varying circumstances. Explain and also state advantages of Statistical
sampling. [MTP – Oct. 20]
Answer
Advantages of Statistical Sampling:
Audit testing done through Statistical Sampling is more scientific than testing based entirely on the
auditor’s own judgment because it involves use of mathematical laws of profitability in determining the
appropriate sample size in varying circumstances. Statistical Sampling has reasonably wide application
where a population to be tested consists of a large number of similar items and more in the case of
transactions involving compliance testing, trade receivables' confirmation, payroll checking, vouching of
invoices and petty cash vouchers.
The advantages of statistical sampling may be summarized as follows:
1. The amount of testing (sample size) does not increase in proportion to the increase in the size of the
area (universe) tested.
2. The sample selection is more objective and thereby more defensible.
3. The method provides means of estimating the minimum sample size associated with a specified risk
& precision.

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4. It provides a means for deriving a “calculated risk” and corresponding precision (sampling error) i.e.
the probable difference in result due to the use of a sample in lieu of examining all the records in the
group (universe), using the same audit procedures.
5. It may provide a better description of a large mass of data than a complete examination of all the data,
since non-sampling errors such as processing and clerical mistakes are not as large.
Question 6
“The auditor is faced with sampling risk in both tests of control and substantive procedures”. Comment
on this statement with reference to SA 530 on Audit Sampling. [Nov. 10, 8 Marks]
Or
While planning the audit of S Ltd., you want to apply sampling techniques. What are the risk factors you
should keep in mind? [RTP-Nov. 18, MTP-April 19]
Or
“Sampling risk can lead to erroneous conclusion". Justify. [May 19, 4 Marks, MTP-April 21]
Answer
Sampling Risk:
SA 530 “Audit Sampling” deals with auditor use of sampling in performing audit procedures. However,
due to application of sampling in audit procedures, there arise risk of sampling.
Sampling Risk may be defined as the risk that the auditor’s conclusion based on a sample may be different
from the conclusion if the entire population were subjected to the same audit procedure.
Sampling risk can lead to two types of erroneous conclusions:
(i) In the case of a test of controls, that controls are more effective than they actually are, or in the case of
a test of details, that a material misstatement does not exist when in fact it does. The auditor is
primarily concerned with this type of erroneous conclusion because it affects audit effectiveness and
is more likely to lead to an inappropriate audit opinion.
(ii) In the case of a test of controls, that controls are less effective than they actually are, or in the case of
a test of details, that a material misstatement exists when in fact it does not. This type of erroneous
conclusion affects audit efficiency as it would usually lead to additional work to establish that initial
conclusions were incorrect.
Question 7
Sampling risk is the risk that the auditor’s conclusion based on a sample may be different from the
conclusion if the entire population were subjected to the same audit procedure. Sampling risk leads to
erroneous conclusions. Explain in detail distinguishing it from non-sampling risk with examples.
[RTP-Nov. 20]
Or

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In the context of SA 530 ‘Audit Sampling’, explain the terms ‘Sampling Risk’ and ‘Non-Sampling risk’.
[Jan. 21, 4 Marks]
Answer
Sampling and Non-sampling Risk:
Sampling Risk: Refer Question 6
Non-Sampling Risk: The risk that the auditor reaches an erroneous conclusion for any reason not related
to sampling risk. Non sampling risk can never be mathematically measured.
Examples of non-sampling risk include use of inappropriate audit procedures, or misinterpretation of
audit evidence and failure to recognize a misstatement or deviation.
Sources of Non-Sampling risk are:
 Human Mistakes
 Misinterpreting the sample results
 Applying audit procedures not appropriate to the objectives of audit
 Relying on erroneous information
Question 8
Discuss the following: As per SA 530, meaning of audit sampling, sample design, sample size and selection
of items for testing. [Nov. 13, 5 Marks]
Or
Discuss the following: With reference to SA 530, meaning of audit sampling and requirements relating to
sample design, sample size and selection of items for testing. [May 16, 5 Marks]
Or
State the requirements relating to audit sampling, sample design, sample size and selection of items for
testing. [MTP - Oct. 21]
Answer
Meaning of Audit Sampling, Sample Design, Sample Size and Selection of items for testing:
Audit Sampling: Application of audit procedures to less than 100% of items within a population of audit
relevance such that all sampling units have a chance of selection in order to provide the auditor with a
reasonable basis on which to draw conclusions about the entire population is known as audit sampling.
Requirement of SA 530 as to Sample Design, Size and Selection of Items for Testing
(i) When designing an audit sample, the auditor shall consider the purpose of the audit procedure and
the characteristics of the population from which the sample will be drawn.
(ii) The auditor shall determine a sample size sufficient to reduce sampling risk to an acceptably low
level.
(iii) The auditor shall select items for the sample in such a way that each sampling unit in the population
has a chance of selection.

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Question 9

Write short note on: Stratified sampling. [May 11, 5 Marks]

Answer
Stratified Sampling:
This method involves dividing the whole population to be tested into a few groups called strata and taking
a sample from each of them. Each stratum is treated as if it were a separate population and proportionate
items are selected from each of the stratum. The groups into which the whole population is divided is
determined by the auditor on the basis of his judgment e.g. entire expense vouchers may be divided into:
 Vouchers above ` 1,00,000
 Vouchers between ` 25,000 and ` 1,00,000
 Vouchers below ` 25,000
The auditor can then decide to check all vouchers above ` 1,00,000, 50% between ` 25,000 and ` 1,00,000
and 25% of those below ` 25,000.
The reasoning behind the stratified sampling is that for a highly diversified population, weights should
be allocated to reflect these differences. This is achieved by selecting different proportions from each strata.
Question 10

XYZ Ltd. is engaged in trading of electronic goods and having huge accounts receivables. For analysing
the whole accounts receivables, auditor wanted to use sampling technique. In considering the
characteristics of the population from which the sample will be drawn, the auditor determines that
stratification or value-weighted selection technique is appropriate. SA 530 provides guidance to the
auditor on the use of stratification and value-weighted sampling techniques. Advise the auditor in
accordance with SA 530. [RTP - May 18, MTP - Oct. 19]
Or
In considering the characteristics of the population from which the sample will be drawn, the auditor may
determine that stratification or value-weighted selection technique is appropriate. Guide the auditor on
the use of stratification and value-weighted sampling techniques. [RTP - Nov.21]
Answer
Stratification and Value-Weighted Selection:
As per SA 530 “Audit Sampling”, the objective of the auditor when using audit sampling is to provide a
reasonable basis for the auditor to draw conclusions about the population from which the sample is
selected. Accordingly, in considering the characteristics of the population from which the sample will be
drawn, the auditor may determine that stratification or value-weighted selection is appropriate.

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Stratification:
Stratification may be defined as the process of dividing a population into sub-populations, each of which
is a group of sampling units which have similar characteristics (often monetary value).
Every such group so divided is called strata. Each stratum is treated as if it were a separate population
and proportionate items are selected from each of the stratum. The groups into which the whole
population is divided is determined by the auditor on the basis of his judgment e.g. entire expense
vouchers may be divided into:
 Vouchers above ` 1,00,000
 Vouchers between ` 25,000 and ` 1,00,000
 Vouchers below ` 25,000
The auditor can then decide to check all vouchers above ` 1,00,000, 50% between ` 25,000 and ` 1,00,000
and 25% of those below ` 25,000.
The reasoning behind the stratified sampling is that for a highly diversified population, weights should
be allocated to reflect these differences. This is achieved by selecting different proportions from each strata.
Value-weighted Selection:
 When performing tests of details, it may be efficient to identify the sampling unit as the individual
monetary units that make up the population.
 One benefit of this approach to defining the sampling unit is that audit effort is directed to the larger
value items because they have a greater chance of selection and can result in smaller sample sizes.
 This approach may be used in conjunction with the systematic method of sample selection and is most
efficient when selecting items using random selection.

Question 11

Discuss the following: The level of sampling risk that the auditor is willing to accept affects the sample
size required. The lower the risk the auditor is willing to accept, the greater the sample size will need to
be. Explain stating the examples of factors that the auditor may consider when determining the sample
size for tests of controls. [MTP - March 18]
Or
The sample size can be determined by the application of a statistically-based formula or through the
exercise of professional judgment. When circumstances are similar, the effect on sample size of factors will
be similar regardless of whether a statistical or non-statistical approach is chosen.
Explain stating the examples of factors that the auditor may consider when determining the sample size
for tests of controls. [MTP - Oct. 18, March 19, May 20]

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Answer
Factors to be considered while determining sample size for tests of controls:
The level of sampling risk that the auditor is willing to accept affects the sample size required. The lower
the risk the auditor is willing to accept, the greater the sample size will need to be.
The sample size can be determined by the application of a statistically-based formula or through the
exercise of professional judgment. When circumstances are similar, the effect on sample size of factors will
be similar regardless of whether a statistical or non-statistical approach is chosen.
Examples of Factors Influencing Sample Size for Tests of Controls:
 An increase in the extent to which the auditor's risk assessment takes into account relevant controls
will increase the sample size.
 An increase in the tolerable rate of deviation, will decrease the sample size.
 An increase in the expected rate of deviation of the population to be tested, will increase the sample
size.
 An increase in the auditor's desired level of assurance that the tolerable rate of deviation is not
exceeded by the actual rate of deviation in the population will increase the sample size.
Question 12
Discuss the following: Factors that should be considered for deciding upon the extent of checking on a
sampling plan. [Nov. 18, 5 Marks, RTP - Nov. 20]
Or
Discuss the factors that should be considered for deciding upon the extent of checking on a sampling plan.
[RTP - May 19]
Answer
Factors to be considered to decide extent of checking:
 Factors Influencing extent of checking for Tests of Controls:
(i) An increase in the extent to which the auditor's risk assessment takes into account relevant
controls will increase the sample size.
(ii) An increase in the tolerable rate of deviation, will decrease the sample size.
(iii) An increase in the expected rate of deviation of the population to be tested, will increase the
sample size.
(iv) An increase in the auditor's desired level of assurance that the tolerable rate of deviation is not
exceeded by the actual rate of deviation in the population will increase the sample size.
 Factors influencing extent of checking for Tests of Details:
(i) An increase in the auditor's assessment of the risk of material misstatement will increase the
extent of checking.

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(ii) An increase in the use of other substantive procedures directed at the same assertion with
decrease the extent of checking.
(iii) An increase in the auditor's desired level of assurance that tolerable misstatement is not
exceeded by actual misstatement in the population will increase the extent of checking.
(iv) An increase in tolerable misstatement will decrease the extent of checking.
(v) An increase in the amount of misstatement the auditor expects to find in the population will
increase the extent of checking.
(vi) Stratification of the population when appropriate will decrease the extent of checking.
Note: Simplified answer as given in Suggested Answers of ICAI is as below:
The factors that should be considered for deciding upon the extent of checking on a sampling plan are
following:
(i) Size of the organisation under audit.
(ii) State of the internal control.
(iii) Adequacy and reliability of books and records.
(iv) Tolerable error range.
(v) Degree of the desired confidence.
Question 13
Describe the Principal methods of selection of sample.
Answer
Meaning of Sampling and Methods of Selection of Samples:
As per SA 530 “Audit Sampling” Application of audit procedures to less than 100% of items within a
population of audit relevance such that all sampling units have a chance of selection in order to provide
the auditor with a reasonable basis on which to draw conclusions about the entire population is known as
audit sampling.
As per SA 530 “Audit Sampling” principal methods of selection of samples are:
1. Random selection: This method of sampling ensures that all items within a population stand an equal
chance of selection by the use of random number tables or random number generators. The sampling
units could be physical items, such as sales invoices or monetary units.
2. Systematic selection: The number of sampling units in the population is divided by the sample size to
give a sampling interval, for example 50, and having determined a starting point within the first 50,
each 50th sampling unit thereafter is selected.
3. Monetary Unit Sampling: It is a type of value-weighted selection in which sample size, selection and
evaluation results in a conclusion in monetary amounts.

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4. Haphazard selection: Samples are selected without following a structured technique. Although, no
structured technique is used, the auditor would nonetheless avoid any conscious bias or predictability.
Haphazard selection is not appropriate when using statistical sampling.
5. Block selection: It involves selection of a block(s) of contiguous items from within the population.
Block selection cannot ordinarily be used in audit sampling because most populations are structured
such that items in a sequence can be expected to have similar characteristics to each other, but different
characteristics from items elsewhere in the population.
Question 14

Write short note on: Random Sampling. [May 12, May 15, 4 Marks, May 17, 6 Marks]
Answer
Selection of Samples on random basis:
 As per SA 530 “Audit Sampling” sampling means application of audit procedures to less than 100% of
items within a population of audit relevance such that all sampling units have a chance of selection in
order to provide the auditor with a reasonable basis on which to draw conclusions about the entire
population.
 Statistical sampling is an approach to sampling that has the following characteristics:
(i) Random selection of the sample items; and
(ii) The use of probability theory to evaluate sample results, including measurement of sampling risk.
 Essential features of statistical sampling are random selection and use of probability theory. Examples
of Statistical sampling are Random selection, Systematic Selection and Monetary Unit Sampling.
 Audit sample collection on a random basis ensures that all items within a population have an equal
chance of selection by the use of random number tables or random number generators. This method
is considered appropriate provided the population to be sampled consists of reasonably similar units
and falls within a reasonable range.
Question 15

Write short note on: Haphazard sampling. [Nov. 17, 4 Marks]

Answer
Haphazard Sampling:
 As per SA 530 “Audit Sampling” sampling means application of audit procedures to less than 100% of
items within a population of audit relevance such that all sampling units have a chance of selection in
order to provide the auditor with a reasonable basis on which to draw conclusions about the entire
population.
 In case of haphazard sampling, samples are selected without following a structured technique.

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 Although no structured technique is used, the auditor would nonetheless avoid any conscious bias or
predictability (for example, avoiding difficult to locate items, or always choosing or avoiding the first
or last entries on a page) and thus attempt to ensure that all items in the population have a chance of
selection.
 Haphazard selection is not appropriate when using statistical sampling.
 It may be accepted as alternative to random sampling, provided the auditor attempts to draw a
representative sample from the population without any biasness.
Question 16
Explain the sampling method which involves selection of a block(s) of contiguous items from within the
population. Also give example. [RTP - May 20]
Answer
Block Selection:
 It involves selection of a block(s) of contiguous items from within the population.
 Block selection cannot ordinarily be used in audit sampling because most populations are structured
such that items in a sequence can be expected to have similar characteristics to each other, but different
characteristics from items elsewhere in the population.
 In some circumstances it may be an appropriate audit procedure to examine a block of items, it would
rarely be an appropriate sample selection technique when the auditor intends to draw valid inferences
about the entire population based on the sample.
Example: Take the first 500 purchase invoices from the purchase day book in the month of October;
alternatively take any ten blocks of 50 purchase invoices. Therefore, once the first item in the block is
selected, the rest of the block follows items to the completion.
Question 17
“In cases where audit sample selection has been done on a random basis, no statistical process for selection
of samples needs to be followed”. Comment.
Answer
Selection of Samples on random basis:
 As per SA 530 “Audit Sampling” means application of audit procedures to less than 100% of items
within a population of audit relevance such that all sampling units have a chance of selection in order
to provide the auditor with a reasonable basis on which to draw conclusions about the entire
population.
 Statistical sampling is an approach to sampling that has the following characteristics:
(i) Random selection of the sample items; and
(ii) The use of probability theory to evaluate sample results, including measurement of sampling risk.

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 Essential features of statistical sampling are random selection and use of probability theory. Examples
of Statistical sampling are Random selection, Systematic Selection and Monetary Unit Sampling.
 Audit sample collection on a random basis ensures that all items within a population have an equal
chance of selection by the use of random number tables or random number generators. This method
is considered appropriate provided the population to be sampled consists of reasonably similar units
and falls within a reasonable range.
Conclusion: For application of statistical sampling techniques, one of the prerequisite is selection on
random basis, hence in case of selection of an audit sample on random basis, no other statistical process
for selection of samples need to be followed.
Question 18
Explain the following terms with reference to Audit Sampling:
(i) Stratification
(ii) Tolerable misstatement
(iii) Tolerable rate of deviation [RTP – May 21]
Answer
Definition of terms related with Audit Sampling:
 Stratification - The process of dividing a population into sub-populations, each of which is a group of
sampling units which have similar characteristics (often monetary value).
 Tolerable misstatement - A monetary amount set by the auditor in respect of which the auditor seeks
to obtain an appropriate level of assurance that the monetary amount set by the auditor is not exceeded
by the actual misstatement in the population.
 Tolerable rate of deviation - A rate of deviation from prescribed internal control procedures set by the
auditor in respect of which the auditor seeks to obtain an appropriate level of assurance that the rate
of deviation set by the auditor is not exceeded by the actual rate of deviation in the population.
Question 19
CA B is appointed as an auditor of M/s. Divine Pharmacy, a wholesale medicine supplier. While auditing
for the financial year 2021-22, CA B wants to use test checking technique. Advise CA B, what kind of
precautions should be taken by him in this regard. [July 21, 4 Marks]
Answer
Precautions to be taken while applying test check techniques are:
1) Thorough study of accounting system should be done before adopting sampling.
2) Proper study of internal control systems.
3) Areas which are not suitable for sampling should be carefully considered. For example: compliance
with statutory provisions, transactions of unusual nature etc.

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4) Proper planning for sampling methods to be used and explaining the staff.
5) Transactions and balances have to be properly classified (stratified).
6) Sample size should be appropriately determined.
7) Sample should be chosen in unbiased way.
8) Errors located in the sample should be analysed properly.
Question 20
CA X is not sure about the kind of Sampling method to be used for audit of a company. Advise him about
the choice of methods (name of methods only) of Sampling to be used in various circumstances. Also
explain briefly the advantages of the Sampling to be used by him in auditing. [MTP - Nov. 21]
Answer
Sample Selection Methods:
CA. X should obtain the knowledge before using the sampling methods. The principal methods are as
follows:
1) Random selection.
2) Systematic selection.
3) Monetary Unit sampling.
4) Haphazard selection.
5) Block selection.
Advantages of Statistical Sampling: Refer Answer of Question 5.
Question 21
When designing an audit sample, the auditor shall consider the purpose of the audit procedure and the
characteristics of the population from which the sample will be drawn. Explain in detail. [RTP - Nov. 21]
Answer
Designing of Audit Sample:
 Audit sampling enables the auditor to obtain and evaluate audit evidence about some characteristic of
the items selected in order to form or assist in forming a conclusion concerning the population from
which the sample is drawn. Audit sampling can be applied using either non-statistical or statistical
sampling approaches.
 When designing an audit sample, the auditor's consideration includes the specific purpose to be
achieved and the combination of audit procedures that is likely to best achieve that purpose.
Consideration of the nature of the audit evidence sought and possible deviation or misstatement
conditions or other characteristics relating to that audit evidence will assist the auditor in defining
what constitutes a deviation or misstatement and what population to use for sampling.

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 The auditor's consideration of the purpose of the audit procedure includes a clear understanding of
what constitutes a deviation or misstatement so that all, and only, those conditions that are relevant to
the purpose of the audit procedure are included in the evaluation of deviations or projection of
misstatements. For example, in a test of details relating to the existence of accounts receivable, such as
confirmation, payments made by the customer before the confirmation date but received shortly after
that date by the client, are not considered a misstatement.

 In considering the characteristics of a population, for tests of controls, the auditor makes an assessment
of the expected rate of deviation based on the auditor's understanding of the relevant controls or on
the examination of a small number of items from the population. This assessment is made in order to
design an audit sample and to determine sample size. For example, if the expected rate of deviation is
unacceptably high, the auditor will normally decide not to perform tests of controls. Similarly, for tests
of details, the auditor makes an assessment of the expected misstatement in the population. If the
expected misstatement is high, 100% examination or use of a large sample size may be appropriate
when performing tests of details.

 In considering the characteristics of the population from which the sample will be drawn, the auditor
may determine that stratification or value-weighted selection is appropriate. The decision whether to
use a statistical or non-statistical sampling approach is a matter for the auditor's judgment; however,
sample size is not a valid criterion to distinguish between statistical and non-statistical approaches.
Question 22
The auditor is required to project misstatements for the population to obtain a broad view of the scale of
misstatement. Explain. [RTP – May 19]
Or
The auditor is required to project misstatements for the population to obtain a broad view of the scale of
misstatement but this projection may not be sufficient to determine an amount to be recorded. Explain.
[RTP – May 19]
Or
It is imperative for the auditor to project misstatements for the population while performing audit
procedures through sampling. Comment. [Nov. 20, 3 Marks]
Answer
Projection of Misstatements:
 As per SA 530 “Audit Sampling”, the auditor is required to project misstatements for the population
to obtain a broad view of the scale of misstatement but this projection may not be sufficient to
determine an amount to be recorded.

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 When a misstatement has been established as an anomaly, it may be excluded when projecting
misstatements to the population. However, the effect of any such misstatement, if uncorrected still
needs to be considered in addition to the projection of the non-anomalous misstatements.
 For tests of details, the auditor shall project misstatements found in the sample to the population
whereas for tests of controls, no explicit projection of deviations is necessary since the sample deviation
rate is also the projected deviation rate for the population as a whole.
Question 23
The auditor shall evaluate the results of the sample and whether the use of audit sampling has provided
a reasonable basis for conclusions about the population that has been tested. Explain.
Answer
Evaluating Results of Audit Sampling:
 The auditor shall evaluate
(a) The results of the sample and
(b) Determine whether the use of audit sampling has provided a reasonable basis for conclusions
about the population that has been tested.
 For tests of controls, an unexpectedly high sample deviation rate may lead to an increase in the
assessed risk of material misstatement, unless further audit evidence substantiating the initial
assessment is obtained. For tests of details, an unexpectedly high misstatement amount in a sample
may cause the auditor to believe that a class of transactions or account balance is materially misstated,
in the absence of further audit evidence that no material misstatement exists.
 In case the auditor concludes that audit sampling has not provided a reasonable basis for conclusions
about the population that has been tested, the auditor may request management to investigate
misstatements that have been identified and the potential for further misstatements and to make any
necessary adjustments; or tailor the nature, timing and extent of those further audit procedures to best
achieve the required assurance. For example, in the case of tests of controls, the auditor might extend
the sample size, test an alternative control or modify related substantive procedures.
 If any error or misstatement identified, auditor shall investigate its nature and cause, and evaluate
their possible effect on the purpose of the audit procedure and on other areas of the audit.
 In analysing the deviations and misstatements identified, the auditor would also need to consider the
qualitative aspects of the misstatements identified by him.
 While evaluating the misstatements, auditor may observe that many have a common feature, for
example, type of transaction, location, product line or period of time. In such circumstances, the
auditor may decide to identify all items in the population that possess the common feature, and extend
audit procedures to those items. In addition, such deviations or misstatements may be intentional, and
may indicate the possibility of fraud.

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Question 24
“An Auditor while analyzing the errors in a sample need not consider the qualitative aspects of errors
detected.” Comment.
Answer
Evaluating Results of Audit Sampling:
 The auditor shall evaluate:
a) The results of the sample and
b) Determine whether the use of audit sampling has provided a reasonable basis for conclusions
about the population that has been tested.
 If any error or misstatement identified, auditor shall investigate its nature and cause, and evaluate
their possible effect on the purpose of the audit procedure and on other areas of the audit.
 In analysing the deviations and misstatements identified, the auditor would also need to consider the
qualitative aspects of the misstatements identified by him.
 While evaluating the misstatements, auditor may observe that many have a common feature, for
example, type of transaction, location, product line or period of time. In such circumstances, the
auditor may decide to identify all items in the population that possess the common feature, and extend
audit procedures to those items. In addition, such deviations or misstatements may be intentional, and
may indicate the possibility of fraud.
Question 25
In most of the circumstances, the evidence available is not conclusive and the auditor always takes a
calculated risk in giving his opinion. Even by undertaking hundred per cent checking of the transactions,
the auditor does not derive absolute satisfaction. This state of uneasiness led pragmatic auditors to adopt
the statistical theory of sampling to derive the necessary satisfaction about the state of affairs by checking
only a part of the total population of entries. Explain in detail. [RTP - May 21]
Answer
Use of Statistical theory of sampling to obtain necessary satisfaction about the state of affairs:
 In most of the circumstances, the evidence available is not conclusive and the auditor always takes a
calculated risk in giving his opinion. Even by undertaking hundred per cent checking of the
transactions, the auditor does not derive absolute satisfaction. This state of uneasiness led pragmatic
auditors to adopt the statistical theory of sampling to derive the necessary satisfaction about the state
of affairs by checking only a part of the total population of entries.
 Auditors realised that they can derive good satisfaction by undertaking a much lesser checking by
adoption of this technique in the auditing process. Itis a mathematical truth that the sample, if picked
purely on a random basis would reveal the features and characteristics of the population.

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 By adopting the sampling technique, the auditor only checks a part of the whole mass of transactions.
The satisfaction he used to derive earlier, by checking all the transactions, can be derived by a sample
checking provided he can put reliance on the internal controls and checks within the client's
organisation because they provide the reliability of the records. Sampling is used as a part of Test of
controls. Auditor will check few internal controls and their operating effectiveness. Based on the
conclusion derived, he can then design the sample size for test of details (i.e. checking of transactions
and balances).
 If the internal control is satisfactory in its design and implementation, a much smaller sample can give
the auditor the necessary reliability of the result he obtains. On the other hand, if in certain areas
controls are slack or not properly implemented, the auditor may have to take a much larger sample for
getting satisfactory result.
 Another truth about the sampling technique should be noted. It can never bring complete reliability;
it cannot give precisely accurate results. It is a process of estimation. It may have some error; What
error is tolerable for a particular matter under examination is a matter of the individual’s judgment in
that particular case.

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 CHAPTER 8

ANALYTICAL PROCEDURES
QUESTIONS WITH ANSWERS
Question 1
Routine checks cannot be depended upon to disclose all the mistakes or manipulation that may exist in
accounts, certain other procedures also have to be applied like trend and ratio analysis. Analyse and
Explain stating clearly the meaning of analytical procedures. [RTP-Nov. 19]
Answer
Analytical Procedures:
 Routine checks cannot be depended upon to disclose all the mistakes or manipulation that may exist
in accounts, due to which, certain other procedures also have to be applied like trend and ratio analysis
in addition to reasonable tests. These collectively are known as overall tests.
 With the passage of time, analytical procedures have acquired lot of significance as substantive audit
procedure.
 SA-520 on Analytical Procedures discusses the application of analytical procedures during an audit.
Meaning of Analytical Procedures: Refer Answer of Question 2.
Question 2
Define Analytical Procedures.
OR
Explain what do you mean by Analytical Procedures. How such procedures are helpful in auditing?
OR
For the purposes of the SAs, the term “analytical procedures” means evaluations of financial information
through analysis of plausible relationships among both financial and non-financial data. Explain giving
examples of both. [RTP – Nov. 21]
Answer
Analytical Procedures:
SA 520 “Analytical Procedures” deals with the auditor’s use of analytical procedures as substantive
procedures.
Meaning of Analytical Procedures: Analytical Procedures means evaluations of financial information
through analysis of relationships among both financial and non-financial data.
It also encompasses such investigation as is necessary of identified fluctuations or relationships that are
inconsistent with other relevant information or that differ from expected values by a significant amount.
Nature of Analytical Procedures:
(a) AP include the consideration of comparisons of the entity’s financial information with
 Comparable information for prior periods.
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 Anticipated results of the entity, such as, budgets or forecasts, or expectations of the auditor (for
example, estimation of depreciation).
 Similar industry information (for example, comparison of entity’s ratio of sales to accounts
receivable with industry averages or with other entities of comparable size in the same industry).
(b) AP also include consideration of relationships, among
 Elements of financial information, such as gross margin percentages.
 Financial information and relevant non-financial information, such as payroll costs to number of
employees.
Benefits of Analytical Procedures:
The analytical procedures may be used for following purposes:
1. To assist the auditor in planning the nature, timing and extent of audit procedures.
2. As a substantive procedure when their use can be more effective or efficient than tests of details in
reducing detection risk for specific F.S. assertions; and
3. As an overall review of the F.S. in the final review, stage of the audit.
Question 3
Analytical procedures use comparisons and relationships to assess whether account balances or other data
appear reasonable. Explain stating the purpose of analytical procedures. [RTP-May 18]
Answer
Refer Answer of Question 2.
Question 4
Give examples of Analytical Procedures having consideration of comparisons of the entity’s financial
information. [RTP-Nov. 19]
Answer
Refer Answer of Question 2.
Question 5
In the planning stage, analytical procedures assist the auditor in understanding the client’s business and
in identifying areas of potential risk. Explain. [RTP-Nov. 20]
Answer
Use of Analytical Procedures in Planning Stage:
 In the planning stage, analytical procedures assist the auditor in understanding the client’s business
and in identifying areas of potential risk by indicating aspects of and developments in the entity’s
business of which he was previously unaware.
 This information will assist the auditor in determining the nature, timing and extent of his other audit
procedures.
 Analytical procedures in planning the audit use both financial data and non-financial information,
such as number of employees, square feet of selling space, volume of goods produced and similar
information.
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Question 6
Use of substantive Analytical Procedures requires consideration of many factors. Explain those factors.
Or
With respect to SA 520 “Analytical procedures”. Explain the following factors to be considered by the
auditor for substantive audit procedures.
(i) Account type (ii) Predictability (iii) Nature of Assertion. [Nov. 15, 3 Marks]
Answer
Factors to be considered while using substantive analytical procedures:
Use of substantive Analytical Procedures requires consideration of following factors:
1. Availability of Data: The availability of reliable and relevant data will facilitate effective procedures.
2. Disaggregation: The degree of disaggregation in available data can directly affect the degree of its
usefulness in detecting misstatements.
3. Account Type: Substantive analytical procedures are more useful for certain types of accounts than
for others. Income statement accounts tend to be more predictable because they reflect accumulated
transactions over a period, whereas balance sheet accounts represent the net effect of transactions at a
point in time or are subject to greater management judgment.
4. Source: Some classes of transactions tend to be more predictable because they consist of numerous,
similar transactions. Whereas the transactions recorded by non-routine and estimation are often
subject to management judgment and therefore more difficult to predict.
5. Predictability: SAPs are more appropriate when an account balance or relationships between items of
data are predictable. A predictable relationship is one that may reasonably be expected to exist and
continue over time.
6. Nature of Assertion: SAP may be more effective in providing evidence for some assertions (e.g.,
completeness or valuation) than for others (e.g., rights and obligations).
Question 7
Substantive analytical procedures are generally more applicable to large volumes of transactions that lend
to be predicable over time. Explain. [RTP-Nov. 18, MTP-April 19]
Answer
Predictability of Substantive Analytical Procedure:
 SA 520 “Analytical Procedures” deals with the auditor’s use of analytical procedures as substantive
procedures. As per SA 520, substantive analytical procedures are generally more applicable to large
volumes of transactions that tend to be predictable over time.
 The application of planned analytical procedures is based on the expectation that relationships among
data exist and continue in the absence of known conditions to the contrary. However, the suitability of
a particular analytical procedure will depend upon the auditor’s assessment of how effective it will be
in detecting a misstatement that, individually or when aggregated with other misstatements, may
cause the financial statements to be materially misstated.

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 In some cases, even an unsophisticated predictive model may be effective as an analytical procedure.
For example, where an entity has a known number of employees as fixed rates of pay throughout the
period, it may be possible for the auditor to use this data to estimate the total payroll costs for the
period with a high degree of accuracy, thereby providing audit evidence for a significant item in the
financial statements and reducing the need to perform tests of details on the payroll.
 The use of widely recognised trade ratios (such as profit margins for different types of retail entities)
can often be used effectively in substantive analytical procedures to provide evidence to support the
reasonableness of recorded amounts.
Question 8
What are the factors that determine the extent of reliance that the auditor places on results of analytical
procedures? Explain with reference to SA-520 on “Analytical Procedures”.
Or
What are the considerations to be kept in mind while performing analytical procedures on data prepared
by the client?
Or
The reliability of data is influenced by its source and nature and is dependent on the circumstances under
which it is obtained. Accordingly, what are the relevant criteria which determine whether the data is
reliable for the purposes of designing substantive analytical procedures?
Or
CA A, auditor of ABC Ltd. wants to design substantive analytical procedure and for that he wants to check
whether the data is reliable or not. Mention the relevant points which he has to consider whether data is
reliable for purpose of designing the substantive analytical procedures. [Nov. 19, 3 Marks]
Answer
Factors determining extent of reliance on analytical procedures (SA-520)
The application of analytical procedures is based on the expectation that relationships among data exist
and continue in the absence of known conditions to the contrary. The presence of these relationship
provides audit evidence as to the completeness, accuracy and validity of the data produced by the
accounting system.
Factors affecting the Reliability of Data on which analytical procedures are to be performed:
As per SA 520 “Analytical Procedures” facts that may affect the reliability of data are:
1. Source of the information available. For example, information may be more reliable when it is
obtained from independent sources outside the entity;
2. Comparability of the information available. For example, broad industry data may need to be
supplemented to be comparable to that of an entity that produces and sells specialized products;
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3. Nature and relevance of the information available. For example, whether budgets have been
established as results to be expected rather than as goals to be achieved; and
4. Controls over the preparation of the information that are designed to ensure its completeness
accuracy and validity. For example, controls over the preparation, review and maintenance of budgets.
Question 9
Explain the techniques available while applying SAP. [RTP – May 19]
Or
Ratio analysis is useful for analysing asset and liability accounts as well as revenue and expense accounts.
An individual balance sheet account is difficult to predict on its own, but its relationship to another account
is often more predictable (e.g., the trade receivables balance related to sales).
Explain stating the techniques available as substantive analytical procedures.
[RTP-May 18, MTP-Oct. 19]
Or
Discuss the techniques available as substantive analytical procedures. [May 18, 5 Marks]
Or
The design of a substantive analytical procedure is limited only by the availability of reliable data and the
experience and creativity of the audit team. Explain clearly stating the techniques available as substantive
analytical procedures. [MTP-Aug. 18, RTP-May 21]
Or
Explain the techniques available as Substantive Analytical Procedures. [Jan. 19, 3 Marks]
Answer
Techniques available while applying SAP:
(a) Trend analysis: Trend analysis is most commonly used techniques which involves comparison of
current data with the prior period balance or with a trend in two or more prior period balances.
(b) Ratio analysis: Ratio analysis involves analysing revenue and capital items forming part of balance
sheet and profit and loss account. Ratios can also be compared over a period of time or to the ratios of
other entities within the industry.
(c) Reasonableness tests: Unlike trend analysis, this analytical procedures does not rely on events of prior
periods, but upon non-financial data for the audit period under consideration. These tests are generally
more applicable to income statement accounts and certain accrual or prepayment accounts.
(d) Structural modelling: A modelling tool constructs a statistical model from financial and/or non-
financial data of prior accounting periods to predict current account balances (e.g., linear regression).

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Question 10
Explain the commonly used technique in the comparison of current data with the prior period balance or
with a trend in two or more prior period balances. [RTP – May 20]
Answer
Commonly used technique in the comparison of current data with the prior period balance:
 Trend Analysis is commonly used technique for the comparison of current data with the prior period
balances or with a trend in two or more prior period balances.
 With this technique, a person can evaluate whether the current balances of an account moves in line
with the trend established with previous balances for that account, or based on an understanding of
factors that may cause the account to change.
Question 11
The decision about which audit procedures to perform, including whether to use substantive analytical
procedures, is based on the auditor’s judgment. Explain. [RTP – Nov. 20]
Answer
Use of Substantive Analytical Procedures:
 The substantive procedures at the assertion level may be tests of details, substantive analytical
procedures, or a combination of both.
 The decision about which audit procedures to perform, including whether to use substantive analytical
procedures, is based on the auditor’s judgment about the expected effectiveness and efficiency of the
available audit procedures to reduce audit risk at the assertion level to an acceptably low level.
 The auditor may inquire of management as to the availability and reliability of information needed to
apply substantive analytical procedures, and the results of any such analytical procedures performed
by the entity. It may be effective to use analytical data prepared by management provided the auditor
is satisfied that such data is properly prepared.
Question 12
Analysis by computation of ratios includes the study of relationships between financial statements
amounts. State commonly used ratios. [RTP – Nov. 21]
Answer
Commonly used ratio for studying the relationship between financial statement amounts:
Commonly used ratios include:
(i) Elements of income or loss as a percentage of sales
(ii) Gross profit turnover
(iii) Accounts receivable turnover
(iv) Inventory turnover
(v) Profitability, leverage, and liquidity

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Question 13
If analytical procedures performed in accordance with SA 520 identify fluctuations or relationships that
are inconsistent with other relevant information or that differ from expected values by a significant
amount, explain how would the auditor investigate such differences. [RTP – May 19]
Or
The statutory auditor of ABC Ltd., CA Raj identified certain inconsistencies while applying analytical
procedures to the financial and non-financial data of ABC Ltd. With reference to SA 520 on “Analytical
Procedures” how CA Raj shall investigate such differences? [July 21, 3 Marks]
Answer
Investigation of Identified fluctuations:
 If analytical procedures performed in accordance with SA 520 identify fluctuations or relationships
that are inconsistent with other relevant information or that differ from expected values by a significant
amount, the auditor shall investigate such differences by:
a) Inquiring of management and obtaining appropriate audit evidence relevant to management’s
responses; and
b) Performing other audit procedures as necessary in the circumstances.
 Audit evidence relevant to management's responses may be obtained by evaluating those responses
taking into account the auditor's understanding of the entity and its environment, and with other audit
evidence obtained during the course of the audit.
 The need to perform other audit procedures may arise when, for example, management is unable to
provide an explanation, or the explanation, together with the audit evidence obtained relevant to
management's response, is not considered adequate.
Question 14
The relationships between individual financial statements items traditionally considered in the audit of
business entities may not always be relevant in the audit of governments or other non-business public
sector entities. Analyse and Explain. [RTP – Nov. 18]
Answer
Considerations Specific to Public Sector Entities
 The relationships between individual financial statement items traditionally considered in the audit of
business entities may not always be relevant in the audit of governments or other non-business public
sector entities; for example, in many public-sector entities there may be little direct relationship
between revenue and expenditure.
 In addition, because expenditure on the acquisition of assets may not be capitalised, there may be no
relationship between expenditures on, for example, inventories and fixed assets and the amount of
those assets reported in the financial statements.

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 Also, industry data or statistics for comparative purposes may not be available in the public Analytical
Procedures sector. However, other relationships may be relevant, for example, variations in the cost
per kilometer of road construction or the number of vehicles acquired compared with vehicles retired.

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 CHAPTER 9

AUDIT OF ITEMS OF FINANCIAL STATEMENTS

QUESTIONS WITH ANSWERS
Question 1
What are the obvious assertions in the following items appearing in the Financial Statements?
(i) Statement of Profit and Loss
Travelling Expenditure ` 50,000
(ii) Balance Sheet
Trade Receivable ` 2,00,000 [MTP – Oct. 19]
Answer
Travelling Expenditure:
 Expenditure has been incurred for the purpose of travelling.
 Travelling has been undertaken during the year under audit.
 Total expenditure incurred was ` 50,000 during the year.
 It is classified as revenue expenditure and charged to Statement of Profit and Loss.
Trade Receivable
 These include all sales transaction occurred during the year.
 These have been recorded properly and occurred during the year.
 These constitute assets of the entity.
 These have been shown at proper value, i.e. after showing the deduction on account of provision for
bad and doubtful debts.
Question 2

Give your assertions for the following items appearing in Balance Sheet of a Limited Company:
` `
(i) Cash in hand 10,000
(ii) Investments 1,00,000
(iii) Secured Loans 10,00,000
(iv) Machinery
Opening cost 13,00,000
Less: Depreciation
Current Depreciation 1,30,000 11,70,000
Compiled by CA Arvind Dubey AUDIT OF ITEMS OF FINANCIAL STATEMENTS

(i) Cash in Hand:

Cash in hand is an item of current assets and it implies the following:
 That the company has ` 10,000 in hand in the form of currency notes and coins on the Balance
Sheet date.
 That the cash is free and available for expenditure to the company.
 That the books of account show a cash balance of ` 10,000 as on balance sheet date.
(ii) Investments:
Investments is an item appearing in Balance Sheet either as non-current or as current investments and
it implies as follows:
 That the company has made invested its surplus funds in the investments, i.e. its existence and
ownership.
 That the investments are non-current or current investments, i.e. its classification and rate of
interest receivable.
 That the value of investments as on Balance Sheet date was ` 1,00,000, i.e. its valuation.
(iii) Secured Loan:
Secured loan is an item appearing in the Balance sheet either as long term borrowing or as short-term
borrowings and it implies as follows:
 That the company has borrowed, i.e. its existence,
 That the borrowing is secured one, i.e. its nature,
 That the borrowing as on Balance sheet date was ` 10,00,000, i.e. its valuation.
(iv) Machinery:
Machinery is an item appearing in the balance sheet as fixed asset under the heading Non-current
assets and it implies as follows:
 That the Company has certain Plant and Machinery as on balance sheet date, i.e. its existence and
ownership.
 Opening WDV is ` 13,00,000 and year end WDV was ` 11,70,000 after charging current year
depreciation, i.e. its valuation and allocation of current year depreciation.
Question 3
Companies prepare their financial statements in accordance with the framework of generally accepted
accounting principles (Indian GAAP), also commonly referred to as accounting standards (AS). In
preparing financial statements, Company's management makes implicit or explicit claims (i.e. assertions)
regarding assets, liabilities, equity, income, expenses and disclosures in accordance with the applicable
accounting standards. Explain with example stating the relevant assertions involved in this regard. Also
explain financial statement audit. [RTP - May 20]

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Answer
Assertions involved in preparation of financial statements:
 Companies prepare their financial statements in accordance with the framework of generally accepted
accounting principles (Indian GAAP), also commonly referred to as accounting standards (AS).
 In preparing financial statements, Company's management makes implicit or explicit claims (i.e.
assertions) regarding.
1. Completeness;
2. Cut-off;
3. Existence/Occurrence;
4. Valuation/Measurement;
5. Rights and Obligations; and
6. Presentation and Disclosure
of assets, liabilities, equity, income, expenses and disclosures in accordance with the applicable accounting
standards.
Example: If balance sheet of an entity shows machinery with carrying amount of ` 25 lakh, the auditor
shall assume that the management has claimed/asserted that:
1. The machinery recognized in the balance sheet exists as at the period- end (existence assertion);
2. Entity owns and controls such machinery (Rights and obligations assertion);
3. The machinery has been valued accurately in accordance with the valuation principles (Valuation
assertion);
4. All machineries owned and controlled by the entity are included within the carrying amount of ` 25
lakh (Completeness assertion).
Financial Statement Audit:
A financial statement audit comprises the examination of an entity's financial statements and
accompanying disclosures by an independent auditor. The result of this examination is a report by the
auditor, attesting to the truth and fairness of presentation of the financial statements and related
disclosures.
Question 4
What does the Valuation assertion mean in respect of Assets, liabilities and equity balances? Explain with
the help of example in respect of Inventory. [RTP - May 20]
Answer
Meaning of Valuation Assertion:
Valuation assertion in respect of Assets, liabilities and equity balances means that Assets, liabilities, and
equity interests are included in the financial statements at appropriate amounts and any resulting
valuation or allocation adjustments are appropriately recorded.

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Example of Valuation assertion w.r.t. Inventory:

As per AS-2 “Valuation of Inventories” inventory is to be recognized at the lower of cost and net realizable
value. Any costs that could not be reasonably allocated to the cost of production (e.g. general and
administrative costs) and any abnormal wastage have been excluded from the cost of inventory. An
acceptable valuation basis (e.g. FIFO, Weighted average etc.) has been used to value inventory as at the
period-end.
Question 5
Discuss the following: Securities premium can be utilized only for certain purposes laid down in the
Companies Act, 2013. [Nov. 17, 5 Marks]
Or
ABC Ltd. has issued shares for cash at a premium of ` 450, that is, at amount in excess of the nominal value
of the shares which is ` 10 for cash. Section 52 of the Companies Act, 2013 provides that a Company shall
transfer the amount received by it as securities premium to securities premium account. Advise the means
in which the amount in the account can be applied. [RTP - May 18]
Or
The securities premium account may only be applied by the company towards the issue of unissued shares
of the company to the members of the company as fully paid bonus shares, Comment. [May 19, 3 Marks]
Answer
Issue of Shares at Premium:
Where a company has issued shares at a premium, whether for cash or otherwise, company shall transfer
the amount received by it to securities premium account and state the means in which the amount in the
account can be applied.
As per Sec. 52 of Companies Act, 2013 the securities premium account may be applied by the company for
the following purposes:
a) Issue of unissued shares of the company to the members of the company as fully paid bonus shares;
b) Writing off the preliminary expenses of the company;
c) Writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or
debentures of the company;
d) Providing for the premium payable on the redemption of any redeemable preference shares or of any
debentures of the company; or
e) For the purchase of its own shares or other securities under section 68.
Auditor needs to verify whether the premium received on shares, if any, has been transferred to a
“securities premium account” and whether the application of any amount out of the said “securities
premium account” is only for the purposes mentioned above.

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Question 6
Discuss the following: Shares issued at a discount. [Nov. 12, 5 Marks]
Or
Briefly discuss the provisions of the Companies Act, 2013 with regard to issue of shares at a discount.
Or
Any share issued by a company at a discounted price shall be void. Explain stating also the audit
procedure in this regard. [MTP - March 19]
Or
Validity and consequence of issue of shares at discount, check with respect to the provisions of the
Companies Act, 2013. [Nov. 19, 4 Marks]
Answer
Shares issued at a discount:
 Sec. 53 of the Companies Act, 2013 provides that a company cannot issue shares at discount. As per
Sec. 53, a company shall not issue shares at a discount, except in the case of an issue of sweat equity
shares given u/s 54 of the Companies Act, 2013.
 Any share issued by a company at a discounted price shall be void.
 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 ` 5 lakh, whichever is less, and the company shall also be
liable to refund all monies received with interest at the rate of 12% p.a. from the date of issue of such
shares to the persons to whom such shares have been issued.
 Auditor needs to verify that the company has not issued any of its shares at a discount. For this
purpose, he may read the minutes of meeting of its directors and shareholders authorizing issue of
share capital and the issue price.
Question 7
Write short note on: Verification of issue of Sweat Equity shares. [Nov. 13, 4 Marks]
Or
What audit points are to be borne in mind in case of issue of “Sweat Equity shares” by a limited company?
[Nov. 16, 6 Marks, MTP – Oct. 19]
Answer
Verification of Sweat Equity Shares:
The auditor may see that the Sweat Equity Shares issued by the company are of a class of shares already
issued and following conditions of Section 54 of Companies Act, 2013 are fulfilled:
(a) The issue is authorised by a special resolution passed by the company;

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(b) The resolution specifies the number of shares, the current market price, consideration, if any, and the
class or classes of directors or employees to whom such equity shares are to be issued;
(c) Where the equity shares of the company are listed on a recognised stock exchange, the sweat equity
shares are issued in accordance with the regulations made by the SEBI in this behalf and if they are not
so listed, the sweat equity shares are issued in accordance with such rules as they be prescribed.
Question 8
How would you vouch/verify the following: Reduction of Share Capital? [May 10, 5 Marks]
Or
What are the duties of an auditor in case of reduction of capital? [Nov. 11, 8 Marks]
Or
BNP Ltd. has reduced its Share Capital to a greater extent in the year for which you are conducting the
audit. State how will you proceed for verifying the reduction of Capital. [MTP – Oct. 20]
Answer
Reduction of Share Capital:
The duties of the auditor in this regard are following:
1. Verifying that the special resolution has been passed for reduction of capital in the meeting of the
shareholder.
2. Check that the Articles of Association authorizes the reduction of capital.
3. Examine the order of the Tribunal confirming the reduction and ensure that a copy of the order and
the minutes have been registered and filed with the ROC.
4. Inspecting the ROC Certificate as regards reduction of capital.
5. Vouching the journal entries recorded to reduce the capital and to write down the assets by reference
to the resolution of shareholders and other documentary evidence.
6. Ensure that the requirements of Schedule III w.r.t. reduced capital have been complied with.
7. Confirming that the revaluation of assets have been properly disclosed in the Balance Sheet.
8. Verifying the adjustment made in the members' accounts in the Register of Members and confirming
that either the paid up amount shown on the old share certificates have been altered or new certificates
have been issued in lieu of the old, and the old ones have been cancelled.
9. Confirming that the words “and reduced”, if required by the order of the Tribunal, have been added
to the name of the company in the Balance Sheet.
10. Verifying that the MOA of the company has been suitably altered.
Question 9
Distinguish Between: Reserves and Provisions. [May 07, May 12, 5 Marks, March 19]

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Answer
Reserves and Provisions:
S.No. Reserves Provisions
(a) It is an appropriation of profit. It is a charge against Profit.
(b) They are not intended to meet any liability, They are made to provide for depreciation,
contingency or diminution in the value of renewal or a known liability or a disputed
assets, though may be made for some specific claim.
purposes, like redemption of debentures.
(c) Reserves cannot be created unless there is a They must be created whether or not there is
profit except a few like revaluation reserve. profit.
(d) Reserves are generally optional except few ones Provisions are not optional and have to be
like creation of CRR, DRR, etc. made as per generally accepted accounting
principles.

Question 10
Reserves are amounts appropriated out of profits whereas on the contrary, provisions are amounts
charged against revenue. Discuss explaining the difference between the two and also explain clearly
revenue reserve and capital reserve. [RTP - May 19]
Answer
Reserves vs Provisions: Refer Answer of Question 9.
Revenue reserve and Capital Reserve:
 Revenue Reserve: Revenue reserves represent profits that are available for distribution to
shareholders held for the time being or any one or more purpose, e.g., to supplement divisible profits
in lean years, to finance an extension of business, to augment the working capital of the business or to
generally strengthen the company's financial position.
 Capital Reserve: Capital reserve represents surplus or profit earned in respect of certain types of
transactions (like sale of fixed assets at a price in excess of cost, realisation of profits on issue of forfeited
shares, etc.) which are not regarded by the directors as free for distribution as a dividend.
Capital Reserves does not include any amount regarded as free for distribution through the Statement of
Profit and Loss. Capital reserves includes share premium, capital redemption reserve, development rebate
reserve and profit on reissue of forfeited shares.
Question 11

Explain the disclosure requirements of IND AS compliant Schedule III to Companies Act, 2013 for each
component of “Other Equity”. [Nov. 19, 3 Marks]

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Answer
Disclosure requirement for individual components of other equity:
For each component of other equity, whether the company has disclosed the following (to the extent
applicable):
1. Balance at the beginning of the reporting period
2. Changes in accounting policy or prior period error
3. Restated balance at the beginning of the reporting period
4. Total Comprehensive Income for the year
5. Dividends
6. Transfer to retained earnings
7. Any other change (to be specified)
8. Balance at the end of reporting period
Question 12
How will you vouch/verify: Borrowings from banks?
Or
Ongoing through the financial statements of PQR Ltd., its auditors Kamal Gagan and Associate observed
that company has taken Loans from banks and financial institutions. Further, the audit team discusses the
following about Liabilities:
“Liabilities are the financial obligations of an enterprise other than owners' funds. Liabilities include
loans/borrowings, trade payables and other current liabilities, deferred payment credits and provisions.
Verification of liabilities is as important as that of assets, for, if any liability is omitted (or under stated) or
over stated, the Balance Sheet would not show a true and fair view of the state of affairs of the company.”
Advise stating clearly the audit procedures generally required to be undertaken for verification of
existence of Borrowings. [MTP – March 18]
Answer
Verification of Borrowings from Banks:
1. Ensure that the loans obtained are within the borrowing powers of the entity.
2. Examine the relevant records to judge the validity and accuracy of the loans.
3. Examine the important terms in the loan agreements and the documents, if any, evidencing charge in
respect of such loans and advances.
4. Where the entity has accepted deposits, the auditor should examine whether the directives issued by
the RBI or other appropriate authority are complied with.
5. Obtain a certificate from the bank showing the balance in the accounts as at the end of the year.
6. Certificate may also be obtained from the bank showing particulars of securities deposited with the
bank as security for the loans or of the charge created on an asset and confirm that the same has been
correctly disclosed and duly registered with ROC and recorded in the Register of charges.

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7. Reconcile the balances in the overdraft or loan account with that shown in the bank statements.
8. Verify that the loan or draft has been raised by appropriate authority. In the case of a company, only
the BOD is authorised to raise a loan or borrow from a bank.
9. Confirm, in the case of a company, that the conditions prescribed in Sec. 180 of the Companies Act,
2013 as regards the maximum amount of loan that the company can raise has not been contravened.
10. Ascertain the purpose for which loan has been raised and the manner in which it has been utilised and
ensure that this has not prejudicially affected the entity.
Question 13
“Until the invoice is paid, the invoice amount is recorded on the organization's balance sheet as accounts
receivable. If balances are not recoverable, then these amounts will need to be written off as an expense in
the income statement/profit and loss account.”
It is important to carry out compliance procedures in the sales audit as part of the debtors' audit procedure.
Verify to ensure that the system for receivables has the necessary features. [MTP – March 18]
Answer
Verification of Systems for receivables:
In relation to credit sales, it becomes imperative to carry out compliance procedures so as to ensure that
the system for receivables has the following features:
 Only bona fide sales lead to receivables.
 Sales are made only to approve customers.
 All such sales are duly recorded in the books.
 Once recorded, the debts can only be eliminated by receipt of cash or on the approval by a responsible
official.
 Debts are collected promptly.
 Balances are regularly reviewed and aged, a proper system of follow up exists and if necessary
adequate provision for bad debt exists.
 Clear segregation of duties relating to identification of debt, receipt of income, reconciliations and
write off of debts.
Question 14
Give your comments and observations on the following: Balance confirmations from trade
receivables/trade payables can only be obtained for balances standing in their accounts at the year-end.
Answer
Balance Confirmations from trade receivables/trade payables:
 Guidance Note on “Audit of Debtors, Loans and Advances” recommends that the trade receivables
may be requested to confirm the balance either:

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(i) As at the date of the balance sheet; or

(ii) As at any other selected date which is reasonably close to the date of the balance sheet.
 The date should be settled by the auditor in consultation with the entity.
 Where the auditor decides to confirm the trade receivables at a date other than the balance sheet date,
he should examine the movements in trade receivable balances which occur between the confirmation
date and the balance sheet date and obtain sufficient evidence to satisfy himself that trade receivable
balances stated in the balance sheet are not materially misstated.
 Therefore, it is not necessary that balances of trade receivables/trade payables should necessarily be
verified at the end of the year only.
Question 15
Describe “Analytical Review Procedures” in Audit. Briefly discuss analytical procedures for verification
of debtors. [May 14, 8 Marks]
Or
Mention the Analytical Review procedures that may be useful as a means of obtaining audit evidence
regarding various assertions relating to Trade receivables, loans and advances. [RTP - May 21]
Answer
Analytical Review Procedures:
SA 520 “Analytical Procedures” deals with the auditor's use of analytical procedures as substantive
procedures. Analytical Procedures may be defined as evaluation of financial information through analysis
of relationships among both financial and non-financial data. It also encompasses such investigation as is
necessary of identified fluctuations or relationships that are inconsistent with other relevant information
or that differ from expected values by a significant amount.
The analytical procedures may be used by auditor to assist the auditor in planning the nature, timing and
extent of audit procedures. It may also be used as a substantive procedure when their use can be more
effective or efficient than tests of details in reducing detection risk for specific F.S. assertions.
Analytical procedures for verification of debtors:
Auditor may also perform below mentioned analytical review procedures as a means of obtaining audit
evidence regarding the various assertions relating to trade receivables, loans and advances.
 Comparison of closing balances of trade receivables, loans and advances with the corresponding
figures for the previous year;
 Comparison of the relationship between current year trade receivable balances and the current year
sales with the corresponding figures for the previous year;
 Comparison of actual closing balances of trade receivables, loans and advances with the corresponding
budgeted figures, if available;

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 Comparison of current year's aging schedule with the corresponding figures for the previous year;
 Comparison of significant ratios relating to trade receivables, loans and advances with the similar
ratios for other firms in the same industry, if available;
 Comparison of significant ratios relating to trade receivables, loans and advances with the industry
norms, if available.
Question 16
Explain disclosure requirements of debtors in financial statements. [Nov. 11, 5 Marks]
Or
Discuss the following: Disclosure requirements relating to trade receivables under Schedule III is the
Companies Act, 2013. [Nov. 14, 5 Marks]
Answer
Disclosure requirements relating to Trade receivable under Schedule III:
(i) Aggregate amount of Trade Receivables outstanding for a period exceeding six months from the date
they are due for payment should be separately stated.
(ii) Trade receivables shall be sub-classified as:
 Secured, considered good;
 Unsecured, considered good;
 Doubtful.
(iii) Allowance for bad and doubtful debts shall be disclosed under the relevant heads separately.
(iv) Debts due by directors or other officers of the company or any of them either severally or jointly with
any other person or debts due by firms or private companies respectively in which any director is a
partner or a director or a member should be separately stated.
Question 17
Write the audit Procedure for verification of existence of Trade Receivables. [MTP – Nov. 21]
Answer
Verification of Existence of Trade Receivable:
1. For Verification of Existence of Trade Receivables, the auditor should check the following:
Check whether there are controls in place to ensure that invoices cannot be recorded more than once
and receivable balances are automatically recorded in the general ledger from the original invoice.
2. Ask for a period-end accounts receivable aging report and trace the balance as per the report to the
general ledger.
3. Check whether realization is recorded invoice-wise or not. If not, check that money received from
debtors is adjusted chronologically invoice-wise and on FIFO basis i.e. previous bill is adjusted first.
4. If any large balance is due for a long time, auditor should ask for reasons and justification for the same.

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5. A list of trade receivables selected for confirmation should be given to the entity for preparing request
letters for confirmation which should be properly addressed.
6. The auditor should maintain strict control to ensure the correctness and proper despatch of request
letters. It should be ensured that confirmations as well as any undelivered letters are returned to the
auditor and not to the client.
7. Any discrepancies revealed by the confirmations received or by the additional tests carried out by the
auditor may have a bearing on other accounts not included in the original sample. The Company
should be asked to investigate and reconcile the discrepancies, if any
8. Where no reply is received, the auditor should perform alternate procedures regarding the balances.
This could include:
 Agreeing the balance to cash received subsequently;
 Preparing a detailed analysis of the balance, ensuring it consists of identifiable transactions and
confirming that these revenue transactions actually occurred. (Examination in depth for those
balances)
9. If there are any related party receivables, review them for collectability as well as whether they were
properly authorized and the value of such transactions were reasonable and at arm's length.
10. Check that receivables for other than sales or services are not included in the list.
11. Review a trend line of sales and accounts receivable, or a comparison of the two over time, to check if
there are any unusual trends i.e. perform Analytical procedures. Make inquiries about reasons for
changes in trends with the management and document the same in audit work papers.
Question 18
What procedures an auditor should adopt to test the authenticity of cash at bank? [Nov. 11, 5 Marks]
Or
How will you verify the following: Bank Balances?
Answer
Verification of Bank Balances:
1. The auditor should advise the entity to send a letter to all its bankers to, directly confirm the balances
to the auditor.
2. The auditor should examine the bank reconciliation statement prepared as on the last day of the year
to identify cheques issued by the entity but not presented for payment, and cheques deposited but not
credited in the bank account and their tracing in subsequent period.
3. The auditor should pay special attention to those items in the reconciliation statements which are
outstanding for an unduly long period.

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4. Where a large number of cheques has been issued/deposited in the last few days of the year, and a
sizeable proportion of such cheques has subsequently remained unpaid/uncleared, this may indicate
an intention of understating creditors/debtors or understating/overstating bank balances. In such a
case, it may be appropriate for the auditor to obtain confirmations from the parties concerned,
especially in respect of cheques involving large amounts. The auditor should also examine whether a
reversal of the relevant entries would be appropriate under the circumstances.
5. In respect of fixed deposits, the relevant receipts/certificates, duly supported by bank advices, should
be examined.
6. Remittances shown as being in transit should be examined with reference to their credit in the bank in
the subsequent period.
7. Where material amounts are held in bank accounts which are blocked, e.g., in foreign banks with
exchange control restrictions or any banks which are under moratorium or liquidation, the auditor
should examine whether the relevant facts have been suitably disclosed in the financial statements.
8. Where the auditor finds that the number of bank accounts maintained by the entity is
disproportionately large in relation to its size, the auditor should exercise greater care in satisfying
himself about the genuineness of banking transactions and balances.
Question 19
Mention disclosure requirements of Bank Balances in the financial statements of a company.
Answer
Disclosure Requirements of Bank balances:
1. Cash and Cash Equivalents shall be classified as:
 Balances with Bank
 Cheques, Drafts on hand
 Cash on hand
 Others (specifying nature)
2. The following shall be shown separately:
 Earmarked balances with bank.
 Balances with bank held as margin money or security against borrowing, guarantees and other
commitments.
 Repatriation restrictions, if any, in respect of cash and bank balances.
 Bank deposits with more than 12 months maturity.
Question 20
“No entry is passed for cheques received by the auditee on the last day of the year and not yet deposited
with the bank”. Give your comments and observations.

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Answer
Cheques received on the last day of Accounting Year:
 Many a times, cheques are received from the customers on the last day of the accounting year and
there are chances that these cheques could not be deposited in the bank on the same day.
 Though in general, it is expected that all cheques should be deposited in the bank daily, but there may
be a possibility that such cheques which are received particularly during the late hours could not be
deposited in the bank.
 In such cases, it becomes important that such cheques should be properly accounted for to avoid any
frauds and that the financial statements reflect a true and fair view. For this purpose, an effective
internal control system needs to be ensured.
 It should be ensured that a list of such cheques is prepared in duplicate and a copy of the same has
been sent to person controlling the trade receivables’ ledger and a second copy is handed over to
cashier along with the cheques received. The person who is controlling the trade receivables’ ledger
should ensure that proper accounting entries have been passed by crediting respective trade
receivables’ accounts.
 The balance of cheques-in-hand should also be disclosed along with the cash and bank balances in the
financial statements.
Question 21
State any six important points to be examined by you, as an auditor, in verifying the correctness of bank
balance of an Educational Institution which deposits all its collection/receipt in separate collection account
of a bank.
Answer
Verification of Bank Balance of an Educational Institution:
For verifying the balances lying with bank in collection account, the auditor should adopt following
procedure:
1. Compare the counterfoils of pay-in-slips with the entries in the ledger account.
2. Compare the entries in the ledger account with the pass book or bank statement.
3. Review the bank reconciliation statement for its correctness.
4. Scrutiny the subsequent period bank statement to ensure that items of reconciliation are subsequently
cleared.
5. Check the casting, carry forwards and balancing of ledger account.
6. Obtain the balance confirmation certificate from the Bank.
Question 22
Comment on “The cash-book showed a huge cash balance on hand consistently throughout the year”.

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Answer
Maintenance of Huge Cash Balance:
“Guidance Note on Audit of Cash and Bank Balances” recommends that if, during the course of the audit,
it comes to the attention of the auditor that the entity is consistently maintaining an unduly large balance
of cash in hand, he may perform the following procedures:
He should carry out surprise verification of cash more frequently.
1. If the cash in hand is not in agreement with the balance as shown in the books, he should seek
explanations from a senior official of the entity.
2. In case any material difference is not satisfactorily explained, the auditor should state this fact
appropriately in his audit report.
3. He should satisfy himself regarding the necessity for such large balances having regard to the normal
working requirements of the entity.
4. The entity may also be advised to deposit the whole or the major part of the cash balance in the bank
at reasonable intervals.
Question 23
M, Statutory Auditor of ABC Ltd. wants to verify cash on hand as on 31st March, 2018. The Management
informs Mr. M that it is not possible to cooperate, as cashier has been hospitalized. Advise Mr. M on how
to deal with the situation.
Answer
Limitation on Scope of Auditor:
 As per “Guidance Note on Audit of Cash and Bank balances” the auditor should carry out physical
verification of cash at the date of the balance sheet. However, if this is not feasible, physical verification
may be carried out, on a surprise basis, at any time shortly before or after the date of the balance sheet.
In the latter case, the auditor should examine whether the cash balance shown in the financial
statements reconciles with the results of the physical verification after taking into account the cash
receipts and cash payments between the date of the physical verification and the date of the balance
sheet.

 In the present case, management refuses for physical verification as cashier has been hospitalized. This
refusal amounts to limitation on scope of auditor, which warrant the auditor to express disclaimer of
opinion or qualified opinion in his audit report depending upon the circumstances.
Conclusion: Non-cooperation of ABC Limited will amount to limitation on scope of auditors and auditor
may modify the report based on the circumstances.

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Question 24
A significant and important audit activity is to contact banks/financial institutions directly and ask them
to confirm the amounts held in current accounts, deposit accounts, EEFC account, cash credit accounts,
etc. as at the end of the reporting period under audit. Explain the audit procedure in this context.
[RTP - Nov. 20]
Answer
Audit procedure for Direct Confirmation Procedure:
a) Auditor is required to confirm all year end account balance maintained with the bank.
b) In case of any discrepancies, client should be asked to investigate and reconcile the discrepancies,
including seeking written explanations/clarifications from the banks/financial institutions on any
unresolved queries.
c) Auditor should emphasize for confirmation of 100% of bank account balances. In remote situations
were no reply is received, the auditor should perform additional testing regarding the balances. This
testing could include:
 Agreeing the balance to bank statement received by the Company or internet/online login to
account in auditor's personal presence;
 Prepare a final summary of the results of the circularization and draw the final conclusion.
Question 25
Comment on the “Responsibility for properly determining the quantity and value of inventories rests with
the management of the entity”.
Answer
Responsibility for determination of quantity and value of inventories:
Guidance Note on Audit of inventories specifies the following:
 The responsibility for properly determining the quantity and value of inventories rests with the
management of the entity.
 The management satisfies this responsibility by carrying out appropriate procedures which will
normally include verification of all items of inventory at least once in every financial year.
 This responsibility is not reduced even where the auditor attends any physical count of inventories in
order to obtain audit evidence.
 In any auditing situation, the auditor employs appropriate procedures to obtain reasonable assurance
to corroborate the management's assertions regarding the following:
1. Existence: that all recorded inventories exist as at the year-end.
2. Ownership: that all inventories owned by the entity are recorded and that all recorded inventories
are owned by the entity.
3. Valuation: that the stated basis of valuation of inventories is appropriate and properly applied,
and that the condition of inventories is recognised in their valuation.

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Question 26
How will you vouch/Verify the following: Work in Progress? [May 13, 4 Marks]
Or
ABC Limited has a closing balance of work in progress of inventories aggregating ` 850 lakhs in their
balance sheet as at March 31, 2020. As Statutory Auditor of ABC Limited, explain various audit procedures
which need to be performed to confirm Work-in-progress of inventories have been valued appropriately
and as per generally accepted accounting policies and practices. [Jan. 21, 3 Marks]
Answer
Verification of Capital Work in Progress:
Auditor is required to carefully assess the stage of completion of the WIP for assessing the appropriateness
of its valuation. For this purpose, the auditor may perform the following:
 Examine the production/costing records (e.g., cost sheets),
 Hold discussions with the personnel concerned, and
 Obtain expert opinion, where necessary.
If physical verification of WIP is impracticable, the auditor should lay greater emphasis on ascertaining
whether the system, from which the WIP is ascertained, is reliable.
Audit procedure which needs to be performed to confirm work in progress has been valued appropriately
and as per generally accepted accounting policies and practices is as follows:
1) Ascertain how the various stages of production/value add are measured and in case estimates are
made, understand the basis for such estimates.
2) Ascertain what elements of cost are included. If overheads are included, ascertain the basis on which
they are included and compare such basis with the available costing and financial data/information
maintained by the entity.
3) Ensure that material costs exclude any abnormal wastage factors.
Question 27
Write short notes on: Physical attendance by auditor during inventory taking. [May 09, 5 Marks]
Or
Briefly mention the matters that are relevant in planning attendance at physical inventory counting.
[Nov. 18, 5 Marks]
Answer
Physical attendance by auditor during inventory taking:
a) The physical verification of stock is the responsibility of the management. The auditor may find it
appropriate to attend the stock taking, if the inventory value is material in his opinion.
b) The extent of participation in inventory taking depends upon the internal control system prevailing,
results of examination of inventory records and analytical review procedures.
c) When auditor attend inventory taking, he ensures that the instructions given for inventory taking is
followed.
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d) He test checks few items by himself for their existence and quantum. He selects to test high value items
importantly.
e) The physical conditions of stock-like its age, deterioration, obsolescence etc., are looked into by auditor.
f) The auditor reviews stores records and notes down major discrepancies for reconciling them in a
subsequent date.
g) The cut off arrangement is also looked into ensure that the entity accounts for stock for which liability
had been booked and excludes stick which had been sold.
Question 28
Write the audit procedures to be performed as an auditor for valuation (assertion) of following:
Finished goods and goods for resale. [Nov. 18, 5 Marks, MTP - May 20]
Answer
Audit procedures to be performed for valuation of Finished Goods and Goods for Resale:
1. Ensure that the valuation of inventories is in accordance with the AS 2, “Valuation of Inventories”,
being lower of cost or Net Realisable Value.
2. Examine the evidence supporting the assessment of Net Realisable Value. In this regard, the auditor
should particularly examine whether appropriate allowance has been made for defective, damaged
and obsolete and slow-moving inventories in determining the NRV.
3. Inquire about the elements of cost and ensure that the overheads included have been determined based
on normal costs and appear reasonable.
4. Request the client to provide inventory ageing split between less than 30 days, 30-60 days old, 60- 90
days old, 90-180 days old, 180- 365 days old and more than 365 days old, for the purpose of follow up
for items that are obsolete, damaged, slow moving and ascertain the possible realizable value of such
items.
5. Compare recorded costs with replacement costs.
6. Calculate inventory turnover ratio. Obsolete inventory may be revealed if ratio is significantly lower.
Question 29
State the different types of Analytical Review carried out in verification of inventories. [May 06, 6 Marks]
Or
State the analytical review procedures normally carried out in the audit of inventories. [May 17, 6 Marks]
Answer
Analytical Review carried out in verification of Inventories:
While carrying out audit of inventories, auditor may also apply following analytical review procedures so
as to obtain audit evidence regarding the various assertions:
1. Reconciliation of quantities of opening stocks, purchases, production, sales and closing stocks;
2. Comparison of closing stock quantities and amounts with those of the previous year;

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3. Comparison of the relationship of current year stock quantities and amounts with the current year
sales and purchases, with the corresponding figures for the previous year;
4. Comparison of the composition of the closing stock (e.g., raw materials as a percentage of total stocks,
WIP as a percentage of total stocks) with the corresponding figures for the previous year;
5. Comparison of current year gross profit ratio with the gross profit ratio for the previous year;
6. Comparison of actual stock, purchase and sales figures with the corresponding budgeted figures, if
available;
7. Comparison of yield with the corresponding figure for the previous year;
8. Comparison of significant ratios relating to inventories with the similar ratios for other firms in the
same industry, if available;
9. Comparison of significant ratios relating to inventories with the industry norms, if available.
Question 30
How will you vouch or verify: Goods sent on consignment.
Answer
Verification of Goods sent on Consignment:
a) Vouch the Proforma invoice sent with goods to ascertain the quantity and value of goods sent.
b) Freight evidences given by the transporter like Challan, Bill, Receipt for freight charged.
c) Insurance charge to be verified from cover note and premium paid receipt issued by Insurance
Company.
d) Account sale sent by consignee, referring to sale price of the goods sold, expenses incurred by him and
stock remained unsold.
e) Obtain confirmation from consignee for the goods held on consignment on balance sheet date.
f) Unsold goods should have been taken in the closing stock valued properly inclusive of expenses
(Proportionate) incurred by consignee.
g) Journal entries relating to such transaction be verified from the books of the Company.
Question 31
While conducting audit of Vee Ltd., CA Aman, auditor of the company, found that some goods are lying
with third party for a long period. Advise Aman how will he verify them. [MTP - Oct. 21]
Answer
Verification of goods lying with third parties:
1) Auditor should check materiality of the goods lying with third parties.
2) Auditor should obtain confirmation of the amount of goods lying with third parties. Confirmation may
be obtained directly by auditor or be produced by client.
3) Auditor should inquire into the necessity of sub-contractor retaining the inventory.

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4) Auditor should pay special attention to the goods lying with third parties for the long period.
5) Auditor should review the records, voucher, slips used for regulating the movement of inventory into
and out of entity for sub-contracting.
6) Auditor should ensure that the valuation of inventories should be correctly made for including
material cost on appropriate inventory valuation formulae and also for inclusion of proportionate
processing charges for the work in process with the contractors.
7) Auditor should ensure that provision should be created for work done, billed for processing and also
for incidence of any applicable levy like service tax payable.
8) Auditor should evaluate condition of goods and see whether adequate provision has been made.
9) Auditor should check whether subsequently the goods lying with third party were sold or received
back after the expiry of stipulated time period.
10) Auditor should ensure that the goods have been included in the closing inventory though lying with
third party.
Question 32
Management of Z Ltd. wants to include all the cost incurred by the Company in valuing the cost of its
inventories. The Accountant is, however, of the view that certain costs should be excluded from the cost
of inventories and should be recognised as expenses for the period in which they are incurred.
What are such costs that should be excluded while determining the cost of inventories? [MTP - Nov. 21]
Answer
Examples of costs to be excluded in determining cost of Inventory:
In determining the cost of inventories, it is appropriate to exclude certain costs and recognize them as
expenses in the period in which they are incurred. Examples of such costs are:
a) Abnormal amounts of wasted materials, labour, or other production costs;
b) Storage costs, unless those costs are necessary in the production process prior to a further production
stage;
c) Administrative overheads that do not contribute to bringing the inventories to their present location
and condition; and
d) Selling and distribution costs.
In the given situation, contention of Z Ltd. is not correct to include all the cost of its inventories while
determining the cost of inventory. However, contention of accountant is correct that certain cost should
be excluded from the cost of inventories and to be recognised as expenses in period in which they are
incurred.

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Question 33
Indicate Expenses which are essentially of a revenue nature, if incurred for creating an asset, are also
regarded as expenditure of capital nature. [May 14, 4 Marks]
Or
Expenses which are essentially of a revenue nature if incurred for creating an asset or adding in its value
of achieving higher productivity are regarded as exposes of a capital nature. Describe any five such
expenses. [May 18, 5 Marks, MTP – April 21]
Answer
Expenses of Revenue Nature regarded as Capital Expenditure:
1. Material and wages when expended on the construction of a building or erection of machinery.
2. Legal expenses incurred in connection with the purchase of land or building.
3. Freight when incurred in respect of purchase of plant and machinery.
4. Major repairs of a fixed asset that increases its productivity.
5. Wages paid on installation costs incurred in Plant & Machinery.
6. Interest paid for the qualifying period as per AS-16 i.e. before the asset is constructed.
Question 34
The auditor A of ABC & Co., firm of auditors is conducting the audit of XYZ Ltd. and while performing
testing of additions wanted to verify that all PPE (Property, Plant and Equipment) purchase invoices are
in the name of the entity he is auditing. For all additions to land, building in particular, the auditor desires
to have concrete evidence about ownership. The auditor is worried about whether the entity has valid
legal ownership rights over the PPE claimed to be held by the entity and recorded in the financial
statements. Advise the auditor. [RTP - May 18, Nov. 19, MTP – Oct. 19]
Answer
Verification of Addition to Property Plant & Equipment:
Acquisition of new property, plant & equipment and improvements to the existing ones should be verified
with reference to supporting documents such as orders, invoices, receiving reports and title deeds and
applicable customs or excise documents. Due care needs to be takes when the purchase is from a related
party The auditor may employ procedures such as possible comparative prices prevalent in a ready
market, evaluation, justification and approvals for the purchase
Verification of Ownership of Property, Plant & Equipment:
The ownership of arts, like land and buildings, may be verified by examining the title deeds. In case the
title deeds are held by other persons, such as solicitors or bankers, confirmation should be, at least where
significant, obtained directly by the auditors through a request signed by the client.

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Question 35
Explain with examples the audit procedure to establish the existence of intangible fixed assets as at the
period-end. [RTP – Nov. 18, MTP – April 19, RTP – Nov. 19]
Answer
Audit procedure to establish the existence of intangible fixed assets as at the period-end:
An intangible asset is an identifiable non-monetary asset, without physical substance, held for use in the
production or supply of goods or services, for rental to others, or for administrative purposes. Auditor
should check the following points:
1. Auditor should ensure that intangible asset should be recognised only if (a) it is probable that the
future economic benefits that are attributable to the asset will flow to the enterprise, and (b) the cost of
the asset can be measured reliably.
2. Ensure that at initial stages, intangible asset should be measured at cost. After initial recognition an
intangible asset should be carried at its cost less any accumulated amortisation and any impairment
losses.
3. For verifying the existence of software, the auditor should verify whether such software is in active
use by the entity and for the purpose, the auditor should verify the sale of related services/goods
during the period under audit, in which such software has been used.
4. For verifying the existence of design/drawings, the auditor should verify the production data to
establish if such products for which the design/drawings were purchased, are being produced and
sold by the entity.
5. In case any intangible asset is not in active use, deletion should have been recorded in the books of
account post approvals by the entity's management and amortization charge should have ceased to be
charged beyond the date of deletion.
Question 36
How will you verify the following?
(a) Intangible Assets [Nov. 15, 4 Marks]
(b) Goodwill [May 05, 4 Marks]
(c) Patents [Nov. 04, 4 Marks]
(d) Trade Marks and Copyrights [May 17, 4 Marks, RTP - Nov. 20]
Answer
Verification procedure:
(a) Intangible Assets:
An intangible asset is an identifiable non-monetary asset, without physical substance, held for use in
the production or supply of goods or services, for rental to others, or for administrative purposes.
Auditor should check the following points:

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1. Auditor should ensure that intangible asset should be recognised only if (a) it is probable that the
future economic benefits that are attributable to the asset will flow to the enterprise; and (b) the
cost of the asset can be measured reliably.
2. Ensure that at initial stages, intangible asset should be measured at cost. After initial recognition
an intangible asset should be carried at its cost less any accumulated amortisation and any
impairment losses.
3. Ensure that if an item covered does not meet the definition of an intangible asset, expenditure to
acquire it or generate it internally is recognised as an expense when it is incurred.
4. In some cases, an asset may incorporate both intangible and tangible elements that are, in practice,
inseparable. Ensure that in determining whether such an asset should be treated under AS 10,
“Property, Plant and Equipments”, or as an intangible asset under AS 26, “Intangible Assets”
appropriate judgment has been taken to assess as to which element is predominant.
5. Auditor should also ensure that proper disclosure is made in the financial statements about the
carrying amount, amortisation methods, useful lives, etc. in compliance of AS 26 and Schedule Ill
to the Companies Act, 2013.
(b) Goodwill:
1. Ensure that goodwill has been recognized in the books in compliance of AS 26. As per AS 26,
“Intangible Assets”, internally generated goodwill is not to be recognised as an asset, as it is not an
identifiable resource controlled by the enterprise that can be measured reliably at cost
2. Examine the vendors' agreement to ascertain the amount of goodwill.
3. Ensure that whenever business is acquired at a price, payable in cash or otherwise, which is in
excess of the value of net assets taken over, such excess amount is the goodwill.
4. Ensure that only the amount paid to the vendors not represented by tangible or intangible assets,
the value of which can be measured reliably has been debited to goodwill account.
5. Ensure goodwill has not recognised in the books by revaluation of assets or writing back the
amount of goodwill earlier written off.
6. Ensure that the goodwill not yet written off has been properly disclosed under the head “Non-
Current Assets” as per Schedule III requirements.
7. Ensure amortisation of goodwill over a reasonable period as a matter of financial prudence.
(c) Patents
1. Obtain a list of patents owned by the client as the balance sheet date and verity ownership of a
patent by inspection of the certificate issued in respect of grant of the patent.

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2. Examine the agreement if it has been so as to find out the total cost.
3. In case of outright purchase of patent rights, the purchase consideration, legal fees and registration
charges should be included in cost. When they are developed within the organisation, all costs
incurred on their development including legal and registration expenses for registration of the
patent should constitute the cost.
4. Check that the patent rights are alive and legally enforceable.
5. Check that renewal fees have been paid on due dates are being charged to revenue. The last
renewal receipt should be examined to ascertain that the patent has not lapsed.
6. Ascertain that the rate at which the value of each patent is being written off is adequate since the
amount paid in respect of each patent should be amortised over its life or a lesser period if its
commercial life is shorter; its value would be completely written off by the time it would cease to
have a commercial value.
7. Ascertain that only the actual cost incurred in the process has been capitalised.
(d) Trade Marks and Copyrights:
1. Obtain duly signed schedule of Trade Marks and Copyrights and confirm that all of them are
shown in the Balance Sheet.
2. Examine the written agreement in case of assignment of Copyrights or transfer of trade marks.
3. Ensure that trademarks and copyrights have been duly registered under respective laws.
4. Verity existence of copyright by reference to contract between the author & the entity and note
down the terms of payment of royalty.
5. See that the value has been determined properly and the costs incurred for the purpose of obtaining
the trademarks and copyrights have been capitalised.
6. Ascertain that the legal life of the trademarks and copyrights have not expired.
7. Ensure that amount paid for both the intangible assets is properly amortised having regard to
appropriate legal and commercial considerations, as per the provisions of AS 26 on Intangible
Assets.
Question 37
You are an auditor of PQR Ltd. which has spent ` 10 lakhs on Research activities of the product during
period under audit. Board of Directors want to recognize it as an internally generate intangible asset.
Advise and discuss the conditions necessary to be fulfilled to recognize the intangible assets in the financial
statements. [May 19, 4 Marks, MTP - Oct. 20, March 21]
Answer
Conditions to be fulfilled to recognise the intangible assets in the financial statements:
 As per AS 26 “Intangible Assets”, an intangible asset is an identifiable non-monetary asset, without
physical substance, held for use in the production or supply of goods or services, for rental to others,
or for administrative purposes.

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 Intangible asset should be recognised only if

a) It is probable that the future economic benefits that are attributable to the asset will flow to the
enterprise; and
b) The cost of the asset can be measured reliably.
 An enterprise should assess the probability of future economic benefits using reasonable and
supportable assumptions that represent best estimate of the set of economic conditions that will exist
over the useful life of the asset.
 Para 41 of AS 26 states that no intangible asset arising from research (or from the research phase of an
internal project) should be recognised. Expenditure on research (or on the research phase of an internal
project) should be recognised as an expense when it is incurred. As 26 takes the view that, in the
research phase of a project, an enterprise cannot demonstrate that an intangible asset exists from which
future economic benefits are probable. Therefore, this expenditure is recognised as an expense when
it is incurred.
Question 38
How will you vouch/verify the following: Leasehold Rights? [RTP – Nov. 20]
Answer
Verification of Leasehold Rights
1. Inspect the lease or assignment thereof to ascertain the amount of premium, if any for securing the
lease, and its terms and conditions, and that the lease has been duly registered. A lease exceeding one
year is not valid unless it has been granted by a registered instrument.
2. Ascertain that all the conditions, the failure to comply with which might result in the forfeiture or
cancellation of the lease, e.g. payment of ground rent on the due dates, insurance of property, its
maintenance in a satisfactory state of repairs, etc prescribed by the lease, are being duly complied with.
3. Examine the counterpart of the tenants' agreements, if part of the leasehold property has been sublet.
4. Make certain that due provisions for any claim that might arise under the dilapidation clause on the
expiry of the lease has been made, and, if no such provision has been made, draw the client's attention
to the matter.
5. Ensure that the outlay as well as any legal expenses incurred to acquire the leases which are shown as
an asset in the Balance Sheet is being written off at a rate which could completely wipe off the asset
over the unexpired term of the lease.
Question 39

The value of intangible assets may diminish due to efflux of time, use and/or obsolescence. The
diminution of the value represents cost to the entity for earning revenue during a given period. Discuss
the audit procedures to be applied by the auditor to ensure that Intangible assets have been valued
appropriately and as per generally accepted accounting policies and practices. [July 21, 3 Marks]

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Answer
Audit procedures to be applied to ensure appropriate valuation of Intangible assets:
a) Verify that the entity has charged amortization on all intangible assets
b) Verify that the amortization method used reflects the pattern in which the asset's future economic
benefits are expected to be consumed by the entity.
c) The auditor should also verify whether the management has done an impairment assessment to
determine whether an intangible asset is impaired. For this purpose, the auditor needs to verify
whether the entity has applied AS 28 - Impairment of Assets for determining the manner of reviewing
the carrying amount of its intangible asset, determining the recoverable amount of the asset to
determine impairment loss, if any.
Question 40
Verification of liabilities is as important as that of assets, considering if any liability is omitted (or
understand) or overstated, the Balance Sheet would not show a true and fair view of the state of affairs of
the state of affairs of the entity. Explain stating also criteria for a liability to be classified as current liability.
[RTP – Nov. 18, MTP – April 19]
Answer
Criteria for classifying a liability as a Current Liability:
A liability shall be classified as current when it satisfies any of the following criteria:
(1) It is expected to be settled in the company’s normal operating cycle;
(2) It is held primarily for the purpose of being traded;
(3) It is due to be settled within twelve months after the reporting date; or
(4) The company does not have an unconditional right to defer settlement of the liability for at least twelve
months after the reporting date. Terms of a liability that could at the option of the counterparty, result
in its settlement by the issue of equity instruments do not affect its classification.
All other liabilities shall be classified as non-current.
Question 41

Liabilities include trade payables and other current liabilities, deferred payment credits and provisions.
Verification of liabilities is as important as that of assets, considering if any liability is omitted (or
understand) or overstated, the Balance Sheet would not show a true and fair view of the state of affairs of
the entity.
Advise stating clearly the audit procedure to establish the existence of trade payables and other current
liabilities as at the period-end. [MTP – Aug. 18]

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Answer
Audit procedure to establish the existence of trade payables and other current liabilities as at the
period-end:
Verification of trade-payables and other current liabilities may be carried out by employing the following
procedures:
a) Examination of records;
b) Direct confirmation procedures;
c) Analytical review procedures.
The NTE of substantive procedures to be performed is, however, a matter of professional judgment of the
auditor which is based, inter alia, on the auditor’s evaluation of the effectiveness of the related internal
controls.
(A) Examination of Records:
1. The auditor should check the adequacy of cut-off procedures adopted by the entity in relation to
transactions affecting the trade payable accounts.
2. The auditor should examine the correspondence and other relevant documentary evidence to
satisfy himself about the validity, accuracy and completeness of trade payables/acceptances.
3. In case there are any unusual payments around the year-end, the auditor should examine them
thoroughly.
4. The auditor should review subsequent transactions to identify/confirm material liabilities
outstanding at the balance sheet date.
(B) Direct confirmation procedures:
1. The verification of balances by direct communication with trade payables is theoretically the best
method of ascertaining whether the balances are genuine, accurately stated and undisputed,
particularly where the internal control system is weak.
2. The auditor employs direct confirmation procedure with the consent of the entity under audit.
There may be situations where the management of the entity requests the auditor not to seek
confirmation from certain trade payables. In such cases, the auditor should consider whether there
are valid grounds for such a request. Before accepting a refusal as justified, the auditor should
examine any available evidence to support the management’s explanations, e.g., correspondence
between the entity and the trade payables.
3. While determining the information to be obtained, the form of confirmation, as well as the extent
and timing of application of the confirmation procedure, the auditor should consider all relevant
factors such as the effectiveness of internal control, the apparent possibility of disputes,
inaccuracies or irregularities in the accounts, the probability that requests will receive
consideration, and the materiality of the amounts involved.

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4. The trade payables may be requested to confirm the balances either (a) as at the date of the balance
sheet, or (b) as at any other selected date which is reasonably close to the date of the balance sheet.
5. The form of requesting confirmation from the trade payables may be either (a) the ‘positive’ form
of request, wherein the creditor is requested to respond whether or not he is in agreement with the
balance shown, or (b) the ‘negative’ form of request, wherein the creditor is requested to respond
only if he disagrees with the balance shown.
(C) Analytical review procedures:
In addition to the audit procedures discussed above, the following analytical review procedures may
often be helpful as a means of obtaining audit evidence regarding the various assertions:
a) Comparison of closing balances of trade payables with the corresponding figures for the previous
year;
b) Comparison of the relationship between current year trade payable balances and the current year
purchases with the corresponding figures for the previous year;
c) Comparison of actual closing balances of trade payables, etc. with the corresponding budgeted
figures, if available;
d) Comparison of current year's aging schedule of trade payables with the corresponding figures for
the previous year;
e) Comparison of significant ratios relating to trade payables with the similar ratios for other firms in
the same industry, if available;
f) Comparison of significant ratios relating to trade payables with the industry norms, if available.
Question 42
How will you vouch/verify: Trade Creditors? [Nov. 07, 5 Marks]
Answer
Verification of Trade Creditors:
a) Check the adequacy of cut off procedure to ensure that transaction of next period are not accounted
and all transactions of year end are accounted.
b) Check posting in the bought ledger from books of prime entry.
c) Compare the balances in the schedule of creditors with balances in bought ledger.
d) Compare the balances with the confirmation or statement of account received from trade creditors.
e) Pay special attention to long outstanding items and enquire about the reason thereof.
f) Verify subsequent payments and reversal entries in the bought ledger of year end entries.
g) See that trade creditors are classified and shown in the balance sheet as per requirement of Schedule
III of the Companies Act, 2013.

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Question 43
Describe the criteria for classification of assert as current asset.
Answer
Classification of Assets:
An asset shall be classified as current when it satisfies any of the following criteria:
(1) It is expected to be realized in, or is intended for sale or consumption in, the company’s normal
operating cycle;
(2) It is held primarily for the purpose of being traded;
(3) It is expected to be realized within twelve months after the reporting date; or
(4) It is cash or cash equivalent unless it is restricted from being exchanged or used to settle a liability for
at least twelve months after the reporting date.
All other assets shall be classified as non-current.
Question 44
Write the audit procedures to be performed as an auditor for valuation (assertion) of: Loans and Advances
and other current assets. [Nov. 18, 8 Marks, MTP – May 20]
Answer
Audit procedures to be performed for valuation of Loans and Advances and other current assets:
(i) Examine the provision made for doubtful accounts. For this purpose, auditor need to review the
process followed by the entity to derive an allowance for doubtful accounts. Compare the process
used in the last year and determine the appropriateness of method used.
(ii) Obtain the ageing report of loans and advances, split between not currently due, 30 days old, 30-40
days old, 60-180 days old, 180-365 days old and more than 365 days old.
(iii) Obtain list of loans and advances under dispute and compare with previous year.
(iv) Identity loans and advances that appear doubtful and check the respective provisions made. In case
provisions are not been made, inquire the reasons from management.
(v) Examine bad loans/advances write-offs. Prepare schedule of movements on Bad loans/advances -
Provision Accounts and loans/advances written off.
(vi) Examine whether the write-offs or other reductions in the recoverable balances have been approved
by appropriate authority.
(vii) Examine whether the restatement of foreign currency loans and advances/other current assets has
been done properly.
Question 45
Newton Ltd. has made loans and advances on the basis of following securities to various borrowers. As
an auditor what type of documents can be verified to ensure that the company holds a legally enforceable
security?

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(i) Shares and Debentures

(ii) Life Insurance Policy
(iii) Hypothecation of goods. [MTP – May 20]
Answer
Documents to be seen in case of Securities:
Types of Security Documents etc. to be seen
Shares and debentures The scrip and the endorsement thereon of the name of the transfer, in the
case of transfer.
Life Insurance Policy Assignment of policy in favour of the lender, duly registered with the
insurer.
Hypothecation of goods Deed of hypothecation or other document creating the charge, together with
a statement of inventories held at the Balance Sheet date.

Question 46
Write a short note on: Contingent Liability.
Answer
Contingent Liability:
As per AS 29 “Provisions, Contingent Liabilities and Contingent Assets” a contingent liability is:
a) A possible obligation that arises from past events and the existence of which will be confirmed only
by the occurrence or non-occurrence of one or more uncertain future events not wholly within the
control of the enterprise; or
b) A present obligation that arises from past events but is not recognised because:
(i) It is not probable that an outflow of resources embodying economic benefits will be required to
settle the obligation; or
(ii) A reliable estimate of the amount of the obligation cannot be made.
Recognition Principle of Contingent Liabilities:
 An enterprise should not recognise a contingent liability.
 A contingent liability is disclosed, unless the possibility of an outflow of resources embodying
economic benefits is remote.
 Contingent liabilities are assessed continually to determine whether an outflow of resources
embodying economic benefits has become probable. If it becomes probable that an outflow of future
economic benefits will be required for an item previously dealt with as a contingent liability, a
provision is recognised in the financial statements of the period in which the change in probability
occurs.

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Question 47
How will you vouch/verify: Contingent Liabilities? [May 07, May 17, 4 Marks]
Answer
Verification of Contingent Liabilities:
1. Review minutes of the meetings of the Board of Directors or other similar bodies.
2. Review contracts, agreements and arrangements.
3. Review list of pending law suits and obtain a certificate and opinion of the lawyer dealing with the
cases.
4. Review of records relating to contingent liabilities maintained by the company.
5. Review of terms and condition of grants and subsidy availed.
6. Obtain representation from the management that all known contingent liabilities have been included
in the accounts and disclosed properly.
7. Ensure that proper disclosure is made of all the contingent liabilities as per the requirements of AS-
29 and Schedule III to the Companies Act, 2013.
Question 48
From the auditing point of view, the auditor should verity that a proper disclosure about contingent
liabilities is made in financial statements as required by AS 29. What type of disclosures should be made
for each class of contingent liability as at the balance sheet date? [MTP - March 21, April 21]
Answer
Disclosure for each class of Contingent Liability:
From the auditing point of view, the auditor should verify that a proper disclosure about contingent
liabilities is made in financial statement as required by AS 29. As pec, AS 29 an enterprise should disclose
for each class of contingent liability at the balance sheet date.
1. A brief description of the nature of the contingent liability and where practicable.
2. An estimate of the amount as per measurement principle as prescribed for provision in AS 29.
3. Indication of the uncertainty relating to outflow.
4. The possibility of any reimbursement.
5. Where any of the information as required above is not disclosed because it is not practicable to do so,
that fact should be stated.
Question 49
How will you vouch/verify the following?
(a) Consignment Sales
(b) Goods sent out on sale or return basis. [Nov. 09, 5 Marks]
Or

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Discuss the audit procedures generally required to be undertaken by the auditor while auditing Goods
sent out on Sale or Return Basis. [Nov. 20, 3 Marks]
Answer
Vouching of Consignment Sales:
1. Verify the terms of agreement between the consignor and the consignee to ascertain the terms and
conditions regarding commission and other expenses.
2. Ensure that the goods consigned are not treated as ordinary sales.
3. Ensure that the gross sale proceeds as mentioned in the account Sales has been credited to the
Consignment Account and debited to the consignee's account.
4. Ascertain that credit has been taken only for the profit on the goods sold through the consignee before
the year end. No profit should be taken for the profit on goods remaining in the hands of the
consignee.
5. Ensure that the stock lying with the consignee at the end should be taken in the balance sheet at cost
on a consistent basis and credited to the Consignment A/c to arrive at the result of the consignment
transactions.
6. Obtain confirmation of the balance in the account of the consignee from the consignee.
7. In case, goods are consigned at invoice price, auditor should ensure that the necessary adjustments to
remove the loading have been made.
8. Examine the adjustments made at the year-end in respect of the goods not yet sold, commission and
the expense incurred by consignee.
Vouching of Goods sent on sale or return basis:
1. Check maintenance of separate memoranda records of goods sent out on sale or return. Only after
approval from customer, personal account of customer is debited and the sales account is credited.
2. Ensure that the price of such gods is unloaded from the sales account and the debtor’s record before
the approval from customer.
3. In respect of the goods for which approval period has expired, ensure that either goods have been
received back or customer's account have been debited.
4. In respect of the goods for which approval period has not expired till the close of the year and lying
with the party, ensure that cost of such goods has been included in the closing stock.
Question 50

Auditor of ABC Ltd. while auditing its financial statements wants to ensure whether the disclosures
regarding sales has been made as required under Schedule III (Part 1) to Companies Act, 2013. Explain
such disclosure requirements. [MTP – March 21]

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Answer
Disclosure requirements of Sales as per Schedule III:
With respect to sales of the client entity, the auditor is required to ensure whether the following disclosures
as required under Schedule III (Part 1) to Companies Act, 2013 have been made:
 Whether disclosures of sales in respect of each class of goods has been made.
 Whether revenue from operations is disclosed separately in the notes as revenue arising from:
a) Sale of products (including excise duty)
b) Sale of services
c) Other operating revenues.
 Whether brokerage and discount on sales other than usual trade discount has been disclosed.
 Whether the transactions with related parties are appropriately disclosed in notes to accounts.
Question 51
CA “X” while conducting an audit of Joyful Ltd. found a considerable increase in sales as compared to the
previous year, he doubts that few fictitious sales have been recorded by the company to overstate its
revenues. Discuss any four audit procedures to be undertaken by the auditor to ensure revenue from sales
of goods and services performed during the period is not overstated? [July 21, 4 Marks]
Answer
Audit procedures to be undertaken to ensure revenue is not overstated:
1. Check whether a single sales invoice is recorded twice or a cancelled sales invoice could also be
recorded.
2. Test check few invoices with their relevant entries in sales journal.
3. Obtain confirmation from few customers to ensure genuineness of sales transaction.
4. Whether any fictitious customers and sales have been recorded.
5. Whether any shipments were done without the consent and agreement of the customer, especially at
the year end to inflate the sales figure.
6. Whether unearned revenue recorded as earned.
7. Whether any substantial uncertainty exists about collectability.
8. Whether customer obligations are contingent on other actions (financing, resale, etc.).
(Any four points may be stated)
Question 52
APQ Ltd. deals in real estate and classifies all of its land holding under current assets as inventory. The
same is, therefore valued at cost or market value whichever is less. How would you verify profit or loss
arising on sale of plots of land by such a dealer? [RTP – Nov. 21]

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Answer
Verification of Profit & Loss Arising on sale of Plots by real estate dealer:
The land holding in the case of real estate dealer will be a current asset and not a fixed asset. The same
should, therefore, be valued at cost or market value whichever is less. The amount of profits or loss arising
on sale of plots of land by such a dealer should be verified as follows:
1. Each property account should be examined from the beginning of the development with special
reference to the nature of charges so as to find out that only the appropriate cost and charges have been
debited to the account and the total cost of the property has been set off against the price realised for
it.
2. This basis of distribution of the common charges between different plots of land developed during the
period and basis for allocation of cost to individual properties comprised in a particular piece of land
should be scrutinized.
3. If land price lists are available, these should be compared with actual selling prices obtained. And it
should be verified that contracts entered into in respect of sale have been duly sanctioned by
appropriate authorities.
4. Where part of the sale price is intended to reimburse taxes or expenses, suitable provisions should be
maintained for the purpose.
5. The prices obtained for various plots of land sold should be checked with the plan map of the entire
tract and any discrepancy or unreasonable price variations should be inquired into. The sale price of
different plots of land should be verified on a reference to certified copies of sale deeds executed.
6. Out of the sale proceeds, provision should be made for the expenditure incurred on improvement of
land, which so far has been accounted for.
Question 53
As statutory auditor of the company, list out audit procedures required to be undertaken for the following:
(i) Interest income from fixed deposits.
(ii) Dividend income.
(iii) Gain/(Loss) on sale of investment in Mutual funds.
Also indicate disclosure requirements of above as per Companies Act, 2013. [May 18, 4+2+2+2 Marks]
Or
ABC Limited appointed XYZ & Company, Chartered Accountants, as a Statutory Auditor of the Company
for the year 2019-20. CA. X, partner of XYZ & Company, was looking after the audit of other income of the
company which consists of interest income on fixed deposits. As a Statutory Auditor how would CA. X
verify interest income on fixed deposits for the year 2019-20? [Nov. 20, 4 Marks]
Or

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As a Statutory Auditor of the company list out audit procedure required to be undertaken for the
recognition of following other income:
i. Interest income from fixed deposit
ii. Dividend income
iii. Gain/(loss) on sale of investment in mutual funds. [Nov. 21, 3 Marks]
Answer
Audit procedure for financial items:
(i) Interest income from fixed deposits:
a) Obtain a list of all fixed deposits exist at the beginning of the year and newly made during the
audit, along with the applicable interest rate and the number of days for which the deposit was
made.
b) Verify the arithmetical accuracy of the interest calculation by multiplying the deposit amount
with the applicable rate and number of days during the period under audit.
c) For deposit outstanding as at the year end, obtain direct confirmation from the respective bank/
financial institution.
d) Obtain a confirmation of interest income from the bank and verify that the interest income as per
bank reconciles to the calculation shared by the entity.
e) Obtain a copy of Form 26AS (TDS) and reconcile the interest reflected therein to the calculation
shared by client.
(ii) Dividend Income:
Verity that the dividend is recognised in the statement of profit and loss only when the entity’s right
to receive payment of the dividend is established, provided it is probable that the economic benefits
associated with the dividend will flow to the entity and the amount of the dividend can be measured
reliably.
(iii) Gain/(Loss) on sale of investment in Mutual funds:
a) Verify that Gain/(loss) on sale of investment in mutual funds is recognised as other income only
on transfer of title from the entity and is determined as the difference between the redemption
price and carrying value of the investments.
b) For this purpose, obtain the mutual fund statement and trace the gain/loss as recorded in the
books of account to the gain/loss as reflected in the statement.
Disclosure Requirements of Schedule III:
1. Classification of Other Income into:
 Interest Income (except for a finance company)
 Dividend Income
 Net gain/loss on sale of Investments
 Other Non-Operating Income (net of expenses directly attributable)

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2. Dividend from foreign company

3. Adjustments to the carrying amount of investments
4. Net gain from foreign currency transactions and translations other than those considered as Finance
Costs
5. Any item of revenue which exceed 1% of revenue from operations or ` 1 lakh, whichever is higher.
Question 54
List out the steps to be taken by auditor while vouching/verifying the 'Refund of General Insurance
premium paid’. [RTP-May 21]
Answer
Refund of General Insurance Premium paid:
The refund of insurance premium may be because of earlier provisional payment of premium or may be
a policy might have been cancelled at a later date. The auditor should take following steps while vouching
such refunds:
(i) Ascertain the reasons for refund of insurance premium.
(ii) Examine insurance policy or cover note to Bid out the amount of premium.
(iii) Verify advice of refund received from the insurance company. When refund is admitted, the
insurance company sends the advice. This will be evidence as a covering letter to the cheque for the
refund. Sometimes, a cheque is issued after a receipt is sent in advance to the insurance company.
(iv) Scrutinise correspondence between the insurance company and the client.
(v) Check entries in the bank book or the bank statement. If necessary, the counterfoil of the pay-in-slips
can also be verified.
Question 55
Explain how you will verify the items given while conducting an audit of an entity:
a) Recovery of Bad debts written off
b) Receipt of Insurance claims
c) Sale proceeds of scrap material [RTP – Nov. 21]
Answer
a) Recovery of Bad Debts written off:
Recovery of bad debts written off is verified with reference to relevant correspondence and proper
authorisation.
 Ascertain the total amount lying as bad debts and verify the relevant correspondence with the
trade receivables whose accounts were written off as bad debt.
 Ensure that all recoveries of bad debts have been properly recorded in the books of account.
 Examine notification from the Court or from bankruptcy trustee. Letters from collecting agencies
or from account receivables should also be seen.

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 Check Credit Manager's file for the amount received and see that the said amount has been
deposited into the bank promptly.
 Vouch acknowledgement receipts issued to account receivables or trustees.
 Review the internal control system regarding writing off and recovery of bad debts.
b) Receipt of Insurance Claims:
Insurance claims may be in respect of fixed assets or current assets. While vouching the receipts of
insurance claims:
 The auditor should examine a copy of the insurance claim lodged with the Insurance company
correspondence with the insurance company and with the insurance agent should also be seen.
Counterfoils of the receipts issued to the insurance company should also be seen.
 The auditor should also determine the adjustment of the amount received in excess or short of the
value of the actual loss as per the insurance policy.
 The copy of certificate/report containing full particulars of the amount of loss should also be
verified.
 The accounting treatment of the amount received should be seen particularly to ensure that
revenue is credited with the appropriate amount and that in respect of claim against asset, the
Statement of Profit and Loss is debited with the short fall of the claim admitted against book value,
if the claim was lodged in the previous year but no entries were passes, entries in the Statement of
Profit and Loss should be appropriately described.
c) Sale Proceeds of Scrap Material:
 Review the internal control on scrap materials, as regards its generation, storage and disposal and
see whether it was properly followed at every stage.
 Ascertain whether the organisation is maintaining reasonable records for the sale and disposal of
scrap materials.
 Review the production and cost records for determination of the extent of scrap materials that may
arise in a given period.
 Compare the income from the sale of scrap materials with the responding figures of the preceding
three years.
 Check the rates at which different types of scrap materials have been sold and compare the same
with the rates that prevailed in the preceding year.
 See that scrap materials sold have been billed and check the calculations in the invoices.
 Ensure that there exists a proper procedure to identify the scrap material and good quality material
is not mixed up with it and sold as scrap.
 Make an overall assessment of the value of the realisation from the sale of scrap materials as to its
reasonableness.
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Question 56
Discuss the special precautions in verification of purchase invoice.
Answer
Special Precautions in verification of purchase Invoice:
 Adjustment of Invoice Amount: In case, the total amount of the invoice has been adjusted in separate
accounts, the entire amount so adjusted should be added together to confirm that there has not been
error under adjustment.
 Duplicate copy of Invoice: Ensure that if the payment is adjusted on the basis of duplicate invoice, the
original invoice also needs to be marked as paid at the same time.
 Compliance of special conditions: If supplies are received on certain special conditions, verified that
these conditions are the same as were agreed to at the time the order was placed, e.g., payment of
freight and insurance charges of goods while in transit, etc.
 Timings of Payment: If the amount of an invoice was payable after the lapse of some time, subsequent
to the receipt of goods, it should be ascertained that it has not been paid earlier and the benefit of cash
discount, if any, has been obtained.
 Goods purchased for personal use: Where goods have been purchased for the use of an officer but the
invoice is made out in the name of the entity, it should be seen that the cost has been charged to the
officer concerned and not to the Purchases Account of entity.
 Purchases from related parties: If purchases are made from the associated concerns, ensure that such
purchases are made only under an appropriate sanction.
 Inspection before taking delivery: Ensure that the goods were inspected on arrival and the delivery
note and the goods inward note should be examined.
 Goods delivered directly to customer: The auditor should make appropriate inquiries in order to
establish that the transaction was appropriately authorised by a responsible official.
A copy of the delivery note signed by the account receivable on delivery of the goods should be
examined, and it should be ascertained whether the account receivable is a regular purchaser of the
company's goods and not an employee of the company wishing to take advantage of a weakness in
the system.
Question 57
While editing purchases which types of analytical procedures will be performed by the auditor to obtain
audit evidence as to overall reasonableness of purchase quantity and price. [May 19, 4 Marks]
Or
Discuss the audit procedure to be considered by an auditor while performing analytical procedure to
obtain audit evidence as to overall reasonableness of purchase quantity and price. [Nov. 19, 3 Marks]

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Answer
Analytical procedures to be performed while auditing purchases:
Analytical procedures to obtain audit evidence as to overall reasonableness of purchase quantity and price
include:
(i) Consumption Analysis: Auditor should examine consumption of raw material from manufacturing
account and compare the same with previous years with closing stock and ask for the reasons from
management for any significant variations noticed.
(ii) Stock Composition Analysis: Auditor should collect reports from management for composition of
stock i.e. raw materials as a percentage of total stock and compare the same with previous year and
ask for reasons from management for any significant variations noticed.
(iii) Ratios: Auditor should compare the creditors turnover ratios and stock turnover ratios of the current
year with previous years.
(iv) Quantitative Reconciliation: Auditor should review quantitative reconciliation of closing stocks with
opening stock, purchases and consumption.
Question 58
State the disclosure requirements in respect of Statement of point and loss as per Schedule III of Companies
Act, 2013, in case of Employee benefits expenses. [Nov. 16, 4 Marks]
Answer
Disclosure requirements w.r.t. employee benefit expenses as per Schedule III:
Schedule III requires that a Company shall disclose by way of notes additional information regarding the
Employee benefit expenses as:
(i) Salaries and wages,
(ii) Contribution to provident and other funds,
(iii) Expense on Employee Stock Option Scheme (ESOP) and Employee Stock Purchase Plan (ESPP),
(iv) Staff welfare expenses.
Question 59
While reviewing Employee benefits expenses of a company, how you as an auditor you will evaluate its
hiring, appraisal and retirement process? [May 19, 3 Marks]
Answer
Evaluation of hiring, appraisal and retirement process:
 Tests the controls the company has set around employee benefit payment process to determine how
effective and reliable they are. If they are effective, the auditor can minimise the amount of transaction
testing he must do.
 Common internal control over the employee benefit payment cycle includes maintaining of attendance
records, employee master, authorisation and approval of monthly payroll processing and
disbursement, computation of employee deductions like payroll taxes, accrual of other benefits like
gratuity, leave encashment, bonus etc.
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 Select a random sample of transactions and examines the related appointment letters, appraisal letters,
attendance records, HR policies, employee master etc.
 Perform substantive analytical procedures, which may comprise of evaluation of reasonable of
monthly expense, comparison with previous accounting period, any analysis auditor may find
relevant and most important of all setting an expectation in relation to the expense incurred during the
period under audit and compare that with the client’s business operations and overall trend in the
industry.
Question 60
Define Depreciation and discuss various purposes of providing depreciation. [May 11, 8 Marks]
Or
Write short note on: Purposes of providing depreciation. [Nov. 12, Nov. 14, May 17, 4 Marks]
Answer
Deprecation and purpose of providing depreciation
AS 10 “Property, Plant and Equipment” defines depreciation as the systematic allocation of the depreciable
amount of an asset over its useful life. Depreciable amount is the cost of an asset, or other amount
substituted for cost less, its residual value.
Purposes of providing depreciation:
a) To provide the funds for the replacement of assets: This is accomplished by retaining the amount of
depreciation charged in the profit and loss account in the business.
b) To determine true cost of manufactured goods: As the value of fixed assets depletes gradually by
consumption during the process of production, it is necessary that such consumption of value be
charged in the accounts for determination of the true cost of production.
c) To determine the profit or loss for the year: Depreciation being an expense represented by the loss in
value of fixed assets arising on use, it is charged to the profit and loss account for determining the
profit or loss during a year.
d) To show a true and fair value of entity's assets in the balance sheet: Since the original costs of fixed
assets gradually decreases due to use and other factors, it is improper to continue to carry such assets
at original costs. Therefore, the amount of depreciation charged in the profit and loss account
representing the loss in value of the assets is deducted from the original cost on a cumulative basis so
as to reflect in the balance sheet a true and fair value of the fixed assets.
Question 61
Mention any five attributes to be considered by an auditor while verifying for depreciation and
amortisation expenses. [May 18, 5 Marks]
Or

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Depreciation and amortisation expense generally constitute an entity's significant part of overall expenses
and have direct impact on the profit/loss of the entity. What are the attributes, the Auditor needs to
consider while verifying Depreciation and amortisation expense. [Jan. 21, 4 Marks]
Answer
Attributes to be considered by auditor while verifying depreciation and amortization:
(a) Occurrence: Recorded depreciation and amortisation expenses were actually incurred during the
period.
(b) Completeness: Depreciation and amortisation expenses pertaining to the period have been recorded
appropriately and there in no understatement/overstatement.
(c) Measurement: Depreciation and amortisation expenses have been measured appropriately.
(d) Presentation: Presentation of depreciation and amortization expenses in the financial statements are
as per requirements of applicable FRF.
(e) Disclosure: Required disclosures for depreciation and amortization have been appropriately made.
Question 62
“While the auditor may choose to analyse the monthly trends for expenses like rent, power and fuel but
for other expenses, an auditor generally prefers to verify other attributes.” Mention those attributes.
[Nov. 18, 5 Marks, MTP - Oct. 21]
Answer
Attributes to be examined while vouching expenses:
a) Whether the expenditure pertained to current period under audit;
b) Whether the expenditure qualified as a revenue and not capital expenditure;
c) Whether the expenditure had a valid supporting like travel tickets, insurance policy, third party
invoice etc.;
d) Whether the expenditure has been classified under the correct expense head;
e) Whether the expenditure was authorised as per the delegation of authority matrix;
f) Whether the expenditure was in relation to the entity's business and not a personal expenditure.
Question 63
Explain the audit procedure to vouch/verify:
Rent expenses
Power and Fuel expenses [RTP – May 19]
Answer
Audit Procedure to Vouch Rent Expenses:
 Obtain a month wise schedule of rent payment along with the rent agreements.
 Examine whether rent expense has been recorded for all 12 months and whether the rent paid is as per
the underlying agreement.
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 Examine whether agreement contains any escalation clause, if yes, verify whether rent has been
increased/adjusted during the period only as per escalation clause.
 Verify whether the agreement is in the name of the entity.
 Verify whether the expense pertains to premises used for running business operations of the entity.
Audit Procedure to Vouch Power and Fuel expenses:
 Obtain a month wise expense schedule of payment towards power and fuel along with the power bills.
 Examine whether the expenses have been recorded for all 12 months.
 Compile a month wise summary of power units consumed and the applicable rate and check the
arithmetical accuracy of the bill raised on monthly basis.
 Analyse the monthly power units consumed by linking it to units of finished goods produced and
investigate reasons for variance in monthly trends.
Question 64
CA Amar wants to verify the payments made by XYZ Ltd. on account of building rent during the FY 2021-
22. The rent amounts to ` 50,000 per month for the year. The monthly rent payments are consistent with
the rent agreement. However, the other companies in the similar industry are paying rent of ` 10,000 per
month for a similar location. How will applying the analytical procedures impact the verification process
of such rental payments by XYZ Ltd.? [MTP - April 21]
Answer
Applying analytical procedures for verification of rental payments:
 If CA Amar checks in detail the monthly rent payments, he may find that such payments are consistent
with the rent agreement i.e. XYZ Ltd. paid ` 50,000 per month as rent and the same is getting reflected
in the rent agreement. Here, CA Amar may not be able to find out the inconsistency in the rent payment
with respect to rent payment prevalent in the similar industry for rent of the similar location.
 If CA Amar applies analytical procedure i.e. company the rent payment by XYZ Ltd., with the similar
payments made by companies in similar industry and similar area, he will notice an inconsistency in
such rent payments as the other companies are paying a very less monthly rent in similar industry for
similar area.
 However, if CA Amar does not make such comparison and only checks the monthly payments
misstatement and rent agreement of XYZ Ltd., he would not have found such inconsistency and as
such the misstatement may remain undetected.
Question 65
The auditor may choose to analyse the monthly trend for Power & fuel expense. Explain how this analysis
will be performed by the auditor. [MTP – Nov. 21]
Answer
Analysis of monthly trand of Power and fuel expense:
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1. Obtain a month wise expense schedule along with the power bills.
2. Verity if expense has been recorded for all 12 months.
3. Also, compile a month wise summary of power units consumed and the applicable rate and check the
arithmetical accuracy of the bill raised on monthly basis.
4. In relation to the units consumed, analyse the monthly power units consumed by linking it to units of
finished goods produced and investigate reasons for variance in monthly trends.
Question 66
Explain how you will verify the items given while conducting an audit of an entity: Payment of Taxes.
[RTP - Nov. 21]
Answer
Payment of Taxes:
 Obtain the computation of taxes prepared by the auditee and verify whether it is as per the Income-
tax Act/GST Act/Rules/Notifications/Circulars etc.
 Examine relevant records and documents pertaining to payment of advance income tax and self-
assessment tax.
 Payment on account of income-tax and other taxes like GST consequent upon a regular assessment
should be verified by reference to the copy of the assessment order, notice of demand and the receipted
challan acknowledging the amount paid.
 The penal interest charged for non-payment should be debited to the interest account.
 Now-a-days, electronic payment of taxes is also in trend. Such electronic payment of taxes by way of
internet banking facility or credit or debit cards shall also be verified.
 The assessee can make electronic payment of taxes also from the account of any other person.
Therefore, it should be verified that the challan for making such payment is clearly indicating the PAN
No./TAN No./TIN No./GSTIN etc. of the assessee on whose behalf the payment is made.

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 CHAPTER 10
COMPANY AUDIT
QUESTIONS WITH ANSWERS
Question 1
Examine the following: “Section 139(1) of the Companies Act, 2013 provides that every company shall, at
the first annual general meeting appoint an auditor who shall hold office till the conclusion of its sixth
annual general meeting”. [RTP – May 18]
Answer
Appointment of Subsequent Auditors in case of Non-Government Companies:
Section 139(1) of the Companies Act, 2013 provides that every company shall, at the first AGM appoint an
individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the
conclusion of its 6th AGM and thereafter till the conclusion of every 6th meeting.
The following points need to be noted in this regard:
 The company shall place the matter relating to such appointment of ratification by member at every
Annual General Meeting.
 Before such appointment is made, the written consent of the auditor to such appointment, and a
certificate from him or it that the appointment, if made, shall be in accordance with the conditions as
may be prescribed, shall be obtained from the auditor.
 The certificate shall also indicate whether the auditor satisfies the criteria provided in section 141.
 The company shall inform the auditor concerned of his or its appointment, and also file a notice of
such appointment with the Registrar within 15 days of the meeting in which the auditor is appointed.
Question 2
Managing Director of PQR Ltd. (Non-Government Company) himself wants to appoint Shri Ganpati, a
practicing Chartered Accountant, as first auditor of the company. Comment on the proposed action of the
Managing Director.
Answer
Appointment of First Auditor of Non-Govt. Company:
1. Section 139(6) of the Companies Act, 2013 lays down that “the first auditor or auditors of a company
shall be appointed by the Board of directors within 30 days from the date of registration of the
company.”
2. In the instant case, the appointment of Shri Ganpati, a practicing Chartered Accountant as first auditors
by the Managing Director of PQR Ltd. by himself is in violation of Section 139(6) of the Companies
Act, 2013, which authorizes the Board of Directors to appoint the first auditor of the company.
Conclusion: In view of the above, the Managing Director of PQR Ltd. should be advised not to appoint
the first auditor of the company.
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Question 3
The first auditor of M/s Healthy Wealthy Ltd., a Government company, was appointed by the Board of
Directors. [MTP – March 19, RTP - May 19]
Answer
Appointment of First Auditor of Govt. Company:
 Section 139(7) of the Companies Act, 2013 lays down that in the case of a Government Company or
any other company owned or controlled, directly or indirectly, by the Central Government, or by any
State Government, or State Governments, or partly by the Central Government and partly by one or
more State Governments, the first auditor shall be appointed by the CAG of India within 60 days of
registration of the company.
 In case the CAG of India does not appoint such auditor within the said period, the BOD of the company
shall appoint such auditor within the next 30 days.
 In the case of failure of the Board to appoint such auditor within the next 30 days, it shall inform the
members of the company who shall appoint such auditor within the 60 days at an EGM.
 Hence in the case of M/s Healthy Wealthy Ltd., being a government company, the first auditors shall
be appointed by the CAG of India.
Conclusion: The appointment of first auditors made by the Board of Directors of M/s Healthy Wealthy
Ltd., is null and void.
Question 4
Nick Ltd. is a subsidiary of Ajanta Ltd., whose 20% shares have been held by Central Government, 25%
by Uttar Pradesh Government and 10% by Madhya Pradesh Government. Nick Ltd. appointed Mr. P as
statutory auditor for the year.
Answer
Appointment of Auditor of Govt. Company:
1) As per Sec. 2(45) of the Companies Act, 2013, a Government Company is defined “as any company in
which not less than 51% of the paid-up share capital is held by the Central Government or by any State
Government or Governments or partly by the Central Government and partly by one or more State
Governments and includes a company which is a subsidiary of a Government Company as thus
defined”.
2) Sec. 139(7) requires that the auditors of a government company shall be appointed or reappointed by
the Comptroller and Auditor General of India.
3) In the given case Ajanta Ltd. is a government company as its 20% shares have been held by Central
Govt. 25% by U.P. State Government and 10% by M.P. State Govt. Total 55% shares have been held by
Central and State Governments.
4) Nick Ltd. will also be a government company, being subsidiary company of Ajanta Ltd. and hence the
Auditor of Nick Ltd. can be appointed only by C & AG.
Conclusion: Appointment of ‘P’ is invalid and ‘P’ should not give acceptance to the Directors of Nick Ltd.

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Question 5
At the AGM of ICI Ltd., Mr. X was appointed as the statutory auditor. He, however, resigned after 3
months since he wanted to give up practice and join industry. State, how the new auditor will be appointed
by ICI Ltd. and the conditions to be complied for.
OR
At the AGM of HDB Pvt. Ltd., Mr. R was appointed as the statutory auditor. He, however, resigned after
3 months since he wanted to purse his career in banking sector. The board of director has appointed Mr.
L as the statutory auditor in board meeting within 30 days. Comment on the matter with reference to the
provisions of companies Act, 2013. [May 18, 5 Marks, RTP – Nov. 20]
Answer
Filling of Casual vacancy:
 As per Sec 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor may be
filled by Board of Directors within 30 days.
 However, if casual vacancy has been created by the resignation of the auditor, such appointment shall
also be approved by the company at a general meeting convened within 3 months of the
recommendation of the board.
 The auditor so appointed shall hold office till the conclusion of the next annual general meeting.
Conclusion: In this case the casual vacancy has been created on account of resignation. Therefore, Board
of Directors will have to fill the vacancy within 30 days and such appointment be approved by the
company at the general meeting within 3 months of the recommendations of the board. The new auditor
so appointed shall hold office only till the conclusion of the next AGM.
Question 6
Due to the resignation of the existing auditor(s), the Board of directors of X Ltd. appointed Mr. Hari as the
auditor. Is the appointment of Hari as auditor valid?
Answer
Board’s Powers to Appoint an Auditor:
1. As per Sec. 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor may be
filled by Board of Directors within 30 days.
2. However, if casual vacancy has been created by the resignation of the auditor, such appointment shall
also be approved by the company at a general meeting convened within 3 months of the
recommendation of the board.
3. The auditor so appointed shall hold office till the conclusion of the next annual general meeting.
Conclusion: Appointment of auditor by Board of Directors will be Valid if it is made within 30 days of
casual vacancy and such appointment is approved by the company at a general meeting within 3 months
of the recommendation of the Board.

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Question 7
At an AGM of a listed company, Mr. R a retiring auditor after completing the tenure of 5 consecutive years
of his service claims that he has been reappointed automatically, as the intended resolution of which a
notice had been given to appoint Mr. P. could not be proceeded with, due to Mr. P’s death.
Answer
Restrictions over tenure of Auditor (Rotation of Auditor)
 As per Sec. 139(2) of the Companies Act, 2013, listed companies and other prescribed class of
companies shall not appoint or reappoint an individual as auditor for more than one term of five
consecutive years.
 Sec. 139(10) of Companies Act, 2013 provides that if no auditor is appointed or reappointed at AGM,
existing auditor will continue.
 In the given case, notice has been given of an intended resolution to appoint some person or persons
in the place of a retiring auditor, and by reason of the death, incapacity or disqualification of that
person or of all those persons, as the case may be, the resolution cannot be proceeded with.
 In the instant case, if Sec. 139(10) of the Companies Act, 2013 is invoked, it results into violation of Sec.
139(2). Hence, Mr. R cannot continue as auditor due to restrictions of Sec. 139(2).
Conclusion: Mr. R cannot continue as auditor of the company due to rotation provisions. Companies Act,
2013 does not provide any provision for such kind of situation, hence it can be concluded that vacancy
arises in the office of auditor which need to be filled by company in EGM.
Question 8
No AGM was held for the year ended 31st March, 2021, in XYZ Ltd., Mr. X is the auditor for the previous
5 years, whether he should continue to hold office for current year or not.
Answer
Auditor’s position if no AGM is held:
 Sec. 139(1) of the Companies Act, 2013 provides that every company shall, at the first AGM appoint an
individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the
conclusion of its 6th AGM and thereafter till the conclusion of every 6th meeting.
 In case the AGM is not within the period prescribed, the auditor will continue in office till the AGM is
actually held and concluded.
Conclusion: Mr. X shall continue to hold office till the conclusion of the AGM.
Question 9
M/s Young & Co., a CA firm, and Statutory Auditors of Old Ltd., is dissolved on 1-4-2021 due to
differences of opinion among the partners. The Board of Directors of Old Ltd. in its meeting on 6-4-2021
appointed another firm M/s Sharp & Co. as their new auditors for one year.

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Answer
Filling of Casual Vacancy:
 As per Sec. 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor may be
filled by Board of Directors within 30 days.
 However, if casual vacancy has been created by the resignation of the auditor, such appointment shall
also be approved by the company at a general meeting convened within 3 months of the
recommendation of the board.
 The auditor so appointed shall hold office till the conclusion of the next annual general meeting.
Conclusion: In the instant case the action of the board of directors in appointing M/s Sharp & Co. to fill
up the casual vacancy due to dissolution of M/s Young & Co., is correct.
However, the board of directors are not correct in giving them appointment for one year. M/s Sharp &
Co. can hold office until the conclusion of next AGM only.
Question 10
ABC Pvt. Ltd. is having paid up share capital of ` 18 Cr. But having public borrowing from nationalized
banks and financial institutions of ` 72 Cr. Comment whether, manner of rotation of auditor will be
applicable over ABC Pvt. Ltd. [RTP – May 18]
Answer
Statement is Incorrect.
 Provisions related with rotation of auditors are applicable in case of private companies having paid up
capital of ` 50 Crore or more and to companies having paid up capital below ` 50 Crore, but having
public borrowings from financial institutions, banks or public deposits ` 50 Crore or More.
 In the instant case, as borrowings if of ` 50 Crore, provisions related with rotation of auditors are
applicable.
Question 11
Jolly Ltd., a listed company, appointed M/s Polly & Co., a Chartered Accountant firm, as the statutory
auditor in its AGM held at the end of September, 2021 for 11 years. Comment whether the appointment is
valid.
Answer
Rotation of Auditor & Cooling Off Period Provisions:
 As per Section 139(2) of the Companies Act, 2013, no listed company or a company belonging to such
class or classes of companies as prescribed, shall appoint or re-appoint:
 An individual as auditor for more than one term of five consecutive years; and
 An audit firm as auditor for more than two terms of five consecutive years.
 In the given case, Jolly Limited is a listed company, the provisions relating to rotation of auditor will
be applicable.
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Conclusion: Jolly Ltd. cannot appoint the auditor for more than two terms of five consecutive years each,
i.e. M/s Polly & Co. shall hold office from the conclusion of this meeting upto conclusions of 6 th AGM to
be held in the year 2026 and thereafter can be re-appointed as auditor for one more term of five years i.e.
upto year 2031. The appointment shall be subject to ratification by members at every AGM of the company.
As a result, the appointment made by Jolly Ltd. for 11 years is void.
Question 12
M/s XYZ & Co., is an audit firm having partner Mrs. X, Mr. Y and Mr. Z, whose tenure has expired in the
company immediately preceeding the financial year. M/s ABZ & Co., another audit firm in which Mr. Z
is a common partner, appointed as auditor for next five years. Comment whether the appointment is valid.
Answer
To examine validity of appointment:
 Sec. 139(2) of Companies Act, 2013 provides that no listed company or other prescribed companies,
shall appoint or re-appoint an audit firm as auditor for more than two terms of five consecutive years.
 An audit firm which has completed its term, shall not be eligible for re-appointment as auditor in the
same company for five years from the completion of such term.
 It is also provided that as on the date of appointment no audit firm having a common partner or
partners to the other audit firm, whose tenure has expired in a company immediately preceding the
financial year, shall be appointed as auditor of the same company for a period of five years.
 In the present case, assuming that company is covered under rotational provisions and two tenures of
5 year each of XYZ & Co expired, M/s ABZ cannot be appointed as auditor as Mr. Z is common partner.
Conclusion: Appointment is not valid.
Question 13
Discuss the following: Filling of Casual Vacancy in respect of a Company Audit.
[Nov. 12, 5 Marks, RTP - May 18]
Answer
Filling of Casual Vacancy:
As per Section 139(8) of the Companies Act, 2013, any casual vacancy in the office of an auditor shall:
(i) In the case of a non-government company, be filled by the Board of Directors within 30 days. But, if
such casual vacancy is as a result of the resignation of an auditor, such appointment shall also be
approved by the company at a general meeting convened within 3 months of the recommendation of
the Board and the auditor so appointed shall hold the office till the conclusion of the next AGM.
(ii) In the case of a government company, the casual vacancy be filled by the CAG of India within 30 days.
But if the CAG does not fill the vacancy within the said period the Board of Directors shall fill the
vacancy within next 30 days.

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Question 14
Under what circumstances the retiring auditor cannot be reappointed. [Nov. 13, 6 Marks]
Answer
Circumstances in which retiring auditor cannot be reappointed:
1. A specific resolution has not been passed to reappoint the retiring auditor.
2. The auditor proposed to be reappointed does not possess the qualification prescribed under section
141 of the Companies Act, 2013.
3. The proposed auditor suffers from the disqualifications under sections 141(3), 141(4) and 144 of the
Companies Act, 2013.
4. He has given to the company notice in writing of his unwillingness to be reappointed.
5. A Special resolution has been passed in AGM appointing somebody else or providing expressly that
the retiring auditor shall not be reappointed.
6. A written certificate has not been obtained from the proposed auditor to the effect that the appointment
or reappointment, if made, will be in accordance within the limits specified under section 141(3)(g) of
the Companies Act, 2013.
Question 15
State the manner of rotation of auditors on expiry of their term. [May 15, 4 Marks]
Or
What are the provisions regarding appointment of auditors by rotation, after expiry of the term of the
current auditor that a company should consider? [May 17, 5 Marks]
Answer
Manner of Rotation of Auditors:
Rule 6 of Companies (Audit & Auditors) Rules, 2014 prescribes the manner of rotation as below:
1. The Audit Committee shall recommend to the Board, the name of an individual auditor or of an audit
firm who may replace the incumbent auditor on expiry of the term of such incumbent.
2. Where a company is required to constitute an Audit Committee, the Board shall consider the
recommendation of such committee, and in other cases, the Board shall itself consider the matter of
rotation of auditors and make its recommendation for appointment of the next auditor by the members
in annual general meeting.
3. For the purpose of the rotation of auditors:
(i) In case of an auditor (whether an individual or audit firm), the period for which the individual or
the firm has held office as auditor prior to the commencement of the Act shall be taken into account
for calculating the period of five consecutive years or ten consecutive years, as the case may be;
(ii) The incoming auditor or audit firm shall not be eligible if such auditor audit firm is associated with
the outgoing auditor or audit firm under the same network of audit firms.
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The term “same network” includes the firms operating or functioning, hitherto or in future, under
the same brand name, trade name or common control.
(iii) For the purpose of rotation of auditors:
(A) A break in the term for a continuous period of five years shall be considered as fulfilling the
requirement of rotation;
(B) If a partner, who is in charge of an audit firm and also certifies the financial statements of the
company, retires from the said firm and joins another firm of chartered accountants, such other
firm shall also be ineligible to be appointed for a period of five years.
Question 16
Provisions regarding rotation of auditors affect only specified class of companies. Discuss.
Or
Specify the class of companies to whom rotation of auditor applies, under the provisions of Companies
Act, 2013. [May 17, 4 Marks]
Answer
Companies requiring rotation of auditors:
As per Section 139(2) of the Companies Act, 2013, no listed company or a company belonging to such class
or classes of companies as prescribed, shall appoint or re-appoint:
 An individual as auditor for more than one term of five consecutive years; and
 An audit firm as auditor for more than two terms of five consecutive years.
Rule 5 of Companies (Audit and Auditors) Rules, 2014, prescribes the following classes of companies for
the purpose of rotation:
a. All unlisted public companies having paid up share capital of ` 10 crore or more;
b. All private limited companies having paid up share capital of ` 20 crore or more;
c. All companies having paid up share capital of below threshold limit mentioned above, but having
public borrowings from financial institutions, banks of public deposits of ` 50 crores or more.
Question 17
Write short note on: Provisions regarding re-appointment of a retiring auditor at the Annual General
Meeting, for a company not covered under auditor rotation provisions. [May 17, 4 Marks]
Or
Enumerate the circumstances under which the retiring auditor can be re-appointed. [MTP – Nov. 21]
Answer
Re-appointment of Auditor - Sec. 139(9):
Subject to the provisions of sub-section (1) and the rules made thereunder, a retiring auditor may be re-
appointed at an AGM, it

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(a) He is not disqualified for re-appointment;

(b) He has not given the company a notice in writing of his unwillingness to be re-appointed; and
(c) A special resolution has not been passed at that meeting appointing some other auditor or providing
expressly that he shall not be re-appointed.
Sec. 139(10) of Companies Act, 2013 that where at any AGM no auditor is appointed or reappointed, the
existing auditor shall continue to be the auditor of the company.
Question 18
Explain the manner and procedure of selection and appointment of auditors as per Rule 3 of Companies
(Audit and Auditors) Rules, 2014. [RTP – May 19]
Answer
Manner and Procedure of selection and appointment of auditors:
Manner and procedure of selection of auditors by the members of the company at AGM has been
prescribed under Rule 3 of the Companies (Audit and Auditors) Rules, 2014. Accordingly:
1) In case of a company that is required to constitute an Audit Committee u/s 177, the committee and, in
cases where such a committee is not required to be constituted, the Board, shall take into consideration
the qualifications and experience of the individual or the firm proposed to be considered for
appointment as auditor and whether such qualifications and experience are commensurate with the
size and requirements of the company:
While considering the appointment, the Audit Committee or the Board, as the case may be, shall have
regard to any order or pending proceeding relating to professional matters of conduct against the
proposed auditor before the ICAI or any competent authority or any Court.
2) The Audit Committee or the Board, as the case may be, may call for such other information from the
proposed auditor as it may deem fit.
3) Subject to the provisions of sub-rule (1), where a company is required to constitute the Audit
Committee, the committee shall recommend the name of an individual or a firm as auditor to the Board
for consideration and in other cases, the Board shall consider and recommend an individual or a firm
as auditor to the members in the AGM for appointment.
4) If the Board agrees with the recommendation of the Audit Committee, it shall further recommend the
appointment of an individual or a firm as auditor to the members in the AGM.
5) If the Board disagrees with the recommendation of the Audit Committee, it shall refer back the
recommendation to the committee for reconsideration citing reasons for such disagreement.
6) If the Audit Committee, after considering the reasons given by the Board, decides not to reconsider its
original recommendation, the Board shall record reasons for its disagreement with the committee and
send its own recommendation for consideration of the Audit Committee, it shall place the matter for
consideration by members in the AGM.

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Question 19
Where a company is required to constitute an Audit Committee, all appointments of an auditor under this
section shall be made after taking into account the recommendations of such committee.
Explain stating also the class of companies required to constitute Audit Committee.
[MTP - March 19, May 20]
Answer
Consideration as to recommendations of Audit Committee:
Sec. 139(11) of Companies Act, 2013 provides that where a company is required to constitute an Audit
Committee u/s 177, all appointments, including the filling of a casual vacancy of an auditor under this
section shall be made after taking into account the recommendations of such committee.
Companies required to constitute Audit Committee: As per Sec. 177 of Companies Act, 2013, in addition
to listed public companies, following classes of companies shall constitute an Audit Committee:
 All public companies with a paid-up share capital of ` 10 Cr. or more;
 All public companies having turnover of ` 100 Cr. or more;
 All public companies, having in aggregate, outstanding loans, debentures and deposits exceeding ` 50
Cr.
Explanation: The paid-up share capital or turnover or outstanding loans, debentures and deposits, as the
case may be, as existing on the last date of latest audited F.S. shall be taken into account for this purpose.
Question 20
Clue Ltd. is a Public unlisted company having paid-up share capital of ` 9 crores and public borrowings
from the financial institutions of ` 51 crores. They appointed M/s Pray and Co., a Chartered Accountant
firm as the statutory auditor in its annual general meeting for 11 years.
a) Is the manner of rotation of auditor applicable in case of Cine Ltd.?
b) Whether the appointment of M/s Pray and Co. is valid? [Nov. 20, 4 Marks]
Answer
Appointment and Rotation of company auditor:
(i) Rotation of Auditor:
 As per Rule 5 of Companies (Audit and Auditor’s) Rules, 2014, provisions related with rotation
of auditors are applicable in case of public unlisted companies having paid up capital of ` 10
Crore or more and to companies having paid up capital below ` 10 Crore, but having public
borrowings from financial institutions, banks or public deposits of ` 50 Crore or more.
 In the instant case, as borrowings is of ` 50 Crore, provisions related with rotation of auditors are
applicable.

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(ii) Appointment of Auditor:

As per Section 139(2) of the Companies Act, 2013, no listed company or a company belonging to such
class or classes of companies as prescribed, shall appoint or re-appoint:
 An individual as auditor for more than one term of five consecutive years; and
 An audit firm as auditor for more than two terms of five consecutive years.
Clue Ltd. cannot appoint the auditor for more than two terms of five consecutive years each i.e. M/s
Pray & Co., shall hold office from the conclusion of this meeting upto conclusion of 6th AGM and
thereafter can be re-appointed as auditor for one more term of five years. The appointment shall be
subject to ratification by members at every AGM of the company. As a result, the appointment made
by Clue Ltd. for 11 years is not valid.
Question 21
Discuss the Provisions regarding appointment of Auditors:
(i) First auditor of a Government Company and a Non-Government Company.
(ii) Subsequent auditor of a Government company and a Non-Government Company. [RTP-May 21]
Answer
(i) Appointment of First of Government Company:
Sec. 139(7) of the Companies Act, 2013 provides that in the case of a Government Company or any
other company owned or controlled, directly or indirectly, by the C.G., or by any S.G. of partly by
the C.G. and partly by one or more S.G.(s), the first auditor shall be appointed by the C & AG within
60 days from the date of registration of the company.
In case the C & AG does not appoint such auditor within the above said period, the Board of Directors
of the company shall appoint such auditor within the next 30 days. Further, in the case of failure of
the Board to appoint such auditor within next 30 days, it shall inform the members of the company
who shall appoint such auditor within 60 days at an extraordinary general meeting. Auditors shall
hold office till the conclusion of the first AGM.
Appointment of First Auditor of a Non-Government Company:
As per Sec. 139(6) of the Companies Act, 2013, the first auditor of a company, other than a
Government company, shall be appointed by the Board of Directors within 30 days from the date of
registration of the company.
In the case of failure of the Board to appoint the auditor, it shall inform the members of the company.
The members of the company shall within 90 days at an extraordinary general meeting appoint the
auditor.
Appointed auditor shall hold office till the conclusion of the first annual general meeting.

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(ii) Appointment of Subsequent Auditor of a Government Company:

As per Sec. 139(5) of the Companies Act, 2013, in the case of a Government company or any other
company owned or controlled, directly or indirectly, by the C.G. or by any S.G. or partly by the C.G.
and partly by one or more S.G.(s), the C & AG shall, in respect of a financial year, appoint an auditor
duly qualified to be appointed as an auditor of companies under this Act, within a period of 180 days
from the commencement of the financial year, who shall hold office till the conclusion of the AGM.
Appointment of Subsequent Auditor of a Non-Government Company:
As per Sec. 139(1) of the Companies Act, 2013, every company shall, at the first AGM appoint an
individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the
conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth
meeting.
Question 22
The recommendation for appointment of auditors is only one of the several functions performed by audit
committee. Discuss at least four other key responsibilities of Audit Committee in accordance with section
177 of the Companies Act, 2013. [July 21, 4 Marks]
Answer
Key responsibilities of Audit Committee:
Audit committee performs wide functions. The recommendation for appointment of auditors is only one
of the several functions performed by audit committee. Under section 177 of Companies Act 2013, audit
committee is responsible for following actions:
1) The recommendation for appointment, remuneration and terms of appointment of auditors of the
company;
2) Review and monitor the auditor’s independence and performance, and effectiveness of audit process;
3) Examination of the financial statement and the auditors’ report thereon;
4) Approval or any subsequent modification of transactions of the company with related parties;
5) Scrutiny of inter-corporate loans and investments;
6) Valuation of undertakings or assets of the company, wherever it is necessary;
7) Evaluation of internal financial controls and risk management systems;
8) Monitoring the end use of funds raised through public offers and related matters.
Question 23
Why Central Government permission is required, when the auditor is to be removed before expiry of their
term, but the same is not needed when the auditors are changed after expiry of their term?

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Answer
Removal of an auditor before expiry of term:
 Sec. 140(1) of Companies Act, 2013 requires prior approval of Central Government in case of removal
of an auditor before the expiry of his term. This is a very stringent provision to ensure that any auditor
who is inconvenient to the management cannot be removed so easily. Such a provision goes a long
way to ensure independence of auditor.
 Therefore, law has provided this safeguard so that Central Govt. can know the real reason of auditor’s
removal before expiry of his term and if not satisfied with the reason, may not accord approval.
 On the other hand, if the auditor has completed his term, i.e. has submitted his report and thereafter
he is not re-appointed, then the matter is not serious enough for Central Govt. to call for its
intervention.
 In view of the above, Central Govt. permission is required when auditors are removed before expiry
of their term and the same is not required when they are not re-appointed after the expiry of their term.
Question 24
PQR Company Ltd. removed their first auditor by passing a resolution in the meeting of the Board of
Directors for his removal without obtaining prior approval from the Central Government. Offer your
comments in this regard. [Nov. 10, 4 Marks]
Answer
Removal of first Auditor:
 As per Sec. 140(1) of the Companies Act, 2013, an auditor appointed u/s 139 may be removed from his
office before the expiry of his term only by a special resolution of the company, after obtaining the
prior approval of the Central Government.
 For this purpose, an application to the Central Government for removal of auditor shall be made in
Form ADT-2 and shall be accompanied with prescribed fees.
 The application shall be made to the Central Government within thirty days of the resolution passed
by the Board.
 The company shall hold the general meeting within sixty days of receipt of approval of the Central
Government for passing the special resolution.
 In the instant case the first auditor appointed by the Board of Directors was removed by a resolution
in the meeting of the Board of Directors inspite of the Special resolution of the Company and without
the prior approval of the Central Government in that behalf.
Conclusion: Removal of Auditor is Invalid as Special Resolution has not been passed and approval of
Central Govt. not obtained.

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Question 25
Comment on the following: Removal of auditor before expiry of term. [Nov. 11, 6 Marks]
Or
Discuss about the provisions for removal of auditor before expiry of term. [Nov. 15, 6 Marks]
Or
The auditor CA Z appointed under section 139 was removed from his office before the expiry of his term
by an ordinary resolution of the company. Comment explaining clearly the procedure of removal of
auditor before expiry of term. [MTP – Oct. 18]
Or
Board of Directors of “XYZ Ltd.” found the auditors of the Company acted in a fraudulent manner, and
decided to remove the auditors in board’s meeting. Comment on the action of Board of Directors and
describe correct procedure to be followed for removal of auditors before expiry of their term.
[May 19, 4 Marks]
Answer
Removal of Auditor before expiry of term:
Sec. 140(1) of Companies Act, 2013 governs the provisions relating to removal of auditor before expiry of
term. The salient features of Sec. 140(1) in reading with Rule 7 of Companies (Audit and Auditors) Rules,
2014 are:
 The auditor appointed under section 139 may be removed from his office before the expiry of his term
only by a special resolution of the company and after obtaining the previous approval of the Central
Government by making an application in Form ADT-2 and shall be accompanied with the prescribed
fees.
 The application shall be made to the Central Government within 30 days of the resolution passed by
the Board.
 The Company shall hold the general meeting within 60 days of receipt of approval of the Central
Government for passing the special resolution.
 Before taking any action for removal of auditor before the expiry of his term, the auditor concerned
shall be given a reasonable opportunity of being heard.
Conclusion: Removal of auditor before expiry of tenure by ordinary resolution or Board resolution is not
valid.
Question 26
As one of the Joint auditors of X Ltd, a non-listed company not covered u/s 139(2) for the immediately
preceding five financial years, you have been considered for re-appointment by the members in the AGM
as the sole auditor, while the said Joint auditors are not re-appointed. Comment. [Nov. 16, 6 Marks]

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Answer
Appointment of Sole Auditor:
When one of the joint auditors of the previous years is considered for re-appointment by the members as
the sole auditor for the next tenure, it is similar to non-re-appointment of one of the joint auditors. As per
Sec. 140(4) of the Companies Act, 2013, special notice shall be required for a resolution at an AGM
appointing as auditor a person other than a retiring auditor, or providing expressly that a retiring auditor
shall not be re-appointed, except where the retiring auditor has completed a consecutive tenure of five
years or, as the case may be, ten years, as provided u/s 139(2).
Accordingly, provisions of the Companies Act, 2013 to be complied with are as under.
a) Special Notice: Ascertain that special notice u/s 140(4) of the Companies Act, 2013 was received by
the company from requisite number of members (1% of total voting power or paid up capital not less
than ` 5 Lacs) at least 14 days before the AGM date.
b) Sending copy of notice: Check whether the said notice has been sent to all the members at least 7 days
before the date of the AGM.
c) Contents of Notice: Verify that the notice contains an express intention of a member for proposing the
resolution for appointing a sole auditor in place of both the joint auditors who retire at the meeting but
are eligible for re-appointment.
d) Notice to Auditor: Ensure that the notice has also been sent to the retiring auditor.
e) Sending the Representation: Verify whether any representation, received from the retiring auditor
was sent to the members of the company.
f) Consideration of representation: Verify from the minutes book whether the representation received
from the retiring joint auditor was considered at the AGM.
Question 27
CA Donald was appointed as the auditor of PS Ltd. at the remuneration of ` 30,000. However, after 4
months of continuing his services, he could not continue to hold his office of the auditor as his wife got a
government job at a distant place and he needs to shift along with her to the new place. Thus, he resigned
from the company and did not perform his responsibilities relating to filing of statement to the company
and the registrar indicating the reasons and other facts as may be relevant with regard to his resignation.
How much fine may he be punishable with under section 140(3) for non-compliance of section 140(2) of
the Companies Act, 2013? [RTP - May 19, MTP - Oct. 19]
Answer
Fine prescribed u/s 140(3) for non-compliance of Sec. 140(2):
 Sec. 140(2) of Companies Act, 2013 provides that the auditor who has resigned from the company shall
file within a period of 30 days from the date of resignation, a statement in the Form ADT-3 with the
company and the Registrar.
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 In case of Govt. companies or Govt. owned/controlled companies, the auditor shall also file such
statement with the CAG, indicating the reasons and other facts as may be relevant with regard to his
resignation.
 As per Sec. 140(3) of Companies Act, 2013, if the auditor does not comply with the provisions of Sec.
140(2), he or it shall be liable to a penalty of ` 50,000 or an amount equal to the remuneration of the
auditor, whichever is less, and in case of continuing failure, with further penalty of ` 500 for each day
after the first during which such failure continues, subject to a maximum of ` 2 lakh.
Question 28
CA Raj, an auditor was removed by PQR Ltd. before the expiry of his term. Discuss the procedure to be
taken by PQR Ltd. to appoint an auditor other than retiring auditor under sec. 140(4) of the Companies
Act, 2013. [Jan. 21, 4 Marks]
Answer
Procedure to appoint an auditor other than retiring auditor:
As per Sec. 140(4) of Companies Act, 2013, procedure to appoint an auditor other than a retiring auditor
who was removed, is as follows:
1) Special notice shall be required for a resolution at an AGM appointing as auditor a person other than
a retiring auditor, or providing expressly that a retiring auditor shall not be re-appointed except where
the retiring auditor has completed a consecutive tenure of 5 years or as the case may be, 10 years, as
provided u/s 139(2).
2) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the retiring
auditor.
3) Where notice is given of such a resolution and the retiring auditor makes with respect thereto
representation in writing to the company (not exceeding a reasonable length) and requests its
notification to members of the company, the company shall, unless the representation is received by it
too late for it to do so,
a) In any notice of the resolution given to members of the company state the fact of the representation
having been made; and
b) send a copy of the representation to every member of the company to whom notice of the meeting
is sent, whether before or after the receipt of the representation by the company, and if a copy of
the representation is not sent as aforesaid because it was received too late or because of the
company’s default, the auditor may (without prejudice to his right heard orally) require that the
representation shall be read out at the meeting.

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Question 29
“Mr. A”, a practicing Chartered Accountant, is holding securities of “XYZ Ltd.” having face value of ` 900.
Whether Mr. A is qualified for appointment as an Auditor of “XYZ Ltd.”? Would your answer will be
changed if the securities are being hold by relative of Mr. A.
Answer
Disqualification as to Security:
As per section 141(3)(d)(i) an auditor is disqualified to be appointed as an auditor if he, or his relative or
partner holding any security of or interest in the company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company.
Conclusion: In the present case, Mr. A is holding security of ` 900 in the XYZ Ltd, therefore he is not
eligible for appointment as an Auditor of “XYZ Ltd”.
Question 30
“Mr. P” is a practicing Chartered Accountant and “Mr. Q”, the relative of “Mr. P”, is holding securities of
“ABC Ltd.” having face value of ` 90,000. Whether “Mr. P” is Qualified from being appointed as an
Auditor of “ABC Ltd.”?
Answer
Disqualifications as to Securities:
 As per section 141(3)(d)(i) an auditor is disqualified to be appointed as an auditor if he, or his relative
or partner holding any security of or interest in the company or its subsidiary, or of its holding or
associate company or a subsidiary of such holding company.
 However, the relative of the auditor may hold the securities or interest in the company of face value
not exceeding ` 1,00,000.
Conclusion: In the present case, Mr. Q (relative of Mr. P, an auditor), is having securities of ` 90,000 face
Value in the ABC Pvt. Ltd, which is as per requirement of proviso to section 141(3)(d)(i). Therefore, Mr. P
will not be disqualified to be appointed as an auditor of ABC Ltd.
Question 31
“BC & Co.” is an Audit Firm having partners “Mr. B” and “Mr. C”, and “Mr. A” the relative of “Mr. C” is
holding securities of “MWF Ltd.” having face value of ` 1,01,000. Whether “BC & Co.” is qualified from
being appointed as an Auditor of “MWF Ltd.”? Would your answer will be changed if Mr. A hold 5000
shares (face value of ` 10 each) in MWF Ltd. having market value of ` 1,50,000?
Answer
Disqualifications as to security:
As per section 141(3)(d)(i) an auditor is disqualified to be appointed as an auditor if he, or his relative or
partner holding any security of or interest in the company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company.
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However, the relative of the auditor may hold the securities or interest in the company of face value not
exceeding of ` 1,00,000.
Conclusion: In the instant case BC & Co., will be disqualified for appointment as an auditor of MWF Ltd.
as the relative of Mr. C i.e. partner of BC & Co. is holding the securities in MWF Ltd. which is exceeding
the limit mentioned in proviso to section 141(3)(d)(i).
However, in the second case, BC & Co. is eligible to be appointed as auditor, as relative may hold securities
of face value upto ` 1 Lac.
Question 32
M/s ABC & Co. is an audit firm, having patterns CA. A, CA. Band CA. C. The firm has been offered the
appointment as an auditor of XYZ Ltd. for the financial year 2021-22.
Mr. D, the relative of CA. A, is holding 25,000 shares (face value of ` 10 each) is XYZ Ltd. having market
value of ` 90,000. Are M/s ABC & Co. qualified to be appointed as auditors of XYZ Ltd.
[May 18, 4 Marks, MTP - May 20, RTP – Nov. 20]
Answer
Disqualifications as to security:
 As per section 141(3)(d)(i) an auditor is disqualified to be appointed as an auditor if he, or his relative
or partner holding any security of or interest in the company or its subsidiary, or of its holding or
associate company or a subsidiary of such holding company.
 However, the relative of the auditor may hold the securities or interest in the company of face value
not exceeding of ` 1,00,000.
Conclusion: In the instant case ABC & Co, will be disqualified for appointment as an auditor of XYZ Ltd.
as the relative of Mr. C i.e. partner of BC & Co., is holding the securities in XYZ Ltd. of face value of
`2,50,000 which is exceeding the limit mentioned in proviso to section 141(3)(d)(i).
Question 33
A, a chartered accountant has been appointed as auditor of Laxman Ltd. in the AGM of the company held
in Sep. 2021, which assignment he accepted. Subsequently in January, 2022 he joined B, another chartered
accountant, who is the Manager Finance of Laxman Ltd., as partner. [RTP - May19]
Answer
Disqualification as to partner of employee:
 Section 141(3)(c) of the Companies Act, 2013 prescribes that any person who is a partner or in
employment of an officer or employee of the company will be disqualified to act as an auditor of a
company.
 Sec. 141(4) provides that an auditor who becomes subject, after his appointment, to any of the
disqualifications specified in Sec 141(3), he shall be deemed to have vacated his office as an auditor.

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Conclusion: In the present case, A, an auditor of M/s Laxman Ltd., joined as partner with B, who is
Manager Finance of M/s Laxman Limited, will be disqualified by Sec. 141(3)(c) and, therefore, he shall be
deemed to have vacated office of the auditor of M/s Laxman Limited.
Question 34
An auditor purchased goods worth ` 501,500 on credit from a company being audited by him. The
company him one month’s credit, which it normally allowed to all known customers.
Answer
Disqualification as to indebtedness:
 Section 141(3)(d) of the Companies Act, 2013 specifies that a person shall be disqualified to act as an
auditor if he is indebted to the company for an amount exceeding ` 5 Lacs.
 Sec. 141(4) provides that a person appointed as auditor incurs any of the disqualification mentioned
u/s 141(3) after his appointment, he shall vacate the office immediately and it will be treated a casual
vacancy.
 Where an auditor purchases goods or services from a company audited by him on credit, he is
considered to be indebted to the company and in case the outstanding amount exceeds ` 5 Lacs, he is
disqualified to be appointed as auditor of the company.
 It does not make any difference if the company allows him the same credit period as it allows to other
customers.
Conclusion: In instant case, auditor has become indebted to the company and consequently he has deemed
to have vacated his office.
Question 35
Ram and Hanuman Associates, Chartered Accountants in practice have been appointed as Statutory
Auditor of Krishna Ltd. for the accounting year 2021-2022. Mr. Hanuman holds 100 equity shares of Shiva
Ltd., a subsidiary company of Krishna Ltd.
Answer
Auditor holding securities of a company:
 As per Sec. 141(3)(d) of the Companies Act, 2013, person shall not be eligible for appointment as an
auditor of a company, who, or his relative or partner is holding any security of or interest in the
company or its subsidiary, or of its holding or associate company or a subsidiary of such holding
company.
 In the present case, Mr. Hanuman, Chartered Accountant, a partner of M/s Ram and Hanuman
Associates, holds 100 equity shares of Shiva Ltd, which is a subsidiary of Krishna Ltd.
Conclusion: The firm, M/s Ram and Hanuman Associates would be disqualified to be appointed as
statutory auditor of Krishna Ltd., which is the holding company of Shiva Ltd, because one of the partner
Mr. Hanuman is holding equity shares of its subsidiary.

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Question 36
Mr. Amar, a Chartered Accountant, bought a car financed at ` 7,00,000 by Chaudhary Finance Ltd., which
is a holding company of Charan Ltd, and Das Ltd. He has been the statutory auditor of Das Ltd. and
continues to be even after taking the loan.
Answer
Disqualification as to indebtedness:
 As per Sec. 141(3)(d)(ii) of the Companies Act, 2013, a person is not eligible for appointment as auditor
of any company. If he is indebted to the company, or its subsidiary, or its holding or associate company
or a subsidiary of such holding company, in excess of ` 5 Lacs.

 In the given case Mr. Amar is disqualified to act as an auditor u/s 141(3)(d)(ii) as he is indebted to M/s
Chaudhary Finance Ltd. for more than ` 5 Lacs.

 Further he cannot act as an auditor of any subsidiary of Chaudhary Finance Ltd. i.e. he is also
disqualified to work in Charan Ltd. & Das Ltd.

 Further Sec. 141(4) provides that a person appointed as auditor incurs any of the disqualification
mentioned u/s 141(3) after his appointment, he shall vacate the office immediately and it will be
treated a casual vacancy.
Conclusion: Mr. Amar should vacate his office immediately and Das Ltd. must have to appoint any other
CA as an auditor of the company.
Question 37
Praveen, a member of the ICAI, does not hold a Certificate of practice. Is his appointment as an auditor
valid?
Answer
Qualifications of an Auditor:
 As per Sec. 141(1) a person shall be qualified for appointment as an auditor of a company, only if he is
a Chartered Accountant within the meaning of the Chartered Accountants Act, 1949.

 Under the Chartered Accountants Act, 1949, only a Chartered Accountant holding the certificate of
practice can engage in public practice.
Conclusion: Mr. Praveen does not hold a certificate of practice and hence cannot be appointed as an
auditor of a company.
Question 38
‘B’ owes ` 5,01,000 to ‘C’ Ltd., of which he is an auditor. Is his appointment valid? Will it make any
difference, if the advance is taken for meeting-out travelling expenses?

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Answer
Indebtedness to the Company:
 As per Section 141(3)(d)(ii) of the Companies Act, 2013, a person who, or his relative or partner is
indebted to the company, or its subsidiary, or its holding or associate company, or a subsidiary of its
holding company, for an amount exceeding ` 5 Lacs, then he is not qualified for appointment as an
auditor of a company.
 Even if the advance was taken for meeting out travelling expenses particularly before commencement
of audit work, his appointment is not valid because in such a case also the auditor shall be indebted to
the company. The auditor is entitled to recover fees on a progressive basis only.
Conclusion: B’s appointment is not valid and he is disqualified as the amount of debt exceeds ` 5,00,000.
Question 39
Mr. Aditya, a practising chartered accountant is appointed as a “Tax Consultant” of ABC Ltd., in which
his father Mr. Singhvi is the Managing Director.
Answer
Appointment of relative as tax consultant:
 Sec. 141(3)(f) of Companies Act, 2013 disqualifies a person to be appointed as auditor whose relative
is a director or is in employment of the company as director or key managerial personnel.
 However, no such disqualification is prescribed under the law for appointing a person as a tax
consultant therefore Sec. 141(3)(f) will not be attracted.
Conclusion: Mr. Aditya can be appointed as a tax consultant irrespective that his father is the managing
director of the company.
Question 40
CA P is providing the services of investment banking to C Ltd. Later on, he was also offered to be
appointed as an auditor of the company for the current financial year. Advise. [RTP - May 18]
Answer
Services not to be rendered by the Auditor:
Section 144 of the Companies Act, 2013 prescribes certain services not to be rendered by the auditor. An
auditor appointed under this Act shall provide to the company only such other services as are approved
by the Board of Directors or the audit committee, as the case may be, but which shall not include any of
the following services (whether such services are rendered directly or indirectly to the company or its
holding company or subsidiary company), namely:
1. Accounting and book keeping services;
2. Internal audit;
3. Design and implementation of any financial information system;
4. Actuarial services;

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5. Investment advisory services;

6. Investment banking services;
7. Rendering of outsourced financial services;
8. Management services; and
9. Any other kind of services as may be prescribed.
Further section 141(3)(i) of the Companies Act, 2013 also disqualify a person for appointment as an auditor
of a company who is engaged as on the date of appointment in consulting and specialized services as
provided in section 144.
In the given case, CA Innocent was appointed as an auditor of Contravene Ltd. He was offered additional
services of actuarial investment advisory and investment banking which was also approved by the Board
of Directors.
Conclusion: The auditor is advised not to accept the services as these services are specifically notified in
the services not to be rendered by him as an auditor as per section 144 of the Act.
Question 41
Mr. Y was appointed as an auditor of PQR Ltd. for the year ended 31-3-2022 at the AGM held on 16-8-
2021. Mr. Y has been indebted to the company for sum of ` 5,10,000 as on 1-4-2021, the opening date of
accounting year which has been subject to his audit. However, Mr. Y having come to know that he might
be appointed as auditor, he repaid the amount on 10-8-2021. One of the shareholders, complains that the
appointment of Mr. Y as an auditor was invalid because he incurred disqualification u/s 141 of the
Companies Act, 2013. Comment. [May 10, 6 Marks]
Answer
Relevant Date for determining Disqualification:
 As per Sec 141(3)(d) of the Companies Act, 2013, a person who is indebted to the company for an
amount exceeding ` 5,00,000 shall be disqualified to act as an auditor of such company.

 The relevant date for determining whether a person is disqualified or not is the date of appointment.
Hence, if a person has liquidated his debt before the appointment date, there is no disqualification to
be construed for such appointment.

 In the given case, Mr. Y was appointment as an auditor of PQR Ltd. for the year ended 31-3-2022 at the
AGM held on 16-8-2021. He repaid the loan amount fully to the company on 10-8-2021 i.e. before the
date of his appointment.
Conclusion: The appointment of Mr. Y as an auditor is valid and the shareholder’s complaint is not
acceptable.

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Question 42
Comment on the following: Sri & Company, a firm of Chartered Accountants was appointed as statutory
auditors of Aaradhana Company Ltd. Aaradhana Company Ltd. holds 51% shares in Sarang Company
Ltd. Mr. Sri, one of the partners of Sri & Company, owed ` 1,500 as on the date of appointment to Sarang
Company Ltd. for goods purchased in normal course of business. [Nov. 10, 5 Marks]
Answer
Disqualification as to indebtedness:
 As per Section 141(3)(d)(ii) of the Companies Act, 2013, a person who, or his relative or partner is
indebted to the company, or its subsidiary, or its holding or associate company, or a subsidiary of its
holding company, for an amount exceeding ` 5,00,000 then he is not qualified for appointment as an
auditor of a company.
Conclusion: Mr. Sri is not disqualified to be appointed as auditor of the company as he is indebted to the
company for an amount not exceeding ` 5,00,000, consequently, Sri & Co. is not disqualified to be
appointed as an auditor of Aaradhana Company Ltd.
Question 43
M/s RM & Co. is an audit firm having partners CA R and CA M. The firm has been offered the
appointment as an auditor of Enn Ltd. for the Financial Year 2021-22. Mr. Bee, the relative of CA R, is
holding 5,000 shares (face value of ` 10 each) in Enn Ltd. having market value of ` 1,50,000. One of the
shareholders, complains that the appointment of RM & Co. as an auditor is invalid because it incurred
disqualification u/s 141 of the Companies Act, 2013. Analyse and advise.
[MTP - March 18, RTP - May 18]
Answer
Disqualification u/s 141(3)(d):
 Section 141(3)(d)(i) of Companies Act, 2013 provides that a person shall not be eligible appointment as
an auditor of a company, who, or his relative or partner is holding any security of or interest in the
company or its subsidiary of such holding company. However, as per proviso to this section, the
relative of the person may hold the securities or interest in the company of face value not exceeding of
` 1,00,000.
 In the instant case, M/s RM & Co. is an audit firm having partners CA R and CA M. Mr. Bee is a
relative of CA R and he is holding shares of Enn Ltd. of face value of ` 50,000 only (5,000 shares > ` 10
per share).
Conclusion: M/s RM & Co. is not disqualified for appointment as an auditor of Enn Ltd. as the relative of
CA R (i.e. partner of M/s RM & Co.) is holding the securities in Enn Ltd. which is within the limit
mentioned in proviso to section 141(3)(d)(i) of the Companies Act, 2013.

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Question 44
RGS & Co. a firm of Chartered Accountants has three partners, namely, R, G & S. The firm is allotted the
audit of BY Ltd. R, partner in the firm subsequently holds 100 shares in BY Ltd. Comment. [MTP-Oct. 18]
Answer
Disqualification u/s 141(3)(d):
 As per Sec. 141(3)(d) of Companies Act, 2013 read with Rule 10 of the Companies (Audit and Auditors)
Rules, 2014, a person who, or his relative or partner is holding any security of or interest in the
company or its subsidiary, or of its holding or associate company or a subsidiary of such holding
company, shall not be eligible for appointment as an auditor of a company. However, a relative may
hold security or interest in the company of face value not exceeding ` 1 lakh.
 Sec. 141(4) provides that where a person appointed as an auditor of a company incurs any of the
disqualifications mentioned in Sec. 141(3) after his appointment, he shall vacate his office as such
auditor and such vacation shall be deemed to be a casual vacancy in the office of the auditor.
 In the instant case, RGS & Co. a firm of Chartered Accountants has three partners, namely, R, G & S.
The firm is allotted the audit of BY Ltd. R, partner in the firm subsequently holds 100 shares in BY Ltd.
Conclusion: Applying the provisions of Sec. 141(3)(d) and Sec. 141(4), it may be concluded that Firm of
RGS, Chartered Accountants is not eligible to continue as auditors. Firm shall vacate its office as auditor
and such vacation shall be treated as casual vacancy.
Question 45
“CA NM who is rendering management consultancy service to LA Ltd. wants to accept offer letter for
appointment as an auditor of the LA Ltd. for the next financial year.” Discuss with reference to the
provision of the Companies Act, 2013. [Nov. 18, 5 Marks, MTP - April 21]
Answer
Disqualification u/s 141(3)(i):
 Section 141(3)(i) of Companies Act, 2013 provides that a person who directly or indirectly renders any
service referred to in Sec. 144 to the company or its holding company of its subsidiary company shall
not be eligible for appointment as an auditor of that company.
 Sec. 144 of Companies Act, 2013 provides the list of services which an auditor of the company cannot
render, directly or indirectly to the company, its holding or subsidiary company. Management services
is included in the list of services prescribed under section 144.
 In the instant case, CA NM who is rendering management consultancy service to LA Ltd wants to
accept offer letter for appointment as an auditor of the LA Ltd. for the next financial year.
Conclusion: CA NM is disqualified by virtue of provisions of Sec. 141(3)(i) of Companies Act, 2013. Hence,
he is advised not to accept the appointment as auditor as long as he is rendering management consultancy
services to the company.

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Question 46
Under the provisions of section 141(3) of Companies Act, 2013 along with relevant rules, a person or a
firm who has “business relationship” with a company is not eligible to be appointed as an auditor of that
company to this context, discuss meaning of term “business relationship”. [RTP – Nov. 21]
Answer
Meaning of term “Business Relationship”:
As per sec 141(3) of Companies Act, 2013, a person or a firm who, whether directly or indirectly has
business relationship with the Company or its Subsidiary, or its Holding or Associate Company or
Subsidiary of such holding company or associate company of such nature as may be prescribed is not
eligible to be appointed as auditor of the company.
The term “business relationship” shall be construed as any transaction entered into for a commercial
purpose, except:
1. Commercial transactions which are in the nature of professional services permitted to be rendered by
an auditor or audit firm under the Act and the Chartered Accountants Act, 1949 and the rules or the
regulations made under those Acts;
2. Commercial transactions which are in the ordinary course of business of the company at arm’s length
price - like sale of products or services to the auditor, as customer, in the ordinary course of business,
by companies engaged in the business of telecommunications, airlines, hospitals, hotels and such other
similar businesses.
Question 47
“ABC & Co.” is an Audit Firm having partners “Mr. A”, “Mr. B” and “Mr. C”, Chartered Accountants.
“Mr. A”, “Mr. B” and “Mr. C” are holding appointment as an Auditor in 4, 6 and 10 Companies
respectively.
(i) Provide the maximum number of Audits remaining in the name of “ABC & Co.”
(ii) Provide the maximum number of Audits remaining in the name of individual partner i.e. Mr. A. Mr.
B and Mr. C.
(iii) Can ABC & Co. accept the appointment as an auditor in 60 private companies having paid-up share
capital less than ` 100 Cr., which has not committed default in filing its financial statements u/s 137
or annual return u/s 92 of Companies Act with the Registrar, 2 small companies and 1 dormant
company?
(iv) Would your answer be different, if out of those 60 private companies, 45 companies are having paid-
up share capital of ` 110 crore each? [MTP – Oct. 20]

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Answer
Ceiling on Number of Audit:
As per section 141(3)(g) of the Companies Act, 2013, a person shall not be eligible for appointment as an
auditor if he is in full time employment elsewhere or a person or a partner of a firm holding appointment
as its auditor, if such person or partner is at the date of such appointment or reappointment holding
appointment as auditor of more than twenty companies:
As per section 141(3)(g), this limit of 20 company audits is per person. In the case of an audit firm having
3 partners, the overall ceiling will be 3 x 20 = 60 company audits. Sometimes, a chartered accountant is a
partner in a number of auditing firms. In such a case, all the firms in which he is partner or proprietor will
be together entitled to 20 company audits on his account.
Conclusion:
(i) ABC & Co. can hold appointment as an auditor of 40 more companies as computed below:
Total Number of Audits available to the Firm = 20 – 3 = 60
Number of Audits already taken by all the partners
In their individual capacity = 4 + 6 +10 = 20
Remaining number of Audits available to the Firm = 40
(ii) Mr. A can hold 20 - 4 = 16 more audits.
Mr. B can hold 20 – 6 =14 more audits and
Mr. C can hold 20 – 10 =10 more audits.
(iii) ABC & Co. can hold appointment as an auditor in all the 60 private companies having paid-up share
capital less than ` 100 crore, 2 small companies and 1 dormant company as these are excluded from
the ceiling limit of company audits given under section 141(3)(g) of the Companies Act, 2013.
(iv) ABC & Co. can accept the appointment as an auditor for 2 small companies, 1 dormant company, 15
private companies having paid-up share capital less than ` 100 crore and 40 private companies
having paid-up share capital of ` 110 crore each in addition to above 20 company audits already
holding.
Question 48
KBC & Co. a firm of Chartered Accountants has three partners, K, B &C; K is also in whole time
employment elsewhere. The firm is offered the audit of ABC Ltd. and is already holding audit of 40
companies. Comment.
Answer
Ceiling on Number of Company Audits:
 As per section 141(3)(g) of the Companies Act, 2013, a person shall not be eligible for appointment as
an auditor if he is in full time employment elsewhere or a person or a partner of a firm holding
appointment as its auditor, if such person or partner is at the date of such appointment or

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reappointment holding appointment as auditor of more than twenty companies, other than one person
company, dormant companies, small companies and private companies having pa up capital less than
100 Crores.
 In the firm of KBC & Co. K is in whole-time employment elsewhere, therefore, he will be excluded in
determining the number of company audits that the firm can hold.
 If B and C do not hold any audits in their personal capacity or as partners of other firms, the total
number of company audits that can be accepted by KBC & Co. is forty, and in the given case company
is already holding forty audits.
Conclusion: KBC & Co. can’t accept the offer for audit of ABC Ltd.
Question 49
PBS & Associates, a firm of Chartered Accountants, has three partners P, B and S. The firm is already
having audit of 45 companies. The firm is offered 20 company audits. Decide and advise whether PBS &
Associates will exceed the ceiling prescribed under Section 141(3)(g) of the Companies Act, 2013 by
accepting the above audit assignments?
Answer
Ceiling on Number of Company Audits:
 As per section 141(3)(g) of the Companies Act, 2013, a person shall not be eligible for appointment as
an auditor if he is in full time employment elsewhere or a person or a partner of a firm holding
appointment as its auditor, if such person or partner is at the date of such appointment or
reappointment holding appointment as auditor of more than twenty companies, other than one person
company, dormant companies, small companies and private companies having paid up capital less
than 100 Crores, which has not committed default in filling its financial statements u/s 137 or annual
return u/s 92 of Companies Act with the Registrar.
 In the case of firm of auditors, it has been further provided that specified number of companies shall
be construed as the number of companies specified for every partner of the firm who is not in full time
employment elsewhere.
 In the firm of PBS & Associates, the overall ceiling will be 3 x 20 = 60 company audits.
 Assuming that the partners, P, B & S do not hold any audits in their personal capacity or as partners
of other firms, the total number of company audits that can be accepted by PBS & Associates is sixty,
and in the given case company is already holding forty five audits.
Conclusion: PBS & Associates can accept offer of audits of 15 Companies.
Question 50
Discuss on the following: Ceiling on number of audit in a company to be accepted by an auditor.
[Nov. 12, 5 Marks]

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Or
What are the provisions prescribed under Companies Act, 2013 in respect of ceiling on number of audits
in a company to be accepted by an auditor? [MTP – April 19]
Answer
Ceiling on number of audit:
 Section 141(3)(g) of Companies Act, 2013 provides that a person is not eligible to be appointed as
auditor of a company if he is in full time employment elsewhere or a person or a partner of a firm
holding appointment as its auditor, if such persons or partner is at the date of such appointment or
reappointment holding appointment as auditor of more than 20 Companies other than one person
company, dormant companies, small companies and private companies having paid up share capital
less than 100 Crores, which has not committed default in filling its financial statements u/s 137 or
annual return u/s 92 of Companies Act with the Registrar.
 In the case of firm of auditors, it has been further provided that specified number of companies shall
be construed as the number of companies specified for every partner of the firm who is not in full time
employment elsewhere.
 Where any partner of the firm is also a partner of any other firm or firms of auditors, the number of
companies which may be taken into account, by all the firms together, in relation to such partner shall
not exceed the specified number, in the aggregate.
 Where any partner of a firm of auditors is also holding office, in his individual capacity, as the auditor
of one or more companies, the number of companies which may be taken into account in his case shall
not exceed the specified number, in the aggregate.
Question 51
In exercise of the powers conferred by the Chartered Accountants Act, 1949, the Council of the Institute of
Chartered Accountants of India specifies that a member of the Institute in practice shall be deemed to be
guilty of professional misconduct, if he holds at any time appointment of more than the “specified number
of audit assignments of the companies u/s 141(3)(g) of the Companies Act, 2013”.
Explain the provisions prescribed under Companies Act, 2013 in respect of ceiling on number of audits in
a company to be accepted by an auditor. [RTP – May 21]
Answer
Ceiling on number of Audits:
 As per Sec. 141(3)(g) of the Companies Act, 2013, a person who is in full time employment elsewhere
or a person or a partner of a firm holding appointment as its auditor, if such person or partner is at the
date of such appointment or reappointment holding appointment as auditor of more than 20
companies other than OPC, dormant companies, small companies and private companies having paid-
up share capital less than ` 100 crore, shall for appointment as an Auditor of a Company.

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 In the case of a firm of auditors, it has been further provided that ‘specified number of companies’ shall
be construed as the number of companies specified for every partner of the firm who is not in full time
employment elsewhere. This limit of 20 company audits is per person. In the case of an audit firm
having 3 partners, the overall ceiling will be 3 x 20 = 60 company audits.
 Sometimes, a chartered accountant is a partner in a number of auditing firms, in such a case, all the
firm all the firms in which he is partner or proprietor will be together entitled to 20 company audits on
his account. Subject to the overall ceiling of company audits, how they allocate the 20 audits between
themselves is their affairs.
Question 52
“The remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as
may be determined therein.” Explain with reference to provisions of the Companies Act, 2013.
[MTP – Oct. 19]
Answer
Remuneration of Auditors:
 As per Sec. 142 of the Act, the remuneration of the auditor of a company shall be fixed in its general
meeting or in such manner as may be determined therein. However, board may fix remuneration of
the first auditor appointed by it.
 Further, the remuneration, in addition to the fee payable to an auditor, includes the expenses, it any,
incurred by the auditor in connection with the audit of the company and any facility extended to him
but does not include any remuneration paid to him for any other service rendered by him at the request
of the company.
 Hence, it may be concluded that the remuneration to auditor shall also include any facility provided
to him.
Question 53
“Auditor of a company shall have a right of access to the books of account and vouchers of the company.”
Explain.
Answer
Auditor's Right of Access to Books of account and vouchers of the company:
 Sec. 143(1) of Companies Act, 2013 provides that every auditor of a company shall have a right of
access at all times to the books of account and vouchers of the company, whether kept at the registered
office of the company or at any other place.
 The term ‘books of account and vouchers’ includes all books which have any bearing or are likely to
have any bearing on the accounts, whether these be the usual financial books or the statutory or
statistical books. Similarly, the term ‘voucher’ includes all or any of the correspondence which may in
any way serve to vouch for the accuracy of the accounts.

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 When the auditor is denied access to books, etc., his only remedy would be to report to the members
that he could not obtain all the information and explanations he had required or considered necessary
for the performance of his duties as auditors.
Question 54
Explain Auditor’s right and duties in relation to:
a) Report to the members of the company on the accounts examined by him. [RTP - Nov. 19]
b) Obtain information and explanation from officers. [RTP - Nov. 18]
Answer
Auditor’s Right and Duties in relation to report on the accounts examined:
Sec. 143(2) of the Companies Act, 2013 provides that the audit shall make a report to the members of the
company on the following:
 Accounts examined by him and
 On every financial statement which are required by or under this Act to be laid before the company in
general meeting and
The Auditor’s Report shall state that to the best of his information and knowledge, the said accounts
financial statements give a true and fair view of the state of the company’s affairs as at the end of its
financial year and profit or loss and cash flow for the year and such other matters as may be prescribed.
Auditor’s Right and Duties to obtain information and explanation from officers:
 Sec. 143(1) of the Companies Act, 2013 provides that every Auditor shall be entitled to require from
the officers of the company such information and explanation as he may consider necessary for the
performance of his duties as auditor.
 As per Sec. 2(59) of Companies Act, 2013, the term ‘officer’ includes any director, manager or key
managerial personnel or any person in accordance with whose directions or instructions the BOD or
any one or more of the directors is or are accustomed to act.
 When the auditor is not provided the information required by him or is denied access to books, etc.,
his only remedy would be to report to the members that he could not obtain all the information and
explanations he had required or considered necessary for the performance his duties as auditors.
Question 55
State the matters to be specified in Auditor’s Report in terms of provisions of Section 143(3) of the
Companies Act, 2013.
Answer
Matters to be specified in Auditor’s report in terms of provisions of Section 143(3):
Sec. 143(3) of Companies Act, 2013 requires that he auditor’s report shall also state the following:

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a) Whether he has sought and obtained all the information and explanations which to the best of his
knowledge and belief were necessary for the purpose of his audit and if not, the details thereof and the
effect of such information on the financial statements;
b) Whether, in his opinion, proper books of account as required by law have been kept by the company
so far as appears from his examination of those books and proper returns adequate for the purposes
of his audit have been received from branches not visited by him;
c) Whether the report on the accounts of any branch office of the company audited u/s 14 by a person
other than the company's auditor has been sent to him under the proviso to sub-section and the manner
in which he has dealt with it in preparing his report;
d) Whether the company’s balance sheet and profit and loss account dealt with in the report are in
agreement with the books of account and returns;
e) Whether, in his opinion, the financial statements comply with the accounting standards;
f) The observations or comments of the auditors on financial transactions or matters which have any
adverse effect on the functioning of the company.
g) Whether any director is disqualified from being appointed as a director under sub-section of section
164;
h) Any qualification, reservation or adverse remark relating to the maintenance of accounts and other
matters connected therewith;
i) Whether the company has adequate internal financial controls with reference to financial statements
in place and the operating effectiveness of such controls;
j) Such other matters as may be prescribed.
Question 56
While conducting the audit of a limited company for the year ended 31st March, 2022, the auditor wanted
to refer to the Minute Books. The Board of Directors refused to show the Minute Books to the auditor.
Or
During the audit of PQR Ltd. you as an auditor requested officers of the company to have access to
secretarial records and correspondence which they refused to provide. Comment.
[MTP - April 19, RTP – May 21]
Answer
Right of Access to Books of Account:
 Sec. 143(1) of the Companies Act, 2013 grants powers to the auditor that every auditor has a right of
access, at all times, to the books of account and vouchers of the company.
 The term books of account include all books which have any bearing or are likely to have any bearing
on the accounts, whether these be the usual financial books or the statutory or statistical books.

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 In order to verify actions of the company and to vouch and verify some of the transactions of the
company, it is necessary for the auditor to refer to the decisions of the shareholders and/or the
directors of the company.
 It is, therefore, essential for the auditor to refer to the Minute Books. In the absence of the Minute
Books, the auditor may not be able to vouch/verify certain transactions of the company.
Conclusion: In case the directors have refused to produce the Minute Books, the auditor may consider
extending the audit procedure as also consider qualifying his report in any appropriate manner.
Question 57
The auditor of X Ltd. did not report on the matters, specified u/s 143(1) of the Companies Act, 2013, on
which he inquired into, because of the reason that he was satisfied. But the management of the company
wanted the auditor to report on those matters so that the members can also be aware of the true position
of the company. Comment as to whether the auditor is required to report the matters, specified under the
Act, he inquired into and whether the contention of the management is sustainable.
Answer
Reporting of Matters contained under Section 143(1) of the Companies Act, 2013:
 Sec. 143(1) of the Act deals with the duties of an auditor requiring him to make an inquiry in respect
of specified propriety matters.
 The matters in respect of which the inquiry has to be made by the auditor are relating to loans and
advances on the basis of security, transactions represented merely by book entries, investments sold
at less than cost price, loans and advances shown as deposits, personal expenses charged to revenue
account etc.
 The law requires the auditor to make an inquiry, the Research Committee of the Institute opined that
the auditor is not required to report on these matters unless he has any special comments to make on
any of the items referred to therein. If the auditor is satisfied as a result of the inquiries, he has no
further duty to report that he is so satisfied.
 Therefore, it could be said that the auditor should make a report to the members in case he finds answer
to any of these matters in adverse.
Conclusion: The auditor of X Ltd. is correct in non-reporting on the matters specified in Sec. 143(1) of the
Act and hence, the contention of the management is not sustainable.
Question 58
“Travelling expenses of ` 2.25 lakhs shown in Statement of Profit and Loss of X Ltd., including a sum of
`1.10 lakhs spent by a Director on his foreign travel for company's business accompanied by his mother
for her medical treatment. Comment.

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Answer
Personal Expenses of Directors:
 All payments to Directors as remuneration or perquisites whether in the case of a public or private
company need to be authorised in accordance with the Companies Act as well as Articles of
Association of the company.
 If the terms of appointment of a Director include payment of expenses of a personal nature, then such
expenses can be incurred by the company; otherwise, no such expense can be incurred or reimbursed
by the company.
 In the instant case the auditor has to ensure that the payment made by the company towards foreign
travel of Director’s mother is covered by terms of appointment or approved by the company in general
meeting.
 This payment is also covered u/s 143(1), and hence auditor is required to inquire into the matter and
make a disclosure in his report accordingly.
Question 59
M/s XYZ & Co., auditors of Goodwill Education Foundation, a recognised non-profit organisation feels
that the standards on auditing need not to be applied as Goodwill Education Foundation is a non-profit
making concern.
Answer
Compliance with Standards on Auditing:
 As per Sec. 143(9) of the Companies Act, 2013, every auditor shall comply with the auditing standards.
Further as per Sec. 143(10), the Central Government may prescribe the standards of auditing or any
addendum thereto, as recommended by the ICAI, in consultation with and after examination of the
recommendations made by the NFRA.
 However, until any auditing standards are notified, standards of auditing specified by the ICAI shall
be deemed to be the auditing standards.
 Further, the Preface to Standards on Auditing requires that while discharging their attest function; it
is the duty of the Chartered Accountant to ensure that SAs are followed in the audit of financial
information covered by their audit reports.
Conclusion: In the given case, even though the client is a non-profit oriented entity the SAs shall apply
and the auditor is required to ensure their compliance. In case he fails to discharge his duty he shall be
guilty of professional misconduct.
Question 60
An auditor became aware of a matter regarding a company, only after he had issued his audit opinion.
Had he become aware of the same prior to his issuing the audit report, he would have issued a different
opinion.

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Answer
Auditor’s duties w.r.t. subsequent events:
 Sec. 146 of the Companies Act, 2013 requires the auditors of a company to attend the general meeting
of the company unless otherwise exempted by the company.
 Auditor shall have the right to be heard at such meeting on any part of the business which concerns
him as auditors.
 The discovery of a fact after issuance of the financial statements that existed at the date of the audit
report which would have caused the revision of the audit report, requires the auditor to bring this to
the notice of the shareholders the matter.
 Further SA 560 “Subsequent Event” also prescribes the procedures which the auditor is required to
perform.
Conclusion: It will be advisable for the auditor to attend the meeting with a view to bringing to the notice
of the shareholders the matter which came to his knowledge subsequent to his signing the report and
perform procedures are per the requirement of SA 560.
Question 61
Y, is the auditor of X Pvt. Ltd. In which there are four shareholders only, who are also the Directors of the
company. On account of bad trade and for reducing the expenses in all directions, the directors asked Y to
accept a reduced fee and for that he has been offered not to carry out such full audit as he has done in the
past. Y accepted the suggestions of the directors.
Answer
Restricting Scope of Audit:
 Auditor’s duties are governed by the provisions of Sec. 143 of Companies Act, 2013, which cannot be
restricted either by the director or even by the entire body of shareholders
 Further, remuneration is a matter of arrangement between the auditor and the shareholders. Section
142 specifies the remuneration of an auditor shall be fixed by the company in general meeting or in
such manner as the company in general meeting may determine.
 Duties of auditor may not necessarily commensurate with his remuneration.
Conclusion: Y, should not accept the suggestions of the directors regarding the scope of the work to be
done. If he accepts the suggestions of the directors regarding the scope of work to be done, it would not
reduce his responsibility as an auditor under the law and he will be violating the provisions of the
Companies Act, 2013.
Question 62
At the Annual General Meeting of the Company, a resolution was passed by the entire body of
shareholders restricting some of the powers of the Statutory Auditors. Whether powers of the Statutory
Auditors can be restricted?

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Answer
Restrictions on Powers of Statutory Auditors:
 Section 143 of the Companies Act, 2013 provides that an auditor of a company shall have right of access
at all times to the books and account and vouchers of the company whether kept at the Head Office or
other places and shall be entitled to require from the offices of the company such information and
explanations as the auditor may think necessary for the purpose of his audit.
 These specific rights have been conferred by the statute on the auditor to enable him to carry out his
duties and responsibilities prescribed under the Act, which cannot be restricted on abridged in any
manner.
 Further it was held in the case of Newton v. Birmingham Small Arms Co. that any resolution even if
passed by entire body of shareholders which preclude the auditors from availing themselves of all the
information for which they are entitled to under the Company Law are inconsistent with the Act and
therefore null and void.
Conclusion: Any resolution restricting the scope of statutory right of auditor even if passed by entire body
of shareholders is ultra vires and therefore void.
Question 63
Mr. Rajendra, a fellow member of the Institute of Chartered Accountants of India, working as Manager of
Shrivastav and Co., a Chartered Accountant firm, signed the audit report of Om Ltd. on behalf of
Shrivastav & Co.
Answer
Signature on Audit Report:
 Section 145 of the Companies Act, 2013 requires that the person appointed as an auditor of the
company shall sign the auditor’s report or sign or certify any other document of the company in
accordance with the provisions of Sec. 141(2), i.e. where a firm including a LLP is appointed as an
auditor of a company, only the partners who are CAs shall be authorized to act and sign on behalf of
the firm.
 In the present case, Mr. Rajendra, a fellow member of the Institute and a manager of M/s Shrivastav
& Co., Chartered Accountants, cannot sign on behalf of the firm in view of the specific requirements
of the Companies Act, 2013. If any auditor’s report or any document of the company is signed or
authenticated otherwise than in conformity with the requirements of Section 145, the auditor
concerned and the person, if any, other than the auditor who signs the report or signs or authenticates
the document shall, if the default is wilful, be punishable with a fine.
Question 64
The members of C Ltd. preferred a complaint against the auditor stating that he has failed to send the
auditors report to them.

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Answer
Dispatch of Auditor’s Report to Shareholders:
 Section 143 of the Companies Act, 2013 lays down the powers and duties of auditor. As per provisions
of the law, it is no part of the auditor’s duty to send a copy of his report to members of the company.
 The auditor’s duty concludes once he forwards his report to the company. It is the responsibility of
company to send the report to every member of the company.
 In case of Allen Graig and Company (London) Ltd., it was held that duty of the auditor after having
signed the report to be annexed to a balance sheet is confined only to forwarding that report to the
secretary of the company. It will be for the secretary or the director to convene a general meeting and
send the balance sheet and report to the members (or other person) entitled to receive it.
Conclusion: Auditor cannot be held liable for the failure to send the report to the shareholders.
Question 65
One of the directors of Hitech Ltd. is attracted by the disqualification under Section 164(2) of the
Companies Act, 2013.
Answer
Disqualification of a Director under section 164(2) of the Companies Act, 2013:
 Section 143(3)(g) of the Companies Act, 2013 imposes a specific duty on the auditor to report whether
any director is disqualified from being appointed as directors under section 164(2) of the Companies
Act, 2013.
 The auditor has to ensure that written representation have been obtained by the Board from each
director that one is not hit by Section 164(2).
Conclusion: In this case, one of the director is attracted by disqualification u/s 164(2) of the Act, the
auditor shall state in his report as per Sec. 143 about the disqualification of the particular director.
Question 66
The Board of Directors of a company have filed a complaint with the ICAI against their statutory auditors
for their failing to attend the AGM of the Shareholders in which audited accounts were considered.
Answer
Auditor’s Attendance at Annual General Meeting:
 Section 146 of the Companies Act, 2013 requires the auditor of a company to attend either by himself
or through his qualified authorised representative to attend the general meeting, unless exempted.
 The said section provides that all notices and other communications relating to any general meeting of
a company shall also be forwarded to the auditor.
 Further, it has been provided that the auditor shall have right to be heard at such meeting on any part
of the business which concerns him as an auditor.
Conclusion: Complaint filed by the Board of Directors is valid if the auditor was not being exempted by
the company.

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Question 67
Mr. X, a Director of M/s KP Private Ltd., is also a Director of another company viz., M/s GP Private Ltd.,
which has not filed the financial statements and annual return for last three years 2019-20 to 2021-22. Mc.
X is of the opinion that he is not disqualified u/s 164(2) of the Companies Act, 2013, and auditor should
not mention disqualification remark in his audit report.
Answer
Disqualification of a Director under section 164(2) of the Companies Act, 2013:
 Section 143(3)(g) of the Companies Act, 2013 imposes a specific duty on the auditor to report whether
any director is disqualified from being appointed as directors/s164(2) of the Companies Act, 2013.
 As per provisions of Section 164(2), if a director is already holding a directorship of a company which
has not filed the financial statements or annual returns for any continuous period of 3 financial years
shall not be eligible to be reappointed as a director of that company or appointed in other company for
a period of five years from the date on which the said company fails to do so.
Conclusion: In this case, Mr. X is a director of M/s KP Private Ltd. as well as of M/s GP Private Ltd. and,
M/s GP Private Ltd, has not filed the financial statements and annual return for last three years. Hence
the provisions of section 164(2) are applicable to him and as such he is disqualified from directorship of
both the companies. Therefore, the auditor shall report about the disqualification u/s 143(3)(g) of the
Companies Act, 2013.
Question 68
Comment: Contravene Ltd. appointed CA Innocent as an auditor for the company for the current financial
year. Further the company offered him the services of actuarial, investment advisory and investment
banking which was also approved by the Board of Directors.
Answer
Services not to be rendered by the Auditor
Section 144 of the Companies Act, 2013 prescribes certain services not to be rendered by the auditor. An
auditor appointed under this Act shall provide to the company only such other services as are approved
by the Board of Directors or the audit committee, as the case may be, but which shall not include any of
the following services (whether such services are rendered directly or indirectly to the company or its
holding company or subsidiary company), namely:
1. Accounting and book keeping services;
2. Internal audit;
3. Design and implementation of any financial information system;
4. Actuarial services;
5. Investment advisory services;
6. Investment banking services;

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7. Rendering of outsourced financial services;

8. Management services; and
9. Any other kind of services as may be prescribed.
Further section 141(3)(i) of the Companies Act, 2013 also disqualify a person for appointment as an auditor
of a company who is engaged as on the date of appointment in consulting and specialized services as
provided in section 144.
In the given case, CA Innocent was appointed as an auditor of Contravene Ltd. He was offered additional
services of actuarial investment advisory and investment banking which was also approved by the Board
of Directors.
Conclusion: The auditor is advised not to accept the services as these services are specifically notified in
the services not to be rendered by him as an auditor as per section 144 of the Act.
Question 69
Mr. Budha, Statutory Auditors of Secret Ltd. was not permitted by the Board of Directors to attend general
meeting of the company on the ground that his right to attend general meetings is restricted only to those
meetings at which the accounts audited by him are to be presented and discussed.
Answer
Auditor’s Attendance at Annual General Meeting:
 Section 146 of the Companies Act, 2013 requires the auditor of a company to attend either by himself
or through his qualified authorised representative to attend the general meeting, unless exempted.

 The said section provides that all notices and other communications relating to any general meeting of
a company shall also be forwarded to the auditor.

 Further, it has been provided that the auditor shall have right to be heard at such meeting on any part
of the business which concerns him as an auditor.

 In the present case Mr. Budha, Statutory Auditors of Secret Ltd. was not permitted by the Board of
Directors to attend general meeting of the company on the ground that his right to attend general
meetings is restricted only to those meetings at which the accounts audited by him are to be presented
and discussed.
Conclusion: Action of Board of Directors is contrary to the provisions of Section 146 as auditor’s duties
and rights with respect of general meetings are extended to all general meetings.
Question 70
Explain the auditor’s duties with respect to reporting over fraud under Companies Act, 2013.
Or

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Mr. A is appointed as statutory auditor of a company for the financial year ended 31st March, 2022. During
the course of audit, it was found that few doubtful transactions had been committed by finance manager
who retired in March, 2022. The fraud was going on since last 3 years and the total amount
misappropriated exceeding ` 100 lakhs. As a statutory auditor, what would be reporting responsibilities
of Mr. A? [May 18, 5 Marks]
Answer
Auditor’s duties to report fraud to the Central Government:
 Section 143(12) of Companies Act, 2013 requires that if an auditor of a company in the course of the
performance of his duties as auditor, has reason to believe that an offence of fraud involving such
amount or amounts as may be prescribed, is being or has been committed in the company by its officers
or employees, the auditor shall report the matter to the Central Government within such time and in
such manner as may be prescribed. For this purpose, Rule 13 prescribes the amount of ` 1 Cr or more.
 However, in case of a fraud involving lesser than the specified amount, i.e. below ` 1 Cr. the auditor
shall report the matter to the audit committee constituted u/s 177 or to the Board in other cases within
such time and in such manner as may be prescribed.
 The companies, whose auditors have reported frauds to the audit committee or the Board but not
reported to the Central Government, shall disclose the details about such frauds in the Board’s report
in such manner as may be prescribed.
 Rule 13 of Companies (Audit and Auditors) Rules, 2014 prescribes the manner of Reporting of Frauds
in various cases.
Question 71
Explain the manner of Reporting of fraud under Companies Act, 2013.
Answer
Manner of Reporting of Fraud:
Rule 13 of Companies (Audit and Auditors) Rules, 2014 prescribes the manner of Reporting of Frauds as
below:
(1) If an auditor of a company, in the course of the performance of his duties as statutory auditor, has
reason to believe that an offence of fraud, which involves or is expected to involve individually an
amount of ` 1 Cr. or above, is being or has been committed against the company by its officers or
employees, the auditor shall report the matter to the CG.
(2) The auditor shall report the matter to the CG as under:
a) The auditor shall report the matter to the Board or the Audit Committee, as the case may be,
immediately but not later than 2 days of his knowledge of the fraud, seeking their reply or
observations within 45 days;

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b) On receipt of such reply or observations, the auditor shall forward his report and the reply or
observations of the Board or the Audit Committee along with his comments (on such reply or
observations of the Board or the Audit Committee) to the CG within 15 days from the date of
receipt of such reply or observations;
c) In case the auditor fails to get any reply or observations from the Board or the Audit Committee
within the stipulated period of 45 days, he shall forward his report to the CG along with a note
containing the details of his report that was earlier forwarded to the Board or the Audit Committee
for which he has not received any reply or observations;
d) The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by
Registered Post with Acknowledgement Due or by Speed Post followed by an e-mail in
confirmation of the same;
e) The report shall be on the letter-head of the auditor containing postal address, e-mail address and
contact telephone number or mobile number and be signed by the auditor with his seal and shall
indicate his Membership Number; and
f) The report shall be in the form of a statement as specified in Form ADT-4.
(3) In case of a fraud involving amount less than ` 1 Cr., the auditor shall report the matter to Audit
Committee constituted u/s 177 or to the Board immediately but not later than 2 days of his knowledge
of the fraud and he shall report the matter specifying the following:
a) Nature of Fraud with description;
b) Approximate amount involved; and
c) Parties involved.
(4) The following details of each of the fraud reported to the Audit Committee or the Board under sub-
rule (3) during the year shall be disclosed in the Board’s Report:
a) Nature of Fraud with description;
b) Approximate Amount involved;
c) Parties involved, if remedial action not taken; and
d) Remedial actions taken.
Question 72
Explain the term “Auditor’s Lien”. [Nov. 12, 4 Marks]
Or
Though legally auditor may exercise right of Lien in case of companies, it is mostly impracticable for legal
and practicable constraints. Do you agree? [May 19, 3 Marks]

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Answer
Auditor’s Lien:
 Lien refers to the right of a person for lawful possession of somebody’s else property on which he has
worked. Right of lien is exercised for non-payment of his dues for the work done.
 The auditor can exercise right of lien on the client’s books and documents in his possession for non-
payment of fees by client, for the work done on the books and documents.
 In respect of auditor exercising the lien, The Institute of Chartered Accountants of England and Wales
has expressed a similar view subject to the following conditions:
a) Documents must belong to the client who owes the money,
b) These documents must come to the possession of the auditor on the client’s authority,
c) The auditor can retain such documents, only if he has done work on such documents, on which
fees have not been paid.
In view of the conditions as stated above, it appears that though legally auditor may exercise right of Lien
in case of companies, it is mostly impracticable for legal and practicable constraints.
It is to be noted in this regard that Ethical Standard Board of ICAI held that a chartered accountant cannot
exercise lien over the client documents/records for non-payment of his fees.
Question 73
State the services which are not to be rendered by an auditor as per the provisions of Companies Act, 2013.
[Nov. 16, 6 Marks]
Or
What are the prohibited services for auditor as per Companies Act, 2013? [Jan. 21, 3 Marks]
Answer
Services not to be rendered by the Auditor:
Section 144 of the Companies Act, 2013 prescribes certain services not to be rendered by the auditor. An
auditor appointed under this Act shall provide to the company only such other services as are approved
by the Board of Directors or the audit committee, as the case may be, but which shall not include any of
the following services (whether such services are rendered directly or indirectly the company or its
holding company or subsidiary company), namely:
1. Accounting and book keeping services;
2. Internal audit;
3. Design and implementation of any financial information system;
4. Actuarial services;
5. Investment advisory services;
6. Investment banking services;
7. Rendering of outsourced financial services;
8. Management services; and
9. Any other kind of services as may be prescribed.

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Question 74
Write short note on: Audit enquiry w.r.t. Companies Act, 2013. [Nov. 16, 4 Marks]
Or
The auditor is not required to report on the matters specified in sub-section (1) of Section 143 unless he has
any special comments to make on any of the items referred to therein. If he is satisfied as a result of the
inquiries, he has no further duty to report that he is so satisfied. Explain clearly stating the matters for
which the auditor has to perform his duty of inquiry under this section. [MTP - Aug 18]
Or
Explain the duties of Auditor to inquire under Section 143(1) of the Companies Act, 2013. [RTP - Nov. 18]
Or
The auditor has to make inquires on certain matters under section 143(1) of Companies Act, 2013. Discuss
those matters. [MTP – Oct. 20]
Answer
Audit Inquiry w/s 143(1):
Section 143(1) of Companies Act, 2013 provides that amongst other matters, auditor is required to inquire
into the flowing matters, namely:
a) Whether loans and advances made by the company on the basis of security have been properly secured
and whether the terms on which they have been made art prejudicial to the interests of the company
or its members;
b) Whether transactions of the company which are represented merely by book entries are prejudicial to
the interests of the company;
c) Where the company not being an investment company or a banking company, whether so much of the
assets of the company as consist of shares, debentures and other securities have been sold at a price
less than that at which they were purchased by the company;
d) Whether loans and advances made by the company have been shown as deposits;
e) Whether personal expenses have been charged to revenue account;
f) Where it is stated in the books and documents of the company that any shares have been allotted for
cash, whether cash has actually been received in respect of such allotment, and if no cash has actually
been so received, whether the position as started in the account books and the balances sheet is correct,
regular and not misleading.
Note: In the opinion of Research Committee of the ICAI, reporting in these matters is required only if the
auditor finds answer to any of these matters in adverse.

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Question 75
Auditors have right to attend only those general meeting at which the accounts audited by them are to be
discussed. Comment. [May 19, 3 Marks]
Answer
Auditor's right as to attend general meetings:
 Sec. 146 of Companies Act, 2013 provides that all notices of, and other communications relating to, any
general meeting shall be forwarded to the auditor of the company and the auditor shall, unless
otherwise exempted by the company attend either by himself or through his authorised representative,
who shall also be qualified to be an auditor, any general meeting and shall have right to be heard at
such meeting on any part of the business which concerns him as the auditor.
 Sec. 146 states that auditor is required to attend, either by himself or through his authorised
representative any general meeting of the company. Hence the statement that auditors have right to
attend only those general meeting at which the accounts audited by them are to be discussed does not
seems to be correct.
Note: From the language of the provisions of Sec. 146, it appears that to attend general meeting is auditor’s
duty, not his right. Auditor has a right to be heard at such meeting on any part of the business which
concerns him as the auditor.
Question 76
According to Companies Act, 2013, the person appointed as an auditor of the company shall sign the
auditor’s report in accordance with the relevant provisions of the Act. Explain clearly the relevant
provisions relating to signing of report. [RTP - Nov. 19]
Answer
Signing of Audit Report:
 As per section 145 of the Companies Act, 2013, the person appointed as an auditor of the company
shall sign the auditor’s report or sign or certify any other document of the company, in accordance
with the provisions of section 141(2).

 Section 141(2) of the Companies Act, 2013 states that where a firm including a limited liability
partnership is appointed as an auditor of a company, only the partners who are chartered accountants
shall be authorised to act and sign on behalf of the firm.

 The qualifications, observations or comments on financial transactions or matters, which have any
adverse effect on the functioning of the company mentioned in the auditor’s report shall be read before
the company in general meeting.

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Question 77
The head accountant of a company entered fake invoices of credit purchases in the books of account
aggregate of ` 50 lakh and cleared all the payments to such bogus creditor. How will you deal as an
auditor? [RTP – May 20]
Answer
Reporting of Fraud:
 As per requirement of Sec 143(12) of Companies Act, 2013 read with Rule 13 of Companies (Audit and
Auditor’s) Rules, 2014, the auditor of the company is required to report the fraudulent activity to the
Board or Audit Committee (as the case may be) within 2 days of his knowledge of fraud.

 Company is also required to disclose the same in Board’s Report.

 It may be noted that the auditor need not to report the Central Government as the amount of fraud
involved is less than ` 1 crore, however, reporting under CARO, 2020 is required.
Question 78
Discuss significance of a company auditor’s right/power to obtain information and explanation from
officers of the company. [RTP – Nov. 21]
Answer
Auditor’s right to obtain information and explanation:
 The right of the auditor to obtain from the officers of the company such information and explanations
as he may think necessary for the performance of his duties as auditor is a wide and important power.
In the absence of such power, the auditor would not be able to obtain details of amount collected by
the directors, etc. from any other company, firm or person as well as of any benefits in kind derived
by the directors from the company, which may not be known from an examination of the books.

 It is for the auditor to decide the matters in respect of which information and explanations are required
by him.

 Therefore, such a right/power is quite significant for discharge of duty of an auditor of a company to
report to the members of the company on accounts examined by him.
Question 79
Examine the applicability of CARO, 2020 in the below mentioned cases:
a) Educating Child is a limited company registered under section 8 of the Companies Act, 2013.
b) Ashu Pvt. Ltd. having paid capital and reserves of ` 50 lakh. During the year, the company had
borrowed ` 70 lakh each from a bank and a financial institution independently. Turnover for the year
was ` 900 lakh.

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Answer
Applicability of CARO, 2020
CARO, 2020 shall apply to every company including a foreign company as defined in Sec. 2(42) of the
Companies Act, 2013, except:
1) A banking company;
2) An insurance company;
3) A company licensed to operate u/s 8 of the Companies Act;
4) A One Person Company as defined in Sec. 2(62) of the Companies Act and a Small Company defined
in Sec. 2(85) of the Companies Act; and
5) A private limited company, not being a subsidiary or holding of a public company,
 Having a Paid up capital & Reserves & Surplus not more than ` 1 Cr. as on the balance sheet date,
and
 Which does not have total borrowings exceeding ` 1 Cr. from any bank or financial institution at
any point of time during the financial year, and
 Which does not have a total revenue as disclosed in Schedule III to the Companies Act, 2013
(including revenue from discontinuing operations) exceeding ` 10 Cr, during the financial year as
per the financial statements.
Conclusion: (a) CARO, 2020 is not applicable in case of Educating Child as it is registered under section 8
of the Companies Act, 2013 (b) In case of Ashu Pvt. Ltd., CARO, 2020 is applicable as borrowings in
aggregate exceeds ` 1 Cr.
Question 80
Write short note on: Reporting requirement under CARO, 2020 w.r.t. physical verification of Property,
Plant and Equipment.
Answer
Reporting requirement under CARO w.r.t. Physical Verification of Property, Plant and Equipment:
 Para 3 of CARO 2020 requires the auditor to comment “Whether the Property, Plant and Equipment
have been physically verified by the management at reasonable intervals”; whether any material
discrepancies were noticed on such verification and if so, whether the same have been properly dealt
with in the books of account.
 The term “Reasonable Intervals” has not been defined and hence depends upon the circumstances of
each case considering the number of assets, nature of assets, relative value of assets, difficulty in
verifications, situation of the assets etc.
 The management may decide about the periodicity of physical verification of fixed assets. While an
annual verification may be reasonable; it may be impracticable to carry out the same in some cases. In
such cases the verification should be programmed in such manner that all assets are verified at least
once in every three years.

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 Auditor is also required to obtain a written representation from management confirming that the fixed
assets are physically verified by the management in accordance with the policy of the company. The
representation should mention the periodicity of the physical verification, details of the material
discrepancies noticed during the physical verification. If no discrepancies were noticed during the
physical verification, the representation should also mention this fact clearly.
Question 81
The company has dispensed with the practice of taking inventory of their inventories at the yearend as in
their opinion the exercise is redundant, time consuming and intrusion to normal functioning of the
operations. Explain reporting requirement under CARO, 2020.
Answer
Reporting Requirements w.r.t. Inventory:
Para 3(ii) of CARO, 2020 requires the auditor to comment on the following:
(a) Whether physical verification of inventory has been conducted at reasonable intervals by the
management; and
(b) Whether, in the opinion of the auditor, the coverage and procedure of such verification by the
management is appropriate;
(c) Whether any discrepancies of 10% or more in the aggregate for each class of inventory were noticed
and if so, whether they have been properly dealt with in the books of account.
Question 82
Comment: No cost accounting records are maintained though the company is required to maintain same.
Answer
Non-maintenance of Cost Records:
 As per the CARO, 2020, where maintenance of cost records has been prescribed by the C.G., auditor of
the company is specifically required to state whether such accounts and records as prescribed have
been made and maintained.
 Though the auditor is not required to conduct detailed audit but the auditor is expect to conduct a
general review of the cost records to determine whether the prescribed accounts and records are prima
facie complete.
 Therefore, whether cost audit is ordered or not the auditor should report upon the non-maintenance
of the cost records.
Question 83
Comment on the following: ABC Ltd. Has not deposited provident fund contributions of ` 20 lakhs to the
authorities, but accounted in the books.

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Answer
Non-Deposit of Provident Fund Dues:
 The auditor's report under CARO 2020 has to specifically state whether the company is regular in
depositing undisputed statutory dues including PF with the appropriate authority and, if not, the
extent of the arrears of outstanding statutory dues as at the last day of the FY year concerned for a
period of more than six months from the date they became payable, shall be indicated by the auditor.
 In this case, the failure of ABC Ltd. to deposit provident fund of ` 20 lakhs will be reported by the
auditor as per CARO, 2020 issued u/s 143(11) of the Companies Act, 2013.
 In indicating the arrears, the period to which the arrears relate should preferably be also given.
Question 84
Comment on the following: XYZ (Pvt.) Ltd. has paid up capital and Reserves of ` 110 lacs and secured
Loans of Nationalized Banks having sanctioned limit of ` 28 lacs and outstanding balance of ` 23 lacs. The
turnover of the company is 10.10 crores for the year ended 31-3-2022. Custom returns goods worth 40 lacs
on 2-4-2022, out of sales made during the year ended 31-3-2022. The management is of the opinion that
CARO is not applicable to the company. [May 10, 6 Marks]
Answer
Applicability of CARO:
CARO is not applicable to a private limited company:
a) Having a paid up capital & Reserves & Surplus not more than ` 1 Cr. as on the balance sheet date, and
b) Which does not have total borrowings exceeding ` 1 Cr. from any bank or financial institutions at any
point of time during the financial year, and
c) Which does not have a total revenue as disclosed in Schedule III to the Companies Act, 2013 (including
revenue from discontinuing operations) exceeding ` 10 Cr. during the financial year as per the financial
statements.
In the given case, the paid up capital and reserves of XYZ (Private) Ltd. is ` 110 lacs. Outstanding loan
amount is ` 23 lacs although sanction limit is ` 28 lacs. Company’s turnover is ` 10.10 crores. Sales return
are deducted from the turnover in the year in which return takes place.
Conclusion: Contention of the management that provision of CARO are not applicable over the company
is not correct and the auditor is required to report on the matter specified in the said order.
Question 85
On what companies the CARO, 2020 is applicable and what companies are not covered by it?
Or
What is CARO? Explain the companies which are not covered by CARO. [Nov. 11, 8 Marks]
Or

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Write short note on: Companies not covered under CARO. [Nov. 14, 4 Marks]
Or
Discuss which class of companies are specifically exempt from the applicability of CARO.
[Nov. 16, 6 Marks]
Answer
Applicability of CARO, 2020:
CARO, 2020 shall apply to every company including a foreign company as defined in Sec.2(42) of the
Companies Act, 2013, except:
(i) A banking company;
(ii) An insurance company;
(iii) A company licensed to operate u/s 8 of the Companies Act;
(iv) A One Person Company as defined in Sec. 2(62) of the Companies Act and a Small Company as
defined in Sec 2(85) of the Companies Act; and
(v) A private limited company, not being a subsidiary or holding of a public company,
 Having a Paid up capital & Reserves & Surplus not more than ` 1 Cr. as on the balance sheet date,
and
 Which does not have total borrowings exceeding ` 1 Cr. from any bank or financial institution at
any point of time during the financial year, and
 Which does not have a total revenue as disclosed in Schedule III to the Companies Act, 2013
(including revenue from discontinuing operations) exceeding ` 10 Cr. during the financial year as
per the financial statements.
The order would be applicable for unlimited companies irrespective of the size of their paid up capital and
reserves, turnover or borrowings.
Question 86
Discuss the matters to be included in the auditor’s report regarding statutory dues and repayment of loans
or borrowing to a financial institution, bank, Government or dues to debenture holders as per CARO, 2020,
Answer
Reporting under CARO, 2020
a) Statutory Dues:
 Whether the company is regular in depositing undisputed statutory does including GST, provident
fund, employees’ state insurance, income-tax, sales tax, service tax, duty of customs duty of excise,
value added tax, cess and any other statutory does to the appropriate authorities and if not, the
extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned
for a period of more than six months from the date they became payable, shall be indicated.

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 Where statutory dues referred above have not been deposited on account of any dispute, then the
amounts involved and the forum where dispute is pending shall be mentioned.
b) Repayment of Loans and Borrowings:
 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 to be reported as per the
format below:
Nature of borrowing Name of Amount not Whether No. of Remarks,
including debt securities lender* paid on due principal or days delay if any
date interest or unpaid

*lender wise details to be provided in case of defaults to banks, financial institutions and Government.
 Whether the company is a declared wilful defaulter by any bank or financial institution or other
lender.
Question 87
State the matters to be included in the auditor’s report as per CARO, 2020 regarding:
Default in repayment of loans or borrowing to a financial institution, bank etc.
Fraud by the company or on the Company by its officers or employees. [MTP – April 21]
Answer
Reporting under CARO, 2020
a) Default in Repayment of Loans and Borrowings: Refer Question 83.
b) Fraud by the company or on the company [Para 3(xi)]:
 Whether any fraud by the company or any fraud on the Company has been noticed or reported
during the year. If yes, the nature and the amount involved is to be indicated;
 Whether any report u/s 143(12) of the Companies Act has been filed by the auditors in Form ADT-
4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with the Central
Government;
 Whether the auditor has considered whistle-blower complaints, if any, received during the year by
the company.
Question 88
State the matters to be included in the auditor’s report as per CARO, 2020 regarding:
a) Private placement of preferential issue.
b) Utilisation of IPO and further public offer. [May 18, 4 Marks]

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Answer
Reporting requirements under CARO, 2020:
a) Private Placement of Preferential issues:
Para 3(x) of CARO, 2020 requires the following:
 Whether the company has made any preferential allotment or private placement of shares or
convertible debentures (fully, partially or optionally convertible) during the year and if so,
 Whether the requirements of section 42 and section 62 of the Companies Act, 2013 have been
complied with and the funds raised have been used for the purposes for which the funds were
raised, if not, provide details in respect of amount involved and nature of non-compliance;
b) Utilisation of IPO and Further Public Offer:
Para 3(x) of CARO, 2020 requires the following:
 Whether moneys raised by way of initial public offer or further public offer (including debt
instruments) during the year were applied for the purposes for which those are raised, if not,
 The details together with delays or default and subsequent rectification, if any, as may be
applicable, be reported.
Question 89
State the matters to be included in the auditor’s report as per CARO, 2020 regarding:
Property, Plant and Equipment
Statutory dues
Or
Explain the Reporting requirements the auditor should ensure under CARO, 2020 related to Property,
Plant and Equipment. [May 19, 3 Marks]
Answer
Matters to be included in the Auditor’s Report under CARO, 2020:
The auditor’s report on the accounts of a company to which CARO applies shall include a statement on
the following matters, namely:
(i) Property, Plant and Equipment:
As per clause (i) of Para 3 of CARO, 2020, reporting requirements in respect of property, plant and
equipment are:
Adequacy of Records
 Whether the company is maintaining proper records showing full particulars, including
quantitative details and situation of Property, Plant and Equipment.
 Whether the company is maintaining proper records showing full particulars of intangible assets.

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Physical verification
 Whether these Property, Plant and Equipment have been physically verified by the management
at reasonable intervals;
 Whether any material discrepancies were noticed on such verification and if so,
 Whether the same have been properly dealt with in the books of account.
Title Deeds
 Whether the title deeds of all the immovable properties (Other than properties where the
company is the lessee and the lease agreements are duly executed in favour of the lessee)
disclosed in the financial statements are held in the name of the company.
 If not, provide details in Specific format.
Revaluation of Property, Plant and Equipment
 Whether the company has revalued its Property, Plant and Equipment (including Right of Use
assets) or intangible assets or both during the year and,
 If so, whether the revaluation is based on the valuation by a Registered Valuer; specify the
amount of change, if change is 10% or more in the aggregate of the net carrying value of each
class of Property, Plant and Equipment or intangible assets;
Proceedings for holding Benami Property
 Whether any proceedings have been initiated or are pending against the company for holding
any benami property under the Benami Transactions (Prohibition) Act, 1988 and rules made
thereunder.
 If so, whether the company has appropriately disclosed the details in its financial statements.
(ii) Statutory Dues: Refer Question 86.
Question 90
“The company has raised funds by issuing fully convertible debentures. These funds were raised for the
expansion and diversification of the business. However, the company utilized these funds for repayment
of long term loans and advances. Advise the auditor regarding requirements under CARO, 2020.
[Nov. 18, 4 Marks]
Answer
Reporting requirements under CARO, 2020:
Para 3(x) of CARO, 2020 requires the following:
 Whether moneys raised by way of initial public offer or further public offer (including debt
instruments) during the year were applied for the purposes for which those are raised, if not.
 The details together with delays or default and subsequent rectification, if any, as may be applicable,
be reported.

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 In the instant case, company has raised funds by issuing fully convertible debentures. These funds
were raised for the expansion and diversification of the business. However, the company utilized these
funds for repayment of long-term loans and advances.
Conclusion: Auditor is required to report the fact that funds raised for the expansion and diversification
of the business by issue of fully convertible debentures were utilized for repayment of long term loans and
advances.
Question 91
M Ltd. has given certain loans to related parties and also has accepted certain deposits. As an auditor, how
you include the above items in paragraph 3 of CARO, 2020? [Nov. 19, 4 Marks, MTP – March 21]
Answer
Reporting under CARO, 2020:
(i) Loans to related parties:
Whether during the year the company has granted any loans or advances in the nature of loans
secured or unsecured, to companies, firms, Limited Liability Partnerships or any other parties, if so,
a. Whether during the year the company has provided loans or provides advances in the nature of
loans, if so, indicate:
i. The aggregate amount during the year, and balance outstanding at the balance sheet date
with respect to such loans or advances to subsidiaries, joint ventures and associates.
ii. The aggregate amount during the year, and balance outstanding at the balance sheet date
with respect to such loans or advances to parties other than subsidiaries, joint ventures and
associates;
b. Whether the terms and conditions of the grant of all loans and advances in the nature of loans
and guarantees provided are not prejudicial to the company’s interest;
c. In respect of loans and advances in the nature of loans, whether the schedule of repayment of
principal and payment of interest has been stipulated and whether the repayments or receipts
are regular;
d. If the amount is overdue, state the total amount overdue for more than 90 days, and whether
reasonable steps have been taken by the company for recovery of the principal and interest;
e. Whether any loan or advance in the nature of loan granted which has fallen due during the year,
has been renewed or extended or fresh loans granted to settle the overdues of existing loans given
to the same parties, if so, specify the aggregate amount of such dues renewed or extended or
settled by fresh loans and the percentage of the aggregate to the total loans or advances in the
nature of loans granted during the year (not applicable to companies whose principal business
is to give loans];

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f. Whether the company has granted any loans or advances in the nature of loans either repayable
on demand or without specifying any terms or period of repayment, if so, specify the aggregate
amount, percentage thereof to the total loans granted, aggregate amount of loans granted to
Promoters, related parties as defined in Sec. 2(76) of the Companies Act, 2013.
(ii) Public Deposits:
In case the company has accepted deposits from the public, Para 3(v) of CARO, 2020 requires the
auditor to report the following:
a) Whether the directives issued by the RBI and the provisions of sections 73 to 76 or any other
relevant provisions of the Companies Act and the rules framed thereunder, where applicable,
have been complied with. If not, the nature of contraventions be stated;
b) If an order has been passed by Company Law Board or National Company Law Tribunal or
Reserve Bank of India or any Court or any other Tribunal, whether the same has been complied
with or not?
Question 92
Provision of CARO is not applicable to ABC Pvt. Ltd., a subsidiary of XYZ Ltd. (a public company) having
fully paid up Capital and Reserves & Surplus of ` 50 lakhs, Secured loan from bank of ` 90 Lakhs and
Turnover of ` 5 Crore, for the financial year 2021-22. [MTP – April 21]
Answer
Applicability of CARO:
The CARO specifically exempts a private limited company not being a subsidiary or holding company of
a public company, having a paid up capital and reserves and surplus not than ` 1 crore as on the balance
sheet date and which does not have total borrowings exceeding ` 1 crore from any bank or financial
institution at any point of time during the financial year and which does not have a total revenue as
disclosed in Scheduled III to the Companies Act, 2013 (including revenue from discontinuing operations)
exceeding ` 10 crore during the financial year as per the financial statements.
In the given question, it is clear that ABC Pvt. Ltd. is a subsidiary of XYZ Ltd. and hence not exempt from
CARO although it is satisfying the conditions that allow exemption to private limited company which is
not a subsidiary or holding company of a public company.
Question 93
Write short note on: Joint audit. [Nov. 08, 5 Marks]
Or
Explain the concept of Joint Audit. Discuss its advantages and Disadvantages. [May 11, 8 Marks]
Or
Discuss the following: Advantages and Disadvantages of Joint Audit. [Nov. 14, 5 Marks]

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Or
The practice of appointing Chartered Accountants as joint auditors is quite widespread in big companies
and corporations. Explain stating the advantages of the joint audit. [RTP – Nov. 19]
Answer
Joint Audit - Meaning, Advantages and Disadvantages:
Meaning: Joint audit means that more than one firm/individuals is appointed as the Statutory Auditors
of the company. It implies pooling together the resources and expertise of two or more firms to perform
an expert job. SA 299 “Joint Audit of financial statements” deals with the professional responsibilities
which the auditors undertake in accepting appointments as joint auditors.
Advantages:
a) Poling and sharing of expertise.
b) Better quality of work performance.
c) Advantage of mutual consultation.
d) Improved services to client.
e) Lower costs to carry out the audit work.
f) Healthy competition towards a better performance.
Disadvantages:
a) Co-ordination problems in conduct of work.
b) Lack of clear definition of responsibility.
c) Different standings of joint auditee.
d) Negligence of areas of common concern.
e) Sharing of fees.
f) Uncertainty about the liability for the work done.
Question 94
A joint auditor is not bound by the views of the majority of the joint auditors regarding matters to be
covered in the report. Justify this statement in the light of responsibilities of Joint Auditors under SA 299.
[May 10, 5 Marks]
Answer
Reporting Responsibilities of Joint Auditor:
(a) The statement that a joint auditor is not bound by the views of the majority of the joint auditors
regarding the matters to be covered in the report is true.
(b) SA 299 “Joint Audit of Financial Statements” provides the following in respect of reporting
responsibilities of joint auditor:
 Joint auditors are required to issue common audit report.

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 However, in case of any disagreement among joint auditors 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 case of separate reports, 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). Such reference shall be made
under the heading “Other Matter Paragraph” as per SA 706.
Question 95
Write short note on: Responsibilities of Joint Auditor.
Or
In joint Audit, “each joint auditor is responsible only for the work allocated to him”. [May 12, 5 Marks]
Or
You have been appointed as an auditor of a company along with 2 other auditors. What steps would you
like to take to ensure a smooth and effective audit? To what extent do you think you will be responsible
in relation to the work performed by yours co-auditors and vice-versa?
Or
Mention the points/areas in which all the joint auditors are jointly and severally responsible.
[Nov. 15, 5 Marks]
Answer
Areas of Joint Responsibility in case of Joint Auditors:
SA 299 “Joint Audit of Financial Statements” deals with the responsibilities of joint auditors. Accordingly,
in respect of audit work divided among the joint auditors, each joint auditor shall be responsible only for
the work allocated to such joint auditor including proper execution of the audit procedures,
All the joint auditors shall be jointly and severally responsible for:
(i) The audit work which is nit divided among the joint auditors and is carried out by all joint auditors;
(ii) Decisions taken by all the joint auditors under audit planning in respect of common audit areas
concerning the NTE of the audit procedures to be performed by each of the joint auditors;
(iii) Matters which are brought to the notice of the joint auditors by any one of them and on which there
is an agreement among the joint auditors;
(iv) Examining that the F.S. of the entity comply with the requirements of the relevant statutes;
(v) Presentation and disclosure of the F.S. as required by the applicable FRF;
(vi) Ensuring that the audit report complies with the requirements of the relevant statutes, the applicable
standards on Auditing and the other relevant pronouncements issued by ICAI.

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It shall be the responsibility of each joint auditor to determine the NTE of audit procedures to be applied
in relation to the areas of work allocated to said joint auditor.
It is the individual responsibility of each joint auditor to study and evaluate the prevailing system of
internal control and assessment of risk relating to the areas of work allocated to said joint auditor.
Question 96
“Before the commencement of audit, the joint auditors should discuss and develop a joint audit plan.”
Discuss the points to be considered in developing the joint audit plan by the joint auditors.
[Nov. 19, 4 Marks]
Answer
Points to be considered in developing the joint audit plan:
As per SA 299 “Joint Audit of Financial Statements” Prior to the commencement of the audit, the joint
auditor’s shall discuss and develop a joint audit plan. In developing the joint audit plan, the joint auditors
shall:
(a) Identify division of audit areas and common audit areas amongst the joint auditors that define the
scope of the work of each joint auditor;
(b) Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of
the communication required;
(c) Consider and communicate among all joint auditors the factors that, in their professional judgment,
are significant in directing the engagement team’s efforts;
(d) Consider the results of preliminary engagement activities and, where applicable, whether knowledge
gained on other or similar engagements performed earlier by the respective engagement partner(s) for
the entity is relevant.
(e) Ascertain the NTE of resources necessary to perform the engagement.
Question 97
X Ltd. has a branch office in Malaysia. The company has appointed Mr. X, who is qualified to audit
accounts as per Malaysian laws. Mr. Z, the statutory auditor objects to the same, contending that he alone
can audit the branch office accounts. Discuss.
Answer
Eligibility criteria for appointment as Branch Auditor:
 As per Sec. 143(8) of the Companies Act, 2013, where the branch office is situated in a country outside
India, the accounts of the branch office shall be audited either by the company’s auditor or by an
accountant or by any other person duly qualified to act as an auditor of the accounts of the branch
office in accordance with the laws of that country.
 Hence, a company can appoint as auditor of a foreign branch an accountant duly qualified to act as an
auditor in accordance with the laws of the foreign country.
Conclusion: Mr. Z contention that he alone can audit the branch office accounts is not valid.
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Question 98
When the accounts of the branch are audited by a person other than the company’s auditor, there is need
for a clear understanding of the role of such auditor and the company’s auditor in relation to the audit of
the accounts of the branch and the audit of the company as a whole. Explain.
[RTP - Nov. 18, MTP - Oct. 20]
Answer
Role and Responsibilities of Company Auditor and Branch Auditor:
SA 600 “Using the work of Another Auditor” establishes the standard when an auditor, reporting on the
financial statements of a company, uses the work of another auditor on the financial information of one or
more components included in the financial statements of the entity. There should be sufficient liaison
between the principal auditor and the other auditor. SA 600 provides the following in this regard:
 Where another auditor has been appointed for the component, the principal auditor would normally
be entitled to rely upon the work of such auditor unless there are special circumstances to make it
essential for him to visit the component and/or to examine the books of account and other records of
the said component. Further, it requires that the principal auditor should perform procedures to obtain
sufficient appropriate audit evidence, that the work of the other auditor is adequate for the principal
auditor’s purposes, in the context of the specific assignment.
 When using the work of another auditor, the principal auditor should ordinarily perform the following
procedures:
a) Advise the other auditor of the use that is to be made of the other auditor’s work and report and
make sufficient arrangements for co-ordination of their efforts at the planning stage of the audit.
The principal auditor would inform the other auditor of matters such as areas requiring special
consideration, procedures for the identification of inter - component transactions that may require
disclosure and the time-table for completion of audit; and
b) Advise the other auditor of the significant accounting auditing and reporting requirements and
obtain representation as to compliance with them.
 The principal auditor might discuss with the other auditor the audit procedures applied or review a
written summary of the other auditor’s procedures and findings which may be in the form of a
completed questionnaire or check-list.
 The principal auditor may also wish to visit the other auditor. The nature, timing and extent of
procedures will depend on the circumstances of the engagement and the principal auditor’s
knowledge of the professional competence of the other auditor.
This knowledge may have been enhanced from the review of the previous audit work of the other
auditor.

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Question 99
Explain the audit procedure when principal auditor is using the work of another auditor.
[Nov. 14, 8 Marks]
Answer
Audit Procedure when principal auditor is using the work of another auditor:
As per SA 600 “Using the work of Another Auditor” when the principal auditor is using the work of
another auditor, he is supposed to perform the following:
a) When principal auditor plans to use the work of another auditor, he should consider the professional
competence of the other auditor in the context of specific assignment if the other auditor is not a
member of the ICAI.
b) The principal auditor should perform procedures to obtain sufficient appropriate audit evidence that
the work of the other auditor is adequate for the principal auditor’s purposes, in the context of the
specific assignment.
c) The principal auditor should consider the significant findings of the other auditor.
d) The principal auditor should document in his audit working papers the followings:
 Components audited by another;
 Audit procedures adopted and results thereof;
 Conclusion that particular component is not material;
 Manner of dealing with modification in another auditor’s report
e) When the principal auditor concludes, based on his procedures, that the work of the other auditor
cannot be used and the principal auditor has not been able to perform sufficient additional procedures
regarding the financial information of the component audited by the other auditor, the principal
auditor should express a qualified opinion or disclaimer of opinion because there is a limitation on the
scope of audit.
f) When the principal auditor has to base his opinion on the financial information of the entity as a whole
relying upon the statements and reports of the other auditors, his report should state clearly the
division of responsibility for the financial information of the entity by indicating the extent to which
the financial information of components audited by the other auditors have been included in the
financial information of the entity.
Question 100
“There should be a sufficient liaison between a principal auditor and other auditors”. Discuss the above
statement and state in this context the reporting considerations, when the auditor uses the professional
work performed by other auditor.

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Answer
Coordination between Principal Auditor and Other Auditor:
SA 600 “Using the work of Another Auditor” applies in situation where an auditor (principal auditor),
reporting on the financial information of an entity, uses the work of another auditor (other auditor) with
respect to the financial information of one or more components included in the financial information of
the entity. To ensure coordination among both of them, SA 600 provides the followings:
1. There should be sufficient liaison between the principal auditor and the other auditor;
2. For this purpose, the principal auditor may find it necessary to issue written communication(s) to the
other auditor.
3. The other auditor, knowing the context in which his work is to be used by the principal auditor, should
co-ordinate with the principal auditor.
 Adhering to time-table.
 Bringing to the attention of Principal author any significant finding.
 Compliance with relevant statutory requirements.
 Respond to detailed questionnaire.
Reporting Considerations
1. When the principal auditor concludes, based on his procedures, that the work of the other auditor
cannot be used.
2. The principal auditor has not been able to perform sufficient additional procedures regarding the
financial information of the component audited by the other auditor, and
3. The principal auditor should express a qualified opinion or disclaimer of opinion because there is a
limitation on the scope of audit.
Question 101
ABC Ltd. is a company incorporated in India. It has branches within and outside India. Explain who can
be appointed as an auditor of these branches within and outside India. Also explain to whom branch
auditor is required to report. [RTP - May 20]
Answer
Branch Auditor:
Sec. 143(8) of the Companies Act, 2013, prescribes the duties and powers of the company’s auditor with
reference to the audit of the branch and the branch auditor. Accordingly, where a company has a branch
office, the accounts of that office shall be audited by either of following:
 The auditor appointed for the company, i.e. company auditor, or
 Any other person qualified for appointment as an auditor of the company under this Act, or

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 Where the branch office is situated in a country outside India, the accounts of the branch office shall
be audited either by the company’s auditor or by an accountant or by any other person duly qualified
to act as an auditor of the accounts of the branch office in accordance with the laws of that country.
The branch auditor shall prepare a report on the accounts of the branch examined by him and send it to
the auditor of the company who shall deal with it in his report in such manner as he considers necessary.
Rule 12 of the Companies (Audit and Auditors) Rules, 2014, provides the following in relation to branch
audit and branch auditor:
1. The duties and powers of the company’s auditor with reference to the audit of the branch and the
branch auditor, if any shall be as contained in sub-sections (1) to (4) of section 143.
2. The branch auditor shall submit his report to the company’s auditor.
Question 102
RJ Limited is in the business of trading of cycles having Head Office at Delhi and branch at Mumbai
Statutory audit of Head Office was to be done by CA D and statutory audit of branch at Mumbai was to
be done by CA M. During the course of audit by CA D at head office, CA D wanted to visit branch at
Mumbai and verify the inventory records at Mumbai. The management of RJ Limited did not allow CA D
to visit Mumbai office and verify the inventory records as the branch audit of Mumbai was already being
undertaken by another CA M. In the above situation, discuss the rights available with CA D in terms of
the Companies Act, 2013. [Nov. 20, 3 Marks]
Answer
Right of Access of Company Auditor for Branch Records:
 As per Sec. 143(8) of the Companies Act, 2013 the audit of the branches can be done by the company
auditor himself or by another auditor. Even where, the branch accounts are audited, the company
auditor has right to visit the branch if he deems it necessary to do so for the performance of his duties
as auditor.
 Company Auditor has also right of access at all times to the books and accounts and vouchers of the
company maintained at the branch office. He can appropriately deal with the report of the branch
auditor in framing his main report. He will disclose how he had dealt with the branch audit report.
 In this case, the audits of two branches were done by the company auditor and one branch was done
by a separate branch auditor.
Conclusion: Management’s objection that the company auditor is transgressing the scope of audit areas
agreed, is absolutely, wrong. The right of company auditor in visiting and accessing the records of branch
cannot be forfeited. Even where the branch accounts are audited by another local auditor, the company
auditor has right to visit the branch and can have access to the books and vouchers of the company
maintained at the branch office.

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Question 103
Briefly discuss the following with respect to applicable provisions under the Companies Act, 2013 and
rules made thereunder:
a) Maintenance of Cost Records
b) Applicability of Cost Audit
c) Non-applicability of Cost Audit.
Answer
Cost Records and Audit Provisions:
a) Maintenance of Cost records:
Sec. 148(1) of Companies Act, 2013 provides that the Central Government may, by order, in respect of
such class of companies engaged in the production of such goods or providing such services as may
be prescribed, direct that particulars relating to the utilisation of material or labour or to other items of
cost as may be prescribed shall also be included in the books of account kept by that class of companies.

 Rule 3 of Companies (Cost Records and Audit) Rules, 2014 provides that the specified class of
companies, including foreign companies, engaged in the production of the goods or providing
services, having an overall turnover from all its products and services of ` 35 Cr. or more during
the immediately preceding financial year, shall include cost records for such products or services
in their books of account.

 A company which is classified as a micro enterprise or a small enterprise under the Micro, Small
and Medium Enterprises Development Act, 2006 are exempted from compliance of these
provisions.

 Specified Class of Companies are classified in two categories:

1. Regulated Sectors: It covers Telecommunication, Electricity Petroleum and Gas, Drugs and
Pharma, Fertilizers and Sugar
2. Non-Regulated Sectors: It includes a number of companies including those engaged in Arms
and ammunitions, Steel, Rubber and Allied products, Coffee, tea, Cement etc.
b) Applicability of Cost Audit:
 Section 148(2) of Companies Act, 2013 provides that if the Central Government is of the opinion,
that it is necessary to do so, it may, by order, direct that the audit of cost records of class of
companies, which are covered under Sec. 148(1) and which have a net worth of such amount as
may be prescribed or a turnover of such amount as may be prescribed, shall be conducted in the
manner specified in the order.

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 Rule 4 of Companies (Cost Records and Audit) Rules, 2014 provides the following:
Regulated Sector Industries: Cost records are required to be audited if the overall annual turnover
of the company from all its products and services during the immediately preceding financial year
is ` 50 Cr. or more and the aggregate turnover of the individual product or products or service or
services for which cost records are required to be maintained under rule 3 is ` 25 Cr. or more.
Non-Regulated Sectors: Cost records are required to be audited if the overall annual turnover of
the company from all its products and services during the immediately preceding financial year is
` 100 Cr. or more and the aggregate turnover of the individual product or products or service or
services for which cost records are required to be maintained under rule 3 is ` 35 Cr. or more.
c) Non-Applicability of Cost Audit:
The requirement for cost audit under these rules shall not apply to a company which is covered in rule
3; and
(i) Whose revenue from exports, in foreign exchange, exceeds seventy five per cent of its total
revenue, or
(ii) Which is operating from a special economic zone.
Question 104
Elucidate the provisions of Companies Act, 2013 relating to submission of cost audit report to the Board
and Central Government.
Answer
Submission of Cost Audit report:
 Every cost auditor, who conducts an audit of the cost records of a company shall submit the cost audit
report along with his or its reservations or qualifications or observations or suggestions, if any, in Form
CRA-3

 Every cost auditor shall forward his duly signed report to the Board of Directors of the company within
a period of 180 days from the closure of the financial year to which the report relates and the Board of
Directors shall consider and examine such report particularly any reservation or qualification
contained therein.

 Every company covered under these rules shall, within a period of thirty days from the date of receipt
of a copy of the cost audit report, furnish the Central Government with such report along with full
information and explanation on every reservation or qualification contained therein, in Form CRA-4
in XBRL format in specified manner along with specified fees.
Question 105
Write short note on: Cost Audit. [May 05, 4 Marks]

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Answer
Cost Audit
 Section 148(2) of Companies Act, 2013 provides that if the Central Government is of the opinion, that
it is necessary to do so, it may, by order, direct that the audit of cost records of class of companies,
which are covered under Sec 148(1) and which have a net worth of such amount as may be prescribed
or a turnover of such amount as may be prescribed, shall be conducted in the manner specified in the
order. The audit conducted under this section shall be addition to the audit conducted under section
143 of the Companies Act, 2013.
 The audit shall be conducted by a Cost Accountant in Practice who shall be appointed by the Board of
such remuneration as may be determined by the members in such manner as may be prescribed. No
person appointed under section 139 as an auditor of the company shall be appointed for conducting
the audit of cost records.
 The auditor conducting the cost audit shall comply with the cost auditing standards.
 The report on the audit of cost records shall be submitted to the Board of Directors of the company and
company shall within 30 days from the date of receipt of a copy of the cost audit report prepared
furnish the Central Government with such report along with full information and explanation on every
reservation or qualification contained therein.
Question 106
“Mr. A is offered by ABC Ltd. for appointment as cost auditor and asked to certify certain requirements
before such appointment.” Discuss those requirements with reference to the provisions of the Companies
Act, 2013. [Nov. 18, 5 Marks]
Answer
Requirements as to Certificate from Cost Auditor:
As per Rule 6 of the Companies (Cost Records and Audit) Rules, 2014, the Cost Auditor appointed shall
submit certificate that:
a) The individual or the firm, as the case may be, is eligible for appointment and is not disqualified for
appointment under the Act, the Cost and Works Accountants Act, 1959 and the Rules or regulations
made thereunder.
b) The individual or the firm, as the case may be, satisfies the criteria provided in Sec. 141, so far as may
be applicable.
c) The proposed amendment is within the limits laid down by or under the authority of the Act.
d) The list of proceedings against the cost auditor or audit firm or any partner of the audit firm pending
with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.

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Question 107
You have been approached by HK Ltd. to be appointed as Cost Auditor for the F.Y. 2021-22. Company has
requested you to provide a certificate confirming your eligibility as per the provisions of Companies Act,
2013. List down the matters to be included in the certificate. [MTP – March 21]
Answer
Appointment of Cost Auditor:
The Companies (Cost Records and Audit) Rules, 2014 requires the companies prescribed under the said
Rules to appoint an Auditor within 180 days of the commencement of every financial year. However,
before such appointment is made, the written consent of the cost auditor to such appointment and a
certificate from him or it shall be obtained,
The certificate to be obtained from the cost auditor shall certify that:
a) The individual or the firm, as the case may be, is eligible for appointment and is not disqualified for
appointment under the Companies Act, 2013, the Cost and Works Accountants Act, 1959 and the rules
or regulations made thereunder;
b) The individual or the firm, as the case may be, satisfies the criteria prided in to 141 of the Companies
Act, 2013 so far as may be applicable;
c) The proposed appointment is within the limits laid down by or under the authority of the Companies
Act, 2013; and
d) The list of proceedings against the cost author or audit firm or any partner of the audit firm pending
with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.
Question 108
Shine Industries is an electricity generating company engaged in generation of electricity for captive
consumption. Its gross turnover was INR 68 crores during the immediately preceding financial year.
Management of shine industries has not maintained any cost records as they felt that there is no
requirement for them to maintain any cost records or conduct any cost audit. Comment. [July 21, 4 Marks]
Answer
Applicability of Provisions related to Cost Records and Audit:
 Provisions relating to cost records and audit are governed by section 148 of the Companies Act, 2013
read with the Companies (Cost Records and Audit) Rules, 2014.
 As per Rule 3 of the Companies (Cost Records and Audit) Rules, 2014, specified companies are
required to include cost records in their books of account if they are having turnover ` 35 Cr. or more
during immediately preceding financial year.
 As per Rule 4 of Companies (Cost Records and Audit) Rules, 2014, audit of cost records is required in
case of non-regulated sector industries if annual turnover from all products and services in
immediately preceding financial year is ` 100 Cr. or more and the turnover of individual product or
service is ` 35 Cr. or more.

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 Rule 4 further provides that requirement of cost audit shall not apply to a company which is covered
under Rule 3, and is engaged in generation of electricity for captive consumption through Captive
Generating Plant.
 In the given case, Shine Industries is an electricity generating company engaged in generation of
electricity for captive consumption. Its gross turnover was INR 68 crores during the immediately
preceding financial year.
Conclusion: Company is required to maintain cost records as its turnover during the preceding financial
year exceeds ` 35 Crores. However, provisions related to cost audit shall not apply.

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 CHAPTER 11

AUDIT REPORTS
QUESTIONS WITH ANSWERS
Question 1
In order to form the audit opinion as required by SA 700, the auditor shall conclude as to whether the
auditor has obtained reasonable assurance about whether the financial statement as a whole are free from
material misstatement, whether due to fraud or error. Explain the conclusion that the auditor shall take
into account. Also explain the objective of auditor as per SA 700. [MTP – Aug. 18]
Or
“An auditor is required to make specific evaluations while forming an opinions in an audit report.” State
them. [Nov. 18, 5 Marks, MTP – April 21]
Answer
Forming an Opinion the Financial Statements:
SA 700 “Forming an Opinion & Reporting on Financial Statements” requires that auditor shall form an
opinion on whether the Financial statements (F.S.) are prepared in all material respects in accordance with
the applicable financial reporting framework (FRF).
To form this opinion, auditor needs to conclude as to whether he has obtained reasonable assurance that
FS as a whole are free of material misstatements, whether or to fraud or error. The conclusion shall take
into account:
(a) The auditor’s conclusion, in accordance with SA 330, whether sufficient appropriate audit evidence
has been obtained;
(b) The auditor’s conclusion, in accordance with SA 450, whether uncorrected misstatement are material,
individually or in aggregate; and
(c) The evaluations mentioned below:
1. Whether the financial statements are prepared, in all material respects in accordance with the
requirements of the applicable FRF. This evaluation shall include consideration of the qualitative
aspects of the entity's accounting practices, including indicators of possible bias in management's
judgments.
2. Whether in view of the requirements of the applicable FRF:
 The F.S. adequately disclose the significant accounting policies selected and applied;
 The accounting policies selected and applied are consistent with the applicable FRF and are
appropriate;
 The accounting estimates made by management are reasonable;
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 The information presented in the F.S. is relevant, reliable, comparable and understandable;
 The F.S. provide adequate disclosures to enable the intended users to understand the effect of
material transactions and events on the information conveyed in the F.S., and
 The terminology used in the F.S., including the title of each F.S., is appropriate.
3. When the F.S. are prepared in accordance with a fair presentation framework, auditor is required
to evaluate whether the F.S. achieve fair presentation by considering the following:
 The overall presentation, structure and content of the F.S.; and
 Whether the F.S., including the related notes, represent the underlying transactions and events
in a manner that achieves fair presentation.
 Whether the F.S. adequately refer to or describe the applicable FRF.
Question 2
The auditor’s report shall include a section with a heading “Responsibilities of Management for the
Financial Statements.” SA 200 explains the premise, relating to the responsibilities of management and,
where appropriate, those charged with governance, on which an audit in accordance with SAs is
conducted. Explain. [RTP-Nov. 18, MTP-April 19, May 20, April 21]
Answer
Responsibilities of Management for the Financial Statements:
As per SA 700 “Forming an Opinion & Reporting on Financial Statements” the auditor’s report shall
include a section with a heading “Responsibilities of Management for the Financial Statements”.
This section of the auditor’s report shall describe management’s responsibility for:
(a) Preparing the F.S. in accordance with the applicable FRF, and for such internal control as
management determiners is necessary to enable the preparation of F.S. that are free from material
misstatement, whether due to fraud or error; and
(b) Assessing the entity’s ability to continue as a going concern and whether the use of the going
concern basis of accounting is appropriate as well as disclosing, if applicable, matters relating to
going concern. The explanation of management’s responsibility for this assessment shall include a
description of when the use of the going concern basis of accounting is appropriate.
Question 3
When does an auditor issue unqualified opinion and what does it indicate. [May 08, 4 Marks]
Or
The Auditor is fully satisfied with the audit of an entity is respect of its systems and procedures and wants
to issue a report without any hesitation. What type of opinion can be given and give reasoning.
[MTP – April 19, May 20, RTP – May 21]
Or
What is clean audit report? [Nov. 07, 8 Marks]

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Answer
Unqualified opinion:
SA 700 “Forming an Opinion and Reporting on Financial Statements” requires the auditor to express an
unqualified opinion when he concludes that the financial statements give a true and fair view in
accordance with the financial reporting framework used for preparation and presentation of the financial
statements.
An unqualified opinion indicates the following:
1. The financial statements have been prepared using the generally accepted accounting principles and
being constantly followed.
2. The financial statements comply with relevant statutory requirements and regulations.
3. All material matters relevant to proper presentation of the financial statements, subject to statutory
requirement, if applicable, have been adequately disclosed.
Question 4
State any six elements of the Auditor’s Report. [Nov. 12, 6 Marks]
Or
The auditor’s report shall include a section, directly following the Opinion Section, with the heading “Basis
for Opinion”. Explain what is included in this “Basis for Opinion” Section.
[RTP – Nov. 19, May 20, Nov. 20]
Or
The first section of the auditor’s report shall include the auditor’s opinion, and shall have the heading
“Opinion”. The Opinion section of the auditor’s report shall also identify the entity whose financial
statements have been audited. Apart from the above, explain the other relevant points to be included in
opinion section. [RTP – May 20]
Answer
Basis Elements of the Auditor’s Report:
As per SA 700 “Forming an Opinion and Reporting on Financial Statement”, the auditor’s report includes
the following basic elements:
1) Title: Audit Report should have a title clearly stating it is a report of an independent auditor.
2) Addresses: Audit Report is normally addressed to those for whom Audit Report is prepared, i.e.,
shareholders or TCWG.
3) Opinion Section: This section states the auditor’s opinion on true and fair view of financial statements.
Opinion Section of the Auditor’s Report shall also cover the following:
 Identify the entity whose FS have been audited.

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 State that Financial Statements have been audited.

 Identify title of each statement that comprises F.S.
 Refer to the notes, including the summary of significant accounting policies; and
 Specify date of period covered by each Financial Statement.
4) Basis for Opinion Section: The auditor’s report shall include a section, directly following the Opinion
section, with the heading “Basis for Opinion”, that:
(a) States that the audit was conducted in accordance with SA;
(b) Refers to the Section of the auditor’s report that describes the auditor’s responsibilities under the
SAs;
(c) Includes a statement that the auditor is independent of the entity in accordance with the relevant
ethical requirements relating to the audit, and has fulfilled the auditor’s other ethical
responsibilities in accordance with these requirements. The statement shall refer to the Code of
Ethics issued by ICAI.
(d) States whether the auditor believes that the audit evidence the auditor has obtained is sufficient
and appropriate to provide a basis for the auditor’s opinion.
5) Going Concern: Where applicable, the auditor shall report in accordance with SA 570.
6) Key Audit matters: For audits of complete sets of general purpose F.S. of listed entitles, the auditor
shall communicate key audit matters in the auditor’s report in accordance with SA 701.
7) Other Information: Where applicable auditor shall report in accordance with SA 720.
8) Management’s Responsibility for the Financial Statements: Describe responsibility of Management
for preparation of Financial Statements in the manner in which responsibility is described in Terms of
Engagement.
9) Auditor’s Responsibility Section: It shall state the auditor’s objectives to obtain reasonable assurance
about whether the F.S. as a whole are free from material misstatement, whether due to fraud or error;
and to issue an auditor’s report that includes the auditor’s opinion. This section also enumerates the
auditor’s responsibilities as prescribed under different Standards on Auditing.
10) Other Reporting Responsibilities: This section covers reporting over those additional matters on
which auditor is required to report under statutory requirements.
11) Signature of the Auditor: Audit report to be signed in auditor’s personal name. Where firm appointed
as auditor, report signed in personal name & in name of audit firm.
12) Date of Auditor’s Report: It should not be earlier than date on which auditor has obtained Sufficient
Appropriate Audit Evidence on which to base auditor’s opinion.
13) Place of signature: It is ordinarily the city where audit report is signed.
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Question 5
The requirements of SA 700 are aimed at addressing an appropriate balance between the need for
consistency and comparability in auditor reporting globally. Explain. [RTP – May 21]
Answer
Need for consistency and comparability in auditor reporting globally:
 The requirements of SA 700 are aimed at addressing an appropriate balance between the need for
consistency and comparability in auditor reporting globally and the need to increase the value of
auditor reporting by making the information provided in the auditor’s report more relevant to users.
 This SA promotes consistency in the auditor’s report but recognizes the need for flexibility to
accommodate particular circumstances of individual jurisdictions. Consistency in the auditor’s report,
when the audit has been conducted in accordance with SAs, promotes credibility in the global
marketplace by making more readily identifiable those audits that have been conducted in accordance
with globally recognized standards.
 It also helps to promote the user’s understanding and to identify unusual circumstances when they
occur.
Question 6
Communicating Key Audit Matter is not a substitute for disclosure is the Financial Statements rather
Communicating key audit matters in the auditor's report is in the context of the Auditor having formed
an opinion on the financial statements as a whole. Analyse. [RTP - May 18]
Answer
Scope of SA 701:
 This SA deals with the auditor's responsibility to communicate key audit matters in the auditor’s
report.
 Communicating key audit matters in the auditor's report is not:
a) A substitute for disclosures in the F.S. that the applicable FRF requires management to make, or
that are otherwise necessary to achieve fair presentation;
b) A substitute for the auditor expressing a modified opinion when required by the circumstances of
a specific audit engagement in accordance with SA 705;
c) A substitute for reporting in accordance with SA 570 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; or
d) A separate opinion on individual matters.
 SA 701 applies to audits of complete sets of general purpose F.S. of listed entities and circumstances
when the auditor otherwise decides to communicate key audit matters in the auditor's report.

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 SA 701 also applies when the auditor is required by law or regulation to communicate key audit
matters in the auditor's report.
 SA 705 prohibits the auditor from communicating key audit matters when the auditor disclaims an
opinion on the financial statements, unless such reporting is required by law or regulation.
Question 7

Explain clearly the purpose of communicating key audit matters. [RTP – Nov. 18]
Answer
Purpose of communicating 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 significance in the
audit of the F.S. of the current period. Key audit matters are selected from matters communicated with
TCWG.
Various purposes of communicating Key Audit matters as per SA 701 are:
1. To enhance the communicative value of the auditor's report by providing greater transparency about
the audit that was performed.
2. To provide additional information to intended users of the financial statements to assist them in
understanding those matters that, in the auditor's professional judgment, were of most significance in
the audit of the F.S. of the current period.
3. To assist intended users in understanding the entity and areas of significant management judgment in
the audited F.S.
4. To provide a basis to further engage with management and TCWG about certain matters relating to
the entity, the audited F.S. or the audit that was performed.
Question 8

Mr. A was appointed as statutory auditor of X Ltd. While doing audit, Mr. A is required to determine the
key audit matters which are required to be mentioned in the audit report. You are required to advise Mr.
A about the consideration which Mr. A shall take into account while determining key audit matters.
Or
How would an auditor determine Key Audit Matters as per SA – 701, “Communicating Key Audit Matters
to in the Independent Auditor’s Report”? [Nov. 20, 3 Marks]
Or
As an auditor of listed company, what are the matters that the auditor should keep in mind while
determining “Key Audit Matters”. [MTP – Oct. 21, RTP – Nov. 21]

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Answer
Consideration 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 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.
Question 9
State the circumstances in which a matter determined to be a key audit matter is not required to be
communicated in the Auditor’s Report.
Answer
Circumstances in which key audit matters not required to be communicated:
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 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 describe each key audit matter in the auditor’s report unless:
1. Law or regulation precludes public disclosure about the matter; or
2. In extremely rare circumstances, the auditor determines that the matter should not be communicated
in the auditor’s report because the adverse consequences of doing so would reasonably be expected to
outweigh the public interest benefits of such communication. This shall not apply if the entity has
publicly disclosed information about the matter.
Question 10
What is a qualified auditor report? Under what circumstances a qualified report is issued.
[May 07, 8 Marks]

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Or
Explain how it is different from qualified report affecting Auditor’s opinion. [Nov. 07, 8 Marks]
Answer
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.
SA 705 “Modification to the Opinion in the Independent Auditor’s Report” requires the auditor to add
one more para named as “Basis for Qualified Opinion Para” in the audit report immediately before the
opinion para stating therein the reasons for the qualified opinion.
The opinion para in case of qualified opinion will be worded as follow:
“Except for the effects of the matter(s) described in the Basis for Qualified Opinion paragraph, the Financial
Statements gives a true and fair view in all material respects in accordance with the applicable FRF”.
Question 11
Write short note on: Disclaimer of opinion. [Nov. 08, 5 Marks]
OR
State briefly the circumstances when an auditor issues a disclaimer of opinion. [Nov. 10, 4 Marks]
Answer
Disclaimer of Opinion:
SA 705 “Modification to the Opinion in the Independent Auditor’s Report” requires the auditor to 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.
If auditor disclaims the opinion auditor is required to add a para in the audit report “Basis for Disclaimer
of Opinion Para” describing therein the auditor’s inability to collect the sufficient appropriate audit
evidence.
Auditor is also required to amend the description of auditor’s responsibility para as “Our responsibility is
to express an opinion on the financial statements based on conducting the audit in accordance with
Standards on Auditing issued by the ICAI. Because of the matter(s) described in the Basis for Disclaimer
of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to
provide a basis for an audit opinion”.

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Question 12
Differentiate between Qualified Report and Adverse Report. [May 10, 5 Marks]
Answer
Distinction between Qualified Report and Adverse Report:
Qualified report Adverse report
Circumstances in A qualified opinion should be An adverse opinion should be expressed
which it is issued expressed when the auditor concludes when the effect of a disagreement is so
that an unqualified opinion cannot be material and pervasive to the financial
expressed but that the effect of any statements that the auditor concludes
disagreement with management is not that a qualification of the report is not
so material and pervasive as to require adequate, to disclose the misleading or
an adverse opinion, or limitation on incomplete nature of the financial
scope is not so material and pervasive statements.
as to require a disclaimer of opinion.
Reporting In qualified report, the auditor’s In adverse report, the auditor states that
reservation is generally written as “the financial statements do not present
“subject to or except for, we report that a true and fair view of the state of affairs
the Balance Sheet shows a true and fair and working results”.
view”.

Question 13
State the circumstances which could lead to any of the following in an Auditor’s Report:
(i) A modification of opinion
(ii) Disclaimer of opinion
(iii) Adverse opinion
(iv) Qualified opinion [May 13, 8 Marks]
Or
Discuss the following: The Auditor’s Report is considered to be modified under certain circumstances.
[May 15, 5 Marks]
Answer
Circumstances in which a modified opinion may be issued:
As per SA 705 “Modifications to the Opinion in the Independent Auditor’s Report” a modified opinion
may be expressed in the following circumstances:
(a) The auditor concludes that, based on the audit evidence obtained, the F.S. as a whole are not free
from material misstatement, may be due to following reasons.

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 Inappropriate method of selection of Accounting Policies;

 Accounting policies are not consistent with applicable FRF;
 Disclosures as required by FRF are not given.
(b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement, may be due to following reasons:
 Limitations imposed by management.
 Circumstances beyond entity control (For Ex.: Accounting records destroyed by fire)
 Circumstances related to Nature and Timing of auditor’s work.
Types of Modified Opinion
(a) Qualified opinion: It is issued under following circumstances:
 Financial statements are materially misstated which in the auditor’s judgments are not
pervasive.
 Auditor is unable to obtain Sufficient and appropriate audit evidence which in the auditor
judgment are not pervasive.
(b) Adverse opinion: It is issued when financial statements are materially misstated which in the
auditor’s judgments is having pervasive effect.
(c) Disclaimer of opinion: It is issued when auditor is unable to obtain Sufficient and appropriate audit
evidence which in the auditor judgment are having pervasive effect.
Question 14
Write short note on: Qualified Opinion. [Nov. 15, 4 Marks]
Answer
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.
SA 705 "Modification to the Opinion in the Independent Auditor's Report" requires the auditor to add one
more para named as "Basis for Qualified Opinion Para" in the audit report immediately before the opinion
para stating therein the reasons for the qualified opinion.
The opinion para in case of qualified opinion will be worded as follow:
"Except for the effects of the matter(s) described in the Basis for Qualified Opinion paragraph, the financial
statements gives a true and fair view in all material respects in accordance with the applicable FRF".

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Question 15
XYZ Ltd. which is in the business of trading of automobile components is following Cash Basis of
Accounting for sale of spare parts. As Statutory Auditor of XYZ Ltd. explain the reporting requirements,
manner of qualification and disclosure, if any, to be made in the auditor’s report in line with AS-1
‘Disclosure of Accounting Policies’. [Jan. 21, 3 Marks]
Answer
Reporting requirements, Manner of qualification and disclosure to be made in the auditor’s report in line
with AS-1, “Disclosure of Accounting Policies”:
 In the case of a company members should quality their audit reports in case:
a) Accounting policies required to be disclosed under Schedule III or any other provisions of the
Companies Act, 2013 have not been disclosed, or
b) Accounts have not been prepared on accrual basis, or
c) The fundamental accounting assumption of going concern has not been followed and this fact has
not been disclosed in the financial statements, or
d) Proper disclosures regarding changes in the accounting policies have not been made.
 Where a company has been given a specific exemption regarding any of the matters stated above but
fact of such exemption has not been adequately disclosed in the accounts, the member should mention
the fact of exemption in his audit report without necessarily making it a matter of audit qualification.
 In view of the above, the auditor will have to consider different circumstances whether the audit report
has to be qualified or only disclosures have to be given.
 In making a qualification/disclosure in the audit report, the auditor should consider the materiality of
the relevant item. Thus, the auditor need not make qualification/disclosure in respect of items which,
in his judgment, are not material.
 A disclosure, which is not a subject matter of audit qualification, should be made in the auditor’s report
in a manner that it is clear to the reader that the disclosure does not constitute an audit qualification.
The paragraph containing the auditor's opinion on true and fair view should not include a reference
to the paragraph containing the aforesaid disclosure.
Question 16
What an auditor should state in “Basis for opinion” section of auditor's report and when the auditor
modifies the opinion on the financial statements, what amendments he should make in this section?
[Jan. 21, 4 Marks]
Answer
Basis for Opinion Section of Auditor's Report:
An auditor should state in “Basis for Opinion” section of Auditor's Report as under:

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Basis for Opinion:

The auditor's report shall include a section, directly following the Opinion section, with the heading “Basis
for Opinion”, that
(i) States that the audit was conducted in accordance with Standards on Auditing;
(ii) Refers to the section of the auditor's report that describes the auditor's responsibilities under the SAs:
(iii) Includes a statement that the auditor is independent of the entity in accordance with the relevant
ethical requirements relating to the audit and has fulfilled the auditor's other ethical responsibilities
in accordance with these requirements.
(iv) States whether the auditor believes that the audit evidence the auditor has obtained is sufficient and
appropriate to provide a basis for the auditor's opinion.
Amendments an Auditor should make:
When the auditor modifies the opinion on the financial statements, the auditor shall, in addition to the
specific elements required by SA 700 (Revised):
(i) Amend the heading “Basis for Opinion” required by para of SA 700 (Revised) to “Basis for Qualified
Opinion”, “Basis for Adverse Opinion”, or “Basis for Disclaimer of Opinion”, as appropriate; and
(ii) Within this section, include a description of the matter giving rise to the modification.
Question 17
CA Guru is in the process of preparing the final audit report of JPA Private Limited and would like to
disclaim his opinion on the financial statements due to an inability to obtain sufficient appropriate audit
evidence. How CA Guru shall amend the description of the auditor's responsibilities as required by SA
700 (Revised)? [July 21, 4 Marks]
Answer
Amending the description of the auditor's responsibilities in case of disclaimer of opinion:
When the auditor disclaims an opinion on the financial statements due to an inability to obtain sufficient
appropriate audit evidence, the auditor shall amend the description of the auditor's responsibilities
required by SA 700 (Revised) to include only the following:
a) A statement that the auditor's responsibility is to conduct an audit of the entity's financial statements
in accordance with Standards on Auditing and to issue an auditor's report;
b) A statement that, however, because of the matter(s) described in the Basis for Disclaimer of Opinion
section, the auditor was not able to obtain sufficient appropriate audit evidence to provide a basis for
an audit opinion on the financial statements; and
c) The statement about auditor independence and other ethical responsibilities required by SA 700.

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Question 18

Delightful Ltd. is a company engaged in the production of smiley balls. During the FY 2021-22 the
company transferred its accounts to computerized system (SAP) from manual system of accounts. Since
the employees of the company were not well versed with the SAP system, there were many errors in the
accounting during the transition period. As such the statutory auditors of the company were not able to
extract correct data and reports from the system. Such data was not available manually also. Further, the
employees and the management of the company were not supportive in providing the requisite
information to the audit team. The auditor believes that the possible effects on the financial statements of
undetected misstatements could be both material and pervasive. Explain the kind of audit report that the
statutory auditor of the company should issue in this case. [RTP – Nov. 21]
Answer:
Modifications in the Audit Report:
 The auditor shall disclaim an opinion when the auditor is unable to obtain 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 in the financial statements.

 In the present case Delightful Ltd., the statutory auditor of the company is unable to extract correct
data and reports from the SAP system for conduct of audit. Also, such data and reports are not
available manually. Moreover, the auditor believes that the possible effects on the financial statements
of undetected misstatements could be both material and pervasive.
Conclusion: Statutory auditor should give a disclaimer of opinion.
Question 19

What is Emphasis of matter Paragraph? State the circumstances when EOM para can be included in
Auditor's report.
Or
Mention the examples of circumstances where the auditor may consider it necessary to include an
Emphasis of Matter paragraph. [MTP – Nov. 21]

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Answer
Emphasis of Matter Paragraph:
 SA 706 “Emphasis of matter Paragraph and Other Paragraphs in the Independent Auditor's
Report” defines Emphasis of Matter paragraph as Para included in Auditor's Report that refers to a
matter appropriately presented/disclosed in financial statement that in the auditor's judgment is of
such importance that it is fundamental to users' understanding of financial statements.
 EOM paragraph is not a substitute for need for expression of qualified opinion, adverse opinion or
Disclaimer of opinion or the disclosures to be made by management in financial statements as required
by applicable FRF.
Circumstances when EOM Para can be included in Auditor's Report:
 An uncertainty relating to the future outcome of an exceptional litigation or regulatory action.
 Early application (where permitted) of a new accounting standard that has a pervasive effect
on the financial statements in advance of its effective date.
 A major catastrophe that has had, or continues to have, a significant effect on the entity's financial
position.
Question 20
What is Modified Reports? Discuss disclosure pattern when the auditor includes an Emphasis of
Matter Paragraph in the Auditor's Report. [May 14, 5 Marks]
Answer
Modified Reports: Refer Question 13.
Disclosure pattern of EOM paragraph:
As per SA 706 "Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor's Report", when the auditor includes an 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.
Question 21
What is an Emphasis of Matter paragraph, when it is used and manner of its use in an audit report?
[May 17, 4 Marks]
Or
Define emphasis of matter paragraph and how it should be disclosed in the Independent auditor’s report
[May 18, 5 Marks]
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Or
Define Emphasis of Matter paragraph. When the auditor shall include an Emphasis of Matter paragraph
in the auditor’s report? Also explain how the auditor would include an Emphasis of Matter in the auditor’s
report? [RTP – May 19]
Answer
Emphasis of Matter Paragraph: Refer Answer of Question 19.
Disclosure of Emphasis of Matter Paragraph in the Auditor’s Report: Refer Answer of Question 20.
Circumstances when EOM Para can be included in Auditor’s Report: Refer Answer of Question 19.
Question 22
State clearly the objective of the Auditor as per SA 706. Also define emphasis of matter paragraph and
other matter paragraph. [MTP – Oct. 20]
Answer
Objectives of the Auditor as per SA 706
The objective of the auditor, having formed an opinion on the financial statements, is to draw users’
attention, when in the auditor's judgment it is necessary to do so, by way of clear additional
communication in the auditor's report, to
a) A matter, although appropriately presented or disclosed in the financial statements, that is of such
importance that it is fundamental to users’ understanding of the financial statement; or
b) As appropriate, any other matter that is relevant to users’ understanding of the audit, the auditor's
responsibilities or the auditor's report.
Definition of EOM and OM Para:
SA 706 defines the emphasis of matter paragraph as Para included in Auditor's Report that refers to a
matter appropriately presented/disclosed in financial statement that in the auditor's judgment is of such
importance that it is fundamental to users understanding of financial statements.
SA 706 defines the Other Matter paragraph as a paragraph included in the auditor's report that refers to a
matter other than those presented or disclosed in the financial statements that, in the auditor’s judgment,
is relevant to users’ understanding of the audit, the auditor's responsibilities or the auditor's report.
Question 23
The nature of the comparative information that is presented in an entity's financial statements depends on
the requirements of the applicable financial reporting framework. There are two different broad
approaches to the auditor's reporting responsibilities in respect of such comparative information:
corresponding figures and comparative financial statements. Explain clearly stating the essential audit
reporting differences between the approaches. Also define comparative information and audit procedures
regarding comparative information. [RTP - May 19]

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Answer
Meaning of Comparative Information:
 SA 710 “Comparative Information-Corresponding Figures and Comparative Financial Statements”
defines the term comparative information as the amounts and disclosures included in the financial
statements in respect of one or more prior periods in accordance with the applicable FRE

 Comparative information where amounts and other disclosures for the prior period, are included as
an integral part of current period financial statements and are intended to be read only in relation to
the amounts and other disclosures relating to the current period is known as Corresponding Figures.

 Comparative information where amounts and other disclosures for the prior period, are included for
comparison with the financial statements of the current period but, if audited, are referred to in the
auditor's opinion is known as Comparative financial statements.
Essential reporting difference:
The essential audit reporting differences between the approaches are:
a) For corresponding figures, the auditor's opinion on the financial statements refers to the current period
only; whereas
b) For comparative financial statements, the auditor’s opinion refers to each period for which financial
statements are presented.
Audit procedures regarding comparative information: Refer Answer of Question 20.
Question 24
What are the auditor's responsibilities in respect of corresponding figures?
Answer
Auditor's Procedures in respect of examination of corresponding figures:
1. SA 710 “Comparative Information - Corresponding Figure and Comparative Financial Information”
deals with the auditor's responsibilities regarding comparative information in an audit of financial
statements.
2. The term Corresponding Figures refers to Comparative information where amounts and other
disclosures for the prior period, are included as an integral part of current period F.S., and are
intended to be read only in relation to the amounts and other disclosures relating to the current
period.
3. To examine the corresponding figures, auditor is required to perform the following procedures:
a) Determine whether F.S. include Comparative information required by FRF, & whether such
information is classified appropriately.
b) Evaluate the following:

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 Whether the comparative information agrees with the amounts and other disclosures
presented in the prior period; and
 Whether the accounting policies reflected in the comparative information are consistent with
those applied in the current period.
 Whether, changes in accounting policies, if any, have been properly accounted for and
adequately presented and disclosed.
c) In case, auditor has doubt over existence of Possible Material Misstatement, then auditor is
required to perform additional audit procedures to obtain sufficient appropriate audit evidence
to determine existence of material misstatement.
d) Obtain Written Representation from management to re-affirm that the Written Representation
it previously made with respect to the prior period remain appropriate.
Question 25
The extent of audit procedures performed on corresponding figures is less compared to audit of
current period figure’s reporting. Justify the statement with regard to auditor's duties for reporting of
comparatives under SA 710. [May 10, 5 Marks]
Answer
Auditor's responsibilities w.r.t. Corresponding figures:
 SA 710 “Comparative Information - Corresponding Figure and Comparative Financial Information”
deals with the auditor's responsibilities regarding comparative information in an audit of financial
statements.
 The term Corresponding Figures refers to Comparative information where amounts and other
disclosures for the prior period, are included as an integral part of current period F.S., and are intended
to be read only in relation to the amounts and other disclosures relating to the current period.
 When corresponding figures are presented, the auditor's opinion shall not refer to the
corresponding figures because the auditor's opinion is on the current period financial statements as a
whole including the corresponding figures.
 When the auditor's report on the prior period, as previously issued, included a modified opinion and
the matter which gave rise to the modified opinion is resolved and properly accounted for or disclosed
in the financial statements in accordance with the applicable FRF, the auditor's opinion on the current
period need not refer to the previous modification.
 If the auditor's report on the prior period, as previously issued, included a modified opinion
and the matter which gave rise to the modification is unresolved, the auditor shall modify the auditor's
opinion on the current period's financial statements.
 In the Basis for Modification paragraph in the auditor's report, the auditor shall either:

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(i) Refer to both the current period's figures and the corresponding figures in the description of the
matter giving rise to the modification when the effects or possible effects of the matter on the
current period's figures are material; or
(ii) In other cases, explain that the audit opinion has been modified because of the effects or possible
effects of the unresolved matter on the comparability of the current period's figures and the
corresponding figures.
Question 26
When corresponding figures are presented, the auditor's opinion shall not refer to the corresponding
figures except in some circumstances. Explain those circumstances. [MTP - Aug 18]
Or
When corresponding figures are presented, the auditors’ opinion shall not refer to the corresponding
figures. Discuss the exceptions of the above statement when the prior period financial statements when
are audited. [Nov. 19, 4 Marks]
Answer
Audit reporting on Corresponding Figures:
When corresponding figures are presented, the auditor's opinion shall not refer to the corresponding
figures except in the following circumstances.
1. If the auditor's report on the prior period, as previously issued, included a qualified opinion, a
disclaimer of opinion, or an adverse opinion and the matter which gave rise to the modification is
unresolved, the auditor shall modify the auditor's opinion on the current period's financial statements.
In the Basis for Modification paragraph in the auditor's report, the auditor shall either.
a) Refer to both the current period’s figures and the corresponding figures in the description of the
matter giving rise to the modification when the effects or possible effects of the matter on the
current period's figures are material; or
b) In other cases, explain that the audit opinion has been modified because of the effects or possible
effects of the unresolved matter on the comparability of the current period’s figures and the
corresponding figures.
2. If the auditor obtains audit evidence that a material misstatement exists in the prior period financial
statements on which an unmodified opinion has been previously issued, the auditor shall verify
whether the misstatement has been dealt with as required under the applicable financial reporting
framework and, if that is not the case, the auditor shall express a qualified opinion or an adverse
opinion in the auditor's report on the current period financial statements, modified.

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3. Prior Period Financial Statements Not Audited: If the prior period financial statements were not
audited, the auditor shall state in an Other Matter paragraph in the auditor's report that the
corresponding figures are unaudited. Such a statement does not, however, relieve the auditor of the
requirement to obtain sufficient appropriate audit evidence that the opening balances.

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 CHAPTER 12

AUDIT OF BANKS
QUESTIONS WITH ANSWERS
Question 1
The functioning of banking industry in India is regulated by the Reserve Bank of India which acts as the
Central Bank of our country. Explain.
Answer
Regulation of Banking Industry:
In India, banking industry is regulated by the Reserve Bank of India (RBI) known as the Central Bank.
Major functions and responsibilities of RBI are:
 Development and supervision of the banks and non-banking financial institutions;
 Determining, the monetary and credit policies;
 Issuance and regulation of currency;
 Acting as banker to the central and state governments, commercial and other types of banks including
term-lending institutions;
 To regulate the activities of commercial and other banks.
Question 2
Write short note on: Principal Enactments governing Bank Audit.
Answer
Principal Enactments governing Bank Audit:
(a) Banking Regulation Act, 1949;
(b) Reserve Bank of India Act, 1934;
(c) Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970;
(d) State Bank of India Act, 1955;
(e) State Bank of India (Subsidiary Banks) Act, 1959;
(f) Regional Rural Banks Act, 1976;
(g) Companies Act, 2013;
(h) Cooperative Societies Act, 1912 or the relevant State Cooperative Societies Acts;
(i) Information Technology Act, 2000;
(j) Prevention of Money Laundering Act, 2002;
(k) Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest 2002;
(l) Credit Information Companies Regulation Act, 2005; and
(m) Payment and Settlement Systems Act, 2007.
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Question 3
There are different types of banks prevailing in India. Explain giving examples of such banks.
[MTP - March 21]
Answer
Different types of banking institutions prevailing in India:
1. Commercial banks are the widest spread banking institutions in India, that provide a number of
products and services to general public and other segments of economy. Two of its main functions are:
a) accepting deposits and
b) granting advances.
2. Regional Rural Banks known as RRBs are the banks that have been set up in rural areas in different
states of the country to cater to the basic banking and financial needs of the rural communities.
Examples are Punjab Gramin Bank, Tripura Gramin Bank, Allahabad UP Gramm Bank, Andhra
Pradesh Grameena Vikas Bank, etc.
3. Co-operative Banks function like Commercial Banks only but are set up on the basis of Cooperative
Principles and registered under the Cooperative Societies Act of the respective state or the Multistate
Co-operative Societies Act and usually cater to the needs of the agricultural and rural sectors. Examples
are The Gujarat State Co-operative Bank Ltd., Chhattisgarh Rajya Sahakari Bank Mayardit, etc.
4. Payments Banks are a new type of banks which have been recently introduced by RBI. They are
allowed to accept restricted deposits but they cannot issue loans and credit cards. However, customers
can open Current & Savings accounts and also avail the facility of ATM cum Debit cards, Internet-
banking & Mobile banking. Examples are Airtel Payments Bank, India Post Payments Bank, Paytm
Payments Bank, etc.
5. Development Banks had been conceptualized to provide funds for infrastructural facilities important
for the economic growth of the country. Examples are Industrial Finance Corporation of India (IFCI),
Industrial Development Bank of India (IDBI), Small Industries Development Bank of India (SIDBI),
etc.
6. Small Finance Banks have been set up by RBI to make available basic financial and banking facilities
to the unserved and unorganised sectors like small marginal farmers, small & micro business units,
etc. Examples are Equitas Small Finance Bank, AU Small Finance Bank, etc.
Question 4
In the case of a nationalized bank, the auditor is required to make a report to the Central Government. The
report of auditors of State Bank of India is also to be made to the Central Government and is almost
identical to the auditor's report in the case of a nationalized bank. Explain what would the auditor state in
his report. [MTP - Oct. 18]

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Answer
Auditor's Report in case of Nationalized Banks:
In the case of a nationalized bank, the auditor is required to make a report to the Central Government in
which the auditor should state the following:
1. Whether, in the auditor's opinion, the balance sheet is a full and fair balance sheet containing all the
necessary particulars and is properly drawn up so as to exhibit a true and fair view of the affairs of the
bank.
2. In case the auditor had called for any explanation or information, whether it has been given and
whether it is satisfactory.
3. Whether or not the transactions of the bank, which have come to the auditor's notice, have been within
the powers of that bank.
4. Whether or not the returns received from the offices and branches of the bank have been found
adequate for the purpose of audit.
5. Whether the profit and loss account show a true balance of profit or loss for the period covered by such
account.
6. Any other matter which the auditor considers should be brought to the notice of the Central
Government.
Question 5
Write a short note on Long Form Audit Report.
Answer
Long Form Audit Report:
 The long form Audit Report has to be furnished by the auditor of a bank in addition to the audit report
as per the statutory requirement.
 The matters which the banks require their auditor to deal with in the form of Long Form Audit Report
have been specified by the RBI.
 The LFAR is to be submitted before 30th June every year. To ensure timely submission of LFAR proper
planning for completion of the LFAR is required. While the format of LFAR does not require an
executive summary to be given, members may consider providing the same to bring out the key
observations from the whole document.
Question 6
“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
smells 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”. Analyse and
explain the above RBI Circular regarding liability of accounting and auditing profession. [MTP - Aug. 18]

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Answer
Reporting of Fraud to RBI:
 Circular issued by RBI regarding liability of accounting and auditing profession, provides that “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”.
 This requirement is applicable to all scheduled commercial banks excluding Regional Rural Banks.
Auditor is not expected to look into each and every transaction but to evaluate the system as a whole.
 While reporting such kind of matters as stated in the circular, auditor need to consider the provisions
of SA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements”.
 SA 240, “The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements further
expounds the concept and 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.
Question 7
Management develops controls and uses performance indicators to aid in managing key business and
financial risks. Explain in this reference the requirements of an effective risk management system in a
bank.
Or
Write short note on: Requirements of a Risk Management Process/System in a bank.
Or
Mr. Piyush, the Bank Manager develops controls to aid in managing key business and financial risks.
Discuss the various requirements for an effective risk management system in a bank.
[May 19, 4 Marks]
Answer
Understanding the Risk Management Process:
An effective risk management system in a bank generally requires the following:
a) Involvement of TCWG: Risk Management policies should be approved by TCWG. While approving
the policies, TCWG should ensure that the policies should be consistent with the bank’s business
objectives and strategies, capital strength, management expertise, regulatory requirements and the
types and amounts of risk it considers as acceptable.
b) Identification, measurement & monitoring of risks: Risks that may significantly affect the
achievement of bank's goals and objectives should be identified, measured and monitored against pre-
approved limits and criteria.

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c) Control activities: Banks must have appropriate controls to manage its risks, including the following:
 Effective segregation of duties,
 Verification and approval of transactions,
 Setting of limits, and
 Reporting and approval of exception.
d) Monitoring activities: Independent risk management unit should be set up which regularly assess the
risk management models, methodologies and assumptions used to measure and manage risk.
e) Reliable information systems: Banks must have a reliable information system that provide adequate
financial, operational and compliance information on a timely and consistent basis to management and
TCWG.
Question 8
“The engagement team should hold discussions to gain better understanding of the bank and its
environment, including internal control, and also to assess the potential for material misstatements of the
financial statements. All these discussions should be appropriately documented for future reference”.
Explain.
Or
The engagement team of FRN & Co. - Auditors of Bank of Baroda held discussions to gain better
understanding of the bank and its environment, including internal control, and also to assess the potential
for material misstatements of the financial statements.
The discussion between the members of the engagement team and the audit engagement partner are being
done on the susceptibility of the bank’s financial statements to material misstatements. These discussions
are ordinarily done at the planning stage of an audit.
Analyse and Advise the matters to be discussed in the engagement team discussion.
[MTP - March 18, March 19]
Or
You are appointed as an auditor of Banking Co., and hold discussions with engagement team. List out
matters which you would discuss at planning stage of an audit to gain better understanding of the bank
and its environment. [May 19, 4 Marks]
Or
The discussion between members of the engagement team members and the audit engagement partner
should be done on the susceptibility of the bank’s financial statements to material misstatements. Briefly
discuss the points ordinarily included in discussion of the engagement team.
[Nov. 19, 3 Marks]
Or

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Discuss the advantages of engagement team discussion done at the planning stage of the bank audit.
[July 21, 3 Marks]
Or
The engagement team discussion ordinarily includes a discussion of the matters such as - Errors that may
be more likely to occur; Errors which have been identified in prior years; Method by which fraud might
be perpetrated by bank personnel or others within particular account balances and/or disclosures; etc.
In the above context, explain the advantages of such a discussion. [RTP – Nov. 21]
Answer
Engagement Team Discussions:
Engagement team should hold discussions to gain better understanding of banks and its environment,
including internal control, and also to assess the potential for material misstatements of the financial
statements. All these discussions should be appropriately documented for future reference. The discussion
should be done on the susceptibility of the bank’s financial statements to material misstatements. These
discussions are ordinarily done at the planning stage of an audit.
Benefits of discussion:
Opportunity for team members to share their insights based on their knowledge of the bank and its
environment.
Opportunity for team members to exchange information about the bank's business risks.
To make an understanding amongst the team members about effect of the results of the risk assessment
procedures on other aspects of the audit, including decisions about the NTE of further audit procedures.
Matters to be discussed:
a) Errors that may be more likely to occur;
b) Errors which have been identified in prior years;
c) Method by which fraud might be perpetrated by bank personnel or others within particular account
balances and/or disclosures;
d) Audit responses to Engagement Risk, Pervasive Risks, and Specific Risks;
e) Need to maintain professional skepticism throughout the audit engagement;
f) Need to alert for information or other conditions that indicates that a material misstatement may have
occurred.
Question 9
As an Auditor of XYZ Bank Limited, how would you assess the Risk of Fraud including Money
Laundering in line with SA 240? [Jan. 21, 3 Marks]

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Answer
Assessing Risk of Fraud:
 As an Auditor of XYZ Bank Limited, risk of fraud including money laundering would be assessed as
explained hereunder which is in line with SA 240.
 As per SA 240 “The Auditor's Responsibilities Relating to Fraud in an Audit of Financial Statements”,
the auditor’s objective is to identify and assess the risks of material misstatement in the financial
statements due to fraud, to obtain sufficient appropriate audit evidence on those identified
misstatements and to respond appropriately.
 The attitude of professional skepticism should be maintained by the auditor so as to recognise the
possibility of misstatements due to fraud.
 The RBI has framed specific guidelines that deal with prevention of money laundering and “Know
Your Customer (KYC)” norms. The RBI has from time to time issued guidelines (“Know Your
Customer Guidelines - Anti Money Laundering Standards”), requiring banks to establish policies,
procedures and controls to deter and to recognise and report money laundering activities.
Question 10
Your firm of auditors, SRG & Co., has been appointed as Statutory Central Auditors of Reliable Bank.
Explain the reporting requirements of the Statutory Central Auditors (SCAs) in addition to their main
audit report. [RTP - May 21]
Answer
Reporting requirements of the Statutory Central Auditors (SCAs) in addition to their main audit report:
Presently, the Statutory Central Auditors (SCAs) have to furnish the following reports in addition to their
main audit report:
a) Report on adequacy and operating effectiveness of Internal Controls over Financial Reporting in case
of banks which are registered as companies under the Companies Act in terms of Section 143(3)(i) of
the Companies Act, 2013 which is normally to be given as an Annexure to the main audit report as per
the Guidance Note on Audit of Internal Financial Controls over Financial Reporting issued by the ICAI.
b) Long Form Audit Report. (LFAR)
c) Report on compliance with SLR requirements.
d) Report on whether the treasury operations of the bank have been conducted in accordance with the
instructions issued by the RBI from time to time.
e) Report on whether the income recognition, asset classification and provisioning have been made as
per the guidelines issued by the RBI from time to time.
f) Report on whether any serious irregularity was noticed in the working of the bank which requires
immediate attention.

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g) Report on status of the compliance by the bank with regard to the implementation of recommendations
of the Ghosh Committee relating to frauds and malpractices and of the recommendations of Jilani
Committee on internal control and inspection/credit system.
h) Report on instances of adverse credit-deposit ratio in the rural areas.
Question 11
An asset becomes NPA when it ceases to generate income for the Bank. Explain the criteria for
classification of advance as Non-Performing Advance.
Answer
Criteria for classification of advance as NPA:
An Advance will be classified as NPA if:
a) It ceases to generate income for a bank.
b) Interest and/or instalment of principal in respect of such an advance have remain overdue or out of
order for a specified period of time.
 Overdue: An amount is said to be ‘Overdue’, if it is not paid on the due date fixed by the Bank.
 Out of Order: An account should be treated as ‘Out-of-order’ if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power.
Or
If there are no credits continuously for 90 days as on the balance sheet date or the credits are not enough
to cover the interest debited during the same period.
NPA classification w.r.t. specified advances
 Term Loans: Term loan will become NPA if interest and/or Instalment of principal has remained
overdue for a period exceeding 90 days.
 CC/OD: CC/OD account will become NPA if the account has remained out-of-order for a period
exceeding 90 days.
 Bills Purchased & Discounted: Bills purchased & Discounted will become NPA when bill remains
overdue & unpaid for a period exceeding 90 days.
Question 12

Shy & Co. had been allotted the branch audit of a nationalized bank for the year ended 31st March 2022. In
the audit planning, the partner of Shy & Co. observed that the allotted branches are predominantly based
in rural areas and major portion of the advances were for agricultural purpose. He needs your assistance
in incorporating the criteria prescribed for determination of NPA norms in respect of agricultural advance,
in audit plan.

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Answer
Criteria for determination of NPA norms in respect of agricultural advances:
An agricultural advance is classified as NPA is interest and/or instalment of principal is overdue for:
 Two crop seasons, in case loans granted for Short Duration crops,
 One crop season, in case loans granted for Long Duration crops (i.e. more than 1 year)
For this purpose, the following points are to be considered:
1. Long duration crops mean the crops with crop season longer than one year.
2. Short Duration Crops means the crops, other than long duration crops.
3. Crop season means the period up to harvesting of the crops, as determined by the State Level Bankers’
Committee in each State.
4. The above norms should be made applicable to all direct agricultural advances as listed in the Master
Circular on Lending to Priority Sectors. In respect of all other agricultural loans, identification of NPAs
would be done on the same basis as non-agricultural advances, which, at present, is the 90 days
delinquency norm.
5. If natural calamities impair the repaying capacity of agricultural borrowers, banks may decide on their
own as a relief measure conversion of the short-term production loan into a term loan or
reschedulement of the repayment period; and the sanctioning of fresh short-term loan, subject to
guidelines issued by RBI.
Question 13
“Ramjilal & Co. had been allotted the branch audit of a nationalized bank for the year ended 31 st March,
2022. In the audit planning, the partner of Ramjilal & Co., observed that the allotted branches are
predominantly based in rural areas and major portion of the advances were for agricultural purpose.”
Now he needs your assistance on the following points so as to incorporate them in the audit plan:
For determine of NPA norms for agricultural advances
For accounts where there is erosion in the value of security/frauds committed by the borrowers.
[Nov. 18, 5 Marks]
Answer
(i) NPA Norms for agricultural advances:
An agricultural advance is classified as NPA is interest and/or instalment of principal is overdue
for:
 Two crop seasons, in case loans granted for Short Duration crops,
 One crop season, in case loans granted for Long Duration crops (i.e. more than 1 year)
For this purpose, the following points are to be considered:
1. Long duration crops mean the crops with crop season longer than one year.
2. Short Duration Crops means the crops, other than long duration crops.

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3. Crop season means the period up to harvesting of the crops, as determined by the State Level
Bankers’ Committee in each State.
(ii) NPA Norms where there is erosion in the value of security/frauds committed by the borrowers:
In case there arise erosion in the value of security or any fraud is committed by Borrowers, banks can
directly classify these accounts as Doubtful Assets or Loss Assets, irrespective of the period for which
the account has remained NPA.
(i) Erosion in the value of securities by more than 50% of the value assessed by the bank or accepted
by RBI inspection team at the time of last inspection, as the case may be, would be considered as
“significant”, requiring the asset to be classified as doubtful straightaway and provided for
adequately.
(ii) The realisable value of security as assessed by bank/approved valuers/RBI is less than 10% of
the outstanding in the borrowal accounts, the existence of the security should be ignored and the
asset should be classified as loss asset. In such cases the asset should either be written off or fully
provided for.
Question 14
State the internal controls in the area of Loans and Advances of Banks.
Or
“The Auditor should examine the efficiency of various internal controls over advances, to determine the
nature, timing and extent of his substantive procedures.” Discuss briefly.
[Nov. 18, 5 Marks, MTP – April 19]
Or
The auditor should examine the efficacy of various internal controls over advances in case of Banks to
determine the nature, timing and extent of his substantive procedures. Explain what is included in the
internal controls over advances. [RTP - May 19]
Answer
Aspects of Internal Control in the area of loans and advances:
To determine the nature, timing and extent of substantive procedures over advances, auditor should
examine the efficacy of various internal controls over advances.
1. Advances should be made only after evaluating creditworthiness of the borrowers and obtaining
sanction from the proper authorities of the bank.
2. All the loan documents like promissory notes, letters of hypothecation, guarantee letter, etc. should be
executed by the parties before advances are made.
3. While determining the loan amount to be sanctioned, sufficient margin should be kept against
securities taken so as to cover any decline in the value thereof and also to comply with RBI directives.

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4. Securities should be received and returned by responsible officer and should be kept in the joint
custody of atleast two responsible officers.
5. Securities requiring registration should be registered in the name of the bank.
6. In the case of physical possession of goods as security, the goods should be test checked at the time of
receipts. In respect of hypothecated goods not in possession of the bank, surprise checks should be
made.
7. Personal inquiries should be made so as to determine market value of goods.
8. For any increase/decrease in the value of securities, drawing power should be adjusted. All the
accounts should be kept within both the drawing power and the sanctioned limit at all times.
9. All irregular accounts should be brought to the notice of the H.O. regularly.
10. The operation in each advance should be reviewed at least once every year.
11. There should exist a proper system for post disbursement supervision and follow-up.
12. Classification of advances should be made as per RBI Guidelines.
13. Ensure that the funds disbursed should be utilized only for the purpose for which advances has been
granted.
Question 15
Your firm of Chartered Accountants has been appointed as the Auditor of two branches of OBC which are
located in the Industrial area. Considering that the location of the branches of bank in industrial area, these
would be advances oriented branches and audit of advances would require the major attention of the
auditors. Advise how would you proceed to obtain evidence in respect of audit of advances.
[RTP - May 18, MTP - Oct. 19]
Or
The auditor can obtain sufficient appropriate audit evidence about advances by study and evaluation of
internal controls relating to advances. Explain in the context of Audit of Banks. [RTP - Nov. 19]
Answer
Collection of Evidences in respect of Advances:
Evidences in respect of advances may be collected by performing compliance and substantive procedures.
Compliance Procedures:
(a) Examine the following:
 Loan documentation;
 Validity of the recorded amounts;
 Existence, enforceability and valuation of the security;
(b) Ensure compliance with the
 Terms of sanction

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 End use of funds

 Loan Policy of Bank as well as RBI norms including appropriate classification and provisioning
 Review the operation of the accounts.
Substantive Procedures:
a) Verify that amounts included in balance sheet in respect of advances are outstanding at the date of the
balance sheet.
b) Verify that advances represent amount due to the bank.
c) Ensure that outstanding amount is appropriately supported by Loan documents.
d) Ensure that there are no unrecorded advances.
e) Verify the appropriateness of basis of valuation of advances.
f) Ensure that the recoverability of advances is recognised in their valuation.
g) Check that the advances are disclosed, classified and described in accordance with recognised
accounting policies and relevant statutory and regulatory requirements.
h) Ensure that appropriate provisions towards advances have been made as per the RBI norms.
Question 16
Mr. A approaches a bank for financial assistance for his upcoming project. The bank branch manager, after
verifying the proposal, is agreeable to financial Mr. A, but asks for the security of be offered to the bank.
Discuss the nature of securities required to be offered to the bank. [May 18, 4 Marks]
Or
Depending on the nature of the item concerned, creation of security may take the form of a mortgage,
pledge, hypothecation, assignment, set-off or lien. Explain with specific reference to Audit of Banks.
[RTP - Nov. 20]
Answer
Nature of Securities to be offered:
a) Primary security: Security offered by the borrower for bank finance or the one against which credit
has been extended by the bank.
b) Collateral security: It is an additional security and can be in any form i.e. tangible or intangible asset,
movable or immovable asset.
Security may be created by different modes like Mortgage, Pledge, Hypothecation, Lien, Assignment.
a) Mortgage: Registered Mortgage can be affected by a ‘Mortgage Deed’ signed by the mortgagor.
Equitable mortgage, is affected by a mere delivery of title deeds or other documents of title with intent
to create security thereof.
b) Pledge: It involves physical delivery of goods by the borrower to the lending bank with the intention
of creating a charge thereon as security for the advance. Legal ownership of the goods remains with
the pledger while the lending banker gets certain defined interests in the goods.
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c) Hypothecation: Hypothecation is the creation of an equitable charge, which is created in favour of the
lending bank by execution of hypothecation agreement in respect of the movable securities belonging
to the borrower. Borrower holds the physical possession of the goods. Neither ownership nor
possession are transferred to the bank. Borrower periodically submits statements regarding quantity
and value of hypothecated assets (like stocks, debtors, etc.) to the bank on the basis of which the
drawing power of the borrower is fixed.
d) Assignment: Assignment represents a transfer of an existing or future debt, right or property
belonging to a person in favour of another person. Only actionable claims such as book debts and life
insurance policies are accepted by banks as security by way of assignment. An assignment gives the
assignee absolute right over the moneys/debts assigned to him.
e) Set-off: Set-off is a statutory right of a creditor to adjust, wholly or partly, the debit balance in the
debtor’s account against any credit balance lying in another account of the debtor.
f) Lien: Lien is creation of a legal charge with consent of the owner, which gives lender a legal right to
seize and dispose/liquidate the asset under lien.
Question 17
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, among other points, the amounts included in balance sheet in respect of advances are outstanding
at the date of the balance sheet. Explain. [RTP - Nov. 19]
Or
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. Explain the broad considerations about which the auditor is primarily concerned with obtaining
evidence in carrying out audit of advances. [RTP - May 21]
Answer
Auditor's considerations while obtaining evidence in carrying out audit of advances:
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 which 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.

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d) There are no unrecorded advances.

e) The stated basis of valuation of advances is appropriate and properly applied and 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.
Question 18
“There is no difference in provisioning of NPA as regards to categories of NPA, whether the debt is secured
or unsecured.” Critically evaluate the statement on the basis of provisioning norms of NPA of nationalized
bank. [Nov. 19, 4 Marks, MTP - Oct. 21]
Answer
Provisioning Requirements of NPA:
Statement that “There is no difference in provisioning of NPA as regards to categories of NPA, whether
the debt is secured or unsecured” is not correct as the provisioning requirements for substandard and
doubtful categories of NPA are different for secured and unsecured advances.
a) For Substandard advances: Additional provision is required @ 10% (5% for infrastructure advances).
b) For Doubtful Advances: Provisioning requirements are given below:
Secured Portion Unsecured Portion
Doubtful upto 1 year 25% 100%
Doubtful 1 to 3 years 40% 100%
Doubtful above 3 years 100% 100%

Question 19
Distinguish between Primary Security and Collateral Security with reference to audit of Banks. Also give
examples of most common types of securities accepted by the Banks. [RTP - Nov. 20]
Or
Banks ask Security or Collateral while lending to assure that the Borrower will return the money to bank
in prescribed time. Explain stating clearly the concept of Primary and Collateral Security. Also give
examples of most common types of securities accepted by banks. [MTP - April 21]
Answer
Primary Security and Collateral Security:
 Primary security refers to the security offered by the borrower for bank finance or the one against
which credit has been extended by the bank.
This security is the principal security for an advance.
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 Collateral security is an additional security. Security can be in any form i.e. tangible or intangible asset,
movable or immovable asset.
Examples of most common types of securities accepted by banks are the following:
 Personal Security of Guarantor
 Goods/Stocks/Debtors/Trade Receivables
 Gold Ornaments and Bullion
 Immovable Property
 Plantations (For Agricultural Advances)
 Third Party Guarantees
 Banker's General Lien
 Life Insurance Policies
 Stock Exchange Securities and Other Instruments
Question 20
Explain “Advances under Consortium” in the context of Prudential Norms on Income Recognition, Asset
Classification and Provisioning pertaining to Advances. [Jan. 21, 4 Marks, MTP - Nov. 21]
Answer
Advances under Consortium:
 Consortium advances should be based on the record of recovery of the respective individual member
banks and other aspects having a bearing on the recoverability of the advances.
 Where the remittances by the borrower under consortium lending arrangements are pooled with one
bank and/or where the bank receiving remittances is not parting with the share of other member
banks, the account should be treated as not serviced in the books of the other member banks and
therefore, an NPA.
 The banks participating in the consortium, therefore, need to arrange to get their share of recovery
transferred from the lead bank or to get an express consent from the lead bank for the transfer of their
share of recovery, to ensure proper asset classification in their respective books.
Question 21
In case of a Bank, explain the meaning of funded loans. Also give examples. [MTP – April 21]
Answer
Funded Loans:
Funded loans are those loans where there is an actual transfer of funds from the bank to the borrower.
Advances comprise of funded amounts by way of:
(i) Term loans
(ii) Cash credits, Overdrafts, Demand Loans

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(iii) Bills Discounted and Purchased

(iv) Participation on Risk Sharing basis
(v) Interest-bearing Staff Loans
Question 22
N Ltd. has been sanctioned a Cash Credit Facility by XYZ Bank Ltd. for INR 1 crore and drawing power
as per the Stock Statements furnished for the last quarter is INR 80 Lakh. Outstanding balance in the
account is INR 75 lakh. Interest charged to the account is INR 3.5 Lakh and total credit into the account for
the quarter is INR 2.5 Lakh. As an auditor how will you report this account in your report.
[July 21, 4 Marks]
Answer
Reporting of Cash credit Facility:
 An Advance will be classified as non-performing advance if:
a) It ceases to generate income for a bank; or
b) Interest and/or instalment of principal in respect of such an advance have remain overdue or out
of order for a specified period of time.
 An account is said to be ‘Overdue’, if it is not paid on the due date fixed by the Bank. An account
should be treated as ‘Out-of-order’ if the outstanding balance remains continuously in excess of the
sanctioned limit/drawing power or if there are no credits continuously for 90 days as on the balance
sheet date or the credits are not enough to cover the interest debited during the same period.
 In the given case, though outstanding balance of INR 75 Lakhs is within the drawing power but, the
amount credited in the account (i.e. INR 2.5 Lakhs] is not enough to cover the interest charged in the
account (i.e., INR 3.5 Lakhs).
Conclusion: Auditor should report the account as non-performing advance in the report.
Question 23
Explain income recognition norms with respect to advances in case of a banking company.
Answer
Income Recognition norms w.r.t. Advances:
 Any income which exceeds
 One per cent of the total income of the bank if the income is reckoned on a gross basis
or
 One per cent of the net profit before taxes if the income is reckoned net of costs,
should be considered on accrual as per AS-9 (subject to certainty as to their ultimate collection). Other
incomes may be recognised when received.
 In case of NPA, RBI guidelines require that banks should not recognize income until it is actually
realised.
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 Interest on advances against Term Deposits, National Savings Certificates (NSCs), Indira Vikas Patras
(IVPs), Kisan Vikas Patras (KVPs) and Life policies may be taken to income account on the due date,
provided adequate margin is available in the accounts.
 In the case of outstanding bills purchased and discounted the discount received thereon should be
properly apportioned.
 Fees and Commission earned by the bank as a result of rescheduling of advances should be recognized
on accrual basis over the period covered by the rescheduled extension of credit period.
Question 24
Write a short note on reversal of income under bank audit.
Answer
Reversal of Income:
a) First time NPAs: If a Loan/Advance is treated as NPA for the first time, interest accrued which has
not been realized but credited to the Income Account should be reversed or provided for.
b) Commission/other Income: If interest income is recognized on cash basis, then Commission and other
such income with respect to the same Borrower, which has been recognized on accrual basis in the
previous year but has not been realized, should be reversed or provided for with respect to previous
year.
c) Finance Charge of leased assets: The finance charge component of finance income [as defined in AS
19 – Leases] on the leased asset which has accrued and was credited to income account before the asset
became non-performing, and remaining unrealised, should be reversed or provided for in the current
accounting period.
Question 25
In view of the significant uncertainty regarding ultimate collection of income arising in respect of non-
performing assets, the guidelines require that banks should not recognize income on non- performing
assets until it is actually realised. When a credit facility is classified as non-performing for the first time,
interest accrued and credited to the income account in the corresponding previous year which has not
been realized should be reversed or provided for. This will apply to Government guaranteed accounts
also. Analyse and Explain. [RTP – May 20]
Answer
Reversal of Income:
 If any advance, including bills purchased and discounted, becomes NPA as at the close of any year,
the entire interest accrued and credited to income account in the past periods, should be reversed or
provided for if the same is not realised. This will apply to Government guaranteed accounts also.
 In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in
the current period and should be reversed or provided for with respect to past periods, if uncollected.

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 Further, in case of banks which have wrongly recognised income in the past should reverse the interest
if it was recognised as income during the current year or make a provision for an equivalent amount
if it was recognized as income in the previous year(s).
 Furthermore, the auditor should enquire if there are any large debits in the Interest Income account
that have not been explained. It should be enquired whether there are any communications from
borrowers pointing out differences in interest charge and whether appropriate action has been taken
in this regard.
Question 26
How would you verify the Interest Expenditure while carrying out audit of a bank?
Or
In carrying out an audit of interest expense, the auditor is primarily concerned with assessing the overall
reasonableness of the amount of interest expense. Analyse and explain stating the audit approach and
procedure in regard to interest expense. [RTP - Nov. 21]
Answer
Verification of Interest Expenditure:
a) Obtain from the bank an analysis of various types of deposits outstanding at the end of each quarter
and compute a weighted average interest rate. The rate so computed should be compared with the
actual average rate and enquire into the difference, if material.
b) Compare the average rate of interest paid on deposits with the corresponding figures for the previous
years and enquire into the difference, if material.
c) Verify the calculation of interest and ensure the following:
 Interest has been provided on all deposits upto the date of the balance sheet and determine whether
there is any excess or short credit.
 Interest rates are in accordance with the bank's internal regulations, RBI directives and agreements
with the depositors;
 In relation to fixed deposits, examine whether the interest rate in the accounting system are same
as mentioned in the Fixed Deposit Receipt/Certificate.
 Interest on Savings Account should be checked on a test check basis in accordance with the rules
framed by the bank.
 Interest on inter-branch balances has been provided at the rates prescribed by the head office.
 Interest on overdue/matured term deposits should be estimated and provided for.
d) Ascertain whether there are any changes in interest rate on saving deposits and term deposits during
the period.

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Question 27
Write short note on: Audit procedures for verification of provisions and contingencies in case of bank
audit.
Or
You are appointed as Statutory Auditor of DEF Bank Limited for the year 2020-21. As an Auditor how will
you verify Provisions created by DEF Bank Limited? [Nov. 20, 4 Marks]
Answer
Audit Procedure for Verification of Provisions and Contingencies:
 Ascertain compliance with the various regulatory requirements for provisioning as contained in the
various circulars.
 Obtain an understanding as to how the Bank computes provision on standard assets and non -
performing assets. It includes the basis of the classification of loans into standard, sub-standard,
doubtful and loss assets.
 Obtain the detailed break up of standard loans, non-performing loans and agree the outstanding
balance with the general ledger.
 Examine whether the provisions in respect of standard loans and NPA comply with the regulatory
requirements.
 Obtain statement of computation of tax provision from the bank’s management and verify the nature
of items debited and credited to profit and loss account to ascertain that the same are appropriately
considered in the tax provision computation.
 Re-compute the provision for tax by applying the applicable tax rate after considering the allowances
and disallowances as per Income Tax Act, 1961.
 Other provisions for expenditure should be examined vis-a-vis the circumstances warranting the
provisioning and the adequacy of the same by discussing and obtaining the explanations from the
bank’s management.

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 CHAPTER 13
AUDIT OF DIFFERENT TYPES OF ENTITIES
QUESTIONS WITH ANSWERS
Question 1
Explain in detail the duties of Comptroller and Auditor General of India.
[May 03, 8 Marks, Nov. 12, 10 Marks, RTP – May 19, Nov. 19]
Answer
Duties of Comptroller and Auditor General:
1. Compilation and Submission of Accounts: The C & AG should compile the accounts pertaining to
annual receipts and disbursements of the Union or State or Union Territory and submit these to the
President or Governor or Administrator.
2. Rendering Assistance in Accounts Maintenance: The C & AG should provide such information to the
Union or State or Union Territory, as they may require from time to time and render such assistance
for preparing annual F.S. as they reasonably ask for:
3. Auditing and Reporting: The C & AG should audit and report on:
 All the expenditures from Consolidated Fund of India/State/Union Territory having a Legislative
Assembly and to determine whether the monies disbursed were legally available for and
applicable to the purpose for which they are applied.
 All the transactions of Union or State pertaining to Contingency Funds and Public Accounts.
 All Trading Manufacturing, Profit & Loss A/c & Balance Sheets & other subsidiary accounts kept
in any department of a Union or State.
4. Audit of Receipts and Expenditure of substantially financed entities: Where anybody or authority
is substantially financed by grant or loans from the Consolidated Fund of India/State/Union Territory,
the CAG shall audit and report on all receipts and expenditure of that body or authority.
5. Audit of Grants or Loans: Where any grant or loan is given for any specific purpose from the
Consolidated Fund of India/State/Union Territory to any authority or body, not being a foreign state
or international organisation, the CAG shall scrutinize the procedures by which the sanctioning
authority satisfies itself as to the fulfillment of the conditions subject to which such grants or loans
were given.
6. Audit of Receipts of Union or States: CAG shall audit all receipts which are payable into the
Consolidated Fund of India/State/Union Territory and satisfy himself that the rules and procedures
in that behalf are designed to secure an effective check on the assessment, collection & proper allocation
of revenue and are being duly observed.
Compiled by CA Arvind Dubey AUDIT OF DIFFERENT TYPES OF ENTITIES

7. Audit of Accounts of Stores and Stock: The CAG shall have authority to audit and report on the
accounts of stores and stock kept in any office or department of the Union/State.
8. Audit of Govt. Companies and Corporation: The duties and powers of the CAG in relation to the
audit of the accounts of government companies shall be performed and exercised by him in accordance
with the provision of the Companies Act, 2013.
Question 2
Write short note on: Audit of Expenditure in Government Audit.
[May 07, 5 Marks, May 11, 4 Marks]
OR
Write short note on: Basic Standards set for audit of Government Expenditure. [Nov. 13, 4 Marks]
OR
An audit of Expenditure is one of the major components of Government Audit. In the context of
‘Government Expenditure Audit’, write in brief, what do you understand by:
(i) Audit against Rules and Orders
(ii) Audit of Sanctions
(iii) Audit against Provision of Funds
(iv) Propriety Audit
(v) Performance Audit. [RTP – May 18]
OR
Write basis standards set for Expenditure Audit of Government. [Nov. 18, 5 Marks]
OR
Audit of government expenditure is one of the major components of government audit conducted by the
office of C & AG. The basic standards set for audit of expenditure are to ensure that there is provision of
funds authorised by competent authority fixing the limits within which expenditure can be incurred.
Explain those standards. [RTP – Nov. 19]
OR
The audit of government expenditure is one of the major components of government audit. Explain the
basic standards set for such audit of expenditure. [MTP – March 21]
Answer
Basic Standards for audit of government expenditure:
Expenditure audit is conducted to observe the following standards:
1. Expenditure incurred conforms to the relevant provisions of the statutory enactments and is also in
accordance with the financial rule and regulation. This is called audit against rules and orders.
2. There is proper sanction either special or general accorded by the competent authority for all
expenditure. This is known as audit of sanctions.

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3. There are provisions or budget of funds out of which expenditure can be met. This is called audit
against provisions of fund.
4. The expenditure is incurred with due regard to broad and general principle of propriety. This is called
propriety audit.
5. That the programmes, schemes and projects where large expenditure has been incurred are being run
economically and yielding results. This is known as performance audit.
Question 3
What are the focus points in doing propriety audits by C & AG as regards government expenditure?
[Nov. 11, 8 Marks]
OR
Write short note on: Propriety Audit. [Nov. 17, 4 Marks]
OR
Audit against the propriety seeks to ensure that expenditure confirms to certain principles. Explain.
[MTP - Oct. 19]
Answer
Propriety Audit:
Propriety Audit stands for verification of transactions on the tests of public interest, commonly accepted
customs and standards of conduct.
Emphasis/Scope: Instead of too much dependence on documents, vouchers and evidence, it shifts the
emphasis to the substance of the transactions and looks into the appropriateness thereof on a consideration
of financial prudence, public interest and prevention of wasteful expenditure.
Thus, propriety audit is concerned with scrutiny of executive actions and decisions bearing on financial
and profit and loss situation of the company with special regard to public interest and commonly accepted
customs, and standards of conduct.
Principles (Focus Points) of Propriety Audit:
(i) Expenditure is not prima facie more than the occasion demands.
(ii) Every official exercise the same degree of vigilance in respect of expenditure as a person of ordinary
prudence would exercise in respect of his own money.
(iii) The authority exercises its power of sanctioning expenditure to pass an order which will not directly
or indirectly accrue to its own advantage.
(iv) Funds are not utilised for benefit of a particular person/group of persons.
(v) Apart from the agreed remuneration, no other avenue is kept open to indirectly benefit the
management personnel, employees and others.
(vi) Wastages are avoided in expenditure.
(vii) The expenditure should bring out optimum, enduring benefits instead of mere frittering away the
public money on meeting day to day needs repeatedly.

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Question 4
With reference to Government Audit, what do you understand by “Audit of Commercial Accounts”?
[May 05, 8 Marks]
Answer
Audit of Commercial Accounts:
Entities engaged in commercial activities can be classified as:
1) Departmental enterprises engaged in commercial and trading operations, which are governed by the
same regulations as other Government departments such as defence factories, mines, etc.
2) Statutory corporations created by specific statutes such as LIC, Air India, etc.
3) Government companies, set up under the Companies Act, 2013.
Auditing Aspects
 Departmental enterprise: The audit of departmental entities is done in the same manner as any
Government, where commercial accounts are kept.
 Statutory Corporations: Audit of statutory corporations depends on the nature of the statue governing
the corporation.
 Government Companies: In respect of government companies, the provisions of Companies Act, 2013
are applicable.
 As per Sec. 139(7) and 139(5) of the Companies Act, 2013 the statutory auditor of a Government
company shall be appointed or re-appointed by the CAG.
 The audit is done by qualified Chartered Accountants and the audit is done on similar with the
audits of limited companies.
 In addition to report under section 143, the auditors have to give report the specific matters as
contained in the directives of the C & AG.
 The auditor aforesaid shall submit a copy of his audit report to the CAG who shall have the right
to comment upon, or supplement, the audit report in such manner as he may think fit.
Question 5
What are the powers of C & AG in relation to the accounts of Government Companies audited by the
statutory auditors? [Nov. 05, 8 Marks]
Or
In case of government companies, CAG has a right to issue directions to auditor and do supplementary
audit. Explain. [May 07, 8 Marks]
Or
Write short notes on the following Power of CAG u/s 143(6) & 143[7] in relation to audit of Government
Company. [Nov. 07, 5 Marks]

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Answer
Powers of CAG in the Audit of a Government company:
Role of C & AG is prescribed under sub-sections (5), (6) and (7) of section 143 of the Companies Act 2013.
 Directions to Auditor - Sec. 143(5): In the case of a Government company, the CAG shall appoint the
auditor and direct such auditor the manner in which the accounts of the Government Company are
required to be audited.
 Supplementary Audit - Sec. 143(6): The CAG shall within 60 days from the date of the audit report
have a right to.
a) Conduct a supplementary audit of the financial statement of the company by such person or
persons as he may authorize in this behalf, and
b) Comment upon or supplement such audit report:
 Test Audit Sec. 143(7): The CAG may, in case of government company, if he considers necessary, by
an order, cause test audit to be conducted of the accounts of such company and the provisions of
section 19A of the CAG (Duties, Powers and Conditions of Service) Act 1971 shall apply to the report
of such test audit.
Question 6
Write short note on: Powers of C & AG in connection with the performance of his duties.
[Nov. 09, 5 Marks, Nov. 14, 4 Marks]
Or
Discuss the power of C & AG in Government audit. [May 19, 3 Marks]
Or
The C & AG Act gives powers to the C & AG in connection with the performance of his duties. Explain.
[MTP - May 20]
Or
The Comptroller and Auditor General’s (Duties, Powers and Conditions of Service) Act, 1971 provides
certain powers to the C & AG in connection with performance of his duties. Discuss. [MTP - Nov. 21]
Answer
Powers of C & AG in connection with the performance of his duties:
The Comptroller and Auditor General's (Duties Powers and Conditions of Service) Act, 1971 gives the
following powers to the C & AG in connection with the performance of his duties:
(i) Inspection: To inspect any office of accounts under the control of the Union/State including office
responsible for the creation of the initial or subsidiary accounts.
(ii) Transmission: To require that any accounts, books, papers and other documents which deal with or
are otherwise relevant to the transactions under audit, be sent to specified places.
(iii) Inquiry: To put such questions or make such observations as he may consider necessary to the
preparation of any account or report which it is his duty to prepare.
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Question 7
Audit of the accounts of stores and inventories has been developed as a part of expenditure audit
with reference to the duties and responsibilities entrusted to C & AG. Discuss.
Answer
Audit of Stores and inventories:
Audit of the accounts of stores and inventories has been developed as a part of expenditure audit with
reference to the duties and responsibilities entrusted to C & AG. Audit procedure of stores include the
followings:
1. Regulations governing purchase, receipts, issues, custody, sales, write-off and stock taking etc. are
reviewed.
2. Purchases are audited according to the rules prescribed for audit of expenditure.
3. Ensure that prices paid are reasonable. Cases of uneconomical purchases of stores should be brought
to the notice of concerned authority.
4. The system of accounting for stores should also be reviewed and sure that the balance of stocks and
stores in hand is within reasonable limits.
5. Valuation of stocks should be seen carefully so that value accounts tally with the physical accounts.
6. The sanction for write-offs is to be scrutinized.
Question 8
The Comptroller and Auditor General shall be responsible for compiling the accounts of the Union and of
each State from the initial and subsidiary accounts rendered to the audit and accounts offices under his
control by treasuries, offices or departments responsible for the keeping of such account. Explain.
[MTP - Oct. 20]
Answer
C & AG responsibility for compiling the accounts of the Union and State:
 The C & AG shall be responsible for compiling the accounts of the Union and of each State from the
initial and subsidiary accounts rendered to the audit and accounts offices under his control by
treasuries, offices or departments responsible for the keeping of such account.
 The C & AG shall, from the accounts compiled by him prepare in each accounts, showing under the
respective heads, the annual receipts and disbursements for the purpose of the Union, of each State
and of each Union Territory having a Legislative Assembly, and shall submit those accounts to the
President or the Governor of a State or Administrator of the Union Territory having a Legislative
Assembly, as the case may be, on or before such dates as he may, with the concurrence of the
Government concerned, determine.

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 The C & AG Act of 1971 has provisions for relieving him of this responsibility to give information and
render assistance to the Union and States. The C & AG shall, insofar as the accounts, for the compilation
or keeping of which he is responsible, enable him so to do, give to the Union Government, to the State
Government or to the Governments of Union Territories having Legislative Assemblies, as the case
may be, such information as they may, from time to time, require and render such assistance in the
preparation of the annual financial statements as they may reasonably ask for.
Question 9
Audit against rules and orders aims to ensure that the expenditure conforms to the relevant provisions of
the Constitution and of the laws and rules made thereunder. The job of audit is to see that these rules,
regulations and orders are applied properly by the subordinate authorities. It is however, not the function
of audit to prescribe what such rules, regulations and orders shall be. Analyse and Explain.
[RTP - Nov. 20]
Or
What is the function of audit while examining various rules, regulations and orders with regard to Audit
against Rules & Orders by C & AG? [Nov. 20, 3 Marks, MTP - Nov. 21]
Answer
Audit against Rules and orders:
Auditor is required to carry out examination of the various rules, regulations and orders issued by the
executive authorities to see that:
a) They are not inconsistent with any provisions of the Constitution or any laws made thereunder;
b) They are consistent with the essential requirements of audit and accounts as determined by the CAG.
c) They do not come in conflict with the orders of, or rules made by, any higher authority; and
d) In case they have not been separately approved by competent authority, the issuing authority
possesses the necessary rule-making power.
Question 10
The auditor of a Govt. Company has to ensure that each item of expenditure is covered by a sanction,
either general or special, of the competent authority. Explain. [RTP - Nov. 20]
Answer
Audit of Sanctions:
The auditor has to ensure that each item of expenditure is covered by sanction, either general or special
from the competent authority. The audit of sanction is directed both in respect of ensuring that:
a) The expenditure is properly covered by a sanction and
b) To satisfy that the authority sanctioning it, is competent for the purpose by virtue of powers vested by
constitution.

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Question 11
The audit of receipts of government is not as old as audit of expenditure but with the rapid growth of
public enterprises audit of receipts tax or non-tax has come to stay. Discuss audit of receipts with respect
to Government Audit. [Nov. 20, 4 Marks]
Answer
Audit of Receipts:
Basic principle of audit of receipts is to look at the general than on the particular, though individual cases
of assessment, demand, collection, refund, etc. are important within the area of test check.
Audit of receipts includes checking:
(i) Whether all revenues due to government have been correctly assessed, realised and credited to
government account by the designated authorities;
(ii) Whether adequate regulations and procedures have been framed by the concerned
department/agency to secure an effective check on assessment and collection;
(iii) Whether regulations and procedures are actually being carried out;
(iv) Whether adequate checks are imposed to ensure the prompt detection and investigation of
irregularities, double refunds, forged refund vouchers or other loss of revenue through fraud or wilful
omission or negligence to levy or collect taxes or to issue refunds; and
(v) Review of systems and procedures to see that the internal procedures adequately secure correct and
regular accounting of demand collections and refunds and to suggest improvement.
Question 12
Government audit has not only adopted the basis essentials of auditing as known and practised in the
profession to suit the requirements of governmental transactions but has also added new concepts,
techniques and procedures to the audit profession. Explain stating clearly the definition of Government
auditing as discussed in U.N. Handbook on Govt. Auditing and Developing Countries and also state
Objectives of Govt. audit. [RTP – May 21]
Answer
Definition of Government Audit:
Government audit has not only adopted the basic essentials of auditing as known and practised in the
profession to suit the requirements of government transactions but has also added new concepts,
techniques and procedures to the audit profession.
The U.N. Handbook on Government Auditing and Developing Countries defines government auditing in
a comprehensive manner which is as follows:
Government auditing is
 The objective, systematic, professional and independent examination

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 Of financial, administrative and other operations

 Of a public entity
 Made subsequently to their execution
 For the purpose of evaluating and verifying them,
 Presenting a report containing explanatory comments on audit findings together with conclusions and
recommendations for future actions
 By the responsible officials
 And in the case of examination of financial statements, expressing the appropriate professional opinion
regarding the fairness of the presentation.
Objectives of government audit:
(a) Accounting for Public Funds: Government audit serves as a mechanism or process for public
accounting of government funds.
(b) Appraisal of Government policies: It also provides public accounting of the operational,
management, programme and policy aspects of public administration as well as accountability of the
officials administering them.
(c) Base for Corrective Actions: Audit observations based on factual data collection also serve to highlight
the lapses of the lower hierarchy, thus helping supervisory level officers to take corrective measures.
Question 13
Government audit is neither equipped nor intended to function as an investigating agency, to pursue
every irregularity or misdemeanor to its logical end. Explain. [RTP – May 21]
Answer
Focus of Government Audit:
 Government audit is neither equipped nor intended to function as an investigating agency, to pursue
every irregularly or misdemeanor to its logical end. The main objective of audit is a combination of
ensuring accountability of administration to legislature and functioning as an aid to administration.
 In India, the function of Government Audit is discharged by the independent statutory authority of
the Comptroller and Auditor General through the agency of the Indian Audit and Accounts
Department.
 Audit is a necessary function to ensure accountability of the executive to Parliament, and within the
executives of the spending agencies to the sanctioning or controlling authorities. The purpose or
objectives of audit need to be tested at the touchstone of public accountability.
 The Comptroller and Auditor General (C & AG), in the discharge of his function, watches that the
various authorities act in regard to financial matters in accordance with the Constitution and the laws
made by Parliament, and conform to the rules or orders made thereunder.
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Question 14
Define Government Audit and explain its objectives. [July 21, 4 Marks]
Answer
Government Audit and its objectives:
Government auditing may be defined as the objective, systematic, professional and independent
examination of financial, administrative and other operations of a public entity made subsequently to their
execution for the purpose of evaluating and verifying them, presenting a report containing explanatory
comments on audit findings together with conclusions and recommendations for future actions by the
responsible officials and in the case of examination of financial statements, expressing the appropriate
professional opinion regarding the fairness of the presentation.
Objectives of Government audit includes the following:
 Accounting for Public Funds: Government audit serves as a mechanism or process for public
accounting of government funds.

 Appraisal of Government policies: It also provides public accounting of the operational,

management, programme and policy aspects of public administration as well as accountability of the
officials administering them.

 Base for Corrective actions: Audit observations based on factual data collection also serve to highlight
the lapses of the lower hierarchy, thus helping supervisory level officers to take corrective measures.

 Administrative Accountability: The main objective of audit is a combination of ensuring

accountability of administration to legislature and functioning as an aid to administration.
Question 15
“Public moneys should not be utilised for the benefit of a particular person or section of the community”.
List out the exceptions to this rule while audit against propriety. [MTP – Oct. 21]
Answer
Exceptions to the rule of audit against propriety:
Public moneys should not be utilised for the benefit of a particular person or section of the community
unless:
(a) The amount of expenditure involved is insignificant; or
(b) A claim for the amount could be enforced in a Court of law; or
(c) The expenditure is in pursuance of a recognised policy or custom; and
(d) The amount of allowances, such as travelling allowances, granted to meet expenditure of a particular
type should be so regulated that the allowances are not, on the whole, sources of profit to the recipients.

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Question 16
PQR Ltd., a government company, constructed a building in conformity with rules and regulations for
installing a telephone exchange but not used for the same purpose resulting in the infructuous
expenditure.
Considering the above case, explain the type of expenditure audit to be performed to curb the
situation. [MTP - Nov. 21]
Answer
Propriety audit:
 In case of propriety audit, auditors try to bring out cases of improper, avoidable, or infructuous
expenditure even though the expenditure has been incurred in conformity with the existing rules and
regulations. Further, it may so happen that a transaction may satisfy all the requirements of regularity
audit insofar as the various formalities regarding rules and regulations are concerned but may still be
highly wasteful.
 In the given situation, PQR Ltd. being a government company, constructed a building in conformity
with rules and regulations for installing a telephone exchange but not used for the same purpose
resulting in an infructuous expenditure.
Conclusion: Propriety audit should be done for PQR Ltd. to bring out improper, avoidable,
or infructuous expenditure even though the expenditure has been incurred in conformity with
the existing rules and regulations to the notice of the proper authorities of wastefulness in public
administration.
Question 17
Describe the salient features of Financial Administration of Local Bodies. [Nov. 04, 8 Marks]
Answer
Salient Features of Financial administration of Local Bodies:
Financial administration of local bodies comprises of following:
1. Budgetary Procedure: The objective of local bodies budgetary procedure are:
 Financial accountability,
 Control of expenditure, and
 To ensure that funds are raised and money is spent in accordance with the rules and regulations.
2. Expenditure Control
 In the local body, legislative powers are vested in the Council whereas executive powers are
delegated to the officers, e.g., Commissioners.
 All matters of regular revenue and expenditures are generally delegated to the executive wing.
 For special situations like, reduction in property taxes, refund of security deposits, etc. sanction
from the legislative wing is necessary.

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3. Accounting System: The accounting system is characterized by:

 Accounts are usually kept under Cash System.
 Subsidiary and statistical registers for taxes, assets, cheques etc.,
 Separate vouchers for each type of transaction,
 Compulsory monthly bank reconciliation,
 Submission of summary reports on periodical basis to authorities at regional & state level.
Question 18

Draft an Audit programme for conducting audit of accounts of a local body.

[May 10, 5 Marks, May 16, 6 Marks]
Or
State the background of “Local Bodies”. Draft an audit programme for audit of local bodies.
[May 14, 8 Marks]
Answer
Audit Programme for conducting audit of accounts of local bodies:
a) Ensure validity of appointment.
b) Determine Objectives of Audit w.r.t.
 Reporting on True and fairness of financial statements.
 Strengths and weakness of Financial Control.
 Adherence to legal and administrative requirements.
c) Perform Audit w.r.t. following:
 Audit against Rules and Orders.
 Audit against Sanctions.
 Audit against provision of funds.
 Propriety Audit and performance audit.
 Audit of Receipts and Revenue.
d) Frame the conclusion and Issue the Report.
Question 19

State the important objectives of local body’s audit. [May 15, May 17, May 18, 4 Marks]
Or
The external control of municipal expenditure is exercised by the state governments through the
appointment of auditors to examine municipal accounts. Explain stating important objectives of audit of
such bodies. [RTP - Nov. 21]

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Answer
Important Objectives of local body’s audit:
a) Reporting on the fairness of the content and presentation of financial statements;
b) Reporting upon the strengths and weaknesses of systems of financial control;
c) Reporting on the adherence to legal and/or administrative requirements;
d) Reporting upon whether value is being fully received on money spent; and detection and prevention
of error, fraud and misuse of resources.

Question 20
Explain the different types of revenue grants which local bodies may receive. [Nov. 20, 3 Marks]
Or
List out the types of Revenue Grants received by local bodies from the State. [MTP - Nov. 21]
Answer
Different types of revenue grants:
Local bodies may receive different types of grants from the State administration as well. Broadly, the
revenue grants are of three categories:
a) General purpose grants: These are primarily intended to substantially bridge the gap between the
needs and resources of the local bodies.
b) Specific purpose grants: These grants which are tied to the provision of certain services or
performance of certain tasks.
c) Statutory and compensatory grants: These grants, under various enactments, are given to local bodies
as compensation on account of loss of any revenue on taking over a tax by State government from local
government.

Question 21
State any five special points which you, as an auditor, would look into while examining the income and
collection of fund by an NGO engaged in providing relief work for flood victims. [Nov. 07, 5 Marks]
Or
What important points should an auditor keep in mind while checking receipt of income of a Non-
Governmental Organization (N.G.O)? [Nov. 10, 4 Marks]
Or
As an Auditor of NGO, how do you check/verify atleast four receipts of income during the year?
[Jan. 21, 4 Marks]

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Answer
Examination of Receipts of Income of NGO:
(i) Contributions and Grants for projects and programmes: Check agreements with donors and grants
letters to ensure that funds received have been accounted for.
Check that all foreign contribution receipts are deposited in the foreign contribution bank account as
notified under the Foreign Contribution (Regulation) Act, 1976.
(ii) Receipts from fund raising programmes: Verify in detail the internal control system and ascertain
who are the persons responsible for collection of funds and mode of receipt. Ensure that collections
are counted and deposited in the-bank daily.
(iii) Membership Fees: Check fees received with Membership Register. Ensure proper classifications is
made between entrance and annual fees and life membership fees. Reconcile fees received with fees to
be received during the year.
(iv) Subscriptions: Check with subscription register and receipts issued. Reconcile subscription received
with printing and dispatch of corresponding magazine/circulars/periodicals. Check the receipts with
subscription rate schedule.
(v) Interest and Dividends: Check the interest and dividends received and receivable with investments
held during the year.
Question 22
What are the points on which an auditor should concentrate while planning audit of an N.G.O.?
[May 13, 8 Marks]
Or
You have been appointed as an auditor of an NGO, briefly state the points on which you would
concentrate while planning the audit of such an organisation? [RTP - Nov. 18]
Or
While planning the audit of an NGO, the auditor may focus on Knowledge of the NGO’s work, its mission
and vision, Updating knowledge of relevant statutes especially with regard to recent amendments,
circulars etc. Explain the other relevant points the auditor needs to focus while planning the audit of NGO.
[RTP - Nov. 21]
Answer
Points to be concentrated while planning an audit of an NGO:
(i) Knowledge of the NGO’s work, its mission and vision, areas of operations & environment in which
it operates.
(ii) Reviewing its legal form and its MOA, AOA, rules and Regulations.
(iii) Reviewing the Organisation chart, Manuals relating to financial and administrative matters.

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(iv) Examination of minutes of meetings of the Managing Committee/Governing Body to ascertain the
impact of decisions on the financial records.
(v) Study the accounting system, procedures, internal controls and internal checks existing for the NGO
and verify their applicability.
(vi) Updating knowledge of relevant statutes especially with regard to recent amendments, circulars,
judicial decisions viz. Foreign Contribution (Regulation) Act, 1976, Societies Registration Act, 1860,
Income Tax Act, 1961 etc. and the Rules related to the statutes.
(vii) Setting of materiality levels for audit purposes.
(viii) The nature and timing of reports or other communications.
Question 23
An NGO operating in Delhi had collected large scale donations for Tsunami victims. The donations so
collected were sent to different NGOs operating in Tamil Nadu for relief operations. This NGO operating
in Delhi has appointed you to audit its accounts for the year in which it collected and remitted donations
for Tsunami victims. Draft audit programme for audit of receipts of donations and remittance of the
collected amount to different NGOs. Mention six points each, peculiar to the situation, which you will like
to incorporate in your audit programme for audit of said receipts and remittances of donations.
[MTP - March 18, Oct. 18, March 19]
Answer
Audit of Donation Receipts:
(i) Internal Control System: Examine internal control system particularly with reference to division of
responsibilities in respect of authorised collection of donations, custody of receipt books and safe
custody of money.
(ii) Custody of Receipt Books: Examine the existence of system regarding issue of receipt books, whether
unused receipt books are returned and the same are verified physically including checking of number
of receipt books and sequence of numbering therein.
(iii) Receipt of Cheques: Receipt Book should have carbon copy for duplicate receipt and signed by a
responsible official. All details relating to date of cheque, bank's name, date, amount, etc. should be
clearly stated.
(iv) Bank Reconciliation: Reconciliation of bank statements with reference to all cash deposits not only
with reference to date and amount but also with reference to receipt book.
(v) Cash Receipts: Register of cash donations to be vouched more extensively. If addresses are available
of donors who had given cash, the same may be cross-checked by asking entity to post thank you
letters mentioning amount, date and receipt number.
(vi) Foreign Contributions, if any, to receive special attention to compliance with applicable laws and
regulations.

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Remittance of Donations to Different NGOs:

(i) Mode of Sending Remittance: Ensure that all remittances are made through account payee cheques.
Remittances through Demand Draft need to be scrutinized thoroughly with reference to recipient.
(ii) Confirming Receipt of Remittance: Ensure that all remittances are supported by receipts and
acknowledgements.
(iii) Identity: Verify address, Registration Number, etc. of recipient NGO.
(iv) Direct Confirmation Procedure: Send confirmation letters to entities to whom donations have been
paid.
(v) Donation Utilisation: Ensure that amount of donation is utilised for providing relief to Tsunami
victims.
(vi) NGOs’ Selection: Check system for selecting NGO to whom donations have been sent.
Question 24
The audit programme of NGO should include in a sequential order all assets, liabilities, income and
expenditure ensuring that no material item is omitted. Explain. [MTP - March 21]
Answer
Audit programme of NGO:
The audit programme should include in a sequential order all assets, liabilities, income and expenditure
ensuring that no material item is omitted.
(i) Corpus Fund: The contributions/grants received towards corpus be vouched with special reference
to the letters from the donor(s). The interest income be checked with Investment Register and
Physical Investments in hand.
(ii) Reserves: Vouch transfers from projects/programmes with donors letters and board resolutions of
NGO. Also check transfer of gross value of asset sold from capital reserve to general reserve and
adjustments during the year.
(iii) Ear-marked Funds: Check requirements of donors institutions, board resolution of NGO, rules and
regulations of the schemes of the ear-marked funds.
(iv) Project/Agency Balances: Vouch disbursements and expenditure as per agreements with donors
for each of the balances.
(v) Loans: Vouch loans with loan agreements, counterfoil of receipt issued.
(vi) Fixed Assets: Vouch all acquisitions/sale or disposal of assets including depreciation and the
authorizations for the same. Also check donor’s letters/agreements for the grant. In the case of
immovable property check title, etc.
(vii) Investments: Check Investment Register and the investments physically ensuring that investments
are in the name of the NGO. Verify further investments and dis-investments for approval by the
appropriate authority and reference in the bank accounts for the principal amount and interest.
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(viii) Cash in Hand: Physically verify the cash in hand and imprest balances, at the close of the year and
whether it tallies with the books of account.
(ix) Bank Balance: Check the bank reconciliation statements and ascertain details for old outstanding
and unadjusted amounts.
(x) Inventory: Verify inventory in hand and obtain certificate from the management for the quantities
and valuation of the same.
(xi) Programme and Project Expenses: Verify agreement with donor/contributor(s) supporting the
particular programme or project to ascertain the conditions with respect to undertaking the
programme/project and accordingly, in the case of programmes/projects involving contracts,
ensure that income tax is deducted, deposited and returns filed and verify the terms of the
contract.
(xii) Establishment Expenses: Verify that provident fund, life insurance premium, employees state
insurance and their administrative charges are deducted, contributed and deposited within the
prescribed time. Also check other office and administrative expenses such as postage stationery,
travelling, etc.
Question 25
How the audit is advantageous to Sole Trader? [May 06, 8 Marks]
Answer
Advantages of Audit to Sole Traders:
Sole traders are not required to have their accounts audited under any law. But still some of the sole traders
who have vast and varied expenditures, get their private accounts audited. In most of such cases the
accountant prepares and finalizes the accounts as well as checks the accuracy of accounts.
Benefits of audit to Sole Trader:
1) The accounts department will become more efficient as they know that their work is to be checked by
an independent person. In this way extent of fraud or misappropriation is reduced to a minimum.
2) Audited accounts are generally accepted as correct by the Income Tax Department. It will help the
individual to get an early assessment of his accounts.
3) Audited accounts help the administrators and executors.
4) The audited accounts can be presented, as an evidence, in the courts.
5) It will help to secure compensation from insurance companies in the event of loss by fire, etc.
6) It helps in borrowing money from banks.
Question 26
You are approached by a partnership firm to list out the advantages that will accrue to them, if the accounts
are audited. State five important advantages. [May 07, 5 Marks]
Or

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What are the advantages of the audit of the accounts of partnership firm?
[May 15, 6 Marks, MTP – April 19]
Answer
Advantages of Audit of Partnership Firms:
The partnerships firms are governed by the Indian Partnership Act, 1932. This Act does not contemplate
audit of the partnership firm. However, it is in the interest of the partners that the accounts of the firm are
regularly audited by an independent auditor. The provision for the same may be made in the partnership
deed itself.
Advantages of Audit of Partnership Firms:
1) Audited accounts help in settling accounts between the partners reliably.
2) Audited accounts provide a reliable evidence for computing the amount due to the retiring partner or
representative of deceased partner.
3) Acceptance of Audited accounts by the Government agencies for various purposes like Income tax
authorities for computing the assessable income.
4) Audited accounts are relied upon by banks for advancing loan.
5) Audited accounts can be helpful in the negotiation for sale or admission of a new partner.
6) It is an effective safeguard against any undue advantage being taken by a working partner as against
the non-working partners.
Question 27
Mention important points which auditors will consider while conducting audit of accounts of a
partnership firm. [May 13, 8 Marks, May 16, 6 Marks, RTP - May 19]
Or
There are certain points which are required to consider specially in the audit of accounts of a partnership.
Discuss any three points briefly. [Nov. 19, 3 Marks]
Answer
Points to be considered in Audit of Partnership Firms:
(i) Confirming that the letter of appointment, signed by a partner, duly authorised, clearly states nature
& scope of audit contemplated by the partners, specially limitation, if any.
(ii) Examine the partnership deed to ensure that it had been signed by all partners & registered with
the registrar of firms. Ascertain from the partnership deed about capital contribution, profit sharing
ratios, interest on capital contribution, powers and responsibilities of the partners, etc.
(iii) Study the minute book, if any, maintained to record the policy decision taken by partners specially
the minutes relating to authorisation of extraordinary and capital expenditure, raising of loans,
purchase of assets and other such matters which are not of a routine nature.

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(iv) Verifying that the business in which the partnership is engaged is authorised by the partnership
agreement.
(v) Examining whether books of account appear to be reasonable and are considered adequate-in
relation to the nature of the business of the partnership.
(vi) Verifying that the profits/losses have been divided among partners in agreed profit-sharing ratio.
(vii) Confirming that a provision for the firm’s tax payable by the partnership has been made in the
accounts before arriving at the amount of profit divisible among the partners.
(viii) Ensure that various requirements of legislations applicable to the partnership firm like Section 44AB
of the Income-tax Act, 1961 have been complied with.
Question 28
Write a short note on: Books of Account to be maintained by a Limited Liability Partnership.
Answer
Books of Account to be maintained by a LLP:
 As per Sec. 34 of LLP Act, 2008, LLP shall maintain such proper books of account as may be prescribed
relating to its affairs for each year of its existence. Books may be maintained on cash basis or accrual
basis and according to double entry system of accounting. Books shall be maintained at registered
office for such period as may be prescribed.
 As per Rule 24 of LLP Rules, 2009, the books of account shall contain:
a) Particulars of all sums of money received and expended by the LLP and the matters in respect of
which the receipt and expenditure takes place;
b) A record of the assets and liabilities of the LLP;
c) Statements of cost of goods purchased, inventories, WIP, finished goods and cost of goods sold;
and
d) Any other particulars which the partners may decide.
 The books of account which a LLP is required to keep shall be preserved for eight years from the date
on which they are made.
Question 29
Write a short note on: Statutory provisions as to Audit of Limited Liability partnerships.
Answer
Statutory Provisions as to Audit of LLP:
As per See. 34 of LLP Act, 2008, accounts of LLP shall be audited in accordance with such rules as
may be prescribed.
Rule 24 of LLP Rules, 2009 provides the following in relation to audit:

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 Requirement of Audit: A LLP whose turnover does not exceed, in any financial year, ` 40 Lacs, or
whose contribution does not exceed ` 25 Lacs shall not be required to get its accounts audited. If
partners of such LLP decide to get the accounts of such LLP audited, the accounts shall be audited in
accordance with these rules.

 Eligibility for auditor: A person shall not be qualified for appointment as an auditor of a LLP unless
he is a Chartered Accountant in practice.

 Period of Appointment: Auditor of a LLP shall be appointed for each financial year of the LLP for
auditing its accounts.

 Appointment of auditor by designated partner: The designated partners may appoint an auditor:
a) At any time for the first financial year but before the end of the first financial year,
b) At least 30 days prior to the end of each financial year (other than the first financial year),
c) To fill a casual vacancy in the office of auditor, including in the case when the turnover or
contribution of a LLP exceeds the limits, or
d) To fill up the vacancy caused by removal of an auditor.

 Appointment of auditor by partner: Partners may appoint an auditor where the designated partners
have power to appoint and have failed to appoint.

 Tenure of Auditor: Auditor shall hold office in accordance with the terms of his or their appointment
and shall continue to hold such office till the period the new auditors are appointed or they are re-
appointed.
Question 30
List the benefits that arise to LLP from getting the accounts audited.
Answer
Benefits that arise to LLP from getting the accounts audited:
a) Detection of errors & frauds.
b) Verification of financial statements.
c) Resolving disputed among the partners in relation to accounting matters.
d) Arranging finance from banks & financial institutions.
e) Improved management of the LLP.
f) Settlement of accounts between partners at the time of admission, death, retirement, insolvency,
insanity, etc.
Question 31
Briefly describe the auditor’s duty regarding audit of LLP.

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Answer
Auditor’s duty regarding Audit of LLP:
a) Auditor should obtain instructions in writing as to the work to be performed by him.
b) Auditor should read the LLP agreement & note the following provisions
 Nature of the business of LLP
 Capital contributed by each partner
 Interest in respect of capital contributions
 Duration of partnership
 Drawings allowed to the partners
 Salaries, commission etc. payable to partners
 Rights & duties of partners
 Method of settlement of accounts between partners at the time of admission, retirement, admission
etc.
 Any loans advanced by the partners
 Profit sharing ratio
c) Auditor should report (a) Whether the records reflects true and fair view (b) Whether he obtains all
information & explanation (c) whether any restriction/limitation imposed upon him.
d) If minute book is being maintained, auditor shall refer it for any resolution passed regarding the
accounts.
Question 32
Tomo Construction Engineering LLP approached CA K to understand various returns to be maintain and
filed by them. Guide/Discuss the various returns to be maintained and filed by them.
[July 21, 3 Marks]
Answer
Returns to be maintained and filed by an LLP:
 Every LLP would be required to file annual return in Form 11 with ROC within 60 days of closer of
financial year. The annual return will be available for public inspection on payment of prescribed fees
to Registrar.
 Every LLP is also required to submit Statement of Account and Solvency in Form 8 which shall be filed
within a period of thirty days from the end of six months the financial year to which the Statement of
Account and Solvency relates.
Question 33
Mention any six points to be considered for good internal control for collection of tuition fees from students
of college. [May 09, 6 Marks]

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Answer
Internal control points for collection of tuition fees:
a) There must be a clear-cut tuition fee structure approved by the college council.
b) The challan or paying in slip should contain necessary fields for identifying the roll number of the
student, class, and period for which fees is paid etc. The slips should have such number of counterfoils
to cross check the remittance.
c) The paying in slip when filled by the students, should be checked for its correctness as to applicable
amount etc. by one clerk and the amount should be entered in a scroll. He must initial the slip which
authorises the cashier to accept the fees as per slip.
d) The cashier scroll and the authorizing officer/s scroll should be checked by an officer daily.
e) All remittance should be banked each day. No amount should be allowed to be spared for meeting any
type of expense.
f) Alternatively, the fees may be directly remitted into bank and banker's daily remittance slip should be
scrutinized by college officers.
g) Arrears list should be periodically prepared from the students rolls. Any concession, remission of
tuition fees should have approval of competent authority.
h) Delayed remittance should carry fines or compensating charges for delay.
i) When students are readmitted after removal for non-payment of fees, the admission should carry the
permission of competent authority.
Question 34
Mention the eight important points which an auditor will consider while conducting the audit of
educational institutions. [May 12, 8 Marks]
Or
Mention any eight important points which an auditor will consider while conducting the audit of a school.
[Nov. 14, 8 Marks]
Or
What are the special steps involved in conducting the audit of an Educational Institution?
[RTP - Nov. 19]
Answer
Special Points in audit of Educational Institutions (School):
1. Examine the charters, trust deed, applicable Act etc. containing the rules and regulations. Particular
attention should be given to those rules and regulations that have a bearing on the accounts.
2. The system of keeping the accounts should be ascertained and go through the proceedings of the
minutes of the governing body, especially those relating to the accounts.

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3. The auditor should obtain a copy of the budget sanctioned or the financial statement. This would
enable him to acquaint himself with the different heads of income and expenditures of the institution.
4. The auditor should vouch all the receipts through students' monthly fees with the help of students’
fees register or the carbon copies of the fees receipts along with the entries in the cash book and bank
book.
5. The auditor should see that the fees received in advance have been properly dealt with.
6. Verify the grants received from the government.
7. Check whether the money has been utilised for the purpose for which it was received.
8. Examine whether the concessions granted to the students are duly authorised.
9. Donations received from different charitable bodies have been duly acknowledged and recorded
properly in the accounts.
10. The auditor should vouch the incomes from the properties, buildings which sometimes are given on
rent for public functions etc.
11. If the institution also provides hostel facilities, the hostel fees and deposits received from the students
should be vouched with the counter foils of the receipts.
12. All the establishment expenses should be carefully vouched in detail and the capital expenses should
be given particular attention.
13. The auditor should examine the stocks of furniture, equipments, stationery etc. very carefully.
14. The amount of salary paid to staff should be vouched thoroughly through the Salary Register. Check
that the salary is given after taking the signatures of the personnel receiving the salary.
15. The auditor should see that all the assets and liabilities are brought into account. Physically verify the
fixed assets.
16. The auditor should check the payments made on account of scholarships with reference to the
Scholarship Register.
17. Verify the annual statements of accounts and while doing so see that separate statements of account
have been prepared as regards different funds, for example, PF to the Staff, Building Fund etc.
Question 35
Mention any 8 special points which you as an auditor would look into while auditing the books of account
of Hospital.
[May 11, Nov. 12, May 14, 8 Marks, MTP - March 18, Aug. 18, Oct. 18, March 19, RTP - May 19]
Or
You have been appointed auditor of Mis. Divine Children Hospital. Discuss any four important points
that would attract your attention while audit. [Nov. 19, 4 Marks, MTP - Oct. 21]

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Answer
Special Points in Audit of books of account of Hospital:
1) Examine the letter of appointment to ascertain the scope of responsibilities.
2) Study the Charter or Trust Deed under which the hospital has been set up and take a special note of
the provisions affecting the accounts.
3) Examine and evaluate the system of internal check and internal control and determine the nature,
timing and the extent of audit procedures.
4) Vouch the entries in the Patients’ Bill Register with the copies of bill issued. Test check the selected
bills to see that these have been correctly prepared taking into account the period of stay of each patient
as recorded in the Attendance Schedule.
5) Vouch the collection from patients with copies of bills and entries in Bills Register. Arrears of dues
should be properly carried forward and where these are deemed to be irrecoverable, they should be
written off under due authorizations.
6) Interest and/or dividend income should be vouched with reference to the Investment Register and
Interest and Dividend warrants.
7) In case of legacies and donations which are received for specific purposes, it should be ensured that
any income therefrom is not applied for any other purposes.
8) Where receipts of subscriptions show significant deviations from budgeted figures, it should be
thoroughly inquired into and the matter be brought to the notice of the trustees or the Managing
Committee.
9) Governments grants or grants from local bodies should be verified with reference to the
correspondence with the concerned authorities.
10) Clear distinction should be made between the items of capital and revenue nature.
11) The capital expenditure should be incurred under proper authorisation by a valid resolution of the
trustees or the Managing Committee.
12) Check the system of internal check as regards purchases and issue of stores, medicines etc.
13) Examine that the appointment of the staff, payment of salaries etc. are duly authorised.
14) Physically verify the investments, fixed assets and inventories.
15) Check that adequate depreciation has been provided on all the depreciable assets.
Question 36
What steps would you take into consideration in auditing the receipts from patients of a Hospital?
[Nov. 17, 6 Marks]

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Answer
Steps to be considered while auditing the receipts from patients of a hospital:
a) Examine and evaluate the system of internal control w.r.t. raising bills, maintaining records of patients,
etc.
b) Vouch the Register of patients with copies of bills issued to them.
c) Verify bills for a selected period with the patients’ attendance record to see that the bills have been
correctly prepared.
d) Ensure that bills have been issued to all patients from whom an amount was recoverable according to
the rules of the hospital.
e) Vouch the collection from patients with copies of bills and entries in Bills Register.
f) Arrears of dues should be properly carried forward and where these are deemed to be irrecoverable,
they should be written off under due authorizations.
Question 37
In the case of audit of a charitable institution, what attentions should be paid by auditor regarding audit
of expenditure items? [Nov. 19, 4 Marks]
Answer
Audit of Expenditure items in case of Charitable Institution:
(i) If any grant is being allowed to any person, verify whether the grant have been paid only for a
charitable purpose or purposes falling within the purview of the objects for which the charitable
institution has been set up and that no trustee, director or member of the Managing Committee has
benefited there from either directly or indirectly.
(ii) Verify the schedules of securities held, as well as inventories of properties both movable and
immovable by inspecting the securities and title deeds of property and by physical verification of the
movable properties on a test basis.
(iii) Verifying the cash and bank balances.
(iv) Ascertaining that any funds contributed for a special purpose have been utilised for the purpose.
Question 38
How will you vouch/verify the following investments income in the case of charitable institution?
[RTP - Nov. 20]
Answer
Investment Income in the case of Charitable Institution:
(i) Vouching the amounts received with the dividend and interest counterfoils.
(ii) Checking the calculations of interest received on securities bearing fixed.
(iii) Checking that the appropriate dividend has been received where any investment has been sold ex-
dividend or purchased cum-dividend.
(iv) Comparing the amounts of dividend received with schedule of investments making special enquiries
into any investments held for which no dividend has been received.
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Question 39
GSR & Co. has been appointed as an auditor of Tagore School. Engagement team wants to verify Fees from
students in detail. Advise the audit procedure to be followed by the engagement team. [MTP - March 21]
Answer
Audit procedure for verify fee from students:
1. Check names entered in the Students Fee Register for each month or term, with the respective Class
Registers, showing names of students on rolls and test amount of fees charged; and verify that there
operates a system of internal check which ensures that demands against the students are properly
raised.
2. Check fees received by comparing counterfoils of receipts granted with entries in the Cash Book and
tracing the collections in the Fee Register to confirm that the revenue from this source has been duly
accounted for.
3. Total up the various columns of the Fees Register for each month or term to ascertain that fees paid in
advance have been carried forward and that the arrears that are irrecoverable have been written off
under the sanction of an appropriate authority.
4. Check admission fees with admission slips signed by the head of the institution and confirm that the
amount has been credited to a Capital fund, unless the Managing Committee has taken a decision to
the contrary.
5. See that free studentship and concessions have been granted by a person authorised to do so, having
regard to the Rules prepared by the Managing Committee.
6. Confirm that fines for late payment or absence, etc. have been either collected or remitted under proper
authority.
7. Confirm that hostel dues were recovered before student's accounts were closed and their deposits of
caution money refunded.
Question 40
You have been appointed as an auditor of VJM Schools. Discuss the points which merit your consideration
as an auditor while verifying assets and Liabilities of VJM Schools. [July 21, 4 Marks]
Answer
Points to be considered while verifying Assets & Liabilities of an Educational Institution:
(1) Report any old heavy arrears on account of fees, dormitory rents, etc. to the Managing Committee.
(2) Confirm that caution money and other deposits paid by students on admission, have been shown as
liability in the balance sheet not transferred to revenue, unless they are not refundable.
(3) See that the investments representing endowment funds for prizes are kept separate and any income
in excess of the prizes has been accumulated and invested along with the corpus.

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(4) Ascertain that the system ordering inspection on receipt and issue of provisions, foodstuffs, clothing
and other equipment is efficient and all bills are duly authorised and passed before payment.
(5) Verify the inventories of furniture, stationery, clothing, provision and all equipment etc. These should
be checked by reference to Inventory Register or corresponding inventories of the previous year and
values applied to various items should be test checked.
Question 41
Mention any 8 special points which you as an auditor would look into while auditing the books of account
of Cinema. [May 11, 8 Marks]
Answer
Steps involved in audit of Cinema Hall:
1) Preliminary Engagement activities:
 Study carefully the documents relating to the setting up of the organisation such as MOA and
AOA, etc. and note down the provisions relating to accounts.
 Examine the letter of appointment to ascertain the scope of responsibilities.
 Obtain an Understanding of Entity and its environment and determine the risk of material
misstatements.
 Determine the responses to assessed risk of material misstatements.
2) Evaluation of Internal Control: To verify
 That entrance to the cinema hall is only through printed tickets;
 Tickets are serially numbered and bound into books;
 That the number of tickets issues for each show and class are different;
 That for advance booking a separate series of tickets is issued and
 Stock of tickets is kept in proper custody.
 That Cash collected is deposited in banks partly on the same day and rest on the next day –
depending upon the banking facility available.
3) Substantive Procedures (Vouching and Verification):
 Verify the income from advertisements and slides showed before the show.
 Vouch the expenditure incurred on publicity of picture, maintenance of hall, electricity expenses
etc.
 Vouch recoveries of advertisement expenses etc. from film distributors.
 Vouch payment of film hire with reference to agreement with distributor or producer.
 Verify the basis of other incomes earned like restaurant, vehicle parking and display windows etc.
 Confirm that depreciation on machinery and furniture has been charged at an appropriate rate.

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4) Others (System Audit):

 If tickets are issued through computer-audit the system to ensure its reliability and authenticity of
data generated by it.
 System should provide that at the end of each show a proper statement should be prepared and
cash collected be tallied.
Question 42
Mention any eight important points which an auditor will consider while conducting audit of club?
[Nov. 13, 8 Marks]
Answer
Steps in auditing the accounts of a club
1. Preliminary Engagement Activities
 Study carefully the documents relating to the setting up of the organisation such as MOA and
AOA, etc. and note down the provisions relating to accounts.
 Examine the letter of appointment to ascertain the scope of responsibilities.
 Obtain an Understanding of Entity and its environment and determine the risk of material
misstatements.
 Determine the responses to assessed risk of material misstatements.
2. Substantive Procedures (Tests of Details)
A. Receipts
 Vouch the receipt on account of entrance fees with members’ applications, counterfoils issued/
minutes of the Managing Committee.
 Vouch member’s subscriptions with the counterfoils of receipt issued to them.
 Reconcile the amount of total subscriptions due with the amount collected and that
outstanding.
 Ensure that arrears of subscriptions for the previous year have been correctly brought over and
arrears for the year under audit and subscriptions received in advance have been correctly
adjusted.
 Verify the internal check as regards members being charged with the price of foodstuffs and
drinks provided to them and their guests, as well as, with the fees chargeable for the special
services rendered, such as billiards, tennis, etc.
 Trace debits for a selected period from subsidiary registers maintained in respect of supplies
and services, to members to confirm that the account of every member has been debited with
amounts recoverable from him.

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B. Payments
 Vouch purchase of sports items, furniture, crockery, etc. and trace their entries into the
respective stock registers.
 Vouch purchases of foodstuffs, cigars, wines, etc. and test their sale price so as to confirm that
the normal rates of gross profit have been earned on their sales. The stock of unsold provisions
and stores, at the end of year, should be verified physically and its valuation checked.
C. Assets
 Check the stock of furniture, sports material and other assets physically with the respective
stock registers or inventories prepared at the end of the year.
 Inspect the share scrips and bonds in respect of investments, check their current values for
disclosure in final accounts; also ascertain that the arrangements for their safe custody are
satisfactory.
D. Others
Examine the financial powers of the secretary and, if these have been exceeded, report specific care
for confirmation by the Managing Committee.
Question 43
Cine Screen Multiples Ltd. is operating cinemas in different locations in Mumbai and has appointed you
as an internal auditor. What are the areas that need to be verified in relation to receipts from sale of Tickets?
[MTP – May 20, MTP - April 21]
Answer
Verification points in receipts from sale of tickets:
(i) Verity that entrance to the cinema-hall during show is only through printed tickets;
(ii) Verify that they are serially numbered and bound into books;
(iii) Verify that the number of tickets issued for each show and class, are different though the numbers
of the same class for the show on the same day, each week, run serially;
(iv) Verify that for advance booking a separate series of tickets is issued;
(v) Verify that the inventory of tickets is kept in the custody of a responsible official;
(vi) Confirm that at the end of show, a statement of tickets sold in prepared and cash collected is agreed
with it.
(vii) Verity that a record is kept of the ‘free passes’ and that these are issued under proper authority.
(viii) Reconcile the amount of Entertainment Tax collected with the total number of tickets issued for each
class.
(ix) Vouch the entries in the Cash Book in respect of cash collected on sale of tickets for different shows
on a reference to Daily Statements which have been test checked as aforementioned with record of
tickets issued for the different shows held.

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Question 44
You have been appointed as internal auditor of ‘City Club’ in Delhi. The receipts of the club were 50 lakhs
during the previous year ending 2021-22. You are required to mention special points of consideration
while auditing such receipts of the club. [Jan. 21, 4 Marks]
Answer
Steps to be considered in conducting the audit of receipts of the club:
1) Vouch the receipt on account of entrance fees with members’ applications, counterfoils issued to them,
as well as on a reference to minutes of the Managing Committee.
2) Vouch members’ subscriptions with the counterfoils of receipt issued to them, trace receipts for a
selected period to the Register of Members; also reconcile the amount of total subscriptions due with
the amount collected and that outstanding.
3) Ensure that arrears of subscriptions for the previous year have been correctly brought over and arrears
for the year under audit and subscriptions received in advance have been correctly adjusted.
4) Check totals of various columns of the Register of members and tally them across.
5) See the Register of Members to ascertain the Member’s dues which are in arrear and enquire whether
necessary steps have been taken for their recovery, the amount considered irrecoverable should be
mentioned in the Audit Report.
6) Verify the internal check as regards members being charged with the price of foodstuffs and drinks
provided to them and their guests, as well as, with the fees chargeable for the special services rendered,
such as billiards, tennis, etc.
Question 45
What procedure may be adopted by an auditor, while auditing leasing transactions entered into by the
leasing company? [Nov. 13, 8 Marks]
Answer
Audit procedure for examination of hire purchase transactions:
1) Examine the MOA and AOA of the hire purchasing company to see whether is it is one of the object
and within its powers to let the goods on hire.
2) Examine the letter of appointment to ascertain the scope of responsibilities.
3) Ensure that adequate resolution has been passed authoring a particular director to execute the hire
purchase agreement.
4) The hire purchase agreement should be in writing and be signed by all the parties viz. the owner, the
hirer.
5) Hire purchase agreement should clearly specify the following:
 The hire purchase price of the goods;

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 The cash price of the goods;

 The date of commencement of the hire purchase agreement;
 The number of instalments by which the hire purchase price is be paid, the amount of those
instalments, the due date etc;
 The description of goods involved in the hire purchase agreement;
 Procedures to be followed in case of default by the hire purchaser.
6) Check whether the payments are being received regularly as per the agreement. Where the payments
are received in cash check the counterfoils issued to the hirer. In most of the cases, postdated cheques
are taken from the hire purchaser. In such cases, the auditor should see that these cheques are kept in
proper custody, are marked as account payer, and duly presented on the due dates.
Question 46
Define the different types of lease agreements as per Accounting Standard/Ind-AS. [May 19, 4 Marks]
Answer
Different Types of Lease Agreements:
As per AS-19/Ind-AS 17 lease arrangements could be of 2 types i.e. 1 Finance Lease and 2 Operating Lease.
a) Finance Lease: An arrangement with the following attributes qualities as a Finance Lease:
1) The lease arrangement transfers ownership of the asset to the lessee at the end of the lease term;
2) The lessee has the option to purchase the asset at a price that is expected to be sufficiently lower
than the fair value at the date the option becomes exercisable for it to be reasonably certain, at the
inception of the lease, that the option will be exercised;
3) The lease term is for the major part of the economic life of the asset even if title is not transferred;
4) At the inception of the lease, the present value of the minimum lease payments amounts to at least
substantially all of the fair value of the leased asset; and
5) The leased assets are of such a specialized nature that only the lessee can use them without major
modifications.
b) Operating Lease: An arrangement that does not transfer substantially all the risks and rewards
incidental to ownership qualifies as an Operating Lease. In other words, an operating lease is a lease
arrangement “Other than finance lease”.
Question 47
What special steps will you take into consideration in auditing the accounts of a hotel? [May 05, 10 Marks]
Or
What are the six important points that will attract your attention in the case of audit of a hotel?
[Nov. 09, 5 Marks]

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Answer
Steps in Auditing the accounts of a hotel:
A. Preliminary Engagement activities
 Study carefully the documents relating to the setting up of the organisation such as MOA and
AOA, etc. and note down the provisions relating to accounts.
 Examine the letter of appointment to ascertain the scope of responsibilities.
 Obtain an Understanding of Entity and its environment and determine the risk of material
misstatements.
 Determine the responses to assessed risk of material misstatements.
B. Substantive Procedures (Tests of Details)
1. Revenue Receipts (Income)
 Vouch the receipts from sale of foodstuffs, cold drinks etc from the copies of cash memos and
the summary of daily takings prepared by the cashier.
 Examine the Visitors Ledger and the daily totals thereof should be vouched with the Cash Book
and Impersonal Ledger.
 Receipts on account of boarding and lodging should be checked with individual customer’s
accounts as also the number of days the rooms were occupied.
 Receipts on account of holding of marriages, receptions, conferences, seminars etc. should be
checked with the agreements and correspondence with the parties concerned and the
counterfoils of money receipts.
 Check the adequacy of internal check as regards charging the members for foodstuffs, etc.
supplied to them and their guests.
2. Revenue Payments (Expenses)
 Where commission is paid to travel agents or booking agents, the same should be verified with
reference to the agreement entered into on this behalf.
 Examine the procedures relating to purchases and issue of foodstuffs, crockery etc. All the
purchases should be properly authorised and be accounted for in the Stock Registers.
 Vouch the expenditure on purchase of magazines and journals with the bills supplied by the
vendors.
 Salaries and yearly increments to staff should be verified by reference to service contracts,
salary registers, etc.
 Expenditure on repairs and maintenance should be vouched with the bills or receipts submitted
by the people involved for the work.
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3. Capital Items (Assets and Liabilities)

 Physically verify the investments, fixed assets and inventories.
 Check that adequate depreciation has been provided on all the depreciable assets.
4. Others
Where the hotel also operates a booth to facilitate conversion of foreign currency into Indian rupees
the auditor should ensure the compliance with the provision of FEMA, 1999.
Question 48
Write short note on: Restriction on shareholding in a Co-operative Society.
Answer
Restrictions on a shareholdings:
 Section 5 of the Co-operative Societies Act, 1912 provides that in the case of society where the liability
of a member of the society is limited, no member of a society other than a registered society can hold
such portion of the share capital of the society as would exceed a maximum of twenty per cent of the
total number of shares or of the value of shareholding ` 1,000.
 The auditor of a co-operative society will be concerned with this provision was to watch any breach
relating to holding of shares
Question 49
Write short note on: Restrictions on Investments of funds of a central co-operative society,
Answer
Investment of funds:
According to Section 32 of the Central Act the modes of investment of funds of a society may be stated as
follows. A society may invest its funds any one more of the following:
a) In the Central of State Co-operative Bank.
b) In any of the securities specified in Section 20 of the Indian Trusts Act, 1882.
c) In the shares, securities, bonds or debentures of any other society with limited liability.
d) In any co-operative bank, other than a Central or State co-operative bank, as approved by the Registrar
on specified terms and conditions.
e) In any other money's permitted by the Central or State Government.
Question 50
Mention the duties of Auditor of Co-operative Societies in regard to the following:
(i) Overdue interest.
(ii) Compliance with provisions of Co-operative Act and Rales thereunder.
(iii) Special Report to Registrar of Co-operative Societies.

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Answer
Duties of Auditor of Co-operative Societies:
1) Overdue Interest: Overdue interest should be excluded from interest outstanding and accrued due
while calculating profit.
2) Adherence to Co-operative Principles: The auditor will have to ascertain in general, how far the
objects, for which the co-operative organisation is set up, have been achieved in the course of its
working. The assessment is not necessarily in terms of profits, but in terms of extending benefits to
members who have formed the society. While auditing the expenses, the auditor should see that they
are economically incurred and there is no wastage of funds. The principles of propriety audit should
be followed for the purpose.
3) Special report to the Registrar: During the course of audit, if the auditor notices that there are some
serious irregularities in the working of the society, he may report these special matters to the Registrar,
drawing his specific attention to the points. The Registrar on receipt of such a special report may take
necessary action against the society.
Circumstances in which special report is required: Refer Question 32.
Question 51
Under what circumstances, an auditor is required to submit a special report to the registrar of Co-operative
Societies?
Answer
Special report to the Registrar:
During the course of the notices that there are serious irregularities in the working of the society, he may
report these special matters to the Registrar. The Registrar on receipt of such a special report may take
necessary action against the society.
Circumstances in which special report is required:
(i) Personal profiteering by members of managing committee in transactions of the society, which are
detrimental in the interest of the society.
(ii) Detection of fraud relating to expenses, purchases, property and stores of the society.
(iii) Mis-management (decisions of management against operative principles).
(iv) In the case of urban co-operative banks, disproportionate advances to vested interest groups such as
relatives of management, and deliberate negligence about the recovery thereof. Cases of reckless
advancing, where the management is negligent about taking adequate security and proper
safeguards for judging the creditworthiness of the party.

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Question 52
“Examination of overdue debts, audit classification of society, and reporting the infringements of
provisions of the Act are the special features of audit of a co-operative society”. Do you agree?
Answer
Special Features of Audit of a co-operative society:
1. Examination of Overdue debts:
Overdue debts for a period from six months to five years and more than five years will have to be
classified and shall have to be reported by an auditor. A further analysis of these overdue debts from
the viewpoint of chances of recovery will have to be made, and they will have to be classified as good
or bad. The auditor will have to ascertain whether proper provisions for doubtful debts is made and
whether the same is satisfactory.
2. Audit Classification of the Society:
After a judgment of an overall performance of the society, the auditor has to award a class to the
society. This judgment is to be based on the criteria specified by the Registrar. It may be noted here
that if the management of the society is not satisfied about the award of audit class, it can make an
appeal to the Registrar, and the Registrar may direct to review the audit classification.
3. Reporting on Infringements of provisions of the Act:
Auditor of a cooperative society is required to point out the infringement with the provisions of
Cooperative Societies Act and Rules and bye-laws. The financial implications of such infringements
should be properly assessed by the auditor and they should be reported.
Question 53
Auditor of a cooperative society has to submit his audit report in the prescribed form specified by the
Registrar or as given in the related Rules. State the matters to be covered in the audit report.
Answer
Matters to be reported in Audit Report:
The audit report has to be submitted in the prescribed form specified by the Registrar or as given in the
related Rules. According to the present prescribed form in some of the States, the auditor has to state:
a) Whether he has obtained all the necessary information and explanations which to the best of his
knowledge and belief were necessary for the purpose of audit.
b) Whether in his opinion and to the best of his information and according to the explanations given to
him, the said accounts give all the information required by the Act.
c) Whether the Profit and Loss Account of the society gives a true and fair views of the Profit and Loss
made by the society.
d) Whether the Balance Sheet drawn up as at the end of the year gives a true and fair view of the state of
affairs of the society as on the given date.

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e) Whether in his opinion, proper books of account as required by the Act, the Rules and the bye-laws of
the society have been properly maintained.
f) Whether the Balance Sheet and the Profit and Loss Account examined by him are in agreement with
the books of account and returns of the society.
The auditor will have to give qualifying observations, if any of the answers to the above mentioned matters
are negative.
Question 54
An auditor of a Co-operative Society governed by Cooperative Societies Act, 1912 is required to attach
schedules giving certain information. Please list the information required to be given in the schedules.
Answer
Schedules forming part of Audit Report:
The form of the audit report to be submitted by the auditor, as prescribed in various states, contains a
number of matters which the auditor has to state or comment upon. In addition to that, the auditor will
have to attach schedules to report regarding the following information:
1) All transactions which appear to be contrary to the pensions of the Act, the rules and bye-laws of the
society.
2) All sums, which ought to have been, but have not been brought into account by the society.
3) Any material, or property belonging to society which appears to the auditor to be bad or doubtful of
recovery.
4) Any material irregularity or impropriety in expenditure or in the realisation or monies due to society.
5) Any other matters specified by the Registrar in this behalf.
In the case of nil report in any of the above matters, the auditor will have to give a nil report.
Question 55
State the requirements regarding the maintenance of books of account with respect to a multi-state co-
operative society.
Or
Write short note on: Aspects to be covered in the books of account to be maintained by a multi-cooperative
society.
Answer
Aspects to be covered in Books of Account:
As per the Multi State Co-operative Society Rules, 2002, every multi state co-operative society shall keep
books of account with respect to:
a) All sum of money received & expended.
b) All sales and purchases of goods.
c) The assets and liabilities of the society.

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d) In the case of Multi State Co-operative Society engaged in production, processing and manufacturing,
particulars relating to utilization of materials or labour or other term of cost as may be specified in the
bye laws.
Question 56
Multi-State Co-operative Societies Act, 2002 states that a person who is a Chartered Accountant within the
meaning of the Chartered Accountants Act, 1949 can only be appointed as auditor of Multi-State
cooperative society. Explain stating also the persons who are not eligible for appointment as auditors of a
Multi-State co-operative society. [MTP – Aug. 18]
Answer
Qualifications of Auditors of Multi-State Co-operative Societies:
Sec. 72 of Multi State Co-operative Societies Act, 2002, provides that a person who is a Chartered
Accountant can only be appointed as auditor of a multi-state co-operative society. Following persons
cannot be appointed as auditor:
a) Body Corporate
b) Officer/Employee of Multi State Cooperative society
c) Partner/Employee of Officer/Employee of Multi State Cooperative society
d) A person who is indebted to multi state cooperative society or who has given guarantee in connection
with a loan of third party to multi state cooperative society for an amount exceeding ` 1000.
Question 57
Briefly explain the provisions for qualification and appointment of Auditors under the Multi-State Co-
operative Societies Act, 2002. [Nov. 18, 5 Marks, MTP – April 21]
Answer
Qualifications of Auditors of Multi-State Co-operative Societies:
Sec. 72 of Multi-State Co-operative Societies Act, 2002, provides that a person who is a Chartered
Accountant can only be appointed as auditor of a multi-state co-operative society. Following persons
cannot be appointed as auditor:
a) Body Corporate
b) Officer/Employee of Multi State Cooperative society
c) Partner/Employee of Officer/Employee of Multi State Cooperative society
d) A person who is indebted to multi state cooperative society or who has given guarantee in connection
with a loan of third party to multi state cooperative society for an amount exceeding ` 1,000.
Appointment of Auditors of Multi-State Co-operative Societies:
Sec. 70 of Multi-State Co-operative Societies Act, 2002, provides the provisions as to appointment of
auditors of Multi-State Co-operative Societies.

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Accordingly,
 First Auditor of Multi-State Co-operative Societies shall be appointed by Board of Directors within one
month of registration. If Board fails, company may appoint first auditor at General meeting Auditor
so appointed hold office till conclusion of first Annual General Meeting.
 Subsequent auditors are appointed at each Annual General Meeting Auditor so appointed hold office
till conclusion of next AGM.
Question 58
Write short notes on: Powers and duties of an auditor of a Multi-State Cooperative Society.
Answer
Powers and Duties of Auditor of Multi-State Cooperative Society:
Section 73 of the Multi-State Cooperative Societies Act, 2002 provides the provisions relating to powers
and duties of auditor.
Powers of Auditor [Sec. 73(1)]:
Every auditor shall have a right of access at all times to the books, accounts and vouchers of the Multi-
State Co-operative Society whether kept at the head office or elsewhere.
Every auditor shall be entitled to require from the officers or other employees of the Multi-State Co-
operative Society such information and explanation as the auditor may think necessary for the
performance of the duties as an auditor
Duties of Auditor [Sec. 73(2):
(A) To conduct Inquiry: The auditor shall make the following inquiries:
(i) Whether loans and advances made by the Multi-State Co-Operative Society on the basis of
security have been properly secured and whether the terms on which they have been made are
not prejudicial to the interests of the Multi-State Co-Operative or its members;
(ii) Whether transactions of the Multi-State Co-operative Society which are represented merely by
book entries are not prejudicial to the interest of the Multi-State Co-operative Society;
(iii) Whether personal expenses have been charged to revenue account; and
(iv) Where it is stated in the books and papers of the Multi-State Co-operative Society that any shares
have been allotted for cash, whether cash has actually been received in respect of such allotment,
and if no cash has actually been so received, whether the position as stated in the account books
and the balance sheet is correct, regular and not misleading.
(B) Making Report: The auditor shall make a report over the following:
 On the accounts examined by him,
 On every Balance Sheet and Profit and Loss Account, and
 On every other document required to be part or attend to the balance sheet or profit and loss
account,

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Which are laid before the society in general meeting during his tenure of office.
The report shall state whether, in his opinion and to the best of his information and according to the
explanations given to him, the said accounts give the information required by this Act in the manner so
required and give a true and fair view:
a) In the case of the balance-sheet, of the state of the multi-state cooperative society’s affairs as at the end
of its financial year, and
b) In the case of the profit and loss account, of the profit or loss for its financial year.
Question 59
As per Multi-state Co-operative Societies Act, 2002, the auditor shall make a report to the members of the
Multi-State co-operative society on the accounts examined by him and on every balance-sheet and profit
and loss account and on every other document required to be part of or annexed to the balance-sheet or
profit and loss account. Explain. [RTP - May 20]
Answer
Auditor’s Duties on Reporting of accounts and financial statements:
As per Sec. 73(3) and 73(4) of Multi-state Co-operative Societies Act, 2002, the auditor shall make a report
to the members of the Multi-State co-operative society on the accounts examined by him and on every
balance-sheet and profit and loss account and on every other document required to be part of or annexed
to the balance-sheet or profit and loss account, which are laid before the Multi-State co-operative society
in general meeting during his tenure of office, and the report shall state whether, in his opinion and to the
best of his information and according to the explanation given to him, the said account give the
information required by this act in the manner so required, and give a true and fair view:
a) In the case of the balance-sheet, of the state of the Multi-State co-operative society’s affairs as at the
end of its financial year; and
b) In the case of the profit and loss account, of the profit or loss for its financial year. The auditor's report
shall also state:
(i) Whether he has obtained all the information and explanation which to the best of his knowledge
and belief were necessary for the purpose of his audit.
(ii) Whether in his opinion, proper books of account have been kept by the Multi-State co-operative
society so far as appears from his examination of these books and proper returns adequate for the
purpose of his audit have been received from branches or offices of the Multi-State cooperative
society not visited by him.
(iii) Whether the report on the accounts of any branch office audited by a person other than the Multi-
State co-operative society's auditor has been forwarded to him and how he has dealt with the same
in preparing the auditor’s report.

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(iv) Whether the Multi-State co-operative society's balance sheet and profit and loss account dealt with
by the report are in agreement with the books of account and return.
(v) Where any of the matters referred to in Sec. 73(3) and 73(4) is answered in the negative or with a
qualification, the auditor’s report shall state the reason for the answer.
Question 60
Under which circumstances can the Central Government appoint the special auditor of a Multi-State
Cooperative Society?
Or
Central Govt. hold 55% of the paid up share Capital in Kisan Credit Co-operative Society, which is
incurring huge losses. Advise when the Central Government can direct Special Audit under Section 77 of
the Multi State Co-operative Society Act. [May 19, 3 Marks]
Answer
Circumstances requiring Special Audit:
Sec. 77 of Multi-State Cooperative Societies Act, 2002 empowers Central Government to pass an order for
the special audit if they are of opinion:
(i) That the affairs of any Multi-State co-operative society are not being managed in accordance with co-
operative principles or prudent commercial practices or with sound business principles; or
(ii) That any Multi-State co-operative society is being managed in a manner likely to cause serious injury
or damage to the interests of the trade industry or business to which it pertains; or
(iii) That the financial position of any Multi-State co-operative society is such as to endanger its solvency.
Question 61
Mr. M. has served as an auditor in the Co-Operative Department of a Government, is appointed as a
statutory auditor by a Co-Operative society that has receipts over ` 3 crores during the financial year. He
is not a chartered accountant. Mr. D, chartered accountant is appointed to conduct tax audit of the society
u/s 44AB of the Income-tax Act, 1961. Comment. [May 18, 4 Marks]
Answer
Tax Audit Report in case of Co-operative society:
 Proviso to Sec. 44AB of Income Tax Act, 1961 lays down that where the accounts of an assessee are
required to be audited by or under any other law, it shall be sufficient compliance with the provisions
of this section, if such person get the accounts of such organisation audited under such other law before
the specified date and furnishes by that date, the report of the audit as required under such other law
and a further report by an Accountant in the form prescribed under this section.
 The term “accountant” as defined under section 288 under the Income Tax Act, 1961 means a chartered
accountant within the meaning of the Chartered Accountants Act, 1949, who holds a valid certificate
of practice.

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 Accordingly, the person who is not a Chartered Accountant as mentioned in the question, is eligible
to act as auditor of Cooperative Society under the Cooperative Society Act, 1912. Tax audit u/s 44AB
of Income Tax Act, 1961 can be performed only be a Chartered Accountant.
Question 62
You are appointed as an auditor of co-operative society. State the special features of the co-operative audit
to be borne in mind by the auditor, concerning.
1) Audit classification of society.
2) Discussion of draft audit report with the managing committee. [Nov. 20, 4 Marks]
Answer
Audit of Co-operative Society:
(i) Audit Classification of Society:
 After a judgment of an overall performance of the society, the auditor has to award a class to the
society. This judgment is to be based on the criteria specified by the Registrar.
 It may be noted here that if the management of the society is not satisfied about the award of audit
class, it can make an appeal to the Registrar, and the Registrar may direct to review the audit
classification.
 The auditor should be very careful, while making a decision about the class of society.
(ii) Discussion of Draft report with the managing committee:
 On conclusion of the audit the auditor should ask the Secretary of the society to convene a meeting
of the managing committee to discuss the draft audit report.
 The audit report should never be finalized without discussion with the managing committee.

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 CHAPTER 14
INTEGRATED CASE STUDIES
QUESTIONS WITH ANSWERS
INTEGRATED CASE STUDY - 1
Moon Group of companies is a retail chain involved in the selling of daily consumer needs directly to the
customer. They are in the process of appointing an audit firm for the audit of their accounts for the financial
year 2019-20. Moon Group is a South Indian based consumer store having a total of 16 outlets across 4
cities in South India.
Sumant & Co. is appointed as the principal auditor for the entire group. Companies Act, 2013 prescribes
in detail the terms of this audit engagement. Further, there are many branch auditors appointed for the
outlets in the other cities. The company also has an internal audit function conducted on quarterly basis
by Ram & Co. Following are the observations during the course of the statutory audit:
a) One of the discounts offered by the store is in the form of payback cards where reward points are
accumulated and the customer can redeem the same on subsequent purchase. The management and
internal auditors are of the opinion that the points redeemed are to be treated as trade discount. The
external auditors are doubtful on the matter.
b) One of the outlet in Chennai region is in the verge of getting closed and is only left with low value
stock to be cleared before closure. During the year, the sales were only around ` 1,40,000 and the
auditor considers this component immaterial. All other outlets are performing well with good revenue
share.
c) The gratuity valuation of the employees of the retail chain is done by an external valuer. The auditor,
considering the quantum involved appoints an external auditor’s expert for the verification of the
actuarial calculation of gratuity.
From the above facts, answer the following questions by choosing the correct answer:
Q.1. As per SA 210 - Agreeing the Terms of Audit Engagement, which of the following statement is
correct?
a) Though law prescribes in sufficient detail the terms of the audit engagement, the auditor
still needs to record them in a written agreement and also seek written agreement from
management that it acknowledges and understands that it has responsibility for the
preparation of financial statements.
b) Since law prescribes in sufficient detail the terms of the audit engagement, the auditor need
not record them in a written agreement except for the fact that law or regulation applies
and also seek written agreement from management that it acknowledges and understands
that it has responsibility for the preparation of financial statements.
Compiled by CA Arvind Dubey INTEGRATED CASE STUDY

c) The auditor has to take an extract of the law prescribing the details of the terms of the audit
engagement and obtain the counter signature of the management in it.
d) Though law prescribes in sufficient detail the terms of the audit engagement, the auditor
still needs to record them in a written agreement, however it need not seek written
agreement from management that it acknowledges and understands that it has
responsibility for the preparation of financial statements.
Q.2. With respect to the treatment of discount on redemption of points in payback card, what should
be the action of the external auditor?
a) The auditor can place reliance and go by the opinion of the branch auditor and internal
auditor as they have only done a thorough and detailed audit of the accounts
b) The auditor can place reliance on the management’s accounting policy as prima facie they
are only responsible for preparation of financial statements.
c) The external auditor has sole responsibility for the audit opinion expressed and hence he
should perform procedures to satisfy himself on the correct treatment and issue opinion
accordingly.
d) The auditor can advise management on correct treatment but cannot qualify his opinion as
branch auditor’s opinion has higher authority than external auditor’s opinion.
Q.3. What is the main objective of the external auditor, when he uses the work of the internal audit
function of Ram & Co.?
a) To determine as to which areas, what extent the work can be used and whether that work
is adequate for the purposes of the audit.
b) To appropriately direct, supervise and review the work of the internal audit function
c) Review the internal audit report and audit the areas not covered by the internal audit
function
d) Enquire from management on the special points that arose during internal audit and follow
up on the course of action on those points.
Q.4. The external auditor finds that the branch auditor of the outlet in the Chennai region, which is in
the verge of closing down, is audited by an auditor who is not a member of the Institute of
Chartered accountants of India. What should the external auditor do?
a) Since the professional competence of the auditor is in question, the external auditor should
himself visit the premise and audit the accounts.
b) Since the financial statement of the component is immaterial, the provisions of SA 600 do
not apply.
c) The auditor can rely on the financial statements of that component by obtaining written
representation from management that the branch auditor is otherwise well qualified.
d) Since the professional competence of the auditor is in question, the external auditor should
coordinate with the branch auditor and call for the books of account and other explanations.

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Q.5. Which of these is not a factor affecting the external auditor’s evaluation of the objectivity of the
internal audit function?
a) Whether the organizational status of the internal audit function supports the ability of the
function to be free from bias, conflict of interest or undue influence of others to override
professional judgment.
b) Whether the internal audit function is free of any conflicting responsibilities.
c) Whether the internal auditors have adequate technical training and proficiency in auditing.
d) Whether those charged with governance oversee employment decisions related to internal
audit function.

Answer - Integrated Case Study 1

Q. No. Answer Reason
Q.1. b) As per SA 210, if law or regulation prescribes in sufficient detail the terms of the
audit engagement, the auditor need not record them in a written agreement,
except for the fact that such law or regulation applies and that management
acknowledges and understands its responsibilities.

Q.2. c) As per SA 600 and SA 610, Statutory auditor may use the work performed by
Another Auditor and Internal Auditor respectively, however, ultimate
responsibility for opinion expressed is of Statutory auditor. Hence, he should
perform procedures to satisfy himself on the correct treatment and issue opinion
accordingly.

Q.3. a) As per SA 610, the objectives of the external auditor, if using the work of the
internal audit function, is to determine whether that work is adequate for
purposes of the audit.

Q.4. b) As per SA 600, when the principal auditor concludes that the financial
information of a component is immaterial, the procedures outlined in SA 600 do
not apply. When several components, immaterial in themselves, are together
material in relation to the financial information of the entity as a whole, the
procedures outlined in SA 600 should be considered.

Q.5. c) As per SA 610, in evaluation of the objectivity of the internal audit function,
external auditor considers organisational status of internal audit function,
conflicting responsibilities, oversight functions of TCWG w.r.t. employment
decisions related to the internal audit function.

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INTEGRATED CASE STUDY – 2

M/s JK & Associates have been appointed as auditors of Venus Ltd. for the financial year 2019-20. The
team consist of Mr. J & Mr. K both Chartered Accountants as also the engagement partners and the audit
staff consisting of 2 article assistants.

While starting the audit work of Venus Ltd., the engagement partners briefed the audit staff about the
audit work, areas to be covered and the various auditing concepts and their application in the audit of
Venus Ltd. along with applicable Standard on Auditing.
Various topics like audit planning, overall audit strategy, audit programme were discussed in detail. The
team was told about the purpose and implication of various statements and guidance notes issued by the
Institute of Chartered Accountants of India (ICAI) from time to time.
Mr. K also briefed the team about the concept of materiality to be applied while planning and performing
audit. The team was also explained in detail about the area where benchmark materiality can be applied
in case of Venus Ltd.
Based on the above facts, answer the following:
Q.1. ______________ sets the scope, timing & direction of the audit and guides the development of the
more detailed plan.
a) Audit Programme b) Overall Audit Strategy
c) Completion Memorandum d) Audit Plan
Q.2. Statement 1: The establishment of the overall audit strategy and the detailed audit plan are not
necessarily discrete or sequential process but are closely inter-related.
Statement 2: The auditor shall establish an overall audit strategy that guides the development of
audit plan.
a) Only Statement 1 is correct b) Only Statement 2 is correct
c) Both Statements 1 & 2 are correct d) Both Statements 1 & 2 are incorrect
Q.3. ____means the amount set by the auditor at less than materiality for the financial statements as a
whole to reduce to an appropriately low level the probability that the aggregate of uncorrected and
undetected misstatement exceeds materiality for the financial statements as a whole:
a) Benchmark Materiality b) Materiality in Planning
c) Performance Materiality d) Materiality
Q.4. Which of the following is not an example of benchmark that can be used in determining the
materiality in the case of financial statements:
a) Total Revenue b) Profit before tax
c) Net Asset Value d) None of the above

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Q.5. (i) Guidance notes issued by ICAI provide guidance to members on matters which may arise in
the course of their professional work.
(ii) Statements are issued by ICAI with a view to secure compliance by members on some matters.
(iii) Guidance notes are recommendatory in nature.
(iv) Statements are mandatory in nature.
a) All the above statements are correct
b) Statements 1 & 2 are correct
c) Statements 1, 2 & 3 are correct
d) Statements 1,2 & 4 are correct

Answer - Integrated Case Study 2

Q. No. Answer Reason
Q.1. b) As per SA 300, the auditor shall establish an overall audit strategy that sets the
scope, timing and direction of the audit, and that guides the development of the
audit plan

Q.2. c) As per SA 300, the establishment of the overall audit strategy and the detailed
audit plan are not necessarily discrete or sequential processes, but are closely
inter-related since changes in one may result in consequential changes to the
other.

Q.3. c) As per SA 320, performance materiality means the amount or amounts set by the
auditor at less than materiality for the financial statements as a whole to reduce
to an appropriately low level the probability that the aggregate of uncorrected
and undetected misstatements exceeds materiality for the financial statements as
a whole.

Q.4. d) -
Q.5. a) -

INTEGRATED CASE STUDY – 3

Anvisha Ltd. is a company engaged in the business of software development. It is one of the largest
companies in this sector with a turnover of ` 25,000 crores. The operations of the company are increasing
constantly, however, the focus of the management is more on cost cutting in the coming years to improve
its profitability. Shares of Anvisha Ltd. are listed on Bombay Stock Exchange. Company in its AGM held
on 26.08.2018, appointed M/s ABC and Associates, Chartered Accountants, as their auditors for five years.

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In respect of the financial statements of the company for the year 2018-19, which are used by various
stakeholders, some fraud was observed in respect of assets reported therein due to which those stake-
holders suffered damages. As a result, those stakeholders applied to Tribunal for change of auditor on the
basis that auditor is colluded in the fraud.
In the meanwhile, ABC and Associates, resigned from the company without assigning any reason. As per
the requirements of Sec. 140(2) of Companies Act, 2013, the auditor who has resigned from the company
shall file within a period of 30 days from the date of resignation, a statement in the Form ADT-3 with the
company and the Registrar. However, no such statement is filed by ABC and Associates.
Based on the above facts, answer the following:
Q.1. In case of an listed entity, for the purpose of appointment of a person as auditor of the company,
qualifications and experience of the individual or the firm proposed to be considered for
appointment as auditor and whether such qualifications and experience are commensurate with
the size and requirements of the company, is to be considered by:
a) Audit Committee b) Board of Directors
c) Audit Committee and SEBI d) Board of Directors and SEBI

Q.2. After appointment of the auditor in AGM, Anvisha Ltd. shall inform ABC and Associates of their
appointment, and also file a notice in Form of such appointment with _______ within ________ of
the meeting in which the auditor is appointed.
a) Form ADT - 1, SEBI, 15 Days b) Form ADT - 1, Registrar, 15 days.
c) Form ADT - 2, SEBI, 30 days d) Form ADT - 2, Registrar, 30 days.

Q.3. Which of the following stands true in respect of application made by shareholders to Tribunal for
change of auditor on the basis that auditor is colluded in the fraud?
a) Application will be rejected by Tribunal as application for change of auditor can be made
only by Central Government.
b) Application will be rejected by Tribunal as Only Tribunal may suo motu take action for

change of auditor.

c) If Tribunal is satisfied that the auditor of a company has, whether directly or indirectly,

acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the

company or its directors or officers, it may, by order, direct the company to change its

auditors.

d) Approval of Central Government is required before making application to Tribunal for

change of auditors.

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Q.4. An auditor, whether individual or firm, against whom final order has been passed by the Tribunal
u/s 140(5) of Companies Act, 2013 shall not be eligible to be appointed as an auditor of any
company for a period of ________ from the date of passing of the order and the auditor shall also
be liable for action under section __________.
a) 5 years; Sec. 147 b) 10 Years; Sec. 147
b) 5 Years; Sec. 447 d) 10 years; Sec. 447
Q.5. If the auditor does not comply with the provisions of Sec. 140(2) of Companies Act, 2013, he or it
shall be liable to a penalty of:
a) ` 50,000 or an amount equal to the remuneration of the auditor, whichever is less, and in
case of continuing failure, with further penalty of ` 100 for each day after the first during
which such failure continues, subject to a maximum of ` 1 lakh.
b) ` 50,000 or an amount equal to the remuneration of the auditor, whichever is higher, and
in case of continuing failure, with further penalty of ` 100 for each day after the first during
which such failure continues, subject to a maximum of ` 1 lakh.
c) ` 50,000 or an amount equal to the remuneration of the auditor, whichever is less, and in
case of continuing failure, with further penalty of ` 100 for each day after the first during
which such failure continues, subject to a maximum of ` 5 lakh.
d) ` 50,000 or an amount equal to the remuneration of the auditor, whichever is less, and in
case of continuing failure, with further penalty of ` 500 for each day after the first during
which such failure continues, subject to a maximum of ` 5 lakh.

Answer - Integrated Case Study 3

Q. No. Answer Reason
Q.1. a) As per Rule 3 of Companies (Audit and Auditor’s) Rules, 2014, in case of a
company that is required to constitute an Audit Committee u/s 177, the audit
committee, shall take into consideration the qualifications and experience of the
individual or the firm proposed to be considered for appointment as auditor and
whether such qualifications and experience are commensurate with the size and
requirements of the company.

Q.2. b) As per Proviso to Sec. 139(1) of the Companies Act, 2013, the company shall
inform the auditor concerned of his or its appointment, and also file a notice (Form
ADT-1) of such appointment with the Registrar within 15 days of the meeting in
which the auditor is appointed.

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Q.3. c) As per Sec. 140(5) of Companies Act, 2013, the Tribunal either suo moto or on an
application made to it by the Central Government or by any person concerned, if
it is satisfied that the auditor of a company has, whether directly or indirectly,
acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation
to, the company or its directors or officers, it may, by order, direct the company to
change its auditors.

Q.4. c) As per Sec. 140(5) of Companies Act, 2013, an auditor, against whom final order
has been passed by the Tribunal under this section shall not be eligible to be
appointed as an auditor of any company for a period of 5 years from the date of
passing of the order and the auditor shall also be liable for action u/s 447.
Q.5. d) As per Sec. 140(3) of Companies Act, 2013, if the auditor does not comply with the
provisions of Sec. 140(2), he or it shall be liable to a penalty of ` 50,000 or an
amount equal to the remuneration of the auditor, whichever is less, and in case of
continuing failure, with further penalty of ` 500 for each day after the first during
which such failure continues, subject to a maximum of ` 5 lakh.

INTEGRATED CASE STUDY – 4

M/s NSG & Associates have been appointed as auditors of Viaan Ltd. for the financial year 2019-20. The
processes, operations, accounting and decisions are carried out by using computers in Viaan Ltd. The
auditors understand that there are several aspects that they should consider to determine the level of
automation and complexity in the business environment of Viaan Ltd.
While planning the audit work, the engagement partners discussed with the audit staff about the various
types of controls in the automated environment.
The different types of audit tests that can be used in audit of an automated business environment were
also discussed within the engagement team. The responsibility regarding the Internal Financial Controls
was also discussed in detail.
Further the tools and techniques that can be used to deal with the enormous data and information of Viaan
Ltd. were briefed to the audit staff by the engagement partners.
From the above facts, answer the following questions by choosing the correct answer:
Q.1. ____________________________ are the manual controls that make use of some form of data or
information or report produced from the IT systems and applications.
a) Application Controls b) IT dependent Controls
c) Automated Controls d) General IT Controls

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Q.2. Statement 1: Application controls include both manual and automated controls that operate at a
business process level.
Statement 2: General IT Controls apply to mainframe, miniframe as well as end user environment.
a) Only Statement 1 is correct b) Only Statement 2 is correct
b) Both Statements 1 & 2 are correct d) Both Statements 1 & 2 are incorrect
Q.3. ________________________ are also known as pervasive or indirect controls:
a) General IT Controls b) Application Controls
c) IT dependent Controls d) None of the above
Q.4. Which of the following are not the types of audit tests that can be used in the audit in an automated
environment?
a) Observation b) Inspection
c) Re-performance d) None of the above
Q.5. ______________________ is the combination of processes, tools and techniques that are used to tap
vast amounts of electronic data to obtain meaningful information:
a) Computer Assisted Audit Techniques
b) Automated Controls
c) Data Analytics
d) None of the above

Answer - Integrated Case Study 4

Q. No. Answer Reason
Q.1. b) -
Q.2. c) -
Q.3. a) -
Q.4. d) -
Q.5. c) -

INTEGRATED CASE STUDY - 5

You are an audit manager at RMT & Co. and you are considering a number of ethical issues which have
arisen on some of the firm’s long-standing audit clients.
ABC Ltd.
RMT & Co. is planning its external audit of ABC Ltd. Yesterday, the audit engagement partner, Ramesh,
discovered that a significant fee for information security services, which were provided to ABC Ltd. by
RMT & Co., is overdue. Mr. Ramesh hopes to be able to resolve the dispute amicably and has confirmed
that he will discuss the matter with the finance director, Mr. Keshav, at the weekend, as they are both
attending a party to celebrate the engagement of Ramesh’s daughter and Keshav’s son.
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XYZ (P) Ltd.

RMT & Co. is the external auditor of XYZ (P) Ltd. and also provides other non-audit services to the
company. While performing the audit for the current year, the audit engagement partner was taken ill and
took an indefinite leave of absence from the firm. The ethics partner has identified the following potential
replacements and is keen that independence is maintained to the highest level:
 Mr. Pankaj Garg who is also the partner in charge of the tax services provided to XYZ (P) Ltd.
 Mr. Mohit Taneja who was the audit engagement partner for the preceding five years.
 Mr. Chetanya Garg who introduced XYZ (P) Ltd. as a client when he joined the firm as an audit partner
five years ago.
 Mr. Nikunj Garg who is also the partner in charge of the payroll services provided to XYZ (P) Ltd.
MN Ltd.
MN Ltd. is a large public company, and has been an audit client of RMT & Co. for several years. Aadish
Jain, a partner of RMT & Co., has acted as the engagement quality control reviewer (EQCR) on the last two
audits. At a recent meeting, he advised that he can no longer be EQCR on the engagement as he is
considering accepting appointment as a non-executive director and will sit on the audit committee of MN
Ltd. The board of directors has also asked RMT & Co. if they would be able to provide internal audit
services to the company.
PQR Ltd.
PQR Ltd., a listed company, is one of RMT & Co.’s largest clients. Last year the fee for audit and other
services was ` 1.2 Cr. and this year it is expected to be ` 1.5 Cr. which represents 18% and 19.6% of RMT
& Co.’s total income respectively.
Q.1. Which of the following statements correctly explains the possible threats to RMT & Co.’s
independence and recommends an appropriate safeguard in relation to their audit of ABC Ltd.?
1) An intimidation threat exists due to the overdue fee and ABC Ltd. should be advised that
all fees must be paid prior to the auditor’s report being signed.
2) A self-review threat exists due to the nature of the non-audit work which has been
performed and an engagement quality control review should be carried out.
3) A self-interest threat exists due to the relationship between Ramesh and Keshav and
Ramesh should be removed as audit partner.
a) 1, 2 and 3 b) 1 and 2 only
c) 2 only d) 3 only
Q.2. Taking into account the concern of the ethics partner, which of the partners identified as potential
replacements should take over the audit of XYZ (P) Ltd. for the current year?
a) Mr. Pankaj Garg b) Mr. Mohit Taneja
c) Mr. Chetanya Garg d) Mr. Nikunj Garg

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Q.3. Which of the following correctly identifies the threats to RMT & Co.’s independence and proposes
an appropriate course of action for the firm if Aadish Jain accepts appointment as a non-executive
director of MN Ltd.?
Threats Course of action
a) Self-interest and familiarity Can continue with appropriate safeguards
b) Self-interest and self-review Must resign as auditor
c) Self-review and familiarity Must resign as auditor
d) Familiarity only Can continue with appropriate safeguards

Q.4. You are separately considering MN Ltd.’s request to provide internal audit services and the remit
of these services if they are accepted.
Which of the following would result in RMT & Co. assuming a management responsibility in
relation to the internal audit services?
1) Taking responsibility for designing and maintaining internal control systems.
2) Determining which recommendations should take priority and be implemented.
3) Determining the reliance which can be placed on the work of internal audit for the external
audit.
4) Setting the scope of the internal audit work to be carried out.
a) 1 and 3 b) 2, 3 and 4
c) 1, 2 and 4 d) 3 and 4 only
Q.5. Which of the following actions should RMT & Co. take to maintain their objectivity in relation to
the level of fee income from PQR Ltd.?
1) The level of fee income should be communicated to those charged with governance
2) Separate teams should be used for the audit and non-audit work
3) Request payment of the current year’s audit fee in advance of any work being performed
4) Request a pre-issuance review be conducted by an external accountant
a) 1 and 4 only b) 3 and 4 only
c) 2 and 3 only d) 1, 2, 3 and 4

Answer - Integrated Case Study 5

Q. No. Answer Reason
Q.1. d) In line with Code of Ethics, a self-interest threat would arise due to the personal
relation- ship between the audit engagement partner and finance director. A self-
interest threat, not intimidation threat, would arise as a result of the overdue fee
and due to the nature of the non-audit work, it is unlikely that a self-review
threat would arise.

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Q.2. c) In order to maintain independence, Chetanya Garg would be the most

appropriate re- placement as audit engagement partner as he has no ongoing
relationship with XYZ (P) Ltd. Appointing any of the other potential
replacements would give rise to self-review or familiarity threats to
independence.
Q.3. b) If Aadish Jain accepts the position as a non-executive director for MN Ltd., self-
interest and self-review threats are created which are so significant that no
safeguards can be implemented. Further as per Code of Ethics, no partner of the
firm should serve as a director of an audit client and as such, RMT & Co. would
need to resign as auditor.
Q.4. c) Assuming a management responsibility is when the auditor is involved in
leading or directing the company or making decisions which are the remit of
management. Designing and maintaining internal controls, determining which
recommendations to implement and setting the scope of work are all decisions
which should be taken by management.
Q.5. a) PQR Ltd. is a listed company and the fees received by RMT & Co. from the
company is substantially high. As per Code of Ethics, this should be disclosed to
TCWG and an appropriate safeguard should be implemented. In this case, it
would be appropriate to have a pre-issuance review carried out prior to issuing
the audit opinion for the current year.

INTEGRATED CASE STUDY - 6

ABC Ltd., is one of the leading companies in the pharmaceuticals manufacturing industry. 75% Equity
shares of ABC Ltd. was acquired by XYZ Ltd. five years ago and is being retained by XYZ Ltd. till date.
Total shareholding of XYZ Ltd. includes the following:
 The Government of Punjab and Government of Haryana each hold 18% of the paid -up share capital,
 The Government of Rajasthan’s share is 15.5%.
On 29th Oct. 2019, Mr. Shyam, the auditor of ABC Ltd. had resigned from his post, citing medical reasons.
However, he had forgotten to inform about his resignation to the concerned authorities. Casual vacancy
so created was filled up with the appointment of RMT & Co. Chartered Accountants as statutory auditors
of ABC Ltd.
As far as RMT & Co. Chartered Accountants are concerned, Mr. R, who is one of the partners of the firm
had borrowed a sum of ` 3.00 lakhs from XYZ Ltd. He had also purchased goods worth ` 1.89 lakhs from
the company. Both the sum borrowed and the cost of the goods bought are not yet paid by Mr. R does not
sign the financials of ABC Ltd.

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During the course of audit for the financial year 2019-20, the following observations with respect to the
company were made by the auditors:
1. The company was not maintaining proper records with respect to the fixed assets maintained by it.
The value of fixed assets of the company amounts to ` 1.50 crores approximately.
2. Physical verification for the same was not carried out at regular intervals. The last physical verification
was conducted on 31st July 2018.
As a result of the above observations, the auditors decided to report the same in the Companies (Auditors
Report) Order 2016. However, the management of the company was against the decision of the auditors
and insisted that the observations need not be reported. After several discussions between the auditors
and the management, RMT & Co. decided not to report the issues.
Q.1. To whom should have Mr. Shyam informed about his resignation? What could be the possible
consequence for his non-compliance?
a) He should have informed the registrar and ABC Ltd. As a consequence of his failure, he is
liable to a penalty not exceeding ₹ 5 lakhs.
b) He should have informed the registrar alone. As a consequence of his failure, he is liable to
a penalty not less than ₹ 50,000.
c) He should have informed the registrar and RMT & Co. As a consequence of his failure, he
is liable to a fine of ₹ 500 per day for each day of failure.
d) He should have informed the registrar & comptroller and auditor general. As a
consequence of his failure, he is liable to a fine of ₹ 45,000.
Q.2. With respect to the acts carried out by Mr. R, the partner of the audit firm, what can you infer about
the appointment of RMT & Co. as auditors of ABC Ltd.?
a) It is valid since the indebtedness is within prescribed limits.
b) It is not valid since the indebtedness exceeds prescribed limit of ₹ 1 lakhs.
c) It is valid since Mr. R is not signing the financials of ABC Ltd.
d) It is valid since the indebtedness is not with ABC Ltd.
Q.3. Is the decision of RMT & Co. of not reporting the issues of ABC Ltd. in CARO 2016 justified? If so,
under what reason?
a) No. CARO 2016 is applicable to ABC Ltd. and hence the same has to be reported under
clause (i) of CARO.
b) Yes. CARO 2016 is not applicable to ABC Ltd. and hence the same need not to be reported.
c) No. As per SA 240, the auditor has to maintain professional skepticism when it comes to
issues in the area of fixed assets and hence the same has to be reported.
d) Yes. As per SA 320, the auditor after taking into account the materiality of the issue, he may
either choose to report or not report about the same.

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Q.4. Based on the shareholding pattern of ABC Ltd and XYZ Ltd., please select the correct answer as to
classification of these companies.
a) Both ABC Ltd. and XYZ Ltd. will be classified as government companies.
b) ABC Ltd. will be classified as Government Company, whereas XYZ Ltd. will be classified
as Non-government Company.
c) ABC Ltd. will be classified as Non-government Company, whereas XYZ Ltd. will be
classified as Government Company.
d) Both ABC Ltd. and XYZ Ltd. will be classified as classified as non-government companies.
Q.5. Casual Vacancy created in the office of auditor in the case of a company whose accounts are subject
to audit by an auditor appointed by the Comptroller and Auditor-General of India, be filled by the
Comptroller and Auditor-General of India within ___________ days:
Provided that in case the Comptroller and Auditor-General of India does not fill the vacancy within
the said period, the Board of Directors shall fill the vacancy within next ____________ days.
a) 30 days; 60 days b) 60 days; 30 days
c) 60 days; 60 days d) 30 days; 30 days

Answer - Integrated Case Study 6

Q. No. Answer Reason
Q.1. d) As per Sec. 140(2) of Companies Act, 2013, statement of resignation is required to
be filed with Registrar, company and CAG (in case of Govt. company). As per
Sec. 140(3) of Companies Act, 2013, minimum penalty for non-compliance of Sec.
140(2) is lower of audit fees and ₹50,000.

Q.2. a) As per Sec. 141(3)(d) of Companies Act, 2013, a firm is disqualified to be

appointed as auditor if any of the partner is indebted to the company, or its
subsidiary, or its holding or associate company or a subsidiary of such holding
company, in excess of ₹5 Lacs

Q.3. a) Reporting under CARO, 2016 is required in case of a public company

Q.4. a) As per Sec. 2(45) of Companies Act, 2013, "Govt. company" means any company
in which not less than 51% of the paid-up share capital is held by the C.G., or by
any S.G. (s), or partly by the C.G. and partly by one or more S.G. (s), and includes
a company which is a subsidiary company of such a Government company.

Q.5. d) Refer Sec. 139(8)

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INTEGRATED CASE STUDY – 7

CGN Ltd is a large company engaged in the business of oil exploration in India. The Tamil Nadu
Government and the Central Government hold 37% and 20% respectively of the paid-up share capital of
CGN Ltd. During the year 2017-18, CGN Ltd. acquires 50.4% shares of NPR Ltd., a company engaged in
construction activities and having an annual turnover of ₹1200 Crores for financial year 2018-19.
The C&AG appointed the statutory auditors of CGN Ltd. and NPR Ltd. as per requirements of the
Companies Act 2013. The company had a concern regarding this appointment because both companies
wanted to appoint other auditors as per their assessment, however, considering the legal hassles which
would have got involved, both companies decided to go ahead with the appointments made by C&AG.
The audit of the financial statement for the year ended 31 March 2019 got completed by the auditors
appointed by the C&AG. Subsequent to this, the C&AG also issued an order for supplementary audit of
financial statements of the CGN Ltd. which was objected by the management of CGN Ltd.
The management objected saying that the complete set of financial statements have been audited by
auditors appointed by the C&AG and hence this order is not acceptable because this would lead to
duplication of work.
Moreover, the management of CGN Ltd. has also written to the C&AG that for the next financial year, the
existing auditors should either resign so that the management may bring in their own auditors or the
C&AG should have faith in the work of the auditors appointed by them.
C&AG refuses to accept the request of CGN Ltd. and appoint auditor for the financial year ended 31 st
March 2020 on 20.08.2019.
The audit of the financial statements of NPR Ltd. for the financial year ended 31 March 2019 got completed
but NPR Ltd. observed that during the course of audit, there was lot of intervention of C&AG, wherein
C&AG was giving directions to the auditors on the manner in which audit should be conducted in respect
of certain areas. Further, it also received comments from C&AG on the audit report of the auditors. NPR
Ltd. is seeking legal opinion to go against C&AG so that they can avoid unnecessary interference of C&AG
and is also looking to have new auditors appointed by NPR Ltd. with whom they will have an engagement
letter with the terms that those auditors don’t accept any interference of C&AG which the existing auditors
have not been able to avoid.
Considering the above mentioned facts, please provide your suggestions in respect of the following:
Q.1. Which of the following option is correct as to appointment of auditors in CGN Ltd. and NPR Ltd.
by C&AG?
a) Appointment of auditor in CGN Ltd. by C&AG is valid; Appointment of auditor in NPR
Ltd. by C&AG is not valid.
b) Appointment of auditor in CGN Ltd. by C&AG is not valid; Appointment of auditor in
NPR Ltd. by C&AG is valid.
c) Appointment of auditors in CGN Ltd. as well as NPR Ltd. by C&AG are valid.
d) Appointment of auditors in CGN Ltd. as well as NPR Ltd. by C&AG are not valid.
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Q.2. Please suggest how to resolve the matter as to objection of management of CGN Ltd. over the order
of C&AG as to Supplementary audit.
a) The management’s stand is not correct. The C&AG may order supplementary audit as per
the requirements of the Companies Act 2013.
b) The management’s stand is not correct. The C&AG may order supplementary audit as per
the requirements of the Indian Penal Code.
c) The management is correct and in this situation they get the right to appoint another auditor
considering the fact that the C&AG has lost faith in the work of auditors appointed by them.
d) Such type of matters should be taken to arbitration as per the requirements of the
Arbitration Act.
Q.3. Which of the following is correct as to order of supplementary audit by C&AG?
a) The CAG shall within 60 days from the date of audit report have a right to, conduct a
supplementary audit of the books of accounts of the company by such person or persons as
he may authorise in this behalf.
b) The CAG shall within 90 days from the date of receipt of the audit report have a right to,
conduct a supplementary audit of the books of accounts of the company by such person or
persons as he may authorise in this behalf.
c) The CAG shall within 60 days from the date of receipt of the audit report have a right to,
conduct a supplementary audit of the financial statement of the company by such person
or persons as he may authorise in this behalf.
d) The CAG shall within 90 days from the date of audit report have a right to, conduct a
supplementary audit of the financial statement of the company by company auditor.
Q.4. In the case of a Government company, the CAG shall appoint the auditor and direct such auditor
the manner in which the accounts of the Government Company are required to be audited. The
auditor so appointed shall submit a copy of the audit report to the CAG which, among other things,
include the following:
(i) Directions, if any, issued by the C&AG
(ii) Action taken on directions issued by C& AG
(iii) Impact of directions on the accounts of the company.
(iv) Impact of directions on the financial statements of the company.
(v) Impact of directions on the audit of the company.
a) (i), (ii) and (v) b) (i), (ii), (iii) and (iv)
c) (i), (ii), (iii) and (v) d) (i), (ii), (iv) and (v)

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Q.5. In the context of directions being issued by C&AG to auditor of NPR Ltd. and stand of NPR Ltd.
to seek legal opinion to go against C&AG so as to avoid unnecessary interference of C&AG, please
advise which of the following should be correct?
a) The stand of the existing auditors should have been better i.e. not to accept any interference
of C&AG.
b) Management could have planned the audit work better by including the same terms in
engagement letter with existing auditors instead of appointing another auditor.
c) C&AG involvement could have been accepted if this was the audit of CGN Ltd. but not in
case of NPR Ltd. and hence NPR Ltd. should also reach out to its parent company to get
this resolved.
d) Stand of NPR Ltd. is wrong as the C&AG may get involved in the audit of NPR Ltd.

Answer - Integrated Case Study 7

Q. No. Answer Reason
Q.1. c) As per Sec. 139(5) of Companies Act, 2013, in the case of a Government company,
the C&AG shall, in respect of a financial year, appoint an auditor duly qualified
to be appointed as an auditor of companies under this Act, within a period of 180
days from the commencement of the financial year, who shall hold office till the
conclusion of the AGM. As per Sec. 2(45) of Companies Act, 2013, "Govt.
company" means any company in which not less than 51% of the paid-up share
capital is held by the C.G., or by any S.G. (s), or partly by the C.G. and partly by
one or more S.G. (s), and includes a company which is a subsidiary company of
such a Government company.
Q.2. a) As per Sec. 143(6) of Companies Act, 2013, the CAG shall within 60 days from the
date of receipt of the audit report have a right to, conduct a supplementary audit
of the financial statement of the company by such person or persons as he may
authorise in this behalf.
Q.3. c) As per Sec. 143(6) of Companies Act, 2013, the CAG shall within 60 days from the
date of receipt of the audit report have a right to, conduct a supplementary audit
of the financial statement of the company by such person or persons as he may
authorise in this behalf
Q.4. b) As per Sec. 143(5) of Companies Act, 2013, In the case of a Government company,
the CAG shall appoint the auditor and direct such auditor the manner in which
the accounts of the Government company are required to be audited.

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The auditor so appointed shall submit a copy of the audit report to the CAG
which, among other things, include the following: 1. directions, if any, issued by
the CAG, 2. the action taken thereon and 3. its impact on the accounts and
financial statement of the company
Q.5. d) As per Sec. 143(5) of Companies Act, 2013, In the case of a Government company,
the CAG shall appoint the auditor and direct such auditor the manner in which
the accounts of the Government company are required to be audited.

INTEGRATED CASE STUDY – 8

ALT company manufactures and sells toys to the wholesale market. It has prepared its financial statements
for the financial year 2018-19. You are an audit assistant with RMT & Co., a firm of Chartered Accountant
in New Delhi and you have been assigned the current liabilities balances in the audit work plan.

You have calculated the payables payment period to be 66 days for the year ending 31.03.2019 (45 days for
the preceding financial year) and have asked the directors of ALT Company to provide an explanation as
to the increase in days. ALT Company receives monthly statements from its main suppliers and performs
regular supplier statement reconciliations.
There were inconsistencies noted in respect of the following at 31.03.2019:
Supplier Balance per purchase ledger (₹) Balance per supplier statement (₹)
Digital Toys 145,321 221,130
Analog Toys (89,973) 99,600
Hybrid Toys 94,658 1,09,650

Digital Toys
ALT Co has a credit agreement with Digital Toys under which it receives goods 14 days before the supplier
raises the invoice. ALT Co. received goods worth ₹ 75,809 on 18 March 2019 for which the invoice was
received shortly after the year end in accordance with the agreement. ALT Co entered the transaction into
its accounting records at the date of invoice.
Analog Toys
The difference on this balance has still to be investigated.
Hybrid Toys
ALT Co’s finance director has informed you that there was an error in closing the purchase ledger and it
was closed three days early. Invoices received 29, 30 and 31 March 2019 were posted to the 2019-20 ledger.
The directors of ALT Co have confirmed that following the discovery of this error, a manual adjustment
was made using the journal book.

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Q.1. Which of the following supplier balances would indicate a high risk in relation to the
COMPLETENESS of the liability recorded at the year end?
a) A supplier with a high balance at the year end and with a low volume of transactions during
the year.
b) A supplier with a low balance at the year end and with a high volume of transactions during
the year.
c) A supplier with a low balance at the year end and with a low volume of transactions during
the year.
d) A supplier with a high balance at the year end and with a high volume of transactions
during the year.
Q.2. Which of the following would correctly explain why the payables payment period has increased
from 45 days in 2018-19 to 66 days in 2019-20?
a) ALT Co. received a prompt payment discount from one of its suppliers for the first time in
2018-19.
b) ALT Co. obtained a trade discount from one of its biggest suppliers which has reduced the
amount owed to that supplier by 10% in the year.
c) ALT Co. purchased an unusually high level of goods in March 2019 to satisfy a large order
and had not paid for those goods by the year end.
d) ALT Co. took advantage of extended credit terms offered by a new supplier in respect of a
large order which it had fully settled by the year end.
Q.3. Which of the following is an appropriate action in respect of the inconsistency in the balance with
Digital Toys?
a) The auditor should take no further action as this is a timing difference which was resolved
upon receipt and posting of the invoice.
b) The auditor should request that the purchase ledger balance is amended at the reporting
date to reflect the recent invoice.
c) The auditor should contact the supplier and request a supplier statement as at the current
date.
d) The auditor should request that an accrual is created in respect of the goods received but
not yet invoiced.
Q.4. Which of the following would be a valid explanation for the difference in respect of Analog Toys?
(1) An invoice for ₹ 189,573 has been paid twice.
(2) An invoice for ₹ 189,573 has been posted as a debit note.
(3) An invoice for ₹189,573 has been received and processed prior to receipt of the goods.
a) 1 only b) 1 and 2 only
c) 2 and 3 only d) 1, 2 and 3
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Q.5. Which of the following would NOT provide sufficient and appropriate audit evidence over the
COMPLETENESS of the purchase ledger balance in respect of Hybrid Toys?
a) Obtain the journal book and confirm that all invoices recorded as received from Hybrid Toys
dated 29– 31 March have been manually adjusted for.
b) Review the accruals listing to ensure goods received from Hybrid Toys post year end for which
an invoice has not been received have been recorded in the correct period.
c) For post year-end cash book payments to Hybrid Toys, confirm date of matching invoice and
if pre year end agree to liability.
d) Review a sample of invoices received from Hybrid Toys recorded post year end and match to
GRN to determine if they should have been recorded at the year end.

Answer - Integrated Case Study 8

Q. No. Answer Reason
Q.1. (b) A supplier with a low balance at the year-end but with a high volume of
transactions during the year may indicate that not all liabilities have been
recorded at the year-end date.

Q.2. (c) A purchase of a large volume of goods close to the year-end would increase the
payables payment period. The prompt payment and trade discounts would both
decrease the payables payment period, and the extended credit terms in this
instance would have no impact as there is no closing balance with the new
supplier.

Q.3. (d) The difference of ₹75,809 with Digital Toys relates to goods which were received
by ALT Co. prior to the year-end but were not recorded in the accounting records
until after the yearend date. As ALT Co. had a liability to pay for the goods at the
date of receipt, an accrual should be created for the goods received not yet
invoiced.

Q.4. (a) The difference in respect of Analog Toys may have arisen if the invoice had been
paid twice in error as an additional ₹189,573 will have been debited to the
supplier account.

Q.5. (b) Reviewing the accruals listing would not help the auditor confirm the purchase
ledger balance with Bath Co as accruals are recorded separately from the
purchase ledger balance.

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INTEGRATED CASE STUDY – 9

M/s TPR & Associates have been appointed as the auditors of Octopus Ltd. for the Financial Year 2019-
20. During the course of audit, the auditor notices that there is significant change in the number of debtors
of the company. The auditor decided to check the debtors account in detail.
Further the company has made various provisions like the provisions for taxation, provision for bad &
doubtful debts.
Also, during the current Financial Year, the auditor attended the physical verification of the inventory
being carried out by the management.
The auditor notices that there is no substantial change in the bifurcation of amount of items representing
the liabilities side of the balance sheet of Octopus Ltd. Still the auditor understands that he needs to check
the liability side in detail.
Further the company has also recognised various income like interest income and dividend income which
auditor understands need to be checked in detail.
The auditor is of the understanding that certain matters need to be reported under Companies Auditors
Report Order (CARO).
Based on the above facts, answer the following:
Q.1. __________ is a possible obligation that arises from the past events and whose existence will be
confirmed only by the occurrence/non-occurrence of one or more uncertain future events not
wholly within the control of the entity:
a) Provision b) Reserve
c) Contingent Liability d) Liability
Q.2. Which of the following is not correct with respect to the inventory held by Octopus Limited:
a) All inventory units held by the company should have been recorded and recognized in the
financial statements
b) Any inventory held by a third party on behalf of the company should not be included as
part of the inventory balance.
c) Inventory should be recognized at cost or net realizable value whichever is lower.
d) Inventory balance as at the yearend does not include any element of next year.
Q.3. If the management of Octopus Ltd. refuses to allow the auditor, to send the confirmation request
to the debtors, the auditor should:
a) Withdraw from the engagement.
b) Not listen at all to any requests of the management.
c) Consider the management’s request for refusal and assess its validity and decide the nature,
timing, extent of his audit procedures accordingly.
d) Agree to management request and proceed with audit of other items of the financial
statements.
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Q.4. Which of the following statements is not true so far as the liabilities of a company are concerned.
a) Liabilities are the financial obligations of a company including owner's funds.
b) Liabilities include borrowing, trade payable and other current liabilities and provisions.
c) Verification of liabilities is an important as that of assets.
d) All of the above.
Q.5. Statement 1: Confirmations as well as undelivered letters should be given/returned to the auditor
and not to the client.
Statement 2: When no reply is received, the auditor should perform alternate procedures regarding
the balances.
a) Only statement 1 is correct
b) Only statement 2 is correct
c) Both 1 & 2 are correct
d) Both 1 & 2 are incorrect

Answer - Integrated Case Study 9

Q. No. Answer Reason
Q.1. c) As per AS 29 "Provisions, Contingent Liabilities and Contingent Assets" a
contingent liability is a possible obligation that arises from past events and the
existence of which will be confirmed only by the occurrence or non-occurrence
of one or more uncertain future events not wholly within the control of the
enterprise.

Q.2. b) Any inventory held by a third party on behalf of the company should be
included as part of the inventory balance, being owned by the company.

Q.3. c) As per SA 505 "External Confirmations", if management refuses to allow the

auditor to send a confirmation request, the auditor shall:
(a) Inquire as to management's reasons for the refusal, and seek audit
evidence as to their validity and reasonableness;
(b) Evaluate the implications of management's refusal on the auditor's
assessment of the relevant risks of material misstatement, including the
risk of fraud, and on the nature, timing and extent of other audit
procedures; and
(c) Perform alternative audit procedures designed to obtain relevant and
reliable audit evidence.

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Q.4. a) As per AS 29 "Provisions, Contingent Liabilities and Contingent Assets", a

liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise of
resources embodying economic benefits.
Q.5. c) As per SA 505 "External Confirmations", in the case of each non-response, the
auditor shall perform alternative audit procedures to obtain relevant and reliable
audit evidence.

INTEGRATED CASE STUDY - 10

ABC Ltd. is a company dealing in products namely chocolate and coffee. ABC Ltd. approached audit firm
XYZ & Associates for the statutory audit of its financial statements for the year ended 31.03.2021. The
Gross turnover of the company is ` 105 crores, out of which turnover from one of its product namely coffee
is of ` 95 crores during the immediate preceding Financial Year.
During the course of Audit, XYZ & Associates found certain delay in the payment of the Employees
Provident Fund by ABC Ltd. They understand that the same need to be reported under the relevant
provisions of Companies (Auditors Report) Order 2020.
During the FY 2020-2021, Mrs. X wife of CA Mr. X who is partner in XYZ & Associates acquires certain
shares of ABC Ltd. The audit firm is of the opinion that this may call for a disqualification for the firm for
being working as the auditor of the company under the relevant provisions of the Companies Act, 2013.
Further, ABC Ltd. also approached the auditors to provide them the Investment Banking service to which
the auditors denied as per the provisions of Companies Act, 2013.
During the course of audit, XVZ & Associates has reason to believe that an offence of fraud involving some
amount has been committed in the ABC Ltd. by its General Manager. The auditors understand that there
is a requirement for reporting of fraud by the auditors under the Companies Act and the relevant rules.
Based on the above facts, answer the following:
Q.1. After the appointment of XYZ & Associates, ABC Ltd. should inform the auditor and file a notice of
such appointment with registrar within:
a) 60 days b) 30 days
c) 15 days d) 20 days
Q.2. If Mrs. X acquires security exceeding the prescribed limit in the ABC Ltd., then XVZ & Associates
shall take corrective actions within ............. days. What is the prescribed limit?
a) 100 days, Market Value ` 1,00,000 b) 60 days, Face value ` 1,00,000
(c) 90 days, Face value ` 1,00,000 d) 15 days, Market Value ` 1,00,000

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Q.3. Under which section reporting of fraud by an auditor to the Central Government is required and
what is the amount of fraud:
a) Section 143(12), 1 crore & above b) Section 139(12), 1 crore & above
c) Section 143(12), 2 crore & above d) None of the above
Q.4. What is the requirement for ABC Ltd. as per the relevant provisions regarding maintenance of cost
records?
a) Maintenance of cost records is mandatory, in Form CRA 1.
b) Maintenance of cost records is mandatory, in Form CRA 2.
c) Maintenance of cost records is mandatory, in any general format.
d) No requirement of maintenance of cost records.
Q.5. Under relevant clause of CARO, 2020, XYZ & Associates is required to report the extent of arrears of
Employees Provident Fund as at the balance sheet date:
a) Exceeding 9 months b) Exceeding 3 months
c) Exceeding 6 months d) Exceeding 12 months

Answer - Integrated Case Study 10

Q. No. Answer Reason
Q.1. c) Proviso to Sec. 139(1) of Companies Act, 2013, requires that the company shall
inform the auditor concerned of his or its appointment, and also file a notice of
such appointment with the Registrar within 15 days of the meeting in which the
auditor is appointed.
Q.2. b) Refer Rule 10 of Companies (Audit and Auditor's) Rules, 2014.
For the purpose of proviso to Sec. 141 (3) (d) (i), a relative of an auditor may hold
securities in the company of face value not exceeding ` I lakh:
Provided further that in the event of acquiring any security or interest by a
relative, above the threshold prescribed, the corrective action to maintain the
limits as specified above shall be taken by the auditor within 60 days of such
acquisition or interest.
Q.3. a) Refer Sec. 143(12) of Companies Act, 2013 and Rule 13 of Companies (Audit and
Auditor's) Rules, 2014
Sec. 143(12): lf an auditor of a company in the course of the performance of his
duties as auditor, has reason to believe that an offence of fraud involving such
amount or amounts as may be prescribed, is being or has been committed in the
company by its officers or employees, the auditor shall report the matter to the
Central Government within such time and in such manner as may be prescribed.

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Rule 13: If an auditor of a company, in the course of the performance of his duties
as statutory auditor, has reason to believe that an offence of fraud, which
involves or is expected to involve individually an amount of ` 1 Cr. or above, is
being or has been committed against the company by its officers or employees,
the auditor shall report the matter to the Central Government.
Q.4. a) Refer Rule 5 of Companies (Cost Records and Audit) Rules, 2014
Every company under these rules including all units and branches thereof, shall,
in respect of each of its financial year commencing on or after the 1st day of April,
2014, maintain cost records in Form CRA 1.
Q.5. c) Refer Para 3 (vii) (a) of CARO, 2020
Whether the company is regular in depositing undisputed statutory dues
including provident fund, employees' state insurance, income-tax, sales-tax,
service tax, duty of customs, duty of excise, value added tax, cess and any other
statutory dues to the appropriate authorities and if not, the extent of the arrears
of outstanding statutory dues as on the last day of the financial year concerned
for a period of more than 6 months from the date they became payable, shall be
indicated.

INTEGRATED CASE STUDY – 11

Mr. Laxman is appointed as statutory auditor of Best Limited for the Financial Year ended 31st March,
2021. During the course of audit, it was found that few doubtful transactions had been committed by
finance manager who retired in March, 2021.
The fraud was going on since last 4-5years and the total amount misappropriated is approximately ` 75
lacs.
Balance sheet of Best Ltd. reflected a cash balance of ` 7 crores. The company has taken a loan of ` 2 crores
from the bank despite of the huge cash balance with the company.
Also, Companies Act bestows some duties on auditors to report matters to Central Government in case of
fraud.
On the basis of above facts answer below questions in relation to Mr. Laxman's rule and duties while
conducting statutory audit of Best Limited. [MTP – OCT. 2020]
Q.1. Mr. Laxman shall obtain __________ that the financial statements are free from fraud and
misstatement.
a) Absolute assurance b) Reasonable assurance
c) Management's assurance d) Chief Financial Officer assurance

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Q.2. Mr. Laxman suspects that cash payments were inflated. Out of the below which could be probable
reason for such inflated cash payments.
a) Not accounting for cash sales completely
b) Making payments against purchase vouchers
c) Making payments against inflated vouchers
d) Teeming and Lading
Q.3. As per Section 143(12) of Companies Act, 2013 & Rule 13 of CAAR, 2014; Mr. Laxman shall
a) Report the matter to the audit committee constituted under section 177 or to the Board in
other cases within such time and in such manner as prescribed.
b) Report the matter to the audit committee constituted under section 177 within such time
and in such manner as prescribed.
c) Report the matter to the audit committee constituted under section 177 and also to the
Board within such time and in such manner as prescribed.
d) Report the matter to the Board within such time and in such manner as prescribed.
Q.4. Owing to the ________ limitations of an audit, there is ______ risk that some material misstatements
of the financial statements will not be detected, even though the audit is properly planned and
performed in accordance with the SAs.
a) Inherent, unavoidable b) Inherit, complete
c) Management, unavoidable d) Regulatory, control
Q.5. As an auditor what conclusion can Mr. Laxman draw looking at the huge cash reserve of the
company and corresponding bank loan?
a) Report this matter to the Central Government u/s 143(12) as there is a possibility of fraud.
b) Obtain sufficient and appropriate audit evidence of existence of fraud
c) Report the matter under CARO, 2020
d) There is nothing to report as it's a normal financial decision.

Answer - Integrated Case Study 11

Q. No. Answer Reason
Q.1. b) As per SA 200, in conducting an audit of financial statements, the overall objective
of the auditor is to obtain 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 prepared, in all material respects, in accordance with an applicable
financial reporting framework.

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Q.2. c) Reasons for inflated cash payments:

(a) Making payments against fictitious vouchers.
(b) Making payments against vouchers, the amounts whereof have been inflated.
(c) Manipulating totals of wage by including names of dummy workers in wage
rolls.
(d) Over casting for petty cash expenditure.
Q.3. a) If an auditor of a company in the course of the performance of his duties as auditor,
has reason to believe that an offence of fraud involving such amount as may be
prescribed, is being or has been committed in the company by its officers or
employees, the auditor shall report the matter to the Central Government within
such time and manner as prescribed:
Provided that in case of a fraud involving lesser than the specified amount, the
auditor shall report the matter to the audit committee constituted u/s 177 or to the
Board in other cases within such time and in such manner as may be prescribed.
Q.4. a) As stated in SA 200 and SA 240, owing to the inherent limitations of an audit, there
is an unavoidable risk that some material misstatements of the financial statements
may not be detected, even though the audit is properly planned and performed in
accordance with the SAs.
Q.5. b) -

INTEGRATED CASE STUDY - 12

Roop & Co. are the auditors of Onda group of Hotels. This is the first time the firm is auditing an industry
in food and beverages and it is day one of the audit. The engagement partner along with his team wants
to make a thorough understanding of the entity and its environment in order to identify and assess the
risks of material misstatements, whether due to fraud or error.
The following are some of the points identified by them on Day 1.
1. The hotel has two banquet halls. The documentation available for verification of banquet hall
revenue is only the invoice raised by the hotel and some mail conversations on customer enquiry
and finalization of price. In audit trail, it is found that finance approval of the transaction is only
after invoice is sent to them for accounting at final settlement. Advance paid by the clients are not
vetted through finance team. The auditor suspects a weakness in this system.
2. The auditor also finds a control deficiency in the process of procurement of stores. A goods receipt
note is not prepared at the time of receipt of goods. On enquiry with management, the auditor finds
that there exists a system control wherein goods receipt note is automatically prepared and approved
in the system once the quantity and price of goods is entered against specific vendor. This entry is
on real-time basis and system does not allow back dated entries.
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3. The auditor enquires of the management as to what is risk assessment process followed by the entity
for prevention and detection of risk of material misstatement due to fraud and error. The auditor
finds there is no documented risk assessment process.
With the help of the above facts, answer the following questions by choosing the correct option.
[MTP - OCT. 2020]
Q.1. What kind of a risk is portrayed in the booking of revenue with respect to Banquet halls?
a) Inherent risk in the class of transaction
b) Control risk in the class of transaction
c) Detection risk in the audit procedures
d) Audit risk in the opinion on the financial statements.
Q.2. Which among the following statement is incorrect in the context of Audit Risk?
a) The more extensive the audit procedures performed, the lower is the detection risk
b) Greater the risk of material misstatement the auditor believes exist, less is the detection risk
that can be accepted and accordingly more persuasive evidence is required by the auditor.
c) Audit risk means the risk that the auditor gives an appropriate audit opinion when the
financial statement are materially misstated.
d) Risk of material misstatement at the assertion level is of two kinds - control risk and
inherent risk.
Q.3. In the case of procurement of stores, the auditor has tested more than one control for the same
assertion. In that given case, what should be his reliance on the control?
a) Since compensating controls are identified, if tested and evaluated to be effective, the
auditor can rely on the control.
b) Even though compensating controls are there, since one control is ineffective, the auditor
should not rely on control for this assertion and should perform extensive procedures.
c) Documentation in electronic medium cannot be accepted, hence, he cannot rely only on
system control.
d) Even though compensating controls are there, since one control is ineffective, the auditor
should not rely on control for this assertion as well as associated assertions.
Q.4. In the context of SA 315, which among the following is not a risk assessment procedure?
a) Inquiries of management, of appropriate individuals within internal audit function and of
others within the entity
b) Analytical Procedures
c) Observation and Inspection
d) Audit Planning.

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Q.5. What should be the course of action of the auditor for the entity not having a documented risk
assessment process?
a) The auditor should obtain management written representations on how risks are identified
b) The auditor shall discuss with management on how risks are identified, addressed and
determine whether the absence is appropriate in the circumstances or whether it represents
a significant deficiency in internal control.
c) The auditor should advise the management to document the same immediately and
accordingly opine on the same in his audit report too.
d) The auditor shall discuss with management on how risks are identified by system and place
reliance on the same as documentation in this context is immaterial.

Answer - Integrated Case Study 12

Q. No. Answer Reason
Q.1. b) The risk that a misstatement that could occur in an assertion about a class of
transaction, account balance or disclosure and that could be material, either
individually or when aggregated with other misstatements, will not be
prevented, or detected and corrected, on a timely basis by the entity's internal
control is known as Control Risk.
Q.2. c) Audit risk may be defined as the risk that the auditor gives an inappropriate audit
opinion when the financial statements are materially misstated. Thus, it is the risk
that the auditor may fail to express appropriate option in an audit assignment
Q.3. a) -
Q.4. d) As per SA 315, components of risk assessment procedures comprise of:
 Inquiries of management, of appropriate individuals within internal audit
function and of others within the entity
 Analytical Procedures
 Observation and Inspection
Q.5. b) -

INTEGRATED CASE STUDY - 13

M/JJ & Associates having office in Chennai are statutory auditors under Companies Act, 2013 of as
company viz. Sweet Aroma Private Limited engaged in business of obtaining and manufacturing rice from
paddy catering to both domestic as well as international market mainly in Gulf nations. The company has
a huge plant capacity for rice extraction in one of the states in Northern India. Needless to state that
inventories are in huge quantity in such type of business consisting of raw material, work in progress and
finished goods. The auditors want to obtain sufficient appropriate audit evidence regarding inventories.

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In above context, answer the following questions: [RTP NOV. 2020]

Q.1. Which of the following is most likely correct in relation to obtaining of sufficient appropriate audit
evidence regarding existence and condition of inventory?
a) It is mandatory for the auditor to attend physical inventory counting on the date of financial
statements in all circumstances.
b) Physical inventory counting may be attended by auditor on the date of financial statement
or at a date other than date of financial statements in his discretion mandatorily in all
circumstances.
c) The attendance of auditors at physical inventory counting is impracticable due to time and
costs involved because of auditor's office location vis-à-vis company's plant location.
Hence, attendance at physical inventory counting may be skipped and alternative audit
procedures may be performed to obtain sufficient appropriate evidence.
d) The auditor shall attend at physical inventory counting unless impracticable. However,
issue of time and costs involved because of auditor's office location vis-à-vis company's
plant location is not a valid basis for skipping physical inventory counting.
Q.2. Below are given certain cluster of matters which are relevant in planning attendance of auditor at
physical inventory counting. Which of the following clusters consists of a likely inappropriate
combination?
a) Nature of inventory, timing of physical inventory counting and stages of completion of
work in progress
b) Nature of inventory, timing of physical inventory counting and valuation method of
inventory
c) Nature of inventory, timing of physical inventory counting considerations regarding
maintenance of a perpetual inventory system
d) Risks of material misstatements related to inventory, nature of internal control pertaining
to inventory, considerations regarding maintenance of a perpetual inventory system.
Q.3. Which of the following is the most likely logical sequence of steps in relation to attendance at
physical inventory counting by auditor?
a) Observance of performance of management's count procedures, inspection of inventory,
performing test counts and evaluation of management's procedures for recording and
controlling results of physical inventory counting
b) Observance of performance of management's count procedures, performing test counts,
inspection of inventory and evaluation of management's procedures for recording and
controlling results of physical inventory counting
c) Performing test counts, inspection of inventory, Observance of performance of
management’s count procedures and evaluation of management's procedures for recording
and controlling results of physical inventory counting

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d) Evaluation of management's procedures for recording and controlling results of physical

inventory counting, Observance of performance of management's count procedures,
inspection of inventory and performing test counts
Q.4. During attendance at physical inventory counting, the auditor inspects inventory. Following
outcomes stated as I, II & III are given below of this inspection procedure:
Outcome I - Existence of inventory
Outcome II - Ownership of inventory
Outcome III - Condition of inventory
Which of following statements is most likely true?
a) Outcomes I, II and III are all necessarily established after inspection.
b) Only Outcomes I and III are established after inspection and Outcome II is never
established.
c) Outcomes I and III are established after inspection. However, outcome II may not be
necessarily established.
d) Outcome II and III are established after inspection. However, outcome I may not be
necessarily established.
Q.5. It was observed by auditors that, out of total rice physically counted on 31st March, 2020 about 67
quintals of rice belonged to M/s PQR, a proprietary concern which had sent paddy to this
company’s plant for extraction of rice. What would be treatment of this item in financial statements
of company?
a) The value of 67 quintals rice would be reflected in company's financial statements as per
method of valuation adopted by the company.
b) The value of 67 quintals rice would be reflected in company's financial statements as per
method of valuation adopted by the proprietary concern.
c) The value of 67 quintals rice would not be reflected in company's financial statements.
d) The value of 67 quintals rice would be reflected in proprietary concern's financial statement
as per method of valuation adopted by the company.

Answer - Integrated Case Study 13

Q. No. Answer Reason
Q.1. d)
Q.2. b)

Q.3. d)
Q.4. c)
Q.5. c)

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INTEGRATED CASE STUDY – 14

A partnership firm of Chartered Accountants, YZ and Associates were appointed as auditor of company
UV Private Limited. The financial year for which YZ and Associates were to audit books of account of UV
Private Limited began on 1 April, 2020 and ended on 31 March, 2021.
YZ and Associates consisted of four partners namely Mr. V. Mr. 7. Mr. G and Mr. H.
While auditing books of accounts of UV Private Limited for the period beginning on 1 April 2020 and
ending on 31 March, 2021, one of the partners of YZ and Associates namely Mr. H took up the expenses
part for the purpose of audit.
The management of UV Private Limited had adopted various accounting policies and principles related
to expenses which Mr. H as auditor of UV Private Limited was unable to understand. Some of the issues
which Mr. H was unable to understand are mentioned as follows:
(1) Power and Fuel expenses paid for the months of April, 2021 and May, 2021 have been included
and shown as Power and Fuel expenses for the period beginning 1 April, 2020 and ending 31
March, 2021.
(2) Personal Rent Expenses of the son of one of the director, Mr. T of UV Private Limited have been
shown as Rent Expenses of business of UV Private Limited.
(3) Repair and Maintenance Expenses for the months of February 2021 and March 2021 were still
outstanding and were not shown in Balance Sheet of UV Private Limited.
(4) Repair and Maintenance Expenses for the financial year 1 April, 2020 to 31 March, 2021 were very
high as compared to financial year 1 April, 2019 to 31 March, 2020. The auditor Mr. H asked the
appropriate authority about the reasons for such huge differences in amounts of two financial
years.
(5) While verifying the insurance expenses, the insurance policies were not shown to auditor Mr. H.
The above mentioned five points were some of the issues which Mr. H was unable to understand.
Answer the following questions: [RTP – NOV. 2020]
Q.1. As per the point number (1) mentioned in the above case, the Power and Fuel Expenses paid for
the months of April 2021 and May 2021 must be shown under asset side of balance sheet of UV
Private Limited as on 31 March, 2021 as:
a) Outstanding Power and Fuel Expenses
b) Prepaid Power and Fuel Expenses
c) Power and Fuel Expenses
d) Power and Fuel Expenses Payable

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Q.2. As per point number (2) mentioned above in the case, the Personal Rent Expenses of the son of one
of the director Mr. T were added to Rent Expenses of business of UV Private Limited. The amount
of personal rent expenses of the son of the director M. T must be:
a) Subtracted from Rent Expenses of business of UV Private Limited
b) Remain Added to Rent Expenses of business of UV Private Limited
c) Again Added to Rent Expenses of business of UV Private Limited
d) Subtracted twice from Rent Expenses of business of UV Private Limited
Q.3. As per point number (3) mentioned above in the case, the Repair and Maintenance Expenses
outstanding for the months of February 2021 and March 2021 must be shown under liability side
of balance sheet of UV Private Limited as on 31 March, 2021 as:
a) Prepaid Repair and Maintenance Expenses
b) Repair and Maintenance Expenses
c) Repair and Maintenance Expenses paid in advance
d) Repair and Maintenance Expenses Payable
Q.4. As per point number (4) mentioned in the case above, the auditor Mr. H asked the appropriate
authority for reasons of huge differences in the amount of two financial years of repair and
maintenance expenses. By appropriate authority Mr. H was referring to:
a) All employees of UV Private Limited
b) Management of UV Private Limited
c) Members of UV Private Limited
d) Any one director of UV Private Limited
Q.5. As per point number (5) mentioned in the case above, in verifying insurance expenses the insurance
policies would provide auditor Mr. H as:
a) Invalid Supporting b) No Supporting
c) Lack of proper Supporting d) Valid Supporting

Answer - Integrated Case Study 14

Q. No. Answer Reason
Q.1. b)
Q.2. a)
Q.3. d)
Q.4. b)
Q.5. d)

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INTEGRATED CASE STUDY 15

Ghan Shyam & Associates have been appointed as the statutory auditors of ABC Ltd. for the FY 2019-20.
The engagement partner, CA Ghan Shyam established the overall audit strategy and made the detailed
plan with respect to the audit assignment of ABC Ltd. after discussing the same with the engagement
team.
The strategy adopted by Ghan Shyam & Associates consisted of relying on the internal control system of
the company and the audit plan and programme were developed accordingly & executed by the
engagement team. During the course of audit, the engagement partner, CA Ghan Shyam found that some
internal control systems of the company were not in place. So, he decided not to rely on the internal control
system of the company and accordingly changed the firm's overall audit strategy, audit plan & audit
programme.
While conducting audit, the engagement partner also discussed with his team regarding the audit
procedures to be performed to verify the debtors’ balances of ABC Ltd. CA Ghan Shyam also asked for
the addresses of various debtors from the management of ABC Ltd. to send balance confirmation request
to such debtors. The management provided such addresses to the audit team. However, the management
of ABC Ltd. asked the debtors to send the responses to such confirmation request to General Manager of
accounts department who will in turn provide such responses to the audit team. Also with respect to five
random debtors, CA Ghan Shyam decided to confirm the terms of agreement also along with confirming
the balance amount, by seeking responses to confirmation requests from such debtors.
During the course of audit, the auditor found that the inventory of ABC Ltd. is kept at its factories and
various other locations including warehouses. The audit team is unable to attend the physical verification
activity undertaken by the management at all such locations
During the course of audit, the audit team found that legal cases have been filed against the company on
account of customer complaint, CA Ghan Shyam discussed with his team regarding the audit procedures
that can be performed by the audit team in this regard. CA Ghan Shyam also briefed his engagement team
regarding the documents to be included in the audit file with respect to the audit assignment of ABC Ltd.
Based on the above facts, answer the following: [MTP - March 21]
Q.1. Is CA Ghan Shyam right in changing the overall audit strategy and plan after the audit team has
started working as per the earlier strategy established & plan so developed?
a) CA Ghan Shyam is not right as once the audit team has started the audit work, it is not
correct to change the audit strategy and plan.
b) CA Ghan Shyam is not right as once the overall audit strategy has been established the
same cannot be changed. Audit plan however can be revised.
c) CA Ghan Shyam is right in making changes to the overall audit strategy and the audit plan.
d) CA Ghan Shyam can change the overall audit strategy and audit plan only after discussing
the same with the management of ABC Ltd.
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Q.2. Which of the following audit procedures should the audit team perform with respect to verification
of debtors balance?
a) Ghan Shyam & Associates can compare the debtors balance reflected in financial statement
with the total balance of ledgers account in the books of ABC Ltd.
b) Ghan Shyam & Associates can obtain direct balance confirmation from the debtors as this
is external evidence which is most reliable and relevant.
c) Ghan Shyam & Associates can obtain management representations with respect to the
debtors balance from the management of ABC Ltd and need not perform other audit
procedure as obtaining written representation from management constitutes sufficient and
appropriate audit evidence.
d) Both (a) & (b)
Q.3. Statement 1: The reliability of information to be used as audit evidence is influenced by its source
and its nature, and the circumstances under which it is obtained.
Statement 2: The audit evidence obtained from sources external to the entity are generally more
reliable than the audit evidence from internal sources.
a) Only statement 1 is true b) Only statement 2 is true
c) Both the statement are true d) None of the statement is true
Q.4. With respect to the inventory of ABC Ltd. legal in warehouse, which audit procedures can the audit
team perform to obtain sufficient and appropriate audit evidence?
a) Checking of warehouse receipt with the inventory record of ABC Ltd.
b) Obtaining direct confirmation with respect to quantity & condition of inventory of ABC
Ltd. from the warehouse.
c) Both (a) & (b)
d) Seeking a management representation regarding inventory valuation and mentioning the
fact regarding inventory being kept at the warehouse in the audit report.
Q.5. Is management correct in asking the debtors to provide the reply of confirmation request of auditor
to the General Manager of accounts department of the company?
a) Yes, the management has correctly asked the debtors to respond directly to the GM of
accounts department.
b) No, management is not correct in asking for a direct response to GM of accounts
department as external confirmation is the response obtained directly by the auditor.
c) Yes, the management is correct in advising direct response to the GM of accounts
department as this will ensure that only correct confirmation are provided to the auditors.
d) No, management is not correct as this is the option of the auditor to see if the response to
external confirmation is to be obtained by management or auditor himself.

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Answer - Integrated Case Study 15

Q. No. Answer Reason
Q.1. c)
Q.2. d)

Q.3. c)
Q.4. c)
Q.5. b)

INTEGRATED CASE STUDY – 16

RRM & Associates have been appointed as the statutory auditors of UVW Ltd. for the FY 2019-20. The
engagement partner is CA Raj and his engagement team consists of 2 article assistants. CA Raj briefed his
audit team regarding the factors affecting the sample selection and the sample size. The team was also told
that the tolerable error should be zero and sample size should be selected accordingly. CA Raj gave a
detailed audit programme to his team. The audit programme with respect to the checking of accounts
receivable and accounts payable consists of checking the accounts on sample basis. CA Raj asked the
engagement team to divide the accounts receivables and account payable balances into separate groups
and to take sample from each of them.
During the course of audit, the audit team noticed that certain internal control system with respect to the
accounts receivable were not in place at few instances during the FY 2019-20.
Also, while checking the payment transactions on sample basis, the engagement team should that on 9th
and 10th of every month, the miscellaneous expense vouchers were not signed by the authorised personnel.
The engagement team discussed the implications of the same on their audit procedures to be performed
in this regard.
Based on the above facts, answer the following: [MTP – MARCH 2021]
Q.1. Which of the following factors should not be considered by CA Raj in deciding the extent of
checking while making the sample plan in case of UVW Ltd.?
a) The size of UVW Ltd.
b) The state of the internal control system of UVW Ltd.
c) The tolerable error range decide in case of UVW Ltd.
d) The competence of the engagement team.
Q.2. With respect to the weakness in internal control system of accounts receivable during the FY 2019-
20, the audit team:
a) Should consider a larger sample size or 100% examination of accounts receivables.
b) Should consider a smaller sample size of accounts receivables.
c) Should not consider applying sampling techniques.
d) Should give a disclaimer of opinion.
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Q.3. Statement 1: While conducting an audit, it is obligatory for the auditor to apply sampling.
Statement 2: There may be sometimes where test checking or sampling may not be suitable.
a) Only Statement 1 is true b) Only Statement 2 is true
c) Both the statements are true d) None of the statements is true
Q.4. With respect to selecting sample for accounts receivable and accounts payable which method of
selecting of sample is advised by CA Raj to the engagement team?
a) Stratified Sampling method b) Monetary Unit Sampling method
c) Haphazard Sampling method d) Interval Sampling
Q.5. With respect to the deviation identified by the auditor occurring on 9th and 10th of every month,
what course of action should the audit firm adopt?
a) RRM & Associates should ignore such deviation as it exists only on a very few instances
during the entire year under audit.
b) RRM & Associates should extend its audit procedures to such deviated transactions.
c) RRM & Associates shall investigate the nature and causes of such deviations as such
deviations may be intentional and may indicate the possibility of fraud
d) Both (b) & (c)

Answer - Integrated Case Study 16

Q. No. Answer Reason
Q.1. d)
Q.2. a)

Q.3. b)
Q.4. a)
Q.5. d)

INTEGRATED CASE STUDY - 17

Mars Ltd. is a public company having a turnover exceeding ` 50 crores in the last 3 financial years
including the current financial year which is FY 2019-20:
 The company comes under the class of companies specified under item (A) Regulated Sectors.
 M/s XYZ & Associates have been appointed as the auditors of Mars Ltd. for Y 2019-20.
 Mars Ltd has a branch office in Dubai for which a separate auditor has been appointed.
 M/s XYZ & Associates understand that they need to communicate with the other auditor appointed
for the branch office in Dubai.
 Further Mars Ltd. has taken a loan from a nationalized bank in 2015 amounting to ` 1 crore payable in
8 equal instalments of ` 12.50 lakhs each starting from 31st March 2016 onwards.

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It has repaid its 4 instalments, however the company as defaulted in the current financial year. Mars
Ltd. has sought rescheduling of loan from the bank.
 The auditors, XYZ & Associates understand that they have certain reporting requirements under
CARO.
 Further, the auditors also attended the physical verification of inventory conducted by the
management at the year end.
Based on the above facts, answer the following: [MTP - APRIL 2021]
Q.1. With respect to the forms specified by companies (Cost Records & Audit) Rule 2014, which of the
following is incorrect combination:
a) Form CRA 1 - Maintenance of cost records by the Company.
b) Form CRA 2 - Intimation of appointment of another cost auditor to Central Government.
c) Form CRA 3 - Submission of Cost Audit Report to the Board of Directors of the company.
d) Form CRA 4 - Submission of Cost Audit Report by the company to the Registrar.
Q.2. Within how many days of the receipt of the copy of Cost Audit Report, Mars Ltd. is required to
forward the report to the Central Government:
a) 30 days b) 60 days
c) 15 days d) 90 days
Q.3. Whether reporting about maintenance of cost records required by CARO. If yes, then under which
clause and which is the relevant section under the Companies Act, 2013:
a) Yes; Clause (vi), Sec. 148(1) b) No, Sec. 148(1)
c) Yes; Clause (v), Sec. 143(1) d) No: Sec. 143(1)
Q.4. With respect to the branch office of Mars Ltd. in Dubai, what is the duty of M/s XYZ & Associates?
a) M/s XYZ & Associates might discuss with the branch auditor the audit procedures applied
by the branch auditor.
b) M/s XYZ & Associates may also visit the branch auditor.
c) M/s XYZ & Associates cannot advise the other auditor of accounting auditing/reporting
requirement as the auditor is well versed with such provisions
d) Both (a) & (b)
Q.5. Which of the following is incorrect?
a) SA 200 – Overall objectives of Independent Auditor
b) SA 230 – Audit Documentation
c) SA 299 – Joint Audit of Financial Statements
d) SA 600 – Subsequent Events

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Answer - Integrated Case Study 17

Q. No. Answer Reason
Q.1. d)
Q.2. a)

Q.3. a)
Q.4. d)
Q.5. d)

INTEGRATED CASE STUDY 18

Sun Private Limited is a newly formed private limited company engaged in the manufacturing of solar
panels. Company has appointed M & S Associates, a Partnership Firm of Mr. Meticulous and Mr. Sincere
as their First Auditors, M & S Associates accepted the assignment and Mr. Meticulous being the
engagement Partner, started their Audit.
During the course of Audit, Mr. Meticulous asked the Management for name of the companies operating
in similar business so that they can compare the Company's Figures. During this procedure, Mr.
Meticulous found that the Gross Margin of the Company is lower than the Industry Standard/Fellow
Companies. He prepared an Interim Report dealing with this matter and asked the Management about
the reasons for this deviation. Management asked him to give all the working along with the Working
Papers as they believed it is the Company's Property. Mr. Meticulous advised them that he can provide
working but cannot give them the working papers as they are the property of the Firm.
Management agreed to that and asked Mr. Meticulous to go into detail and tell them the reasons for lower
Gross Margin to which he agreed. During the detailed audit, Mr. Meticulous came to know about the fact
that the company dispatched its solar panels to its Distributors on Delivery Challans and once the goods
were accepted, Sales bills were raised. Checking each Challan against Sales Invoices, Mr. Meticulous found
that there were many challans for which no Invoices were raised and thus Sales was grossly understated
and there was no mechanism where unbilled Challans were recorded or tracked. Company employed a
person to reconcile all the challans and prepared a list where Bills are yet to be sent to the Customers. In
addition, Company was also asked to seek confirmation of balances from all its customers. The
Management assured Mr. Meticulous that Inventories are physically verified and hence there will be no
impact on them. [MTP - APRIL 2021]
Q.1. Mr. Meticulous asked about other Companies, he was intending to perform which audit
procedure?
a) Analytical Procedures b) Substantive Procedures
c) Random Sampling d) Statistical Sampling

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Q.2. What was the initial procedure carried on by Mr. Meticulous?

a) Trend Analysis b) Ratio Analysis
c) Statistical Modelling d) Random Sampling
Q.3. Who has the right to retain the working papers of the Company in current case?
a) Audit Committee b) Board of Directors
c) Auditor d) Chairman of the Audit Committee
Q.4. When Mr. Meticulous decided to go in detail checking of Sales, which Audit Procedure be applied
to obtain the evidence?
a) Test of Transactions b) Test of Balances
c) Both (a) and (b) d) Analytical Procedures
Q.5. The impact of the exercise carried on by the Company for unbilled challans will have an impact on
a) Gross Receipts and Debtors b) Gross Receipts and Inventory
c) Debtors d) Inventory

Answer - Integrated Case Study 18

Q. No. Answer Reason
Q.1. a)
Q.2. b)

Q.3. c)
Q.4. c)
Q.5. a)

INTEGRATED CASE STUDY 19

Suresh Rana & Associates have been appointed as the statutory auditors of HAIL Ltd. by the Comptroller
& Auditor General for the FY 2019-20. HAIL Ltd. is a Government company engaged in the manufacture
of metro train coaches. During the course of audit, CA Suresh extended his scope of audit to cover
efficiency, effectiveness and economy audit. CA Suresh Rana also asked his audit team to conduct
expenditure audit as part of the audit engagement of HAIL Ltd.
During the course of audit, CA Suresh also found that the company has constructed its new stockyard for
parking its metro coaches and maintenance of its metro coaches. However, the stockyard was not being
used by the company for the designated purpose and the company continued using the rented stockyard.
Suresh considered such expenditure as infructuous and avoidable expenditure.
The engagement partner also discussed with his team regarding the areas to be covered while conducting
the audit of receipts. The reporting responsibilities of the engagement team were also discussed by the
engagement partner with his team.

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Based on the above facts, answer the following: [RTP - MAY 2021]
Q.1. Statement 1: Government audit provides public accounting of operational management
programme and policy aspects of public administration as well as accountability of officials
administering them.
Statement 2: Government audit is equipped and intended to function as an investigating agency
to pursue every irregularity or misdemeanour to its logical end.
a) Only statement 1 is correct b) Only statement 2 is correct
c) Both 1 & 2 are correct d) Both 1 & 2 are incorrect
Q.2. _______ is conducted to ensure that the various programmes, schemes, and projects where large
financial expenditure have been incurred are run economically and are yielding results expected
of them:
a) Propriety audit b) Audit against Roles and orders
c) Performance Audit d) Audit against Provision of funds
Q.3. While conducting audit against provision of funds, the statutory auditors, M/s Suresh Rana &
Associates must check:
a) That each item of expenditure is covered by a sanction either general or special of a
competent authority.
b) That the expenditure incurred has been on the purpose for which the grant and
appropriation has been provided and the amount of expenditure does not exceed the
appropriation made.
c) That the expenditure conforms to the relevant provision of the constitution.
d) That the expenditure is in accordance with the financial rules, regulations and orders issued
by the competent authority.
Q.4. Which part of expenditure audit covers the scrutiny of the expenditure incurred on the
construction of stockyard by the company which is considered as infructuous and avoidable by
CA Suresh Rana?
a) Propriety Audit b) Audit against provision of funds
c) Audit of sanctions d) Performance Audit
Q.5. While conducting the audit of receipts of HAIL Ltd., which of the following area is to be covered
as part of Audit of Receipts?
1. Whether all revenues or other debts due to government have been correctly assessed,
realised and credited to government account by the designated authorities of HAIL Ltd.
2. Whether adequate checks are imposed to ensure the prompt detection and investigation of
irregularities, double refunds, fraudulent or forged refund vouchers or other loss of
revenue through fraud or wilful omission or negligence to levy or collect taxes or to issue
refunds.

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3. Whether the expenditure incurred has been on the purpose for which the grant and
appropriation had been provided and that the amount of such expenditure does not exceed
the appropriation made.
4. Whether the various schemes/projects are executed and their operations conducted
economically and whether they are yielding the results expected of them.
a) Only statement 1 is correct b) Statements 1 & 2 are correct
c) Statements 1, 2, 3, 4 are correct d) Statements 1, 2, 3 are correct

Answer - Integrated Case Study 19

Q. No. Answer Reason
Q.1. a)
Q.2. c)

Q.3. b)
Q.4. a)
Q.5. b)

INTEGRATED CASE STUDY 20

R S & Associates have been appointed as the statutory auditors of MNO Ltd. for the Financial Year 2019-
20. CA Ramesh is the engagement partner for the assignment.

The management of MNO Ltd. has duly given a written representation letter to CA Ramesh regarding
acknowledgement of its responsibility for the implementation and operation of accounting system and the
internal control system of the company. The management has assured the audit firm that such accounting
and internal control systems are designed and implemented to prevent and detect any misstatement on
account of fraud or error.
During the course of audit, the auditor found that the wages cost has increased substantially as compared
to the last year. On detailed checking CA Ramesh found that many new workers have been added to the
workers list which appear to be dummy workers to CA Ramesh.
Further the auditor found that there was a fraud amounting to Rs. 2 crores committed during the year
under audit by an officer of the company. Such fraud has already been reported by the Cost Accountant
of the company, Mr. Sudesh, to the Central Government. The statutory auditors are considering their
reporting responsibilities in this regard.
The audit team also realized that there is inadequate Internal Control System with respect to the following:
The system of authorization and approval of transactions specially in the process of making purchases.
The system of record keeping with respect to the assets.

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Based on the above facts, answer the following: [RTP – MAY 21]
Q.1. As the management of MNO Ltd. has given a written representation regarding its responsibility
for prevention and detection of misstatement on account of fraud and error, M/s RS & Associates:
a) Should rely on such management representation and conduct its audit procedures without
wasting much time and resources towards detection of fraud and error.
b) Should not consider such management representation as a substitute for obtaining
sufficient and appropriate audit evidence and design its audit procedures accordingly.
c) Should not rely on such management representation and should obtain written
representation from those charged with governance.
d) Should concentrate on audit of accounting system and accounting policies so used by the
company as the prevention and detection of fraud and error is the responsibility of the
management.

Q.2. The inclusion of dummy workmen in the workmen list by the management of MNO Ltd. as noticed
by CA Ramesh amounts to:
a) Suppressing cash receipts b) Casting wrong total in cash book
c) Inflating cash payment d) Misappropriation of good

Q.3. With respect to the fraud which has already been reported by The Cost accountant of the company,
Mr. Sudesh, what is the responsibility of M/s RS & Associates in this regard?
a) Since the reporting has been done to the Central Government by the cost accountant of the
company, the statutory auditor has no responsibility for such fraud and its reporting.
b) The cost accountant has detected and reported the fraud to the Central Government. The
statutory auditor should not interfere in the work of the Cost Accountant.
c) CA Ramesh should review the steps taken by the management with respect to the reported
fraud and if he is not satisfied with such steps, he should request the management to
perform additional procedures to enable him to satisfy himself that the matter has been
appropriately addressed.
d) CA Ramesh should obtain written representation from the management that once the
matter is appropriately addressed, he will be duly informed by the management.

Q.4. ________ refers to events or conditions that indicate an incentive or pressure to commit fraud or
provide an opportunity to commit fraud:
a) Fraud Risk Factors b) Misappropriation of assets
c) Incentives/Pressures d) Fraud

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Q.5. Statement 1: The risk of auditor not detecting a material misstatement resulting from employee
fraud is greater than for management fraud.
Statement 2: The risk of not detecting a material misstatement resulting from fraud is higher than
the risk of not detecting one resulting from error.
a) Only statement 1 is correct b) Only statement 2 is correct
c) Both 1 & 2 are correct d) Both 1 & 2 are incorrect

Answer - Integrated Case Study 20

Q. No. Answer Reason
Q.1. b)
Q.2. c)

Q.3. c)
Q.4. a)
Q.5. b)

INTEGRATED CASE STUDY 21

A Partnership Firm of Chartered Accountants by the name of HS and Associates was appointed to audit
books of account of WT Limited for financial year 2021-22. HS and Associates consisted of two partners
CA H and CA S.
While conducting audit, CA H, used different audit procedures in order to obtain audit evidence. The
different audit procedures used by CA H were as follows:
1) As WT Limited was engaged in manufacturing business of wooden doors, CA H and his team
members carefully watched the whole process of counting of finished wooden doors by employees of
WT Limited. The counting of finished wooden doors was necessary for the purpose of verification of
stock of finished wooden doors.
2) In WT Limited the stock of finished wooden doors was valued manually by multiplying number of
finished wooden doors with value per finished wooden door. A team member of CA H again did the
calculation in order to verify the accuracy regarding valuation of stock of wooden finished doors.
3) CA H with the help of his team members obtained information from people (who were experienced in
manufacturing business of wooden doors) about the purchase price of raw materials required in
manufacturing business of wooden doors and also obtained some non-financial information.
4) CA H and his team members while conducting the audit of WT Limited for financial year 2019-20 in
detail checked and evaluated the books of account and relevant documents of W Limited.
5) CA H asked for written confirmations regarding account balances from Debtors and Creditors of WT
Limited.

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Keeping the basic concepts about various audit procedures in mind, answer the following multiple
choice questions: [MTP – OCT. 2021]
Q.1. CA H and his team members carefully watched the whole process of counting of finished wooden
doors by employees of WT Limited. This is an example of which audit procedure:
a) External Confirmation. b) Observation.
c) Inquiry. d) Inspection.
Q.2. In order to verify the accuracy regarding valuation of stock of wooden finished doors, a team
member of CA H again did the calculation. This is an example of which audit procedure:
a) Analytical Procedures. b) Inquiry
c) Inspection d) Recalculation
Q.3. CA H with the help of his team members obtained information (both financial and non-financial
Information) from experienced people is manufacturing business of wooden doors. These
experienced people provided the required information. This whole method of obtaining
information is an example of which audit procedure.
a) Inspection b) Reperformance
c) Inquiry d) Investigation
Q.4. CA H and his team members in detail checked and evaluated the books of account and relevant
documents of WT Limited. This is an example of which audit procedure:
a) Inspection b) Reperformance
c) Recalculation d) Investigation
Q.5. Asking for written confirmations regarding account balances from Debtors and Creditors of WT
Limited by CA H is an example of which audit procedure:
a) Inquiry b) Inspection
c) Investigation d) External Confirmation

Answer - Integrated Case Study 21

Q. No. Answer Reason
Q.1. b)
Q.2. d)

Q.3. c)
Q.4. a)
Q.5. d)

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INTEGRATED CASE STUDY 22

RM & Associates have been appointed as Auditors of Techblocks Consulting Ltd. for the year 2021-22. CA
R and CA M were the Engagement partners.
Para 1
The Firm has freshly appointed 2 Article Clerks who had no practical knowledge in the area of Auditing.
They had to work to tight hard-headed factual issues and were baffling to understand the various terms
and their objectives in the field of Auditing.
Para 2
To make sure that the Article Clerk do not misplace or mis-handle the Working Papers, CA M also
described the relevance of Audit File and clarified that working papers are the property of Auditor. Such
Audit file should be preserved for a period of seven years.
Para 3
CA R while scrutinizing Books of Account suspected some fictitious sales as result of which he anticipated
inflated Debtors. Management was reluctant to give the details. As CA R could not gather more evidence
from the Management, he sought to obtain details from the third party.
Para 4
On further perusal of Opening Balances, it is essential to perceive that Accounting Policies have been
consistently applied in the current period's financial statements and whether any changes have been
properly accounted for and disclosed. CA M assigned this day to his article clerk. The Article Clerk
explained to CA M about how he had observed that accounting policies were not consistently applied in
relation to opening balances in accordance with the financial reporting framework or a change is not
properly accounted or not adequately disclosed.
Para 5
Subsequently, the Auditors gathered from the Management that there was a fire in the Factory premises
after the Balance Sheet date, as a result of which the company offered loss of Inventories. It did not provide
any conditions on the Balance Sheet date. SA 560 deals with such type of transactions.
[MTP – OCT. 2021]
Q.1. The Auditor explained his Audit team the purpose of Audit Documentation. Which of the
following is incorrect with respect to the purpose of Audit Documentation?
a) It enables the conduct of quality control reviews and inspections in accordance with SQC-1.
b) It helps in preparation of Financial Statements.
c) It retains a record of matters of continuing significances future audits.
d) It enables the conduct of external inspections in accordance with applicable legal,
regulatory or other requirements.

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Q.2. Auditor strictly ensured that the audit team should document/assemble all the working papers in
Audit file. The completion of assembling the Audit File is an administrative process and should be
done in:
a) It should be within 30 days from the date of Audit Report.
b) It should be within 60 days from the completion of Audit.
c) It should not be more than 60 days from the date of Audit Report.
d) It should be before 90 days from the completion of Audit.
Q.3. With reference to para 3 of Case scenario, this is a case of obtaining External Confirmation by the
Auditor. Which of the following is inappropriate with regard to External Confirmation?
a) External Confirmations are restricted to Account balances only.
b) It is also used in a case to obtain Audit evidence about the absence of certain conditions say,
Side Agreement.
c) It can be also effective in obtaining Audit evidence about verification of Inventories held by
third parties at bonded warehouses for processing or on consignment.
d) External Confirmation is also functional in case of Investments held for safekeeping by
third parties, or purchased from stockbrokers but not delivered at the Balance Sheet date.
Q.4. With reference to para 4, in such a situation CA M shall express a:
a) A Disclaimer Opinion
b) A qualified opinion
c) A qualified opinion or an adverse opinion in accordance with SA 705
d) An unmodified opinion
Q.5. In respect to subject matter mentioned in Para 5, what procedures should Auditor perform to
identify such events?
Statement 1: Obtain an understanding of any procedures management has established as well as
Inquiry with Management and those charged with governance procedures for identification of
such subsequent events.
Statement 2: Inspection of Minutes of the meetings of the entity's owners, management and those
charged with governance that have been held after the date of the financial statements and
inquiring about the matters discussed at any such meetings for which minutes are not yet available.
Statement 3: The Auditor should not read the entity's latest subsequent interim financial
statements, if any.
a) Only Statement 1 is correct b) Only Statement 2 is correct
c) Both Statements 1 and 2 are correct d) Only Statement 3 is correct

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Answer - Integrated Case Study 22

Q. No. Answer Reason
Q.1. b)
Q.2. c)

Q.3. a)
Q.4. c)
Q.5. c)

INTEGRATED CASE STUDY 23

Mars Ltd. is a public limited Company incorporated during the previous financial year 2021-22. R S Shah
& Associates have been appointed as the Auditors of the Company.
Para 1
Its Authorized Capital was ` 75 Lacs. Subsequently it increased its Share Capital. They issued Shares at a
premium of ` 25 per share. The Company has transferred the amount received as premium to the
Securities Premium Account.
Para 2
CA R recommended his Engagement Team to prepare an Audit Strategy as well as Audit plan for efficient
conduct of audit. He advised to the team that they should include a series of verification procedures to be
applied to Financial Statements of the Company for accomplishing the Audit objectives. CA R illustrated
to his team the relationship between Audit strategy as well as Audit plan.
Para 3
Encompassed by a huge clientele, one of the Auditee firm was a LLP. It was in the name of Mangaldeep
Geotech LLP. They conducted the business in a very efficient way but had allotted only the Audit and the
Income Tax work to CA R S Shah & Associates. The Partners of the LLP were capable enough but however
inadvertently bypassed the ROC Compliances. They had no knowledge about the Compliances and its
related penalties. Thus, they approached CA R S Shah and Associates for their guidance. They were
completely clueless as to filing of Annual Return with ROC.
Para 4
R S Shah and Associates have been appointed as Auditors of a large Enterprise namely Search Results Ltd.
Considering the overhaul required in the Organizational’s Risk Management, Directors of the listed
companies braced the subject of Internal Financial Control with much seriousness and rigor. The dawn of
the Financial Year lays down the daunting task of establishing and implementing Internal Financial
Control in an Enterprise.

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Para 5
The Auditors are performing their Audit work in the Company Search Results Ltd. by using CAAT’s. The
Company is completely automated and all the processes, operations are carried out using the computer
systems.
Testing is performed in an automated environment to increase the efficiency and allow for more robust
tools to be built. There are four types of testing methods in an Automated environment. They are Inquiry,
Observation, Inspection and Re-performance.
Q.1. Sec. 52 of the Companies Act states that Security Premium Account can be applied by the Company
for one of the purposes mentioned below. Which of the following is an incorrect option?
a) To write off preliminary expenses of the Company
b) To pay dividend to equity shareholders
c) To provide premium on redemption of Preference share capital
d) To purchase its own shares or other securities u/s 68
Q.2. In reference to para 2, which of the following Statement is inappropriate?
a) Once the overall audit strategy is established, an audit plan can be developed to address
the various matters identified in the overall audit strategy
b) The establishment of overall audit strategy as well as detailed audit plan is a discrete and
sequential process.
c) Audit Strategy and Audit plan are inter-related as changes in one may result in
consequential changes to the other.
d) The Audit plan is more detailed than the Audit Strategy that includes the nature, timing
and extent of audit procedures to be performed by engagement team members.
Q.3. In reference to para 3, which form from the following should be filed by the Partners to avoid
penalty consequences?
a) Form 11 within 90 days of end of closer of financial year and Form 8 within a period of 60
days from the end of six months of the financial year.
b) Form 11 within 60 days of end of closer of financial year and Form 8 within a period of 30
days from the end of six months of the financial year.
c) Form 11 within 30 days of end of closer of financial year and Form 8 within a period of 60
days from the end of three months of the financial year.
d) Form 11 within 60 days of end of closer of financial year and Form 8 within a period of 90
days from the end of three months of the financial year.

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Q.4. With reference to para 4, which of the following point ensures Implementation of policies and
procedures with regard to Internal Financial Control by the Companies?
a) Reliability of Financial Reporting
b) Effectiveness and efficiency of operations
c) Compliance with applicable laws and regulations
d) All of the above.
Q.5. Which of the following statement is inappropriate with regard to testing methods as mentioned in
Para 5 above?
a) Inquiry in combination with Inspection gives the most effective and efficient audit evidence
b) Re-performance is the most effective as an audit test and gives the best audit evidence
c) Inquiry should always be used in combination with any other testing method
d) Which audit best to use and in what combination does not require professional judgment.

Answer - Integrated Case Study 23

Q. No. Answer Reason
Q.1. b)
Q.2. b)
Q.3. b)
Q.4. d)
Q.5. d)

INTEGRATED CASE STUDY 24

A Partnership Firm of Chartered Accountants by the name of S K and Associates were appointed as the
Auditors of the Company named Big Box Ltd.
Para 1
Big Box Ltd. is a Public Listed Company. The CA Firm comprised of 2 partners namely CA S and CA K.
Subsequently, a close relative of CA K, acquired security having face value ` 4,95,000 of Big Box Ltd. As
per the provisions of Sec. 141 of the Companies Act, 2013, an Auditor will be disqualified from
appointment, if the Auditor himself or his relative acquires the security exceeding the prescribed limit in
the Company.
Para 2
Further, the Auditors, S K and Associates also had to bank on the policies and procedures adopted by the
Company for ensuring the efficient conduct of its business. They have to state about the adequacy of
Internal Financial Controls in the Company. The Company had a turnover of ` 60 Crores as per the latest
Audited Balance Sheet and its Borrowings during the year were ` 20 Crores from Banks.

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Para 3
The CFO of the Company, Mrs. Darshana felt dubious in the Accounts department of the Company. She
entreated the Auditors to perform a thorough investigation of the Accounts department. Mrs. Darshana
was also anticipating a fraud in this situation. Both the Auditor as well as the CFO of the Company
analyzed the various risk factors.
The Auditors observed that the Head Accountant of the Department has inflated the Sales amount to finish
his targets. There was collusion between the Head Accountant & Employees of the Company. Employees
were presented incentives on accomplishing their targets. This resulted in a fraud by the Head Accountant
of amount aggregating to ` 75 Lacs.
Para 4
Mr. X. an acquaintance of CA S, wanted to form an LLP with his distant relatives. He wanted to possess
in depth knowledge about LLP. CA S explained him that LLP is a separate legal structure and is liable to
full extent of its assets but the partners are liable to the extent of their agreed contribution in LLP. Mr. X
wanted to know the criteria for the accounts of LLP to be audited. CA S enlightened him that the accounts
of every LLP shall be audited in accordance with Rule 24 of LLP Rules, 2009.
Para 5
Big Box Ltd. is expanding its business. Consequently, it requires many Computers. Purchasing computers
may involve paying a huge upfront cost, Cash flow may get disrupted. Hence the Company came up with
an idea of getting the computers on lease.
It will allow the businesses to have access to the latest technology without harming their cash flow. The
Auditors explained to the Directors that leasing Computers shall come under the purview of Operating
Lease. [MTP – NOV. 2021]
Q.1. With reference to para 1, S K and Associates can take corrective actions within _______ days. The
relative may hold security or interest in the company of face value not exceeding _______.
a) 45 days, Face Value ` 1,00,000 b) 60 days, Market Value ` 5,00,000
c) 30 days, Face Value ` 5,00,000 d) 60 days, Face Value ` 1,00,000
Q.2. The Auditors of S K and Associates were doubtful concerning the applicability of Internal Financial
Controls in the Company Big Box Ltd. With reference to details provided in Para 2 above, please
guide them in this regard.
a) It will be applicable as Turnover exceeds the threshold limit of ` 50 Crores.
b) It is not applicable as the Borrowings are less than ` 25 Crores during the financial year.
c) It will be applicable as the Company is a Public Listed Company.
d) Reporting on Internal Financial Control is not under the scope of Auditors reporting.
Hence, not applicable.

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Q.3. With reference to para 3, wherein a fraud was observed by the auditor, what should be the course
of action of the Auditor?
a) The Auditor should report the fraud details to Central Government.
b) The Auditor shall report the fraud to the audit Committee or to the Board within the
prescribed time
c) The Auditor shall disclose it in the Audit Report and report the fraud details to RBI too.
d) Both (a) & (c) above
Q.4. With regard to information provided in Para 4, which of the following is a correct option?
a) Any LLP whose turnover does not exceed in any financial year ` 40 Lacs or whose
contribution does not exceed ` 25 Lacs is not required to gets its accounts audited.
b) Any LLP whose turnover does not exceed, in any financial year ` 50 Lacs or whose
contribution does not exceed ` 20 Lacs is not required to gets its accounts audited.
c) Any LLP whose turnover exceeds ` 25 Lacs in any financial year or whose contribution
exceeds ` 10 Lacs in any financial year is required to gets its accounts audited.
d) Any LLP whose turnover does not exceed in any financial year ` 40 Lacs and whose
contribution does not exceed ` 20 Lacs is not required to gets its accounts audited.
Q.5. In reference to para 5, which among the following is an incorrect trait about the Operating Lease?
a) The Lessee does not have the option to buy the asset during the lease period.
b) The Lessee cannot claim depreciation on the leased asset.
c) The Lessee generally bears the Insurance, Maintenance and Taxes.
d) The Lease term generally extends to less than 75% of the projected useful life of the leased
asset.

Answer - Integrated Case Study 24

Q. No. Answer Reason
Q.1. d)
Q.2. c)

Q.3. b)
Q.4. a)
Q.5. c)

INTEGRATED CASE STUDY 25

Ms. Rhea was among the promoters who set up a public company by the name “Aksham Ltd”. The
company appointed CA Rajendra as the auditor of Aksham Ltd. CA Rajendra is the brother of one of the
directors of Aksham Ltd.

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After setting up of company, the company had a dispute with one customer of the company in year 2019-
20 who took the company to court. There are probable chances that company will have to shelve out ` 50
lakhs as compensation but the case will likely to be finalized in year 2021-22.
CA Rajendra considers the fact that Aksham Ltd. has a present obligation and it is probable that an outflow
of resources embodying economic benefits will be required to settle the obligation and that a reliable
estimate i.e. ` 50 Lakhs can be made of the amount of the obligation.
Aksham Ltd. declared dividend of ` 10 per equity share on 10th April, 2021. The financial statements were
approved on 30th June, 2021. Aksham Ltd. took loan of ` 65 lakhs from Saksham Bank for a period of 10
years; the loan amount was guaranteed by Mr. Pramod, one of the directors of Aksham Ltd. The loan was
completely secured against the fixed assets of the company, Aksham Ltd. drew designs of one of the
products of the company and this product constituted 90% sales of the company. The designs of the
product were such that the sale of the company will increase every year for the next 5 years. Aksham Ltd.
booked the designs of the company at a value of ` 1 crore in the books of account of the company as
intangibles at its cost. [RTP – NOV. 2021]
Q.1. State whether appointment of CA Rajendra is correct in law.
a) Yes, it is correct in law as per Companies Act, 2013.
b) It is incorrect in law as per Companies Act, 2013 as the relative of director is not allowed
to be appointed as an auditor of the company.
c) It is correct in law as per Companies Act, 2013 because brother is not covered under the
definition of relative.
d) It is correct as appointment of auditor is not governed by any law in India.
Q.2. Advise the company regarding the course of action Aksham Ltd. will have to follow for the court
case for financial statements prepared for year ending 31st March, 2021.
a) Create provision b) Create revenue reserve
c) Create capital reserve d) To be disclosed as contingent liability
Q.3. What is the action which Aksham Ltd. is supposed to take with regard to treatment of dividend
declared while preparing and finalizing financial statements for year ending 31st March, 2021?
a) Recognise dividends as a liability b) Disclose the amount of dividend
c) Both (a) and (b) d) None of the above
Q.4. State the disclosures Aksham Ltd. is required to make with respect to the long term borrowings
taken from Saksham Bank.
I. Secured loan from Saksham Bank.
II. The fixed assets are secured against the loan.
III. The loan of ` 65 lakhs is guaranteed by directors.
IV. Repayment terms of the loan.

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a) I, II, III and IV b) I, II

c) I, II, III d) II, III
Q.5. State which of the following statement is true with respect to recording an intangible in the books
of the company.
a) Intangible is correctly booked by the company.
b) Intangible is wrongly booked by the company as an intangible cannot be booked as per the
accounting standard of India.
c) Intangible is wrongly booked by the company as an intangible cannot be booked as per the
auditing standards of India.
d) Intangible is wrongly booked by the company as an intangible cannot be booked as per the
Companies Act, 2013.

Answer - Integrated Case Study 25

Q. No. Answer Reason
Q.1. b)
Q.2. a)

Q.3. b)
Q.4. a)
Q.5. a)

INTEGRATED CASE STUDY 26

Best Tea House is a Co-operative society formed as per the provisions of the Co-operative Societies Act,
1912. It runs a chain of restaurants serving mainly tea and snacks in Delhi. RAS & Associates, a Chartered
Accountant firm, has been appointed to conduct the statutory audit of the society. None of the partners of
the firm, CA R, CA A and CA S have ever conducted a Co-operative Society audit before and so familiarize
themselves with the provisions of the particular Act governing the society before starting the audit.
During the audit, Best Tea House informs the auditors that they have been in operation for the last five
years, and no audit was required earlier since their turnover had not exceeded the prescribed limit.
While examining the books of account of Best Tea House, RAS & Associates notice that as stated u/s 43(h)
of the Central Act, certain rules were framed prescribing the books and accounts to be kept by Best Tea
House.
The auditors also understand that according to section 5 of the Central Act, in the case of a society where
the liability of a member of the society is limited, no member of a society other than a registered society
can hold such portion of the share capital of the society as would exceed a maximum of a certain
percentage of the total number of shares or of the value of shareholding to a specified amount.

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RAS & Associates were concerned with this provision so as to watch any breach relating to holding of
shares.
While examining the loans of Best Tea House, the auditors notice that the society has given a loan to a
relative named Mr. P. of a member of the society, Mr. T, of an amount not exceeding ` 1000.
RAS & Associates examined the overdue debts and checked its classification which they are required to
report.
During the audit, RAS & Associates notice few transactions for personal profiteering by members of the
management committee, which are ultimately detrimental to the interest of the society. RAS & Associates
report this matter to the required authority to take necessary action.
After the conclusion of the audit, in addition to the audit certificate in the prescribed form and various
schedules, RAS & Associates also answered two sets of questionnaires called audit memos. The auditors
also submitted the audit report in a narrative form addressed to the Chairman of the society which was
divided into two parts styled as Part I and Part II. [RTP – NOV. 2021]

Q.1. According to Sec. 5 of the Central Act, what is maximum percentage of the total number of shares
and what is the maximum value of shareholding that RAS & Associates were concerned with, so
as to watch any breach relating to holding of shares?
a) 25% of the total number of shares or of the value of shareholding upto ` 5,000
b) 20% of the total number of shares or of the value of shareholding upto ` 5,000
c) 25% of the total number of shares or of the value of shareholding upto ` 1,000
d) 20% of the total number of shares or of the value of shareholding upto ` 1,000
Q.2. As per Sec. 29 of the Central Act, Best Tea House cannot give a loan to any person other than:
a) A member and with the special sanction of the Registrar, relatives of the member not
exceeding an amount of ` 1000.
b) A member and with the special sanction of the Registrar, another registered society.
c) A member and with the special sanction of the Registrar, relatives of the member.
d) A member and with the special sanction of the Registrar, another registered society not
exceeding an amount of ` 1000.
Q.3. Overdue debts for a period from _________ to _______ and more than ________ were classified and
reported by RAS & Associates.
a) 3 months to 6 months and more than 6 months.
b) 6 months to 3 years and more than 3 years.
c) 6 months to 5 years and more than 5 years.
d) 3 months to 5 years and more than 5 years.

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Q.4. To whom does RAS & Associates report the few transactions noticed during audit?
a) Registrar of Co-operative Societies b) Secretary of Best Tea House
c) State Government d) Management Committee of Best Tea House
Q.5. Mistakes having an impact on the profitability of society were pointed out by RAS & Associates as
it had a consequential effect on the financial position of society. In which of the following
submission was this information included?
a) Part I of the audit report b) Part II of the audit report
c) Schedules to the audit report d) Audit memos

Answer - Integrated Case Study 26

Q. No. Answer Reason
Q.1. b)
Q.2. d)

Q.3. c)
Q.4. a)
Q.5. b)

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