CA FINAL NEW COURSE (May 2021)
GROUP I – PAPER 3
ADVANCED AUDITING AND PROFESSIONAL ETHICS
(Series 2)
Time Allowed: - 3 Hours Maximum Marks: 100
This question paper comprises two parts, Part I and Part II.
Part I comprises MCQs and Part II comprises questions which require descriptive type answers.
PART – I (MCQs)
All MCQs are compulsory
Questions no. 1-10 carry 2 Marks each and Questions no. 11-20 carry 1 Mark each.
The following scenario relates to questions 1–5
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:-
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
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
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
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undetected misstatement exceeds materiality for the financial statements as a whole :-
(a) Benchmark Materiality
(b) Materiality in Planning
(c) Performance Materiality
(d) Materiality.
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
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
The following scenario relates to questions 6–10
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.
Based on the above facts, answer the following:-
6. ______ 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
7. Statement 1: Application controls include both manual and automated controls that operate at a
business process level.
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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
(c) Both Statements 1 & 2 are correct
(d) Both Statements 1 & 2 are incorrect
8. _____ are also known as pervasive or indirect controls :-
(a) General IT Controls
(b) Application Controls
(c) IT dependent Controls
(d) None of the above
9. 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
10. _______ 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
11. Statement 1: Audit procedures consist of Risk Assessments Procedures and other procedures.
Statement 2: Substantive procedures consist of test of details and analytical procedures.
(a) Only Statement 1 is correct
(b) Only Statement 2 is correct
(c) Both 1 & 2 are correct
(d) Both 1 & 2 are incorrect
12. 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.
13. Statement I As per the Standard on Auditing (SA) 520 “Analytical Procedures”, the term “analytical
procedures” means evaluations of financial information through analysis of plausible relationships
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among financial data.
Statement II Analytical procedures also encompass 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.
(a) Only Statement I is correct
(b) Only Statement II is correct
(c) Both statements are correct
(d) Both Statements are incorrect
14. Which of the following is not an example of Analytical Procedures having consideration of
comparisons of the entity’s financial information:
(a) Comparable information for prior periods.
(b) Anticipated results of the entity, such as budgets or forecasts, or expectations of the auditor,
such as an estimation of depreciation.
(c) Similar industry information, such as a comparison of the entity’s ratio of sales to accounts
receivable with industry averages or with other entities of comparable size in the same industry.
(d) Among elements of financial information that would be expected to conform to a predictable
pattern based on the entity’s experience, such as gross margin percentages.
15. Statement I: A firm whereof majority of partners practising in India are qualified for appointment may
be appointed by its firm name to be auditor of a company.
Statement II: Where a firm including a limited liability partnership is appointed as an auditor of a
company, all the partners shall be authorised to act and sign on behalf of the firm.
(a) Only Statement I is correct
(b) Only Statement II is correct
(c) Both statements are correct
(d) Both Statements are incorrect
16. ______ refer to the 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.
(a) Audit assessment procedures
(b) substantive procedures
(c) test of control
(d) Risk assessment procedures
17. When more persuasive audit evidence is needed regarding the effectiveness of a control,
(a) it may be appropriate to increase the extent of testing of the control and reduce the extent of the
degree of reliance on controls.
(b) it may be appropriate to decrease the extent of testing of the control as well as the degree of
reliance on controls.
(c) it may be appropriate to decrease the extent of testing of the control and increase the extent of
the degree of reliance on controls.
(d) it may be appropriate to increase the extent of testing of the control as well as the degree of
reliance on controls.
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18. When deviations from controls upon which the auditor intends to rely are detected,
(a) the auditor shall not make any inquiries to understand these matters and their potential
consequences
(b) the auditor shall make specific inquiries to understand these matters and their potential
consequences
(c) the auditor shall make general inquiries to understand these matters and their potential
consequences
(d) the auditor shall make both general as well as specific inquiries to understand these matters and
their potential consequences
19. Which of the following statement is correct :
(a) Substantive analytical procedures are generally more applicable to large volumes of transactions
that tend to be predictable over time
(b) Substantive analytical procedures are generally less applicable to large volumes of transactions
that tend to be predictable over time
(c) Substantive analytical procedures are generally more applicable to small volumes of
transactions that tend to be predictable over time
(d) None of the above
20. In case of a company that is required to constitute an Audit Committee under section 177, the
committee, and, in cases where such a committee is not required to be constituted, __________, 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.
(a) the board
(b) any director
(c) Managing Director
(d) Whole time director
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PART – II (Descriptive Answers)
This part comprises 6 questions. Question No. 1 is compulsory. Attempt any 4
questions out of the remaining 5 questions.
1(a) Statutory auditor of O Ltd requested the management for a written 4
representation in respect of obsolescence of inventory and warranty obligations
recognized by the company in its financial statements. The management denied
the representation on the ground that during the course of audit, all the
required procedures were performed by the auditor and after obtaining sufficient
appropriate audit evidence, auditor has issued a clean report. Please comment.
(b) OP & Associates are the statutory auditors of BB Ltd. BB Ltd is a listed company 5
and started its operations 5 years back. The field work during the audit of the
financial statements of the company for the year ended 31 March 2018 got
completed on 1 May 2018. The auditor’s report was dated 12 May 2018. During
the documentation review of the engagement, it was observed that the
engagement quality control review was completed on 15 May 2018. Engagement
partner had completed his reviews in entirety by 10 May 2018. Please comment.
(c) Rathi Limited had definite plan of its business being closed within a short period 5
from the close of the accounting year ended on 31 st March, 2018. The Financial
Statements for the year ended 31/03/2018 had been prepared on the same basis
as it had been in earlier periods with an additional note that the business of
the Company shall cease in near future and the assets shall be disposed off in
accordance with a plan of disposal as decided by the Management. The Statutory
Auditors of the Company indicated this aspect in Key Audit Matters only by a
reference as to a possible cessation of business and making of adjustments, if
any, thereto to be made at the time of cessation only. Comment on the reporting
by the Statutory Auditor as above.
2(a) CA. T, in practice, was appointed to carry out internal audit of a stock broker, 4
listed with BSE. However, he failed to intimate his appointment to the statutory
auditors of the company. The statutory auditor feels this is violation of
professional ethics. Comment with reference to the Chartered Accountants Act,
1949, and Schedules thereto.
(b) As an auditor of a company registered under section 8 of the Companies Act, 2013 5
you find that as per the notification of the Ministry of Corporate Affairs regarding
applicability of Indian Accounting Standards (Ind-AS), the company has to prepare
its financial statements for the year ended 31st March, 2018 under Ind-AS. The
management of the company is however of the strong view that being a section 8
company having charitable objects, Ind-AS cannot apply to the company. The
financial statements are therefore prepared by the management under the earlier
GAAP and a note for the same is given in the financial statements. How would you
report on these financial statements?
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(c) ST Ltd is a growing company and currently engaged in the business of 5
manufacturing of tiles. The company is planning to expand and diversify its
operations. The management has increased the focus on the internal controls to
ensure better governance. The management had a discussion with the statutory
auditors to ensure the steps required to be taken so that the statutory audit is
risk based and focused on areas of greatest risk to the achievement of the
company’s objectives. Please advise the management and the auditor on the
steps that should be taken for the same.
3(a) An Japanese Company engaged in the business of manufacturing and distribution of 4
industrial gases, is interested in acquiring a listed Indian Company having a market
share of more than 65% of the industrial gas business in India, request you to conduct
a “Due Diligence” of this Indian Company and submit your report.
As a due diligence auditor, list out the contents of your Due Diligence Review Report
that you will submit to your Japan based Client.
(b) H Limited is an Investment Company preparing its Financial Statements in 5
accordance with Ind AS. The Company obtains funds from various investors and
commits its performance for fair return and capital appreciation to its investors.
During the year under audit, it had been observed that the Company had
invested 25% in S1 Ltd., 50% in S2 Ltd. and 60% in S3 Ltd. of the respective
share capitals of the Investee Companies. When checking the investment
schedule of the Company, an issue cropped as to whether there would arise any
need to consolidate accounts of any such investee companies with those of H
Limited in accordance with section 129(3) of the Companies Act, 2013 which
contains no exclusion from consolidation. Analyse the issues involved and give
your views.
(c) ABC Limited is in the practice of maintaining consistent dividend payment over a 5
minimum of 14%. The Financial year 2017-18 was so very bad for the Company
that it was not possible for the Company to maintain the payment of consistent
dividend as above. The Management, being hopeful of recovery of its performance
in next year, felt that the depreciation of the year to the extent of 75% alone be
charged to the Statement of Profit and Loss and the remaining 25% be kept in a
separate account code in the Balance Sheet- 'Debit Balances Adjustable against
Revenue account'. The Management was of the view that it would be in fair
practice of accounting if the depreciation for asset is charged before the expiry of
the lifes of assets and the amount parked in asset code as above would
unfailingly be adjusted to Revenue before the close of next financial year anyway.
Analyse the issues involved and state how the Auditor should decide on this
matter.
4(a) What are the major steps to be undertaken by auditor in application of CAAT? 4
(b) While doing Tax Audit, under section 44AB of the. Income Tax Act, 1961, of the 5
accounts of Glue Private Limited for the Assessment Year 2018-19, it was found
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that during the Financial Year 2017-18, Glue Private Limited had received 9,000
shares, the market value of which was Rs. 90,000 on the date of transfer, at a
price of Rs. 45,000 from Stick Private Limited. The Management of Glue Private
Limited maintained that the transaction was as per the terms of negotiations and
there would be no cause for the Auditor to bring this matter in his Tax Audit
Report - Comment.
(c) Amudhan & Co., are the Auditors of XYZ Company Ltd., for the year ended on 5
31/03/2018. The Audit Report for that year was signed by the Auditors on
04/05/2018. The Annual General Meeting was decided to be held during the
month of August 2018. On 06/05/2018, the Company had received a
communication from the Central Government that an amount of ₹ 5800 crore kept
pending on account of incentives pertaining to Financial Year 2017-18 had been
approved and the amount would be paid to the Company before the end of May
2018. To a query to Chief Financial officer of the Company by the Board, it was
informed that this amount had not been recognised in the Audited Financial
Statements in view of the same not being released before the close of the Financial
Year and due to uncertainty of receipt. Now, having received the amount, the
Board of Directors wished to include this amount in the Financial Statements of
the Company for the Financial Year ended on 31/03/2018. On 08/05/2018, the
Board amended the accounts, approved the same and requested the Auditor to
consider this event and issue a fresh Audit Report on the Financial Statements
for the year ended on 31/03/2018. Analyse the issues involved and give your
views as to whether or not the Auditors could accede to the request of the Board
of Directors.
5(a) During the opening ceremony of a new branch office of CA. Young, his friend CA. 4
Old introduced to CA. Young, his friend and client Mr. Rich, the owner of an
Export House whose accounts had been audited by CA. Old for more than 15
Years. After few days, Mr. Rich approached CA. Young and offered a certification
work which hitherto had been done by CA. Old. CA. Young undertook the work
for a fee which was not less than fee charged by CA. Old in earlier period.
Comment whether CA. Young had done any professional misconduct.
(b) Write short note on Focus of a Peer Review. 5
(c) What are the liabilities of a Chartered Accountant under Income Tax Act, 1961 for 5
furnishing an incorrect statement in any report or certificate required to be
submitted by him under the Act?
6(a) What are the matters to be considered for Audit Planning? 4
(b) Write short note on Block selection. 5
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(c) During the financial year ended on 31/03/2018, LM Private Limited had 5
borrowed from a Nationalized Bank, a term loan of ₹ 120 lakhs consisting of ₹
100 lakhs for purchase of a machinery for the new plant and ₹ 20 lakhs for
erection expenses. As on the date of 31st March, 2018, the total of capital and
free reserves of the Company was ₹ 50 lakhs and turnover for the year 2017-18
was ₹ 750 lakhs. The Bank paid ₹ 100 lakhs to the vendor of the Company for
the supply of machinery on 31/12/2017. The machinery had reached the yard
of the Company. On 28/02/2018, the Company had drawn the balance of loan
viz. ₹ 20 lakhs to the credit of its current account maintained with the Bank and
utilized the full amount for renovating its administrative office building. The
machinery had been kept as capital stock under construction. Comment as to
reporting issues, if any, that the Auditor should be concerned with for the
financial year ended on 31/03/2018, in this respect.
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