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Question Paper
ADVANCED AUDITING, ASSURANCE Duration: 60
AND PROFESSIONAL ETHICS
Details: Test-16 (Ch-16 ) Marks: 30
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Q-1 XYZ Ltd. is engaged in the manufacturing of Fabrics and Bed Sheets. It sells its products in
both domestic as well as in International Markets. It has achieved a turnover of 250 crores in
the F.Y. 2022-23. Directors of the company realized that they are not managing the company
professionally and thereby request your firm of Internal Auditors for an appraisal of its
organizational structure to ascertain whether it is in harmony with the objectives of XYZ Ltd.
Comment.
(5 Marks)
Q-2 One of the independent directors sought information regarding the appointment of
internal auditors for following Group Companies in accordance with the Companies Act, 2013 of
which certain Financial Information are given below: Figures are in ` crore and correspond to
the previous year.
Name Nature Equity Share Turnover Loan from Public
Capital Bank and PFI Deposits
AADI Ltd. Listed 100 190 50 24
AJIT Ltd. Unlisted 60 190 50 24
Public
NEMI Ltd. Unlisted 60 190 50 -
Private
You are required to evaluate the requirements of the Companies Act, 2013 regarding the
appointment of internal Auditors for the Group Companies. Discuss.
(6 Marks)
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Q-3 You have been appointed as an internal auditor for DEF Pvt. Ltd., a prominent
manufacturing company based in Mumbai, specializing in producing textiles and home
furnishings. The company, which caters to both domestic and international markets, reported a
turnover of ₹300 crores in the financial year 2023-24. Recently, the Managing Director, Mr.
Rajesh Mehta, expressed his concern over a significant increase in employee attrition rates over
the past year. He believes that this issue is impacting productivity and the overall growth of the
company. Mr. Mehta has requested you to conduct a thorough analysis to identify the causes
behind the high employee attrition rate in DEF Pvt. Ltd. And What factors would you consider in
such analysis?
(4 Marks)
Q-4 Horizon Travels Pvt. Ltd. is a travel management company offering customized domestic
and international tour packages to its clients. During the COVID-19 pandemic and the
subsequent year, the company faced significant losses, prompting a cost-cutting regime. As part
of this process, the company appointed an internal auditor. The auditor observed that the
company maintains a large hall as a recreational room for employees, but it is used only 1-2
days a week on average. The auditor also noted a substantial balance in the company's bank
account, but the management has not made investment decisions due to market volatility.
Additionally, the company rents a hall for a sitting cum waiting lounge for customers, and there
is an hourly downtime for computers and other equipment each day. The internal auditor
intends to include these observations in the report, but Ms. Y, the company's manager, believes
these matters do not pertain to internal audit and should not be reported. Provide your opinion
on this issue and suggest an appropriate course of action.
(5 Marks)
Q-5 MCQs
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1. Global Enterprises Ltd. appointed M/s Verma & Associates, Chartered Accountants, as
Statutory Auditor. The Statutory Auditor found the Internal Audit function reliable and
effective. The Statutory Auditor assigned the task of assessing the inventory levels of a few
branches, where the Statutory Auditor believed there might be some risk of material
misstatement, to one of the Internal Auditors, Mr. Rahul. Since the Internal Auditor had
recently done such assessments as part of their Internal Audit program, the Statutory Auditor
believed they could rely on the former’s report. Besides this, due to the paucity of time, the
Statutory Auditors also requested Mr. Rahul to help them with some paperwork, including audit
documentation.
Before the audit was concluded, Mr. Rahul got promoted and moved to another city. During the
audit discussion stage, the lead Statutory Auditor found out that the documentation delegated
to Mr. Rahul was not complete. Accordingly, the Statutory Auditor further checked the
inventory work delegated to the Internal Auditor and found it to be satisfactory.
In view of the above case scenario, state which of the following statement(s) hold true:
(a) The working of the Internal Audit function was reliable and satisfactory; therefore, the
allocation of inventory level work was within the authority of the Statutory Auditor. This was
further confirmed by the satisfactory work of the Internal Auditor, as found out later.
(b) The documentation would be considered complete as far as the Statutory Auditor’s
responsibility is concerned, as the missing documentation was because of the oversight of the
Internal Auditor.
(c) Since the Internal Audit had conducted the similar inventory level checking activity recently,
therefore, because of familiarity with the audit, the Statutory Auditor was right in delegating
the same to the Internal Auditor.
(d) The Statutory Auditor should not have delegated the inventory level checking to the Internal
Auditor, as the risk assessed was material. Further, the audit documents are Statutory Auditor’s
property and responsibility. Also, the Statutory Auditor should maintain confidentiality during
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all the stages of the audit. Therefore, it was wrong on the part of the Statutory Auditor to hand
over the task of audit documentation to the Internal Auditor.
2. An educational institute was collecting fees from their students by cash/ cheque / draft and
through net banking. Institute follows the policy to account for the fees received in the year of
receipt only and for the cheques or drafts received but not deposited in bank or credited in
bank account, should be shown in reconciliation statement. The internal auditor of branches
noticed that at some branches only the fees received up to 25th March are accounted for in the
same year and the receipts after that date are carried forward to be accounted for in the next
financial year. The fees collected in these branches between 25 th to 31st March amounted to
Rs. 15 lakhs for the year 2017-18 and the collection for the financial year ended 31st March
2018 amounted to Rs. 115 crores. The auditor was of the view that it will not give a true and
fair view on institute’s revenue for the year. What do you think should be the next step of the
auditor?
(a) The branches have accounted for those receipts in the next financial year so the auditor can
ignore the observation.
(b) Auditor should report the matter in Executive Summary paragraph and highlight it as
significant internal control lapse.
(c) Internal auditor can discuss the matter with the management to take a strict action against
the branches not following institute’s policy.
(d) Auditor should get the accounts modified and report the matter in action taken report.
3. The management of HFC Ltd. noticed a sudden increase in expenses under the head "wages
& salaries" for the years 2015-16 and 2016-17. To identify the reason for this increase, the
management decided to conduct a management audit and appointed Mr. Arsh Gupta, a
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Chartered Accountant, as the management auditor on 15th April 2017. What areas do you think
the auditor needs to verify for this purpose?
(a) Check the payroll sheet prepared as per approved pay and allowances; verify the overtime
sanctioned and authorised; and verify the payment process followed by the company for the
payment of wages & salaries to employees.
(b) Overtime authorised and the payment done to employees are the main areas that need to
be verified by the auditor.
(c) The auditor should first understand the HR Policy of the company. Then verify all the
authorised vouchers for overtime payments done during the year; verify the payroll
preparation and reconcile the gross pay in terms of increments/promotions & resignations;
verify the appointments made during the year as per HR Policy and payments made to agencies
providing contractual staff.
(d) The auditor needs to verify the new appointments, i.e., of company’s payroll or outsourced
staff, and the overtime allowance paid to employees.
4. During an internal audit of Zenith Corporation, the Chief Internal Auditor, Mr. Rajesh Mehta,
found that several prior audit issues from the previous years had not been fully resolved.
According to SIA 390 Monitoring and Reporting of Prior Audit Issues, Mr. Mehta is responsible
for continuously monitoring the closure of these issues through the timely implementation of
action plans included in past audits.
One of the critical issues identified was related to the improper handling of inventory, which led
to a loss of INR 10 lakhs in the previous financial year. The management, led by Mr. Anil
Sharma, had committed to implementing a new inventory management system by March 2023
to rectify this issue. Mr. Mehta found that, as of his latest review in April 2023, the system had
not been fully implemented, and similar inventory discrepancies were still occurring, resulting
in an additional loss of INR 5 lakhs.
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Mr. Mehta prepared an Action Taken Report (ATR) and discussed it with Mr. Sharma and the
governance committee. The ATR highlighted that despite management's commitment, the
necessary corrective actions were not completed, and the inventory issues persisted. Based on
the principles of SIA 390, what should be Mr. Mehta's next steps?
(a) Mr. Mehta should close the issue in the ATR since he has reported it to the management
and the governance committee, fulfilling his responsibility.
(b) Mr. Mehta should revise the ATR to include a new action plan with a more stringent timeline
and continue to monitor the issue until it is resolved.
(c) Mr. Mehta should stop monitoring the issue further since the management has failed to
implement the action plan within the agreed timeline, making it purely a management
responsibility.
(d) Mr. Mehta should escalate the issue to external auditors immediately, as the recurring loss
of INR 5 lakhs indicates potential fraud or severe negligence by the management.
5. AB Pvt. Ltd., a company with outstanding loans and borrowings exceeding one hundred crore
rupees, wishes to appoint Mr. X as its internal auditor. Is the appointment of Mr. X valid under
the Companies Act, 2013?
(a) No, because Mr. X is not a member of the Institute of Chartered Accountants of India (ICAI).
(b). Yes, because Mr. X is a practicing cost accountant and meets the qualification criteria
specified in section 138 of the Companies Act, 2013.
(c). No, because Mr. X is not a qualified company secretary as per the Companies Act, 2013.
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(d). Yes, because Mr. X has extensive experience in auditing large companies, irrespective of his
current membership status.
(2 x 5 = 10 Marks)
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