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AUDIT Practice Manual

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AUDIT Practice Manual

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kaustuvapati2005

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Answer to MTP_ Intermediate_Syllabus2016_Jun 2017_Set 1

(c) As AS 11 ‗The Effects of Changes in Foreign Exchange Rates‘, exchange differences

arising on the settlement of monetary items or on reporting an enterprise‘s monetary
items at rates different from those at which they were initially recorded during the
period, or reported in previous financial statements, should be recognized as income or
expenses in the period in which they arise. Thus exchange differences arising on
repayment of liabilities incurred for the purpose of acquiring fixed assets are recognized
as income or expense.
Calculation of Exchange Difference:

` 7, 500 lakhs
Foreign currency loan = = 120 lakhs US Dollars
` 62.50
Exchange difference = `120 lakhs US Dollars  (65.00 – 62.50)
= ` 300 lakhs (including exchange loss on payment of first installment)
Therefore, entire loss due to exchange differences amounting ` 300 lakhs
should be charged to profit and loss account for the year.

(d) Reasons for preparation of Cash Flow Statement:

Cash Flow Statement is considered to be a summarized statement showing sources of

Cash Inflows and application of cash outflows of an enterprise during a particular
period of time. It is prepared on the basis of the published data as disclosed by the
Financial Statement of two different financial periods. It is an essential tool for
managerial decision-making. Cash Flow reports the management Net Cash Flow (i.e.
cash inflow less cash outflow or vice versa) from each activity of the enterprise as
well as of the overall business of the enterprise. The management of the enterprise gets a
picture of movement of cash resources from the Cash Flow Statement and can assess
the stronger and weaker area of movement of cash for different activities of the
business for drawing up the future planning.

Section – B
Question no. 6 is compulsory

6. (a) Choose the correct answer from the given four alternatives: [6x1=6]

(ii) The _________________ is also expected to provide the resources needed and select
staff members to accompany the auditors.
(a) Auditor
(b) Client
(c) Internal auditor
(d) Auditee

(iii) Each of the three parties involved in an audit _____________ plays a role that
contributes to its success.
(a) the client, the auditor, and the auditeer
(b) the client, the auditor, and the audite
(c) the client, the moderator, and the auditee

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 9

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Answer to MTP_ Intermediate_Syllabus2016_Jun 2017_Set 1

(d) the client, the auditor, and the auditee

(iv) SA 230 stands for ___________________.

(a) Quality control for an audit of financial Statements
(b) Agreeing the terms of Audit engagements.
(c) Audit Documentation
(d) Responsibility of Joint Auditor

(v) Permanent Audit file contains _________________.

(a) Copies of management letters
(b) Audit Programme
(c) Analysis of transaction and balances
(d) Analysis of significant ratios and trends

(vi) Internal Control Questionnaire contains the questions need to be followed by the
_____________
(a) Employer of the organisation
(b) Employee of the organsation
(c) Auditor of the entity
(d) Banker to the organsation

(vii) Secretarial Audit is covered under Section ____________ of Companies Act, 2013.
(a) Section 204
(b) Section 148
(c) Section 139
(d) None of the above

(b) Match the following: [4×1=4]

Column ‗A‘ Column ‗B‘

1. Independent Directors A. Unqualified Opinion.
2. Maximum term of Firm as Auditor B. 2 Consecutive terms of 5 years
3. Maximum term of Individual Auditor C. Audit Committee
4. True and Fair Audit Report D. 1 term of 5 years

Answer:

Column ‗A‘ Column ‗B‘

1. Independent Directors C Audit Committee
2. Maximum term of Firm as Auditor B 2 Consecutive terms of 5 years
3. Maximum term of Individual Auditor D 1 term of 5 years
4. True and Fair Audit Report A Unqualified Opinion

(i) "Branch office", in relation to a company, means any establishment described as

such by the company.
(ii) Internal Auditor can be removed by the Board.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 10

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Answer to MTP_ Intermediate_Syllabus2016_Jun 2017_Set 1

(iii) Final dividend is declared in the general meeting.

(iv) ―Debenture‖ includes debenture stock, bonds or any other instrument of a
company evidencing a debt, whether constituting a charge on the assets of the
company or not.

Answer:

(i) True;
(ii) True;
(iii) True;
(iv) True.

Answer any three questions out of the following four questions [3×12=36]

7. (a) State the advantages of continuous audit

(b) How would you determine the materiality of an item, while conducting audit.
[5+7 = 12]
Answer:

(a) Advantages of continuous audit:

Continuous audit may be defined as the examination and verification of a firm‘s financial
transactions and their supporting documents, continuously throughout the year, at regular
or irregular intervals. Its main advantages are as follows:
(i) Early location of errors and frauds: It helps in detecting errors and frauds immediately
on their occurrence, and not at the year end when it would become difficult to install
corrective control mechanisms.
(ii) Quick rectification: Rectification of errors at an early stage is possible.
(iii) Guidance: Continuous guidance to client.
(iv) Finalizations of accounts completion in time: Just at the end of the accounting
period.
(v) Moral check: Make employees of the client alert and more efficient in conducting
their work.
(vi) Improves statutory auditor‘s focus: It relieves statutory auditors of routine testing and
allows them to focus efforts on more valuable activities.

(b) Concept of ―Materiality‖ in planning and performing the audit

Materiality is one of the basic fundamental concepts in the process of Accounting and
Auditing. It is a continuous process and covers in its ambit all the stages from recording
to classification and presentation. An auditor has to constantly judge whether a
particular item or transaction is material or not.

The main factors to be considered for determining materiality of an item are:

(i) Individually: It may be determined individually. E.g., a payment of `1000 may be
material in a small business, but even `1 lac could be immaterial for a big business
entity.

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(ii) Aggregate: It may be determined in aggregate. E.g., total income from investment
in mutual funds could be more material than looking into each individual
investment.
(iii) Legal Considerations: It depends on the statutory or legal considerations. E.g., where
the terms of appointment of a whole time director are not according to law, the
remuneration paid to him is a material item even if the financial implication is not
much.
(iv) Legal Definition: It may be defined or described in law itself. E.g., Schedule III
requires separate disclosure of items of all expenses exceeding 1% of turnover or to
write off capital assets purchased for less than `5000.
(v) Relative overall impact: It may depend on the relative degree of relevance to the
overall accounts or the group, or class of transactions to which it pertains. E.g., short
recoveries from debtors.
(vi) Qualitative: It may be qualitative and not often reckoned with respect to
quantitative details alone.E.g, improper disclosure of an accounting policy in the
Notes to the Annual Financial Statements may affect economic decisions.
(vii) Insignificant quantity but special context: It maybe of an insignificant quantity
otherwise, but material in special circumstances. E.g., rounding off to the nearest
rupee the fraction of 0.666 as 0.67 in computer software. It may be material in future
due to cumulative effect even if insignificant now.

8. (a) Mr. Raghav, who is a chartered accountant, wants to conduct the audit of Ram-Shyam
Limited. State the disqualifications that would make him ineligible for the post.
(b) Should an auditor sign his audit report? [9+3 = 12]

Answer:

(a) Appointment of Mr. Raghav as an Auditor.

The following persons shall not be eligible for appointment as an auditor of a company,
namely:—
(a) a body corporate other than a limited liability partnership registered under the
Limited Liability Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee of
the company;
(d) a person who, or his relative or partner—
(i) 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.
(ii) Provided that the relative may hold security or interest in the company of face
value not exceeding one thousand rupees or such sum as may be prescribed;
(iii) is indebted to the company, or its subsidiary, or its holding or associate
company or a subsidiary of such holding company, in excess of such amount as
may be prescribed; or
(iv) has given a guarantee or provided any security in connection with the
indebtedness of any third person to the company, or its subsidiary, or its holding

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 12

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Answer to MTP_ Intermediate_Syllabus2016_Jun 2017_Set 1

or associate company or a subsidiary of such holding company, for such

amount as may be prescribed;
(e) 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;
(f) a person whose relative is a director or is in the employment of the company as a
director or key managerial personnel;
(g) 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 persons or partner is at the date of such
appointment or reappointment holding appointment as auditor of more than
twenty companies;
(h) a person who has been convicted by a court of an offence involving fraud and a
period of ten years has not elapsed from the date of such conviction;
(i) any person whose subsidiary or associate company or any other form of entity, is
engaged as on the date f appointment in consulting and specialised services as
provided in section 144.

If Mr. Raghav possess any of the above disqualifications he would not be eligible for the
post of an auditor in Ram-Shyam Ltd.

(b) Auditor to sign audit reports [Section 145]

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 sub-
section (2) of section 141, and 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 and shall be open to inspection by any member of the company.

9. (a) Is rotation applicable to a Cost Auditor?

(b) Discuss how you would conduct audit of Inventories. [5+7 = 12]

Answer:

(a) Rotation of a Cost Auditor

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 13

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Section 139(3) of the Act, applicable to appointment of auditors (financial), and Rule 6
of Companies (Audit and Auditors) Rules, 2014 deals with the provision of rotation of
auditors and these provisions are applicable only to appointment of auditors (financial).
The Act does not provide for rotation in case of appointment of cost auditors and the
same is not applicable to a cost auditor. It may, however, be noted that though there is
no statutory provision for rotation of cost auditors, individual companies may do so as a
part of their policy, as is the practice with Public Sector Undertakings.

(b) Audit of Inventories:

Inventories are tangible property held for sale in the ordinary course of business, or in the
process of production for such sale, or for consumption in the production of goods or
services for sale, including maintenance supplies and consumable stores and spare parts
meant for replacement in the normal course. Inventories normally comprise raw
materials including components, work-in-process, finished goods including by-products,
maintenance supplies, stores and spare parts, and loose tools. Inventories normally
constitute a significant portion of the total assets, particularly in the case of
manufacturing and trading entities as well as some service rendering entities. Audit of
inventories, therefore, assumes special importance.

The following features of inventories have an impact on the related audit procedures:
(i) By their very nature, inventories normally turn over rapidly.
(ii) Inventories are susceptible to obsolescence and spoilage. Further, some of the items
of inventory may be slow-moving while others may follow a seasonal pattern of
movement.
(iii) Inventories are normally movable in nature, although there may be some instances
of immovable inventories also, e.g., in the case of an entity dealing in real-estate.
(iv) All the items of inventory may not be located at one place but may be held at
different locations such as factories and warehouses, or with third parties such as
selling agents.
(v) The individual items of inventory may not be significant in value, but taken together,
they normally constitute a significant proportion of total assets and current assets of
manufacturing, trading and certain service entities.
(vi) Physical condition (e.g., stage of completion of work-in-process in certain industries)
and existence of certain items of inventories may be difficult to determine.
(vii) Valuation of inventories may involve varying degrees of estimation, including expert
opinions, e.g., in the case of jewellery.

10. Write short note (any three): [3×4 = 12]

(a) Information Systems Audit
(b) Utilisation of Investor Education and Protection Fund
(c) Internal Audit as a management tool
(d) Surprise Check

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 14

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Answer to MTP_ Intermediate_Syllabus2016_Jun 2017_Set 1

Answer:

(a) Information Systems Audit

According to Ron Weber, ―Information systems auditing is an organizational function that

evaluates asset safeguarding, data integrity, system effectiveness, and system efficiency
in computer based information systems. It has arisen for seven major reasons:
(i) The consequences of losing the data resource;
(ii) The possibility of misallocating resources because of decision based on incorrect
data or decision rules;
(iii) The possibility of computer abuse if computer systems are not controlled;
(iv) The high value of computer hardware, software, and personnel;
(v) The high costs of computer error;
(vi) The need to maintain the privacy of individual persons; and
(vii) The need to control the evolutionary use of computers.

(b) Utilisation of Investor Education and Protection Fund

The Fund shall be utilised for—

(a) education, awareness and protection;
(b) the refund in respect of unclaimed dividends, matured deposits, matured
debentures, the application money due for refund and interest thereon; promotion
of investors‘
(c) distribution of any disgorged amount among eligible and identifiable applicants for
shares or debentures, shareholders, debenture-holders or depositors who have
suffered losses due to wrong actions by any person, in accordance with the orders
made by the Court which had ordered disgorgement;
(d) reimbursement of legal expenses incurred in pursuing class action suits under
sections 37 and 245 by members, debenture-holders or depositors as may be
sanctioned by the Tribunal; and
(e) any other purpose incidental thereto, in accordance with such rules as may be
prescribed:

Provided that the person whose amounts referred to in clauses (a) to (d) of sub –
section (2) of section 205C transferred to Investor Education and Protection Fund,
after the expiry of the period of seven years as per provisions of the Companies Act,
shall be entitled to get refund out of the Fund in respect of such claims in
accordance with rules made under this section.

(i) Internal audit ensures compliance of Companies (Auditors Report) Order, 2016.
(ii) It ensures compliance of accounting standards and policies.
(iii) It ensures reliability of MIS through internal audit‘s independent appraisal and
review.
(iv) It looks into the standard of efficiency of business operation.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 15

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Answer to MTP_ Intermediate_Syllabus2016_Jun 2017_Set 1

(v) It can evaluate various problems independently and suggest improvement.

(vi) This system makes the internal control system effective.
(vii) It ensures the adequacy, reliability, accuracy and understandability of financial and
operational data.
(viii) It performs as an integral part of ‗Management by system‘.
(ix) It can add valuable assistance to management in acquiring new business,
promoting new products and expansion or diversification of business etc.

(d) Surprise Check

An element of surprise can significantly improve the effectiveness of an audit and

therefore, wherever practicable, an element of surprise should be incorporated into the
audit programme. The following recommendations may be referred to in this regard:

(i) Surprise checks should be considered as a desirable part of each audit.

(ii) The areas over which surprise checks should be employed would depend upon the
circumstances of each audit but should normally include:
 Verification of cash and investments.
 Test verification of stores and stocks and the records relating thereto.
 Verification of books of prime entry and statutory registers normally required to be
examined for the purposes of audit.
(iii) The frequency of surprise checks may be determined by the auditor in the
circumstances of each audit but should normally be at least once in the course of
an audit.
(iv) The results of the surprise checks should be communicated to the management if
they reveal weakness in the internal control system or the existence of fraud or error.
(v) The auditor should satisfy himself that adequate action is taken by the management
on the matters communicated by him.
(vi) The results of surprise checks should be included in the audit report if they are
material and affect the true and fair view of the accounts on which the reporting is
done.

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 16

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Answer to MTP_ Intermediate_Syllabus2016_Jun 2017_Set 2

Functions: The functions of the Central Commission include regulating the tariff of
generating companies, the inter-state transmission of electricity, to issue licenses, to
levy fees, to fix trading margin etc.

(d) Comparison between Ind AS 21 and AS 11:

Ind AS -21 AS - 11
1. Forward exchange contracts and Forward exchange contracts and
other similar financial instruments are other similar financial instruments are
excluded from the scope of this not excluded from the scope of this
standard. standard.
2. Factors for determining the There are two aspects – integral
functional currency of an entity is foreign operations and non-integral
same as the indicators in existing AS foreign operations for accounting.
11 to determine the non-integral
foreign operations.
There is no substantive differences in
respect of the accounting
procedure.
3. There is an option to recognise the There is no such permission.
exchange differences arising on
translation of any long-term
monetary items from foreign
currency to functional currency and
it is permitted.
Accumulated exchange differences
are to be transferred to P& L
Account in a appropriate way.

Section – B
Question no. 6 is compulsory

6. (a) Choose the correct answer from the given four alternatives: [6x1=6]

(i) The purpose of internal audit is to protect the

(A) Assets
(B) Audit staff
(C) Accountant
(D) Management

(ii) Proving the truth means vouching of ___________________.

(A) Payment
(B) Expenses
(C) Assets
(D) Liabilities

(iii) Form for maintenance of Cost Records by the Company is ____________________.

(A) CRA-1
(B) CRA-2
(C) CRA-3
(D) CRA-4

(iv) The meetings of Audit committee should be ______________ in a year.

(A) 4
(B) 5

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 11

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Answer to MTP_ Intermediate_Syllabus2016_Jun 2017_Set 2
(C) 3
(D) 2

(v) An audit report is the __________ product of audit.

(A) Main
(B) Final
(C) Semi final
(D) None of the above

(vi) Statutory Auditor can be removed by the __________________

(A) Shareholders
(B) Audit committee
(C) BOD
(D) None of the above.

(b) Match the following: [4×1=4]

Column ‘A’ Column ‘B’

1. Statutory Audit A. Final Audit

2. Annual Audit B. Comptroller and Auditor General of India

3. Functional Classification of Audit C. Tax Audit

4. The authority for Govt. Audit D. External and Internal Audit

Answer:

Column ‘A’ Column ‘B’

1. Statutory Audit C Tax Audit

2. Annual Audit A Final Audit

3. Functional Classification of Audit D External and Internal Audit

4. The authority for Govt. Audit B Comptroller and Auditor General of India

(i) Should reporting in Audit report comply with the requirements as made by statues?

(ii) An audit work reflects the work done by the management.

(iii) The concept of true or fair is a fundamental concept in auditing.

(iv) An auditor is not insurer.

Answer:

(i) True;
(ii) False;
(iii) False:

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 12

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Answer to MTP_ Intermediate_Syllabus2016_Jun 2017_Set 2
(iv) True.

Answer any three questions out of the following four questions [3×12=36]

7. (a) Differentiate between Accounting and auditing.

(b) State the advantages of conducting Audit of Sole proprietors. [9+3 = 12]

Answer:

(a) Difference between Accounting and Auditing:

Accounting Auditing
It is the collection, classification and Auditing is an analytical and critical
summarization of data for preparation of examination of books of accounts,
(i)
books of accounts, and to make financial financial records and the financial
statements. statements prepared thereon.
It is the recording of transactions at the It is the post examination of recorded
(ii)
time of occurrence. transactions.
It measures the business events in
Auditing reviews financial records to form
monetary terms, records them, and
(iii) an opinion on the authenticity of
communicates the financial results
Financial Statements.
through Financial Statements.
The primary responsibility is of the
The auditor is an independent person
management towards the shareholders/
appointed by the business entity to
owners, to maintain the Financial records
(iv) review the Financial Statements and to
in such a manner that Financial
give his opinion thereon.
Statements can be prepared from the
records.
An auditor is required to submit a report
An accountant is not expected to
with his opinion on ‗true and fair‘
review/ report on the Financial Statement
(v) assertions made in the Financial
but to report the compilation of records
Statements to the owners.
to the management.

The auditor is an independent person

An accountant works for/ under the answerable/liable to the owners/
(vi)
management. shareholders and not just to the
management.
In certain circumstances, the auditor
(viI) No such liability
could be held liable to third parties also.
Maintenance of accounts may not be Audit could be exempt for various
mandatory for small individuals or individuals or small partnerships, e. g.
partnership firms, e. g. under section under section 44AB of the Income tax
(viii)
44AA of the Income Tax Act, but could Act, and even in case where maintaining
be mandatory under other laws, e. g. for books of accounts is a statutory
companies under the Companies Act. requirement under section 44AA, but may

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 13

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be mandatory under other laws e. g. for
Companies under the Companies Act.
Accounting is done as per the principles Auditing is done as per the principal set in
(ix)
set by Indian Accounting standards standards an auditing.

(b) Advantages of auditing for sole proprietors

(i) It evaluates the internal control system and strengthens it by removing weaknesses, if
any.
(ii) It increases the reliability and authenticity of Financial Statements.
(iii) It helps in timely finalization of Annual Financial Statements and tax assessments.
(iv) It keeps a moral check on the working of employees.
(v) It helps them in obtaining funds easily from financial institutions, based on more
reliable Financial Statements available to the banks and financial institutions.
(vi) It helps in settling:
 Trade disputes
 Labour disputes
 Insurance claims

8. (a) ‘Auditor not to render certain services’. Comment.

(b) Discuss about the manner in which rotation of Auditors may be done by the company
on expiry of their term. [6+6 = 12]

Answer:

(a) Auditor not to render certain services

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
maybe, but which shall not include any of the following services (whether such services
are rendered directly or indirectly to the company or itsholding company or subsidiary
company, namely:—
(i) accounting and book keeping services;
(ii) internal audit;
(iii) design and implementation of any financial information system;
(iv) actuarial services;
(v) investment advisory services;
(vi) investment banking services;
(vii) rendering of outsourced financial services;
(viii) management services; and
(ix) any other kind of services as may be prescribed.

Provided that an auditor or audit firm who or which has been performing any non-audit
services on or before the commencement of this Act shall comply with the provisions of

Academics Department, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 14

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this section before the closure of the first financial year after the date of such
commencement.

Explanation. — For the purposes of this sub-section, the term ―directly or indirectly‖ shall
include rendering of services by the auditor,—
(i) in case of auditor being an individual, either himself or through his relative or any
other person connected or associated with such individual or through any other
entity, whatsoever, in which such individual has significant influence or control, or
whose name or trade mark or brand is used by such individual;
(ii) in case of auditor being a firm, either itself or through any of its partners or through its
parent, subsidiary or associate entity or through any other entity, whatsoever, in
which the firm or any partner of the firm has significant influence or control, or whose
name or trade mark or brand is used by the firm or any of its partners.

(b) Manner of rotation of auditors by the companies on expiry of their term:

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.

(1) 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.
(2) 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 or audit
firm is associated with the outgoing auditor or audit firm under the same
network of audit firms.
Explanation. I - For the purposes of these rules the term ―same network‖ includes the
firms operating or functioning, hitherto or in future, under the same brand name, trade
name or common control.

Explanation. II - 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.

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9. (a) How should an auditor verify the issue of Bonus shares of a Company?
(b) Write a note on ‘Adverse Report’. [8+4 = 12]

Answer:

(a) Issue of Bonus Shares (Section 63)

(i) Confirm that issue of Bonus Share was authorized by articles.

(ii) Verify the minutes of the Board meeting and ordinary resolution passed in the
general meeting in which the approval of members is obtained.
(iii) Check that the company has issue fully paid-up bonus shares to its members only.
(iv) Confirm that the issue of bonus shares shall not be made by capitalising reserves
created by the revaluation of assets.
(v) Check whether the company has made any default in payment of interest or
principal in respect of fixed deposits or debt securities issued by it.
(vi) Check whether the company has made any default in payment of statutory dues
of the employees, such as, contribution to provident fund, gratuity and bonus.
(vii) Whether the partly paid-up shares are made fully paid-up.
(viii) Check whether the bonus shares shall not be issued in lieu of dividend.

(b) Adverse or Negative Report

(i) An Adverse or Negative Report is given when the Auditor concludes that based on
his examination, he does not agree with the affirmations made in the Financial
Statements / Financial Report.
(ii) The Auditor states that the Financial Statements do not present a true and fair view
of the state of affairs and the working results of the organisation.
(iii) The Auditor should state the reasons for issuing such a report.
(iv) An Adverse Opinion should be expressed when the effect of a disagreement is so
material and pervasive to the Financial Statements, that the Auditor concludes
that a qualification of the report is not adequate to disclose the misleading or
incomplete nature of the Financial Statements.

10. Write short note (any three): [3×4 = 12]

(a) Auditor’s report on revised accounts of Companies before circulation to
shareholders.
(b) Auditor’s duty on redemption on debenture
(c) Audit of Bills payable for banks
(d) First Auditor

Answer:

(a) Auditor’s report on revised accounts of companies before circulation to shareholders.

There may be instances, where the Management of a Company amends its audited
accounts, and re-approves it and then requests the Statutory Auditors to make a Report

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Answer to MTP_ Intermediate_Syllabus2016_Jun 2017_Set 2
once again on the amended accounts. The Auditors' duties in this regard are
enumerated below;
(i) Return: Ensure that all copies of the Original Accounts and Report are returned to
the Auditor.
(ii) Disclosure: Ensure that the fact of Revision of accounts already approved by the
Board and reported upon by the Statutory Auditors, appears as a specific Note on
the amended accounts.
(iii) Reporting: Reporting requirements are as under
(a) Adequate Disclosure: If the Statutory Auditor is satisfied that the disclosure
made by the Company in the Notes on Accounts is adequate, there is no
further need for the Auditor to refer to the revision of the Balance Sheet and/ or
the Profit and Loss Account in his report.
(b) Inadequate Disclosure: If the Notes on Accounts do not contain any note on
the revision or if such Note is not considered as adequately comprehensive by
the Auditor, the Auditor should refer to the fact of revision of the accounts in his
report.

The above principles are also applicable to the audit of Government Companies.

(b) Redemption of debentures:

A company may issue debentures with an option to convert such debentures into
shares, either wholly or partly at the time of redemption. If debentures are redeemable it
can be redeemed in any of the following way:
(i) By way of periodical drawing i.e. by creating Debenture Redemption Reserve
Account.
(ii) By way of payment on fixed date.
(iii) By payment whenever the company desires to do so.

Auditor‘s Duty:
(i) The auditor should inspect the debentures or trust deed for the terms and conditions
regarding redemption of debentures.
(ii) He should see the Director‘s minute book authorizing the redemption of debentures.
(iii) He should also vouch the redemption with the help of debenture bonds cancelled
and the cash book.
(iv) He should also examine the accounting treatment thoroughly.

(c) Audit of bills payable for Banks:

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Answer to MTP_ Intermediate_Syllabus2016_Jun 2017_Set 2
(iii) The bank should have a reliable private code known only to the responsible officers
of its branches coding and decoding of the telegrams should be done only by such
officers.
(iv) The signatures on a demand draft should be checked by an officer with the
specimen signature book.
(v) AW the telegraphic transfers and demand drafts issued by a branch should be
immediately confirmed by advices to the branches concerned. On payment of
these instruments, the paying branch should send a debit advice to the originating
branch.
(vi) If the paying branch does not receive proper confirmation of any telegraphic
transfers or demand draft from the issuing branch, it should take immediate steps to
ascertain the reasons.
(vii) In case an instrument prepared on a security paper, e.g., draft, has to be cancelled
(say, due to error in preparation), it should be examined whether the manner of
cancellation is such that the instrument cannot be misused.

(d) First Auditor

 First auditor of the company, other than a Government company, shall be appointed
by the BOD within 30 days from the date of registration of the company;
 If BOD fails to appoint, by the member of the company within 90 days at an
extraordinary general meeting appoint the first auditor;
 In case of Government company, first auditor shall be appointed by CAG within 60
days from the date of registration;
 If CAG fails to appoint, by the BOD of the company within next 30 days;
 If again BOD fails to appoint the first auditor of the company, by the member of the
company within 60 days at an extraordinary general meeting;
 Tenure of the first auditor of the company in both the above cases till the conclusion
of the first annual general meeting;

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sweat equity shares issued under this section and the holders of such shares shall
rank pari passu with other equity shareholders.

(c) Following are the main features of Electricity Act, 2003 —

 The activities like generation, transmission and distribution of power have been
separately identified.
 The Act de-licenses power generation completely (except for hydro power
projects, over a certain size).
 10% of the power supplied by suppliers and distributors to the consumers has to
be generated using renewable and non-conventional sources of energy.
 Setting up State Electricity Regulatory Commission (SERC) made mandatory. (v)
Appellate Tribunal to hear appeals against the decision of the CERC and SERCs.
 Ombudsman scheme for consumers’ grievance redressal.
 Provision for private licensees in transmission and entry in distribution through an
independent network.
 Metering of all electricity supplied made obligatory.
 Provision relating to theft of electricity made stricter.

(d) Finance Lease – It is a lease, which transfers substantially all the risks and rewards
incidental to ownership of an asset to the Lessee by the Lessor but not the legal
ownership. In following situations, the lease transactions are called Finance Lease.
 The lessee will get the ownership of leased asset at the endof the lease term.
 The lessee has an option to buy the leased asset at the end of term at price,
which is lower than its expected fair value at the date on which option will be
exercised.
 The lease term covers the major part of the life of asset.
 At the beginning of lease term, present value of minimum lease rental covers
substantially the initial fair value of the leased asset.
 The asset given on lease to lessee is of specialized nature and can only be used
by the lessee without major modification.

Section – B
Question no. 6 is compulsory

6. (a) Choose the correct answer from the given four alternatives: [6x1=6]

(i) First auditor of the company is appointed by the BOD within

(A) 15 days
(B) 30 days
(C) 45 days
(D) 60 days

(ii) Proving the truth means vouching of ___________________.

(A) Payment
(B) Expenses
(C) Assets
(D) Liabilities

(iii) Form for Secretarial Audit Report is

(A) MR-2
(B) MR-3

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(C) MR-4
(D) MR-5

(iv) The meetings of Audit committee should be ______________ in a year.

(A) 4
(B) 5
(C) 3
(D) 2

(v) An audit report is the __________ product of audit.

(A) Main
(B) Final
(C) Semi final
(D) None of the above

(vi) Cost Auditor is appointed by the

(A) Audit Committee
(B) BOD
(C) BOD on recommendation of Audit Committee
(D) None of the above

Answer:

(i) — (B)
(ii) — (B)
(iii) — (B)
(iv) — (A)
(v) — (B)
(vi) — (C)

(b) Match the following: [4×1=4]

Column ‗A‘ Column ‗B‘

1. Section 61 of the Co. Act 2013 A. Final Audit

2. Annual Audit B. Comptroller and Auditor General of India

3. Functional Classification of Audit C. Alteration of Share Capital

4. The authority for Govt. Audit D. External and Internal Audit

Answer:

Column ‗A‘ Column ‗B‘

1. Section 61 of the Co. Act 2013 C Alteration of Share Capital

2. Annual Audit A Final Audit

3. Functional Classification of Audit D External and Internal Audit

4. The authority for Govt. Audit B Comptroller and Auditor General of India

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(c) State whether the following statements are True (or) False. [4×1=4]

(i) Cost Accounting Standards is mandatory as per section 143 of the companies Act
2013.
(ii) Audit report reflects the work done by the employees.
(iii) The concept of true or fair is a fundamental concept in auditing.
(iv) Statutory Auditor is appointed by the shareholder in the general meeting.

Answer:

(i) False;
(ii) False;
(iii) False:
(iv) True.

Answer any three questions out of the following four questions [3×12=36]

7. (a) State the Advantages of Statutory Audit.

(b) Discuss the differences between a checklist and internal control questionnaire. [8+4=12]

Answer:

(a) The auditor expresses his independent opinion after following relevant audit procedures
and checking the external and internal evidences necessary for the conduct of audit.
He comments on the truthfulness and fairness of statement of affairs of the organization
as on certain date and also about the fact that no misstatement or misrepresentation
has been made in the Financial Statements under report.

Such an independent opinion by the auditor increases the reliability, authenticity and
credibility of the Financial Statements which may further be used by different users for
various purposes such as:

(i) The members/shareholders/stakeholders, for their economic decisions and for

exercising their voting rights.
(ii) For timely tax assessments.
(iii) For determining the purchase or sale consideration in case of ongoing concern.
(iv) Settlement of partners’ accounts in case of admission, retirement or death of
partner on account of goodwill or otherwise.
(v) Before the court, in case of settlement of disputes with employees, creditors or
debtors.
(vi) For determining the actual value of business or shares in case of merger,
acquisition, etc.
(vii) For getting financial assistance from financial institutions, banks or investors.
(viii) In case of non-profit organizations, for getting government grants and availing tax
exemptions.
(ix) Evaluation of the internal control systems and strengthening it by removing the
inherent weaknesses, and checking the efficacy of the internal checks.
(x) For checking the integrity of the management which manages the funds and
affairs on behalf of the real owners or shareholders.

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(xi) For other users of financial statements like creditors, investors and government
agencies, it ensures that any assertions in the Financial Statements are neither
overstated/understated nor misrepresented.
(xii) For the proper distribution of profits by way of payment of wages and other
benefits.
(xiii) For ensuring of proper distribution of profits as dividends.
(xiv) For ensuring that all legal requirements are fulfilled and statutory compliances are
adhered.
(xv) For settlement of insurance claims or other recoveries from government bodies or
otherwise.

(b) Difference between a Checklist and Internal Control Questionnaire:

Basis Check List Internal Control

Questionnaire
(i) Point of Time It is issued at the It can be issued at any point
commencement of audit of time and reported back
and reported back after immediately.
completion of audit.
(ii) Issued To It is issued to the audit staff to It is issued to various people
be followed by them during at different levels in the
audit and reported back at organization.
completion.
(iii) Contents It contains instructions to be It contains questions to be
followed by audit assistants. answered by the employees
of the organization.
(vi) Objective It works as a guideline for This is used to collect the
audit staff so that no remains information to know about
unchecked. the internal control system
and to evaluate the
weaknesses therein.

8. (a) Discuss the eligibility, qualifications and disqualifications of auditors as per Section 141
of the Companies Act,2013.
(b) List the functions of an Audit Committee. [8+4=12]

Answer:

(a)
(1) A person shall be eligible for appointment as an auditor of a company only if he is a
chartered accountant.
Provided that a firm whereof majority of partners practicing in India are qualified for
appointment as aforesaid may be appointed by its firm name to be auditor of a
company.

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(2) 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.
(3) The following persons shall not be eligible for appointment as an auditor of a company,
namely:—

(a) a body corporate other than a limited liability partnership registered under the
Limited Liability Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee of
the company;
(d) a person who, or his relative or partner—

(i) 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.
Provided that the relative may hold security or interest in the company of face
value not exceeding one thousand rupees or such sum as may be prescribed;
(ii) is indebted to the company, or its subsidiary, or its holding or associate company
or a subsidiary of such holding company, in excess of such amount as may be
prescribed; or
(iii) has given a guarantee or provided any security in connection with the
indebtedness of any third person to the company, or its subsidiary, or its holding or
associate company or a subsidiary of such holding company, for such amount as
may be prescribed;

(4) Where a person appointed as an auditor of a company incurs any of the

disqualifications mentioned in sub-section (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.

(b) Function of Audit Committee:

The various Functions of the Audit Committee is enumerated below;
(i) For the appointment and fixation of the remuneration of Auditor.

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(ii) Examination of the Financial Statement.
(iii) Scrutiny of Inter Corporate Loans and Investment,
(iv) Valuation of the Assets of the Company,
(v) Evaluation of the internal financial control and risk management system of the
entity.
(vi) Evaluation of the use of the funds rose through public offers.
(vii) Evaluation of any related party transaction.

9. (a) ‗Remuneration of a Cost Auditor‘ — Discuss.

(b) List the features of a Qualified Audit Report. [4+8=12]

Answer:
(a) Rule 14 of the Companies (Audit and Auditors) Rules, 2014 has laid down the
procedure of appointment and fixing the remuneration of a cost auditor. It states as
follows:

Remuneration of the Cost Auditor: For the purpose of sub-section (3) of section 148 –
(a) in the case of companies which are required to constitute an audit committee-

(i) the Board shall appoint an individual, who is a cost accountant in practice, or a
firm of cost accountants in practice, as cost auditor on the recommendations of
the Audit committee, which shall also recommend remuneration for such cost
auditor;
(ii) the remuneration recommended by the Audit Committee under
(iii) shall be considered and approved by the Board of Directors and ratified
subsequently by the shareholders;
(b) in the case of other companies which are not required to constitute an audit
committee, the Board shall appoint an individual who is a cost accountant in practice
or a firm of cost accountants in practice as cost auditor and the remuneration of such
cost auditor shall be ratified by shareholders subsequently.

(b) Features of a Qualified Report –

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Answer to MTP_ Intermediate_Syllabus2016_Dec2017_Set 1
for taxation has been made in view of the loss during the year', etc. should be
avoided.
vi. Violation of Law: Where the Company has committed an irregularity resulting in a
breach of law, the Auditor should bring the same to the notice of the shareholders
by properly qualifying his report.
vii. Quantification: The Auditors should quantify, wherever possible, the effect of these
qualifications on the Financial Statements if the same is material. Where the effect
of qualification cannot be accurately quantified, the Auditor may reflect the effect
on the basis of Management estimates, after carrying out necessary audit tests on
such estimates.
viii. Notes-Report Relationship: Where notes of a qualificatory nature appear in the
accounts, the Auditors should state all qualifications independently in their report so
that the user can assess the significance of these qualifications.
ix. Draft Report: The Auditor may discuss matters of qualification with the Management
of the Company to acquire their views. It is not necessary that the Auditor should
accept the Management's view and modify his opinion. But it would enable the
Auditor to accurately draft the qualifications in his Final Report.

10. Write short note (any three): [3×4 = 12]

(a) Advantages of Joint Audit;
(b) Auditor‘s duty on redemption on debenture;
(c) Audit of Bills payable for banks;
(d) First Auditor.

Answer:

(a) The various advantages that accrue out of Joint Audit are enumerated below:
(c) Lower workload
(d) Timely completion of work
(e) Sharing of expertise
(f) Improved quality of services
(g) Healthy competition
(h) Quality of performance

(b) Auditor‘s duty on Redemption of debentures:

Auditor’s Duty:

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(i) The auditor should inspect the debentures or trust deed for the terms and conditions
regarding redemption of debentures.
(ii) He should see the Director’s minute book authorizing the redemption of debentures.
(iii) He should also vouch the redemption with the help of debenture bonds cancelled
and the cash book.
(iv) He should also examine the accounting treatment thoroughly.

(c) Audit of bills payable for Banks:

The auditor should evaluate the existence, effectiveness and continuity of internal
controls over bills payable. Such controls should usually include the following:
(i) Drafts, mail transfers, traveller's cheques, etc., should be made out in standard
printed forms.
(ii) Unused forms relating to drafts, traveller's cheques, etc., should be kept under the
custody of a responsible officer.
(iii) The bank should have a reliable private code known only to the responsible officers
of its branches coding and decoding of the telegrams should be done only by such
officers.
(iv) The signatures on a demand draft should be checked by an officer with the
specimen signature book.
(v) AW the telegraphic transfers and demand drafts issued by a branch should be
immediately confirmed by advices to the branches concerned. On payment of
these instruments, the paying branch should send a debit advice to the originating
branch.
(vi) If the paying branch does not receive proper confirmation of any telegraphic
transfers or demand draft from the issuing branch, it should take immediate steps to
ascertain the reasons.
(vii) In case an instrument prepared on a security paper, e.g., draft, has to be cancelled
(say, due to error in preparation), it should be examined whether the manner of
cancellation is such that the instrument cannot be misused.

(d) First Auditor

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(c) Reasons for preparation of Cash Flow Statement:

Cash Flow Statement is considered to be a summarized statement showing sources of

(d)
(i) As the contribution to Pension Fund is made on actuarial basis every year, therefore
the policy is as per AS-15, which is based on actuarial basis of accounting.
(ii) As the contribution is being made on annual basis to gratuity fund on actuarial basis,
the policy is in accordance with AS-15.
(iii) As regard leave encashment, which is accounted for on PAY-AS-YOU-GO basis, it is
not in accordance with AS-15. It should be accounted for on accrual basis.

Section – B
Question no. 6 is compulsory

6. (a) Choose the correct answer from the given four alternatives: [6x1=6]

(i) The most comprehensive type of audit is the _________system audit, which examines
suitability and effectiveness of the system as a whole.
(a) Quantity
(b) Quality
(c) Preliminary
(d) Sequential

(ii) Each of the three parties involved in an audit _____________ plays a role that
contributes to its success.
(a) the client, the auditor, and the auditeer
(b) the client, the auditor, and the audite
(c) the client, the moderator, and the auditee
(d) the client, the auditor, and the auditee

(iii) SA 300 stands for ___________________.

(a) Quality control for an audit of financial Statements
(b) Agreeing the terms of Audit engagements.
(c) Audit Planning
(d) Responsibility of Joint Auditor

(iv) Internal Check is a valuable part of the _______________ control.

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(a) Internal
(b) External
(c) Bothe (a) and (b)
(d) None of the above

(v) Remuneration of auditors is covered under Section ____________ of Companies Act,

2013.
(a) Section 142
(b) Section 148
(c) Section 139
(d) None of the above

(vi) CAATS stands for

(a) Cornwall Air Ambulance Trust
(b) Children Air Ambulance Trust
(c) Center for alternatives to Animal Testing
(d) Computer Assisted Auditing Technique

Answer:

(i) — (b)
(ii) — (d)
(iii) — (c)
(iv) — (a)
(v) — (a)
(vi) — (d)

(b) Match the following: [4×1=4]

Column ‗A‘ Column ‗B‘

1. Government Company A. Unqualified Opinion.
2. Detailed of audit work to be performed B. Audit Programme
A company which is a subsidiary
3. Maximum term of Individual Auditor C.
of Government Company
4. True and Fair Audit Report D. 1 term of 5 years

Answer:

Column ‗A‘ Column ‗B‘

A company which is a subsidiary
1. Government Company C.
of Government Company
2. Detailed of audit work to be performed B. Audit Programme
3. Maximum term of Individual Auditor D. 1 term of 5 years
4. True and Fair Audit Report A. Unqualified Opinion

(i) An audit report should have a proper title.

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(ii) Auditor has right to disclose the client information to a third party.
(iii) An in depth examination to detect a suspected fraud is termed as Investigation.
(iv) ―Debenture‖ includes debenture stock, bonds or any other instrument of a
company evidencing a debt, whether constituting a charge on the assets of the
company or not.

Answer:

(i) True;
(ii) False;
(iii) True;
(iv) True.

Answer any three questions out of the following four questions [3×12=36]

7. (a) Voluntary Audit or Private Audit – discuss.

(b) List the objectives of Internal Control. [5+7=12]

Answer:

(a) Voluntary Audit or Private Audit

―Though audit is not necessary for each form of ownership, yet they go for audit’’.
―Audit of accounts may not be compulsory, yet one may get the books of accounts
audited for various reasons’’.
Audit refers to the process of examination of books and records together with the
evidence relating to an entity, whether it is required by law or not, for the purpose of
formation of opinion with regard to true and fair view disclosed by Financial Statements.
Broadly there are two classifications of audits:
(i) Statutory Audit
(ii) Voluntary Audit or Private Audit

(A) Statutory audits are mandatory in nature.

(B) Voluntary audits are non-statutory audits i.e. not compelled by law. There is no
statutory requirement for audits of sole trader, partnership firm (except for a statutory tax
audit u/s 44AB required as per the Income Tax Act, 1961, e.g. when such an entity
exceeds the turnover of certain limit). The sole proprietors and partnership firms may get
their accounts audited voluntarily on their own because of certain advantages.

(b) Objectives of Internal Control Each organization must have a system of internal control in
place for achieving the preset goals. Other than accomplishing the desired goals and
objectives of the organization, this system plays a very important role in any organization.
The main objectives of internal control are enumerated below:
(i) Compliance: To have compliance with law and the accounting practices
generally accepted and followed in the country. The accounting process also
needs to be in compliance with these.

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(ii) Reliance: To increase the reliance on the internal systems, people and accounting
practices followed by the organization, so that the chances of frauds are reduced.
(iii) Safeguarding: To safeguard the organization’s accounts, employees and assets by
formation of fool-proof policies, rules and regulations.
(iv) Security: To provide security to customers, employees and property of the
organization. Physical security systems like security guards, locks and anti-theft
devices are used for providing protection.
(v) Increased efficiency: To assist in human resource and performance management,
and to keep proper control over business activities to achieve maximum levels of
efficiency.
(vi) Evaluation: To evaluate the accounting system for proper authorization of
transactions.
(vii)Review and correction: To review the working of the business, locate weak points in
operations and to take corrective measures for proper working.
(viii) Authorization: To provide proper authority for purchase, sale, valuation,
verification and possession of assets.
(ix) Delegation: To provide for division of duties among the employees where all staff
members work cohesively.
(x) Accurate planning: To ensure that the auditors and the accountants of the
organization make all the financial reports correctly and to ensure that financial
planning is done accurately.
(xi) Conformity with accounting principles: To conform to the basic accounting
concepts, and principles that was governing an organization.
(xii)Resource utilization: To ensure that all the resources: Man, Material, Money and
Machines of the organization are optimally used.
(xiii) Safeguarding of resources: To protect the resources of the organization against
mismanagement or fraud and to ensure that the company’s activities are in
accordance with laws and regulations.
(xiv) Setting future Corporate Goals: An efficient system of internal control helps the
organization in goal setting. However, the organization should have certain
policies, rules and regulations in place to achieve the preset goals.

8. (a) Mr. Raghav, who is a chartered accountant, wants to conduct the audit of Ram-Shyam
Limited. State the disqualifications that would make him ineligible for the post.
(b) “Auditors to attend general meeting‖ — Comment. [9+3 = 12]

Answer:

(a) Appointment of Mr. Raghav as an Auditor.

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(c) a person who is a partner, or who is in the employment, of an officer or employee of

the company;
(d) a person who, or his relative or partner—
(i) 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.
(ii) Provided that the relative may hold security or interest in the company of face
value not exceeding one thousand rupees or such sum as may be prescribed;
(iii) is indebted to the company, or its subsidiary, or its holding or associate
company or a subsidiary of such holding company, in excess of such amount as
may be prescribed; or
(iv) has given a guarantee or provided any security in connection with the
indebtedness of any third person to the company, or its subsidiary, or its holding
or associate company or a subsidiary of such holding company, for such
amount as may be prescribed;
(e) 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;
(f) a person whose relative is a director or is in the employment of the company as a
director or key managerial personnel;
(g) 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 persons or partner is at the date of such
appointment or reappointment holding appointment as auditor of more than
twenty companies;
(h) a person who has been convicted by a court of an offence involving fraud and a
period of ten years has not elapsed from the date of such conviction;
(i) any person whose subsidiary or associate company or any other form of entity, is
engaged as on the date f appointment in consulting and specialised services as
provided in section 144.

If Mr. Raghav possess any of the above disqualifications he would not be eligible for the
post of an auditor in Ram-Shyam Ltd.

(b) 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.

9. (a) Is rotation applicable to a Cost Auditor?

(b) ―Statutory Auditor vs. Internal Auditor‖ — Discuss. [5+7 = 12]

Answer:
(a) Rotation of a Cost Auditor

The provisions for maintenance of cost accounting records and cost audit are governed
by Section 148 of the Companies Act, 2013. The provisions of Section 148 clearly states

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that no person appointed under Section 139 as an auditor of the company shall be
appointed for conducting audit of cost records of the company. Section 148 also
provides that qualifications, disqualifications, rights, duties and obligations applicable to
auditors (financial) shall apply to a cost auditor appointed under this section. The
eligibility, qualifications and disqualifications are provided in Section 141 of the Act and
powers and duties are provided in Section 143. Section 143(14) specifically states that
the provisions of Section 143 shall mutatis mutandis apply to a cost auditor appointed
under Section 148. There are no other provisions governing the appointment of a cost
auditor.
Section 139(3) of the Act, applicable to appointment of auditors (financial), and Rule 6
of Companies (Audit and Auditors) Rules, 2014 deals with the provision of rotation of
auditors and these provisions are applicable only to appointment of auditors (financial).
The Act does not provide for rotation in case of appointment of cost auditors and the
same is not applicable to a cost auditor. It may, however, be noted that though there is
no statutory provision for rotation of cost auditors, individual companies may do so as a
part of their policy, as is the practice with Public Sector Undertakings.

(b) Statutory Audit is the act of checking books of accounts as per the provision of
Companies Act, whereas Internal Audit is conducted by the either be a chartered
accountant or a cost accountant, or such other professional as may be decided by the
Board of the Company to detect weakness in internal control system and for their
improvement. However both of these types of audit check books of accounts, detect
frauds & errors however they differ from each other which is reproduced below;

Basis Statutory Audit Internal Audit

1 Appointing Statutory Auditor is appointed Internal Auditor is appointed
Authority by the shareholder in the by the Board.
general meeting.
2 Scope of the The scope of work is defined The scope of work includes
work in the Companies Act. the adherence of
management policies and
procedures and indentifies
the weakness in the internal
control.
3 Removal of Statutory Auditor can be Internal Auditor can be
Auditor removed by the shareholders. removed by the Board.
4 Remuneration It is fixed by the shareholders. It is fixed by the board
5 Audit Report It is submitted to the It is submitted to the Board
appointing Authority. as a suggestion to improve
weakness in the internal
control.

10. Write short note (any three): [3×4 = 12]

(a) Interim Audit;
(b) Utilisation of Investor Education and Protection Fund
(c) Internal Audit as a management tool

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(d) Cut off procedures.

Answer:

(a) Interim Audit

Meaning and concept: Interim audit is an audit conducted between two annual audits.
It may be conducted for a specific period, such as a quarter or half year, with an interim
object of declaration of interim dividend or valuation of shares on a certain date, in case
of mergers.
It is carried out by professionals, but has no legal status as the figures may be altered
subsequently.

It is useful for:
i. Early detection and rectification of errors & frauds,
ii. Publishing of interim results in some cases,
iii. Timely completion of records and final audit,
iv. Moral checks on employees.

(b) Utilisation of Investor Education and Protection Fund

The Fund shall be utilised for—

(a) education, awareness and protection;
(b) the refund in respect of unclaimed dividends, matured deposits, matured
debentures, the application money due for refund and interest thereon; promotion
of investors’
(c) distribution of any disgorged amount among eligible and identifiable applicants for
shares or debentures, shareholders, debenture-holders or depositors who have
suffered losses due to wrong actions by any person, in accordance with the orders
made by the Court which had ordered disgorgement;
(d) reimbursement of legal expenses incurred in pursuing class action suits under
sections 37 and 245 by members, debenture-holders or depositors as may be
sanctioned by the Tribunal; and
(e) any other purpose incidental thereto, in accordance with such rules as may be
prescribed:

Provided that the person whose amounts referred to in clauses (a) to (d) of sub – section
(2) of section 205C transferred to Investor Education and Protection Fund, after the
expiry of the period of seven years as per provisions of the Companies Act, shall be
entitled to get refund out of the Fund in respect of such claims in accordance with rules
made under this section.

(i) Internal audit ensures compliance of Companies (Auditors Report) Order, 2016.
(ii) It ensures compliance of accounting standards and policies.

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(iii) It ensures reliability of MIS through internal audit’s independent appraisal and
review.
(iv) It looks into the standard of efficiency of business operation.
(v) It can evaluate various problems independently and suggest improvement.
(vi) This system makes the internal control system effective.
(vii) It ensures the adequacy, reliability, accuracy and understandability of financial and
operational data.
(viii) It performs as an integral part of ‘Management by system’.
(ix) It can add valuable assistance to management in acquiring new business,
promoting new products and expansion or diversification of business etc.

(d) Cut off procedures:

i) Definition: Periods usually coincide with calendar months, which lead to the need for
specific demarcation between transactions forming the part of one period from
those included in the following period. Thus, cut-off procedures are adopted to
allocate revenues and costs to the proper accounting period.
ii) Areas of concern: Close attention should be paid to the accounts payable and
accounts receivable functions. These two functions are the most susceptible to
recording of transactions in the wrong accounting period.
iii) Cut-off points: Serially numbered documents like invoice for sales or purchase bills
are allocated to the respective accounting periods by establishing cut-off points
based on the serial numbers.
iv) Importance: Cut-off procedures require detailed testing by the auditor so as to
ensure proper accounting of assets and liabilities, which may arise without the
corresponding physical delivery of goods taking place.
v) Example: The purchase procedure involves a number of steps, like issuing purchase
requisitions, inviting quotations, selecting sellers and defining the terms of purchase,
entering agreement, receipt of goods, storage of goods, payment, etc. All the
documents and vouchers that substantiate the proof of authentication of these
transactions are serially numbered. It is the auditor’s duty to examine the cut-off
points and ensure that the transaction has been recorded in the period in which the
title in goods is transferred, irrespective of the period of physical delivery of goods
and to ensure compliance of the Indian Accounting Standards and the relevant
Statute.

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(c) Main Characteristics of a Bank‗s Book-Keeping System:

Voucher Posting Entries in the personal ledger are made directly from vouchers
instead of being posted from the books of prime entry.
Voucher The vouchers entered into different personal ledgers each day are
Summary Sheets summarised on summary sheets, totals of which are posted to the
control accounts in the general ledger.
Daily Trial The general ledger trial balance is extracted and agreed every
Balance day.
Continuous All entries in the detailed personal ledgers and summary sheets
Checks are checked by persons other than those who have made the
entries. A considerable force of such check is employed, with the
general result that most clerical mistakes are detected before
another day begins.
Control Accounts A trial balance of the detailed personal ledgers is prepared
periodically, usually every two weeks, agreed with general ledger
control accounts.
Double Voucher Two vouchers are prepared for every transaction not involving
System cash-one debit voucher and another credit voucher.

(d) Finance Lease :

It is a lease, which transfers substantially all the risks and rewards incidental to ownership of
an asset to the Lessee by the Lessor but not the legal ownership. In following situations, the
lease transactions are called Finance Lease.
• The lessee will get the ownership of leased asset at the end of the lease term.
• The lessee has an option to buy the leased asset at the end of term at price, which is
lower than its expected fair value at the date on which option will be exercised.
• The lease term covers the major part of the life of asset.
• At the beginning of lease term, present value of minimum lease rental covers
substantially the initial fair value of the leased asset.
• The asset given on lease to lessee is of specialized nature and can only be used by
the lessee without major modification.

Section – B (Auditing)
Answer Question No. 6 and any three from Question Nos. 7,8,9 and 10.

6. (a) Choose the correct answer from the given four alternatives: [6x1=6]

(i) Audit Procedures to obtain audit evidences include

(A) Compliance Procedure
(B) Substantive Procedure
(C) Both (A) and (B)
(D) Neither (A) nor (B)

(ii) A Cost Auditor submits his report to

(A) Board of Directors
(B) Government
(C) Shareholders
(D) Statutory Auditor

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(iii) The first Auditor of a Company shall be appointed by the Board of Directors within
(A) 30 days from the date of registration.
(B) 90 days from the date of registration.
(C) 30 days from the date of first AGM.
(D) 1 year from the date of registration.

(vi) The purpose of internal audit is to protect the

(A) Assets
(B) Audit staff
(C) Accountant
(D) Management

(v) Proving the truth means vouching of ___________________.

(A) Payment
(B) Expenses
(C) Assets
(D) Liabilities

(vi) Form for maintenance of Cost Records by the Company is ____________________.

(A) CRA-1
(B) CRA-2
(C) CRA-3
(D) CRA-4

Answer:

(i) — C
(ii) — A
(iii) — B
(iv) — A
(v) — B
(vi) — A

(b) Match the following: [4×1=4]

Column ‗A‘ Column ‗B‘

1. Statutory Audit A. Disclaimer of Opinion
Unable to form an overall
2. B. Comptroller and Auditor General of India
conclusion on Financial Statement
3. Audit Report with reservations C. Tax Audit

4. The authority for Govt. Audit D. Qualified Audit Report

Answer:

Column ‗A‘ Column ‗B‘

1. Statutory Audit C Tax Audit

2. Unable to form an overall A Disclaimer of Opinion

conclusion on Financial Statement
3. Audit Report with reservations D Qualified Audit Report

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4. The authority for Govt. Audit B Comptroller and Auditor General of India

(i) Audit report should comply with the requirements made by statues.
(ii) An audit work reflects the work done by the management.
(iii) The first auditor of a company is appointed by the shareholders of the company at
the general meeting.
(iv) A company auditor can render actuarial services to his client.

Answer:

(i) True;
(ii) False;
(iii) False:
(iv) False.

Answer any three questions out of the following four questions [3×12=36]

7. (a) Define 'Audit Engagement Letter'. What are the general contents of an audit
engagement letter? [2+5=7]

(b) ‗Internal audit involves five areas of operations: .'—Discuss. [5]

Answer:

(a) Unlike a statutory audit, in a non-statutory audit the objective and scope of an audit
is not clearly described in any law. Accordingly, a misunderstanding may arise about
the exact scope of the work. Thus to avoid any kind of misunderstanding or dispute it
is in the interests of both the auditor as well as the client to exactly define the scope
of the engagement. An auditor's engagement letter signifies the confirmation by the
auditor of his acceptance of appointment as auditor, the documentation of the
objective and scope of audit or other work, and the extent of his responsibilities to the
client and the form of any reports.

Although the form and content of the engagement letter differs from client to client
but in general the following references should be made in audit engagement letter:
(i) The objective and the scope of the engagement.
(ii) Management's responsibility for the financial statements.
(iii) The existence of inherent limitations of audit and resulting material misstatements
that may remain undiscovered,
(iv) The need for use of services of internal auditors and/or other experts that may
arise during the course of the engagement.
(v) The requirement of management confirmation letter as regards representations
made by them concerning audit.
(vi) Restriction of the auditor's liability, if any.
(vii) Basis for computation of audit fees and billing arrangements.
(viii) The form of reports or other communication of results of the engagement.

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(b) According to the Institute of Internal Auditors, internal audit involves five areas of
operations:

i. Reliability and integrity of financial and operating information: Internal auditors

should review the reliability and integrity of financial and operating information
and the means used to identify, measures, classify and report such information.
ii. Compliance with laws, policies, plans, procedures and regulations: Internal
auditor should review the systems established to ensure compliance with those
policies, plan and procedures, law and regulations which could have a
significant impact on operations and reports and should determine whether the
organization is in compliance thereof.
iii. Safeguarding of Assets: Internal auditors should verify the existence of assets and
should review the means of safeguarding assets.
iv. Economic and efficient use of resources: Internal auditor should ensure the
economic and efficient use of resources available.
v. Accomplishing of established objectives and goals for operations: Internal
auditor should review operation or programmes to ascertain whether results are
consistent with established objectives and goals and whether the operations or
programmes are being carried out as planned.

8. (a) Discuss — ―Functions and powers of Audit Committee‖.

(b) Discuss about the manner in which rotation of Auditors may be done by the company
on expiry of their term. [6+6 = 12]

Answer:

(a) Functions and powers of Audit Committee

The various Functions of the Audit Committee is enumerated below;

1. For the appointment and fixation of the remuneration of Auditor.
2. Examination of the Financial Statement.
3. Scrutiny of Inter Corporate Loans and Investment,
4. Valuation of the Assets of the Company,
5. Evaluation of the internal financial control and risk management system of the
entity.
6. Evaluation of the use of the funds rose through public offers.
7. Evaluation of any related party transaction.

The powers of the Audit Committee are enumerated below;

(i) Audit Committee has the power to call for comments of the Auditor about
Internal Control Systems and the scope of the Audit including its observation.
(ii) Before submission of the report to the Board the Audit Committee have the
power to review the Financial Statement.
(iii) Power to discuss any issues with the Statutory & Internal Auditor and the
Management of the Company in relation to matter contained in the Financial
Statement.

(b) Manner of rotation of auditors by the companies on expiry of their term:

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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.

(1) 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.
(2) 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 or audit
firm is associated with the outgoing auditor or audit firm under the same
network of audit firms.
Explanation. I - For the purposes of these rules the term “same network” includes the
firms operating or functioning, hitherto or in future, under the same brand name, trade
name or common control.

Explanation. II - For the purpose of rotation of auditors,-

9. (a) How should an auditor verify the issue of Bonus shares of a Company?
(b) Write a note on ‗Adverse Report‘. [8+4 = 12]

Answer:

(a) Issue of Bonus Shares (Section 63)

(i) Confirm that issue of Bonus Share was authorized by articles.

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(vii) Whether the partly paid-up shares are made fully paid-up.
(viii) Check whether the bonus shares shall not be issued in lieu of dividend.

(b) Adverse or Negative Report

10. Write short note (any three): [3×4 = 12]

(a) Auditor‘s report on revised accounts of Companies before circulation to
shareholders.
(b) Auditor‘s duty on redemption on debenture
(c) Audit of Bills payable for banks
(d) First Auditor

Answer:

(a) Auditor‘s report on revised accounts of companies before circulation to shareholders.

There may be instances, where the Management of a Company amends its audited
accounts, and re-approves it and then requests the Statutory Auditors to make a Report
once again on the amended accounts. The Auditors' duties in this regard are
enumerated below;
(i) Return: Ensure that all copies of the Original Accounts and Report are returned to
the Auditor.
(ii) Disclosure: Ensure that the fact of Revision of accounts already approved by the
Board and reported upon by the Statutory Auditors, appears as a specific Note on
the amended accounts.
(iii) Reporting: Reporting requirements are as under
(a) Adequate Disclosure: If the Statutory Auditor is satisfied that the disclosure
made by the Company in the Notes on Accounts is adequate, there is no
further need for the Auditor to refer to the revision of the Balance Sheet and/ or
the Profit and Loss Account in his report.
(b) Inadequate Disclosure: If the Notes on Accounts do not contain any note on
the revision or if such Note is not considered as adequately comprehensive by
the Auditor, the Auditor should refer to the fact of revision of the accounts in his
report.

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The above principles are also applicable to the audit of Government Companies.

(b) Auditor‘s duty on Redemption of debentures:

Auditor’s Duty:
(i) The auditor should inspect the debentures or trust deed for the terms and conditions
regarding redemption of debentures.
(ii) He should see the Director’s minute book authorizing the redemption of debentures.
(iii) He should also vouch the redemption with the help of debenture bonds cancelled
and the cash book.
(iv) He should also examine the accounting treatment thoroughly.

(c) Audit of bills payable for Banks:

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(d) First Auditor

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Answer to MTP_ Intermediate_Syllabus2016_June2018_Set2
assets during the accounting period.
c) The amount of exchange difference in respect of forward contracts to be
recognized in the profit/ loss for one or more subsequent accounting period.
d) Foreign currency risk management policy.

(d) Buy-back have the following advantages:

(i) A company with capital, which cannot be profitably employed, may get rid of it
by resorting to buy-back, and re-structure its capital.
(ii) Free reserves which are utilized for buy-back instead of dividend enhance the
value of the company‗s shares and improve earnings per share.
(iii) Surplus cash may be utilized by the company for buy-back and avoid the
payment of dividend tax.
(iv) Buy-back may be used as a weapon to frustrate any hostile take-over of the
company by undesirable persons.

Section – B (Auditing)
Answer Question No. 6 and any three from Question Nos. 7,8,9 and 10.

6. (a) Choose the correct answer from the given four alternatives: [6x1=6]

(i) The most comprehensive type of audit is the _________system audit, which examines
suitability and effectiveness of the system as a whole.
(A) Quantity
(B) Quality
(C) Preliminary
(D) Sequential

(ii) Each of the three parties involved in an audit _____________ plays a role that
contributes to its success.
(A) the client, the auditor, and the auditeer
(B) the client, the auditor, and the audite
(C) the client, the moderator, and the auditee
(D) the client, the auditor, and the auditee

(iii) SA 300 stands for ___________________.

(A) Quality control for an audit of financial Statements
(B) Agreeing the terms of Audit engagements.
(C) Audit Planning
(D) Responsibility of Joint Auditor

(iv) Internal Check is a valuable part of the _______________ control.

(A) Internal
(B) External
(C) Bothe (a) and (b)
(D) None of the above

(v) Remuneration of auditors is covered under Section ____________ of Companies Act,

2013.
(A) Section 142

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(B) Section 148
(C) Section 139
(D) None of the above

(vi) CAATS stands for

(A) Cornwall Air Ambulance Trust
(B) Children Air Ambulance Trust
(C) Center for alternatives to Animal Testing
(D) Computer Assisted Auditing Techniques

Answer:

(i) — (B)
(ii) — (D)
(iii) — (C)
(iv) — (A)
(v) — (A)
(vi) — (D)

(b) Match the following: [4×1=4]

Column ‗A‘ Column ‗B‘

Answer:

Column ‗A‘ Column ‗B‘

(i) An audit report should have a proper title.

Answer:

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Answer to MTP_ Intermediate_Syllabus2016_June2018_Set2
(i) True;
(ii) False;
(iii) True;
(iv) True.

Answer any three questions out of the following four questions [3×12=36]

7. (a) State the advantages of continuous audit.

(b) How would you determine the materiality of an item, while conducting audit.
[5+7 = 12]
Answer:

(a) Advantages of continuous audit:

(b) Concept of ―Materiality‖ in performing the audit

The main factors to be considered for determining materiality of an item are:

(i) Individually: It may be determined individually. E.g., a payment of `1000 may be
material in a small business, but even `1 lac could be immaterial for a big business
entity.
(ii) Aggregate: It may be determined in aggregate. E.g., total income from investment
in mutual funds could be more material than looking into each individual
investment.
(iii) Legal Considerations: It depends on the statutory or legal considerations. E.g., where
the terms of appointment of a whole time director are not according to law, the
remuneration paid to him is a material item even if the financial implication is not
much.

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(iv) Legal Definition: It may be defined or described in law itself. E.g., Schedule III
requires separate disclosure of items of all expenses exceeding 1% of turnover or to
write off capital assets purchased for less than `5000.
(v) Relative overall impact: It may depend on the relative degree of relevance to the
overall accounts or the group, or class of transactions to which it pertains. E.g., short
recoveries from debtors.
(vi) Qualitative: It may be qualitative and not often reckoned with respect to
quantitative details alone. E.g, improper disclosure of an accounting policy in the
Notes to the Annual Financial Statements may affect economic decisions.
(vii) Insignificant quantity but special context: It maybe of an insignificant quantity
otherwise, but material in special circumstances. E.g., rounding off to the nearest
rupee the fraction of 0.666 as 0.67 in computer software. It may be material in future
due to cumulative effect even if insignificant now.

8. (a) Who are the persons not qualified for appointment as an Auditor of a company under
section 141 of the Companies Act 2013? [7]

(b) Mention the services that an Auditor cannot render u/s 144 of the Companies Act
2013. [5]

Answer:

(a) As per Section 141(3) read with Rule 10 of Company (Audit and Auditor) Rule 2014,
the following persons shall not be eligible for appointment as an auditor of a
company:
(a) a body corporate other than a limited liability partnership registered under the
Limited Liability Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee
of the company;
(d) a person who, or his relative or partner—
(i) 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, of
face value not exceeding rupees one lakh;
(ii) is indebted to the company, or its subsidiary, or its holding or associate
company or a subsidiary of such holding company, in excess of rupees five
lakh;
(iii) has given a guarantee or provided any security in connection with the
indebtedness of any third person to the company, or its subsidiary, or its
holding or associate company or a subsidiary of such holding company, in
excess of rupees one lakh;
(e) 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;
(f) a person whose relative is a director or is in the employment of the company as a
director or key managerial personnel;
(g) 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 persons or partner is at the date of
such appointment or reappointment holding appointment as auditor of more
than twenty companies;
(h) a person who has been convicted by a court of an offence involving fraud and a
period of ten years has not elapsed from the date of such conviction;

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(i) any person whose subsidiary or associate company or any other form of entity, is
engaged as on the date of appointment in consulting and specialised services as
provided in section 144.

(b) According to Section 144 of the Companies Act 2013, 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. However, such
services shall not include the following services, whether rendered directly or
indirectly to the company or its holding company or subsidiary company.
(a) accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services;
(h) management services; and
(i) any other kind of services as may be prescribed.

9. (a) Is Rotation applicable to cost auditor? [5]

(b) Discuss the features of a qualified report. [7]

Answer:

(a) The provisions for maintenance of cost accounting records and cost audit are
governed by Section 148 of the Companies Act, 2013. The provisions of Section 148
clearly states that no person appointed under Section 139 as an auditor of the
company shall be appointed for conducting audit of cost records of the company.
Section 148 also provides that qualifications, disqualifications, rights, duties and
obligations applicable to auditors (financial) shall apply to a cost auditor appointed
under this section. The eligibility, qualifications and disqualifications are provided in
Section 141 of the Act and powers and duties are provided in Section 143. Section
143(14) specifically states that the provisions of Section 143 shall mutatis mutandis apply
to a cost auditor appointed under Section 148. There are no other provisions governing
the appointment of a cost auditor.
Section 139(3) of the Act, applicable to appointment of auditors (financial), and Rule 6
of Companies (Audit and Auditors) Rules, 2014 deals with the provision of rotation of
auditors and these provisions are applicable only to appointment of auditors
(financial). The Act does not provide for rotation in case of appointment of cost
auditors and the same is not applicable to a cost auditor. It may, however, be noted
that though there is no statutory provision for rotation of cost auditors, individual
companies may do so as a part of their policy, as is the practice with Public Sector
Undertakings.

(b) The features of a Qualified Report are –

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iv. Subject to: The words "subject to" are essential to state any qualification. The
qualification should be preceded by words such as "Subject to" or "Except that" to
make it clear that he is making an exception.
v. Nature of Qualification: Vague statements, the effect of which on accounts
cannot be ascertained, like, the debtors balances are subject to confirmation, ‗No
provision for taxation has been made in view of the loss during the year', etc.
should be avoided.
vi. Violation of Law: Where the Company has committed an irregularity resulting in a
breach of law, the Auditor should bring the same to the notice of the shareholders
by properly qualifying his report.
vii. Quantification: The Auditors should quantify, wherever possible, the effect of these
qualifications on the Financial Statements if the same is material. Where the effect
of qualification cannot be accurately quantified, the Auditor may reflect the
effect on the basis of Management estimates, after carrying out necessary audit
tests on such estimates.
viii. Notes-Report Relationship: Where notes of a qualificatory nature appear in the
accounts, the Auditors should state all qualifications independently in their report
so that the user can assess the significance of these qualifications.
ix. Draft Report: The Auditor may discuss matters of qualification with the
Management of the Company to acquire their views. It is not necessary that the
Auditor should accept the Management's view and modify his opinion. But it
would enable the Auditor to accurately draft the qualifications in his Final Report.

10. Write short note (any three): [3×4=12]

(a) Joint Audit and its advantages;
(b) Features of inventories that have an impact on the related audit procedures;
(c) Types of Banking institutions prevailing in India;
(d) Audit of Re-issue of forfeited shares.

Answer:

(a) Joint Audit and its advantages

In big corporate more than one persons or firm of Chartered Accountants are
appointed as a Joint Auditor for conducting the audit of the company. This practice of
appointing joint auditor accrues great advantages to the company. In a big
organisation the task of carrying audit cannot be accomplished with single individual
so for overcoming such situation joint auditors are appointed.
Advantages of Joint Audit:
i. Lower workload ;
ii. Timely completion of work;
iii. Sharing of expertise ;
iv. Improved quality of services;
v. Healthy competition ;
vi. Quality of performance.

(b) The following features of inventories have an impact on the related audit
procedures:
i. By their very nature, inventories normally turn over rapidly.
ii. Inventories are susceptible to obsolescence and spoilage. Further, some of
the items of inventory may be slow-moving while others may follow a seasonal
pattern of movement.
iii. Inventories are normally movable in nature, although there may be some
instances of immovable inventories also, e.g., in the case of an entity dealing
in real-estate.

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iv. All the items of inventory may not be located at one place but may be held
at different locations such as factories and warehouses, or with third parties
such as selling agents.
v. The individual items of inventory may not be significant in value, but taken
together, they normally constitute a significant proportion of total assets and
current assets of manufacturing, trading and certain service entities.
vi. Physical condition (e.g., stage of completion of work-in-process in certain
industries) and existence of certain items of inventories may be difficult to
determine.
vii. Valuation of inventories may involve varying degrees of estimation, including
expert opinions, e.g., in the case of jewelry.

(c) There are following types of Banking institutions prevailing in India:

(a) Commercial banks;
(b) Regional Rural banks;
(c) Co-operative banks;
(d) Development banks (more commonly known as 'term-lending institutions');
(e) Payment Banks; and
(f) Small Finance Banks.

(d) Audit of Re-issue of forfeited shares:

i. The auditor should ascertain that the board of directors has the authority
under the Articles of Association of the company to reissue forfeited shares.
Check the relevant resolution of the Board of Directors.
ii. Vouch the amounts collected from persons to whom the shares have been
allotted and verify the entries recorded from re-allotment. Auditor should
check the total amount received on the shares including received prior to
forfeiture, is not less than the par value of shares.
iii. Verify that computation of surplus amount arising on the reissue of shares
credited to Capital Reserve Account and
iv. Where partly paid shares are forfeited for non-payment of call, and re-issued
as fully paid, the reissue is considered as an allotment at a discount and
compliance of the provisions is essential.

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Cash means cash in hand and balance of foreign currency. Cash equivalent implies
bank balance and other risk-free short term investments, and advances which are readily
encashable. Cash equivalent means short term highly liquid investments that are readily
convertible into known amounts of cash and which are subject to an insignificant risk of
changes in value. An investment of short maturity, say three months or less from the date
of acquisition is generally considered as cash equivalent. Equity investments are not
considered as cash equivalent because of high market risk. Investments in call money
market, money market mutual funds, repo transactions, badla transactions, etc., are
usually classified as cash equivalents.

(d) Surrender Value of a Life Insurance Policy

In the case of life policy, the policy normally has value only when it matures. But to
facilitate the promotion of business, insurance companies assign value to the policy on
the basis of the premiums paid. Insurance companies will be prepared to pay such value
on the surrender of the policy by a needy policy holder desiring to realize the policy.
Therefore the value is referred to as ‗surrender value‘. Surrender value is usually nil until at
least two annual premiums are paid. Amount paid as surrender value is an expenditure
and is similar to claims paid.

Section – B (Auditing)
Answer Question No. 6 and any three from Question Nos. 7,8,9 and 10.

6. (a) Choose the correct answer from the given four alternatives: [6x1=6]

(i) An audit committee should have ______ directors.

(A) 3
(B) 2
(C) 1
(D) 4

(ii) Appointment of auditor for government company is done by

(A) BOD
(B) Audit committee
(C) Managing Director
(D) CAG

(iii) An in depth examination to detect a suspected fraud is termed as _______________.

(A) Cost Audit
(B) Bank Audit
(C) Investigation
(D) None of the above

(iv) _____________ Audit is conducted at the end of the accounting year, after the books
of accounts have been closed.
(A) Interim
(B) Annual
(C) Investigation
(D) None of the above

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(v) Form CRA -_________ is related to appointment of Cost Auditor.
(A) 1
(B) 2
(C) 3
(D) 4

(vi) Each of the three parties involved in an audit _____________ plays a role that
contributes to its success.
(A) the client, the auditor, and the auditeer
(B) the client, the auditor, and the audite
(C) the client, the moderator, and the auditee
(D) the client, the auditor, and the auditee

(b) Match the following: [4×1=4]

Column ‘A’ Column ‘B’

1. Functional Classification of Audit A. Disclaimer of Opinion
Unable to form an overall
2. B. Comptroller and Auditor General of India
conclusion on Financial Statement
3. Audit Report with reservations C. External and Internal Audit
4. The authority for Govt. Audit D. Qualified Audit Report

Answer:

Column ‘A’ Column ‘B’

1. Functional Classification of Audit C External and Internal Audit
Unable to form an overall
2. A Disclaimer of Opinion
conclusion on Financial Statement
3. Audit Report with reservations D Qualified Audit Report
4. The authority for Govt. Audit B Comptroller and Auditor General of India

(i) Internal audit, in its initial stages, was developed as a branch of Operational
auditing.
(ii) An auditor is not insurer.
(iii) The first auditor of a company is appointed by the shareholders of the company at
the general meeting.
(iv) Balance sheet audit is generally synonymous with statutory audit.

Answer:

(i) False;
(ii) True;
(iii) False:
(iv) True.

Answer any three questions out of the following four questions [3×12=36]

7. (a) Compare external and internal audit. [7]

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Answer:

The major points of distinction between the two are as follows:

(i) The external auditors are appointed by the owners of the organisation, e.g.,
shareholders in case of a company. When external auditors are appointed under
a particular statue, they are called as statutory auditors. But internal auditors are
appointed by the management of the organisation. The internal auditors may be
appointed on contractual basis or they may be appointed as employees of the
organisation.
(ii) The scope of work of an external auditor is determined by the particular statue
under which they are appointed but the internal auditors have to work within the
scope defined the management which generally includes review and appraisal
of accounting, financial and administrative controls.
(iii) The main concern for an external auditor is to collect the adequate and reliable
evidence to support his opinion as to the truth and fairness of the representations
made in the financial statements. The internal auditors, on the other hand, are
concerned with the compliance of various policies, rules and procedures of the
enterprise, compliance with applicable laws and generally accepted
accounting principles.
(iv) The external auditors are directly responsible to the owners and in some cases to
the third parties but the internal auditors do not have any freedom to report to
the outsiders.
It may be noted that unlike external auditors, internal auditors are generally not
considered as independent of the management. But one of the basic
philosophies of audit is that the auditor must be independent. Thus, in order to
derive benefit from audit in its right earnest even internal auditor must be
independent to the extent practicable.

(b) Discuss ‘Government Audit’. [5]

Answer:

Meaning:

United Nations (UN)Handbook on Government Auditing in Developing Countries states

that ―Government auditing is the objective, systematic, professional and independent
examination of financial, administrative and other operations of a public entity for the
purpose of evaluating and verifying them, presenting a report containing comments,
conclusions and recommendations and expressing the appropriate professional opinion
in respect of financial statements.‖ Authorization:

The Comptroller & Auditor General (CAG) of India is the Supreme Audit Institution.

Types of Government Audit —

(a) Transaction audit

i. Expenditure Audit
ii. Receipts Audit.

(b) Efficiency cum Performance Audit:

Expenditure Audit: The basic standards set for audit of expenditure are to ensure that
there is provision of funds authorized by competent authority fixing the limits within
which expenditure can be incurred. Some standards are briefly explained below;

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i. Audit against Rules & Orders: It is also known as Regularity Audit. Under this, the
auditor has to see that the expenditure incurred conforms to the relevant
provisions of the statutory enactment and is in accordance with the financial
rules and orders framed by the competent authority.
ii. Audit of Sanctions: The auditor has to ensure that each item of expenditure is
covered by a sanction, either general or special, accorded by the competent
authority, authorizing such expenditure. In case expenditure exceeds the
sanctioned limit, objection is raised.
iii. Audit against Provision of Funds: It contemplates that there is a provision of funds
out of which expenditure can be incurred and the amount of such expenditure
does not exceed the sanctioned amount as well as examine whether the
money has been spent for the specified purpose.
iv. Audit of financial propriety: The auditor has to ensure that the expenditure
incurred are with respect to the recognized standards of financial propriety i.e.
quantity, quality, morality and ethics.

8. (a) Discuss the Punishment under section 147 of the Companies Act,2013. [8]

Answer:

Punishment for Contravention [Section 147]

(1) If any of the provisions of sections 139 to 146 (both inclusive) is contravened, the
company shall be punishable with fine which shall not be less than twenty-five
thousand rupees but which may extend to five lakh rupees and every officer of the
company who is in default shall be punishable with imprisonment for a term which may
extend to one year or with fine which shall not be less than ten thousand rupees but
which may extend to one lakh rupees, or with both.
(2) If an auditor of a company contravenes any of the provisions of section 139, section
143, section 144 or section 145, the auditor shall be punishable with fine which shall not
be less than twenty-five thousand rupees but which may extend to five lakh rupees or
four times the remuneration of the auditor, whichever is less. Provided that if an auditor
has contravened such provisions knowingly or willfully with the intention to deceive the
company or its shareholders or creditors or tax authorities, he shall be punishable with
imprisonment for a term which may extend to one year and with fine which shall not
be less than one lakh rupees but which may extend to twenty-five lakh rupees or eight
times the remuneration of the auditor, which is less.
(3) Where an auditor has been convicted under sub-section (2), he shall be liable to —
(i) refund the remuneration received by him to the company; and
(ii) pay for damages to the company, statutory bodies or authorities or to the
members of creditors of company for loss arising out of incorrect or misleading
statements of particulars made in his audit report.
(4) The Central Government shall, by notification, specify any statutory body or authority or
an officer for ensuring prompt payment of damages to the company or the persons
under clause (ii) of sub- section (3) and such body, authority or officer shall after
payment of damages to such company or persons file a report with the Central
Government in respect of making such damages in such manner as may be specified
in the said notification.
(5) Where, in case of audit of a company being conducted by an audit firm, it is proved
that the partner or partners of the audit firm has or have acted in a fraudulent manner
or abetted or colluded in any fraud by, or in relation to or by, the company or its
directors or officers, the liability, whether civil or criminal as provided in this Act or in any
other law for the time being in force, for such act shall be of the partner or partners
concerned of the audit firm and of the firm jointly and severally. Provided that in case

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of criminal liability of an audit firm, in respect of liability other than firms, the concerned.
Partner or partners, who acted in a fraudulent manner or abetted or as the case may
be, colluded in any fraud, shall only be liable.

(b) Discuss – ‘ appointment and tenure of First Auditor of a Company’. [4]

Answer:

First auditor of the company, other than a Government company, shall be appointed
 by the BOD within 30 days from the date of registration of the company;
 If BOD fails to appoint, by the member of the company within 90 days at an
extraordinary general meeting appoint the first auditor;
 In case of Government company, first auditor shall be appointed by CAG within 60
days from the date of registration;
 If CAG fails to appoint, by the BOD of the company within next 30 days;
 If again BOD fails to appoint the first auditor of the company, by the member of the
company within 60 days at an extraordinary general meeting;
 Tenure of the first auditor of the company in both the above cases till the conclusion
of the first annual general meeting;

9. (a) Procedure of fixing Remuneration of a Cost Auditor – discuss. [5]

Answer:

(a) Rule 14 of the Companies (Audit and Auditors) Rules, 2014 has laid down the
procedure of appointment and fixing the remuneration of a cost auditor.
It states as follows:
Remuneration of the Cost Auditor: For the purpose of sub-section (3) of section 148 -

(b) in the case of companies which are required to constitute an audit committee –

(i) the Board shall appoint an individual, who is a cost accountant in practice, or a
firm of cost accountants in practice, as cost auditor on the recommendations of
the Audit committee, which shall also recommend remuneration for such cost
auditor;
(ii) the remuneration recommended by the Audit Committee under (i) shall be
considered and approved by the Board of Directors and ratified subsequently by
the shareholders;
(c) in the case of other companies which are not required to constitute an audit
committee, the Board shall appoint an individual who is a cost accountant in
practice or a firm of cost accountants in practice as cost auditor and the
remuneration of such cost auditor shall be ratified by shareholders subsequently.

(b) Discuss the purposes to issue an Audit certificate. [7]

Answer:

Sometimes apart from an audit report for general use, an auditor is often called upon to
give a certificate for special purpose. The certificate should include the following: —
i. Auditor should see that there is a suitable declaration by the management about the
subject matter.

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ii. Auditor should give the certificate on his letter head or on stationary carrying his
name and address to avoid misunderstanding.
iii. Auditor should clearly state his limitations and indicate the extent to which he has
relied upon a technical expert if any.
iv. Auditor should indicate the specific record covered by the certificate.
v. Auditor should mention the manner in which the audit was conducted.
vi. Auditor should indicate in the certificate if he has made certain fundamental
assumptions. Auditor should make a reference to the information and explanations
obtained. Auditor should give clear title to it, indicating whether it is a report or a
certificate.
vii. Auditor should mention whether he has used any general purpose statement like Profit
& Loss Account for his investigation and also, state whether that general purpose
statement has been audited by other auditors.
viii. Auditor should be careful while interpreting any law related matter, he should clearly
mention that he is expressing merely his own opinion.
ix. Auditor should see that the certificate should be self contained documents. Auditor
should clearly mention the responsibility assumed by him.
x. Auditor should, if he has referred the audited statements, clearly mention that the
figures are used from the audited statements and relied upon.
xi. Auditor should address the certificate to the client or the Public Authority or the person
requiring it as the case may be. In appropriate circumstances it may be issued by
using the words as ―to whom so ever it may concern―.

10. Write short note (any three): [3×4=12]

(a) Joint Audit and its advantages;
(b) Features of inventories that have an impact on the related audit procedures;
(c) Audit of Municipalities and Panchayats (Local Bodies);
(d) Interest on Debentures and its audit.

Answer:

(a) Joint Audit and its advantages

Advantages of Joint Audit:

i. Lower workload ;
ii. Timely completion of work;
iii. Sharing of expertise ;
iv. Improved quality of services;
v. Healthy competition ;
vi. Quality of performance.

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(b) The following features of inventories have an impact on the related audit
procedures:
i. By their very nature, inventories normally turn over rapidly.
ii. Inventories are susceptible to obsolescence and spoilage. Further, some of
the items of inventory may be slow-moving while others may follow a seasonal
pattern of movement.
iii. Inventories are normally movable in nature, although there may be some
instances of immovable inventories also, e.g., in the case of an entity dealing
in real-estate.
iv. All the items of inventory may not be located at one place but may be held
at different locations such as factories and warehouses, or with third parties
such as selling agents.
v. The individual items of inventory may not be significant in value, but taken
together, they normally constitute a significant proportion of total assets and
current assets of manufacturing, trading and certain service entities.
vi. Physical condition (e.g., stage of completion of work-in-process in certain
industries) and existence of certain items of inventories may be difficult to
determine.
vii. Valuation of inventories may involve varying degrees of estimation, including
expert opinions, e.g., in the case of jewelry.

(c) Audit of Municipalities and Panchayats (Local Bodies)

The major objective of audit of Municipalities and Panchayats are enumerated

below;
(i) To ensure on the fairness and correctness of contents in the Financial Statement
(ii) To report on adequacy of Internal control
(iii) To ensure value of money is fully received on amount spent.
(iv) To detect the frauds and errors.

The following points are to be considered necessary for carrying on audit of

Municipalities and panchayats (Local Bodies);
(i) To ensure that the expediters incurred conform to the relevant provision of the
law and is in accordance with the financial Rules and regulation formed by the
compliant authority.
(ii) To encase that sanction is accorded by the competent authority either special
or general.
(iii) To encase that there is provision of funds for expenditure and is authorized by
competent Authority.
(iv) To ensure that where huge financial expenditure is made is run economically
and is expected to contribute growth.

(d) Interest on Debentures and its audit:

A predetermined fixed rate of interest is payable on debentures irrespective of the

fact that company has earned the profit or not. Debenture holders are creditors of
the company, they are not the owners. They have no voting powers and cannot
influence the management but their claim of interest rank ahead of the claims of the
shareholders.

Auditor‘s Duty:

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i. The payment of interest should be vouched by the auditor with the
acknowledgement of the debenture-holders, endorsed warrants and in case of
bearer debentures with the coupons surrendered.
ii. The auditor should reconcile the total amount paid with the total amount due
and payable with the amount of interest outstanding for payment.
iii. He should ensure that the interest paid on debenture like that on other fixed
loans, must be disclosed as a separate item in the profit & loss account.

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and weaker area of movement of cash for different activities of the business for drawing
up the future planning.

Section – B (Auditing)
Answer Question No. 6 and any three from Question Nos. 7,8,9 and 10.

6. (a) Choose the correct answer from the given four alternatives: [6x1=6]

(i) Proving the truth means vouching of ___________________.

(A) Payment
(B) Expenses
(C) Assets
(D) Liabilities

(ii) In case there is an Audit Committee the Cost Auditor is appointed by the
(A) Audit Committee
(B) BOD
(C) BOD on recommendation of Audit Committee
(D) None of the above

(iii) Internal Check is a valuable part of the _______________ control.

(A) Internal
(B) External
(C) Bothe (a) and (b)
(D) None of the above

(iv) CAATS stands for

(A) Cornwall Air Ambulance Trust
(B) Children Air Ambulance Trust
(C) Center for alternatives to Animal Testing
(D) Computer Assisted Auditing Techniques

(v) The most comprehensive type of audit is the _________system audit, which examines
suitability and effectiveness of the system as a whole.
(A) Quantity
(B) Quality
(C) Preliminary
(D) Sequential

(vi) Cost Audit is covered under

(A) Section 204
(B) Section 148
(C) Section 139
(D) None of the above

(b) Match the following: [4×1=4]

Column ‘A’ Column ‘B’

1. Government Company A. Unqualified Opinion.

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2. Detailed of audit work to be performed B. Audit Programme

A company which is a subsidiary
3. Maximum term of Individual Auditor C.
of Government Company
4. True and Fair Audit Report D. 1 term of 5 years

Answer:

Column ‘A’ Column ‘B’

(i) An audit report should have a proper title.

(ii) Auditor has right to disclose the client information to a third party.
(iii) An in depth examination to detect a suspected fraud is termed as Investigation.
(iv) Before submission of the report to the Board the Audit Committee has the power to
review the Financial Statement.

Answer:

(i) True;
(ii) False;
(iii) True;
(iv) True.

Answer any three questions out of the following four questions [3×12=36]

7. (a) Discuss – Surprise Checks.

Answer:

Auditor and his staff have to visit the client‘s place for carrying out the audit. Normally, the
visit is given to understand the accounting system, to evaluate the system of internal
controls, stock taking etc. It is well accepted that the audit constitutes a moral check on
the employees of the client and thus have a deterrent effect. But at the same time, if the
auditor or his staff visits at regular intervals, the client or his staff may get time to be well
prepared in advance for the audit queries. This may impair the deterrent effect. Thus,
there is a need of element of surprise.

An element of surprise can significantly improve the effectiveness of an audit and

therefore, wherever practicable, an element of surprise should be incorporated into the
audit programme. The Council of ICAI has made the following recommendations in this
regard:

i. Surprise checks should be considered as a desirable part of each audit.

ii. The areas over which surprise checks should be employed would depend upon the
circumstances of each audit but should normally include:

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• Verification of cash and investments.
• Test verification of stores and stocks and the records relating thereto.
• Verification of books of prime entry and statutory registers normally required to be
examined for the purposes of audit.

iii. The frequency of surprise checks may be determined by the auditor in the
circumstances of each audit but should normally be at least once in the course of an
audit.
iv. The results of the surprise checks should be communicated to the management if
they reveal weakness in the internal control system or the existence of fraud or error.
v. The auditor should satisfy himself that adequate action is taken by the management
on the matters communicated by him.
vi. The results of surprise checks should be included in the audit report if they are material
and affect the true and fair view of the accounts on which the reporting is done.

(b) List the essentials of Internal Control. [7+5=12]

Answer:

An efficient internal control system should provide the followings;

i. Proper division of functional responsibilities;
ii. Proper authorization and assignment of duties to perform and record the transactions;
iii. Adoption of proper practices for adherence with management policies;
iv. Proper review and authorization of all transactions before they are recorded in the
books of accounts and safeguard all business assets;
v. Proper internal checks;
vi. Proper internal audit system.

8. (a) Discuss the qualifications and disqualifications of auditors under section 141 of the
Companies Act 2013? [8]

Answer:

(1) A person shall be eligible for appointment as an auditor of a company only if he is a

chartered accountant: Provided that a firm whereof majority of partners practicing in India
are qualified for appointment as aforesaid may be appointed by its firm name to be auditor
of a company.

(2) 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.
(3) The following persons shall not be eligible for appointment as an auditor of a company,
namely:—
(a) a body corporate other than a limited liability partnership registered under the
Limited Liability Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee of
the company;
(d) a person who, or his relative or partner—
(i) 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:

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Provided that the relative may hold security or interest in the company of face
value not exceeding one thousand rupees or such sum as may be prescribed;

(ii) is indebted to the company, or its subsidiary, or its holding or associate company
or a subsidiary of such holding company, in excess of such amount as may be
prescribed; or

(iii) has given a guarantee or provided any security in connection with the
indebtedness of any third person to the company, or its subsidiary, or its holding
or associate company or a subsidiary of such holding company, for such
amount as may be prescribed;

(e) 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;
(f) a person whose relative is a director or is in the employment of the company as a
director or key managerial personnel;
(g) 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 persons or partner is at the date of such
appointment or reappointment holding appointment as auditor of more than twenty
companies;
(h) a person who has been convicted by a court of an offence involving fraud and a
period of ten years has not elapsed from the date of such conviction;
(i) a person whose relative is a director or is in the employment of the company as a
director or key managerial personnel of the company. [Section 141(3)(f)].
(j) A person who is in the full time employment elsewhere or a person or a partner of a
firm holding appointment as its auditor if such person or persons is at the date of such
appointment or reappointment holding appointment as auditor of more than twenty
companies. [Section 141(3)(g)].
(k) A person who has been convicted by a court for an offence involving fraud and a
period of ten years has not elapsed from the date of such conviction. [Section
141(3)(h)].
(l) a person who, directly or indirectly, renders any service referred to in section 144 to
the company or its holding company or its subsidiary company. Such services are —
(i) accounting and book keeping services

(ii) internal audit

(iii) design and implementation of any financial information system
(iv) actuarial services
(v) investment advisory services
(vi) investment banking services
(vii) rendering of outsource d financial services
(viii) management services.

(b) List the functions of Audit Committee. [4]

Answer:

The various Functions of the Audit Committee is enumerated below;

(i) For the appointment and fixation of the remuneration of Auditor.
(ii) Examination of the Financial Statement.
(iii) Scrutiny of Inter Corporate Loans and Investment,

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(iv) Valuation of the Assets of the Company,
(v) Evaluation of the internal financial control and risk management system of the entity.
(vi) Evaluation of the use of the funds rose through public offers.
(vii) Evaluation of any related party transaction.

9. (a) Discuss the procedure of Appointment of a Cost Auditor? [4]

Answer:

The cost auditor is to be appointed by the Board of Directors (BOD) on the

recommendation of the Audit Committee, where the company is required to have an
Audit Committee. The cost auditor proposed to be appointed is required to give a letter
of consent to the Board of Directors. The company shall inform the cost auditor
concerned of his or its appointment as such and file a notice of such appointment with
the Central Government within a period of thirty days of the Board meeting in which such
appointment is made or within a period of one hundred and eighty days of the
commencement of the financial year, whichever is earlier, through electronic mode, in
form CRA-2 along with the fee as specified in Companies (Registration Offices and Fees)
Rules, 2014 Any casual vacancy in the office of a cost auditor, whether due to resignation,
death or removal, shall be filled by the Board of Directors (BOD) within thirty days of
occurrence of such vacancy and the company shall inform the Central Government in
Form CRA-2 within thirty days of such appointment of cost auditor.

(b) Discuss the features of a qualified report. [8]

Answer:

The features of a Qualified Report are –

i. Clarity: The Auditor must express the nature of qualification, in a clear and
unambiguous manner.
ii. Explanation: Where the Auditor answers any of the statutory affirmations in the
negative or with a qualification, his Report shall state the reasons for such answer.
iii. Placement: All qualifications should be contained in the Auditor's Report. When
there are Notes, which are subject matter of a qualification, the same should
preferably be annexed to the Auditors' Report. However a reference to the Notes
to Accounts in the Auditors' Report does not automatically become a
qualification.
iv. Subject to: The words "subject to" are essential to state any qualification. The
qualification should be preceded by words such as "Subject to" or "Except that" to
make it clear that he is making an exception.
v. Nature of Qualification: Vague statements, the effect of which on accounts
cannot be ascertained, like, the debtors balances are subject to confirmation, ‗No
provision for taxation has been made in view of the loss during the year', etc.
should be avoided.
vi. Violation of Law: Where the Company has committed an irregularity resulting in a
breach of law, the Auditor should bring the same to the notice of the shareholders
by properly qualifying his report.
vii. Quantification: The Auditors should quantify, wherever possible, the effect of these
qualifications on the Financial Statements if the same is material. Where the effect
of qualification cannot be accurately quantified, the Auditor may reflect the
effect on the basis of Management estimates, after carrying out necessary audit
tests on such estimates.
viii. Notes-Report Relationship: Where notes of a qualificatory nature appear in the
accounts, the Auditors should state all qualifications independently in their report
so that the user can assess the significance of these qualifications.

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ix. Draft Report: The Auditor may discuss matters of qualification with the
Management of the Company to acquire their views. It is not necessary that the
Auditor should accept the Management's view and modify his opinion. But it
would enable the Auditor to accurately draft the qualifications in his Final Report.

10. Write short note (any three): [3×4 = 12]

(a) Branch Audit;
(b) Information Systems Audit;
(c) Audit of Bills payable for banks;
(d) Differences between Qualified report and Adverse report.

Answer:

(a) ―Branch office‖, in relation to a company, means any establishment described as such
by the company - section 2(14) of the 2013 Act.
Where a company has a branch office, the accounts of that office shall be audited
either by the auditor appointed for the company (herein referred to as the company‘s
auditor) under this Act or by any other person qualified for appointment as an auditor of
the company under this Act and appointed as such under section139, or 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 and 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
such as may be prescribed.
Provided that 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.
(b) According to Ron Weber, ―Information systems auditing is an organizational function that
evaluates asset safeguarding, data integrity, system effectiveness, and system efficiency
in computer based information systems. It has arisen for seven major reasons:
i. The consequences of losing the data resource;
ii. The possibility of misallocating resources because of decision based on incorrect data
or decision rules;
iii. The possibility of computer abuse if computer systems are not controlled;
iv. The high value of computer hardware, software, and personnel;
v. The high costs of computer error;
vi. The need to maintain the privacy of individual persons; and
vii. The need to control the evolutionary use of computers.‖

(c) The auditor should evaluate the existence, effectiveness and continuity of internal
controls over bills payable. Such controls should usually include the following:

(i) Drafts, mail transfers, traveller's cheques, etc., should be made out in standard
printed forms.
(ii) Unused forms relating to drafts, traveller's cheques, etc., should be kept under the
custody of a responsible officer.
(iii) The bank should have a reliable private code known only to the responsible
officers of its branches coding and decoding of the telegrams should be done
only by such officers.

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(iv) The signatures on a demand draft should be checked by an officer with the
specimen signature book.
(v) AW the telegraphic transfers and demand drafts issued by a branch should be
immediately confirmed by advices to the branches concerned. On payment of
these instruments, the paying branch should send a debit advice to the
originating branch.
(vi) If the paying branch does not receive proper confirmation of any telegraphic
transfers or demand draft from the issuing branch, it should take immediate steps
to ascertain the reasons.
(vii) In case an instrument prepared on a security paper, e.g., draft, has to be
cancelled (say, due to error in preparation), it should be examined whether the
manner of cancellation is such that the instrument cannot be misused.

(d) Differences between Qualified report and Adverse report:

Qualified Report Adverse Report

i. A Qualified Audit Report is one where An Adverse Report is given when the
an Auditor gives an opinion subject to concludes that based on his examination,
certain reservations. he does not agree with the affirmations
made in the Financial Statements/
Financial Report.
ii. The Auditor‘s reservation is generally The Auditor states that the Financial
Stated as: ―Subject to the above, we Statements do not present a true and fair
report that the Balance Sheet shows a view of the state of affairs and working
true and fair view.‖ results of the organization
iii. The accounts present a true and fair The accounts do not present a true and
view subject to certain reservations. fair view on the whole.
iv. A Qualification is made in the Audit An Adverse Report is given when the
Report when the Auditor has reservation Auditor has his reservations on the true
on specific item(s) of material nature. and fair view presented by the Financial
Statements.

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said name, sue or be sued. Constitution: The Central Commission shall consist of the
following Members namely: (i) A chairperson and 3 Members (ii) The Chairperson of the
Authority who shall be the Member, ex-officio.
Appointment: The Chairperson and Members of the Central Commission shall be
appointed by the Central Government on the recommendation of the Selection
Committee.
Functions: The functions of the Central Commission include regulating the tariff of
generating companies, the inter-state transmission of electricity, to issue licenses, to levy
fees, to fix trading margin etc.

Disclosure under AS -11:

(a) The amount of exchange difference included in the net profit or loss for the period.
(b) The amount of exchange difference adjusted in the carrying amount of fixed assets
during the accounting period.
(c) The amount of exchange difference in respect of forward contracts to be
recognized in the profit/ loss for one or more subsequent accounting period.
(d) Foreign currency risk management policy.

Section – B (Auditing)
Answer Question No. 6 and any three from Question Nos. 7,8,9 and 10.

6. (a) Choose the correct answer from the given four alternatives: [6x1=6]

(i) Audit is a fact-finding process that compares actual results with___________.

(A) Specified standards and plans
(B) Expected results
(C) Premature results
(D) Preliminary results

(ii) _______ ________ is a continuous critical review of financial and operating activities by
a staff member of the auditor.
(A) Internal Check
(B) Internal Control
(C) Internal Audit
(D) None of the above

(iii) Preventive Controls is a type of _ _.

(A) Internal Control
(B) Detective Control
(C) Verification
(D) None of the above

(iv) Which of the following is/are technique of Verification?

(A) Inspection
(B) Observation
(C) Confirmation
(D) All of the above

(v) The purpose of Internal audit is to detect the error in the;

(A) Accounting records
(B) Employees records

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(C) Bank records

(D) None of the above

(vi) Form CRA -_________ is related to Cost Audit Report.

(A) 1
(B) 2
(C) 3
(D) 4

(b) Match the following: [4×1=4]

Column ‘A’ Column ‘B’

1. Sec 148 of the Companies Act,2013 A. Comptroller and Auditor General of India
Section 144 of the Companies
2. B. Remuneration of Auditors
Act,2013
Section 142 of the Companies
3. C. Auditors not to render certain services
Act,2013
4. The authority for Govt. Audit D. Cost Audit

Answer:

Column ‘A’ Column ‘B’

1. Sec 148 of the Companies Act,2013 D Cost Audit
Section 144 of the Companies
2. C Auditors not to render certain services
Act,2013
Section 142 of the Companies
3. B Remuneration of Auditors
Act,2013
4. The authority for Govt. Audit A Comptroller and Auditor General of India

(i) An audit report do not require a proper title.

(ii) Flow Chart is a pictorial representation of the internal control system depicting its
various elements.
(iii) Audit Report reflects the work done by the Shareholders.
(iv) Partial audit is a non statutory audit.

Answer:

(i) False;
(ii) True;
(iii) False:
(iv) True.

Answer any three questions out of the following four questions [3×12=36]

7. (a) List the basic principles governing an audit. [7]

Answer:

Basic Principles Governing an Audit

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The following basic principles govern the auditor’s responsibilities whenever an audit
is carried out:

(i) Integrity, objectivity and independence: The auditor should be straight-forward,

honest, sincere and free form any influence on his audit work. He should maintain
impartiality and be free of any interest.
(ii) Confidentiality: He should not disclose the client’s information to anybody without
the client’s permission or under any regulatory requirement.
(iii) Skills and competence: The audit should be performed and audit report be
prepared by adequately trained, experienced and competent person.
(iv) Work performed by others: The auditor should carefully supervise the work
performed by others (such as his subordinates, other auditors, experts etc.) as
remains responsible for the work delegated by him to his assistants, other auditors
or experts.
(v) Documentation: Proper working papers should be maintained by the auditor to
evidence the audit work. Working paper which is maintained is to demonstrate
that the audit is in adherence to the basic principles.
(vi) Planning: The auditor should obtain the knowledge about client’s business to
determine the nature, timing and the extent of the audit procedures.
(vii) Audit evidence: The auditor should obtain sufficient appropriate audit evidence
through performing the compliance and substantive procedures.
(viii) Accounting system and internal controls: An understanding of the accounting
system and the related internal controls help in determining the nature, timing
and extent of other audit procedures.
(ix) Audit conclusions and reporting: On the basis of conclusions drawn from the
audit evidence obtained the auditor should give unqualified report or qualified
report or adverse report or the disclaimer report.

(Students may mention any 7 points)

(b) “Social audit is the way of measuring, understanding, reporting and improving an
organization’s performance towards meeting its social and ethical objectives”. Discuss.
[5]

Answer:

Social audit is the way of measuring, understanding, reporting and improving an

organization’s performance towards meeting its social and ethical objectives.

It helps in assessing the needs of the society and resources available for fulfilling them. It
spreads awareness among beneficiaries about the business’ efforts towards attaining
social objectives. Increasing efficacy and effectiveness of the organization’s Corporate
Social Responsibility (CSR) programmes is an important function of Social Audit. It also
scrutinizes the policy decisions, keeping in view the interests of stakeholders.

Advantages of Social Audit are:

(i) Encourages community participation among different business entities.

(ii) Ensures continuous efforts towards environmental protection and use of
environment friendly production processes.
(iii) Builds customer satisfaction and trust through ethical business practices.
(iv) Promotes collective decision making and sharing responsibilities.
(v) Develops human resources by working towards improvement of workers’ and the
underprivileged persons’ working/ living conditions.

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8. (a) Discuss eligibility, qualifications and disqualifications of auditors [section 141]. [10]

Answer:

1. A person shall be eligible for appointment as an auditor of a company only if he is a

chartered accountant.
Provided that a firm whereof majority of partners practicing in India are qualified for
appointment as aforesaid may be appointed by its firm name to be auditor of a
company.
2. 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.
3. The following persons shall not be eligible for appointment as an auditor of a
company, namely:—
(a) a body corporate other than a limited liability partnership registered under the
Limited Liability Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or
employee of the company;
(d) a person who, or his relative or partner—
(i) 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.
Provided that the relative may hold security or interest in the company of face
value not exceeding one thousand rupees or such sum as prescribed in rule 10
of chapter X under the act;

Rule 10 : Disqualifications of Auditor

1. Provided that the condition under this sub-rule shall, wherever relevant,
be also applicable in the case of a company not having share capital
or other securities:

2. 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 sixty days of such acquisition or interest.

(2) For the purpose of sub-clause (ii) of clause (d) of sub-section (3) of
section 141, a person who or whose relative or 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 rupees five lakh shall
not be eligible for appointment.

(3) For the purpose of sub-clause (iii) of clause (d) of sub-section (3) of
section 141, a person who or whose relative or partner has given a
guarantee or provided any security in connection with the
indebtedness of any third person to the company, or its subsidiary, or its
holding or associate company or a subsidiary of such holding company,

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in excess of one lakh rupees shall not be eligible for appointment.

(4) For the purpose of clause (e) of sub-section (3) of section 141, the term
"business relationship" shall be construed as any transaction entered into
for a commercial purpose, except -

i. 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;

ii. (i) 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.

(ii) is indebted to the company, or its subsidiary, or its holding or associate

company or a subsidiary of such holding company, in excess of such amount
as prescribed in rule 10 of chapter X under the act; or
(iii)has given a guarantee or provided any security in connection with the
indebtedness of any third person to the company, or its subsidiary, or its holding
or associate company or a subsidiary of such holding company, for such
amount as prescribed in rule 10 of chapter X under the act;
(e) 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 prescribed in
rule 10 of chapter X under the act;
(f) a person whose relative is a director or is in the employment of the company as
a director or key managerial personnel;
(g) 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 persons or partner is at the date of
such appointment or reappointment holding appointment as auditor of more than
twenty companies;
(h) a person who has been convicted by a court of an offence involving fraud and
a period of ten years has not elapsed from the date of such conviction;
(i) a person who, directly or indirectly, renders any service referred to in section 144
to the company or its holding company or its subsidiary company.
Explanation. — For the purposes of this clause, the term "directly or indirectly" shall
have the meaning assigned to it in the Explanation to section 144.
Where a person appointed as an auditor of a company incurs any of the
disqualifications mentioned in sub-section (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.

(b) What is unqualified opinion. [2]

Answer:

An opinion is said to be unqualified, when the Auditor concludes that the Financial
Statements give a true and fair view in accordance with the financial reporting
framework used for the preparation and presentation of the Financial Statements. Or,

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The Auditor gives a Clean or Unqualified Report, when he does not have any significant
reservation in respect of matters contained in the Financial Statements.

9. (a) List the differences between Audit Report and Audit Certificate. [7]
Answer:

Basis Audit Report Audit Certificate

Audit Report is a statement of collected

and considered information so as to give
a clear picture of the state of affairs of the While Audit Certificate is a written
business to the persons who are not in pos- confirmation of the accuracy of the
Meaning session of the full facts. information stated there in.
Audit Report contains the opinion of the
auditor on the accounts While Audit Certificate does not contain
any opinion but only confirms the
accuracy of the figures with the books of
Opinion accounts.

Audit Report is made out on the basis of while Audit Certificate is made out on the
information obtained & books of account basis of the particular data capable of
Basis verified by the auditor, verification as regards accuracy.
Audit Report may not guarantee While Audit Certificate guarantees
Guarantee correctness of financial statement in absolute correctness of the figures &
absolute terms information mentioned in the certificate.

Audit Report always covers entire While Audit Certificate covers only certain
Coverage accounts of the concern, part of the accounts of the concern.
Responsibility Audit Report does not hold auditor respon- While Audit Certificate makes an
sible for anything wrong in the accounts, auditor responsible if anything
mentioned in the certificate found as
wrong later on.
Suggestion Audit Report may provide certain While Audit certificate does not provide
suggestions for improvement any such suggestion.
Nature Audit Report is based on the vouching & While Audit Certificate is based on
verification of books of accounts, voucher, checking arithmetical accuracy of the
assets & liabilities, facts.
Scope Audit Report covers all transactions done While the Audit Certificate is very specific.
during the year,

Characteris- Audit Report is subjective as it is opinion While Audit certificate is objective as it is

tics oriented, fact oriented.

While Audit Certificate, except in few

Audit Report is required to be presented in cases, is not required to be presented in
Form: the prescribed format. any standard format.

While Audit Certificate is addressed to

Audit report is addressed to the members particular person or sometimes may
of the company at large or appointing include the words like “To Whomsoever it
Address authority, may concern”.

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(b) Remuneration of Cost Auditor — Discuss. [5]

Answer:

Remuneration of the Cost Auditor: For the purpose of sub-section (3) of section 148 —

(a) in the case of companies which are required to constitute an audit committee –

(b) in the case of other companies which are not required to constitute an audit
committee, the Board shall appoint an individual who is a cost accountant in practice
or a firm of cost accountants in practice as cost auditor and the remuneration of such
cost auditor shall be ratified by shareholders subsequently.

10. Write short note (any three): [3×4=12]

(a) Advantages and disadvantages of Joint Audit;
(b) Auditor’s duty on Redemption of debentures;
(c) Features of inventories that have an impact on the related audit procedures;
(d) Types of Banking institutions prevailing in India.

Answer:

(a) Advantages of Joint Audit:

The various advantages that accrue out of Joint Audit are enumerated below;
i. Lower workload
ii. Timely completion of work
iii. Sharing of expertise
iv. Improved quality of services
v. Healthy competition
vi. Quality of performance

Disadvantages of Joint Audit:

The disadvantages of Joint Audit are enumerated below;

i. Superiority complex of some auditor
ii. Costly for small entity
iii. Lack of coordination in work
iv. Uncertainty about liability of work
v. Psychological problem
vi. Difficulty in fixation of work among other

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(b) Auditor’s duty on Redemption of debentures:

(c) The following features of inventories have an impact on the related audit procedures:
i. By their very nature, inventories normally turn over rapidly.
ii. Inventories are susceptible to obsolescence and spoilage. Further, some of the
items of inventory may be slow-moving while others may follow a seasonal
pattern of movement.
iii. Inventories are normally movable in nature, although there may be some
instances of immovable inventories also, e.g., in the case of an entity dealing in
real-estate.
iv. All the items of inventory may not be located at one place but may be held at
different locations such as factories and warehouses, or with third parties such as
selling agents.
v. The individual items of inventory may not be significant in value, but taken
together, they normally constitute a significant proportion of total assets and
current assets of manufacturing, trading and certain service entities.
vi. Physical condition (e.g., stage of completion of work-in-process in certain
industries) and existence of certain items of inventories may be difficult to
determine.
vii. Valuation of inventories may involve varying degrees of estimation, including
expert opinions, e.g., in the case of jewelry.

(d) There are following types of Banking institutions prevailing in India:

(a) Commercial banks;
(b) Regional Rural banks;
(c) Co-operative banks;
(d) Development banks (more commonly known as 'term-lending institutions'); Payment
Banks; and
(e) Small Finance Banks.

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(d) Business segment as per AS 17.

A business segment is a distinguishable component of an enterprise that is engaged in

providing an individual product or service or a group of related products or services
and that is subject to risks and returns that are different from those of other business
segments. Factors that should be considered in determining whether products or
services are related include:

(a) the nature of the products or services;

(b) the nature of the production processes;
(c) the type or class of customers for the products or services;
(d) the methods used to distribute the products or provide the services; and
(e) if applicable, the nature of the regulatory environment, for example, banking,
insurance, or public utilities

Section – B (Auditing)
Answer Question No. 6 and any three from Question Nos. 7,8,9 and 10.

6. (a) Choose the correct answer from the given four alternatives: [6x1=6]

(i) A cost auditor submits his report to –

(A) Government
(B) Shareholders
(C) Statutory Auditor
(D) Board of Directors

(ii) Appointment of auditor for government company is done by

(A) BOD
(B) Audit committee
(C) Managing Director
(D) CAG

(iii) Form for maintenance of Cost Records by the Company is ____________________.

(A) CRA-1
(B) CRA-2
(C) CRA-3
(D) CRA-4

(vi) Each of the three parties involved in an audit _____________ play a role that contributes
to its success.
(A) the client, the auditor, and the auditeer
(B) the client, the auditor, and the audite
(C) the client, the moderator, and the auditee
(D) the client, the auditor, and the auditee

(iv) An audit report is the __________ product of audit.

(A) Main
(B) Final
(C) Semi final
(D) None of the above

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(v) Statutory Auditor can be removed by the __________________

(A) Shareholders
(B) Audit committee
(C) BOD
(D) None of the above.

(vi) Remuneration of auditors is covered under Section ____________ of Companies Act,

2013.
(A) Section 142
(B) Section 148
(C) Section 139
(D) None of the above

(b) Match the following: [4×1=4]

Column ‘A’ Column ‘B’

1. Statutory Audit A. Final Audit

2. Annual Audit B. Audit programme

3. Functional Classification of Audit C. Tax Audit

Detailed of audit work to be
4. D. External and Internal Audit
performed

Answer:

Column ‘A’ Column ‘B’

1. Statutory Audit C Tax Audit

2. Annual Audit A Final Audit

3. Functional Classification of Audit D External and Internal Audit

Detailed of audit work to be
4. B Audit programme
performed

(i) Joint auditors shall not be jointly and severally responsible in respect of undivided work.
(ii) An audit work reflects the work done by the management.
(iii) The concept of true and fair is a fundamental concept in auditing.
(iv) An auditor is not insurer.

Answer:

(i) False;
(ii) False;
(iii) True:
(iv) True.

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Answer any three questions out of the following four questions [3×12=36]

7. (a) “Internal audit involves five areas of operations”—Discuss. [5]

Answer:

According to the Institute of Internal Auditors, internal audit involves five areas of
operations:

i. Reliability and integrity of financial and operating information: Internal auditors should
review the reliability and integrity of financial and operating information and the
means used to identify, measures, classify and report such information.

ii. Compliance with laws, policies, plans, procedures and regulations: Internal auditor
should review the systems established to ensure compliance with those policies, plan
and procedures, law and regulations which could have a significant impact on
operations and reports and should determine whether the organization is in
compliance thereof.

iii. Safeguarding of Assets: Internal auditors should verify the existence of assets and
should review the means of safeguarding assets.

iv. Economic and efficient use of resources: Internal auditor should ensure the economic
and efficient use of resources available.

v. Accomplishing of established objectives and goals for operations: Internal auditor

should review operation or programmes to ascertain whether results are consistent
with established objectives and goals and whether the operations or programmes are
being carried out as planned.

(b) State the differences between Audit and Investigation. [7]

Answer:

It is to be noted that both Auditing and Investigation have a fact finding character. Both
involve a systematic and critical examination of the available evidence, yet these are
quiet distinct from each other as follows:

Sl Basis Audit Investigation

No.
(i) Meaning Auditing is an independent and An investigation may be defined
systematic examination of the as an examination of accounts
evidence underlying the and records with a view to
accounting or other data in ascertain any fact for some
accordance with the generally special purpose which varies from
accepted auditing practices to assignment to assignment.
ascertain the true and fair view of
the financial statements of an
enterprise.
(ii) Scope The audit has a wide scope. In The scope of investigations, on the
statutory audit, the scope is other hand, is limited as regards
determined by the relevant law the period or areas to be
and in case of a private audit covered.
(e.g. management audit) by a
client.

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(iii) Objective ln audit, the accounts and Investigation is for special purpose
records are verified as to their (e.g. investigation on the behalf of
truth and fairness incoming partner)
(iv) Audit The audit is conducted in Investigations involve an
Procedure accordance with the generally extended auditing procedure.
accepted auditing principle.
(v) Evidence An auditor will evaluate the An investigator can draw his
accounting records conclusions only on the basis of
predominantly based on substantial or sometimes
persuasive evidence. conclusive evidence.
(vi) Approach Auditor is sceptical and not Whereas an investigator starts with
suspicious. suspicion and collects evidence
to either confirm or dispel that
suspicion.
(vii) Periodicity Auditing is a routine exercise Investigation may spread over a
(normally conducted annually). gap period longer than one year.

8. (a) Discuss the manner in which rotation of Auditors may be done by the company on
expiry of their term. [7]

Answer:

Manner of rotation of auditors by the companies on expiry of their term:

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.

(1) 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.
(2) 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 or audit
firm is associated with the outgoing auditor or audit firm under the same
network of audit firms.
Explanation. I - For the purposes of these rules the term “same network” includes the
firms operating or functioning, hitherto or in future, under the same brand name, trade
name or common control.

Explanation. II - For the purpose of rotation of auditors,-

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chartered accountants, such other firm shall also be ineligible to be appointed for a
period of five years.

(b) Auditor not to Render Certain Services [Section 144] — discuss. [5]

Answer:

a. accounting and book keeping services;

b. internal audit;
c. design and implementation of any financial information system;
d. actuarial services;
e. investment advisory services;
f. investment banking services;
g. rendering of outsourced financial services;
h. management services; and
i. any other kind of services as may be prescribed.

Provided that an auditor or audit firm who or which has been performing any non-audit
services on or before the commencement of this Act shall comply with the provisions of
this section before the closure of the first financial year after the date of such
commencement.

9. (a) Discuss — Cost Audit Report. [5]

Answer:

As per sub-rule (4) of Rule 6 of the Companies (Cost Records and Audit) Rules 2014 as
amended, a Cost Auditor is required to submit the Cost Audit Report along with his or its
reservations or qualifications or observations or suggestions, if any, in form CRA-3 to Board
of Directors of the company within a period of one hundred and eighty days from the
closure of the financial year to which the report relates.

Form for filing Cost Audit Report with the Central Government

As per sub-rule (6) of Rule 6 of the Companies (Cost Records and Audit) Rules 2014 as
amended, every company to whom cost auditor submits his or its report 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 along with fees specified in
the Companies (Registration Offices and Fees) Rules, 2014. It is to be noted that the cost
audit report is required to be filed in XBRL format.

(b) List the main contents of an Audit Certificate. [7]

Answer:

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The certificate should include the following: —

i. Auditor should see that there is a suitable declaration by the management about the
subject matter.
ii. Auditor should give the certificate on his letter head or on stationary carrying his
name and address to avoid misunderstanding.
iii. Auditor should clearly state his limitations and indicate the extent to which he has
relied upon a technical expert if any.
iv. Auditor should indicate the specific record covered by the certificate.
v. Auditor should mention the manner in which the audit was conducted.
vi. Auditor should indicate in the certificate if he has made certain fundamental
assumptions. Auditor should make a reference to the information and explanations
obtained. Auditor should give clear title to it, indicating whether it is a report or a
certificate.
vii. Auditor should mention whether he has used any general purpose statement like
Profit & Loss Account for his investigation and also, state whether that general
purpose statement has been audited by other auditors.
viii. Auditor should be careful while interpreting any law related matter, he should clearly
mention that he is expressing merely his own opinion.
ix. Auditor should see that the certificate should be self contained documents. Auditor
should clearly mention the responsibility assumed by him.
x. Auditor should, if he has referred the audited statements, clearly mention that the
figures are used from the audited statements and relied upon.
xi. Auditor should address the certificate to the client or the Public Authority or the
person requiring it as the case may be. In appropriate circumstances it may be issued
by using the words as “to whom so ever it may concern“.

10. Write short note (any three): [3×4 = 12]

(a) Benefits of Joint Audit;
(b) Audit of Municipalities and Panchayats;
(c) Audit of Re-issue of forfeited shares;
(d) Auditing and Assurance Standards Relating to Audit of Fixed Assets.

Answer:

(a) Benefits of Joint Audit:

Benefits of Joint Audit are

(i) Lower workload: In large organizations where auditing is a mammoth task, the
work-load gets divided among all the auditors and hence reduce.
(ii) Timely completion of work: Huge auditing work can be completed on timely basis
which is divided among joint auditors.
(iii) Sharing of expertise: Expertise of different auditors gets shared if there are several
auditors.
(iv) Improved quality of services: Since specific auditors concentrate on their
specialised areas of operation, hence improving quality of services.
(v) Healthy competition: Healthy competition increases efficiency and productivity.
(vi) Quality of performance: Quality of performance increases with healthy
competition and sharing of knowledge.

(b) The major objective of audit of Municipalities and Panchayats are enumerated
below;
(i) To ensure on the fairness and correctness of contents in the Financial Statement

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(ii) To report on adequacy of Internal control

(iii) To ensure value of money is fully received on amount spent.
(iv) To detect the frauds and errors.

The following points are to be considered necessary for carrying on audit of

Municipalities and panchayats (Local Bodies);

(i) To ensure that the expediters incurred conform to the relevant provision of the
law and is in accordance with the financial Rules and regulation formed by the
compliant authority.
(ii) To encase that sanction is accorded by the competent authority either special or
general.
(iii) To encase that there is provision of funds for expenditure and is authorized by
competent Authority.
(iv) To ensure that where huge financial expenditure is made is run economically and
is expected to contribute growth.

(c) Audit of Re-issue of forfeited shares:

(i) The auditor should ascertain that the board of directors has the authority under the
Articles of Association of the company to reissue forfeited shares. Check the relevant
resolution of the Board of Directors.
(ii) Vouch the amounts collected from persons to whom the shares have been allotted
and verify the entries recorded from re-allotment. Auditor should check the total
amount received on the shares including received prior to forfeiture, is not less than
the par value of shares.
(iii) Verify that computation of surplus amount arising on the reissue of shares credited to
Capital Reserve Account and
(iv) Where partly paid shares are forfeited for non-payment of call, and re-issued as fully
paid, the reissue is considered as an allotment at a discount and compliance of the
provisions is essential.

(d) Auditing and Assurance Standards Relating to Audit of Fixed Assets:

1. The term Property, plant and equipment in respect of those entities which are
required to comply with the relevant Revised AS refers to such tangible items that:
(a) are held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes; and
(b) are expected to be used during more than one period.

2. An asset can be classified as a Property, Plant, Equipment (PPE) or otherwise,

depending upon the use to which it is put or intended to be put. For example,
assets which are classified as PPE in one type of business may be considered as
current assets in another. Similarly, the same asset may be classified differently in
an entity at different points of time. The recognition of Property, Plant and
Equipment should be done as per the principles laid down in the “relevant
applicable AS”.

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Audit:
(1) Auditor should review internal controls over acquisition like authorisation, capital
budgeting etc.
(2) Physical verification of Fixed Assets
(3) Check whether proper records are maintained
(4) Check whether proper depreciation of Fixed Assets is done
(5) Check supporting documents of acquisition disposal
(6) Check qhether scrapping retirement of Fixed Assets is properly authorised.
(7) Check whether sale proceeds of FA are propely accounted
(8) Check title needs of ownership of Fixed Assets

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(d) Geographical Segments as per AS 17

A geographical segment is a distinguishable component of an enterprise that is

engaged in providing products or services within a particular economic environment
and that is subject to risks and returns that are different from those of components
operating in other economic environments. Factors that should be considered in
identifying geographical segments include:
(a) similarity of economic and political conditions;
(b) relationships between operations in different geographical areas;
(c) proximity of operations;
(d) special risks associated with operations in a particular area;
(e) exchange control regulations; and
(f) the underlying currency risks

Section – B (Auditing)
Answer Question No. 6 and any three from Question Nos. 7,8,9 and 10.

6. (a) Choose the correct answer from the given four alternatives: [6x1=6]

(i) The most comprehensive type of audit is the ......... system audit, which examines
suitability and effectiveness of the system as a whole.
(a) Quantity
(b) Quality
(c) Preliminary
(d) Sequential

(ii) Cost Audit is covered under

(a) Section 204
(b) Section 148
(c) Section 139
(d) None of the above

(iii) Cost Auditor is required to submit the cost audit report in :

(a) CRA -1
(b) CRA-2
(c) CRA-3
(d) CRA-4

(iv) Secretarial Audit is applicable to the public sector company having the turnover of-
(a) 100 crore
(b) 200 crore
(c) 250 crore
(d) 300 crore

(v) Audit of debenture is covered under section-

(a) Section 70
(b) Section 71
(c) Section 72

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(d) Section 73

(vi) The ......... is also expected to provide the resources needed and select staff members to
accompany the auditors.
(a) Auditor
(b) Client
(c) Internal auditor
(d) Auditee

Answer:

(i) — (b)
(ii) — (b)
(iii) — (c)
(iv) — (c)
(v) — (b)
(vi) — (d)

(b) Match the following: [5×1=5]

Column „A‟ Column „B‟
1. The authority for Government Audit. A. Forming an opinion and reporting
on financial statements.
2. GRA 7 Challan B. Unqualified opinion
3. SA 700 C. Comptroller & Auditor General of
India.
4. True and fair audit report D. Excise Duty

Answer:

Column „A‟ Column „B‟

1. The authority for Government Audit. C. Comptroller & Auditor General of
India.
2. GRA 7 Challan D. Excise Duty
3. SA 700 A. Forming an opinion and reporting
on financial statements.
4. True and fair audit report B. Unqualified opinion

(c) Say True or False for the following question: [5×1=5]

(i) There is no difference between statutory and external audit.
(ii) The concept of true and fair is a fundamental concept in auditing.
(iii) As per ICAI (CA) auditor need to retain the working paper for a period of 5 years.
(iv) An audit report is the end product of auditing.

Answer:

(i) False
(ii) False
(iii) False
(iv) True

Answer any three questions out of the following four questions [3×12=36]

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7 (a) Compare audit and investigation. [7]

(b) List any five basic elements of Internal Control. [5]

Answer:

(a)

BASIS AUDIT INVESTIGATION

1 MEANING Auditing is an independent and An investigation may be defined
systematic examination of the as an examination of accounts
evidence underlying the and records with a view to
accounting or other data in ascertain any fact for some special
accordance with the generally purpose which varies from
accepted auditing practices to assignment to assignment.
ascertain the true and fair view of
the financial statements of an
enterprise.
2 SCOPE The audit has a wide scope. In The scope of investigations, on the
statutory audit, the scope is other hand, is limited as regards
determined by the relevant law and the period or areas to be covered.
in case of a private audit (e.g.
management audit) by a client.
3 OBJECTIVE ln audit, the accounts and records Investigation is for special purpose
are verified as to their truth and (e.g. investigation on the behalf of
fairness incoming partner)
4 AUDIT The audit is conducted in Investigations involve an extended
PROCEDURE accordance with the generally auditing procedure
accepted auditing principle.
5 EVIDENCE An auditor will evaluate the An investigator can draw his
accounting records predominantly conclusions only on the basis of
based on persuasive evidence substantial or sometimes
conclusive evidence.
6 APPROACH Auditor is sceptical and not Whereas an investigator starts with
suspicious. suspicion and collects evidence to
either confirm or dispel that
suspicion
7 PERIODICITY Auditing is a routine exercise Investigation may spread over a
(normally conducted annually). gap period longer than one year

(b) An effective system of internal control should have the following basic elements:

1. Financial and other Organizational Plans: This may take the form of manual suitably
classified by flow charts. It should specify the various duties and responsibilities of both
management and staff, stating the powers of authorization that reside with various
members. This is important as in the event of staff absence or otherwise the correct flow
of work and the internal control system could be vitiated by any wrong implementation
of procedures by staff either unintentionally or willfully.

2. Competent Personnel: In any internal control system, personnel are the most important
element. When the employees are competent and efficient in their assigned work, the
internal control system can be worked and operated efficiently and effectively even if
some of the other elements of the internal control system are absent.

3. Division of Work: This refers to the procedure of division of work properly among the
employees of the organization. Each and every work of the organization. Each and

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every work of the organization should be divided in different stages and should be
allocated to the employees in accordance with quality and skill.

4. Separation of operational responsibility from record keeping: If each department of an

organization is being assigned to prepare its own records and reports, there may be a
tendency to manipulate results for showing better performance. So in order to ensure
reliable records and information, record- keeping function is separated from the
operational responsibility of the concerned department.

5. Separation of the custody of assets from accounting: To protect against misuse of assets
and their misappropriation, it is required that the custody of assets and their
accounting should be done by separate persons. When a particular person performs
both the functions, there is a chance of utilizing the organization‘s assets for his
personal interest and adjusting the records to relieve himself from the responsibility of
the assets.

8. (a) List down the certain services which are not to be rendered by the Auditor of a
company.
[8]
(b) What are the powers of the Audit Committee? [3]

Answer:

(a) 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
maybe, but which shall not include any of the following ser-vices (whether such services
are rendered directly or indirectly to the company or its holding company or subsidiary
company, namely:—
(i) Accounting and book keeping services;
(ii) Internal audit;
(iii) Design and implementation of any financial information system;
(iv) Actuarial services;
(v) Investment advisory services;
(vi) Investment banking services;
(vii) Rendering of outsourced financial services;
(viii) Management services; and
(ix) Any other kind of services as may be prescribed

(b) The powers of the Audit Committee are enumerated below:

 Audit Committee has the power to call for comments of the Auditor about
Internal Control Systems and the scope of the Audit including its observation.
 Before submission of the report to the Board the Audit Committee have the power
to review the Financial Statement.
 Power to discuss any issues with the Statutory & Internal Auditor and the
Management of the Company in relation to matter contained in the Financial
Statement

9. (a) What are eligibility criteria for appointment of a cost auditor? [10]
(b) Discuss the features of Consolidated Financial statement [CFS] [2]

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Answer:

(a)

Eligibility Criteria under Section 141 of the Companies Act, 2013 read with Rule 10 of the
Companies (Audit and Auditors) Rules, 2014 and Section 148 of the Companies Act, 2013.
The following persons are not eligible for appointment as a cost auditor:

1. A body corporate. However, a Limited Liability partnership registered under the Limited
Liability Partnership Act, 2008 can be appointed. [Section 141(3)(a)].
2. An officer or employee of the company. [Section 141(3)(b)].
3. A person who is a partner, or who is in the employment, of an officer or employee of
the company. [Section 141(3)(c)].
4. A person who, or his relative or partner is holding any security of or interest in the
company or any of its subsidiary or of its holding or associate company or a subsidiary
of such holding company. [Section 141(3) (d)(i)].
5. Relatives of any partner of the firm holding any security of or interest in the company of
face value exceeding `1 lakh. [Section 141(3)(d)(i) and Rule 10(1) of Companies (Audit
and Auditors) Rules, 2014].
6. A person who is indebted to the company or its subsidiary, or its holding or associate
company or a subsidiary or such holding company, for an amount exceeding `5 lakhs.
[Section 141(3)(d)(ii) and Rule 10(2) of Companies (Audit and Auditors) Rules, 2014].
7. A person who has given any guarantee or provided any security in connection with the
indebtedness of any third person to the company or its subsidiary, or its holding or
associate company or a subsidiary of such holding company, for an amount
exceeding ` 1 lakh. [Section 141(3)(d)(iii) and Rule 10(3) of Companies (Audit and
Auditors) Rules, 2014.
8. A person whose relative is a director or is in the employment of the company as a
director or key managerial personnel of the company. [Section 141(3)(f)].
9. A person who is in the full time employment elsewhere or a person or a partner of a firm
holding appointment as its auditor if such person or persons is at the date of such
appointment or reappointment holding appointment as auditor of more than twenty
companies. [Section 141(3)(g)].
10. A person who has been convicted by a court for an offence involving fraud and a
period of ten years has not elapsed from the date of such conviction. [Section
141(3)(h)].
11. Any person whose subsidiary or associate company or any other form of entity, is
engaged as on date of appointment in consulting and providing specialized services
to the company and its subsidiary companies: [Section 141(3)(i) and Section 144].

 accounting and book keeping services

 internal audit
 design and implementation of any financial information system
 actuarial services
 investment advisory services
 investment banking services
 rendering of outsourced financial services
 management services

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(b)
CFS are prepared using the Separate Financial Statements of the Parent, Subsidiaries,
Associates and Joint Ventures and also other financial information, which might not be
covered by the Separate Financial Statements of these entities.

The ‗other financial information‘ would include disclosures to be made in the CFS about
the Subsidiaries, Associates and joint Ventures, proportion of items included in the CFS to
which different accounting policies have been applied, adjustments made for the
effects of significant transactions or other events that occur between the Financial
Statements of Subsidiaries, Associates or Joint Ventures and the Parent, as the case may
be, etc.

10. Write short notes on( any three) [3x4=12]

(a) Joint audit
(b) Audit of Inventories
(c) Audit of hospital
(d) Differences between Statutory Audit and Internal Audit

Answer:

(a) Joint Audit In big corporate more than one persons or firm of Chartered Accountants
are appointed as a Joint Auditor for conducting the audit of the company. This
practice of appointing joint auditor accrues great advantages to the company. In a
big organisation the task of carrying audit cannot be accomplished with single
individual so for overcoming such situation joint auditor wheres appointed.

Advantages of Joint Audit: The various advantages that accrue out of Joint Audit are
enumerated below;
 Lower workload
 Timely completion of work
 Sharing of expertise
 Improved quality of services
 Healthy competition
 Quality of performance

Disadvantages of Joint Audit: The disadvantages of Joint Audit are enumerated below;
 Superiority complex of some auditor
 Costly for small entity
 Lack of coordination in work
 Uncertainty about liability of work
 Psychological problem
 Difficulty in fixation of work among other

Normally, the joint auditors are able to arrive at an agreed report. However, where
the joint auditors are in disagreement with regard to any matters to be covered by
the report, each one of them should express his own opinion through a separate
report. A joint auditor is not bound by the views of the majority of the joint auditors
regarding matters to be covered in the report and should express his opinion in a
separate report in case of a disagreement

(b) Audit of Inventories:

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including components, work-in-process, finished goods including by-products,

maintenance supplies, stores and spare parts, and loose tools.

Inventories normally constitute a significant portion of the total assets, particularly in the
case of manufacturing and trading entities as well as some service rendering entities.
Audit of inventories, therefore, assumes special importance.

The following features of inventories have an impact on the related audit procedures:
(i) By their very nature, inventories normally turn over rapidly.
(ii) Inventories are susceptible to obsolescence and spoilage. Further, some of the
items of inventory may be slow-moving while others may follow a seasonal pattern
of movement.
(i) Inventories are normally movable in nature, although there may be some instances
of immovable inventories also, e.g., in the case of an entity dealing in real-estate.
(ii)All the items of inventory may not be located at one place but may be held at
different locations such as factories and warehouses, or with third parties such as
selling agents.
(iii) The individual items of inventory may not be significant in value, but taken together,
they normally constitute a significant proportion of total assets and current assets of
manufacturing, trading and certain service entities.
(iv) Physical condition (e.g., stage of completion of work-in-process in certain industries)
and existence of certain items of inventories may be difficult to determine.
(v) Valuation of inventories may involve varying degrees of estimation, including expert
opinions, e.g., in the case of jewelry.

(c) Audit of hospital

The following points are to be considered necessary for conducting an audit of Hospital.
 Check the letter of appointment to ascertain the scope of responsibilities.
 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.
 Examine, evaluate and verify the system of internal check, internal control and
determine the nature, timing and the extent of the audit procedures.
 Vouch the entries in the Patient‘s Bill Register with a copies of bill issued. Test check
the selected bills to see that these have been correctly prepared taking into
consideration the period of stay of each patient as recorded in the Attendance
Schedule.
 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.
 Interest and/ or dividend income should be vouched with reference to the
Investment Register and Interest and Dividend warrants.
 In case of legacies and donations which are received for specific purposes, it should
be ensured that any income there from is not utilized for any other purposes.
 Where receipts of subscription show a 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.
 Government grants or grants from local bodies should be verifies with the reference
to the correspondence with the concerned authorities.
 Clear distinction should be made between the items of capital and revenue nature.
 The capital expenditure should be incurred under proper authorization by a valid
resolution of the trustees or the Managing Committee.
 Verify the system of internal check as regards purchases and issue of stores,
medicines etc.
 Examine that the appointment of the staff, payment of salaries etc. are duly
authorized.
 Physically verify the investments, fixed assets and inventories.

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(d) Differences between Statutory Audit and Internal Audit

SI.No. Basis Statutory Audit Internal Audit

1 Appointing Statutory Auditor is appointed Internal Auditor is appointed by
Authority by the shareholder in the the Board.
general meeting.
2 Scope of the The scope of work is defined The scope of work includes the
work in the Companies Act. adherence of management
policies and procedures and
indentifies the weakness in the
internal control.
3 Removal of Statutory Auditor can be Internal Auditor can be removed
auditor removed by the shareholders. by the Board.
4 Remuneration It is fixed by the shareholders. It is fixed by the board.
5 Audit report It is submitted to the It is submitted to the Board as a
appointing Authority. suggestion to improve weakness
in the internal control.

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are controlled by, or are under common control with the reporting enterprise;
 Associates and joint ventures of the reporting enterprise and the investing party or
venture in respect of which the reporting enterprise is an associate or a joint
venture;
 Individuals owing, directly or indirectly, an interest in the voting power of the
reporting enterprise that gives them control or significant influence over the
enterprise and relatives of any such individual.
Here "relative" means the spouse, son, daughter, brother, sister, father and mother
who may be expected to influence, or be influenced by that individual in his/her
dealings with the reporting enterprise.
 Key management personnel and relatives of such personnel are those persons
who have authority and responsibility for planning, directing and controlling the
activities of the reporting enterprise; and enterprise over which individual or key
management personnel described as above is able to exercise significant
influence.

(d) There are certain basic differences between life policies and other types of policies. These
are listed below:
(i) Human life cannot be valued exactly. Therefore each insured is permitted to insure his life
for a specified sum, depending on his capacity to pay premiums. This is also one form of
investment and the policy amount depends on his investment decision. In the event of
the policy maturing, the insurer must pay the policy amount, as actual loss cannot be
determined. This is not the case with other policies. Other policies are contracts of
indemnity. Therefore, notwithstanding the amount for which the policy is taken, the
insurer would pay (reimburse) only the actual loss suffered or the liability incurred.
(ii) Life insurance contracts are long-term contracts. Once a policy is taken, premiums have
to be paid for number of years till maturity and the policy amount is paid on maturity. Of
course, a life policy can be surrendered after certain number of years and the insured is
paid a proportion of the premiums paid known as surrender value. In the case of other
policies, they are for a short period of one year although the policy can be renewed
year after year.
(iii) Life insurance is known also by another term 'assurance' since the insured gets an assured
sum. Other policies are known as insurance.
(iv) The determination of profit is by different methods for life and general insurance business.
In the case of life business, periodically actuaries estimate the liability under existing
policies. On that basis, a valuation Balance Sheet is prepared to determine the profit. In
the case of general insurance business, a portion of the premium is carried forward as a
provision for unexpired liability and the balance net of claims and expenses is taken as
profit (or loss).

Section – B (Auditing)

Answer Question No. 6 and any three from Question Nos. 7,8,9 and 10.

6. (a) Choose the correct answer from the given four alternatives: [6x1=6]

(i) Appointment of first auditor for government company is done by

(a) BOD
(b) Audit committee
(c) Managing Director
(d) CAG.

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(ii) Audit is a fact-finding process that compares actual results with......................

(a) Specified standards and plans
(b) Expected results
(c) Premature results
(d) Preliminary results.

(iii) Form for maintainence of Cost Records by the Company.

(a) CRA-1
(b) CRA-2
(c) CRA-3
(d) CRA-4

(iv) SA 530 stands for

(a) Quality control for an audit of financial statement.
(b) Agreeing the terms of Audit engagements
(c) Audit Documentation
(d) Audit Sampling

(v)Objective of an Audit is to formulate an overall opinion on

(a) Cost statement
(b) Financial statement
(c) Books of accounts
(d) none of these

(vi) CAATS stands for –

(a) Cornwall Air Ambulance Trust
(b) Children Air Ambulance Trust
(c) Center for Alternative to Animal Testing
(d) Computer Assisted Auditing Technique

Answer:

(i) (d)
(ii) (a)
(iii) (a)
(iv) (d)
(v) (b)
(vi) (d)

(B) Match the following: [4×1=4]

Column ‘A’ Column ‘B’
1. SA 210 A. Does not agree with affirmation made by the
management in the books.
2. Objective of an audit B. Audit Engagment
3. Scope of work C. Agreeing the terms of Audit Engagement.
4. Negative report D. Opinion on Financial Statement

Answer :

1. C

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2. D
3. B
4. A

(C) Say True or False for the following question: [4×1=4]

(i) In an audit report the Membership number of the Chartered Accountants is irrelevant.
(ii) Co-operative banks are not governed by the Co-operative Socities Act,1912 .
(iii) Cost Auditors has to follow the Cost Auditing Standards while calculating Cost Audit.
(iv) Secretarial Audit Report is attached with the Board report.
Answer:

(i) False
(ii) False
(iii) True
(iv) True

Answer any three questions out of the following four questions [3×12=36]

7. (a) State the factors to be considered for determining materiality of an item. [6]
(b) Describe the objects of verification of assets and liabilities. [6]

Answer:

(a) The main factors to be considered for determining materiality of an item are:

(i) Individually: It may be determined individually. E.g., a payment of ` 1000 may be

material in a small business, but even `1 lac could be immaterial for a big business
entity.
(ii) Aggregate: It may be determined in aggregate. E.g., total income from investment in
mutual funds could be more material than looking into each individual investment.
(iii) Legal Considerations: It depends on the statutory or legal considerations. E.g., where
the terms of appointment of a whole time director are not according to law, the
remuneration paid to him is a material item even if the financial implication is not
much.
(iv) Legal Definition: It may be defined or described in law itself. E.g., Schedule III requires
separate disclosure of items of all expenses exceeding 1% of turnover or to write off
capital assets purchased for less than ` 5000.
(v) Relative overall impact: It may depend on the relative degree of relevance to the
overall accounts or the group, or class of transactions to which it pertains. E.g., short
recoveries from debtors.
(vi) Qualitative: It may be qualitative and not often reckoned with respect to quantitative
details alone. E.g., improper disclosure of an accounting policy in the Notes to the
Annual Financial Statements may affect economic decisions.
(vii) Insignificant quantity but special context: It maybe of an insignificant quantity
otherwise, but material in special circumstances. E.g., rounding off to the nearest
rupee the fraction of 0.666 as 0.67 in computer software. It may be material in future
due to cumulative effect even if insignificant now.

(b) Verification of assets and liabilities is done with the following objects :
i. To know whether the Balance-Sheet exhibits a true and fair view of the State of affairs
of the business.
ii. To find out whether the assets were in existence.
iii. To find out the ownership and title of the assets .
iv. To show correct valuation of assets and liabilities.

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v. To verify the arithmetical accuracy of the books of accounts.

vi. To ensure that the assets have been recorded properly.
vii. To detect frauds & errors, if any .

8.(a) Discuss the eligibility, qualifications and disqualifications of auditors as per Section 141
of the Companies Act,2013. [10]
(b) Discuss the remuneration of an auditor. [2]

Answer:

(a) (1) A person shall be eligible for appointment as an auditor of a company only if he is a
chartered accountant.
Provided that a firm whereof majority of partners practicing in India are qualified for
appointment as aforesaid may be appointed by its firm name to be auditor of a
company.

Rule 10 : Disqualifications of Auditor

(1) For the purpose of proviso to sub-clause (i) of clause (d) of sub-section (3) of section 141,
a relative of an auditor may hold securities in the company of face value not exceeding
rupees one lakh: Provided that the condition under this sub-rule shall, wherever relevant,
be also applicable in the case of a company not having share capital or other
securities:
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 sixty days of such acquisition or interest
(2) For the purpose of sub-clause (ii) of clause (d) of sub-section (3) of section 141, a person
who or whose relative or 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
rupees five lakh shall not be eligible for appointment.
(3) For the purpose of sub-clause (iii) of clause (d) of sub-section (3) of section 141, a person
who or whose relative or partner has given a guarantee or provided any security in
connection with the indebtedness of any third person to the company, or its subsidiary,
or its holding or associate company or a subsidiary of such holding company, in excess
of one lakh rupees shall not be eligible for appointment.
(4) For the purpose of clause (e) of sub-section (3) of section 141, the term ―business
relationship‖ shall be construed as any transaction entered into for a commercial
purpose, except –
(i) 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;
(ii) 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.

(2) 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 authorized to act
and sign on behalf of the firm.
(3) The following persons shall not be eligible for appointment as an auditor of a company,

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namely:—
(a) a body corporate other than a limited liability partnership registered under the
Limited Liability Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee
of the company;
(d) a person who, or his relative or partner—
(i) 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.
Provided that the relative may hold security or interest in the company of face
value not exceeding one thousand rupees or such sum as prescribed;
(ii) is indebted to the company, or its subsidiary, or its holding or associate company
or a subsidiary of such holding company, in excess of such amount as may be
prescribed .
(iii)has given a guarantee or provided any security in connection with the
indebtedness of any third person to the company, or its subsidiary, or its holding or
associate company or a subsidiary of such holding company, for such amount as
may be prescribed;
(e)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;
(f) a person whose relative is a director or is in the employment of the company as a
director or key managerial personnel;
(g) 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 persons or partner is at the date of such
appointment or reappointment holding appointment as auditor of more than
twenty companies;
(h) a person who has been convicted by a court of an offence involving fraud and a
period of ten years has not has not elapsed from the date of such conviction;
(i) A person who, directly or indirectly, renders any service referred to in section 144 to
the company or its holding company or its subsidiary company.
(4) Where a person appointed as an auditor of a company incurs any of the disqualifications
mentioned in sub-section (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.

(b) (1) The remuneration of the auditor of a company shall be fixed in its general meeting or
in such manner as may be determined therein.
Provided that the Board may fix remuneration of the first auditor appointed by it.
(2) The remuneration under sub-section (1) shall, in addition to the fee payable to an
auditor, include the expenses, if 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.

9. (a) What is the procedure for appointment of cost auditor under the Companies Act , 2013?
[4]
(b) Distinguish between Audit Report and Audit Certificate. [8]

Answer:

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(a)
1. The cost auditor is to be appointed by the Board of Directors (BOD) on the
recommendation of the Audit Committee, where the company is required to have
an Audit Committee.
2. The cost auditor proposed to be appointed is required to give a letter of consent to
the Board of Directors.
3. The company shall inform the cost auditor concerned of his or its appointment as
such and file a notice of such appointment with the Central Government within a
period of thirty days of the Board meeting in which such appointment is made or
within a period of one hundred and eighty days of the commencement of the
financial year, whichever is earlier, through electronic mode, in form CRA-2 along with
the fee as specified in Companies (Registration Offices and Fees) Rules, 2014.
4. Any casual vacancy in the office of a cost auditor, whether due to resignation, death
or removal, shall be filled by the Board of Directors (BOD) within thirty days of
occurrence of such vacancy and the company shall inform the Central Government
in Form CRA-2 within thirty days of such appointment of cost auditor.

(b)
S.NO. Basis Audit Report Audit Certificate
1 Meaning Audit Report is a statement of While Audit Certificate is a
collected and considered information written confirmation of the
so as to give a clear picture of the accuracy of the information
state of affairs of the business to the stated there in.
persons who are not in possession of
the full facts.
2 Opinion Audit Report contains the opinion of while Audit Certificate does
the auditor on the accounts not contain any opinion but
only confirms the accuracy
of the figures with the books
of accounts
3 Basis Audit Report is made out on the basis while Audit Certificate is
of information obtained & books of made out on the basis of the
account verified by the auditor particular data capable of
verification as regards
accuracy.
4 Guarantee Audit Report may not guarantee While Audit Certificate
correctness of financial statement in guarantees absolute
absolute terms correctness of the figures &
information mentioned in the
certificate
5 Coverage Audit Report always covers entire While Audit Certificate
accounts of the concern covers only certain part of
the accounts of the
concern.
6 Responsibility Audit Report does not hold auditor While Audit Certificate
responsible for anything wrong in the makes an auditor
accounts, responsible if anything
mentioned in the certificate
found as wrong later on
7 Suggestion Audit Report may provide certain While Audit certificate does
suggestions for improvement not provide any such
suggestion
8 Scope Audit Report covers all transactions while the Audit Certificate is
done during the year very specific.

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10. Write short notes (any three) [3X4 = 12]

(a) Branch Audit
(b) Inventory Audit
(c) Audit of Service Industry
(d) Audit of Shares & Debenture.

Answer:

(a) Branch Audit

―Branch office‖, in relation to a company, means any establishment described as such

by the company - section 2(14) of the 2013 Act.

Audit of Branch Office by company’s auditor or branch auditor - Where a company

has a branch office, the accounts of that office shall be audited either by the
company‘s auditor (i.e. auditor appointed for the company in AGM) or by any other
person qualified for appointment as an auditor of the company under the 2013 Act.
Such ‗branch auditor‘ shall be appointed as such under section 139 of the 2013 Act -
first part of section 143(8) of the 2013 Act.

Audit of branch offices outside India - 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 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 may be prescribed second part
of section 143(8) of the 2013 Act.

Report by Branch Auditor to company‘s auditor - The branch auditor shall prepare a
report on the accounts of the branch examined by him and send it to the company‘s
auditor. The company‘s auditor shall deal with the report of branch auditor in his report
in such manner as he considers necessary proviso to section 143(8) of the 2013 Act.

Duties and powers of company‘s auditors in connection with branch audit - Duties and
powers of com-pany‘s auditor (main auditor) with reference audit of branch and
branch auditor shall be as contained in section 143(1) to 143(4) of the 2013 Act and
Rule 12(1) of Companies (Audit and Auditors Amendment Rules, 2015. Thus, the
company‘s auditor is responsible even if branch auditor is appointed.

Branch auditor‘s responsibility to report fraud - Responsibility to report fraud, as

applicable to company‘s auditor applies to branch auditor.

(b) Inventory audit

Inventories normally constitute a significant portion of the total assets, particularly in

the case of manufacturing and trading entities as well as some service rendering
entities. Audit of inventories, therefore, assumes special importance.

The following features of inventories have an impact on the related audit procedures:

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 By their very nature, inventories normally turn over rapidly.

 Inventories are susceptible to obsolescence and spoilage. Further, some of the
items of inventory may be slow-moving while others may follow a seasonal
pattern of movement.
 Inventories are normally movable in nature, although there may be some
instances of immovable inventories also, e.g., in the case of an entity dealing in
real-estate.
 All the items of inventory may not be located at one place but may be held at
different locations such as factories and warehouses, or with third parties such as
selling agents.
 The individual items of inventory may not be significant in value, but taken
together, they normally constitute a significant proportion of total assets and
current assets of manufacturing, trading and certain service entities.
 Physical condition (e.g., stage of completion of work-in-process in certain
industries) and existence of certain items of inventories may be difficult to
determine.
 Valuation of inventories may involve varying degrees of estimation, including
expert opinions, e.g., in the case of jewelry.

(c) Audit of Educational Institution:

The special steps involved in the audit of an educational institution are the following:

 Examine the Trust Deed, or Regulations in the case of school or college and note all
the provisions affecting accounts. In the case of a university, refer to the Act of
Legislature and the Regulations framed there under.
 Read through the minutes of the meetings of the Managing Committee or Governing
Body, noting resolutions affecting accounts to see that these have been duly
complied with, specially the decisions as regards the operation of bank accounts and
sanctioning of expenditure.
 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.
 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.
 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 the arrears that are
irrecoverable have been written off under the sanction of an appropriate authority.
 Check admission fees with admission slips signed by the head of the institution and
confirm that the amount had been credited to a Capital Fund, unless the Managing
Committee has taken a decision to the contrary.
 See that free studentship and concessions have been granted by a person
authorised to do so, having regard to the prescribed Rules.
 Confirm that fines for late payment or absence, etc., have either been collected or
remitted under proper authority.
 Confirm that hostel dues were recovered before students‘ accounts were closed and
their deposits of caution money refunded.

(d) Shares transfer audit :

The following aspects are required to be examined by the auditor in conducting the share
transfer audit:

i. Inspection of the Articles of Association regarding the prescribed form of transfer and
other provisions, particularly the time limits laid down by the Articles or law.

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ii. Notification by transferor of the lodgement made by the transferee and inspect the
objections received, if any. Also see, where calls due or not paid, whether transfer can
be refused under the articles and whether any transfer was so refused.
iii. Examining in the case of particularly partly-paid shares, where the application for
registration was made by the transferor, a notice was sent to the transferee and
registration was effected only on receipt of ‗non-objection‘ received from him.
iv. Scrutiny of transfer forms, noting specially:

 That in every case, the application for transfer was made in the prescribed form and
the prescribed authority had stamped the date on which it was presented to it; also
that it was delivered to the company within 60 days exaction.
 That each transfer form is properly executed and bears the proper stamp duty.
 That the name of the company is correctly stated on the form.
 That where the consideration for transfer appears to be inadequate, an inquiry was
made by the company for ascertaining the reasons there for. (This is not necessary if
the transfer form bears the seal of the Collector of Stamps.)
 That the alterations, if any, have been suitably initiated; and
 That the name and address of the transferee have been recorded completely and
fully for purposes of correspondence.

v. Comparison of the signatures of each transferor on the transfer form with his signature on
the original application for shares or on the transfer form (if the shares were acquired on
a transfer).
vi. Ascertaining that none of the transferees is disqualified from holding shares in the
company.

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Cash flows are crucial to business decisions. Cash is invested in the business and the
rationality of such investment is evaluated taking into account the future cash flows it is
expected to generate. Economic value of an asset is derived on the basis of its ability to
generate future cash flows. Economic value of an asset is given by the present value of
future cash flows expected to be derived from the asset.
Profit is an accounting concept. Profit is derived on accrual assumption. Profit and cash
flows from operational activities are not the same. Dividend decision is taken on the basis
of profit, although it is to be paid in cash. Similarly, debt servicing capacity of a company
is determined on the basis of cash flows from operations before interest. Ploughing back
of profit is a much talked about source of financing modernization, expansion and
diversification. Unless retained profit is supported by cash, ploughing back is not possible.
Thus cash flows analysis is an important basis for making several management decisions.

Section – B (Auditing)
Answer Question No. 6 and any three from Question Nos. 7,8,9 and 10.

6. (a) Choose the correct answer from the given four alternatives: [6x1=6]

(i) Secretarial Audit is covered under

(a) Section 204
(b) Section 148
(c) Section 139
(d) None of the above

(ii) Audit Procedures to obtain audit evidences include

(a) Compliance Procedure
(b) Substantive Procedure
(c) Both (a) and (b)
(d) Neither (a) nor (b)

(iii) An effective internal control system consists of which of the following steps?
(a) Control Environment
(b) Assessment of Risk
(c) Control Activities
(d) All of the above

(iv) SA 230 is related to which of the following?

(a) Audit Documentation
(b) Audit Planning
(c) Appointment of auditors
(d) None of the above

(v) USEPA stands for

(a) United States Environmental Practice Agency
(b) United States Environmental Protection Agency
(c) United States Environmental Protection Agreement
(d) United States Efficient Protection Agency

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(vi) Transaction Audit contains which of the following

(a) Expenditure Audit & Receipts Audit
(b) Expenditure Audit & Income Audit
(c) Payments Audit & Receipts Audit
(d) None of the above

Answer:

(i) — (a)
(ii) — (c)
(iii) — (d)
(iv) — (a)
(v) — (b)
(vi) — (a)

(b) Match the following: [4×1=4]

Column ‘A’ Column ‘B’
1. To ensure that expenditure is made A. Using the work of another Auditor
according to limit.
2. CRA 2 B. Cannot be its Cost Auditor
3. SA 600 C. Audit against provision of funds
4. Internal auditor D. Appointment of Cost Auditor

Answer:

Column ‘A’ Column ‘B’

1. To ensure that expenditure is made C. Audit against provision of funds.
according to limit.
2. CRA 2 D. Appointment of Cost Auditor
3. SA 600 A. Using the work of another Auditor
4. Internal auditor B. Cannot be its Cost Auditor

(c) Say True or False for the following question: [4×1=4]

(i) An audit report should have a proper title.
(ii) Test checking depends upon the statistical technique applied.
(iii) Operational Audit is process based.
(iv) A voucher is a piece of substantiating evidence, in the form of a written record of
expenditure, disbursement, or completed transaction.

Answer:
(i) True
(ii) False
(iii) True
(iv) True

Answer any three questions out of the following four questions [3×12=36]

7. (a) List the Methods to Obtain Audit Evidence. [5]

Answer:

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Methods to Obtain Audit Evidence Auditor obtains evidence in performing compliance

and substantive procedures by any one or more of the following methods –

(i) Inspection - It consists of examining records, documents, or tangible assets.

Inspection of records and documents provides evidence of varying degrees of
reliability depending on their nature, source and the effectiveness of internal
controls over their processing.
(ii) Observation - It consists of witnessing a process or procedure being performed by
others.
(iii) Inquiry and Confirmation - Inquiry consists of seeking appropriate information from
a knowledgeable person inside or outside the entity, Confirmation consists of the
response to an inquiry to corroborate information contained in the accounting
records.
(iv) Computation - It consists of checking the arithmetical accuracy of source
documents and accounting records or performing independent calculations.
(v) Analytical Review - It consists of studying significant ratios and trends and
investigating unusual fluctuations and items.

(b) Internal audit is an important management tool. Discuss. [7]

Answer:

Internal audit is an important management tool for the following reasons:

a. Internal audit ensures compliance of Companies (Auditors Report) Order, 2016.

b. It ensures compliance of accounting standards and policies.
c. It ensures reliability of MIS through internal audit’s independent appraisal and
review.
d. It looks into the standard of efficiency of business operation.
e. It can evaluate various problems independently and suggest improvement.
f. This system makes the internal control system effective.
g. It ensures the adequacy, reliability, accuracy and understandability of financial
and operational data.
h. It performs as an integral part of ‘Management by system’.
i. It can add valuable assistance to management in acquiring new business,
promoting new products and expansion or diversification of business etc.

8. (a) Discuss the provisions for reporting of Fraud by Auditor. [9]

Answer:

Reporting of Frauds by Auditor:

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 rupees one 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.
2. The auditor shall report the matter to the Central Government 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 two days of his knowledge of the
fraud, seeking their reply or observations within forty-five days;
(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)

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to the Central Government within fifteen 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 forty-five days, he shall forward
his report to the Central Government 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 lesser than the amount specified in sub-rule (1), the
auditor shall report the matter to Audit Committee constituted under section 177 or to
the Board immediately but not later than two 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.

• 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.

• The provision of this rule shall also apply, mutatis mutandis, to a Cost Auditor and a
Secretarial Auditor during the performance of his duties under section 148 and
section 204 respectively.
• No duty to which an auditor of a company may be subject to shall be regarded as
having been contravened by reason of his reporting the matter referred to in sub-
section (12) if it is done in good faith.
• The provisions of this section shall mutatis mutandis apply to—
(a) the cost accountant in practice conducting cost audit under section 148; or
(b) the company secretary in practice conducting secretarial audit under section
204.
• If any auditor, cost accountant or company secretary in practice do not comply with
the provisions of sub-section (12), he shall be punishable with fine which shall not be
less than one lakh rupees but which may extend to twenty-five lakh rupees.

(b) Discuss the provisions for re-appointment of retiring auditor. [3]

Answer:

A retiring auditor may be re-appointed at an annual general meeting, if—

(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;
(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;

Where at any annual general meeting, no auditor is appointed or re-appointed, the existing
auditor shall continue to be the auditor of the company;

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Where provision of section 177 is applicable i.e., constitution of Audit Committee, all
appointments, including the filling of a casual vacancy of an auditor shall be made after
taking into account the recommendations of such committee.

9. (a) What is the procedure to be followed for fixing the remuneration of a cost auditor? [4]

Answer:

Rule 14 of the Companies (Audit and Auditors) Rules, 2014 has laid down the procedure
of appointment and fixing the remuneration of a cost auditor.

In the case of companies which are required to constitute an audit committee-

the Board shall appoint an individual, who is a cost accountant in practice, or a firm of cost
accountants in practice, as cost auditor on the recommendations of the Audit committee,
which shall also recommend remuneration for such cost auditor;
the remuneration recommended by the Audit Committee under (i) shall be considered and
approved by the Board of Directors and ratified subsequently by the shareholders;

In the case of other companies which are not required to constitute an audit committee, the
Board shall appoint an individual who is a cost accountant in practice or a firm of cost
accountants in practice as cost auditor and the remuneration of such cost auditor shall be
ratified by shareholders subsequently.

(b) What are the features of a Qualified Report? [8]

Answer:

The features of a Qualified Report are –

Clarity: The Auditor must express the nature of qualification, in a clear and unambiguous
manner.
Explanation: Where the Auditor answers any of the statutory affirmations in the negative or
with a qualification, his Report shall state the reasons for such answer.
Placement: All qualifications should be contained in the Auditor’s Report. When there are
Notes, which are subject matter of a qualification, the same should preferably he annexed
to the Auditors’ Report. However a reference to the Notes to Accounts in the Auditors’
Report does not automatically become a qualification.
Subject to: The words “subject to” are essential to state any qualification. The qualification
should be preceded by words such as “Subject to” or “Except that” to make it clear that he
is making an exception.
Nature of Qualification: Vague statements, the effect of which on accounts cannot be
ascertained, like, The debtors balances are subject to confirmation’, No provision for taxation
has been made in view of the loss during the year’, etc. should be avoided.
Violation of Law: Where the Company has committed an irregularity resulting in a breach of
law, the Auditor should bring the same to the notice of the shareholders by properly
qualifying his report.
Quantification: The Auditors should quantify, wherever possible, the effect of these
qualifications on the Financial Statements if the same is material. Where the effect of
qualification cannot be accurately quantified, the Auditor may reflect the effect on the basis
of Management estimates, after carrying out necessary audit tests on such estimates.

10. Write short notes on (any three): [3x4=12]

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(a) Responsibility of Joint Auditor.

(b) Auditing and Assurance Standards Relating to Audit of Fixed Assets.
(c) Audit of Capital Reserve and Surplus of Banks.
(d) Audit of Alteration of Share Capital.

Answer:

(a) Responsibility of Joint Auditor.

SA 299 issued by The Institute of Cost Accountants of India on “Responsibility of Joint Auditor”
lay down the responsibilities on joint auditors.

In respect of audit work divided among the joint auditors, each joint auditor is responsible
only for the work allocated to him, whether or not he has prepared a separate report on the
work performed by him. On the other hand, all the joint auditors are jointly and severally
responsible –
• in respect of the audit work which is not divided among the joint auditors and is
carried out by all of them;
• in respect of decisions taken by all the joint auditors concerning the nature, timing or
extent of the audit procedures to be performed by any of the joint auditors. It may,
however, be clarified that all the joint auditors are responsible only in respect of the
appropriateness of the decisions concerning the nature,
• timing or extent of the audit procedures agreed upon among them; proper
execution of these audit procedures is the separate and specific responsibility of the
joint auditor concerned;
• in respect of matters which are brought to the notice of the j joint auditors by any one
of them and on which there is an agreement among the joint auditors;
• examining that the financial statements of the entity comply with the disclosure
requirements of the relevant statute; and
• for ensuring that the audit report complies with the requirements of the relevant
statute.

(b)Auditing and Assurance Standards Relating to Audit of Fixed Assets.

The term Property, plant and equipment in respect of those entities which are required to
comply with the relevant Revised AS refers to such tangible items that:

• are held for use in the production or supply of goods or services, for rental to others, or
for administrative purposes; and
• are expected to be used during more than one period.

An asset can be classified as a PPE or otherwise, depending upon the use to which it is put or
intended to be put. For example, assets which are classified as PPE in one type of business
may be considered as current assets in another. Similarly, the same asset may be classified
differently in an entity at different points of time. The recognition of Property, Plant and
Equipment should be done as per the principles laid down in the “relevant applicable AS”.

(c)Audit of Capital Reserve and Surplus of banks

Capital:
• Examine the opening balance of capital
• Examine with special resolution of shareholder or MOA about increase in authorized
capital durig the year
• Examine with prospectus about increase in subscribed/ paid up capital
• Examine with Government notification for any fresh contribution from them.
.

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Reserve and Surplus:

To examine the opening balance of different type of Reserve.

• Addition/ deduction from reserves.
• Reason for appropriation of any fund from such account.
• Dividend paid by bank.
• In respect of foreign branch ensure compliance with foreign laws.

(d) Audit of Alteration of Share Capital.

Alteration of Share Capital [Section 61]-

• Confirm that alteration was authorised by articles.

• Verify the minutes of the Board meeting and ordinary resolution passed in the general
meeting in which the approval of members is obtained.
• Verify that alteration had been effected in copies of Memorandum, Articles, etc.
• Obtain the reasons for which the memorandum of the company is altered.
• Check whether there is any change in the voting percentage of shareholders due to
consolidate and divide all or any of its share capital into shares of a larger amount
than its existing shares.
• To confirm that the alter share capital’s denomination should be more than R1.
• Verify that proper accounting entries have been passed. Register of members may
also be checked to see that the necessary alteration have been effected therein.

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• In case of Listed Companies, Share warrants are issued to Promoters & others in terms
of the Guidelines for Preferential Issues viz. SEBI (Issue of Capital and Disclosure
Requirements), Guidelines, 2009.
• Effectively, Share Warrants are amounts which would ultimately form part of the
Shareholder's Funds. Since Shares are yet to be allotted against the same, these are
not reflected as part of Share Capital, but as a separate line – item.

Section – B (Auditing)

Answer Question No. 6 and any three from Question Nos. 7,8,9 and 10.

6. (a) Choose the correct answer from the given four alternatives: [6x1=6]

(i) Statutory Auditor is appointed by the shareholder in the

(a) General Meeting
(b)Statutory Meeting
(c) EGM
(d)Board Meeting

(ii) A Cost Auditor submits his report to

(a) Board of Directors
(b) Government
(c) Shareholders
(d) Statutory Auditor

(iii) An audit committee should have ______ directors.

(a) 3
(b) 2
(c) 1
(d) 4

(iv) Any fraud to involve an amount of _______ is to be reported to the Central government.
(a) 5 crore or above
(b) 100 crore or above
(c) 1 crore or above
(d) 10 crore or above

(v) Form for Secretarial Audit Report is-

(a)MR-2
(b)MR-3
(c)MR-4
(d)MR-5

(vi) Preventive Controls is a type of __________

(a) Internal Control
(b) Detective Control
(c) Verification
(d) None of the above

Answer:

(i) — (a)
(ii) — (a)

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(iii) — (a)
(iv) — (c)
(v) — (b)
(vi) — (a)

b) Match the following: [4x1=4]

Column ‘A’ Column ‘B’

1. Analysis of significant ratios and trends A. Power of company to Purchase its
Own Securities.
2. SA 300 B. Verification
3. Section 68 of the Co. Act 2013 C. Permanent Audit File
4. Proving the Truth D. Audit Planning

Answer:

Column ‘A’ Column ‘B’

1. Analysis of significant ratios and trends C. Permanent Audit File
2. SA 300 D. Audit Planning
3. Section 68 of the Co. Act 2013 A. Power of company to Purchase its
Own Securities.
4. Proving the Truth B. Verification

(c) Say True or False for the following question: [4×1=4]

(i) Cut off procedures are generally applied to trading transactions.

(ii) The primary objective of the audit is for detecting frauds and error in the books of
accounts and financial records of the clients business.
(iii) If the debentures are issued as collateral security to the banks or creditors then
auditor needs to ensure that such issue is approved by debenture trustee.
(iv) Company Secretaries are eligible to conduct Cost Audit having valid certificate of
practice.

Answer:

(i) True
(ii) False
(iii) False
(iv) False

Answer any three questions out of the following four questions [3×12=36]

7. (a) What is an ‘Audit Engagement Letter’? What are the points to be covered in every audit
engagement letter? [2+6=8]

Answer:

Audit Engagement letter is given by Auditor to Company, explaining scope of work duties &
responsibilities of Auditor and that of management of Company. It specifies limits of Liability
of Auditor. It avoids misunderstanding confusion, dispute between client & Auditor at a later
stage. Audit engagement letter confirms acceptance of Audit by Auditor, documentation

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objective & scope of Audit & Other work and the extent of his responsibilities to client the
forms of report to be given by him.

Every engagement letter as per ICAI should cover following points: -

(a) Objective & scope of engagement
(b) Management responsibility
(c) Existence of inherent limitations
(d) Need for use of Internal Auditor
(e) Management confirmation letter
(f) Restrictions & limitations of Auditor liabilities
(g) Basis of computation of Audit fees
(h) Billing arrangement
(i) Form of report & Other communications of engagement
(j) Validity of report
(k) Limits on submission of report to other authorities

(b) What are the techniques for evaluation of Internal control system? [4]

Answer:

Techniques for Evaluation of Internal Control System :

i. Narrative Record: It is a complete and exhaustive description of the system. It is

appropriate in circumstances where a formal control system is lacking, like in the case of
small businesses. Gaps in the control system are difficult to identify using a narrative
record.
ii. Check List: It is a series of instructions that a member of the audit staff is required to
follow. They have to be signed/ initialed by the audit assistant as proof for having
followed the instructions given. A specific statement is required for every weakness area.
iii. Flow Chart: It is a pictorial representation of the internal control system depicting its
various elements such as operations, processes and controls, which help in giving a
concise and comprehensive view of the organization’s working to the auditor. A
complete flow chart would depict the process of raising documents, personnel involved
in doing so, the flow of documents through various departments, maintenance of
records, flow of goods and consideration, and dealing with results.
The internal control evaluation process becomes easier through a flow chart as a broad
picture of all the controls involved can be gauged in a glimpse.
iv. Internal Control Questionnaire: This is the most widely used method for collecting
information regarding the internal control system and involves asking questions to
various people at different levels in the organization. The questionnaire is in a pre-
designed format to ensure collection of complete and all relevant information. The
questions are formed in a manner that would facilitate obtaining full information through
answers in “Yes” or “No’’.

8. (a) Discuss the procedure for appointment of first auditor of a company. [4]

Answer:

The first auditor of a company, other than a Government company, shall be appointed by
the Board of Directors within thirty days from the date of registration of the company and in
the case of failure of the Board to appoint such auditor, it shall inform the members of the
company, who shall within ninety days at an extraordinary general meeting appoint such
auditor and such auditor shall hold office till the conclusion of the first annual general
meeting.
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 Governments, or
partly by the Central Government and partly by one or more State Governments, the first

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auditor shall be appointed by the Comptroller and Auditor-General of India within sixty days
from the date of registration of the company and in case the Comptroller and Auditor-
General of India does not appoint such auditor within the said period, the Board of Directors
of the company shall appoint such auditor within the next thirty days; and in the case of
failure of the Board to appoint such auditor within the next thirty days, it shall inform the
members of the company who shall appoint such auditor within the sixty days at an
extraordinary general meeting, who shall hold office till the conclusion of the first annual
general meeting.

(b) Discuss the duty of an auditor to report certain matters in the audit report u/s 143(3). [8]

Answer:

Rule 11: Other Matters to be Included in Auditors Report

The auditor’s report shall also include their views and comments on the following matters,
namely:-
(a) whether the company has disclosed the impact, if any, of pending litigations on its
financial position in its financial statement;
(b) whether the company has made provision, as required under any law or accounting
standards, for material foreseeable losses, if any, on long term contracts including
derivative contracts;
(c) whether there has been any delay in transferring amounts, required to be transferred, to
the Investor Education and Protection Fund by the company.
(d) whether the company had provided requisite disclosures in its financial statements as to
holdings as well as dealings in Specified Bank Notes during the period from 8th
November, 2016 to 30th December, 2016 and if so, whether these are in accordance
with the books of accounts maintained by the company.

The auditor’s report shall also state—

(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
under subsection (8) by a person other than the company’s auditor has been sent to
him under the proviso to that 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 (2) 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.

9(a) The Companies Act, 2013 has introduced provision regarding rotation of auditors. Is the
provision of rotation of auditors applicable to cost auditors also? [6]

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Answer:

The provisions for maintenance of cost accounting records and cost audit are governed by
Section 148 of the Companies Act, 2013. The provisions of Section 148 clearly states that no
person appointed under Section 139 as an auditor of the company shall be appointed for
conducting audit of cost records of the company. Section 148 also provides that
qualifications, disqualifications, rights, duties and obligations applicable to auditors (financial)
shall apply to a cost auditor appointed under this section. The eligibility, qualifications and
disqualifications are provided in Section 141 of the Act and powers and duties are provided
in Section 143. Section 143(14) specifically states that the provisions of Section 143 shall
mutatis mutandis apply to a cost auditor appointed under Section 148. There are no other
provisions governing the appointment of a cost auditor.
Section 139(3) of the Act, applicable to appointment of auditors (financial), and Rule 6 of
Companies (Audit and Auditors) Rules, 2014 deals with the provision of rotation of auditors
and these provisions are applicable only to appointment of auditors (financial). The Act does
not provide for rotation in case of appointment of cost auditors and the same is not
applicable to a cost auditor. It may, however, be noted that though there is no statutory
provision for rotation of cost auditors, individual companies may do so as a part of their
policy, as is the practice with Public Sector Undertakings.

(b) Under what circumstances should an auditor express an adverse opinion or disclaimer of
opinion? [6]

Answer:

An Adverse or Negative Report is given when the Auditor concludes that based on his
examination, he does not agree with the affirmations made in the Financial Statements /
Financial Report.
The Auditor states that the Financial Statements do not present a true and fair view of the
state of affairs and the working results of the organisation.
The Auditor should state the reasons for issuing such a report. An Adverse Opinion should be
expressed when the effect of a disagreement is so material and pervasive to the Financial
Statements, that the Auditor concludes that a qualification of the report is not adequate to
disclose the misleading or incomplete nature of the Financial Statements.
A Disclaimer of Opinion Report is given when the Auditor is unable to form an overall opinion
about the matters contained in the Financial Statements. A Disclaimer of Opinion should be
expressed when the possible effect of a limitation on scope is so material and pervasive that
the Auditor has not been able to obtain sufficient appropriate audit evidence and is,
accordingly, unable to express an opinion on the Financial Statements.
It may happen in situations such as -- (a) when books of account of the Company seized by
Income Tax Authorities, (b) when it is not possible for the Auditor to obtain certain information
or (c) when scope of audit work is restricted.
The Auditor will state in his Report that he is unable to term an opinion on the Financial
Statements. Such Report is called as “Disclaimer of Opinion Report”.

10. Write short notes (Any three) (3x4=12)

(a) Declaration of dividend by a company u/s 123.

(b) Features of Inventories that have impact on related audit procedures.
(c) Audit of Co-operative Society
(d) Audit of Issue of Bonus Shares.

Answer:

(a) Declaration of dividend by a company u/s 123.

No dividend shall be declared or paid by a company for any financial year except—

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● out of the profits of the company for that year arrived at after providing for depreciation in
accordance with the provisions of sub-section (2), or out of the profits of the company for
any previous financial year or years arrived at after providing for depreciation in accordance
with the provisions of that sub-section and remaining undistributed, or out of both; or
● out of money provided by the Central Government or a State Government for the
payment of dividend by the company in pursuance of a guarantee given by that
Government.
Provided that a company may, before the declaration of any dividend in any financial year,
transfer such percent-age of its profits for that financial year as it may consider appropriate
to the reserves of the company.
Provided further that where, owing to inadequacy or absence of profits in any financial year,
any company proposes to declare dividend out of the accumulated profits earned by it in
previous years and transferred by the company to the reserves, such declaration of dividend
shall not be made except in accordance with such rules as may be prescribed in this behalf.
Provided also that no dividend shall be declared or paid by a company from its reserves
other than free reserves.
Provided also that no company shall declare dividend unless carried over previous losses
and depreciation not pro-vided in previous year or years are set off against profit of the
company for the current year.
For the purposes of clause (a) of sub-section (1), depreciation shall be provided in
accordance with the provisions of Schedule II.

(b) Features of Inventories that have impact on related audit procedures.

The following features of inventories have an impact on the related audit procedures:
• By their very nature, inventories normally turn over rapidly.
• Inventories are susceptible to obsolescence and spoilage. Further, some of the items
of inventory may be slow-moving while others may follow a seasonal pattern of
movement.
• Inventories are normally movable in nature, although there may be some instances of
immovable inventories also, e.g., in the case of an entity dealing in real-estate.
• All the items of inventory may not be located at one place but may be held at
different locations such as factories and warehouses, or with third parties such as
selling agents.
• The individual items of inventory may not be significant in value, but taken together,
they normally constitute a significant proportion of total assets and current assets of
manufacturing, trading and certain service entities.
• Physical condition (e.g., stage of completion of work-in-process in certain industries)
and existence of certain items of inventories may be difficult to determine.
• Valuation of inventories may involve varying degrees of estimation, including expert
opinions, e.g., in the case of jewelry.

(c) Audit of Co-operative Society

In general while conducting audit of Co-operative society the auditor need to look into the
followings:

(i) The auditor should carefully go through the bye-laws of the society and see that they
are being observed both in letter and spirit.
(ii) He should examine the Register of Members of the society and individual
shareholdings.
(iii) He should test-check the internal check and control system operated by the society
and model his audit examination based on its strengths and weaknesses.

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Audit of income: He should carefully vouch the receipt of cash. Cash receipts on account of
share capital should be vouched with the Register of Members. Cash received against sales
should be vouched with the cash memos and invoices issued to customers as also Sales
Account. Receipt of cash in respect of payment of interest and repayment of loans
advanced by the society should be vouched with the loan agreements. Cash received from
members towards construction of houses or their maintenance, should be vouched with the
Register of Members, demands made by the society from time to time, and money receipts.

Audit of Expenditure:
• He should vouch all expenditure with reference to authorisation from the Managing
Committee, particularly in the case of large capital expenditure, as also the bills
received from individual parties, the money receipts obtained from them, and entries
in the Bank Pass Book along with counter-foils of cheques.
• He should vouch the payment of loans from the loan agreements entered into with
borrower members.
• He should vouch establishment expenses with reference to the resolutions of the
Managing Committee, agreements with the persons concerned, and money receipts
obtained from them.

Other aspects points:

• He should appropriately classify overdue debts for a period from six months to five
years and more, and report them to the members, with a note regarding the effects
these might have on the financial position of the society. He should also put a note
regarding the probability of recovery of such debts.
• Similarly, he should make a special reference to the overdue amount of interest from
members. Generally, interest on overdue debts should not be credited to Interest
Account but to the Overdue Interest Reserve Account.
• Writing off of bad debts should be after prior authorisation from the Managing
Committee of the society. According to the Maharashtra Co-operative Societies
Rules, a bad debt can be written off only when it is certified to be irrecoverable by
the auditor. This casts a special obligation on the auditor to ascertain whether the
debt in question was created within the Rules of the society, and whether it has now
really become bad and irrecoverable.

(d) Audit of Issue of Bonus Shares.

Issue of Bonus Shares [Section 63] –

The auditor shall-

• Confirm that issue of Bonus Share was authorized by articles.
• Verify the minutes of the Board meeting and ordinary resolution passed in the general
meeting in which the approval of members is obtained.
• Check that the company has issue fully paid-up bonus shares to its members only.
• Confirm that the issue of bonus shares shall not be made by capitalising reserves
created by the revaluation of assets.
• Check whether the company has made any default in payment of interest or
principal in respect of fixed deposits or debt securities issued by it.
• Check whether the company has made any default in payment of statutory dues of
the employees, such as, contribution to provident fund, gratuity and bonus.
• Whether the partly paid-up shares are made fully paid-up.
• Check whether the bonus shares shall not be issued in lieu of dividend.

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proportionate amount is transferred to Income Statement during the expected life of
the Asset.
Accounting Practice 2: SLD is accounted for as Reserve as the amount is not
refundable and disclosed under the head Reserves and Surplus without transferring
any proportionate amount to Income Statement during the expected life of the
Asset.
Accounting Practice 3: SLD is accounted for as Capital Reserve as the amount is not
refundable and subsequently proportionate amount is transferred to Income
Statement during the expected life of the Asset to match against depreciation on
total cost of such asset.
Accounting Practice 4: SLD is accounted for as reduction in the cost of Non-Current
Asset and depreciation is provided on such reduced cost.

(d) Objective of preparing Cash Flow Statement:

The objectives are as follows:
(i) To provide information about firm's liquidity, flexibility and ability to generate
future cash flow.
(ii) To provide information about firm's ability to meet future obligations.
(iii) To enhance comparability among firms.
(iv) To assess reliability of net profit and quality of earnings.
(v) To enable the users to assess how assets and liabilities have increased or
decreased.
(vi) To project future cash flow streams.
(vii) To provide information on different types of cash flow.

Section - B (Audit)
Answer Question No. 6 and any three from Question No. 7, 8, 9 and 10.

6. (a) Identify the correct alternative: 1×6=6

(i) Which of the following is not an audit risk?

(A) Inherent Risk
(B) Detection Risk
(C) Control Risk
(D) Omission Risk
(ii) Dividend cannot be paid out of
(A) current year's profit after providing depreciation.
(B) undistributed profits for any previous financial year or years after providing for
depreciation.
(C) profit on revaluation of any fixed assets.
(D) money provided by the Central Government or a State Government.
(iii) Permanent Audit File does not contain
(A) a record of study and evaluation of internal control system.
(B) significant audit observations of earlier years.
(C) copies of management letters.
(D) analysis of significant ratios and trends.
(iv) Audit Procedures to obtain audit evidences include
(A) Compliance Procedure
(B) Substantive Procedure
(C) Both (A) and (B)
(D) Neither (A) nor (B)
(v) A Cost Auditor submits his report to
(A) Board of Directors
(B) Government

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(C) Shareholders
(D) Statutory Auditor
(vi) The first Auditor of a Company shall be appointed by the Board of Directors within
(A) 30 days from the date of registration.
(B) 90 days from the date of registration.
(C) 30 days from the date of first AGM.
(D) 1 year from the date of registration.

(b) Match the following items in Column 'A' with items shown in Column 'B': 1×4=4
Column 'A' Column 'B'
1. Responsibility of Joint Auditor A. Qualified Audit Report
2. Unable to form an overall conclusion on Financial B. SA 230
Statement
3. Audit Report with reservations C. SA 299
4. Audit Documentation D. Disclaimer of Opinion

(c) State whether the following statements are True or False: 1×4=4
(i) Audit Programme is a part of Current Audit File.
(ii) Internal audit is conducted by the staff of the entity or by an independent
professional appointed for that purpose.
(iii) The first auditor of a company is appointed by the shareholders of the company
at the general meeting.
(iv) A company auditor can render actuarial services to his client.

Answer:

6. (a)
(i) —D
(ii) —C
(iii) —C
(iv) —C
(v) —A
(vi) —A

(b)
(1) C
(2) D
(3) A
(4) B

7. (a) Define 'Audit Engagement Letter'. What are the general contents of an audit
engagement letter? 2+6=8

(b) 'Checklist and Internal Control Questionnaire are not the same.'—Discuss. 4

Answer:

7. (a) Unlike a statutory audit, in a non-statutory audit the objective and scope of an audit
is not clearly described in any law. Accordingly, a misunderstanding may arise about
the exact scope of the work. Thus to avoid any kind of misunderstanding or dispute it

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is in the interests of both the auditor as well as the client to exactly define the scope
of the engagement. An auditor's engagement letter signifies the confirmation by the
auditor of his acceptance of appointment as auditor, the documentation of the
objective and scope of audit or other work, and the extent of his responsibilities to the
client and the form of any reports.

Although the form and content of the engagement letter differs from client to client
but in general the following references should be made in audit engagement letter:
(vii) The objective and the scope of the engagement.
(viii) Management's responsibility for the financial statements.
(ix) The existence of inherent limitations of audit and resulting material misstatements
that may remain undiscovered,
(x) The need for use of services of internal auditors and/or other experts that may
arise during the course of the engagement.
(xi) The requirement of management confirmation letter as regards representations
made by them concerning audit.
(xii) Restriction of the auditor's liability, if any.
(xiii) Basis for computation of audit fees and billing arrangements.
(xiv) The form of reports or other communication of results of the engagement.

(b) Difference between Checklist and Internal Control Questionnaire.

SI. Basis Check List Internal Control Questionnaire

No.
1 Point of It is issued at the commencement It can be issued at any point of
Time of audit and reported back after time and reported back
completion of audit. immediately.
2 Issued to It is issued to the audit staff to be It is issued to various people at
followed by them during audit different levels in the
and reported back at organization.
completion.
3 Contents It contains instructions to be It contains questions to be
followed by audit assistants. answered by the employees of
the organization.
4 Objective It works as a guideline for audit This is used to collect the
staff so that none remains information to know about the
unchecked. internal control system and to
evaluate the weaknesses
therein.

8. (a) Who are the persons not qualified for appointment as an Auditor of a company under
section 141 of the Companies Act 2013? 7

(b) Mention the services that an Auditor cannot render u/s 144 of the Companies Act
2013. 5

Answer:

8. (a) As per Section 141(3) read with Rule 10 of Company (Audit and Auditor) Rule 2014,
the following persons shall not be eligible for appointment as an auditor of a
company.
(a) a body corporate other than a limited liability partnership registered under the
Limited Liability Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee
of the company;

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(d) a person who, or his relative or partner—
(i) 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, of
face value not exceeding rupees one lakh;
(ii) is indebted to the company, or its subsidiary, or its holding or associate
company or a subsidiary of such holding company, in excess of rupees five
lakh;
(iii) has given a guarantee or provided any security in connection with the
indebtedness of any third person to the company, or its subsidiary, or its
holding or associate company or a subsidiary of such holding company, in
excess of rupees one lakh;
(e) 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;
(f) a person whose relative is a director or is in the employment of the company as a
director or key managerial personnel;
(g) 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 persons or partner is at the date of
such appointment or reappointment holding appointment as auditor of more
than twenty companies;
(h) a person who has been convicted by a court of an offence involving fraud and a
period of ten years has not elapsed from the date of such conviction;
(i) any person whose subsidiary or associate company or any other form of entity, is
engaged as on the date of appointment in consulting and specialised services as
provided in section 144.

9. (a) Distinguish between Qualified Audit Report and Adverse Report. 4

(b) Discuss the provisions of Cost Audit under Companies Act 2013. 8

Answer:

9. (a)
Qualified Report Adverse Report
A Qualified Audit Report is one An Adverse Report is given when the auditor
where an Auditor gives an opinion concludes that based on his examination, he
subject to certain reservations. does not agree with the affirmations made in
the Financial Statements/Financial Report.

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The Auditor's reservation is generally The Auditor states that the Financial
Stated as: "Subject to the above, we Statements do not present a true and fair
report that the Balance Sheet shows view of the state of affairs and working results
a true and fair view." of the organisation.
The accounts present a true and fair The accounts do not present a true and fair
view subject to certain reservations. view on the whole.
A Qualification is made in the Audit An Adverse Report is given when the Auditor
Report when the Auditor has has his reservations on the true and fair view
reservation on specific item(s) of presented by the Financial Statements.
material nature.

(b) Cost Audit Provision of Section 148 of the Companies Act.

As per Section 148 —

(1) Notwithstanding anything contained in this Chapter, 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:
Provided that the Central Government shall, before issuing such order in respect
of any class of companies regulated under a special Act, consult the regulatory
body constituted or established under such special Act.
(2) 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 subsection (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.
(3) The audit under sub-section (2) shall be conducted by a Cost Accountant in
practice who shall be appointed by the Board on such remuneration as may be
determined by the members in such manner as may be prescribed:
Provided that no person appointed under section 139 as an auditor of the
company shall be appointed for conducting the audit of cost records:
Provided further that the auditor conducting the cost audit shall comply with the
cost auditing standards.
Explanation. - For the purposes of this sub-section, the expression "cost auditing
standards" mean such standards are as issued by the Institute of Cost and Works
Accountants of India, constituted under the Cost and Works Accountants Act,
1959, with the approval of the Central Government.
(4) An audit conducted under this section shall be in addition to the audit
conducted under section 143.
(5) The qualifications, disqualifications, rights, duties and obligations applicable to
auditors under this Chapter shall, so far as may be applicable, apply to a cost
auditor appointed under this section and it shall be the duty of the company to
give all assistance and facilities to the cost auditor appointed under this section
for auditing the cost records of the company:
Provided that the report on the audit of cost records shall be submitted by the
cost accountant in practice to the Board of Directors of the company.
(6) A company shall within thirty days from the date of receipt of a copy of the cost
audit report prepared in pursuance of a direction under sub-section (2) furnish the
Central Government with such report along with full information and explanation
on every reservation or qualification contained therein.
(7) If, after considering the cost audit report referred to under this section and the
information and explanation furnished by the company under sub-section (6), the
Central
Government is of the opinion that any further information or explanation is

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necessary, it may call for such further information and explanation and the
company shall furnish the same within such time as may be specified by that
Government.
(8) If any default is made in complying with the provisions of this section,—
(a) The company and every officer of the company who is in default shall be
punishable in the manner as provided in sub-section (1) of section 147;
(b) The cost auditor of the company who is in default shall be punishable in the
manner as provided in sub-sections (2) to (4) of section 147.

Eligibility for Cost Audit:

The students may also be given marks, if they state the limits for Cost Audit as per
Companies (Cost Records and Audit) Amended Rules, 2014 w.e.f. 31-12-2014. The
Rule states:

(i) Every company covered under regulated sector of Rule 3 shall get its cost
records audited if the overall annual turnover of the company from all its
products and services during the immediately preceding financial year is rupees
fifty crore 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 is rupees twenty five crore or more.
(ii) Every company covered under non-regulated sector of Rule 3 shall get its cost
records audited if the overall annual turnover of the company from all its
products and services during the immediately preceding financial year is rupees
one hundred crore 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 is rupees thirty five crore or more.
(iii) The requirement for cost audit shall not apply to a company-
(a) Whose revenue from exports, in foreign exchange, exceeds seventy five
per cent of its total revenue; or
(b) Which is operating in Special Economic Zone.

10. Write short notes (any three): 4×3=12

(a) Audit of a Hospital
(b) Difference between Statutory Audit and Internal Audit
(c) Audit of Inventories
(d) Benefits offered by Joint Audit

Answer:

10. (a) The following points are to be considered necessary for conducting an audit of
Hospital.
(i) Check the letter of appointment to ascertain the scope of responsibilities.
(ii) 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.
(iii) Examine, evaluate and verify the system of internal check, internal control and
determine the nature, timing and the extent of the audit procedures.
(iv) Vouch the entries in the Patient's Bill Register with a copies of bill issued. Test
check the selected bills to see that these have been correctly prepared taking
into consideration the period of stay of each patient as recorded in the
Attendance Schedule.
(v) Vouch the collection from patients with copies of bills and entries in Bills

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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.
(vi) Interest and/or dividend income should be vouched with reference to the
Investment Register and Interest and Dividend warrants.
(vii) In case of legacies and donations which are received for specific purposes, it
should be ensured that any income there from is not utilized for any other
purposes.
(viii) Where receipts of subscription show a 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.
(ix) Government grants or grants from local bodies should be verifies with the
reference to the correspondence with the concerned authorities.
(x) Clear distinction should be made between the items of capital and revenue
nature.
(xi) The capital expenditure should be incurred under proper authorization by a
valid resolution of the trustees or the Managing Committee.
(xii) Verify the system of internal check as regards purchases and issue of stores,
medicines etc.
(xiii) Examine that the appointment of the staff, payment of salaries etc. are duly
authorized.
(xiv) Physically verify the investments, fixed assets and inventories.
(xv) Check that adequate depreciation has been provided on all the depreciable
assets.

(b)
SI.No. Basis Statutory Audit Internal Audit
1 Appointing Statutory Auditor is appointed Internal Auditor is appointed by
Authority by the shareholder in the the Board.
general meeting.
2 Scope of The scope of work is defined The scope of work includes the
the work in the Companies Act. adherence of management
policies and procedures and
indentifies the weakness in the
internal control.
3 Removal of Statutory Auditor can be Internal Auditor can be removed
auditor removed by the shareholders. by the Board.
4 Remunerati It is fixed by the shareholders. It is fixed by the board.
on
5 Audit report It is submitted to the It is submitted to the Board as a
appointing Authority. suggestion to improve weakness
in the internal control.

(c) Inventories are tangible property held for sale in the ordinary course of business, or in
the process of production for such sale, or for consumption in the production of
goods or services for sale, including maintenance supplies and consumable stores
and spare parts meant for replacement in the normal course. Inventories normally
comprise raw materials including components, work-in-process, finished goods
including by-products, maintenance supplies, stores and spare parts, and loose tools.

Inventories normally constitute a significant portion of the total assets, particularly in

the case of manufacturing and trading entities as well as some service rendering
entities. Audit of inventories, therefore, assumes special importance.

The following features of inventories have an impact on the related audit

procedures:
(i) By their very nature, inventories normally turn over rapidly.

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(ii) Inventories are susceptible to obsolescence and spoilage. Further, some of the
items of inventory may be slow-moving while others may follow a seasonal
pattern of movement.
(iii) Inventories are normally movable in nature, although there may be some
instances of immovable inventories also, e.g., in the case of an entity dealing in
real-estate.
(iv) All the items of inventory may not be located at one place but may be held at
different locations such as factories and warehouses, or with third parties such as
selling agents.
(v) The individual items of inventory may not be significant in value, but taken
together, they normally constitute a significant proportion of total assets and
current assets of manufacturing, trading and certain service entities.
(vi) Physical condition (e.g., stage of completion of work-in-process in certain
industries) and existence of certain items of inventories may be difficult to
determine.
(vii) Valuation of inventories may involve varying degrees of estimation, including
expert opinions, e.g., in the case of jewelry.

(d) Benefits of Joint Audit are –

(i) Lower workload: In large organizations where auditing is a mammoth task, the
work-load gets divided among all the auditors and hence reduce.
(ii) Timely completion of work: Huge auditing work can be completed on timely
basis which is divided among joint auditors.
(iii) Sharing of expertise: Expertise of different auditors gets shared if there are several
auditors.
(iv) Improved quality of services: Since specific auditors concentrate on their
specialised areas of operation, hence improving quality of services.
(v) Healthy competition: Healthy competition increases efficiency and productivity.
(vi) Quality of performance: Quality of performance increases with healthy
competition and sharing of knowledge.

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terms of the Guidelines for Preferential Issues viz. SEBI (Issue of Capital and
Disclosure Requirements), Guidelines, 2009.
 Effectively, Share Warrants are amounts which would ultimately form part of the
Shareholder's Funds. Since Shares are yet to be allotted against the same, these
are not reflected as part of Share Capital, but as a separate line - item.

Section - B (Audit)
Answer Question No. 6 and any three from Question No. 7, 8, 9 and 10.

6. (a) Identify the correct alternative: 1×6=6

(i) An auditor should submit a Disclaimer of Opinion when
(A) he is satisfied with the truth and fairness of financial statements.
(B) he has certain reservations as to the presentation of truth and fairness in
financial statements.
(C) some material information is not available.
(D) the effect of any disagreement with the management is not so material.
(ii) In case of a company other than a Government Company, any casual vacancy
in the post of auditor is to be filled by the
(A) Board of Directors
(B) Managing Director
(C) Comptroller and Auditor General (CAG)
(D) Shareholders
(iii) An Audit Committee should have a minimum of ____________ number of directors.
(A) 4
(B) 3
(C) 5
(D) 6
(iv) SA 530 stands for
(A) Audit Documentation
(B) Audit Sampling
(C) Responsibility of Joint Auditor
(D) Agreeing the terms of Audit Engagements
(v) Unpaid dividend standing at the credit of Unpaid Dividend A/C should be
transferred to Investor Education and Protection Fund after _______ years of its
remaining unpaid.
(A) six
(B) eight
(C) seven
(D) five
(vi) Which of the following services cannot be rendered by an auditor as per
Companies Act 2013?
(A) Vouching
(B) Verification of assets and liabilities
(C) Issuing certificates on relevant matters
(D) Providing investment advisory services

(b) Match the following items in Column 'A' with items shown in Column 'B': 1x4=4
Column 'A' Column 'B'
1. Appointment of Company Auditor A. Current Audit File
2. Remuneration of a Company Auditor B. Section 139 of Companies Act 2013
3. Different accounting schedules such as C. Permanent Audit File
schedule of debtors and creditors
4. Analysis of significant ratios and trends D. Section 142 of Companies Act 2013

(c) State whether the following statements are true or false: 1x4=4
(i) As per Section 138 of Companies Act 2013, no private company or unlisted

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company is required to appoint an internal auditor.

(ii) Audit Memorandum is a detailed plan of audit work clearly specifying the
responsibilities of the audit staff and time allotted to perform the same.
(iii) Substantive procedure is also known as test of control.
(iv) Cut-off procedures are adopted to allocate revenues and costs to the proper
accounting period.
Answer:

6. (a) (i) C
(ii) A
(iii) B
(iv) B
(v) C
(vi) D

(b) (1) B
(2) D
(3) A
(4) C

(c) (i) False

(ii) False
(iii) False
(iv) True

7. (a) Discuss the various methods of obtaining audit evidences. How will you assess the
reliability of audit evidences obtained? 5+3=8

(b) 'An auditor applies various techniques to evaluate the internal control system of an
organization'— Discuss. 4

Answer:

7. (a) An auditor applies the following methods for obtaining sufficient and appropriate
audit evidence.
(i) Inspection: Inspection involves examining records or documents, whether internal
or external, in paper form or otherwise or a physical verification of a tangible
asset. Inspection can provide reliable audit evidence depending on their nature
and source and effectiveness of the internal control over their generation and
processing.
(ii) Observation: Observation consists of looking at a process or procedure being
performed by others on a real time basis. For example the auditor may observe
the inventory counting by the entity's personnel and obtain evidence that it is
done correctly.
(iii) External Confirmation: External confirmation represents audit evidence obtained
by the auditor as a direct written response from a third party, in paper form or by
electronic or any other medium. For example, confirmation from the customer
about the terms of agreement.
(iv) Recalculation: Recalculation consists of checking the mathematical accuracy of
documents or records. This may be performed manually or electronically.
(v) Reperformance: Reperformance involves auditor's independent execution of
procedures or controls that were originally performed as part of entity's internal
control.
(vi) Analytical Procedures: Analytical procedures involve evaluation of financial
information by studying possible relationships among both financial and non-
financiai data and investigating identified fluctuations from previous years that
are inconsistent.

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(vii) lnquiry: Inquiry consists of seeking information, both financial and non-financial,
from knowledgeable persons within or outside the entity. Inquiries may range from
formal written inquiries addressed to external parties to informal inquiries
addressed to client's staff.

As per SA 500, reliability of audit evidence depends on its source (whether internal or
external) and nature (whether visual, documentary or oral). However, the following
generalizations may be considered useful while assessing the reliability of audit
evidence.
(i) Evidence obtained from independent and external sources are more reliable.
(ii) Internal evidence becomes more reliable when the related internal control over
its preparation and maintenance is effective.
(viii) Evidence obtained directly by the auditor is more reliable than those
obtained indirectly or by inference.
(ix) Evidence in documentary form is usually more reliable than oral representation.
(x) Audit evidence provided by original documents is more reliable than audit
evidence provided by photocopies or facsimiles or documents that have been
filmed or digitized. In order to be certain about the reliability of audit evidence in
relation to a particular matter, an auditor should try to obtain evidence from
various sources. In case there appears any inconsistency, the auditor must obtain
additional evidence by conducting other audit procedures.

(b) Techniques for Evaluation of Internal Control System

i. Narrative Record: It is a complete and exhaustive description of the system. It is
appropriate in circumstances where a formal control system is lacking, like in the
case of small businesses. Gaps in the control system are difficult to identify using a
narrative record.
ii. Check List: It is a series of instructions that a member of the audit staff is required
to follow. They have to be signed/ initialed by the audit assistant as proof for
having followed the instructions given. A specific statement is required for every
weakness area.
iii. Flow Chart: It is a pictorial representation of the internal control system depicting
its various elements such as operations, processes and controls, which help in
giving a concise and comprehensive view of the organization's working to the
auditor. The internal control evaluation process becomes easier through a flow
chart as a broad picture of all the controls involved can be gauged in a glimpse.
iv. Internal Control Questionnaire: This is the most widely used method for collecting
information regarding the internal control system and involves asking questions to
various people at different levels in the organization. The questionnaire is in a pre-
designed format to ensure collection of complete and all relevant information.
The questions are formed in a manner that would facilitate obtaining full
information through answers in "Yes" or "No".

8. (a) Discuss the provisions under Section 139(7) relating to the appointment of the first
auditor in a Government Company. How can an auditor, duly appointed by a
company, be removed before expiry of his term? 4+3=7

(b) Discuss the duty of an auditor to report certain matters in the audit report u/s 143(3). 5

Answer:

8. (a) Appointment of First Auditor in Case of a Government Company [Section 139(7)]:

(i) 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 Governments, or partly by the Central Government and partly by
one or more State Governments, the first auditor shall be appointed by the
Comptroller, and Auditor-General of India within sixty days from the date of

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registration of the company.

(ii) In case the Comptroller and Auditor-General of India does not appoint such
auditor within the aforesaid period, the Board of Directors of the company shall
appoint such auditor within the next thirty days.
(iii) Further, in the case of failure of the Board to appoint such auditor within the next
thirty days, it shall inform the members of the company who shall appoint such
auditor within sixty days at an extraordinary general meeting.
(iv) The auditor, so appointed, shall hold office till the conclusion of the first annual
general meeting.

Removal of Auditor before the Expiry of His Term:

The auditor appointed under section 139 may be removed from his office before the
expiry of his term subject to the fulfillment of the following conditions under Section
140(1) read with Rule 7 of CAAR 2014.
(i) An application to the Central Government for removal of the auditor shall be
made in Form ADT-2. The application shall be accompanied with fees as
provided for this purpose under the Companies (Registration Offices and Fees)
Rules, 2014.
(ii) The application shall be made to the Central Government within thirty days of the
resolution passed by the Board.
(iii) The company shall hold the general meeting within sixty days of receipt of
approval of the Central Government for passing the special resolution for removal
of the said auditor.
(iv) The auditor concerned shall be given a reasonable opportunity of being heard.

(b) Duty Regarding Inclusion of Certain Matters in the Audit Report: As per Section 143(3),
the company auditor, in his audit report, shall clearly state -
(i) 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.
(ii) Whether, in his opinion, proper books of account as required by law have been
kept by the company and proper returns adequate for the purposes of his audit
have been received from branches not visited by him.
(iii) Whether the report on the accounts of any branch office of the company
audited by a person other than the company's auditor has been sent to him and
the manner in which he has dealt with it in preparing his report.
(iv) 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.
(v) Whether, in his opinion, the financial statements comply with the accounting
standards.
(vi) The observations or comments of the auditors on financial transactions or matters
which have any adverse effect on the functioning of the company.
(vii) Whether any director is disqualified from being appointed as a director under
sub-section (2) of section 164.
(viii)Any qualification, reservation or adverse remark relating to the maintenance of
accounts and other matters connected therewith.
(ix) Whether the company has adequate internal financial controls system in place
and the operating effectiveness of such controls.

(9) (a) What is the procedure of appointing a cost auditor in a company? 4

(b) Discuss the basic elements of an audit report. 8

Answer:

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(9) (a) Procedure for Appointment of a Cost Auditor

The cost auditor is to be appointed by the Board of Directors (BOD) on the

The company shall inform the cost auditor concerned of his or its appointment as
such and file a notice of such appointment with the Central Government within a
period of thirty days of the Board meeting in which such appointment is made or
within a period of one hundred and eighty days of the commencement of the
financial year, whichever is earlier, through electronic mode, in form CRA-2 along
with the fee as specified in Companies (Registration Offices and Fees) Rules, 2014.

Any casual vacancy in the office of a cost auditor, whether due to resignation, death
or removal, shall be filled by the Board of Directors (BOD) within thirty days of
occurrence of such vacancy and the company shall inform the Central Government
in Form CRA-2 within thirty days of such appointment of cost auditor.

(b) The Basic Elements of the Auditors' Report are –

(i) Title: The Auditor's Report should have an appropriate title i.e. "Auditor's Report". It
should be distinguished from other Reports, e.g. reports of officers of the entity,
Board of Directors.
(ii) Addressee: The Auditor's Report should be appropriately addressed as required
by the circumstances of the engagement and applicable laws and regulations.
Ordinarily, the Auditor's Report is addressed to the authority appointing the
Auditor.
(iii) Opening or Introductory Paragraph:
(a) The Auditor's Report should identify the Financial Statements of the entity that
have been audited, including the date of and period covered by the
Financial Statements.
(b) The Report should include a Statement that the Financial Statements are the
responsibility of the entity's management and a Statement that the
responsibility of the Auditor is to express an opinion on the Financial
Statements based on the audit.
(iv) Scope Paragraph:
(a) The Auditor's Report should describe the scope of the audit by stating that the
audit was conducted in accordance with standards on auditing generally
accepted in India.
(b) The Report should include a statement that the audit was planned and
performed to obtain reasonable assurance whether the Financial Statements
are free of material misstatement.
(c) The Auditor's Report should describe the Audit as including examining, on a
test basis, evidence to support the amounts and disclosures in Financial
Statements, assessing the accounting principles used in the preparation of the
Financial Statements, assessing significant estimates made by management,
in the preparation of Financial Statements, & evaluating the overall position of
Financial Statements.
(d) The Report should include a statement by the Auditor that the audit provides
a reasonable basis for his opinion.
(v) Opinion Paragraph: The Opinion paragraph of the Report should indicate the
Financial Reporting framework used to prepare the Financial Statements. It should
state the Auditor's opinion as to whether the Financial Statements give a true and
fair view in accordance with the financial reporting framework and, where
appropriate, whether the Financial Statements comply with the statutory
requirements.

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(vi) Date of the Report: The date of an Auditor's Report is the date on which the
Auditor signs the Report expressing an opinion on the Financial Statements. The
Auditor should not date the Report earlier than the date on which the Financial
Statements are signed or approved by Management.
(vii) Place of Signature: The Report should name the specific location, which is
ordinarily the city where the Audit Report is signed.
(viii) Auditor's Signature: The Report should be signed by the Auditor in his personal
name. Where a Firm is appointed as the Auditor, the Report should be signed in
the personal name of the Auditor and in the name of the Audit Firm. The Partner/
Proprietor signing the Report should mention his ICAI Membership Number.

10. Write short notes (any three): 4×3=12

(a) Audit of Municipalities and Panchayats
(b) Audit of Bonus share issued by a company
(c) Branch Auditor
(d) Declaration of dividend by a company u/s 123

Answer:

10. (a) Audit of Municipalities and Panchayats

The major objective of audit of Municipalities and Panchayats are enumerated

below;
(i) To ensure on the fairness and correctness of contents in the Financial Statement
(ii) To report on adequacy of internal control
(iii) To ensure value of money is fully received on amount spent.
(iv) To detect the frauds and errors.

The following points are to be considered necessary for carrying on audit of

Municipalities and panchayats (Local Bodies);
(i) To ensure that the expediters incurred conform to the relevant provision of the law
and is in accordance with the financial Rules and regulation formed by the
compliant authority.
(ii) To encase that sanction is accorded by the competent authority either special or
general.
(iii) To encase that there is provision of funds for expenditure and is authorized by
competent Authority.
(iv) To ensure that where huge financial expenditure is made is run economically and
is expected to contribute growth.

(b) Audit of bonus share issued by a company (Section 63)

The auditor should take note of the following points:

(i) Confirm that issue of Bonus Share was authorized by articles.

(ii) Verify the minutes of the Board meeting and ordinary resolution passed in the
general meeting in which the approval of members is obtained
(iii) Check that the company has issue fully paid-up bonus shares to its members
only.
(iv) Confirm that the issue of bonus shares shall not be made by capitalizing
reserves created by the revaluation of assets.
(v) Check whether the company has made any default in payment of interest or
principal in respect of fixed deposits or debt securities issued by it.
(vi) Check whether the company has made any default in payment of statutory
dues of the employees, such as, contribution to provident fund, gratuity and
bonus.
(vii) Whether the partly paid-up shares are made fully paid-up.

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(viii) Check whether the bonus shares shall not be issued in lieu of dividend.

(c) Branch Auditor

Branch Auditor may be appointed under Section 139 of 2013 Act to audit the
Accounts of Branch Office of a Company. Such person, who is appointed as Branch
Auditor, should be qualified for appointment as an auditor of the Company under
2013 Act. The Branch Auditor shall prepare a report on the Accounts of the Branch
examined by him and send it to Company's Auditor. The report of Branch Auditor will
be dealt by Company's auditor in the manner deemed fit. Branch auditor is
responsible to report fraud, as applicable to Company's auditor.

(d) Declaration of dividend by a company u/s 123

No dividend shall be declared or paid by a company for any financial year except —

(a) out of the profits of the company for that year arrived at after providing for
depreciation in accordance with the provisions of subsection (2), or out of the
profits of the company for any previous financial year or years arrived at after
providing for depreciation in accordance with the provisions of that sub-section
and remaining undistributed, or cut of both; or

(b) out of money provided by the Central Government or a State Government for
the payment of dividend by the company in pursuance of a guarantee given by
that Government.

Provided that a company may, before the declaration of any dividend in any
financial year, transfer such percentage of its profit for that financial year as it
may consider appropriate to the reserves of the company.

Provided further that where, owing to inadequacy or absence of profits in any

financial-year, any company proposes to declare dividend out of the
accumulated profits earned by it in previous/ears and transferred by the
company to the reserves, such declaration of dividend shall not be made except
in accordance with such rules as may be prescribed in this behalf.

Provided also that no dividend shall be declared or paid by a company from its
reserves other than free reserves.

Provided also that no company shall declare dividend unless carried over
previous losses and depreciation net provided in previous year or years are set
off against profit of the company for the current year.

For the purposes of clause (a) of sub-section (1), depreciation shall be provided in
accordance with the provisions of Schedule II.

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under existing policies. On that basis, a valuation Balance Sheet is prepared to

determine the profit. In the case of general insurance business, a portion of the
premium is carried forward as a provision for unexpired liability and the balance
net of claims and expenses is taken as profit (or loss).

(d) Share application money pending allotment

As per Schedule III it is to be shown as a separate line item on the face of Balance
Sheet. Other provisions in this respect are as follows:
(i) Share Application Money not exceeding the Issued Capital and to the extent not
refundable, is to be disclosed as a separate line item after - Share Holders Funds
and before - Non-Current Liabilities.
(ii) If the Company's Issued Capital is more than the Authorized Capital, and
approval of increase in Authorized Capital is pending, the amount of Share
Application Money received over and above the Authorized Capital should be
shown under the head - Other Current Liabilities.
(iii) The amount shown as Share Application Money Pending Allotment will not
include Share Application Money to the extent refundable. For example, the
amount, in excess of Issued Capita], or where Minimum Subscription requirement
is not met. Such amount will have to be shown separately under 'Other Current
Liabilities'.
(iv) Calls Paid in Advance are to be shown under - Other Current Liabilities. The
amount of interest which may accrue on such advance should also is to be
reflected as a Liability.

Section - B
(Audit)

Answer Question No. 6 and any three from Question No. 7, 8, 9 and 10.

6. (a) Identify the correct alternative in each of the following cases: 1×6=6

(i) If the Debentures are issued as collateral security either to Banks or Creditors the
Auditor needs to ensure that such issue is approved by
(A) Shareholders
(B) Board of Directors
(C) Debenture Trustee
(D) Audit Committee
(ii) As per SQC 1, Audit working papers should be retained for a period of
(A) 2 years
(B) 5 years
(C) 7 years
(D) 10 years
(iii) Current Audit files contains
(A) Articles of Association and Memorandum of Association
(B) Analysis of significant ratios and trends
(C) Notes regarding significant Accounting policies
(D) Audit Programme
(iv) Form for maintenance of Cost Records of a Company is
(A) CRA-1
(B) CRA-2
(C) CRA-3
(D) CRA-4
(v) Secretarial Audit is applicable to every Public Company having a turnover of
(A) ` 100 crores

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(B) ` 150 crores

(vi) Statutory Auditor is appointed by the Shareholders in the

(A) General Meeting
(B) Statutory Meeting
(C) EGM
(D) Board Meeting

(b) Match the following items in Column 'A' with items shown in Column 'B': 1x4=4

Column 'A' Column 'B'

1. Independent appraisal activity A Secretarial Audit Report
2. SA700 B Section 123
3. Form MR3 C Internal Audit
4. Declaration of dividend D Forming an opinion and reporting on
financial statements

(c) State whether the following statements are True or False: 1x4=4
(i) Section 70 deals with the Audit of Debenture.
(ii) An Audit Committee should have 4 directors.
(iii) CARO-Companies (Auditor's Report) order, 2016 is applicable to Banking Companies.
(iv) Internal Check is part of Accounting Control.

Answer:

6. (a) (i) B
(ii) C
(iii) D
(iv) A
(v) C
(vi) A

(b) (1) C
(2) D
(3) A
(4) B

(c) (i) False

(ii) False
(iii) False
(iv) True

7. (a) Distinguish between Permanent and Current Audit File. 6

(b) "Internal Audit is an important tool for the management."—Discuss. 6

Answer:

7. (a) Permanent and Current Audit File: In case of recurring audits, some working papers
files may be classified into permanent audit files and current audit files: while the
former is updated with the information of continuing importance, the latter contains
information relating to audit of a single period. The contents of these files are given
below:

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Sr. Permanent Audit File Current Audit File

No.
1 Legal and organizational structure of the Correspondence relating to
entity, e.g. Memorandum of Association acceptance of annual re-
and Article of Association in case of a appointment
company
2 Extracts or copies of legal documents, Extracts of important matters in the
agreements and minutes relevant to the minutes of Board Meetings and
audit. General Meetings relevant to the
audit
3 A record of study and evaluation of Copies of management letters
internal controls
4 Analysis of significant ratios and trends. Analysis of transactions and balances
5 Copies of the audited financial Copies of communication with other
statements of previous year(s) auditors, experts and third parties
6 Notes regarding significant accounting Audit programme
policies
7 Significant audit observations of the Conclusions reached on significant
earlier years aspects of audit

(b) Internal audit is an important management tool for the following reasons:
a. Internal audit ensures compliance of Companies (Auditors Report) Order, 2016.
b. It ensures compliance of accounting standards and policies.
c. It ensures reliability of MIS through internal audit's independent appraisal and
review.
d. It looks into the standard of efficiency of business operation.
e. It can evaluate various problems independently and suggest improvement.
f. This system makes the internal control system effective.
g. It ensures the adequacy, reliability, accuracy and understandability of financial
and operational data.
h. It performs as an integral part of 'Management by system'.
i. It can add valuable assistance to management in acquiring new business,
promoting new products and expansion or diversification of business etc.

8. (a) Discuss the provisions of Companies Act, 2013 as regards reporting of frauds by
Company Auditor. 6
(b) Discuss about the manner in which rotation of Auditors may be done by the company
on expiry of their term. 6
Answer:

8. (a) The provisions of Companies Act 2013 regarding reporting of frauds by a company
auditor are as follows:
(1) For the purpose of sub-section (12) of section 143, in case the auditor has
sufficient reason to believe that an offence involving fraud, is being or has been
committed against the company by officers or employees of the company, he
shall report the matter to the Central Government immediately but not later than
sixty days of his knowledge and after following the procedure indicated herein
below.
(i) auditor shall forward his report to the Board or the Audit Committee, as the
case may be, immediately after he comes to knowledge of the fraud,
seeking their reply or observations within forty-five days;
(ii) 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 Central Government within fifteen days of receipt of such
reply or observations;

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(2) The report shall be sent to the Secretary, Ministry of Corporate Affairs fin a sealed
cover by Registered Post with Acknowledgement Due or by Speed post followed by
an e-mail in confirmation of the same.
(3) The report shall be on the letter-head of the auditor containing postal address, e-mail
address and contact number and be signed by the auditor with his seal and shall
indicate his Membership Number.
(4) The report shall be in the form of a statement as specified in Form ADT-4.
(5) The provision of this rule shall also, mutatis mutandis, to a cost auditor and a
secretarial auditor during the performance of his duties under section 148 and section
20,4 respectively.

(b) 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.
(1) 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.
(2) For the purpose of the rotation of the 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 or audit
firm is associated with the outgoing auditor or audit firm under the same
network of audit firms.

Explanation I: For the purposes of these rules, the term "same network" includes
the firms operating or functioning, hitherto or in future under the same brand
name, trade name or common control.

Explanation II: 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.

(9) (a) What is the procedure to be followed for fixing the remuneration of a Cost Auditor? 5

(b) Distinguish between 'Audit Report' and 'Audit Certificate'. 7

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Answer:

(9) (a) Authority for fixing the Remuneration of a Cost Auditor:

Rule 14 of the Companies [Audit and Auditors] Rules 2014 has laid down the
procedure of appointment and fixing the remuneration of a cost auditor.lt states as
follows:
Remuneration of the Cost Auditor: For the purpose of sub-section (3) of section 148 –

(a) In the case of companies which are required to constitute an audit committee -
(i) The Board shall appoint an individual, who is a cost accountant in practice, or
a firm of cost accountants in practice, as cost auditor on the
recommendations of the Audit committee, which shall also recommend
remuneration for such cost auditor;
(ii) The remuneration recommended by the Audit Committee under (i) shall be
considered and approved by the Board of Directors and ratified subsequently
by the shareholders;
(b) In the case of other companies which are not required to constitute an audit
committee, the Board shall appoint an individual who is a cost accountant in
practice or a firm of cost accountants in practice as cost auditor and the
remuneration of such cost auditor shall be ratified by shareholders subsequently.
(b)
Basis Audit Report Audit Certificate
1 Meaning Audit Report is a statement of While Audit Certificate is a
collected and considered written confirmation of the
information so as to give a clear accuracy of the information
picture of the state of affairs of stated there in.
the business to the persons who
are not in possession of the full
facts.
2 Opinion Audit Report contains the opinion While Audit Certificate does not
of the auditor on the accounts. contain any opinion, but only
confirms the accuracy of the
figures with the books of
accounts.
3 BasisAudit Report is made out on the While Audit Certificate is made
basis of information obtained and out on the basis of the particular
books of account verified by the data capable of verification as
auditor. regards accuracy.
4 Guarantee Audit Report may not guarantee While Audit Certificate
correctness of financial statement guarantees absolute correctness
in absolute terms. of the figures and information
mentioned in the Certificate.
5 Coverage Audit Report always covers entire While Audit Certificate covers
accounts of the concern. only, certain part of the accounts
of the concern.
6 Responsibility Audit Report does not hold While Audit Certificate makes an
auditor responsible for anything auditor responsible, if anything
wrong in the accounts. mentioned in the certificate
found as wrong, later on.
7 Suggestion Audit Report may provide certain While Audit Certificate does not
suggestions for improvement. provide any such suggestion.
8 Nature Audit Report is based on the While Audit Certificate is based
vouching and verification of on checking arithmetical
books of accounts, voucher, accuracy of the facts.

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assets and liabilities.

9 Scope Audit Report covers all While the Audit Certificate is very
transactions done during the specific.
year.
10 Characteris Audit Report is subjective, as it isWhile Audit Certificate is
tics opinion oriented. objective, as it is fact oriented
11 Form Audit Report is required to be While Audit Certificate, expect in
presented in the prescribed few cases, is not required to be
format. presented in any standard
format.
12 Address Audit report is addressed to the While Audit certificate is
members of the company at addressed to particular person or
large or appointing authority. sometimes may include the
words like "To whomsoever it may
concern."

10. Write short notes (any three): 4×3=12

(a) Responsibility of a Joint Auditor
(b) Elements of 'cost of inventory' as per AS 2
(c) Audit of Education Institutions
(d) Auditor's duty regarding Issue of Debentures

Answer:

10. (a) Responsibility of a Joint Auditor:

1. For the audit work divided among themselves, each joint auditor is responsible
only for the work allocated to him. Accordingly, among other duties,
(i) Each joint auditor is required to scrutinize the audit report of the branch/
divisions specifically allocated to him.
(ii) Each joint auditor is required to obtain and evaluate information and
explanations from the management of the divisions, zones or units specifically
allocated to him.

2. In respect of undivided work.

(i) In respect of decision taken jointly regarding the nature, timing or extent of
audit procedures to be performed by any of the joint auditor. (However, they
will be responsible only with respect to the appropriateness of the decision,
proper execution of the audit procedures is the separate and specific
responsibility of the joint auditor concerned.)
(ii) In respect of matters which are brought to the notice of the joint auditors by
any one of them and on which there is an agreement among them.
(iii) In respect of compliance with disclosure requirement (i.e. Notes on accounts)
of the relevant statute while examining the financial statements.
(iv) For ensuring that the audit report complies with the requirements of the
relevant statute.

(b) Elements of 'cost of inventory' as per AS 2

Cost of inventory includes the following

1. Cost of purchase
2. Cost of conversion
3. Other costs incurred in bringing the inventories to their present location and
condition.

1. Cost of purchase includes—

Purchase price, Duties and Taxes, Freight inward, other expenditures directly
attributable to the acquisition less duties and taxes recoverable by enterprises

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from taxing authorities. Trade discount, Rebate, Duty drawback, Other similar
items.
2. Cos of conversion —
It consists of the cost directly related to the units + Systematic Allocation of fixed
and variable production overheads that are incurred in converting material into
finished goods.
Fixed Production overhead means Indirect cost of production that remains
relatively constant regardless of volume of production. Allocation of fixed
production overhead is done on normal capacity.
Variable Production overhead means indirect cost of production that varies
directly or nearly directly with the volume of production. Allocation of variable
production overhead is done on actual production.
In case of Joint-products, when the cost of conversion of each product is not
identifiable separately, total cost of conversion is allocated between the products
on the rational and consistent basis, if by-products, scrap or waste materials are
not of material value, they are measured at net realisable value, then the net
realisable value is deducted from cost of conversion. Net cost of conversion is
distributed among the main products.
3. Other costs: Cost incurred in bringing the inventories to their present location and
condition.

(c) Audit of Education Institutions

The special steps involved in the audit of an educational institution are the following:
(i) Examine the Trust Deed, or Regulations in the case of school or college and note
all the provisions affecting accounts. In the case of a university, refer to the Act of
Legislature and the Regulations framed there under.
(ii) Read through the minutes of the meetings of the Managing Committee or
Governing Body, noting resolutions affecting accounts to see that these have
been duly complied with, specially the decisions as regards the operation of bank
accounts and sanctioning of expenditure.
(iii) 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.
(iv) 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.
(v) Total up the various columns of the Fees Register for each month preterm to
ascertain that fees paid in advance have been carried forward and the arrears
that are irrecoverable have been written off under the sanction of an
appropriate authority.
(vi) Check admission fees with admission slips signed by the head of the institution
and confirm that the amount had been credited to a Capital Fund, unless the
Managing Committee has taken a decision to the contrary.
(vii) See that free studentship and concessions have been granted by a person
authorised to do so, having regard to the prescribed Rules.
(viii)Confirm that fines for late payment or absence, etc., have either been collected
or remitted under proper authority.
(ix) Confirm that hostel dues were recovered before students' accounts were closed
and their deposits of caution money refunded.
(x) Verity rental income from landed property with the rent rolls, etc.
(xi) Verify the inventories of furniture, stationery, clothing, provision and all equipment,
etc.
These should be checked by reference to Stock Register and values applied to
various items should be test checked.
(xii) Confirm that the refund of taxes deducted from the income from investment

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(interest on securities, etc.) has been claimed and recovered since the institutions
are generally exempted from the payment of income-tax.
(xiii)Verify the annual statements of accounts and while doing so see that separate
statements of account have been prepared as regards Poor Boys Fund, Games
Fund, Hostel and Provident Fund of Staff, etc.

(d) Auditor's duty regarding Issue of Debentures:

(i) The auditor should verify that the prospectus had been duly filed with the registrar
before the date of allotment of debentures.
(ii) He should check the amount collected in the cash book with the counterfoils of
receipts issued to the applicants and also cross check the amount into the
application and allotment book.
(iii) He should examine the debenture trust deed and note the conditions contained
therein as to issue and repayment.
(iv) If the debentures are covered by a mortgage of a charge, it should be verified
that the charge has been correctly recorded in the register of mortgage and
charges" and it has also been registered with the registrar of the companies.
(v) Compliance with SEBI guidelines should also be ensured.
(vi) Where debentures have been issued as fully paid up to vendors as a part of the
purchase consideration, the contract in this regard should be checked.

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Answer: 5(d)
As per Schedule III of Companies Act 2013, Cash and Cash Equivalents shall be reported
under the heading Current Assets. For the purpose of reporting Cash and Cash Equivalents
shall be further classified as-
(a) Balances with Banks,
(b) Cheques, Drafts on Hand,
(c) Cash on Hand,
(d) Other (Specify nature).
Notes:
 Earmarked Balances with Banks (e.g. for Unpaid Dividend) shall be separately stated.
 Balances with Banks to the extent held as margin Money or Security against the
Borrowings, Guarantees, and Other Commitments shall be disclosed separately.
 Repatriation restrictions, if any, in respect of Cash and Bank Balances shall be separately
stated.
 Bank Deposits with more than 12 months Maturity shall be disclosed separately.

Section-B
(Auditing)
Answer QuestionNo. 6 and any three from Question Nos. 7, 8, 9 and 10.

6. (a) Identify the correct alternative in each of the following cases: 16=6
(i) Internal Auditor is appointed by
(A) Audit Committee
(B) Shareholders in General Meeting
(C) Extraordinary General Meeting
(D) Board of Directors
(ii) Cost Audit Report is submitted to Board of Directors in Form No.
(A) CRA-1
(B) CRA-2
(C) CRA-3
(D) CRA-4
(iii) Check list contains the instruction to be followed by the
(A) Internal Auditor
(B) External Auditor
(C) Audit Assistants
(D) Employee of the organization
(iv) Form for Secretarial Audit Report is
(A) MR-2

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(B) MR-3
(C) MR-4
(D) MR-5
(v) Permanent Audit file contains
(A) copies of management letters
(B) audit programme
(C) analysis of transaction and balances
(D) analysis of significant ratios and trends
(vi) Audit of debenture is covered under section
(A) 70
(B) 71
(C) 72
(D) 73
(b) Match the following items in Column ‘A’ with items shown in Column ‘B’ 14=4
Column ‘A’ Column ‘B’
(i) The authority for Government Audit (a) Audit programme
(ii) Details of Audit work to be performed (b) Comptroller an Auditor General
(iii) Removal of Statutory Company Auditor (c) Audit Note Book
(iv) Details about Name and Organization Structure (d) Section 140
(e) No match found

(c) State whether the following statements are True or False: 14=4
(i) The Branch Auditor shall prepare report on the Accounts of the Branch examined by him
andsend it to Audit Committee
(ii) Maintenance of Cost Accounting Standards is mandatory as per Section 143 of
Companies Act
(iii) Routine checking is a substitute of vouching
(iv) Casual vacancy in the office of Cost Auditor is filled by Board of Directors
Answer: 6(a)
(i) (D) . Board of Directors
(ii) (C). CRA 3
(iii) (C). Audit Assistants
(iv) (B). MR-3
(v) (D) . Analysis of significant ratios and trends
(vi) (B). Section 71

Answer: 6(b)

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Column „A‟ Column „B‟
(i) The authority for Government Audit (b) Comptroller an Auditor
General
(ii) Details of Audit work to be performed (a) Audit programme
(iii) Removal of Statutory Company Auditor (d) Section 140
(iv) Details about Name and Organization Structure (c) Audit Note Book

Answer: 1(c)
(i) False
(ii) False
(iii) False
(iv) True
7. (a) Discuss the method of obtaining Audit Evidences. 6
(b) Distinguish between Internal Control and Internal Check 6
Answer: 7(a)
Auditor obtains evidence in performing compliances and substantive procedures by any
one or more of the following methods-
(i) Inspection-It consists of examining records, documents, or tangible assets. Inspection of
records and documents provides evidence of varying degrees of reliability depending
on their nature, source and the effectiveness of internal controls over their processing.

(ii) Observation-It consists of witnessing a process or procedure being performed by others.

(iii) Inquiry and Confirmation-Inquiry consists of seeking appropriate information from a

knowledgeable person inside or outside the entity, confirmation consists of the response
to an inquiry to corroborate information contained in the accounting records.

(iv) Computation-It consists of checking the arithmetical accuracy of source documents and
accounting records or performing independent calculations.

(v) Analytical Review-It consists of studying significant ratios and trends and investigating
unusual fluctuations and items.

Answer: 7(b)
No. Basis Internal Control Internal Check
1 Way of checking In internal controls systems, work of It operates in routine to
one person is automatically doubly check every part of
checked by another a transaction at the time of
occurrence and recording
of the same
2 Objective Its objective is to ensure Its objective is to ensure
adherence to management that no one employee has
policies, safeguarding of assets, exclusive control over any
prevention and detection of transaction or group of
frauds and errors, accuracy and transactions and their
completeness of accounting recording in the books
records

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3 Point of Time In an internal Control system, Methods of recording
checking is done simultaneously transactions are devised
with the conduct of work. Every where work of an
transaction is checked as soon as employee is checked
it is entered continuously by correlating,
it with the work of others
4 Thrust of system The thrust of internal check The thrust of internal control
systems is to prevent errors lies in fixing of responsibility
and division of work to
avoid duplication
5 Cost Involvement The system proves to be costly in It is a part of internal control
case of small businesses because and a method of division of
more number of employees are work, therefore does not
engaged add to the cost
6 Report Internal Controls provide for built in The summary of day to day
MIS reports transaction work as report
for the senior

8. (a) Discuss the functions and power of the Audit Committee. 6

(b) Discuss the procedure for appointment for first Auditor of the Company and his tenure 6

Answer: 8(a)

Constitution of an Audit committee is mandatory for the:

(i) Every listed company; and
(ii) Such directors or classes of the companies, as may be prescribed
An Audit committee shall have minimum 3 Directors, majority of them should be
independent Directors. Majority of the members of the Audit Committee should be able to
read and understand the financial statements.
Functions of Audit Committee:
(i) For the appointment and fixation of the remuneration of Auditor
(ii) Examination of the financial statement
(iii) Scrutiny of Inter Corporate Loans and Investment
(iv) Valuation of the Assets of the company
(v) Evaluation of the internal financial control and risk management system of the entity
(vi) Evaluation of the use of funds rose through public offers.
(vii) Evaluation of an related party transaction
Powers of the Audit Committee
(i) Audit Committee has the power to call for comments of the Auditor about Internal
Controlsystems and the scope of the audit including its observation
(ii) Before submission of the report to the Board, the Audit Committee have the power to
reviewthe financial Statement
(iii) Power to discuss any issue with the Statutory and Internal Auditor and the Management
ofthe company in relation to matter contained in the Financial Statement

Answer: 8(b)

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First auditor of the company, other than a Government company, shall be appointed
- By the BOD within 30 days from the date of registration of the company;
- If BOD fails to appoint, by the member of the company within 90 days at an extraordinary
general meeting appoint the first auditor‟;
- In case of Government company, first auditor shall be appointed by CAG within 60 days
from the date of registration;
- If CAG fails to appoint, by the BOD of the company within next 30 days;
- If again BOD fails to appoint the first auditor of the company, by the member of the
companywithin 60 days at an extraordinary general meeting;
- Tenure of the first auditor of the company in both the above cases till the conclusion of the
firstannual general meeting.

9. (a) Discuss the relevant provisions of Companies (Cost Records and Audit) Rules 2014 on
applicability of Cost Audit to different sectors. 6
(b) What is a qualified Audit Report? Discuss the circumstances when an Auditor shall qualify
his report. 2+4=6

Answer: 9(a)
Applicability of Cost Audit

The provisions regarding applicability of cost audit is explained in Companies (Cost Records
and Audit) Rules 2014. Accordingly,

(a) The Rules have classified sectors/industries under Regulated and Non-Regulated sectors.
The sectors/industries covered under Table A of the Rules are under the Regulated Sector
and sectors/industries covered under Table B are under the Non-Regulated Sector.

(b) Every company, including foreign companies defined in clause (42) of section 2 of the
Act, engaged in the production of the goods or providing services, specified in Tables A
and B, having an overall turnover from all its products and services of rupees thirty five
crore or more during the immediately preceding financial year, shall be required to
maintain cost accounting records.

However, foreign companies having only liaison office in India and engaged in production,
import and supply or trading of medical devices listed in Sl. 33 of Table B are exempted.
Further, companies which are classified as a micro enterprise or a small enterprise including as
per the turnover criteria under subsection (9) of section 7 of the Micro, Small and Medium
Enterprises Development Act, 2006 (27 of 2006) are also excluded from the purview of the
Rules.

Answer: 9(b)
A Qualified Audit Report is one where an auditor gives an opinion on the truth and fairness of
Financial Statements, subject to certain reservations. The Auditor‟s Reservation is generally
stated as: “Subject to the above, we report that the Balance Sheet shows a true and fair
view.”

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Qualified report is submitted by the auditor when the overall impact of all reservations or
qualification taken together is not material enough to vitiate the overall true and fair view of
Financial Statements, but it is important that such a matter(s) should be brought to the
attention of the shareholders.

The circumstances when an auditor should qualify his report are as follows:

(i) Where the Auditors are unable to obtain all the information and explanations which they

consider necessary for the purpose of their audit, e.g.

(a) Absence of satisfactory documentary evidence of the existence of ownership of the

material assets, such as, title deeds in respect of land

(b) Absence of vouchers in respect of material payments made by the Company,

(c) Destruction of books and re cords by fire or accident,

(d) Non-availability of books and records owing to unavoidable circumstances, such as

books

and records of a foreign branch with which no communication is possible.

(ii) Where proper books of accounts have not been kept in accordance with the law

(iii) Where the Balance Sheet and P & L Account are not in agreement with the hooks of

account and returns.

(iv) When the information required by law is not furnished

(v) When the accounts do not disclose a true and fair view like-

(a) Where the accounting practices followed by the Company are not considered
appropriateto the circumstances and nature of the business e.g. treatment of HP
Sales as outright sales,

(b) Where there has been a change in accounting principles or procedures in relation
tomaterial items, such, valuation of stock, depreciation, treatment of by-product
cost, etc. without adequate explanation and disclosure of effect of the change.

(c) Where difference of opinion with management has arisen regarding valuation or
realisabilityof assets, such as Stock-in-Trade, Debtors, Loans & Advances or the
extent of liabilities, contingent or otherwise,

(d) Where income or expenditure is not properly reflected so as to show a fair figure of
profit for the year,

(e) Where information is not required by law to be disclosed but the disclosure of which
is considered essential by the Auditors in order to show a true and fair view,

(f) Where there is a contravention of the provisions of the Companies Act having a
bearingupon the accounts and transactions of the Company e.g. donations to
political parties orfor political purposes in contravention of Section 182, or
contributions to charitable or other funds in excess of the limitation specified in
Section 181;

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(g) Where the Company has contravened the provisions of its Memorandum and
Articles of Association.

10. Write short notes (any three):43=12

(a) Auditor’s duty regarding unclaimed dividend
(b) Physical verification of Inventory and Auditor’s responsibility thereof
(c) Audit of Co-operative Society
(d) Difference between Statutory Audit and Internal Audit

Answer: 10 (a)
In connection with the unclaimed dividend, the auditor must consider the following points:

(i) He shall collect the list of the names of the shareholders to whom dividend could not
be paid.
(ii) He shall verify the calculation of unclaimed dividend.
(iii) He shall verify that the unpaid dividend has been transferred to a separate account
namelyUnpaid Dividend Account within seven days from the expiry of 30 days allowed
fordeclaration and payment of dividend.
(iv) In case there is any default on the part of the company to deposit the unpaid dividend
within the stipulated time as mentioned above, the company needs to pay interest
@12% p.a. The auditor must verify whether there is any fault on the part of the
company and if so whether they have deposited the interest and the penalty.
(v) The auditor shall also verify whether the company has published the details of unpaid
dividend in its own website and also in other website(s) approved by the government
for this purpose.
(vi) In case the company has made any payment during the year from the Unpaid
Dividend Account to any shareholder on his application for the same, the auditor must
verify that the payment has been made to the right person and the amount so paid is
determined properly.
(vii) In case any amount of dividend is remaining unpaid for more than seven years, the
auditor shall verify whether the same along with the interest accrued thereon has been
transferred by the company to IEPF. He shall verify the same based on the statement
submitted by the company to the IEPF and the receipt issued by the IEPF in this context.
(viii) The auditor shall also verify whether all the shares in respect of which unpaid dividend
has been transferred to IEPF, have also been transferred to such fund.

Answer: 10 (b)

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Physical verification of inventories is the responsibility of the management of the entity.
However, where the inventories are material and the auditor is placing reliance upon the
physical count by the management, it may be appropriate for the auditor to attend the
inventory taking. The extent of auditor‟s attendance at inventory taking would depend
upon his assessment of the efficacy of relevant internal control procedures, and the results of
his examination of the inventory records maintained by the entity and of the analytical
review procedures.

According to SA-501 „Audit Evidence-Specific Considerations for Selected Items‟, the

management ordinarily established procedures under which inventory is physically counted
at least once a year to serve as a basis for the preparation of the financial statements and, if
applicable, to ascertain the reliability of the entity‟s perpetual inventory system.

Attendance at physical inventory counting involves:

(i) Inspecting the inventory to ascertain its existence and evaluate its condition, and
performingtest counts.

(ii) Observing compliance with management‟s instructions and the performance of

procedures for recording and controlling the results of the physical inventory count, and

(iii) Obtaining audit evidence as to the reliability of management‟s count procedures. These
procedures may serve as test of controls or substantive procedures depending on the
auditor‟s risk assessment, planned approach and the specific procedures carried out.

Observing the performance of management‟s count procedures, for example, those

relating to control over the movement of inventory before, during and after the count, assists
the auditor in obtaining audit evidence that management‟s instructions and count
procedures are adequately designed and implemented. In addition, the auditor may
obtain copies of cut off information, such as details of the movement of inventory, to assist
the auditor in performing audit procedures over the accounting for such movements at a
later date.

In addition to recording the auditor‟s test counts, obtaining copies of the management‟s
completed physical inventory count records assists the auditor in performing subsequent
audit procedures to determine whether the entity‟s final inventory records accurately reflect
actual inventory count results.

Answer: 10 (c)

In general while conducting audit of Co-operative society ‘The auditor need to look into the
followings:
1. General Points: -

(i)The auditor should carefully go through the bye-laws of the society and see that they
are being observed both in letter and spirit.

(ii)He shouldexamine the Register of Members of the society and individual

shareholdings.

(iii)He should test-check the internal check and control system operated by the society

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and model his audit examination based on its strengths and weaknesses.

2. Audit of income: He should carefully vouch the receipt of cash. Cash receipts on
account of share capital should be vouched with the Register of Members. Cash
received against sales should be vouched with the cash memos and invoices issued to
customers as also Sales Account. Receipt of cash in respect of payment of interest and
repayment of loans advanced by the society should be vouched with the loan
agreements. Cash received from members towards construction of houses or their
maintenance, should be vouched with the Register of Members, demands made by the
society from time to time, and money receipts.

3. Audit of Expenditure:

(i) He shouldvouch all expenditure with reference to authorization from the Managing
Committee, particularly in the case of large capital expenditure, as also the bills
received from individual parties, the money receipts obtained from them, and
entries in the Bank Pass Book along with counter-foils of cheques.

(ii) He should vouchthe payment of loans from the loan agreements entered into with
borrower members.

(iii) He shouldvouch establishment expenses with reference to the resolutions of the

Managing Committee, agreements with the persons concerned, and money
receipts obtained from them.

Other aspects points:

(i) He should appropriately classify overdue debts for a period from six months to five years
and more, and report them to the members, with a note regarding the effects these
might have on the financial position of the society.

(ii) Similarly, he should make a special reference to the overdue amount of interest from
members.

(iii) Writing off bad debts should be after prior authorization from the Managing Committee
of the society.

Answer: 10 (d)

Basis Statutory Audit Internal Audit

Appointing Statutory Auditor is appointed by Internal Auditor is appointed by the
Authority the shareholder in the general Board
meeting
Scope of the The scope of work is defined in the
The scope of work includes the
work Companies Act adherence of management policies
and procedures and indentifies the
weakness in the internal control
Removal of Statutory Auditor can be removed Internal Auditor can be removed by
Auditor by the shareholders the Board
Remuneration It is fixed by the shareholders It is fixed by the board
Audit Report It is submitted to the appointing It is submitted to the Board as a
Authority suggestion to improve weakness in

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the internal control

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redemption does not apply. redeemable although a

However, as per the recent company can issue perpetual
changes in the Companies Act, a debentures.
company can buy back shares in
accordance with the provisions in
the Act.
Voting rights A shareholder has voting rights. A debenture holder can't have
voting rights.
Status at At the time of winding up, At the time of winding up,
the time of shareholders have the least debenture holders have a
winding up priority regarding the return of priority over the shareholders
amount due to them. regarding the return of amount
due to them.

(c) Surrender Value of a Life Insurance Policy

In the case of life policy, the policy normally has value only when it matures. But to
facilitate the promotion of business, insurance companies assign value to the policy
on the basis of the premiums paid. Insurance companies will be prepared to pay
such value on the surrender of the policy by a needy policy holder desiring to realize
the policy. Therefore, the value is referred to as 'surrender value'. Surrender value is
usually nil until at least two annual premiums are paid. Amount paid as surrender
value is an expenditure and is similar to claims paid.

(d) Finance Lease

It is a lease, which transfers substantially all the risks and rewards incidental to
ownership of an asset to the Lessee by the Lessor but not the legal ownership. In
following situations, the lease transactions are called Finance Lease.
(i) The lessee will get the ownership of leased asset at the end of the lease term.
(ii) The lessee has an option to buy the leased asset at the end of term at price,
which is lower than its expected fair value at the date on which option will be
exercised.
(iii) The lease term covers the major part of the life of asset.
(iv) At the beginning of lease term, present value of minimum lease rental covers
substantially the initial fair value of the leased asset.
(v) The asset given on lease to lessee is of specialized nature and can only be used
by the lessee without major modification.

Section - B
(Audit)

Answer Question No. 6 and any three from Question No. 7, 8, 9 and 10.

6. (a) Choose the correct answer from the four alternatives given: 1×6=6

(i) A nomination and remuneration committee should have _________ directors.

(A) 5
(B) 10

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(ii) An individual auditor who has completed his term shall not be eligible for
reappointment as auditor in the same company for
(A) Next 3 Years
(B) Next 5 Years
(C) Next 7 Years
(D) Next 8 Years

(iii) Proving the truth means vouching of ____________ .

(A) payment
(B) expenses
(C) assets
(D) liabilities

(iv) Secretarial Audit is applicable to the Public Company having the paid-up share
capital of ₹ __________________.
(A) 50 crore
(B) 75 crore
(C) 100 crore
(D) 200 crore

(v) Internal Control Questionnaire contains the questions which need to be followed
by the _________________________ .
(A) Employer of the organisation
(B) Employee of the organisation
(C) Auditor of the entity
(D) Banker to the organisation

(vi) Declaration of dividend is covered under section _____________ of the Companies

Act, 2013.
(A) 122
(B) 123
(C) 124
(D) 125

(b) Match the following items in Column 'A' with items shown in Column 'B' 1x4=4

Column 'A' Column 'B'

1. CRA-1 A. Audit Sampling
2. Verification B. Maintenance of Cost Records
by the Company
3. SA 530 C. Comptroller and Auditor
General of India
4. The authority for Government Audit D. Proving the truth

(i) An Audit notebook is a bound book in which a large variety of matters observed
during the course of audit are recorded.
(ii) The concept of true and fair is a fundamental concept in auditing.
(iii) First auditor of the company is appointed by the Board of Directors within 45 days
from the date of first AGM.
(iv) A Statutory Audit is an official investigation into alleged wrong doing.

Answer:

6. (a) (i) D 3

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(ii) B Next 5 years

(iii) B expenses
(iv) A ₹50 crore
(v) B Employee of the organisation
(vi) B 123

(b) 1. B
2. D
3. A
4. C

(c) (i) True

(ii) True
(iii) False
(iv) False

7. (a) What do you mean by Audit Programme? Discuss the various advantages of an Audit
Programme.

(b) Discuss different types of internal control systems with example. (1+5)+6=12

Answer:

7. (a) An audit programme is a detailed plan of the auditing work to be performed,

specifying the procedures to be followed in verification of each item and the
financial statements and the estimated time required. To be more comprehensive, an
audit programme is written plan containing exact details with regard to the conduct
of a particular audit. It is a description or memorandum of the work to be done during
an audit. Audit programme serves as a guide in arranging and distributing the audit
work as well as checking against the possibility of the omissions.

Advantages of audit programme

The main advantages of an audit programme are enumerated below;

(i) It serves as a ready check list of audit procedures to be performed.
(ii) The audit work can be properly allocated to the audit assistants or the article
clerks.
(iii) The auditor may easily know the extent of work done at any point of time. Thus,
the progress of work done can be under the supervision and control of the
auditor.
(iv) Audit programme would not only be useful for the audit assistants in carrying
the audit work but for the principal too as he would be in a position to
account for the individual responsibilities.
(v) A uniformity of the work can be attained as the same programme would be
followed from time to time.
(vi) It is a useful basis for planning the programme for the following year it is useful in
selection of team members & delegation of responsibilities to them.
(vii) It may be used as evidence by the auditor in the event when any charge is
brought against him.
(viii) It is useful in selection of Team members and delegation of responsibilities to
them.
(ix) He can prove that there has no negligence on his part and he exercised

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reasonable care and skill while performing the task.

(x) It helps in timely completion of the audit work.

(b) Generally, there are two types of Internal Control in an Organisation: preventive and
detective controls. Both types of controls are essential to an effective internal control
system. From a quality standpoint, preventive controls are essential because they are
proactive and emphasize quality. However, detective controls play a critical role by
providing evidence that the preventive controls are functioning as intended.

i) Preventive Controls are designed to discourage errors or irregularities from

occurring. They are proactive controls that help to ensure departmental
objectives are being met. Examples of preventive controls are:
 Segregation of Duties: Duties are segregated among different people to
reduce the risk of error or inappropriate action. Normally, responsibilities for
authorizing transactions (approval), recording transactions (accounting) and
handling the related asset (custody) are divided.
 Approvals, Authorizations, and Verifications: Management authorizes
employees to perform certain activities and to execute certain transactions
within limited parameters. In addition, management specifies those activities
or transactions that need supervisory approval before they are performed or
executed by employees. A supervisor's approval (manual or electronic)
implies that he or she has verified and validated that the activity or
transaction conforms to established policies and procedures.
 Security of Assets (Preventive and Detective): Access to equipment,
inventories, securities, cash and other assets is restricted; assets are
periodically counted and compared to amounts shown on control records.

ii) Detective Controls are designed to find errors or irregularities after they have
occurred. Examples of detective controls are:
 Reviews of Performance: Management compares information about current
performance to budgets, forecasts, prior periods, or other benchmarks to
measure the extent to which goals and objectives are being achieved and to
identify unexpected results or unusual conditions that require follow-up.
 Reconciliations: An employee relates different sets of data to one another,
identifies and investigates differences, and takes corrective action, when
necessary.
 Physical Inventories
 Audits

8. (a) Discuss the rights of an auditor according to the Companies Act, 2013.

(b) How can an auditor, who is appointed under section 139 of the Companies Act, 2013,
be removed from his office before the expiry of his term? 8+4=12

Answer:

8. (a) Rights of an Auditor according to Companies Act 2013:

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a) Right to Inspect Books of Accounts and Vouchers: 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. In addition, auditor of a holding company shall also have the right of access to
the records of all its subsidiaries in so far as it relates to the consolidation of its financial
statements with that of its subsidiaries. [Section 143(1)]
b) Right to Obtain Information and Explanations: The 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. [Section 143(1)]
c) Right to Inspect Branch Offices and Branch Accounts: The company auditor is also
entitled to inspect the accounts of any branch office in case he considers it necessary
in order to discharge his duties as the company auditor. He can do so even if a
separate auditor has already been appointed to audit the branch accounts. [Section
143(8)]
d) Right to Receive the Report of Branch Audit from the Branch Auditor: In case a
separate auditor has been appointed to audit the branch accounts, the company
auditor has the right to receive the branch audit report from the branch auditor so
appointed and use it to prepare the overall audit report. [Section 143(8)]
e) Right to Receive Notices and Attend General Meetings: The company auditor is also
entitled to receive all notices of, and other communications relating to, any general
meeting and to attend such meetings either by himself or through his authorised
representative, who shall also be qualified to be an auditor. The auditor shall also have
the right to be heard at such meeting on any part of the business which concerns him
as the auditor. [Section 146]
f) Right to Sign the Audit Report and Other Documents: The company auditor also has the
right to sign the auditor's report or sign or certify any other document of the company
in accordance with the provisions of sub-section (2) of section 141. [Section 145]
g) Right to Have Audit Report Read at the AGM: The company auditor has the right to have
the report read before the company in the General Meeting (especially in case the
qualifications, observations or comments on financial transactions or matters,
mentioned in the auditor's report, have any adverse effect on the functioning of the
company) and the same shall be opened to inspection by any member of the
company. [Section 145]
h) Right to Attend the Meeting of the Audit Committee: The auditors of a company shall
have a right to attend the meetings of the Audit Committee and to be heard in the
meetings when the Committee considers the auditor's report but shall not have the
right to vote. [Section 177(7)]
i) Right to be Indemnified: The auditor of a company shall also have the right to be
indemnified for any expenses incurred by him in defending himself in case the
judgement in any law suit (whether civil or criminal) against the company goes in
favour of the auditor.

(b) Removal of Auditor before the Expiry of His Term:

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in Form ADT-2. The application shall be accompanied with fees as provided for this
purpose under the Companies (Registration Offices and Fees) Rules, 2014.
b) The application shall be made to the Central Government within thirty days of the
resolution passed by the Board.
c) The company shall hold the general meeting within sixty days of receipt of
approval of the Central Government for passing the special resolution for removal
of the said auditor.
The auditor concerned shall be given a reasonable opportunity of being heard.

9. (a) With reference to the Companies (Cost Records and Audit) Rules, 2014 as amended,
discuss the following:
(i) Submission of cost audit report to the Board of Directors by the Cost Auditor
(ii) Applicability of rotation to Cost Auditors
(iii) Remuneration of a Cost Auditor

(b) "Disclaimer of Opinion and Adverse Report do not serve the same purpose". Discuss.
(2+2+3)+5=12

Answer:

9. (a) (i) Filing of cost audit report to the Board of Directors by the Cost Auditor:

As per sub-rule (4) of Rule 6 of the Companies (Cost Records and Audit) Rules
2014 as amended, a Cost Auditor is required to submit the Cost Audit Report
along with his or its reservations or qualifications or observations or suggestions, if
any, in form CRA-3 to Board of Directors of the company within a period of one
hundred and eighty days from the closure of the financial year to which the report
relates.

(ii) Applicability of rotation to Cost Auditors:

Section 148 also provides that qualifications, disqualifications, rights, duties and
obligations applicable to auditors (financial) shall apply to a cost auditor appointed
under this section. The eligibility, qualifications and disqualifications are provided in
Section 141 of the Act and powers and duties are provided in Section 143.

Section 143(14) specifically states that the provisions of Section 143 shall mutatis
mutandis apply to a cost auditor appointed under Section 148. There are no other
provisions governing the appointment of a cost auditor.

Section 139(3) of the Act, applicable to appointment of auditors (financial), and

Rule 6 of Companies (Audit and Auditors) Rules, 2014 deals with the provision of
rotation of auditors and these provisions are applicable only to appointment of
auditors (financial). The Act does not provide for rotation in case of appointment
of cost auditors and the same is not applicable to a cost auditor. It may, however,
be noted that though there is no statutory provision for rotation of cost auditors,
individual companies may do so as a part of their policy, as is the practice with
Public Sector Undertakings.

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(iii) Remuneration of a Cost Auditor:

For the purpose of sub-section (3) of section 148 -

(a) in the case of companies which are required to constitute an audit committee -

(i) the Board shall appoint an individual, who is a cost accountant in

practice, or a firm of cost accountants in practice, as cost auditor on the
recommendations of the Audit committee, which shall also recommend
remuneration for such cost auditor;
(ii) the remuneration recommended by the Audit Committee under (i) shall
be considered and approved by the Board of Directors and ratified
subsequently by the shareholders;

(b) in the case of other companies which are not required to constitute an audit
committee, the Board shall appoint an individual who is a cost accountant in
practice or a firm of cost accountants in practice as cost auditor and the
remuneration of such cost auditor shall be ratified by shareholders subsequently.

(b) Disclaimer of Opinion

A Disclaimer of Opinion Report is given when the Auditor is unable to form an overall
opinion about the matters contained in the Financial Statements.

A Disclaimer of Opinion should be expressed when the possible effect of a limitation on

scope is so material and pervasive that the Auditor has not been able to obtain
sufficient appropriate audit evidence and is, accordingly, unable to express an opinion
on the Financial Statements.

It may happen in situations such as -- (a) when books of account of the Company
seized by Income-Tax Authorities, (b) when it is not possible for the Auditor to obtain
certain information or (c) when scope of audit work is restricted.

The Auditor will state in his Report that he is unable to form an opinion on the
Financial Statements. Such Report is called as “Disclaimer of Opinion” Report.

Adverse Report

An Adverse or Negative Report is given when the Auditor concludes that based on
his examination, he does not agree with the affirmations made in the Financial
Statements / Financial Report.

An Adverse Opinion should be expressed when the effect of a disagreement is so

material and pervasive to the Financial Statements, that the Auditor concludes that a
qualification of the report is not adequate to disclose the misleading or incomplete
nature of the Financial Statements.

The Auditor states that the Financial Statements do not present a true and fair view of
the state of affairs and the working results of the organisation. The Auditor should state

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the reasons for issuing such a report.

Thus Disclaimer of Opinion and Adverse Report do not serve the same purpose, while
the first is appropriate when the auditor is unable to form his opinion due to lack of
information the latter is used when he thinks that the financial statements have failed to
exhibit true and fair view of the performance and affairs of the company.

10. Write short notes (any three): 4×3=12

(i) Auditor's duty regarding interim dividend

(ii) Audit of Property, Plant and Equipment
(iii) Audit of a Charitable Trust
(iv) Audit of alteration of Share Capital

Answer:

10. (a) Auditor's duty regarding Interim Dividend:

In connection with the payment of interim dividend, the auditor must consider the
following points:
a) The auditor should examine the Articles of Association of the company to ascertain
whether payment of interim dividend is permitted by the articles or not.
b) The auditor should also examine the minute book of directors' meeting to verify
resolution approving the payment of interim dividend.
c) The amount of interim dividend shall be deposited in a scheduled bank in a separate
account within five days from the date of declaration of such dividend.
d) Based on the particulars of Dividend Register, the auditor must verify whether the
dividend warrants have been issued to rightful owners. In case of payment through
electronic mode (ECS), he must verify from the bank statements that the payment
has been properly credited to the account of shareholder.
e) The auditor should verify the Dividend Register and returned dividend warrants to
determine the amount of interim dividend that could not be paid. He shall also to
enquire the reason for such dividend remaining unpaid and ensure that the legal
requirement, in this context, has been duly complied with.

(b) Audit of Property, Plant and Equipment:

An auditor should follow the procedure mentioned below while performing an audit
of PPE.
(i) The auditor must ensure physical verification of the assets to confirm that they
exist and are under the possession of the client. He shall ensure that PPE
additions up to the date of verification have been updated in the register.
(ii) He shall specifically ensure that assets that are not in the working condition
have been accounted for as deletions.
(iii) He shall also verify the PPE schedule (asset class wise) maintained by the
management and tally the closing balances to the entity's books of accounts.
(iv) He should also check the arithmetical accuracy of the movement in PPE
schedule and reconcile the opening balance with the closing balance of each
class of asset by considering the additions and disposals during the year.

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(v) He shall also verify whether appropriate internal processes and procedures like
inviting competitive quotations or floating tenders were done before finalising the
vendor.
(vi) The auditor shall check that PPE purchase invoices are in the name of the client
that entails the legal ownership.
(vii) In relation to all deletions, he shall verify management's rationale for deletion. He
may also seek any report from the technical expert, if any, that led to such
decision of deletion.
(viii) The auditor shall see that all items of PPE have been carried at cost less
accumulated depreciation less accumulated impairment loss.
(ix) The auditor shall verify whether depreciation has been charged on all items
except the freehold land. In case of company, the auditor shall also ensure that
depreciation has been calculated in compliance with Schedule II of the
Companies Act 2013.
(x) In case of a company, the auditor should ensure that the all items of PPE have
been disclosed in the balance sheet of the company under the head 'Non-
current Assets' and subhead 'Fixed Assets' as 'Tangible Asset' as per Schedule III
of the Companies Act 2013. (ii) He shall also ensure that all the relevant
information has also been disclosed in the 'Notes to Accounts' section.

Alternative Answer:

The term Property, plant and equipment in respect of those entities which are
required to comply with the relevant Revised AS refers to such tangible items that: (a)
are held for use in the production or supply of goods or services, for rental to others, or
for administrative purposes; and (b) are expected to be used during more than one
period.
An asset can be classified as a Property, Plant, Equipment (PPE) or otherwise,
depending upon the use to which it is put or intended to be put. For example, assets
which are classified as PPE in one type of business may be considered as current
assets in another. Similarly, the same asset may be classified differently in an entity at
different points of time. The recognition of Property, Plant and Equipment should be
done as per the principles laid down in the “relevant applicable AS”.

Audit:

(1) Auditor should review internal controls over acquisition like authorization, capital
budgeting etc.
(2) Physical verification of Property, Plant and Equipment.
(3) Check whether proper records are maintained.
(4) Check whether proper depreciation of Property, Plant and Equipment is done,
where required.
(5) Check supporting documents of acquisition disposal.
(6) Check whether scrapping or retirement of Property, Plant and Equipment is
properly authorised.
(7) Check whether sale proceeds of Property, Plant and Equipment are properly
accounted.
(8) Check title needs of ownership of Property, Plant and Equipment.

(c) When conducting the audit of a charitable institution, the auditor should consider the
following matters:
(i) Constitution: The auditor should study the constitution of the charitable

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institution, for example, whether it is set up under the Societies Registration Act
or as per section 8 of the Companies Act or as a trust.
(ii) Interest of members: He should obtain a list of members of the governing body.
This will help the auditor in identifying whether any of the members of the
governing body has any interest in the charitable institution.
(iii) Budget: The auditor should obtain a copy of the budget sanctioned or the
financial statement.
(iv) Internal Check: He should examine the system of internal check, especially as
regards to the accounting of the amounts collected.
(v) Collection & Deposit of income: He should also check that the amounts
received towards income have been duly collected, received and deposited
into the bank regularly and promptly.
(vi) Subscription and donation: The auditor should check the following with respect
to the subscription:
 The amount or the rate of the annual subscription.
 Any instructions given by the donors as to the specific utilization of donation.
 Adequacy of internal controls existing as regards unused receipt books, counter
foils, etc.
 Where subscriptions are received in advance these should be properly dealt
with in the accounts.
(vii) Legacies received: He needs to verify the amounts of legacies received by
reference to correspondence with any figures and other available information's.
(viii) Income from Investment: The amount of dividend and interest received should be
properly vouched with reference to the counterfoils or dividend warrants
received.
(ix) Rent: Rent received must be checked based on tenancy agreement and the rent
slips.
(x) The auditor should be careful in conducting audit of income and expenditure
associated with different concerts and other programmes organised by the
institution. All the gross receipts and outgoings are to be properly vouched by him.
(xi) He should physically verify the cash in hand, inventories and fixed assets.

(d) While conducting the audit of alteration of share capital of a company, the auditor
should
(i) Confirm that alteration was authorised by articles.
(ii) Verify the minutes of the Board meeting and ordinary resolution passed in the
general meeting in which the approval of members is obtained.
(iii) Verify that alteration had been effected in copies of Memorandum, Articles, etc.
(iv) Obtain the reasons for which the memorandum of the company is altered.
(v) Check whether there is any change in the voting percentage of shareholders due
to consolidate and divide all or any of its share capital into shares of a larger
amount than its existing shares.
(vi) To confirm that the altered share capital's denomination is more than Rupee 1.00.
(vii) Verify that proper accounting entries have been passed. Register of members
may also be checked to see that the necessary alteration have been effected
therein.

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(viii) Must ensure that the alteration has been effected following all the provisions of
Section 61 of the Companies Act 2013.

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or Services sold and the Type of
Customers, etc.

3. Bad/Doubtful: Allowance for Bad and

Doubtful Loans and Advances shall be  Amounts due under contractual
disclosed under the relevant heads obligations, e.g. dues in respect of
separately. Insurance Claims, Sale of Fixed Assets,
Contractually Reimbursable Expenses,
interest Accrued on Trade Receivables,
etc, cannot be included within Trade
Receivables, such Receivables should
be classified as “Other Current Assets”
and each such item should be
disclosed nature-wise.
4. Directors, etc: Debts due by Directors
or Other Officers of the Company or  Lean Period Activities: Receivables
any of them either severally or jointly arising out of sale of materials/
with any other person or debts due by rendering of services during a
Firms or Private Companies respectively in Company’s lean period should be
which any Director is a Partner or a included under “Trade Receivables”, if
Director or a Member should be such activity is in the normal course of
separately stated business. If they are not part of “normal
course of business”, they are to be
classified under “Other Assets”.

Section B (Audit)
Answer Question No. 6 and any three from Question Nos. 7, 8, 9 and 10.

6.(a) Identify the correct alternative in each of the following cases: 1x6=6

(i) Section 146 of the Companies Act, 2013 deals with

(A) Auditor not to render certain services
(B) Auditor to sign Audit Reports
(C) Auditor to attend general meeting
(D) Punishment for contravention

(ii) Which of the following is not included in the Current Audit File?
(A) Memorandum and Articles of Association
(B) Current year’s audit programme
(C) Internal Control Questionnaire
(D) Copies of budget

(iii) Which of the following is not an external audit evidence?

(A) Quotations
(B) Confirmation from debtors
(C) Goods Received Note
(D) Confirmation from bankers

(iv) The ___________ shall act as the secretary of the Audit Committee.
(A) Auditor
(B) Managing Director
(C) Comptroller and Auditor General
(D) Company Secretary

(v) Cost Auditor is appointed by

(A) Audit Committee
(B) Board of Directors

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(C) Board of Directors on recommendation from Audit Committee
(D) None of the above

(vi) Remuneration of Auditors is covered under the following section of Companies Act,
2013:
(A) Section 142
(B) Section 148
(C) Section 139
(D) Section 143

(b) Match the following items in Column ‘A’ with items shown in Column ‘B’: 1x4=4

Column A Column B
Fundamental Accounting
(1) Section 144 of the Companies Act (A) Assumption
Reporting of fraud by Auditor to External and Internal
(2) Central Government (B) Audit
(3) Functional Classification of Audit (C) Form ADT-4
Auditors not to render
(4) Going Concern (D) certain services

(i) An audit work reflects the work done by the Management.

(ii) “Branch Office” in relation to a Company means any establishment described as
such by the Company.
(iii) Cooling period of the individual auditor is 2 consecutive terms of 5 years.
(iv) There is no difference between Statutory and External audit.

Answer :

6. (a) (i) (C)

(ii) (A)
(iii) (C)
(iv) (D)
(v) (C)
(vi) (A)

(b) 1. (D)
2. (C)
3. (B)
4. (A)

(c) (i) False

(ii) True
(iii) False
(iv) False

7. (a) Discuss the basic principles of governing an audit as per SA 200. 6

(b) “The existence of a good internal check system reduces to a great extent the work
of the auditor but does not reduce his liability.”— Discuss. 6

Answer:

7. (a) SA 200 issued by ICAI (CA) gives the following basic principles that govern the
auditor’s responsibilities whenever an audit is carried out:

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(i) Integrity, objectivity and independence:- The auditor should be straight-

forward, honest, sincere and free form any influence on his audit work. He
should maintain impartiality and be free of any interest.
(ii) Confidentiality: - He should not disclose the client’s information to anybody
without the client’s permission or under any regulatory requirement.
(iii) Skills and competence:- The audit should be performed and audit report be
prepared by adequately trained, experienced and competent person.
(iv) Work performed by others:- The auditor should carefully supervise the work
performed by others (such as his subordinates, other auditors, experts etc.) as
remains responsible for the work delegated by him to his assistants, other auditors
or experts.
(v) Documentation: - Proper working papers should be maintained by the auditor
to evidence the audit work. Working paper which is maintained is to
demonstrate that the audit is in adherence to the basic principles.
(vi) Planning: - The auditor should obtain the knowledge about client’s business to
determine the nature, timing and the extent of the audit procedures.
(vii) Audit evidence: - The auditor should obtain sufficient appropriate audit
evidence through performing the compliance and substantive procedures.
(viii) Accounting system and internal controls: - An understanding of the
accounting system and the related internal controls help in determining the
nature, timing and extent of other audit procedures.
(ix) Audit conclusions and reporting: - On the basis of conclusions drawn from the
audit evidence obtained the auditor should give unqualified report or
qualified report or adverse report or the disclaimer report.

7. (b) In an organisation, an auditor is appointed to authenticate the books of accounts and

final financial statements based on all available evidences. He is also to express an
unbiased opinion on the exhibition of true and fair view of the financial performance
and financial state of affairs through the Income Statement and the Balance Sheet
respectively. Thus keeping in mind such an objective the auditor needs to decide the
extent of examination that he should conduct to arrive at any conclusion. The
auditor, in this context, can resort to either detailed checking or test checking.
Detailed checking refers to the examination of books of accounts in detail. Test
checking, on the other hand, is the technique of checking some transactions
selected as sample from the group of transactions and drawing conclusion on that
basis, taking sample transactions selected to be the representative of the remaining
transactions. Detailed checking is time consuming as well as laborious whereas test
checking relieves the auditor from such pain. Thus, in actual practice, often the
auditor is found reporting to test checking, provided the internal check system is
satisfactory. Reliance on an effective internal check system and thereby streamlining
the audit process enables the auditor to devote more time in examining the critical
areas of accounting including valuation of closing stock, valuation of assets and
liabilities, determining the reasonableness of provisions etc.
However, such reliance simultaneously increases the risk of the auditor. This is because
even a sound internal check system cannot guarantee the non-existence of any error
or fraud in the accounts. Thus, when the auditor applies test checking instead of a
detailed checking, there is every possibility that any such error or fraud remains
undetected.

8. (a) Discuss the provisions relating to ‘Punishment for Contravention’ under section 147 of
the companies Act 2013. 6

(b) List down the certain services which are not to be rendered by the Auditor of a
Company. 6

Answer :

8. (a) Punishment for Contravention (Section 147):

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(2) If an auditor of a company contravenes any of the provisions of section 139, section
143, section 144 or section 145, the auditor shall be punishable with fine which shall not
be less than twenty-five thousand rupees but which may extend to five lakh rupees or
four times the remuneration of the auditor, whichever is less.

Provided that if an auditor has contravened such provisions knowingly or willfully with
the intention to deceive the company or its shareholders or creditors or tax authorities,
he shall be punishable with imprisonment for a term which may extend to one year
and with fine which shall not be less than fifty thousand rupees but which may extend
to twenty-five lakh rupees or eight times the remuneration of the auditor, whichever is
less.

(3) Where an auditor has been convicted under sub-section (2), he shall be liable to—
(i) refund the remuneration received by him to the company; and
(ii) pay for damages to the company, statutory bodies or authorities or to any other
persons for loss arising out of incorrect or misleading statements of particulars made in
his audit report.

(4) The Central Government shall, by notification, specify any statutory body or authority or
an officer for ensuring prompt payment of damages to the company or the persons
under clause (ii) of subsection (3) and such body, authority or officer shall after payment
of damages to such company or persons file a report with the Central Government in
respect of making such damages in such manner as may be specified in the said
notification.

(5) Where, in case of audit of a company being conducted by an audit firm, it is proved
that the partner or partners of the audit firm has or have acted in a fraudulent manner or
abetted or colluded in any fraud by, or in relation to or by, the company or its directors
or officers, the liability, whether civil or criminal as provided in this Act or in any other law
for the time being in force, for such act shall be of the partner or partners concerned of
the audit firm and of the firm jointly and severally.

Provided that in case of criminal liability of an audit firm, in respect of liability other than
fine, the concerned partner or partners, who acted in a fraudulent manner or abetted
or, as the case may be, colluded in any fraud shall only be liable.

(b) AUDITOR NOT TO RENDER CERTAIN SERVICES [SECTION 144]

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 maybe, 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:—
(a) accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services;
(h) management services; and

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(i) any other kind of services as may be prescribed.

Explanation :— For the purposes of this sub-section, the term “directly or indirectly” shall
include rendering of services by the auditor:-

i. in case of auditor being an individual, either himself or through his relative or any
other person connected or associated with such individual or through any other
entity, whatsoever, in which such individual has significant influence or control, or
whose name or trade mark or brand is used by such individual;
ii. in case of auditor being a firm, either itself or through any of its partners or through
its parent, subsidiary or associate entity or through any other entity, whatsoever, in
which the firm or any partner of the firm has significant influence or control, or
whose name or trade mark or brand is used by the firm or any of its partners.

9. (a) With reference to the Companies (Cost records and Audit) Rules 2014, as amended,
discuss provisions relating to maintenance of cost accounting records and cost audit. 6

(b) Discuss briefly some of the situations calling for qualifications in Audit Report. 6

Answer:

9. (a) With reference to the Companies (Cost Records and Audit) Rules 2014, as
amended:
The provisions regarding Maintenance of Cost Accounting Records and Cost
Audit are as follows –

The Rules state that cost records are to be maintained in Form CRA-1, which
provides principles to be followed for different cost elements. The principles are
in sync with the cost accounting standards issued by the Institute of Cost
Accountants of India. Since the Rules are principle based, no format has been
prescribed for maintenance of cost accounting records like pre-2011 industry
specific rules. It is opened for industry to maintain cost accounting records
according to its size and nature of business so long as it determines a true and
fair view of the cost of production, cost of sales and margin of the
products/services. The cost audit report is required to be in conformity with the
“cost auditing standards” as referred to in Section 148 of the Companies Act,
2013. It may be noted that the Council of the Institute of Cost Accountants of
India has made it mandatory for cost accountants in practice to follow and
conform to the Cost Accounting Standards issued by it and it is incumbent on
the cost auditors to report any deviations from cost accounting standards.

(b) Some situations calling for qualifications in Audit Reports are :

i. Where the Auditors are unable to obtain all the information and explanations
which they consider necessary for the purposes of their audit, e.g. –

(a) Absence of satisfactory documentary evidence of the existence of

ownership of the material assets, such as, title deeds in respect of land,

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(b) Absence of vouchers in respect of material payments made by the
Company,
(c) Destruction of books and records by fire or accident,
(d) Non-availability of books and records owing to unavoidable
circumstances, such as books and records of “a foreign branch with which
no communication is possible.
ii. Where proper books of accounts have not been kept in accordance with the
law.
iii. Where the Balance Sheet and P&L Account are not in agreement with the
hooks of account and returns.
iv. When the information required by law is not furnished.

v. When the accounts do not disclose a true and fair view like –

(a) Where the accounting practices followed by the Company are not
considered appropriate to the circumstances and nature of the business e.g.
treatment of HP Sales as outright sales,
(b) Where there has been a change in accounting principles or procedures in
relation to material items, such valuation of stock, depreciation, treatment of
by-product cost, etc. without adequate explanation and disclosure of effect
of the change,
(c) Where difference of opinion with management has arisen regarding valuation
or realisability of assets, such as Stock-in-Trade, Debtors, Loans & Advances or
the extent of liabilities, contingent or otherwise,
(d) Where income or expenditure is not properly reflected so as to show a fair
figure of profit for the year,
(e) Where information is not required by law to be disclosed but the disclosure of
which is considered essential by the Auditors in order to show a true and fair
view,
(f) Where there is a contravention of the provisions of the Companies Act having a
bearing upon the accounts and transactions of the Company e.g. donations to
political parties or for political purposes in contravention of Section 182, or
contributions to charitable or other funds in excess of the limitation specified in
Section 181;
(g) Where the Company has contravened the provisions of its Memorandum and
Articles of Association.

10. Write short notes (any three): 4x3=12

(a) Branch Audit
(b) Information Systems Audit
(c) Audit of Municipalities and Panchayats (Local Bodies)
(d) Audit of interest on debentures

Answer :

10 (a) Branch Audit

“Branch office”, in relation to a company, means any establishment described as such

by the company - section 2(14) of the 2013 Act. Where a company has a branch office,
the accounts of that office shall be audited either by the auditor appointed for the
company (herein referred to as the company’s auditor) under this Act or by any other
person qualified for appointment as an auditor of the company under this Act and
appointed as such under section139, or 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 and 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 such as may be prescribed.

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Provided that 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.

(b) Information Systems Audit:

According to Ron Weber, “Information systems auditing is an organizational

function that evaluates asset safeguarding, data integrity, system effectiveness,
and system efficiency in computer based information systems”. It has arisen for
seven major reasons:
i. The consequences of losing the data resource;
ii. The possibility of misallocating resources because of decision based on
incorrect data or decision rules;
iii. The possibility of computer abuse if computer systems are not controlled;
iv. The high value of computer hardware, software, and personnel;
v. The high costs of computer error;
vi. The need to maintain the privacy of individual persons; and
vii. The need to control the evolutionary use of computers.

(c) Audit of Municipalities and Panchayats (Local Bodies)

The major objective of audit of Municipalities and Panchayats are enumerated
below;
(i) To ensure on the fairness and correctness of contents in the Financial
Statement
(ii) To report on adequacy of Internal control
(iii) To ensure value of money is fully received on amount spent
(iv) To detect the frauds and errors.

The following points are to be considered necessary for carrying on audit of

(d) Audit of interest on debentures:

A predetermined fixed rate of interest is payable on debentures irrespective of the fact that
company has earned the profit or not. Debenture holders are creditors of the company,
they are not the owners. They have no voting powers and cannot influence the
management but their claim of interest rank ahead of the claims of the shareholders.
Auditor’s Duty:

i. The payment of interest should be vouched by the auditor with the

acknowledgement of the debenture-holders, endorsed warrants and in case of
bearer debentures with the coupons surrendered.
ii. The auditor should reconcile the total amount paid with the total amount due
and payable with the amount of interest outstanding for payment.
iii. He should ensure that the interest paid on debenture like that on other fixed
loans, must be disclosed as a separate item in the Profit & Loss Account.

DoS, The Institute of Cost Accountants of India (Statutory Body under an Act of Parliament) Page 19

160
SUGGESTED ANSWERS TO QUESTIONS
INTERMEDIATE EXAMINATION
GROUP – II
(SYLLABUS 2016)
DECEMBER – 2021
Paper-12: COMPANY ACCOUNTS AND AUDIT
Time Allowed: 3 Hours Full Marks : 100

Section A MCQ 20X1=20 Marks

Q.1 In case of an Electricity Company, balance of Security Deposit A/c at the end of the
accounting period should be disclosed as

Ans 1. A non-current asset in the Balance Sheet

2. A current liability in the Balance Sheet

3. A non-current liability in the Balance Sheet

4. A current asset in the Balance Sheet

Q.2 Which of the following is a part of functional classification of audit?

Ans 1. Continuous audit

2. Internal audit

3. Cost audit

4. Tax audit

Q.3 The term „FPO‟, in the context of issuing shares by a company, refers to
Ans 1. Future Public Offer

2. First Public Offer

3. Follow-on Public Offer

4. Full Public Offer

Q.4 Which of following is not a source of dividend?

Ans 1. Out of current year‟s profit after providing for past losses

2. Out of profits of any previous financial year without providing

depreciation

3. Out of profits for current year after providing for depreciation for current
year

4. Out of past reserves subject to certain conditions

Q.5 Partly paid-up preference shares can be redeemed

Ans 1. After obtaining the permission from Company Law Board

2. After passing a special resolution

3. After the permission from the Board Of Directors

4. After making them fully paid up

161
Q.6 Which of the following services by an auditor is not restricted under Section 144 of the
Companies Act 2013?

Ans 1. Actuarial services

2. Rendering outsourced financial services

3. Investment Advisory Services

4. Issuing Deposit Return Certificate

Q.7 Appointment of a cost auditor is communicated to the Central Government through

Ans 1. CRA 1

2. CRA 4

3. CRA 2

4. CRA 3

Q.8 Cooling period of an individual auditor is

Ans 1. Two consecutive terms of 5 years each

2. One term of 4 years

3. Two consecutive terms of 4 years each

4. One term of 5 years

Q.9 Secretarial Audit is applicable to the Public company having turnover of at least
Ans 1. Rs.100 crores

2. Rs.250 crores

3. Rs.300 crores

4. Rs.200 crores

Q.10 Proposed Dividend by a company is

Ans 1. Appropriation of profit
2. None of these

3. Charge against the profit

4. Deferred revenue expenditure

Q.11 A company may purchase its own shares out of

Ans 1. free reserves

2. all of these

3. securities premium account

4. proceeds of the issue of any shares or other specified securities

Q.12 Copies of management letters are a part of

Ans 1. None of these

2. Current Audit File

3. Permanent Audit File

4. Both Current and Permanent Audit File

162
Q.13 For the issuer, unpaid matured debentures and interest accrued thereon will be shown
under the head

Ans 1. Non-current liabilities

2. Non-current assets

3. Current assets

4. Current liabilities

Q.14 Minimum penalty payable by a company for contravention of any provisions of

Section 139 to 146 (both inclusive) of Companies Act 2013 is

Ans 1. Rs.25000

2. Rs.100000

3. Rs.30000

4. Rs.15000

Q.15 An audit report with certain reservations is also known as

Ans 1. Disclaimer of opinion

2. Clean report

3. Piecemeal report

4. Qualified report

Q.16 Which of the following is/ are the quantitative threshold(s) while identifying the
reportable segments as per AS 17?

Ans 1. 10% of the aggregate segment assets

2. 10% of the aggregate segment result

3. 10% of the aggregate total revenue

4. All of these

Q.17 How should the revaluation of Fixed Assets be treated in a Cash Flow Statement?

Ans 1. Under cash flow from financing activities

2. Do not appear in cash flow statement

3. Under cash flow from operating activities

4. Under cash flow from investing activities

Q.18 SA 210 stands for

Ans 1. Audit Documentation

2. Audit Working Papers

3. Agreeing the terms of Audit Engagements

4. Audit Planning

163
Q.19 Which of the following are mandatory financial statements of a General Insurance
Company as per IRDA regulations?

Ans 1. Balance Sheet

2. Profit and Loss Account

3. All of these

4. Revenue Account

Q.20 Grant received specifically for a fixed asset is disclosed in the financial statement:
I. By way of deduction from the gross block of asset
II. The grant is treated as deferred revenue income and charged off on a systematic
basis over the useful life of asset.
Which of the following is correct?

Ans 1. Both I and II

2. Either I or II

3. Only II

4. Only I

164
Section : B SAQ 20X1=20 Marks

Q.1 Under what type of insurance business, claim will arise either on death of insured or
on maturity of policy?
Answer :

Life

Q.2 Where is Debenture Redemption Reserve transferred after the redemption of all
Debentures?
Answer :

General Reserve Account

Q.3 What is the name given to the part of capital of a company which is called up onlyon
winding up?
Answer :

Reserve Capital

Q.4 Fill in the blank:

As per SQC 1, an auditor needs to retain the working papers for a period of
years.
Answer :

Seven (7)

Q.5 Fill in the blank:

Cost audit report is submitted by the company to the Central Government within
days from the receipt of a copy of the cost audit report from the cost auditor.
Answer :

Thirty (30)

Q.6 Fill in the blank:

is a continuous critical review of financial and operating activities of a
concern by appointed entity/person.
Answer :
Internal Audit

Q.7 Cash Flow arising from which of the following Operating, Investing or Financing
Activities may be reported on a net basis? Name one item.
Answer :

Cash receipts and payments on behalf of customers when the cash flow reflect the activities of the customer
rather than those of the entity OR cash receipts and payments for items in which turnover is quick, the amounts
are large, and the maturities are short

Q.8 Fill in the blank:

The maximum amount beyond which a company is not allowed to raise funds by
Issue of Share is known as .
Answer :
Nominal Capital

Q.9 What is the maximum number of members in Central Electricity Authority?

Answer :

Q.10 Fill in the blank:

Form CRA is related to appointment of Cost Auditor.
Answer :

CRA 2

165
Q.11 Name the account to which dividend not paid or claimed for seven consecutiveyears
or more is to be transferred.
Answer :

Investors Education and Protection Fund

Q.12 Fill in the blank:

Interest received by a finance company on loans granted to borrowers is shown
under the head in the Statement of Profit and Loss.
Answer :

Revenue from Operations

Q.13 Fill in the blank:

Segment Reporting is covered under Accounting Standard .
Answer :

AS 17

Q.14 How will you treat Bank overdraft and Cash Credit in the Balance Sheet of aCompany ?
Answer :
Short term borrowing

Q.15 Fill in the blank:

Every buyback of shares must be completed within a period of fromthe date of
Passing special resolution.
Answer :

Within time limit as fixed in General Meeting

Q.16 Fill in the blank:

Internal Auditor is appointed by the .
Answer :

Management

Q.17 Can the balance of Securities Premium Account be utilized for making existing partly
paid-up equity shares into fully paid-up?
Answer :

No.

Q.18 In case of Government Audit who is the supreme Audit Institution?

Answer :

Comptroller and Auditor General

Q.19 Fill in the blank:

A Banking Company is required to maintain percentage provision on
unsecured portion of doubtful advances.
Answer :

100%

Q.20 What are the important contents of Permanent Audit File? (Name at least three)
Answer :

Memorandum and Articles of Association, copies of Financial statements of

Previous years, significant Audit observations of pervious years.

166
Section : C
(12X4= 48 Marks)
One LAQ
Q.1 3+3= 6 Marks

I) Gross investment in the lease

II) Unearned Finance Income.

Answer :

i) Gross investment in the lease

= Rs.64,50,000

ii) Unearned Finance Income.

= Rs. 22,03,620

3+3= 6 Marks
Q.2

(i) Capitalization rate

(ii) Total interest cost to be capitalized.

Answer:
i) Capitalization rate = 7.5%(approximately)

ii) Total interest cost to be capitalized = Rs. 2,53,750

167
Two LAQ

Q.1 3+3+3+3= 12 Marks

168
a. Determine the fund from operation

b. Calculate Cash Flow from operating activities

c. Calculate Cash Flow from investing activities

d. Calculate Cash Flow from financing activities

Answer:

a) Fund from operation = Rs. 4,09,600

b) Cash Flow from operating activities : Rs. 3,37,600

c) Cash Flow from investing activities : Rs. 72,000

d) Cash Flow from financing activities : Rs. (4,09,600)

169
Three LAQ

Q. 1 2+2= 4 Marks

i) Calculate the exchange loss/gain on the reporting date.

ii) Calculate the exchange loss/gain on the settlement date.

Answer:

i) Exchange gain on the reporting date. (31.03.2021) = Rs.6,90,000

ii) Exchange loss on the settlement date. (30.06.2021) = Rs. 1,80,000

170
4 Marks
Q.2 Discuss various methods of obtaining audit evidence.

Answer:
Auditor obtains evidence in performing compliance and substantive procedures by any one or more of the
following methods –
(a) Inspection - It consists of examining records, documents, or tangible assets. Inspection of records and
documents provides evidence of varying degrees of reliability depending on their nature, source and the
effectiveness of internal controls over their processing.
(b) Observation - It consists of witnessing a process or procedure being performed by others.
(c) Inquiry and Confirmation - Inquiry consists of seeking appropriate information from a knowledgeable person
inside or outside the entity, Confirmation consists of the response to an inquiry to corroborate information
contained in the accounting records.
(d) Computation - It consists of checking the arithmetical accuracy of source documents and accounting records or
performing independent calculations.
(e) Analytical Review - It consists of studying significant ratios and trends and investigating unusual fluctuations
and items.

Q.3 What are the duties of Statutory Auditor regarding reissue of forfeited shares? 4 Marks
Answer:

Auditor's duty regarding Re-issue of forfeited shares

i) The auditor should ascertain that the board of directors has the authority under the Articles of
Association of the company to reissue forfeited shares. Check the relevant resolution of the Board of
Directors.

ii) Vouch the amounts collected from the persons to whom the shares have been allotted and verify the
entries recorded from re-allotment. Auditor should check the total amount received on the shares
including received prior to forfeiture, is not less than par value shares.

iii) Verify that the computation of surplus amount arising on the reissue of shares credited to Capital
Reserve Account and

iv) Where partly paid shares forfeited for non-payment of call, and re-issued as fully paid, the reissue is
considered as an allotment at a discount and compliance of the provisions of Section 53 is essential.

171
Four LAQ

Q.1 Discuss the provisions for reporting of Frauds by Auditors. 4 Marks

Answer:
Provisions for reporting of Fraud by Auditor
1) For the purpose of sub-section (12) of section 143, in case the auditor has sufficient reason to believe that an
offence involving fraud, is being or has been committed against the company by officers or employees of the
company, he shall report the matter to the Central Government immediately but not later than sixty days of his
knowledge and after following the procedure indicated herein below

(i) Auditor shall forward his report to the Board or the Audit Committee, as the case may be, immediately
after he comes to knowledge of the fraud, seeking their reply or observations within forty-five days;

(ii) 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 Central Government within fifteen days of
receipt of such reply or observations;

(iii) in case the auditor fails to get any reply or observations from the Board or the Audit Committee within the
stipulated period of forty-five days, he shall forward his report to the Central Government along with a
note containing the details of his report that was earlier forwarded to the Board or the Audit Committee
for which he failed to receive any reply or observations within the stipulated time.
(2) 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.
(3) The report shall be on the letter-head of the auditor containing postal address, e-mail address and contact number
and be signed by the auditor with his seal and shall indicate his Membership Number.
(4) The report shall be in the form of a statement as specified in Form ADT-4.

(5) The provision of this rule shall also, mutatis mutandis, to a cost auditor and a secretarial auditor during the -
performance of his duties under section 148 and section 204 respectively.

Q.2 Discuss the importance of internal control system in an organization.

4 Marks
Answer:

The various benefits accrue out of the Internal control system are enumerated below;

i) Attainment of goal & Objectives: - A sound internal control helps the entity towards the attainment of goal
&objective of the business.

ii) Reliable financial Information: A sound internal control helps the organization to set reliable financial
information for managerial decision making.

iii) Compliance with law &Regulations: Sound Internal control system ensures various compliance with laws
&regulation prevailing in the country .

iv) Efficient &Effective operation: - A sound internal control system ensures efficient and effective operations
that accomplish the goals of the organizations and protect employees and assets of the business.

v) Prevention of fraud &errors: - A sound internal control system prevents and detects frauds and errors and
ensures timely preparations of financial statements and various reports for decision making.

Q. 3 List the services that an Auditor cannot render U/S 144 of Companies Act 2013
4 Marks
Answer:
i) Accounting and bookkeeping services.
ii) Internal audit.
iii) Design and implementation of financial information system .
iv) Actuarial services .
v) Investment advisory services .
vi) Investment banking services .
vii) Rendering of outsourced financial services .
viii) Management services.

172
Five LAQ
Q.1 Discuss the features of Cost Audit Report. 4 Marks
Answer:

Cost Audit Report:

As per sub-rule (4) of Rule 6 of the companies (Cost Records and Audit) Rules 2014 as amended, a Cost Auditor is
required to submit the Cost Audit Report along with his or its reservations or qualifications or observations or
suggestions, if any, in form CRA-3 to Board of Directors of the company within a period of one hundred and eighty
days from the closure of the financial year to which the report relates. Form for filling Cost Audit Report with the
Central Government: As per sub-rule (6) of Rule 6 of the companies (Cost Records and Audit) Rules 2014 as
amended, every company to whom cost auditor submits his or its report .
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 along with fees specified in the Companies (Registration Offices and
Fees) Rules, 2014. It is to be noted that the cost audit report is required to be filed in XBRL format.

Q.2 Discuss the basic elements of an Auditor‟s Report.

4 Marks
Answer:
The Basic Elements of the Auditors' Report are –
i. Title: The Auditor's Report should have an appropriate title i.e. “Auditor's Report". It should be
distinguished from other Reports, e.g. reports of officers of the entity, Board of Directors.
ii. Addressee: The Auditor's Report should be appropriately addressed as required by the circumstances of
the engagement and applicable laws and regulations. Ordinarily, the Auditor's Report is addressed to the
authority appointing the Auditor.
iii. Opening or Introductory Paragraph: (a) The Auditor's Report should identify the Financial Statements of
the entity that have been audited, including the date of and period covered by the Financial Statements
(b) The Report should include a Statement that the Financial Statements are the responsibility of the
entity's management and a Statement that the responsibility of the Auditor is to express an opinion on the
Financial Statements based on the audit.

iV Scope Paragraph: (a) The Auditor's Report should describe the scope of the audit by stating that the audit
was conducted in accordance with standards on auditing generally accepted in India. (b) The Report
should include a statement that the audit was planned and performed to obtain reasonable assurance
whether the Financial Statements are free of material misstatement. (c) The Auditor's Report should
describe the Audit as including examining, on a test basis, evidence to support the amounts and
disclosures in Financial Statements, assessing the accounting principles used in the preparation of the
Financial Statements, assessing significant estimates made by management, in the preparation of
Financial Statements, &evaluating the overall position of Financial Statements. (d) The Report should
include a statement by the Auditor that the audit provides a reasonable basis for his opinion.

V Opinion Paragraph: The Opinion paragraph of the Report should indicate the Financial Reporting framework
used to prepare the Financial Statements. It should state the Auditor's opinion as to whether the Financial
Statements give a true and fair view in accordance with the financial reporting framework and, where
appropriate, whether the Financial Statements comply with the statutory requirements.

Vi . Date of the Report: The date of an Auditor's Report is the date on which the Auditor signs the Report
expressing an opinion on the Financial Statements. The Auditor should not date the Report earlier than the
date on which the Financial Statements are signed or approved by Management.

vii. Place of Signature: The Report should name the specific location, which is ordinarily the city where the
Audit Report is signed.

viii. Auditor's Signature: The Report should be signed by the Auditor in his personal name. Where a Firm is
appointed as the Auditor, the Report should be signed in the personal name of the Auditor and in the name
of the Audit Firm. The Partner / Proprietor signing the Report should mention his ICAI Membership
Number.

173
Q.3 State the advantages of Joint Audit
4 Marks
Answer:

Advantages of Joint Audit:

- Lower Workload

- Timely completeness of work

-Sharing of expertise

- Improve quality of service

- Healthy competition

--Quality
Qualityof
ofperformance
performance

174
Six LAQ
(4X3= 12 Marks)

Q.1 Write short notes on Treatment of Voluntary Retirement Scheme Payments 3 Marks
Answer:
Treatment of Voluntary Retirement Scheme Payments

(i) Termination benefits to be paid irrespective of the voluntary retirement scheme i.e. balance in P.F, leave
encashment; gratuity etc.
(ii) Termination benefits which are payable on account of VRS i.e. monetary payment on the basis of years of
completed service or for the balance period of service whichever is less and notice pay.

Expert Advisory Committee (EAC) opines in favour of treating the costs (except gratuity which should
have been provided for in the respective accounting period) as deferred revenue expenditure since it is
construed upon as saving in subsequent periods, on some rational basis over a period, preferably over 3
- 5 year. However, the terminal benefit is, to the extent these are not deferred should be treated as
expense in the P/L Account with disclosure.

Q.2 Write short notes on Auditing and Assurance Standards Relating to Audit of Fixed Assets 3 Marks
Auditing and Assurance Standards Relating to Audit of Fixed Assets
1. The term Property, plant and equipment in respect of those entities which are required to comply with the
relevant Revised AS refers to such tangible items that:
• are held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes; and
• are expected to be used during more than one period.
2. An asset can be classified as a PPE or otherwise, depending upon the use to which it is put or intended to be
put. For example, assets which are classified as PPE in one type of business may be considered as current
assets in another. Similarly, the same asset may be classified differently in an entity at different points of time.
The recognition of Property Plant and Equipment should be done as per the principles laid down in the
"relevant applicable AS”.

Q.3 Write short notes on Objective of Internal Object questionnaire

3 Marks
Answer:

Objective of internal control questionnaire.

This is used to collect information to know about the internal control system and evaluate weakness of therein .

Q.4 Write short notes on Advantages of Buyback of shares

3 Marks

Answer:
Advantages of buy-back of shares:
Buy-back of shares have the following advantages:

(i) A company with capital, which cannot be profitably employed, may get rid of it by resorting
to buy-back, and re-structure its capital.

(ii) Free reserves which are utilized for buy-back instead of dividend enhance the value of the
company's shares and improve earnings per share.
(iii) Surplus cash may be utilized by the company for buy-back and avoid the payment of
dividend tax.
(iv) Buy-back may be used as a weapon to frustrate any hostile take-over of the company by
undesirable persons .

175
Q.5 Write short notes on Borrowing Cost as per AS-16 3 Marks

Answer:

Borrowing Cost as per AS-16:

Borrowing costs are interests and other costs incurred by an enterprise in connection with the
borrowing of funds. The standard is applied in accounting for borrowing costs which include:

1. Interest and commitment charges on bank borrowing and other short term borrowings;
2. Amortization of discounts/premium relating to borrowings;
3. Amortization of ancillary cost incurred in connection with arrangement of borrowings;
4. Finance charges for assets acquired under finance lease or other similar arrangement
5. Exchange difference in foreign currency borrowing to the extent it relates to interest
element

176
Section : D - Case Study Question

Q.1 4+2= 6 Marks

177
i) You are required to determine the amounts of Employee Benefit Expenses,Finance Cost, Other
Expenses and Depreciation the year ended on 31.03.2021 as theyshould appear in Notes to
Accounts
ii) You are required to determine the Profit after tax for the year ended on31.03.2021.

Answer: (i)
1. Employee Benefit Exp. Rs. 10,46,000
2. Finance Cost Rs. 48,000
3. Other Expenses Rs. 8,43,000
4. Total Depreciation Rs. 5,95,000

(ii) Profit after Tax: Rs. 3,73,000

178
Q. 2 2+2+2= 6 Marks

(i) GFL has shown in the Accounts, a plot of Land at Cost valued at Rs 200 lakhs, but could not produce any
title deeds of the same. GFL Management, however, haveshown the vacant plot of Land to Mr AKC, Partner.

Faced with these anomaly, Mr AKC has gone to his friend Mr BKB, a more senior member of the profession and
sought his opinion regarding how he should deal with the situation.
What opinion Mr BKB should give to Mr AKC under the circumstance?

(ii) GFL has not provided satisfactory evidence regarding realisability of Debts to the extent of Rs. 80 lakhs. In
fact, it has been observed that one of the clients from whom an amount of Rs. 20 lakhs has been shown as
Debtor by GFL in the Accounts, has since filed for insolvency. However, the Management of GFL has
provided the Auditor with a letter stating that they have understanding with the defaulting client that they
would settle the claim of Rs. 20 lakhs in individual capacity, if the situation arises.

Faced with these anomaly, Mr AKC has gone to his friend Mr BKB, a more seniormember of the profession and
sought his opinion regarding how he should deal with the situation.
What opinion Mr BKB should give to Mr AKC under the circumstance?

(iii) As per GFL Balance Sheet under Audit the Company has negative Net worth and a negative Current Assets
Ratio. GFL management has requested AKC & Associates to provide a clean Audit Report as they are
negotiating with its Bankers for additional loans

Faced with these anomaly, Mr AKC has gone to his friend Mr BKB, a more seniormember of the profession and
sought his opinion regarding how he should deal with the situation.
What opinion Mr BKB should give to Mr AKC under the circumstance?

Answer:

Mr BKB's advice to Mr AKC to follow the following lines:

The circumstances are such that AKC and Associates should give a Qualified Audit Report stating as under:

(i) “We are unable to form an opinion about the realisability of an amount of Rs. 200 lakhs, included in
Assets under the heading of Freehold Land, as the Company has failed to provide any Title Deed for
the same

(ii) There is doubt about realisability of an amount of Rs20 lakhs included in Debtors under Current
Assets"

As regards Para
(iii) Of the Query the Report of Auditor should contain a Note in a separate Paragraph stating about the
“Going Concern Concept” of the Company. This needs to be emphasized only and not Qualify the
Report, as such.

179
180
181
SUGGESTED ANSWERS TO QUESTIONS
Section – A

Answer Question no 1 and any three out of Question No 2, 3, 4, 5

1. (a) 1X6 = 6 Marks
Choose the correct alternatives:-

(i) (C)
(ii) (D)
(iii) (B)
(iv) (C)
(v) (B)
(vi) (D)

1. (b) 1X4 =4 Marks

1. (B)
2. (C)
3. (D)
4. (A)

1. (c) 1X4 = 4 Marks

(i) TRUE.
(ii) TRUE.
(iii) TRUE.
(iv) TRUE.

2. (a) 4+4 =8 Marks

(i) Liability in shares :
A - Nil
B - 22,500
C – Nil
D - 27,500
(ii) Liability in amount (Rs.) :
A - (80,000)
B - 1,65,000
C - (40,000)
D - 2,55,000

2. (b) 4 Marks
Borrowing cost to be capitalized = ` 42,845

182
1
5. (d)
Cash Flow Statement explains cash movements under three different heads, namely
1 Cash flow from operating activities;
2 Cash flow from investing activities;
3 Cash flow from financing activities.
Sum of these three types of cash flow reflects net increase or decrease of cash and cash equivalents.
Operating activities are the principal revenue - producing activities of the enterprise and other activities
that are not investing and financing. Operating activities include all transactions that are not defined as
investing or financing. Operating activities generally involve producing and delivering goods and
providing services.

Investment activities are the acquisition and disposal of long-term assets and other investments not
included in cash equivalents.

Financing activities are activities that result in changes in the size and composition of the owners‟ capital
(including preference share capital in the case of a company) and borrowings of the enterprise.

SECTION – B
Answer Question no 6 and any three out of Question No 7, 8, 9, 10
6. (a) 1X6 = 6 Marks

Choose the correct alternatives:-

(i) (D)
(ii) (D)
(iii) (D)
(iv) (C)
(v) (A)
(vi) (D)

6. (b) 1X4 =4 Marks

1 D
2 C
3 B
4 A

6. (c) 1X4 =4 Marks

i) FALSE.
ii) TRUE.
iii) FALSE.
iv) FALSE.
183
5
[Answer any THREE from Question Nos. 7 to 10]
7. (a) 6 Marks
Although the form and content of the engagement letter differs from client to client but in general, the
following references should be made in audit engagement letter:
(i) The objective and the scope of the engagement.
(ii) Management‟s responsibility for the financial statements.
(iii) The existence of inherent limitations of audit and resulting material misstatements that may
remain undiscovered,
(iv) The need for use of services of internal auditors and/ or other experts that may arise during the
course of the engagement.
(v) The requirement of management confirmation letter as regards representations made by them
concerning audit.
(vi) Restriction of the auditor‟s liability, if any.
(vii) Basis for computation of audit fees and billing arrangements.
(viii) The form of reports or other communication of results of the engagement.
(ix) Validity of report
(x) Limits on submission of report to other authorities

7. (b) 6 Marks
In the case of a big concern where there is a good internal check system the auditor may, to a great
extent, presume the accuracy of the accounting. But he must not be negligent. He should apply a few test
checks, i.e., he should check a few transactions here and there at random or check fully the accounts for a
few months, and carry out a thorough check of the whole of a certain class of transactions taking place
during that particular period, e.g., cash sales, or cash received or credit purchases during that period. In
selecting certain transactions are representative and true specimens the auditor should see that such
sample transactions are representative and true specimens of such entries throughout the year.
If he finds that there is no mistake and there is nothing to arouse his suspicion, he may presume that the
accounts are correct. It must be remembered that in such a case, the auditor is not relieved of his
responsibility. Therefore, it would be better for him to probe the matter thoroughly if there is the slightest
suspicion. If later on, it is found that a fraud had been committed which the auditor failed to detect as he
had not checked all the transactions, he would be held liable. The existence of a good internal check
system reduces to a great extent the work of the auditor but does not reduce his liability. To what extent
an auditor should depend upon the internal check system will depend upon his tact, skill, experience and
judgment.

184
6
8. (a) 6 Marks

Need for Audit Evidence

Audit evidence provides the auditor a reasonable assurance in respect of the assertions made by the
management While obtaining evidence through substantive procedures, the different assertions made by
the management can be as follows:
(a) Existence - that an asset or a liability exists at a given date;
(b) Rights and Obligations - that an asset is a right of the entity and a liability is an obligation
of the entity at a given date;
(c) Occurrence -that a transaction or event took place which pertains to the entity during the
relevant period;
(d) Valuation - that an asset or liability is recorded at an appropriate carrying value;
(e) Measurement -that a transaction is recorded in the proper amount and revenue or expense
is allocated to the proper period;
(f) Presentation and Disclosure - an item is disclosed, classified and described in accordance
with recognized accounting policies and practices and relevant statutory requirements, if
any.

While obtaining evidence through compliance procedures, the different assertions made by the
management can be as follows:
(i) Existence -that the internal controls exist;
(ii) Effectiveness - that the internal controls are operating effectively;
(iii) Continuity - that the internal controls have been so operated throughout the period of
intended reliance.

8. (b) 6 Marks
Significance of Scope Paragraph:

a) The Scope Paragraph' seeks to inform the Users about the practices and procedures followed in
the conduct of audit by the Auditor.
b) In the Scope Paragraph, the Auditor states that the audit was planned and performed in
accordance with Auditing Standards generally accepted in India, and also that the audit provides a
reasonable basis for his opinion.
c) The significance of the Scope Paragraph lies in the fact that the Auditor intends to convey to the
readers of his report, about the scope of audit by highlighting the nature and progress of audit The
test check approach of audit adopted by the Auditor in performing his audit work as also the
significant aspect of evaluation of accounting principles and accounting estimates is also clarified
d) The basic objective of auditing that the Auditor provides only "reasonable assurance'' is
emphasized in the Scope Paragraph. Thus, this paragraph signifies the inherent limitations of
audit.
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9. (a) 5 Marks

Cost Audit Report-

As per sub-rule (4) of Rule 6 of the companies (Cost Records and Audit) Rules 2014 as amended, a
Cost Auditor is required to submit the Cost Audit Report along with his or its reservations or
qualifications or observations or suggestions, if any, in form CRA -3 to Board of Directors of the
company within a period of one hundred and eighty days from the closure of the financial year to which
the report relates.
Form for filling Cost Audit Report with the Central Government
As per sub-rule (6) of Rule 6 of the companies (Cost Records and Audit) Rules 2014 as amended,
every company to whom cost auditor submits his or its report shall, within a period 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 along with fees specified in the Companies (Registration Offices and Fees) Rules, 2014.
It is to be noted that the cost audit report is required to be filed in XBRL format.

9. (b) 7 Marks
A Qualified Audit Report is one where an Auditor gives an opinion on the truth and fairness of Financial
Statements, subject to certain reservations.
The Auditor‟s Reservation is generally stated as: “Subject to the above, we report that the Balance Sheet
shows a true and fair view.”
The features of a Qualified Report are –
Clarity: The Auditor must express the nature of qualification, in a clear and unambiguous manner.
Explanation: Where the Auditor answers any of the statutory affirmations in the negative or with a
qualification, his Report shall state the reasons for such answer. Placement: All qualifications should be
contained in the Auditor‟s Report. When there are Notes, which are subject matter of a qualification, the
same should preferably he annexed to the Auditors‟ Report. However, a reference to the Notes to
Accounts in the Auditors‟ Report does not automatically become a qualification.
Subject to: The words “subject to” are essential to state any qualification. The qualification should be
preceded by words such as “Subject to” or “Except that” to make it clear that he is making an exception.
Nature of Qualification: Vague statements, the effect of which on accounts cannot be ascertained, like,
„the debtors balances are subject to confirmation‟, „no provision for taxation has been made in view of
the loss during the year‟, etc. should be avoided.

Violation of Law: Where the Company has committed an irregularity resulting in a breach of law, the
Auditor should bring the same to the notice of the shareholders by properly qualifying his report.

Quantification: The Auditors should quantify, wherever possible, the effect of these qualifications on the
Financial Statements if the same is material. Where the effect of qualification cannot be accurately
quantified, the Auditor may reflect the effect on the basis of Management estimates, after carrying out
necessary audit tests on such estimates.

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Write short notes any THREE
10. (a) 4X3 = 12 Marks
In respect of audit work divided among the joint auditors, each joint auditor is responsible only for the
work allocated to him, whether or not he has prepared a separate report on the work performed by him.
On the other hand, all the joint auditors are jointly and severally responsible:
(i) In respect of the audit work which is not divided among the joint auditors and is carried out by all
of them; in respect of decisions taken by all the joint auditors concerning the nature, timing or
extent of the audit procedures to be performed by any of the joint auditors. It may, however, be
clarified that all the joint auditors are responsible only in respect of the appropriateness of the
decisions concerning the nature,
(ii) timing or extent of the audit procedures agreed upon among them; proper execution of these audit
procedures is the separate and specific responsibility of the joint auditor concerned;
(iii) in respect of 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) for examining that the financial statements of the entity comply with the disclosure requirements
of the relevant statute; and
(v) For ensuring that the audit report complies with the requirements of the relevant statute.

10. (b)

The following features of inventories have an impact on the related audit procedures:
(i) By their very nature, inventories normally turn over rapidly.
(ii) Inventories are susceptible to obsolescence and spoilage. Further, some of the items of inventory
may be slow-moving while others may follow a seasonal pattern of movement.
(iii) Inventories are normally movable in nature, although there may be some instances of immovable
inventories also, e.g., in the case of an entity dealing in real-estate.
(iv) All the items of inventory may not be located at one place but may be held at different locations
such as factories and warehouses, or with third parties such as selling agents.
(v) The individual items of inventory may not be significant in value, but taken together, they
normally constitute a significant proportion of total assets and current assets of manufacturing,
trading and certain service entities.
(vi) Physical condition (e.g., stage of completion of work-in-process in certain industries) and
existence of certain items of inventories may be difficult to determine.
(vii) Valuation of inventories may involve varying degrees of estimation, including expert opinions,
e.g., in the case of jewellery

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10. (c)
Audit of income:
The auditor should carefully vouch the receipt of cash. Cash receipts on account of share capital should
be vouched with the Register of Members. Cash received against sales should be vouched with the cash
memos and invoices issued to customers as also Sales Account. Receipt of cash in respect of payment of
interest and repayment of loans advanced by the society should be vouched with the loan agreements.
Cash received from members towards construction of houses or their maintenance, should be vouched
with the Register of Members, demands made by the society from time to time, and money receipts.
Audit of Expenditure:
(i) The auditor should vouch all expenditure with reference to authorisation from the Managing
Committee, particularly in the case of large capital expenditure, as also the bills received from
individual parties, the money receipts obtained from them, and entries in the Bank Pass Book
along with counter-foils of cheques.
(ii) He should vouch the payment of loans from the loan agreements entered into with borrower
members.
(iii) He should vouch establishment expenses with reference to the resolutions of the Managing
Committee, agreements with the persons concerned, and money receipts obtained from them.

10. (d)

The duties of the auditor are as follows:

(i) Confirm that issue of Bonus Share was authorized by articles.
(ii) Verify the minutes of the Board meeting and ordinary resolution passed in the general meeting in
which the approval of members is obtained.
(iii) Check that the company has issue fully paid-up bonus shares to its members only.
(iv) Confirm that the issue of bonus shares shall not be made by capitalising reserves created by the
revaluation of assets.
(v) Check whether the company has made any default in payment of interest or principal in respect of
fixed deposits or debt securities issued by it.
(vi) Check whether the company has made any default in payment of statutory dues of the employees,
such as, contribution to provident fund, gratuity and bonus.
(vii) Whether the partly paid-up shares are made fully paid-up.
(viii) Check whether the bonus shares shall not be issued in lieu of dividend.
_____________________

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INTERMEDIATE EXAMINATION SET 1
MODEL QUESTION PAPER TERM – JUNE 2023
PAPER - 10
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5. (a) The following information has been provided by S Ltd.
Profit attributable to ordinary shareholders `50,00,000
Ordinary share outstanding 20,00,000
Average market price per ordinary share during the year `75

There are the following potential ordinary shares:

(i) Options 1,00,000 with exercise price of `60 per share
(ii) Convertible preference 8,00,000, 8% shares of `100 each to be
shares converted into two ordinary shares
(iii) 5% Convertible bonds Face value of ` 10 crore. Each `1000 bond is
convertible into 20 ordinary shares
Tax rate is 40%.
Analyze with respect to the provisions under Ind AS 33, Earnings Per Share, the
impact of the above conversions on EPS to determine the order of inclusion of
dilutive instruments. Examine the dilutive/anti-dilutive nature of the above
instruments while calculating the diluted EPS.

(b) Write a short note on different types of bonus paid by insurance companies.
[8+4=12]

SECTION - B : (Auditing)
Answer Question No. 6 and any three from Question No. 7, 8, 9 and 10.

6. (a) Choose the correct alternative [1 × 6 = 6]

(i) SA 700 stands for

a. Forming an Opinion and Reporting on Financial Statements
b. Audit Sampling
c. Communicating Key Audit Matters in the Independent Auditor’s
Report
d. Audit Evidence

(ii) Internal Audit is mandatory for every unlisted public company having paid
up share capital of
a. ` 100 crores during the preceding financial year
b. ` 50 crores during the preceding financial year
c. ` 500 crores during the preceding financial year
d. ` 200 crores during the preceding financial year

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(iii) Cost audit report is submitted in Form No.
a. CRA – 1
b. CRA – 2
c. CRA – 3
d. CRA – 4
(iv) In case of a company other than a Government Company, any casual vacancy
in the post of auditor is to be filled by the
a. Board of Directors
b. Managing Director
c. Comptroller and Auditor General (CAG)
d. Shareholders
(v) Permanent Audit File does not contain
a. A record of study and evaluation of internal control system
b. Significant audit observations of earlier years
c. Copies of management letters
d. Analysis of significant ratios and trends
(vi) Audit Procedures to obtain audit evidences include
a. Compliance Procedure
b. Substantive Procedure
c. Both of A and B
d. Neither A nor B

(b) State true or false. [1× 4=4]

(i) Routine checking is a substitute of vouching.

(ii) CRA – 3 is used to intimate the appointment of cost auditor to the Central
Govt.
(iii) Audit Memorandum is a detailed plan of audit work clearly specifying the
responsibilities of the audit staff and time allotted to perform the same.
(iv) Substantive procedure is also known as test of control.

(c) Fill in the blanks. [1× 4=4]

(i) Cost Records are to be maintained as per Form ____________.

(ii) Auditor in a co-operative society is appointed by the _________ of Co-
operative Societies.
(iii) The rural self-governance in India is structured in ____________ layers.
(iv) Cut off procedures are generally applied to _____________ transactions.

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7. (a) “In order to arrive at an appropriate conclusion regarding the truthfulness and
fairness of financial statements, the audit evidences under examination must be
relevant and reliable”. With reference to SA-500, demonstrate some suggestions
with regard to obtaining relevant and reliable audit evidence.

(b) Can a statutory auditor rely on the work of an internal auditor? Relate your response
to the relevant SA. [6+6=12]

8. (a) Which companies are required to undergo secretarial audit? Discuss the provisions
relating to the procedures of appointment of a secretarial auditor.

(b) Analyze the pros and cons of joint audit. [4+8=12]

9. (a) PQR & Co. has been appointed as the statutory auditor of Y Ltd. from the financial
year 2021-22. During the year Y Ltd. has already declared paid an interim dividend
of Rs.2 per share. Unfortunately, the company could not trace three shareholders –
Mr. M, Mr. N and Mr. O. Accordingly, their dividend remained unpaid. However,
this has been the case since last seven years. In spite of repeated attempts, the
company could not trace these shareholders based on their address registered with
the company. PQR & Co. being new to corporate audit assignments, wants your
advice in this context. Recommend appropriate steps to conduct the audit in line
with the provisions of Companies Act, 2013.

(b) State the differences between audit report and audit certificate. [8+4=12]

10. (a) What are the possible organization forms of educational institutions? How will
you conduct audit of receipt related items of an educational institution?

(b) Demonstrate the comparative features of permanent and current audit file with
example.
[(2+6) +4=12]

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SECTION - B : (Auditing)
Answer Question No. 6 and any three from Question No. 7, 8, 9 and 10.

6. (a)
(i) a
(ii) b
(iii) c
(iv) a
(v) c
(vi) c

(b)
1. False
2. False
3. False
4. False

7. (a) As per SA-500, relevance of audit evidence deals with the logical connection with
the purpose of audit procedure and is therefore affected by the direction of testing.
On the other hand, the reliability of audit evidence depends on its source - internal
or external and on its nature - visual, documentary or oral. While the reliability of
audit evidence is dependent on the circumstances under which it is obtained, the
following generalizations may be useful in assessing the reliability of audit
evidence:
a. External evidence (e.g., confirmation received from a third party) is generally
more reliable than internal evidence;
b. Internal evidence is more reliable when related internal control is
satisfactory;
c. Evidence in the form of documents and written representation is usually more
reliable than oral representations;
d. Evidence obtained by the auditor himself is more reliable than that obtained
through the entity.

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(b) As per SA 610, Using the Work of Internal Auditor, the external auditor can use the
work of an internal auditor after conducting an evaluation of internal audit
functions.
Accordingly, the external auditor shall consider the following factors to determine
the extent to which he can rely on the work of an internal auditor:
(i) whether internal audit is undertaken by an outside agency or by a separate
audit department within the entity.
(ii) the scope of internal audit, management action and the internal audit report.
(iii) experience and qualification of internal auditor.
(iv) the technical compliance by internal auditor.
(v) authority vested on internal auditor and level of management to whom he is
accountable.
(vi) whether professional care has been taken by the internal auditor in
conducting audit work.
After the evaluation, if the external auditor is satisfied with all the above criteria
and if the law doesn’t prohibit, he can decide to rely upon the work of an internal
auditor.
The external auditor, in such a case, shall discuss his plans to use direct assistance
of the internal audit function with the internal auditor. He shall carefully undergo
the reports of internal audit function and obtain an understanding of the nature and
extent of the audit procedures that has been applied and the related findings. In
addition, the external auditor shall also perform sufficient and appropriate audit
procedure on the body of work of the internal audit function as a whole to determine
its adequacy for purposes of the statutory audit. He shall also inform the
management about his decision to rely on the internal audit function.
However, the reliance of a statutory auditor on the work of the internal auditor can,
in no way, reduce his responsibility and he will be held responsible for all damages
arising out of any material misstatement in the accounts remaining undetected
because of his reliance on the work of the internal auditor.

8. (a)
 Applicability of Secretarial Audit
As per the provision of Section 204(1) of the Companies Act, 2013 read with
Rule 9 of the Companies (Appointment and Remuneration of Managerial
Personnel) Rules, 2014:
1. Every listed company;
2. Every public company having a paid-up share capital of 50 crore rupees
or more; or

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3. Every public company having a turnover of 250 crore rupees or more;
or
4. Every company having outstanding loans or borrowings from banks or
public financial institutions of 100 crore rupees or more,
- is required to annex with its Board’s Report made in terms of Section
134(3) of the Companies Act, 2013, a Secretarial Audit Report, given
by a Company Secretary in practice, in Form MR-3.
 Appointment of Secretarial Auditor
As per Rule 8 of the Companies (Meetings of Board and its Powers) Rules,
2014, read with Section 179 of the Companies Act, 2013, secretarial auditor
is required to be appointed by means of resolution at a duly convened board
meeting.
It is advisable for the Secretarial Auditor to get a letter of engagement from
the company. Secretarial Auditor should accept the letter of engagement.
The company shall report any change in the secretarial auditor during the
financial year to the members through the Board’s Report. The qualifications,
observations or comments / remarks of the secretarial Audit Report shall be
read at the annual general meeting of the company along with the explanation
and comments of the Board of Directors (Clause 13 of Secretarial Standard 2).

(b) The benefits of joint audit are as follows:

a) Joint audit reduces the workload of a single auditor.
b) Since different auditors may be engaged to handle different parts of accounts,
timely completion of work is possible even in a large organisation.
c) The auditors may share their expertise and solve critical problems in the
process.
d) Joint audit improves the quality of audit work to a great extent.
e) There may be healthy competition among the auditors which improves the
quality and speed of the audit work.
f) Under joint audit, it is possible to get the benefit of extensive knowledge of
different auditors at the same time.

The limitations of joint audit are enumerated below:

a) Established auditors may have a superiority complex over the less
experienced one.
b) It is not suitable for a small entity due to substantial cost burden.
c) At times, lack of coordination among the auditors may slow down the speed
of work.

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d) There may be uncertainty about the liability of any work.
e) Areas of common concern may be neglected.
f) The auditors have to share the fees.
9. (a) PQR & Co. should follow the audit procedure mentioned below in this context.
(i) The auditor should collect a statement or list containing every detail
regarding the unpaid dividend such as the names of the shareholders,
dividend payable to them, dividend warrant number, reason for the dividend
remaining unpaid etc.
(ii) The auditor shall conduct an enquiry to identify whether there was any fault
on the part of the company.
(iii) The auditor shall verify the statement provided by the management in this
respect with other supporting documents like Dividend Register, Returned
Warrants, bank statement, etc. and shall determine whether the dividend
amount has been accurately calculated.
(iv) The auditor shall also verify whether the unpaid dividend has been
transferred to a separate account namely Unpaid Dividend Account within
seven days from the expiry of 30 days allowed for declaration and payment
of dividend.
(v) The auditor must verify whether there is any fault on the part of the company
and if so whether they have deposited the interest and the penalty.
(vi) The auditor shall also verify whether the company has published the details
of unpaid dividend in its own website and also in other website(s) approved
by the government for this purpose.
(vii) Since the amount of dividend is remaining unpaid for more than seven years,
the auditor shall verify whether the same along with the interest accrued
thereon has been transferred by the company to Investor Education and
Protection Fund.
(viii) The auditor shall also verify whether all the shares in respect of which unpaid
dividend has been transferred to Investor Education and Protection Fund,
have also been transferred to such fund.
(b)
Sl. No. Points Auditor’s Report Auditor’s Certificate
1. Nature It is an expression of opinion It is a confirmation of
about the financial statements. correctness and accuracy about
some matters.
2. Basis of The report is based on The certificate is based on actual
audit assumptions and estimations figures and facts.

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3. Advice In audit report, there is a scope No scope of constructive advice
of giving constructive advice exists in the case of the
to the company. certificate.
4. Guarantee Audit report is an opinion by Audit certificate is a formal
the auditor and does not statement by the auditors which
guarantee the accuracy of the guarantee the accuracy of the
financial statements facts stated therein.
5. Time of The report is submitted to the Certificates are issued as and
issue appointing authority only after when required.
the audit is complete.
6. Liability As a report is merely an In case of the wrong certificate,
of auditor opinion, if it is not correct, the the auditor will be held
auditor may not be held responsible.
responsible, unless he is found
to be negligent to his duty.

10. (a) Educational institutions of any state in India are generally established and run under
the Societies Registration Act 1960 or Public Trust Act of the state concerned.
Similarly, central educational institutions are guided by the respective regulations
issued by the Ministry of Education from time to time. In some cases, large
educational institutions like universities are established by Central or State
governments by enacting special legislation.

Audit procedure to verify the receipts related transactions:

(i) Tuition Fees: Tally the counterfoils of fee receipt with fee register to see
whether they have been duly recorded or not. Check the register to identify
whether all the students have paid their fees in due time. If any student has
deposited the fees beyond the due date, check whether late fine has been
charged or not and whether the same has been properly recorded. See whether
all collections are deposited in the bank account at the end of the day.
(ii) Admission Fees: Check admission fees with admission slips signed by the
head of the institution and confirm that the amount had been credited to a
Capital Fund, unless the Managing Committee has taken a decision to the
contrary.
(iii) Other Fees: Verify the collection of other fees such as library fees, session
fees or development fees, fees for hostel etc. based on the counterfoils and
fee registered and ensure that the fees have been accounted for in appropriate
heads.

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(iv) See that all arrears on account of fees, fines, etc. have been taken into
consideration at the end of accounting period. See that free studentship and
concessions have been granted by an authorised person only.
(v) Confirm that hostel dues were recovered before students’ accounts were
closed and their deposits of caution money refunded.
(vi) Verify grants received from Government or other organisations based on the
sanction letter and bank statement.
(vii) Ensure that donation received, if any, has been acknowledged and recorded
properly in the books of accounts.
(viii) Vouch income from endowments and legacies, as well as interest and
dividends from investment; also inspect the securities in respect of
investments held.

(b) Permanent audit file contains all the documents which are of continuing importance
for the audit of succeeding years.
Accordingly, permanent audit file contains documents such as:
(i) Legal and organizational structure of the entity, e.g., Memorandum of
Association and Article of Association in case of a company;
(ii) Extracts or copies of legal documents, agreements and minutes relevant to
the audit;
On the other hand, temporary audit file contains documents relevant for the audit
of the current year only.
Accordingly, current audit file contains documents such as:
(i) Correspondence relating to acceptance of annual reappointment.
Extracts of important matters in the minutes of Board Meetings and General
Meetings relevant to the audit.

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MODEL QUESTION PAPER TERM – JUNE 2023
PAPER - 10
CORPORATE ACCOUNTING AND AUDITING
SECTION - B : (Auditing)
Answer Question No. 6 and any three from Question No. 7, 8, 9 and 10.

6. (a) Choose the correct alternative. [1´6=6]

(i) A company auditor resigning from his post shall inform the same to the
Registrar in
a. Form No. ADT - 1
b. Form No. ADT - 2
c. Form No. ADT - 3
d. Form No. ADT - 4
(ii) Which of the following is not included in the Current Audit File?
a. Memorandum and Articles of Association
b. Current year’s audit programme
c. Internal Control Questionnaire
d. Copies of budget
(iii) Which of the following is not an external audit evidence?
a. Quotations
b. Confirmation from debtors
c. Goods Received Note
d. Confirmation from bankers
(iv) Cooling period of an individual auditor is
a. One term of 5 years
b. Two consecutive terms of 5 years each
c. One term of 4 years
d. Two consecutive terms of 4 years each
(v) Which of following is Not a source of dividend?
a. Out of profits for current year after providing for depreciation for
current year
b. Out of profits of any previous financial year without providing
depreciation
c. Out of current year’s profit after providing for past losses
d. Out of past reserves subject to certain conditions
(vi) Which of the following is not a part of rural self-governance system in India?
a. Gram Panchayat
b. Gram Parishad
c. Panchayat Samiti
d. Zilla Parishad

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(b) State True or False. [1´ 4=4]

(i) A company auditor can render investment advisory services to his client.
(ii) Each joint auditor shall be jointly and severally responsible in respect of
undivided work.
(iii) A piecemeal opinion is issued when whole of the matter in the financial
statement is true and fair.
(iv) Companies (Auditor’s Report) Order, 2020 is not applicable to a banking
company.

(c) Fill in the blanks. [1´ 4=4]

(i) Auditor’s right to attend the meeting of the Audit Committee is guided by
Section _________ of the Companies Act, 2013.
(ii) Reporting of fraud to the Central Govt. by the auditor is guided by Section
___________ of the Companies Act, 2013.
(iii) A good audit report should be based on ___________ evidence.
(iv) Audit sampling is guided by SA ___________.

7. (a) Distinguish between Statutory Audit and Non-Statutory Audit.

(b) ‘An auditor applies various techniques to evaluate the internal control system of an
organization’ – Discuss. [6+6=12]

8. (a) (i) PQR & Co. a firm of Chartered Accountants has three partners, P, Q & R; P
is also in whole time employment elsewhere. The firm is offered the audit of
XYZ Ltd. which is a private limited company with paid up share capital of
₹120 crore. The firm already holds audit of 40 companies including audit of
one dormant company. Examine whether acceptance of audit of XYZ Ltd.
will be within the specified limits.

(ii) M/s MNP & Co., a Chartered Accountant firm, has three partners, M, N and
P who have no interest in any other partnership firm. The firm has a total of
33 company audits, of which 15 are public companies. Mr. M retires on 31st
August, 2022. The reconstituted firm accepts one audit of a private company
having paid up share capital of more than ₹100 crores and audit of seven one
person companies on 2nd September, 2022. Examine the situation and advice
the firm regarding the appropriate course of action.

(b) What is the procedure of appointing a cost auditor in a company? [(4+4) + 4=12]

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CORPORATE ACCOUNTING AND AUDITING
9. (a) Recommend the important issues to be reviewed while conducting the audit of
issue of debentures by a company.

(b) What is known as Disclaimer of Opinion? In what context is it used by a statutory

auditor? [8+4=12]

10. (a) How will you conduct the audit of a local self-government?

(b) Discuss various types of audit risks. [8+4=12]

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SECTION - B : (Auditing)
Answer Question No. 6 and any three from Question No. 7, 8, 9 and 10.

6. (a)
(i) c
(ii) a
(iii) c
(iv) a
(v) b
(vi) b

(b)
1. False
2. True
3. False
4. True

7. (a)
S. No. Points of Distinction Statutory Audit Non-statutory Audit
1. Legal compulsion It is compulsory. It is voluntary.
2. Scope The relevant statute or law The employer or partners
determines the scope of determine the scope of
work. work.
3. Qualification of The academic or The auditor need not
auditor professional qualification possess any academic or
is prescribed for the professional qualifications.
auditor.
4. Powers, rights and The statute dictates the The agreement between an
duties of an auditor powers, rights and duties of auditor and firm decides
an auditor. these matters.

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5. Independence The auditor has The auditor does not enjoy
independence in status and such independence.
in mental attitude.
6. Auditor’s liability The auditor is liable for The auditor is liable for
negligence under the negligence only under the
Common Law and for Common Law.
misfeasance under the
relevant statute governing
the audit.
7. Publication of audit The audit report is The audit report is made
report published for the public. known to the employers or
partners.

(b) The following techniques are generally used for evaluation of internal control system:
a. Narrative Record: It is a complete and exhaustive description of the system. It is
appropriate in circumstances where a formal control system is lacking, like in the
case of small businesses. Gaps in the control system are difficult to identify using a
narrative record.
b. Check List: The Internal Control Checklist is a tool to help evaluate and strengthen
internal controls, promote effective and efficient business practices, and improve
compliance in a department or functional unit. The checklist is not meant to be
absolute but informative when reviewing controls in a given area. In fact, checklist
is a series of instructions and/or questions which the auditor or the audit staff must
follow and answer. When he completes the instructions, he initials the space against
the instruction. Answers to the checklist instructions are usually ‘Yes’, ‘No’ or ‘Not
Applicable’.
c. Flow Chart: It is a pictorial representation of the internal control system depicting
its various elements such as operations, processes and controls, which help in giving
a concise and comprehensive view of the organization’s working to the auditor. A
complete flow chart would depict the process of raising documents, personnel
involved in doing so, the flow of documents through various departments,
maintenance of records, flow of goods and consideration, and dealing with results.
d. Internal Control Questionnaire: This is the most widely used method for
collecting information regarding the internal control system and involves asking
questions to various people at different levels in the organization. The questionnaire
is in a pre-designed format to ensure collection of complete and all relevant
information. The questions are formed in a manner that would facilitate obtaining

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CORPORATE ACCOUNTING AND AUDITING
full information through answers in ‘Yes’ or ‘No’, whereby the answer 'Yes' is
satisfactory, whereas the answers 'No' appear to indicate a weakness. However,
questionnaire may receive descriptive responses also.

8. (a) (i) As per Section 141(3)(g), a person or a partner of a firm shall not be eligible for
appointment as the auditor of a company if –
(i) Such person is in full time employment elsewhere; or
(ii) 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 companies, dormant companies, small companies and private
companies having paid up capital less than `100 crore.
In the given case, P is in whole-time employment elsewhere, thus excluded
for calculation of the limit for the firm. If Q and R do not hold any audits in
their personal capacity/as partners of other firms, the total number of
company audits to be accepted by PQR & Co. is 40. Since audit of dormant
companies are excluded from the limit, the firm holds (40-1) = 39 eligible
audit assignments. Thus, acceptance of audit of XYZ Ltd. will accordingly be
within specified limits.

(ii) In the given case, after retirement of Mr. M, the firm shall hold audit of 33
companies of which 15 will be public companies. The ceiling as per requirement of
the Council of ICAI will be 40 audit assignments (20 x 2 = 40 audits). The firm also
accepts the audit of one private company with paid up share capital of more than
100 crores, and seven one person companies. Here, the assignments of one person
companies are excluded from the ceiling as per Section 141(3)(g). Hence the total
audit assignments = 33 + 1 = 34. Thus, the ceiling is not violated and hence the
above assignments can be accepted.

(b) As per Section 148(3) of the Companies Act 2013, cost audit shall be conducted by a Cost
Accountant who shall be appointed by the Board. No person appointed under Section 139 as an
auditor of the company shall be appointed for conducting the audit of cost records. The auditor so
appointed shall comply with the cost auditing standards.
Rule 6 of the Companies (Cost Records and Audit) Rules 2014 –
1) The category of companies specified in rule 3 and the thresholds limits laid down
in rule 4, shall within one hundred and eighty days of the commencement of every
financial year, appoint a cost auditor.
2) Every company referred to in sub-rule (1) shall inform the cost auditor concerned
of his or its appointment as such and file a notice of such appointment with the

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Central Government within a period of 30 days of the Board meeting in which such
appointment is made or within a period of 180 days of the commencement of the
financial year, whichever is earlier, through electronic mode, in Form CRA-2, along
with the fee as specified in Companies (Registration Offices and Fees) Rules, 2014.
3) Every cost auditor appointed as such shall continue in such capacity till the expiry
of 180 days from the closure of the financial year or till he submits the cost audit
report, for the financial year for which he has been appointed.

9. (a) The audit procedure to be applied to conduct audit of the issue of debentures include the
following:
 The auditor should verify that the prospectus had been duly filed with the registrar
before the date of allotment of debentures.
 He should check the amount collected in the cash book with the counterfoils of
receipts issued to the applicants and also cross check the amount into the application
and allotment book.
 He should examine the debenture trust deed and note the conditions contained
therein as to issue and repayment.
 If the debentures are covered by a mortgage of a charge, it should be verified that
the charge has been correctly recorded in the register of mortgage and charges and
it has also been registered with the registrar of the companies.
 Compliance with SEBI guidelines should also be ensured.
 Where debentures have been issued as fully paid up to vendors as a part of the
purchase consideration, the contract in this regard should be checked.

(b) The auditor shall disclaim an opinion when the auditor is unable to obtain sufficient
appropriate audit evidence on which to base the opinion, and the auditor concludes that
the possible effects on the financial statements of undetected misstatements, if any, could
be both material and pervasive. The auditor shall disclaim an opinion when, in extremely
rare circumstances involving multiple uncertainties, the auditor concludes that,
notwithstanding having obtained sufficient appropriate audit evidence regarding each of
the individual uncertainties, it is not possible to form an opinion on the financial
statements due to the potential interaction of the uncertainties and their possible
cumulative effect on the financial statements.
An audit report with a disclaimer of opinion must include the ‘Basis for Disclaimer’.
Situations leading to reporting with a disclaimer of opinion are:

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(i) Auditor was prevented by the management from (a) observing the counting of
physical inventory and (b) performing other procedures such as requesting external
confirmation of debtors and creditors, and bank account balances.
(ii) Non-receipt of branch audit reports from a significant number of branches.

10. (a) The auditor is supposed to consider the following general points in conducting the audit
of local self-government:
a) Ensure that his appointment is in line with the respective regulation of the local
body and approved by the appropriate authority.
b) Obtain a detail understanding of the rules and regulations that governs the
operations, especially the financial control and accounting of the organisation.
c) Consult the relevant documents, minutes and resolutions of various meetings of
different committees.
d) With regards to various government schemes which are implemented through local
bodies, check the utilization of grant, appropriate authorization being maintained
throughout and adequacy of accounting.
e) Apply in depth investigation in areas with potential fraud such as revenue
collection, various waiver schemes, use of casual labour etc.
f) Whenever there is a provision of funds, ensure that the expenditure is incurred from
the provision and the same has been authorized by the competent authority.
g) Ensure that where huge financial expenditure is involved, the schemes are running
economically and is expected to generate the targeted outcome.

(b) Audit risk can broadly be classified into – Risk of Material Restatement and Detection
Risk.
A. Risk of Material Misstatement
It may be defined as the risk that the financial statements are materially misstated
prior to the audit exercise either due to any unintentional error or any organised
fraud. This risk may exist either at the overall financial statement level (i.e.,
possibility that material misstatement relates pervasively to the financial statements
as a whole) or at assertion level (i.e., possibility that material misstatement may
exist while classifying the transactions, calculating the balances or disclosing some
material information).
The risk of material misstatement at the assertion level has two components as
follows:
(a) Inherent Risk: This refers to the possibility of material misstatement due to
complex transactions or even due to organised fraud. Accordingly, this risk

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may be higher for some classes of transactions, account balances and
disclosures.
(b) Control Risk: This refers to the possibility of material misstatement due to
ineffective design, implementation and maintenance of internal control
system. Thus, a sound internal control system significantly reduces this risk.
B. Detection Risk
This refers to the possibility that the audit procedures applied by the auditor to
reduce the audit risk to an acceptably low level will not be able to detect a
misstatement which, either individually or in aggregate, may be material.

14
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