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Mock Test Paper - Series I

FINAL COURSE: GROUP I

PAPER-3 ADVANCED AUDITING AND PROFESSIONAL ETHICS

SUGGESTED ANSWERS TO DIVISION A CASE SCENARIO BASED MCQs (30 Marks) Case
scenario 1
Q1 B. Siddharth should resign from the engagement, as being a member of the NGO creates a conflict of
interest, irrespective of board approval.
Reason: Even though the NGO’s bylaws permit members to act as auditors, professional ethics override
internal bylaws. Siddharth’s dual role as a member and auditor creates a conflict of interest, affecting his
independence and objectivity. Resigning from the engagement ensures compliance with ethical standards.

Q2. B. Violates ethical guidelines by using prohibited advertising methods for professional services
Reason: Using social media ads and bulk messaging for promoting professional services is
explicitly prohibited under the Code of Ethics for CAs.

Q3. A. Y e s , b e c a u s e t h e t r u s t h a s a n i n d e p e n d e n t m a n a g e m e n t s t r u c t u r e , a n d t h e a u d i t s c o p e d o e s n o t
o v e r la p w ith th e p a r e n t c o m p a n y .
Reason: Even Pension Fund Trust operates independently with its own management structure, and the audit
scope does not overlap with the parent company. This ensures that there is no direct conflict of interest,
allowing Siddharth to serve as both the internal auditor for the parent company and the statutory auditor for
the trust.

Q4. B. The investment compromises his independence and objectivity.

Reason: A significant personal investment in a company being audited compromises the
auditor’s independence and objectivity, creating a conflict of interest.

(4 MCQs X 2 Marks = 8 Marks)

Case scenario 2

Q5. C. Assigning audit tasks to team members with the appropriate level of competence and capability.

Reason: SA 220 requires the Engagement Partner to ensure that team members assigned to
the engagement have the appropriate competence and experience. In this case, delegating
the review of critical estimates to an inexperienced team member violated this principle,
leading to audit errors.
(2 Marks)

Case scenario 3

Q6. B. Adequate provisioning and classification of assets as per RBI norms.

Reason: NBFCs are required to classify assets and create provisions as per RBI’s prudential

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guidelines. Classifying overdue accounts as “Standard Assets” and failing to make adequate
provisions for doubtful assets is a clear violation of these norms, making it a critical area in
the audit of NBFCs.
(2 Marks)

Case scenario 4

Q7. C. Perform alternative audit procedures to corroborate the balances when confirmations
are unreliable or unavailable.

Reason: SA 505 emphasizes the auditor's responsibility to evaluate the reliability of external
confirmations. When confirmations are unreliable or unavailable, the auditor must perform alternative
procedures, such as subsequent payment verification or reconciling supporting documents, to obtain
sufficient and appropriate audit evidence. Failure to do so can result in flawed audit conclusions,
especially in light of amendments emphasizing professional skepticism.
(2 Marks)

Case scenario 5

Q8. B. Evaluating the reasonableness of assumptions used in determining the provision.

Reason: SA 540 requires the auditor to assess whether assumptions used by management in accounting
estimates are reasonable and consistent with available evidence.

Q9. A. Ensuring the impairment test includes market trends and updated data.

Reason: SA 540 mandates that estimates involving market data, such as impairment tests, must use the
most current and reliable information available.

Q10. A. Analyzing management’s cash flow projections.

Reason: SA 570 emphasizes the auditor's responsibility to evaluate the entity’s cash flow projections and
its ability to meet obligations as part of the going concern assessment.

Q11. B. A formal written representation from the company’s legal team.

Reason: SA 501 and SA 540 require obtaining written evidence from independent experts, such as legal
counsel, to assess the likelihood of adverse outcomes in contingent liabilities.

(4 MCQs X 2 Marks = 8 Marks)

Case scenario 6

Q12. B. Evaluating whether revenue recognition policies align with applicable accounting standards.

Reason: SRE 2400 emphasizes reviewing compliance with accounting standards as part of the auditor’s
responsibility.

Q13. B. Ensuring that the assumptions underlying the PFI are reasonable and supported by evidence.

Reason: SAE 3400 requires the auditor to evaluate the reasonableness and reliability of assumptions in
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prospective financial information.

Q14. C. Results from feasibility studies or pilot projects supporting the assumptions.

Reason: Evidence such as feasibility studies or pilot project results is critical to support management’s
cost reduction assumptions.

Q15. A. Modify the review report to highlight material deficiencies in disclosures.

Reason: SRE 2400 requires the auditor to modify the report if material deficiencies, such as incomplete
disclosures, are identified.
(4 MCQ X 2 Marks = 8 Marks)

DIVISION B – Answers to descriptive question (70 Marks)

1). (a) A liability is a present obligation of the entity to transfer an economic resource as a result of past
events. Instead of fulfilling an obligation to transfer an economic resource to the party that has a right to
receive that resource, entities sometimes decide to:

a) settle the obligation by negotiating a release from the obligation;

b) transfer the obligation to a third party; or
c) replace that obligation to transfer an economic resource with another obligation by entering into a new
transaction.

In the above situations, an entity has the obligation to transfer an economic resource until it has settled,
transferred, or replaced that obligation. In the given situation, the company has written back liabilities due
to creditors unilaterally. The company has not settled the obligation by negotiating a release from the
obligation from respective creditors. Such an accounting treatment by management is questionable and
against the conceptual framework for financial reporting under Ind AS. CA Ananya wanted to send external
confirmations in accordance with SA 505, "External Confirmations," but management informed her that
sending such requests may be used by creditors as proof of existence of liability. In fact, she should display
professional skepticism and be alert to the possibility of misstatements in financial statements, if restrained
by management from obtaining external confirmations.
The reasons advanced by management do not appear to be valid and reasonable. In accordance with SA
505, she should reassess risks and perform alternative audit procedures to mitigate such risks. Besides, she
should consider implications of the same for her audit opinion.

SA 705, "Modifications to the Opinion in the Independent Auditor’s Report," requires that the auditor shall
modify the opinion in the auditor’s report when:

a) The auditor concludes that, based on the audit evidence obtained, the financial statements as a whole
are not free from material misstatement; or

b) The auditor is unable to obtain sufficient appropriate audit evidence to conclude that the financial
statements as a whole are free from material misstatement.

SA 705 also states that misstatements in financial statements arise when selected accounting policies are
not in accordance with an applicable financial reporting framework. It also states that examples of an
inability to obtain sufficient appropriate audit evidence arise from a limitation on the scope of audit
imposed by management when management prevents the auditor from requesting external confirmation of
specific account balances. Therefore, she needs to issue a modified opinion.
Keeping in view the above, her contemplation of including above matters under "Key Audit Matters" is not

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proper and is not in accordance with SA 701, "Communicating Key Audit Matters in the Independent
Auditor’s Report." It states that the auditor shall not communicate a matter in the Key Audit Matters section
of the auditor’s report when the auditor would be required to modify the opinion in accordance with SA 705
as a result of the matter.

Communicating key audit matters in the auditor’s report is not a substitute for the auditor
expressing a modified opinion when required by the circumstances of a specific audit engagement in
accordance with SA 705.
(5 Marks)

1). (b) As per SQC 1, “Quality Control for Firms that Perform Audits and Reviews of Historical Financial
Information, and Other Assurance and Related Services Engagements,” the firm should establish policies
and procedures designed to provide it with reasonable assurance that the firm, its personnel and, where
applicable, others subject to independence requirements (including experts contracted by the firm and
network firm personnel), maintain independence where required by the Code.

Such policies and procedures should enable the firm to:

i) Communicate its independence requirements to its personnel and, where applicable, to others subject to
them; and

ii) Identify and evaluate circumstances and relationships that create threats to independence, and to take
action to eliminate those threats or reduce them to an acceptable level by applying safeguards, or, if
considered appropriate, to withdraw from the engagement.

Further, as per SA 220, “Quality Control for an Audit of Financial Statements”, the engagement partner shall
form a conclusion on compliance with independence requirements that apply to the audit engagement. In
doing so, the engagement partner shall:

i) Obtain relevant information from the firm and, where applicable, network firms, to identify and evaluate
circumstances and relationships that create threats to independence;

ii) Evaluate information on identified breaches, if any, of the firm’s independence policies and procedures to
determine whether they create a threat to independence for the audit engagement; and

iii) Take appropriate action to eliminate such threats or reduce them to an acceptable level by applying
safeguards, or, if considered appropriate, to withdraw from the audit engagement, where withdrawal is
permitted by law or regulation. The engagement partner shall promptly report to the firm any inability to
resolve the matter for appropriate action.
(5 Marks)

1). (c). • It is clear from the ageing schedule that company is not able to pay its creditors on time.
Outstanding to creditors for a period of 1 year or more account for 80% creditors of the company.

• Most of key financial ratios are adverse.

• Further, bankers have refused further debits in cash credit account due to negative drawing power from
March 2022. Cash credit loans are repayable on demand. There is no other information available how the
company plans to run its business without bank finance.

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• Also, upon inquiry with the management, it was identified that management did not have any major
future contracts to boost their revenue and financial position.
• All the above factors are indicators that a material uncertainty exists that may cast significant doubt on
the company’s ability to continue as a going concern.

• There is no express disclosure of this fact in financial statements.

• Therefore, it is a situation where material uncertainty exists, which has cast significant doubt on
company’s ability to continue as going concern in accordance with SA 570, Going Concern.

• Considering above the fact that although a material uncertainty exists casting significant doubt on the
ability of the company to continue as going concern, adequate disclosure of material uncertainty is not
made in financial statements. Thus, CA K shall give qualified or adverse opinion in accordance with SA 705,
'Modifications to the Opinion in the Independent Auditor’s Report.'
(4 Marks)

2). (a) Verification of Accounts Receivable: As per SA 510, “Initial Audit Engagements – Opening Balances”,
while conducting an initial audit engagement, the objective of the auditor with respect to opening balances
is to obtain sufficient appropriate audit evidence about whether –

(i) Opening balances contain misstatements that materially affect the current period’s financial
statements; and

(ii) Appropriate accounting policies reflected in the opening balances have been consistently applied in
the current period’s financial statements, or changes thereto are properly accounted for and adequately
presented and disclosed in accordance with the applicable financial reporting framework.

When the financial statements for the preceding period were audited by another auditor, the current
auditor may be able to obtain sufficient appropriate audit evidence regarding opening balances by
perusing the copies of the audited financial statements. Ordinarily, the current auditor can place reliance
on the closing balances contained in the financial statements for the preceding period, except when
during the performance of audit procedures for the current period the possibility of misstatements in
opening balances is indicated.

For current assets and liabilities, some audit evidence about opening balances may be obtained as part
of the current period’s audit procedures, say, the collection of opening accounts receivable, (like external
confirmations) during the current period will provide some audit evidence of their existence, rights and
obligations, completeness and valuation at the beginning of the period.

In addition, according to SA 505, “External confirmations” the auditor can use external confirmation
procedures to obtain audit evidence. In addition, according to SA 580, “Written Representations”, the
auditor may consider it necessary to request management to provide written representations about
specific assertions in the financial statements; in particular, to support an understanding that the auditor
has obtained from other audit evidence of management’s judgment or intent in relation to, or the
completeness of, a specific assertion. Although such written representations provide necessary audit
evidence, they do not provide sufficient appropriate audit evidence on their own for that assertion.

In the given case, the management of F(P) Ltd. has restrained CA. Pack, its auditor, from obtaining
appropriate audit evidence for balances of Accounts Receivable outstanding as it is from the preceding
year. CA. Pack, on believing that the preceding year balances have already been audited and on the
statement of the management that there are no receipts and credits during the current year, therefore
excluded the verification of Account Receivable from his audit programme.

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Thus, CA. Pack should have requested the management to provide written representation for their views
and expressions and he should also not exclude the audit procedure of closing balances of Accounts
Receivable from his audit programme.

(5 Marks)

2). (b) Contingent Liabilities:

In respect of contingent liabilities, the auditor is primarily concerned with seeking reasonable assurance
that all contingent liabilities are identified and properly valued. The auditor should obtain representation
from management that:

1. All off-balance sheet transactions have been accounted in the books of accounts as and when such
transaction has taken place;

2. All off-balance sheet transactions have been entered into after following due procedure laid down;

3. All off-balance sheet transactions are supported by the underlying documents;

4. All year-end contingent liabilities have been disclosed;

5. The disclosed contingent liabilities do not include any crystallised liabilities which are of the nature of
loss/expense and which, therefore, require creation of a provision/adjustment in the financial
statements;

6. The estimated amounts of financial effect of the contingent liabilities are based on the best estimates
in terms of Accounting Standard 29, including consideration of the possibility of any reimbursement;

7. In case of guarantees issued on behalf of the bank’s directors, the bank has taken appropriate steps to
ensure that adequate and effective arrangements have been made so that the commitments would be
met out of the party’s own resources and that the bank will not be called upon to grant any loan or
advances to meet the liability consequent upon the invocation of the said guarantee(s) and that no
violation of section 20 of the Banking Regulation Act, 1949 has arisen on account of such guarantee; and

8. Such contingent liabilities which have not been disclosed on account of the fact that the possibility of
their outcome is remote include the management’s justification for reaching such a decision in respect of
those contingent liabilities

Note: Students may be given due credit for any other relevant point quoted.
(5 Marks)

2). (c) Key Features of a Digital Audit

• Digital audit encourages the auditee to embrace the latest technological advancements and provides
confidence to auditee to stay updated in a constantly evolving environment.

• A digital audit improves the quality of opinion. This consequently leads to a more reliable audit report

• Digital Audit leads to savings in time, cost and human effort which can be utilized towards more
productive tasks. Many of today’s digitally enabled processes can be orchestrated to operate
autonomously 24x7, driving real-time transactions.

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• Digital Audit allows to standardize processes and allow controls to be implemented to mitigate risk.

• The digital audit will help organization gain a more comprehensive overview of end-to-end processes
and how technologies are utilized, controlled and optimized against standards set.

• The digital audit will help create a future for a digital strategy and paves way for adopting new
technologies such as AI and Robotic, usage of analytics and automation.

• It can help auditee to make informed decisions.

(4 Marks)

3). (a) (In carrying out the audit of the standalone financial statements, the computation of materiality for the
purpose of issuing an opinion on the standalone financial statements of each component would be done
component-wise on a standalone basis. However, with regard to determination of materiality during the
audit of consolidated financial statements (CFS), the auditor should consider the following:

• The auditor is required to compute the materiality for the group as a whole. This materiality should be
used to assess the appropriateness of the consolidation adjustments (i.e. permanent consolidation
adjustments and current period consolidation adjustments)

• The parent auditor can also use the materiality computed on the group level to determine whether the
component's financial statements are material to the group to determine whether they should scope in
additional components, and consider using the work of other auditors as applicable.

• The principal auditor also computes materiality for each component and communicates to the
component auditor, if he believes is required for true and fair view on CFS.

• The principal auditor also obtains certain confirmations from component auditor like independence,
code of ethics, certain information required for consolidation and disclosure requirements etc.

However, while considering the observations (for instance modification and /or emphasis of matter in
accordance with SA 705/706) of the component auditor in his report on the standalone financial
statements, the principles of SA 600 need to be considered., The parent auditor should comply with the
requirements of SA 600, “Using the Work of Another Auditor”. Therefore, the concept of materiality
would be considered while considering the observations of the component auditor.

Hence RS & Co. cannot ignore the qualification of B Ltd. while framing the opinion on consolidated
financial statements of T Ltd.
(5 Marks)

3). (b) In order to identify a particular company as Non-Banking Financial Company (NBFC), it will consider
both assets and income pattern as evidenced from the last audited balance sheet of the company to
decide its principal business. The company will be treated as NBFC when a company's

(i) Financial assets constitute more than 50 per cent of the total assets (netted off by intangible assets)
and

(ii) Income from financial assets constitute more than 50 percent of the gross income. A company which
fulfils both these criteria shall qualify as an NBFC and would require to be registered as NBFC by RBI.

A company which fulfils both these criteria shall qualify as an NBFC and would require to be registered as
NBFC by RBI.

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In the given case of ABC Ltd, its Financial Assets are =` 55.90 + ` 344.47= ` 400.37 Cr

Total Assets (netted off by intangible assets) = ` 527 Cr

Income from financial assets = ` 52 Cr
Gross Income = ` 102.57 Cr

From the above, it is clear that ABC Ltd.’s financial assets constitute more than 50 per cent of the total
assets (netted off by intangible assets) and income from financial assets constitutes more than 50
percent of the gross income. Hence, ABC Ltd. fulfills boththese criteria to qualify as an NBFC.

Thus ABC Ltd. can apply for registration under Section 45-IA of Reserve Bank of India (Amendment) Act,
1997 in prescribed form along with the necessary documents.
(5 Marks)

3). (c) Engaging into other Occupations (MD of Management Consultancy company):

• As per Clause (11) of Part I of First Schedule to the Chartered Accountants Act, 1949, a Chartered
Accountant in practice will be deemed to be guilty of professional misconduct if he engages in any
business or occupation other than the profession of Chartered Accountant unless permitted by the
Council so to engage.

As per Chapter XVII of Council General Guidelines, 2008, a member in practice is allowed to hold the
office of Managing Director of a body corporate provided that the body corporate is engaged exclusively
in rendering Management Consultancy and Other Services permitted by the Council and complies with
the conditions as specified by the Council from time to time in this regard.

• In such cases, members can retain full-time Certificate of Practice besides being the Managing Director
of such Management Consultancy Company. Such members shall be regarded as being in full-time
practice and therefore can continue to do attest function and they are also entitled to train articled
assistants.

In the given case, CA. R accepted the position of managing director of a company engaged in rendering
management consultancy without obtaining prior permission from the Institute. It is not specified
whether the conditions as stated in the guidelines as to name, registration etc. of management
consultancy company are being complied with or not.

Conclusion: Assuming that conditions as regard to name and registration of management consultancy
company, as stated in the guidelines are complied with, action of CA. R will stands valid.
(4 Marks)

4). (a) As per section 27 of Chartered Accountants Act 1949, if a Chartered Accountant in practice or a Firm of
Chartered Accountants has more than one office in India, each one of such offices should be in the separate
charge of a member of the Institute. Failure on the part of a member or a firmto have a member in charge
of its branch and a separate member in case of each of the branches, where there is more than one, would
constitute professional misconduct. This condition applies to any additional office situated at a place
beyond 50 kms from the municipal limits in which any office is situated.

However, exemption has been given to members in practicing in hill areas subject to certain conditions
such as:

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− Such member/ firm be allowed to open temporary offices in a city in the plains for a limited period not
exceeding 3 months in a year.

− The regular office need not be closed during this period and all correspondence can continue to be
made at the regular office.

− The name board of the firm in temporary office should not be displayed at times other than the period
such office is permitted to function.

− The temporary office should not be mentioned in letter head, visiting card, any other documents as a
place of business of the member/ firm.

− Before commencement of every winter, it shall be obligatory on the member/firm to inform the
Institute that he/it is opening the temporary office from a particular date and after the office is closed at
the expiry of the period of permission, an intimation to that effect should also be sent to the office of the
Institute by registered post.

In the given case, Mr. Z has set up his regular office in the hill area of Kodaikanal, he decided to set up a
temporary office in the nearby city Marudai, situated at about 100 kms from the main office. As planned,
he took an office space on rent for the months of April, May & June. During these months, his regular
office was not closed. Further he was in-charge for both the offices. In view of abovementioned
criteria’s, he is eligible to avail the benefits of the above exemptions. Also, it is given that the temporary
office was open in Madurai for only 3 months and not beyond that. The fact that Mr. Z is in-charge for
both the offices, the temporary office being set-up in the plains which is 100 kms away and the regular
office kept open during the 3 months does not constitute any violation of the provisions of the Chartered
Accountant Act. Assuming Mr. Z has informed the Institute regarding such temporary office in the
prescribed manner.

Therefore, in the given case, no penal action needs to be taken on the basis of complaint registered by
Mrs. A, as Mr. Z is not guilty of professional misconduct.
(5 Marks)

4). (b) (i) As per SA 501 “Audit Evidence- Specific Considerations for Selected Items”:
When inventory is material to the financial statements, the auditor shall obtain sufficient appropriate
audit evidence regarding the existence and condition of inventory by:

(a) Attendance at physical inventory counting, unless impracticable, to:

➢ Evaluate management’s instructions and procedures for recording and controlling the results of the
entity’s physical inventory counting;

➢ Observe the performance of management’s count procedures;

➢ Inspect the inventory; and

➢ Perform test counts; and

(b) Performing audit procedures over the entity’s final inventory records to determine whether they
accurately reflect actual inventory count results.

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(ii) Attendance at Physical Inventory Counting Involves:

- Inspecting the inventory to ascertain its existence and evaluate its condition and perform test counts.
- Observing compliance with management’s instructions and the performance of procedures for
recording and controlling the results of the physical inventory count.
- Obtaining audit evidence as to the reliability of management’s count procedures.

(iii) Reporting:

Hence, in the given case, the approach of the Engagement Partner is not appropriate as when inventory
is material to the financial statements, the auditor shall obtain sufficient appropriate audit evidence
regarding the existence and condition of inventory. This should be done by performing various audit
procedures which also include attending physical count, observing the count, inspecting the inventory,
and reperforming physical counts.
(5 Marks)

4). (c) SA 300 requires the auditor to document the audit plan and significant changes made during the
audit engagement to the audit plan. It also requires the auditor to document the reasons for such
changes.

The documentation of the audit plan is a record of the planned nature, timing, and extent of risk
assessment procedures and further audit procedures at the assertion level in response to the assessed
risks. It also serves as a record of the proper planning of the audit procedures that can be reviewed and
approved prior to their performance. Further, changes to the audit plan, along with reasons thereof, due
to the decision to undertake extensive procedures for verifying foreign contributions in comparison to
what was originally planned, need to be documented. Failure to document the audit plan could entail
the risk of not conducting the audit in accordance with professional standards in a qualitative manner.
(4 Marks)

5). (a) According to Clause (xi) (a) of Para 3 of CARO 2020, the auditor is required to report whether any
fraud by the company or any fraud on the company has been noticed or reported during the year. If
yes, the nature and the amount involved is to be indicated. Further, as per Clause (xi) (b) of Para 3 of
CARO 2020, whether any report under section 143(12) of Companies Act has been filed by the auditors in
Form ADT-4 as prescribed under rule 13 of Companies (Audit and Auditors) Rules, 2014 with Central
Government;

As per section 143(12) of the Companies Act, 2013, if an auditor of a company, in the course of the
performance of his duties as auditor, his 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 immediately
report the matter to the Central Government (in case the amount of fraud is rupees 1 crore or above)
or Audit Committee or Board in other cases (in case the amount of fraud involved is less than rupees 1
crore) within such time and in such manner as may be prescribed.

(i) Fraud committed against the company by an employee of the company:

In case employees are involved in fraud committed against the company, reporting has to be done in
accordance with CARO 2020 and as per section 143(12) of Companies Act, 2013.

(ii) Company has committed a major fraud on its customer:

Major fraud committed by the company on its customer has to be reported in accordance with CARO
2020.
(5 Marks)

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5). (b) (i) The internal auditor of M/s. Real Ltd. has identified some risks while applying risk assessment
procedures and various analytical procedures.

(ii) As per SA 315 “Identifying and Assessing the Risks of Material Misstatement through Understanding
the Entity and Its Environment”, in exercising judgment as to which risks are significant risks, the auditor
shall consider at least the following factors:

- Whether the risk is a risk of fraud is there;

- Whether the risk is related to recent significant economic, accounting, or other developments like
changes in the regulatory environment, etc., and therefore requires specific attention;

- The complexity of transactions;

- Whether the risk involves significant transactions with related parties;

- The degree of subjectivity in the measurement of financial information related to the risk, especially
those measurements involving a wide range of measurement uncertainty; and

- Whether the risk involves significant transactions that are outside the normal course of business for the
entity, or that otherwise appear to be unusual.
(5 Marks)

5). (c) Failure to exercise due diligence and to obtain necessary information:

• Clause 2 of Part I of Second Schedule of CA Act, 1949 states that a CA in practice shall be guilty of
professional misconduct if he Certifies or submits in his name or in the name of his firm a report of an
examination of financial statements unless the examination of such statements and the related records
has been made by him or by a partner or an employee in his firm or by another CA in practice.

• Clause 7 of Part I of Second Schedule of CA Act, 1949 states that a CA in practice shall be deemed to be
guilty of professional misconduct if he “does not exercise due diligence or is grossly negligent in the
conduct of his professional duties”.

• Clause 8 of Part I of Second Schedule to CA Act, 1949 states that if a CA in practice fails to obtain
sufficient information to warrant the expression of an opinion or its exceptions are sufficient material to
negate the expression of an opinion, the CA shall be deemed to be guilty of a professional misconduct.

In the present case, Mr. Z, did not exercise due diligence and is grossly negligent in the conduct of his
professional duties since he certified the circulation figures without the examination of records and other
required documents. He should not express his opinion before obtaining the examination of documents.

As an auditor, Mr. Z ought to have verified the basic records such as print order, printer’s bill, number of
copies printed, sold and paid for, number of copies returned unsold to ensure the correctness of
circulation figures.

Conclusion: Mr. Z will be held guilty of professional misconduct as per clauses 2, 7 and 8 of Part I of Second
Schedule of Chartered Accountants Act, 1949.
(4 Marks)

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6). (a) Environment, Social, and Governance (ESG) reporting is all about disclosure of information, data,
metrics that explain the added value in the following three areas:

Environment
Environmental stands for corporate climate policies, energy use, waste, pollutions, natural resource
conservation, and treatment of animals. It includes the natural resources that every entity absorbs for its
functioning like that of coal, electricity, water and so on. Processing this energy into products/services
which will leave behind certain wastes like that of carbon emissions, water discharges, e-wastes and so
on. Thus, one is dependent on the environment for carrying out its operations.

Social
It addresses the relationships the entity has and the reputation it fosters with people and institutions in
the environments where you do business and the value chain involved. It further includes labor relations,
diversity, and inclusivity. Every company operates within a broader and diverse society.

Governance
It is the internal system of practices, controls, and procedures entity adopts in order to govern itself,
make effective investment decisions, comply with the law, and meet the needs of all stakeholders. Every
entity, which is itself a legal creation, requires governance.

Nature of Reporting
ESG reporting can be both quantitative and qualitative in nature. Qualitative reports tend to describe a
company’s strategy or policy around the relevant topics, while a quantitative approach includes metrics,
and key performance indicators (KPIs) linked to each area in order to measure progress against goals and
report on achievements. Naturally, a mixed approach that makes use of both qualitative and quantitative
information tends to add the maximum value to the quality of disclosures.

How Can Corporates Contribute to SDGs?

United Nations members states adopted Sustainable Development to provide a blueprint which
mentioned the Sustainable Development Goals (SDGs). They recognized that ending poverty and other
deprivations must go hand in hand with strategies that improve health and education, reduce inequality,
and spur economic growth – all while tackling climate change and working to preserve our oceans and
forests. Corporates can contribute to SDGs due to their capacity to provide solutions necessary for
meeting SDGs. Companies can lead in innovation and contribute to the achievement of Sustainable
Development Goals.
(5 Marks)

6). (b) A Comprehensive Audit by the Comptroller and Auditor General of India for Sunlight Limited may
cover the following aspects:

1. Project Costs

- Comparison of the overall capital cost of the project with approved planned costs.
- Analysis of substantial cost increases, if any, with reasons for such increases.

2. Project Execution

- Examination of project formulation and execution systems.

- Identification of inadequacies, if any, and their impact on the gestation period and capital costs.

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3. Production Efficiency

- Assessment of whether planned production or operational outputs were achieved.

- Identification of under-utilization of installed capacity and reasons for shortfall.

4. Return on Investment

- Evaluation of whether the planned rate of return was achieved.

5. Cost Controls

- Review of cost control measures and identification of inefficiencies or wastages in raw material
consumption.

6. Technology and Innovation

- Analysis of research and development programs, adoption of new processes, and their impact on
improving profitability and reducing costs.

7. Inventory Management

- Examination of inventory levels to identify redundancy in stores and spares.

8. Repairs and Maintenance

- Evaluation of adequacy and efficiency of the repair and maintenance systems.

(5 Marks)

6). (c) (A) Equity Research and Advising:

As per the recent decisions taken by the Ethical Standards Board of ICAI, a Chartered Accountant in
practice may be an equity research adviser, but he cannot publish a retail report, as it would amount to
other business or occupation.
In the given case, though Mr. S is involved in doing equity research and in advising people, it is clear that
he does not publish any retail report of his research. Hence, this act of Mr. S shall not make him guilty of
professional misconduct.

(B) Paper-Setting and Agricultural Activities:

As per Clause 11 of Part I of the First Schedule of the Chartered Accountants Act and Regulation 190A of
the Chartered Accountants Regulations, a Chartered Accountant in practice is deemed to be guilty of
professional misconduct if he engages in any business or occupation other than the profession of
chartered accountant unless permitted by the Council so to engage.

Further, Regulation 190A mentions the 'Permissions Granted Generally' to engage in a certain category
of occupations, for which no specific permission of the Council is required.

These include:
- Valuation of papers, acting as a paper-setter, head examiner or moderator, for any examination.
- Owning agricultural land and carrying out agricultural activities.

Therefore, in the given case, the activities of Mr. S as a paper-setter and involvement in agricultural
activities do not make him guilty of professional misconduct.

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(C) Discharged Insolvent:

Section 8 of the Chartered Accountants Act, 1949 enumerates the circumstances under which a person is
debarred from having his name entered in or borne on the Register of Members, if he, being a
discharged insolvent, has not obtained from the court a certificate stating that his insolvency was caused
by misfortune without any misconduct on his part. It should be noted that a person who has been
removed from membership for a specified period shall not be entitled to have his name entered in the
Register until the expiry of such period. Failure on the part of a person to disclose the fact that he suffers
from any one of the a forementioned disabilities would constitute professional misconduct. The name of
the person, who is found to have been subject at any time to any of the disabilities discussed in Section
8, can be removed from the Register of Members by the Council. In the given case, it is clearly stated
that Mr. S was discharged insolvent, and he has also obtained from the court a certificate stating that his
insolvency was caused by misfortune without any misconduct on his part. Hence, Mr. S has not violated
the provisions of Section 8, and he is not debarred from having his name entered in the Register of
Members.
(4 Marks)

OR

Procedures to be performed on Summary Financial Statements:

As per SA 810 'Engagements to Report on Summary Financial Statements' the auditor shall perform the
following procedures, and any other procedures that the auditor may consider necessary, as the basis for
the auditor’s opinion on the summary financial statements:

A. Evaluate:

(a) Whether Summary F.S. adequately:

• Disclose their summarized nature; and

• Identify the audited FS.

(b) If Summary F.S. are not accompanied by audited FS, whether they clearly describe:

• From whom or where audited FS are available; OR

• Law & Regulation that specifies that audited F.S. need not be made available to intended users of
Summary F.S. & establishes criteria for preparation of Summary F.S.

(c) Whether Summary F.S. adequately disclose the applied criteria.

(d) Whether Summary F.S. are prepared in accordance with applied criteria.

(e) Whether Summary F.S. contain necessary info & are appropriately aggregated so as not to be
misleading.

(f) Whether audited F.S. are available to intended users without undue difficulty.

B. Compare:
Summary F.S. with related information in audited F.S. to determine whether Summary F.S. agree with or
can be re-calculated from related information in audited F.S.

(4 Marks)

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