The WAY CA test series
CA FINAL P3: ADVANCED AUDITING, ASSURANCE 11.02.2025
AND PROFESSIONAL ETHICS
[ SYLLABUS : SAE 3400, 3402, 3420, SA 402 ]
TIME : 1 HR 15 MIN TOTAL : 40 MARKS
PART A : MULTIPLE CHOICE QUESTIONS 10 MARKS
QUESTION : 1 2 MARKS
A company is in its start-up phase and its future business prospects are dependent not only upon
funding by stream of VC (venture capital) funds but also how its product would be perceived by
potential customers. The company asks CA P to prepare a projection for a coffee table discussion with
venture capital firms and also provide a report duly signed by him providing assurance on such
projections. What is likely appropriate course of action for him?
a) Such a reporting is outside the scope of services which can be rendered by Chartered
Accountants. Therefore, such engagement should be straightaway refused.
b) He can report in respect of examination of evidence supporting the assumptions in such financial
information and on accuracy of projections.
c) He can report in respect of examination of evidence supporting the assumptions in such financial
information but not on accuracy of projections.
d) He can report only in respect of examination of evidence supporting the assumptions in such
financial information when management expects these future events described in situation to
take place.
QUESTION : 2 2 MARKS
ABC Ltd. is planning to acquire XYZ Ltd. on January 1, 2024. To provide stakeholders with a clearer
financial picture, the management of ABC Ltd. decides to prepare Pro Forma Financial Information (PFFI)
based on SAE 3420. As part of this process, they make adjustments to their financial statements to
illustrate the impact of the acquisition as if it had occurred on January 1, 2023. They also ensure that all
adjustments align with the applicable financial reporting framework (FRF) and accounting policies.
1
The WAY CA test series
CA FINAL P3: ADVANCED AUDITING, ASSURANCE 11.02.2025
AND PROFESSIONAL ETHICS
[ SYLLABUS : SAE 3400, 3402, 3420, SA 402 ]
TIME : 1 HR 15 MIN TOTAL : 40 MARKS
Based on the above scenario, which of the following best describes the nature of pro forma adjustments
under SAE 3420?
a) Adjustments made to financial statements for tax-saving purposes.
b) Adjustments to reflect the financial position had a significant event occurred earlier.
c) Adjustments that change historical financial statements permanently.
d) Adjustments that are optional and not required for PFFI preparation.
QUESTION : 3 2 MARKS
XYZ Ltd., a listed company, is planning a major acquisition of ABC Ltd. To comply with regulatory
requirements, XYZ Ltd. includes Pro Forma Financial Information (PFFI) in its prospectus to illustrate the
financial impact of the acquisition. The PFFI presents the financial statements as if the acquisition had
occurred on January 1, 2023, even though the actual acquisition is set for January 1, 2024. While
preparing the PFFI, XYZ Ltd. applies necessary pro forma adjustments to ensure consistency with the
Financial Reporting Framework (FRF).
However, investors raise concerns that the PFFI does not reflect the actual financial position of the
company. The company's management clarifies that PFFI is only for illustrative purposes and does not
represent actual financial performance, position, or cash flows.
Based on the above scenario, which of the following statements is most accurate?
a) PFFI in a prospectus is a mandatory financial statement that must be audited and reported as
actual financial data.
b) PFFI represents the company's actual financial position and is legally binding for financial
reporting purposes.
c) PFFI is included in the prospectus only for illustrative purposes and does not represent actual
financial results.
d) PFFI is used to manipulate financial results and mislead investors by altering historical data.
2
The WAY CA test series
CA FINAL P3: ADVANCED AUDITING, ASSURANCE 11.02.2025
AND PROFESSIONAL ETHICS
[ SYLLABUS : SAE 3400, 3402, 3420, SA 402 ]
TIME : 1 HR 15 MIN TOTAL : 40 MARKS
QUESTION : 4 2 MARKS
In case of a type 2 report issued under SAE 3402, if work of internal audit function has been used in
performing tests of controls, which of following is true regarding reporting implications in service auditors
report?
a) That part of the service auditor’s assurance report that describes the service auditor’s tests of
controls and the results includes a description of the internal auditors work and of the service
auditor’s procedures with respect to that work.
b) Internal auditors work is not referred to in service auditors’ assurance report.
c) A description of the internal auditors work and of the service auditor’s procedures with respect
to that work are stated in service auditors’ responsibility section
d) The question of reference to internal auditor’s work does not arise as in such assurance reports
ultimate responsibility is of service auditor.
QUESTION : 5 2 MARKS
During the audit of Tech Limited, you observe that the company has outsourced its accounting data
processing to a third-party service organisation. As per SA 402, the auditor must assess various factors to
determine the impact of the service organisation’s activities on the audit risk.
Which of the following best describes the primary objective of the auditor’s assessment under SA 402?
a) To determine whether the service organisation is financially stable and profitable.
b) To understand how the service organisation’s activities affect the user entity’s financial reporting
and internal controls.
c) To evaluate the service organisation’s compliance with tax laws and regulatory requirements.
d) To ensure that the service organisation follows the same accounting policies as the user entity.
3
The WAY CA test series
CA FINAL P3: ADVANCED AUDITING, ASSURANCE 11.02.2025
AND PROFESSIONAL ETHICS
[ SYLLABUS : SAE 3400, 3402, 3420, SA 402 ]
TIME : 1 HR 15 MIN TOTAL : 40 MARKS
PART B : DESCRIPTIVE QUESTIONS 30 MARKS
QUESTION : 1 4 MARKS
G Ltd. is a mobile phone operating company. Barring the marketing function, it had outsourced the entire
operations like maintenance of mobile infrastructure, customer billing, payroll, accounting functions, etc.
Assist the auditor of G Ltd. as to how he can obtain an understanding of how G Ltd. uses the services of
the outsourced agency in its operations.
QUESTION : 2 6 MARKS
The management of S Ltd. requests you to accept an engagement to report on compilation of pro forma
financial information to be included in a prospectus. In light of SAE 3420, what are the factors to be
considered by you as a practitioner before agreeing to accept such engagement to report on pro forma
financial information.
QUESTION : 3 4 MARKS
ENN Limited is availing the services of APP Private Limited for its payroll operations. Payroll cost accounts
for 65% of total cost for ENN Limited. APP Limited has provided the type 2 report as specified under SA
402 for its description, design and operating effectiveness of control.
APP Private Limited has also outsourced a material part of payroll operation M/s SMP & Associates in
such a way that M/s SMP & Associates is sub-service organisation to ENN Limited. The Type 2 report
which was provided by APP Private Limited was based on carve-out method as specified under SA 402.
4
The WAY CA test series
CA FINAL P3: ADVANCED AUDITING, ASSURANCE 11.02.2025
AND PROFESSIONAL ETHICS
[ SYLLABUS : SAE 3400, 3402, 3420, SA 402 ]
TIME : 1 HR 15 MIN TOTAL : 40 MARKS
CA Raman while reviewing the unmodified audit report drafted by his assistant found that, a reference
has been made to the work done by the service auditor. CA Raman hence asked his assistant to remove
such reference and modify report accordingly.
Comment whether CA Raman is correct in removing the reference of the work done by service auditor?
QUESTION : 4 6 MARKS
XYZ Ltd. is a financial services company that outsources its transaction processing and IT support to ABC
Services, a third-party service organisation. As part of the audit process, the external auditor of XYZ Ltd.
needs assurance regarding the description, design, and operating effectiveness of controls at ABC
Services, as these controls impact the financial reporting of XYZ Ltd.
To address this, ABC Services engages an independent auditor to perform an assurance engagement and
issue a report. This report provides an opinion on whether ABC Services' controls were suitably designed
and operated effectively throughout a specified period.
As an auditor, discuss how the report on the description, design, and operating effectiveness of controls
at a service organisation is structured. What key elements should be included in this report to ensure it
meets the standard requirements?
QUESTION : 5 (Previous syllabus question) 6 MARKS
During the financial year ended on 31/03/2018, LM Private Limited had borrowed from a Nationalized
Bank, a term loan of ₹ 120 lakhs consisting of ₹ 100 lakhs for purchase of a machinery for the new plant
and ₹ 20 lakhs for erection expenses. As on the date of 31st March, 2018, the total of capital and free
5
The WAY CA test series
CA FINAL P3: ADVANCED AUDITING, ASSURANCE 11.02.2025
AND PROFESSIONAL ETHICS
[ SYLLABUS : SAE 3400, 3402, 3420, SA 402 ]
TIME : 1 HR 15 MIN TOTAL : 40 MARKS
reserves of the Company was ₹ 50 lakhs and turnover for the year 2017-18 was ₹ 750 lakhs. The Bank
paid ₹ 100 lakhs to the vendor of the Company for the supply of machinery on 31/12/2017. The
machinery had reached the yard of the Company. On 28/02/2018, the Company had drawn the balance of
loan viz. ₹ 20 lakhs to the credit of its current account maintained with the Bank and utilized the full
amount for renovating its administrative office building. The machinery had been kept as capital stock
under construction. Comment as to reporting issues, if any, that the Auditor should be concerned with for
the financial year ended on 31/03/2018, in this respect.
QUESTION : 6 4 MARKS
Ayurda Ltd. is a fast-growing and award-winning software company which is headquartered in Mumbai. It
also has offices in the UK and provides cloud-based professional services automation (PSA) software
solutions to professional services organizations around the world. They want to engage you to provide an
assurance report for one of its major clients over the controls it operates as a service organisation. Can
you provide such an assurance report?
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