CA Final

Paper 3

Advanced Auditing, Assurance

&Professional Ethics
Study Material Compilation
May’25 and onwards

Includes
Illustrations &
Test Your Knowledge questions
from ICAI Study Material

CA SANIDHYA SARAF
Note to Readers:

This book contains all ICAI Study Material questions compiled with each question followed
immediately by its corresponding answer. It includes all Illustrations and Test Your Knowledge
questions from the ICAI Study Material applicable for May 2025 and onwards.

The purpose of this compilation is to help students navigate ICAI’s vast content with ease. By
presenting questions and answers together in a structured, easy-to-read format, the book is
designed to enhance clarity, speed, and confidence in preparation.

A heartfelt thank you to Vivitsu, whose deep understanding of CA students’ needs and
commitment to quality education made this possible. Vivitsu specializes in curating high-
quality question banks, compilers, and conceptual content that empowers students to
practice smart and succeed in exams. Their precision, speed, and expertise played a vital role
in shaping this book into a student-centric resource.

CA Sanidhya Saraf
x
CA SANIDHYA SARAF

Table of Contents
Sr. Particulars Page Number
No
1 Quality control 1.1-1.7
2 General Auditing Principles and Auditor’s 2.1 – 2.12
Responsibilities
3 Audit Planning, Strategy & Execution 3.1 – 3.10
4 Materiality, Risk Assessment & Internal Control 4.1 – 4.12
5 Audit Evidence 5.1 – 5.16
6 Completion and Review 6.1- 6.15
7 Reporting 7.1 -7.19
8 Specialized Areas 8.1 – 8.7
9 Audit – related Services 9.1 – 9.7
10 Review of Financial Information 10.1-10.7
11 Prospective Financial Information and other Assurance 11.1 – 11.7
Services
12 Digital Auditing and Assurance 12.1 – 12.13
13 Group Audits 13.1-13.10
14.1 Special Features of Audit of Banks 14.1.1-14.1.10
14.2 Special Features of Audit of Non-Banking Financial 14.2.1-14.2.11
Companies
15 Overview of Audit of Public Sector Undertakings 15.1-15.10
16 Internal Audit 16.1-16.13
17 Due Diligence, Investigation and Forensic Audit 17.1-17.17
18 Sustainable Development Goals (SDG) and Environment, 18.1-18.10
Social and Governance (ESG) Assurance
19 Professional Ethics and Liabilities of Auditors 19.1-19.32
 CA SANIDHYA SARAF 1.1

Chapter 1
Quality Control
Question 1
SPS & Associates, Chartered Accountants, are statutory auditors of Grec Limited for the last two years. Grec
Limited is engaged in the manufacturing and marketing of pharmaceutical goods in India. During the year
2023-24, the company has diversified and commenced providing software solutions in "e-commerce" in
India as well as in certain African countries. SPS & Associates, while carrying out the audit, noticed that the
company has expanded its operations into a new segment as well as in a new country. SPS & Associates
does not possess the necessary expertise and infrastructure to carry out the audit of these diversified
business activities and accordingly wishes to withdraw from the engagement and client relationship. Discuss
the issues that need to be addressed before deciding to withdraw.
Answer 1
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
for the acceptance and continuance of client relationships and specific engagements, designed to provide it
with reasonable assurance that it will undertake or continue relationships and engagements only where it is
competent to perform the engagement and has the capabilities, time and resources to do so.
In the given case, SPS & Associates, Chartered Accountants, statutory auditors of Grec Limited for the last two
years, came to know that the company has expanded its operations into a new segment as well as in new
country. SPS & Associates does not possess the necessary expertise for the same, therefore, SPS & Associates
wish to withdraw from the engagement and client relationship. Policies and procedures on withdrawal from
an engagement or from both the engagement and the client relationship address issues that include the
following:
Discussing with the appropriate level of the client’s management and those charged with its governance
regarding the appropriate action that the firm might take based on the relevant facts and circumstances.
If the firm determines that it is appropriate to withdraw, discussing with the appropriate level of the client’s
management and those charged with governance withdrawal from the engagement or from both the
engagement and the client relationship, and the reasons for the withdrawal.
Considering whether there is a professional, regulatory, or legal requirement for the firm to remain in place,
or for the firm to report the withdrawal from the engagement, or from both the engagement and the client
relationship, together with the reasons for the withdrawal, to regulatory authorities.
Documenting significant issues, consultations, conclusions, and the basis for the conclusions.
SPS & Associates should address the above issues before deciding to withdraw.

Question 2
PQR Associates are the statutory auditors of a large un-listed company, which is engaged in manufacturing
of auto components. Subsequent to reappointment of auditors in the Annual General Meeting, the
Company shared the appointment letter with PQR Associates, seeking acknowledgement and acceptance
letter. CA R is the engagement partner and is planning to issue the acceptance letter. During the current
financial year, there was a search by the Income-tax Authorities on the company, and certain accounting
records were seized for verification. Based on the information available on social media, CA R noted that
the promoters’ brother is contemplating to contest in the ensuing elections, under the banner of a political
party. One of the current senior engagement team manager, who has been doing the audit engagement till
last year, has left PQR Associates and is planning to provide some accounting services to one of the associate
companies. PQR Associates are yet to recruit another senior manager having adequate experience in the
audits of clients engaged in the automotive sector. Elaborate the matters to be considered by PQR
Associates with respect to acceptance & continuance of client relationships considering the above issues.
Answer 2
Acceptance and Continuance of Client Relationships: As per SQC 1, “Quality Control for Firms that Perform
Audits and Reviews of Historical Financial Information, and Other Assurance and Related Services
Engagements,” a firm before accepting an engagement should acquire vital information about the client. Such
an information should help firm to decide about: -
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 CA SANIDHYA SARAF 1.2

• Integrity of Client, promoters, and key managerial personnel.

• Competence (including capabilities, time, and resources) to perform engagement.
• Compliance with ethical requirements.
The firm should obtain such information as it considers necessary in the circumstances before accepting an
engagement with a new client, when deciding whether to continue an existing engagement, and when
considering acceptance of a new engagement with an existing client. Where issues have been identified, and
the firm decides to accept or continue the client relationship or a specific engagement, it should document
how the issues were resolved.
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 obtain relevant information from the firm and, where applicable,
network firms, to identify and evaluate circumstances and relationships that create threats to independence.
In view of the above, PQR Associates should:
• follow their firm's policies and procedures for client acceptance and continuance. This includes evaluating
the integrity of the client, assessing potential risks associated with the engagement, and ensuring the firm
has the necessary resources and expertise to perform the engagement effectively. The engagement team,
should assess, whether the company is involved in any funding activities, to the political parties, and if so
enquire and assess the risks related to such transactions.
• communicate clearly with the client regarding the scope of the engagement, the responsibilities of both
parties, and any limitations on the services to be provided. This helps manage expectations and ensures
alignment between the firm and the client
• independence and objectivity throughout the engagement. Any potential threats to independence, such
as relationships with the client's affiliates or involvement in political activities by related parties, should be
evaluated and mitigated appropriately. Since the senior manager who was on this engagement is providing
certain accounting services, to one of the group companies, the engagement partner, should assess,
whether it would have any impact on the audit and examine the relevant ethical/independence
requirements.
• continually monitor the client relationship for any changes or developments that may impact the firm's
ability to provide services effectively. This includes staying informed about significant events such as the
income-tax search, changes in client management, or potential conflicts of interest. Since there was an
income-tax raid on the organisation, the engagement partner should evaluate the risks of material
misstatements, and non-disclosure of tax disputes and liabilities.
• ensure that their engagement team possesses the necessary competence and capabilities to perform the
audit effectively. The departure of a senior manager and the need to recruit a replacement with specific
industry experience should be addressed promptly to maintain audit quality. Since one of the senior
engagement team members has left PQR Associates, the engagement partner should assess, whether he
would be in a position to devote adequate time on the engagement or whether to recruit another resource,
before commencement of the audit.

Question 3
CA Giri is a senior partner of M/s TSV Associates. M/s TSV Associates is a reputed firm of Chartered
Accountants which has been in practice for more than five decades. The firm undertakes statutory audits of
large listed companies across various industry sectors and has more than fifty qualified experienced
professionals. CA Giri has been assigned as an Engagement Quality Control Reviewer for an audit
engagement of a listed company. What are the aspects which would be looked into by CA Giri as an EQCR
in relation to the engagement?
Upon completion of the review, CA Giri has identified certain issues with respect to revenue recognition and
adequacy of provisions relating to onerous contracts. The views of CA Giri are not accepted by the
Engagement Partner. Suggest ways of resolving the differences of opinion between CA Giri and the
engagement partner.

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 CA SANIDHYA SARAF 1.3

Answer 3
As per SA 220, “Quality Control for an Audit of Financial Statements”, for audits of financial statements of
listed entities, CA Giri, the engagement quality control reviewer, on performing an engagement quality control
review, shall also consider the following:
(i) The engagement team’s evaluation of the firm’s independence in relation to the audit engagement;
(ii) Whether appropriate consultation has taken place on matters involving differences of opinion or other
difficult or contentious matters, and the conclusions arising from those consultations;
(iii) Whether audit documentation selected for review reflects the work performed in relation to the significant
judgments made and supports the conclusions reached.
As per SQC 1, “Quality Control for Firms that Perform Audits and Reviews of Historical Financial Information,
and Other Assurance and Related Services Engagements,”, there might be difference of opinion within
engagement team, with those consulted and between engagement partner and engagement quality control
reviewer. The report should only be issued after resolution of such differences. In case, recommendations of
engagement quality control reviewer are not accepted by engagement partner and matter is not resolved to
reviewer’s satisfaction, the matter should be resolved by following established procedures of firm like by
consulting with another practitioner or firm, or a professional or regulatory body. In the given situation, under
completion of review, CA Giri, Engagement Quality Control Reviewer has identified certain issues. However,
the view of CA Giri, the EQCR are not accepted by the Engagement Partner. This difference of opinion among
the CA Giri and Engagement Partner should be resolved with abovementioned manner as per SQC 1.

Question 4
TPX & Co., Chartered Accountants, is a large audit firm. It maintains audit documentation both electronically
and in physical form (hard files). The physical files are neither scanned and incorporated into electronic files
nor cross-referenced to the electronic files. Further, there are many instances where audit working papers
do not contain details as to whether information was obtained from client or prepared by engagement
team. How do you view the above situation from the point of view of quality control system in audit firm?
Analyze.
Answer 4
In accordance with 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 maintain confidentiality, safe custody, integrity, accessibility and retrievability of
engagement documentation.
In the given situation, the physical files are neither scanned and incorporated in the electronic files nor cross-
referenced to the electronic files. Inability to do so shows that firm has not established policies and procedures
to maintain integrity of engagement documentation. Lack of ensuring the same makes it difficult to
demonstrate completeness of audit files and whether these were assembled within 60 days timeframe
stipulated in SQC 1.
Where engagement documentation is in paper, electronic, or other media, the integrity, accessibility or
retrievability of the underlying data may be compromised if the documentation could be altered, added to or
deleted without the firm’s knowledge, or if it could be permanently lost or damaged. One of the reasons for
designing and implementing appropriate controls for engagement documentation in this regard is the
protection of the integrity of information at all stages of engagement.
For the practical reasons, original paper documentation may be electronically scanned for inclusion in
engagement files. In that case, the firm implements appropriate procedures requiring engagement teams to:
(a) Generate scanned copies that reflect the entire content of the original paper documentation,
including manual signatures, cross-references and annotations;
(b) Integrate the scanned copies into the engagement files, including indexing and signing off on the
scanned copies as necessary; and
(c) Enable the scanned copies to be retrieved and printed as necessary.
It has also been stated that there are many instances where audit working papers do not contain details as to
whether information was obtained from the client or prepared by the engagement team. It is important to
identify the source of the document and the information used as audit evidence to ensure its reliability. It
could have potential risks of non-compliance with Standards on Auditing.
Chapter 1 Quality Control
 CA SANIDHYA SARAF 1.4

Question 5
Pine & Associates is the statutory auditor of BB Ltd., a listed company and started its operations 6 years
ago. The fieldwork during the audit of the financial statements of the company for the year ended 31st
March, 2024 was completed on 1st May, 2024. The auditor’s report was dated 15th May, 2024. During the
documentation review of the engagement, it was observed that the engagement quality control review was
completed on 18th May, 2024. The engagement partner had completed his reviews in entirety by 12th May,
2024. Comment
Answer 5
As per SA 220, “Quality Control for an Audit of Financial Statement”, the engagement partner shall take
responsibility for reviews being performed in accordance with the firm’s review policies and procedures.
For audits of financial statements of listed entities, the engagement partner shall:
• Determine that an engagement quality control reviewer has been appointed;
• Discuss significant matters arising during the audit engagement, including those identified during the
engagement quality control review, with the engagement quality control reviewer; and
• Not date the auditor’s report until the completion of the engagement quality control review.
Further, SA 700,” Forming an Opinion and Reporting on Financial Statements”, requires the auditor’s report
to be dated not earlier than the date on which the auditor has obtained sufficient appropriate evidence on
which to base the auditor’s opinion on the financial statements. In cases of an audit of financial statements of
listed entities where the engagement meets the criteria for an engagement quality control review, such a
review assists the auditor in determining whether sufficient appropriate evidence has been obtained.
Conducting the engagement quality control review in a timely manner at appropriate stages during the
engagement allows significant matters to be promptly resolved to the engagement quality control reviewer’s
satisfaction on or before the date of the auditor’s report.
In this case, the audit of BB Ltd. for the year ending on 31st March 2024 was conducted by Pine & Associates
and was completed on 1st May, 2024. Subsequently, the engagement partner reviewed the audit by 12th May,
2024. The audit report issued by Pine and Associates was dated 15th May, 2024. However, the engagement
quality control review was finalized on 18th May, 2024, which is later than the date of the audit report. In view
of above, the date of auditors’ report before the completion of the engagement quality control review, is not
correct.

Question 6
PQR & Associates are statutory auditors of a listed company. There arose an issue during the course of audit
relating to related party transactions. The engagement partner wants to consult an engagement quality
control reviewer on this matter during the course of audit process itself. Can he consult with engagement
quality control reviewer? Discuss
Answer 6
It is necessary to maintain objectivity of reviewer. Therefore, participation in engagement or making decisions
for engagement team is to be avoided at all costs. However, engagement partner may consult engagement
quality control reviewer during the engagement so as not to compromise his objectivity and eligibility to
perform the role.

Question 7
Beta Private Limited has approached a firm of Chartered accountants to assist them in preparation of
financial statements and issue a compilation report in this regard. Does CA firm have responsibility in
relation to quality control for above said engagement? Discuss with reasons.
Answer 7
Such kind of services fall in category of “related services”. SQC 1 is applicable to all type of engagements
including engagement pertaining to “related services”.

Question 8
Ramanujan, a CA final student, feels that engagement file in audit engagement should be ready prior to
issue of audit report. Discuss whether Ramanujan’s view is in order.

Chapter 1 Quality Control

 CA SANIDHYA SARAF 1.5

Answer 8
The firm should establish policies and procedures for engagement teams to complete the assembly of final
engagement files on a timely basis after the engagement reports have been finalized. Engagement files should
be completed in not more than 60 days after date of auditor’s report in case of audit engagements. Thus, view
of Ramanujan is not in order.

Question 9
BNE & Co. are in midst of audit process of a listed company. During the audit, an issue arose relating to
revenues from contracts with customers in terms of Ind AS 115. The engagement partner took a certain
stand. However, engagement quality control reviewer recommended otherwise after review. The
engagement partner is not willing to accept recommendations of reviewer. How can this conflict be
resolved?
Answer 9
In case, recommendations of engagement quality control reviewer are not accepted by engagement partner
and matter is not resolved to reviewer’s satisfaction, the matter should be resolved by following established
procedures of firm like by consulting with another practitioner or firm, or a professional or regulatory body.
The audit report should be issued only after resolution of the matter.

Question 10
MB & Associates is a partnership firm of Chartered Accountants which was established seven years back.
The firm is getting new clients and has also been offered new engagement services with existing clients. The
firm is concerned about obtaining such information as it considers necessary in the circumstances before
accepting an engagement with a new client and acceptance of a new engagement with an existing client.
The firm is looking to work with only select clients to adhere to the Quality Control Standards. Guide MB &
Associates about the matters to be considered with regard to the integrity of a client, as per the
requirements of SQC 1.
Answer 10
As per SQC 1, the firm should obtain such information as it considers necessary in the circumstances before
accepting an engagement with a new client, when deciding whether to continue an existing engagement, and
when considering acceptance of a new engagement with an existing client. Where issues have been identified,
and the firm decides to accept or continue the client relationship or a specific engagement, it should document
how the issues were resolved.
With regard to the integrity of a client, matters that the firm considers include, for example:
• The identity and business reputation of the client’s principal owners, key management, related parties and
those charged with its governance.
• The nature of the client’s operations, including its business practices.
• Information concerning the attitude of the client’s principal owners, key management and those charged
with its governance towards such matters as aggressive interpretation of accounting standards and the
internal control environment.
• Whether the client is aggressively concerned with maintaining the firm’s fees as low as possible.
• Indications of an inappropriate limitation in the scope of work.
• Indications that the client might be involved in money laundering or other criminal activities.
• The reasons for the proposed appointment of the firm and non-reappointment of the previous firm.
The extent of knowledge a firm will have regarding the integrity of a client will generally grow within the
context of an ongoing relationship with that client.

Question 11
ABC & Associates, Chartered Accountants, has a policy to accept the clients wherein the risk evaluation is
conducted with respect to the Company and the promoter. XYZ Limited approached ABC & Associates. The
promoter of XYZ Limited is a close associate and family friend of Mr. A, Managing Partner of ABC &
Associates. XYZ Limited has been in the news in the previous year for certain inquiries from the regulatory
authorities in relation to certain matters. The existing auditor of XYZ Limited has resigned and has created
Chapter 1 Quality Control
 CA SANIDHYA SARAF 1.6

a casual vacancy. XYZ Limited is ready to offer 25% more than the existing fees and has approached ABC &
Associates for appointment as Auditor. Mr. A has a strong recommendation to the Firm to accept the audit.
What is your understanding of the functioning of the tone at the top of the firm ABC & Associates, Chartered
Accountants.? What are the considerations one should exercise to uphold Quality of the Firm?
Answer 11
The given situation indicates that proposed client is a new one whose promoter is close associate and family
friend of managing partner of M/s ABC & Associates. However, the previous auditor of proposed client has
resigned and company is offering hike in audit fees in comparison to audit fees paid to previous auditor.
Besides, there are also regulatory inquires against the company. In spite of all this, managing partner of firm
Mr. A has recommended for acceptance of offered audit of the company.
It reflects poorly regarding functioning at the top of the firm as regards quality control. SQC 1 requires that
the firm establish a system of quality control designed to provide it with reasonable assurance that firm and
its personnel comply with professional standards and legal and regulatory requirements. It further requires
that the firm’s business strategy is subject to overriding the requirement of firm to achieve quality in all
engagements. However, in the given situation, commercial considerations seem to be an overriding factor.
The managing partner of firm is close associate and family friend of promoter. The matter should have been
brought to knowledge of firm in accordance with requirements of SQC 1 as it involves issue of independence
of managing partner of the firm with respect to proposed audit engagement. Further, matters of inquiries
from regulators and resignation of previous auditor raise question about integrity of the proposed client. SQC
1 further requires firm to consider before acceptance of an engagement that client does not lack integrity. All
these factors need to be taken into consideration before accepting engagement.
Overall, such a situation reflects lack of proper establishment of quality control framework at top of the firm.
Following considerations should be taken into account while upholding quality of firm: -
(i) The firm assigns its management responsibilities so that commercial considerations do not override
quality of work performed
(ii) The firm’s policies and procedures in relation to its personnel are designed to demonstrate its overriding
commitment to quality.
(iii) The firm devotes sufficient resources for development and documentation of its quality control policies
and procedures
(iv) A firm before accepting an engagement should acquire vital information about the client. Such an
information should help firm to decide about integrity of Client, promoters and key managerial personnel,
competence (including capabilities, time and resources) to perform engagement and compliance with
ethical requirements.

Question 12
MNP & Co., a firm of auditors, is appointed by a bank to conduct stock audit of a borrower. It deputes one
of its paid Chartered accountant employees, Sudhanshu, to conduct above said stock audit. He leverages it
as an opportunity to prevail upon the client to get the accounts audited from their firm. He also assures the
client of a clean stock audit report without adverse comments as a quid pro quo. Is approach of Sudhanshu
proper? How does it reflect upon the quality control system of firm?
Answer 12
Approach of Sudhanshu is not proper. Such practices clearly violate Code of Ethics and its spirit. It reflects
poorly upon the quality control system of firm envisaged in SQC 1 which requires that quality control policies
and procedures should be documented and communicated to the firm’s personnel. It shows that firm’s
personnel are not properly sensitized regarding requirements of SQC 1.

Question 13
CA M is introduced to a prospective client in a social function. He assures to visit office of CA M very soon
in relation to professional work. During discussions over a cup of coffee next week, it transpires that there
was a search by the Enforcement Directorate in his premises about a month back resulting in recovery of
huge sum of cash. The income tax department had also searched his premises in relation to bogus capital
gains on penny stocks. Complaining about the poor quality of services provided by his present auditor, he

Chapter 1 Quality Control

 CA SANIDHYA SARAF 1.7

offers appointment as tax auditor of his five family-owned firms to CA M in lieu of handsome fees. What
are the factors to be evaluated by CA M if he wants to take up the engagement?
Answer 13
As per SQC 1, before accepting a new engagement, integrity of client should be considered including matters
that indicate involvement in money laundering or criminal activities. There has been search of ED on the said
party leading to recovery of huge amount of cash. The above coupled with actions of income tax department
relating to bogus capital gains on penny stocks indicates that client might be involved in money laundering
activities. Therefore, offer should not be accepted.

Question 14
GVN & Associates are auditors of a listed company involved in “fin-tech” sector. The engagement team is
stuck up with some issues pertaining to a particular Ind AS applicable to the company. They have framed a
query and sent to ICAI for expert opinion on the matter. The issue was resolved upon receipt of expert
opinion. Since expert opinion was provided by ICAI, engagement team was of the view that appointment of
engagement quality control reviewer has lost its relevance. Do you agree?
Answer 14
Engagement quality control review in listed entities is a mandatory requirement. Expert opinion of ICAI
pertains to the issue of interpretation. The appointment of reviewer is a separate and mandatory requirement
in audits of listed companies

Question 15
RST & Co., a firm of Chartered accountants, are auditors of a listed company engaged in manufacturing of
heavy machinery components. The audit report for the year 2023-24 also included reports on matters listed
in CARO, 2020. While reporting under clause vii(a) of the said order relating to regularity of undisputed
statutory dues by the company, the auditors have commented that company is “generally regular” in
depositing statutory dues to appropriate authorities. Is the above reporting qualitative and in line with the
requirements of SA 220?
Answer 15
Such type of reporting is not qualitative. It is not in accordance with SA 220. One of the objectives of the
auditor, as per SA 220, is to implement quality control procedures at the engagement level that provide the
auditor with reasonable assurance that the audit complies with professional standards and regulatory and
legal requirements. The reporting under CARO, 2020 is not proper. Hence, the audit does not comply with
regulatory and legal requirements.

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 CA SANIDHYA SARAF 2.1

Chapter 2
General Auditing Principles and Auditor’s Responsibilities

Question 1
Studio Ltd. appointed RST & Associates and XYZ & Co. as joint auditors for conducting the audit for the
year ending on 31st March 2024. During the audit, it was observed that there is a significant
understatement in the value of trade receivables. The trade receivable valuation work was looked after
by RST & Associates, however, there was no documentation outlining the division of the work between
the joint auditors. Comment on the above situation with respect to the allocation of responsibilities
among joint auditors as per relevant Standards on Auditing.
Answer 1
Responsibility and Co-ordination among Joint Auditors: As per SA 299, “Joint Audit of Financial Statements”,
where joint auditors are appointed, they should, by mutual discussion, divide the audit work among
themselves. The division of the work would usually be in terms of audit identifiable units or specified area.
In some cases, due to the nature of the business entity under audit, such a division of the work may not be
possible. In such situations, the division of the work may be with reference to items of assets or liabilities
or income or expenditure or with reference to period of time. The division of the work among joint auditors
as well as the areas of work to be covered by all of them should be adequately documented and preferably
communicated to the entity. In respect of the 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 audit
of the work performed by him. On the other hand, all the joint auditors are jointly and severally responsible
(i) The audit work which is not divided among the joint auditors and is carried out by all joint auditors;
(ii) Decisions taken by all the joint auditors under audit planning phase concerning the nature, timing and
extant of the audit procedure to be performed by each of the auditor;
(iii) Matters which are bought to the notice of the joint auditors by any one of them and on which there is
an agreement among the joint auditors;
(iv) Examining that the financial statements of the entity comply with the requirements of the relevant
statute;
(v) Presentation and disclosure of financial statements as required by the applicable financial reporting
framework;
(vi) Ensuring that the audit report complies with the requirements of the relevant statutes, the applicable
Standards on Auditing and the other relevant pronouncements issued by ICAI;
The joint auditors shall also discuss and document the nature, timing, and the extent of the audit procedures
for common and specific allotted areas of audit to be performed by each of the joint auditors and the same
shall be communicated to those charged with governance. After identification and allocation of work among
the joint auditors, the work allocation document shall be signed by all the joint auditors and the same shall
be communicated to those charged with governance of the entity.
Hence, in respect of audit work divided among the joint auditors, each joint auditor shall be responsible
only for the work allocated to such joint auditor including proper execution of the audit procedures.
In the instant case, Studio Ltd. appointed two CA Firms RST & Associates and XYZ & Co. as joint auditors for
conducting audit. As observed during the course of audit that there is a significant understatement in the
value of trade receivable and valuation of trade receivable work was looked after by RST & Associates.
In view of SA 299, RST & Associate will be held responsible for the same as trade receivable valuation work
was looked after by RST & Associates only. Further, there is violation of SA 299 as the division of work has
not been documented.

Question 2
During the audit of Indo limited, CA Harish observed that processing of accounting data was given to a
third party on account of certain considerations like cost reduction, own computer working to full
capacity. Indo Limited used a service organisation to record transactions and process related data. What
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 CA SANIDHYA SARAF 2.2

factors should CA Harish consider regarding the nature and extent of activities undertaken by service
organisation so as to determine whether those activities are relevant to the audit and, if so, to assess
their effect on audit risk. Discuss with reference to the relevant Standards on Auditing.
Answer 2
As per SA 402 “Audit Considerations relating to an Entity using a Service Organization”, when obtaining an
understanding of the user entity in accordance with SA 315, “Identifying and Assessing the Risks of Material
Misstatement Through Understanding the Entity and its Environment”, the user auditor shall obtain an
understanding of how a user entity uses the services of a service organisation in the user entity’s operations,
including:
(i) The nature of the services provided by the service organisation and the significance of those services to
the user entity, including the effect thereof on the user entity’s internal control;
(ii) The nature and materiality of the transactions processed or accounts or financial reporting processes
affected by the service organisation;
(iii) The degree of interaction between the activities of the service organisation and those of the user entity;
and
(iv) The nature of the relationship between the user entity and the service organisation, including the
relevant contractual terms for the activities undertaken by the service organization.
Based on above, while conducting the audit, CA Harish will assess the effect on the audit risk and take
necessary steps.

Question 3
Happy Hospital is a very renowned hospital for Orthopedic Surgeries in Mumbai having sophisticated
infrastructure. Happy Hospital has started using a novice system which includes complete record of
Indoor Patient i.e. their diagnosis, their treatment, their medications, their billings, and receipts thereon
which is developed and managed by CT Contractors. CA Z is a statutory auditor of Happy Hospital. CA Z
came to know about this system while auditing. CA Z is concerned whether the controls at CT Contractors
Associates are operating effectively or not. For this purpose, CA Z demanded from CT Contractors, an
assurance report from a practicing chartered accountant about their opinion on the description of CT
Contractor's system, and the effectiveness of the control. Which type of report should be obtained by CA
Z in terms of relevant Standard on Auditing? What aspects are to be considered by CA Z in using such
assurance report as audit evidence that controls at CT Contractors are operating effectively?
Answer 3
In the given scenario, CA Z, as the statutory auditor of Happy Hospital, is concerned about the effectiveness
of controls at the service organization, specifically the system managed by CT Contractors. To address this
concern, CT Contractors should provide a Type 2 assurance report from a practicing chartered accountant
as per SA 402, “Audit Considerations Relating to an Entity Using a Service Organisation”. This report will
offer an opinion on the description of the system in use at Happy Hospital, as well as evaluate the
effectiveness of the controls implemented by CT Contractors.
Using a Type 2 report as audit evidence that controls at the service organisation are operating effectively:
If, the user auditor plans to use a Type 2 report as audit evidence that controls at the service organisation
are operating effectively, the user auditor shall determine whether the service auditor’s report provides
sufficient appropriate audit evidence about the effectiveness of the controls to support the user auditor’s
risk assessment by:
(a) Evaluating whether the description, design, and operating effectiveness of controls at the service
organisation is at a date or for a period that is appropriate for the user auditor’s purposes;
(b) Determining whether complementary user entity controls identified by the service organisation are
relevant to the user entity and, if so, obtaining an understanding of whether the user entity has
designed and implemented such controls and, if so, testing their operating effectiveness;
(c) Evaluating the adequacy of the time period covered by the tests of controls and the time elapsed since
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 CA SANIDHYA SARAF 2.3

the performance of the tests of controls; and

(d) Evaluating whether the tests of controls performed by the service auditor and the results thereof, as
described in the service auditor’s report, are relevant to the assertions in the user entity’s financial
statements and provide sufficient appropriate audit evidence to support the user auditor’s risk
assessment.

Question 4
FAB Limited is availing the services of Atiya Private Limited for its payroll operations. Payroll cost accounts
for 63% of total cost for FAB Limited. Atiya Limited has provided the type 2 report as specified under SA
402 for its description, design, and operating effectiveness of control.
Atiya Private Limited has also outsourced a material part of payroll operation M/s RST & Associates in
such a way that M/s RST & Associates is sub-service organization to FAB Limited. The Type 2 report which
was provided by Atiya Private Limited was based on carve-out method as specified under SA 402.
CA Akram 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 Akram hence asked his assistant to remove
such reference and modify report accordingly.
Comment whether CA Akram is correct in removing the reference of the work done by service auditor?
Answer 4
Reporting by the User Auditor: As per SA 402, “Audit Considerations Relating to an Entity Using a Service
Organisation”, the user auditor shall modify the opinion in the user auditor’s report in accordance with SA
705, “Modifications to the Opinion in the Independent Auditor’s Report”, if the user auditor is unable to
obtain sufficient appropriate audit evidence regarding the services provided by the service organisation
relevant to the audit of the user entity’s financial statements.
The user auditor shall not refer to the work of a service auditor in the user auditor’s report containing an
unmodified opinion unless required by law or regulation to do so. If such reference is required by law or
regulation, the user auditor’s report shall indicate that the reference does not diminish the user auditor’s
responsibility for the audit opinion.
Thus, in view of the above, contention of CA Akram in removing reference of the work done by service
auditor is in order as in case of unmodified audit report, user auditor cannot refer to the work done by
service auditor.

Question 5
Arihant Ltd. was engaged in the business of owning and managing hotels and resorts, selling tourism
packages and performing airline bookings for corporate and individuals. It appointed Upadhyay & Co. as
its statutory auditor for the financial year 2023-24. While planning the audit, the audit team decided that
the risk of improper revenue recognition from hotel business should not be treated as a fraud risk. This
conclusion was based on the assessment of earlier years, wherein no fraud was identified in revenue
recorded from such business. While testing the internal financial controls over the process of revenue
recognition, it was identified that the controls are not properly designed to mitigate the risk of fraud and
risk of improper revenue recognition. As a result, the audit team decided to perform additional
substantive testing. However, the audit team still were to the conclusion that there is no risk of fraud in
revenue recognition. During the course of substantive testing, it was identified that the management did
not account for revenue received from corporate hotel bookings amounting to ` 43 crore. These amounts
were partially received in the company’s bank accounts and partially received in the CFO’s personal
account. The amounts received in the bank account of the company were disclosed as advances received
against the future bookings. In the light of above scenario, kindly guide the statutory auditors with
respect to their responsibility relating to fraud in an audit of a financial statement.
Answer 5
As per SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements” and SA
315, “Identifying and Assessing the Risks of Material Misstatement Through Understanding the Entity and
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 CA SANIDHYA SARAF 2.4

Its Environment”, the auditor shall identify and assess the risks of material misstatement due to fraud at
the financial statement level, and at the assertion level for classes of transactions, account balances and
disclosures. When identifying and assessing the risks of material misstatement due to fraud, the auditor
shall, based on a presumption that there are risks of fraud in revenue recognition, evaluate which types of
revenue, revenue transactions or assertions give rise to such risks.
In accordance with SA 240, “The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial
Statements” and SA 330, “The Auditor’s Responses to Assessed Risks” the auditor shall determine overall
responses to address the assessed risks of material misstatement due to fraud at the financial statement
level and assertion level.
The presumption that there are risks of fraud in revenue recognition may be rebutted. For example, the
auditor may conclude that there is no risk of material misstatement due to fraud relating to revenue
recognition in the case where there is a single type of simple revenue transaction, for example, leasehold
revenue from a single unit rental property. However, when there is a complex revenue structure or when
there is lack of controls on revenue recognition, then there is a high probability of fraud risk in revenue
recognition.
Obtaining an understanding of the entity and its environment, including the entity’s internal control
(referred to hereafter as an “understanding of the entity”), is a continuous, dynamic process of gathering,
updating and analysing information throughout the audit.
In the current scenario, the company was earning revenue from multiple streams. Also, it was identified
that the controls are not properly designed to mitigate the risk of fraud and risk of improper revenue
recognition. During the year it was identified that the management did not account for revenue from
corporate hotel bookings amounting to ₹ 43 crore. These amounts were partially received in the company’s
bank accounts and partially received in the CFO’s personal account. The amounts received in the bank
account of the company were disclosed as advances received against future bookings.
Therefore, the auditor while performing the risk assessment procedures should consider the complexity
and nature of the revenue for determining the fraud risks in revenue recognition. Also, there were no
adequate controls addressing the risk of improper revenue recognition or fraud risk, the audit team
rebutted the fraud risk. Moreover, the audit team should have recognised fraud risk by identifying the
deficiencies of internal control over the revenue recognition process and should have treated the risk of
improper revenue recognition as a significant risk. Also, as per Section 143(12), the auditor is required to
report all the frauds identified during the course of the audit involving amounts above ₹ 1 crore within the
prescribed time frame to the Central Government.
(Note: Content of SA 200 Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing; SA 210 Agreeing the Terms of Audit Engagements and SA 230 Audit
Documentation is covered in depth at Intermediate level. Thus, application part of above SAs may be
discussed in the form of Case Study at Final level.)

Question 6
A, B and C are joint auditors of a company. B is of the opinion that there are material misstatements in
financial statements of a company which, if accounted for, would turn profit reflected in financial
statements for ₹ 25 crore to a loss of ₹ 5 crore. He, therefore, wants an adverse opinion to be expressed
in audit report. However, A and B do not concur with his views and are inclined to accept management’s
version. Is B required to go by majority opinion of 2-1?
Answer 6
Where the joint auditors are in disagreement with regard to the opinion or any matters to be covered by
the audit report, they shall express their opinion in a separate audit report. A joint auditor is not bound by
the views of the majority of the joint auditors regarding the opinion or matters to be covered in the audit
report and shall express opinion formed by the said joint auditor in separate audit report in case of
disagreement. Therefore, B is not required to go by majority opinion of 2-1.
In such circumstances, the audit report issued by the joint auditors shall make a reference to the separate
audit report issued by the other joint auditor. Further, separate audit report shall also make reference to
the audit report issued by other joint auditors. Such reference shall be made under the heading “Other
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 CA SANIDHYA SARAF 2.5

Matter Paragraph” as per SA 706.

Question 7
CA Shelly Goel is offered appointment as auditor of RUTE Limited, a listed company. The audit committee
of the company wants her to justify independence in relation to company through proper communication.
Although she has ensured that there are no threats to her independence, she feels requirement of audit
committee to be beyond its purview. What is your opinion in this regard?
Answer 7
As required in SA 260, in the case of listed entities, the auditor shall communicate with those charged with
governance: -
(a) A statement that the engagement team and others in the firm as appropriate, the firm and, when
applicable, network firms have complied with relevant ethical requirements regarding independence
and
(b) i. All relationships and other matters between the firm, network firms, and the entity that, in the
auditor’s professional judgment, may reasonably be thought to bear on independence. This shall
include total fees charged during the period covered by the financial statements for audit and non-
audit services provided by the firm and network firms to the entity and components controlled by
the entity. These fees shall be allocated to categories that are appropriate to assist those charged
with governance in assessing the effect of services on the independence of the auditor and
ii. The related safeguards that have been applied to eliminate identified threats to independence or
reduce them to an acceptable level.
Further, as per the Companies Act, 2013 requires audit committee to review and monitor auditor’s
independence. Therefore, audit committee requiring auditor to justify her independence is well within its
purview

Question 8
You are auditor of a social media company. Of late, government has tightened noose around companies
operating in this segment by bringing in a maze of regulatory legislations to protect interests of users. How
you can proceed to verify that company is compliant with new regulatory requirements? Besides, what does
above situation underscore to you as an auditor?
Answer 8
It needs to be verified that the company has put in place systems and procedures to meet with new
regulatory requirements. The same can be verified by examining policies and procedures developed by
company in this regard like devising appropriate system of internal control, sensitizing employees regarding
new rules, engaging legal advisors etc.
Further, financial stability of the company may be threatened due to new regulatory requirements. The
management may be under pressure. It is also a fraud risk factor and may need to be evaluated by auditor.

Question 9
Discuss why the potential effects of inherent limitations of an auditor’s ability to detect material
misstatements described in SA 200 are far greater in respect of non-compliance with laws and regulations?
Answer 9
In the context of laws and regulations, the potential effects of inherent limitations on the auditor’s ability
to detect material misstatements are greater for such reasons as the following: -
• There are many laws and regulations, relating principally to the operating aspects of an entity that
typically do not affect the financial statements and are not captured by the entity’s information
systems relevant to financial reporting.
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 CA SANIDHYA SARAF 2.6

• Non-compliance may involve conduct designed to conceal it, such as collusion, forgery, deliberate
failure to record transactions, management override of controls or intentional misrepresentations
being made to the auditor.
• Whether an act constitutes non-compliance is ultimately a matter for legal determination by a court
of law.

Question 10
MN & Associates are the statutory auditors of ABC Ltd. for the FY 2023-24. During the course of audit, the
engagement partner, Mr. Manohar notices a misstatement resulting from a suspected fraud that brings into
question the audit team’s ability to continue performing the audit. How should the audit team deal with
the situation?
Answer 10
During the course of audit, the engagement partner, Mr. Manohar notices a misstatement resulting from a
suspected fraud that brings into question the audit team’s ability to continue performing the audit. In such
a situation the audit team should:
(a) Determine the professional and legal responsibilities applicable in the circumstances, including
whether there is a requirement for the auditor to report to the person or persons who made the
audit appointment or, in some cases, to regulatory authorities;
(a) Consider whether it is appropriate to withdraw from the engagement, where withdrawal from the
engagement is legally permitted; and

(b) If the auditor withdraws: -

(i) Discuss with the appropriate level of management and those charged with governance, the
auditor’s withdrawal from the engagement and the reasons for the withdrawal and
(ii) Determine whether there is a professional or legal requirement to report to the person or
persons who made the audit appointment or, in some cases, to regulatory authorities, the
auditor’s withdrawal from the engagement and the reasons for the withdrawal.

Question 11
CA Anand is the engagement partner for the audit assignment of NHT Ltd. engaged in manufacture of Iron
and Steel bars. The company has its plants in the state of Sikkim. While verifying the wages record of the
company, CA Anand found that maximum of the labour employed in the plants of the company was child
labour. He questioned the management of the company about the same to which the management replied
that looking into the compliance of such law is outside his scope of financial audit. Give your comments
with respect to such situation.
Answer 11
As per SA 250 “Considerations of Laws and Regulations in an Audit of Financial Statements”, the auditor is
not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all
laws and regulations. The auditor is responsible for obtaining reasonable assurance that the financial
statements, taken as a whole, are free from material misstatement, whether caused by fraud or error. In
conducting an audit of financial statements, the auditor takes into account the applicable legal and
regulatory framework.
For the compliance with provisions of those laws and regulations generally recognised to have a direct effect
on the determination of material amounts and disclosures in the financial statements, the auditor’s
responsibility is to obtain sufficient appropriate audit evidence about compliance with the provisions of
those laws and regulations.
For other laws and regulations that do not have a direct effect on the determination of the amounts and

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 CA SANIDHYA SARAF 2.7

disclosures in the financial statements but compliance with which may be fundamental to the operating
aspects of the business, the auditor’s responsibility is limited to undertaking specified audit procedures to
help identify non-compliance with those laws and regulations that may have a material effect on the
financial statements.
In the instant case, maximum of the labour employed in the plants of the company was child labour. When
CA Anand questioned the management of the company about the same, the management replied that
looking into the compliance of such law is outside his scope of financial audit. Such reply by the management
is not acceptable as such situation may have a material effect on the financial statements. Therefore, CA
Anand should ensure as to whether any penal provisions will be there for non- compliance of such law and
also whether the same has been duly disclosed by the company. If CA Anand concludes that such non-
compliance has a material effect on the financial statements and the same has not been adequately
reflected in the financial statements by the company, he shall express an adverse or a qualified opinion on
the financial statements

Question 12
Magnet Interiors Ltd. is a listed company engaged in the manufacture of office furniture. The company has
its activities divided into four geographic regions. The company has appointed two joint auditors, namely,
AB & Co. and CD & Co. to conduct the joint audit of the financial statements of the company for the year
ending 31-03-2024. The engagement partners from both the firms, CA Amar and CA Chetanya along with
their audit teams had a meeting to discuss the areas of the work to be divided and their respective
responsibilities. Explain the responsibilities of the joint auditors with respect to such joint audit.
Answer 12
As per SA 299 “Joint Audit of Financial Statements”, in respect of audit work divided among the joint
auditors, each joint auditor shall be responsible only for the work allocated to such joint auditor including
proper execution of the audit procedures. In cases where specific divisions, zones or units are allocated to
different joint auditors, it is the separate and specific responsibility of each joint auditor to obtain
information and explanations from the management in respect of such divisions/zones/units and to
evaluate the information and explanations so obtained by said joint auditor. The joint auditors shall have
proper coordination and rationality wherever required.
All the joint auditors shall be jointly and severally responsible for: -

(a) the audit work which is not divided among the joint auditors and is carried out by all joint auditors

(b) decisions taken by all the joint auditors under audit planning in respect of common audit areas
concerning the nature, timing and extent of the audit procedures to be performed by each of the
joint auditors.

(c) 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

(d) examining that the financial statements of the entity comply with the requirements of the relevant
statutes

(e) presentation and disclosure of the financial statements as required by the applicable financial
reporting framework

(f) ensuring that the audit report complies with the requirements of the relevant statutes, the
applicable Standards on Auditing and the other relevant pronouncements issued by ICAI.
Where, in the course of the audit, a joint auditor comes across matters which are relevant to the areas of

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 CA SANIDHYA SARAF 2.8

responsibility of other joint auditors and which deserve their attention, or which require disclosure or
require discussion with, or application of judgment by other joint auditors, the said joint auditor shall
communicate the same to all the other joint auditors in writing prior to the completion of the audit.
It shall be the responsibility of each joint auditor to determine the nature, timing and extent of audit
procedures to be applied in relation to the areas of work allocated to said joint auditor. It is the individual
responsibility of each joint auditor to study and evaluate the prevailing system of internal control and
assessment of risk relating to the areas of work allocated to said joint auditor.
As regards decisions taken by all the joint auditors under audit planning in respect of common audit areas
concerning the nature, timing and extent of the audit procedures to be performed by each of the joint
auditors, all the joint auditors are responsible only in respect of the appropriateness of the decisions
concerning the nature, timing and extent of the audit procedures agreed upon among them, proper
execution of these audit procedures is the individual responsibility of the joint auditor concerned.

Question 13
MNO Ltd. gets its accounting data processed by a service organisation. CA. Riya is the statutory auditor
of MNO Ltd. CA. Riya wants to obtain an understanding as to how MNO Ltd. is using the services of the
service organisation. What all understanding should she obtain?
Answer 13
When obtaining an understanding of MNO Ltd. (user entity) in accordance with SA 315, CA Riya shall obtain
an understanding of how MNO Ltd. uses the services of a service organisation in its operations, including: -
(a) The nature of the services provided by the service organisation and the significance of those services
to the user entity, including the effect thereof on the user entity’s internal control. Information on
nature of services provided by a user organization may be available from sources such as user
manuals, contract between the user entity and service organization, reports by service auditors etc.
(b) The nature and materiality of the transactions processed or accounts or financial reporting processes
affected by the service organisation. In certain situations, the transactions processed and the
accounts affected by the service organisation may not appear to be material to the user entity’s
financial statements, but the nature of the transactions processed may be significant and the user
auditor may determine that an understanding of those controls is necessary in the circumstances.
(c) The degree of interaction between the activities of the service organisation and those of the user
entity. The degree of interaction refers to the extent to which a user entity is able to and elects to
implement effective controls over the processing performed by the service organisation. For
example, a high degree of interaction exists between the activities of the user entity and those at
the service organisation when the user entity authorises transactions and the service organisation
processes and does the accounting for those transactions
(d) The nature of the relationship between the user entity and the service organisation, including the
relevant contractual terms for the activities undertaken by the service organisation.

Question 14
UVW & Associates are the statutory auditors of Moon Ltd., a listed company, for the financial year 2023-
24. CA. Udhav is the engagement partner for the audit assignment. He was of the understanding that as
per the requirement of one of the SAs he has a responsibility to communicate following matters to those
charged with governance:
(a) The auditor’s responsibilities in relation to the financial statement audit.
(b) Planned scope and timing of the audit.

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 CA SANIDHYA SARAF 2.9

(c) Auditor independence

Which of the matters is not included in the list prepared by CA. Udhav. Discuss such matters in detail.
Answer 14
SA 260 “Communication with Those Charged with Governance” deals with auditor’s responsibility to
communicate with those charged with governance in relation to an audit of financial statements. Among
various matters as included by CA Udhav in his list, one of the matters that is not mentioned in the list is
Significant findings from the audit. With respect to such matter, the auditor shall communicate with those
charged with governance: -

(a) The auditor’s views about significant qualitative aspects of the entity’s accounting practices, including
accounting policies, accounting estimates and financial statement disclosures. When applicable, the
auditor shall explain to those charged with governance why the auditor considers a significant
accounting practice, that is acceptable under the applicable financial reporting framework, not to be
most appropriate to the particular circumstances of the entity;

(b) Significant difficulties, if any, encountered during the audit;

(c) Unless all of those charged with governance are involved in managing the entity: -

(i) Significant matters arising during the audit that were discussed, or subject to correspondence,
with management;
(ii) Written representations the auditor is requesting

(c) Circumstances that affect the form and content of the auditor’s report, if any and

(d) Any other significant matters arising during the audit that, in the auditor’s professional judgment, are
relevant to the oversight of the financial reporting process.
The communication of findings from the audit may include requesting further information from those
charged with governance in order to complete the audit evidence obtained. For example, the auditor may
confirm that those charged with governance have the same understanding of the facts and circumstances
relevant to specific transactions or events.

Question 15
My Decor Limited, presently engaged in manufacturing of fabrics, wants to set up a new plant for
manufacturing of special kind of fabric providing an altogether different texture and feel. This kind of
fabric has become a hit with retail customers. The company needs to set up plant for manufacturing the
above kind of fabric involving huge capital outlays to stay competitive in the market.
You are auditor of the company and find that company’s revenue has increased in financial year 2023-24
to ₹ 1000 crore from ₹ 750 crore in last year. By the time, you started the audit, there was no change in
plant capacity and information regarding need to set up new plant has become known to you during
inquiry of company’s personnel. Discuss, how you should proceed to deal with above situation, as auditor
of the company, paying special attention to risk of material misstatement due to fraudulent financial
reporting?
Answer 15
The given situation highlights need for the company to set up new plant for manufacturing of special kind
of fabric to stay competitive in the market. Setting up of such plant involves huge capital outlays which

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 CA SANIDHYA SARAF 2.10

could entail financing arrangements. Therefore, excessive pressure exists for management to be involved
in fraudulent financial reporting. In such a situation, management may be tempted to inflate its revenues
to show rosy picture. It is a fraud risk factor and needs to be evaluated by the auditor.
The revenues of company have jumped from ₹ 750 crore in last year to ₹ 1000 crore in year 2023-24 without
any change in plant capacity. The auditor may consider above said fraud risk factor for assessing risk of
material misstatement due to fraud.
In case of auditor assessing risk of material misstatement due to fraudulent financial reporting, audit
procedures to address such risk like performing substantive analytical procedures relating to revenue, use
of computer assisted audit techniques to identify unusual revenue transactions and testing controls
pertaining to revenue transactions need to be performed.

Question 16
CA. Ridhima, internal auditor of Track Store Limited, has pointed out following deficiencies in internal
control of the company, in her reports: -

(i) Receivables are not reconciled at stipulated intervals.

(ii) Customers are provided a credit limit based upon their track record. However, no review of customer
credit limits is undertaken at required intervals.
The statutory auditor of the company finds that no action has been taken by the company on the said
deficiencies pointed out in reports of internal auditor.
What does above situation indicate to statutory auditor of company?

Answer 16
Management failing to remedy known significant deficiencies in internal control on a timely basis is a fraud
risk factor for misstatements arising from fraudulent financial reporting.
When management does not correct significant deficiencies in internal control on a timely basis, it reflects
an attitude, character or set of ethical values that allow them knowingly and intentionally to commit a
dishonest act.
Failure to rectify known control deficiencies pertaining to reconciliation of receivables and review of
customer credit limits has the potential to fraud. Lack of timely reconciliation of receivables may lead to
intentional misstatements. Further, non-reviewing customer limit may lead to grant of credit beyond
creditworthiness of customers. It may result in intentional tying up of company’s funds with risky customers
due to collusion.
The above situation is a fraud risk factor for fraudulent financial reporting.

Question 17
FAS Insurance Brokers Limited is a leading online insurance intermediary. During the year, Director
General of GST Intelligence (DGGI) has issued notice to the company for allegedly creating fictitious
invoices for “marketing and sales services” amounting to ₹ 50 crores in favour of non-life insurance
companies. The premises of company were also searched during the year by DGGI officials. The matter
was also informed to IRDAI by DGGI for violation of norms and regulations in this regard.
Does above situation has any bearing on your responsibilities as statutory auditor of the company?
Outline briefly in context of possible non-compliance with laws by the company.
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Answer 17
When the auditor becomes aware of the existence of or has information about investigations by
government departments and regulatory organizations, it may be an indication of non- compliance with
laws and regulations.
In the instant case, notice has been served upon the company by DGGI for allegedly creating fictitious
invoices in guise of providing “marketing and sales services” for ₹ 50 crores. Issuing an invoice without
supply of services is a serious offence under GST laws and it could involve penalties and imprisonment. Such
suspected non-compliance may have a direct effect on financial statements.
The matter has also been informed to regulator i.e. IRDAI. Violation of IRDAI regulations may result in fines,
litigation or other consequences for the entity that may have a material effect on the financial statements.
If the auditor becomes aware of information concerning an instance of non-compliance or suspected non-
compliance with laws and regulations, the auditor shall obtain: -

a) An understanding of the nature of the act and the circumstances in which it has occurred and

b) Further information to evaluate the possible effect on the financial statements.

If the auditor suspects there may be non-compliance, the auditor shall discuss the matter with management
and, where appropriate, those charged with governance. If management or, as appropriate, those charged
with governance do not provide sufficient information that supports that the entity is in compliance with
laws and regulations and, in the auditor’s judgment, the effect of the suspected non-compliance may be
material to the financial statements, the auditor shall consider the need to obtain legal advice.
If sufficient information about suspected non-compliance cannot be obtained, the auditor shall evaluate
the effect of the lack of sufficient appropriate audit evidence on the auditor’s opinion.
The auditor shall evaluate the implications of non-compliance in relation to other aspects of the audit,
including the auditor’s risk assessment and the reliability of written representations, and take appropriate
action.

Question 18
CA. Vallabh Sundar is auditor of a leading private sector bank. “IT Systems and controls” is under his
consideration to be reported as “Key audit matter” in audit report of the bank due to high level of
automation and complexity of the IT architecture and its impact on the financial reporting system.
At what time he should communicate such identified “Key audit matter”? What are relevant
considerations in this regard and their usefulness?
Answer 18
SA 260 requires the auditor to communicate with those charged with governance on a timely basis.
SA 701 states that the appropriate timing for communications about key audit matters will vary with the
circumstances of the engagement. However, the auditor may communicate preliminary views about key
audit matters when discussing the planned scope and timing of the audit, and may further discuss such
matters when communicating about audit findings. Doing so may help to alleviate the practical challenges
of attempting to have a robust two-way dialogue about key audit matters at the time the financial
statements are being finalized for issuance.
Communication with those charged with governance enables them to be made aware of the key audit
matters that the auditor intends to communicate in the auditor’s report, and provides them with an
opportunity to obtain further clarification where necessary. The auditor may consider it useful to provide
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 CA SANIDHYA SARAF 2.12

those charged with governance with a draft of the auditor’s report to facilitate this discussion.
Communication with those charged with governance recognizes their important role in overseeing the
financial reporting process, and provides the opportunity for those charged with governance to understand
the basis for the auditor’s decisions in relation to key audit matters and how these matters will be described
in the auditor’s report. It also enables those charged with governance to consider whether new or enhanced
disclosures may be useful in light of the fact that these matters will be communicated in the auditor’s report.

Question 19
Four audit firms viz. GPR & Co., MKS & Co., CY & Associates and DES & Associates have been appointed
for conducting statutory audit of KNB Bank, a public sector bank in accordance with regulatory guidelines.
The professional work was divided by audit firms on the basis of zones of bank. However, work relating
to “IT Systems and controls” was not allocated by them due to its very nature.
While planning for the above common work area, it was decided to test IT general controls, application
controls and IT dependent manual controls. Planned key audit procedures relating to this common area
also included testing design and operating effectiveness of controls over “computer operations including
back-up, batch-processing and data centre security”.
The actual audit procedures pertaining to “testing controls over batch processing” were performed by
team of DES & Associates. In case work in relation to above audit procedures is not performed
professionally by DES & Associates, discuss where responsibility for such lapses would lie in line with SA
299?
Answer 19
In respect of common areas, the joint auditors are only responsible for appropriateness of nature, timing
and extent of planned audit procedures agreed among them. The responsibility of individual execution lies
with concerned joint auditor.
In the instant case, audit procedures relating to testing design and operating effectiveness of controls over
computer operations including back-up, batch-processing and data center security have been planned
jointly as it is a common area.
However, audit procedures relating to testing controls over batch processing were actually performed by
team of DES & Associates although these were planned jointly. In case of any lapses in performing such
procedures, DES & Associates would be responsible.

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 CA SANIDHYA SARAF 3.1

Chapter 3
Audit Planning, Strategy & Execution
Question 1
While auditing Z Ltd., you observe certain material financial statement assertions have been based on
estimates made by the management. As the auditor how do you minimize the risk of material
misstatements?
Answer 1
As per SA 540 “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related
Disclosures”, the auditor shall obtain an understanding of the following in order to provide a basis for the
identification and assessment of the risks of material misstatements for accounting estimates:
(i) The requirements of the applicable financial reporting framework relevant to the accounting
estimates, including related disclosures.
(ii) How Management identifies those transactions, events and conditions that may give rise to the
need for accounting estimates to be recognised or disclosed, in the financial statements. In
obtaining this understanding, the auditor shall make inquiries of management about changes in
circumstances that may give rise to new, or the need to revise existing, accounting estimates.
(iii) The estimation making process adopted by the management including-
(1) The method, including where applicable the model, used in making the accounting estimates.
(2) Relevant controls.
(3) Whether management has used an expert?
(4) The assumption underlying the accounting estimates.
(5) Whether there has been or ought to have been a change from the prior period in the methods
for making the accounting estimates, and if so, why; and
(6) Whether and, if so, how the management has assessed the effect of estimation uncertainty.

Question 2
KRP Ltd., at its annual general meeting, appointed Mr. X, Mr. Y and Mr. Z as joint auditors to conduct
audit for the financial year 2023-24. For the valuation of gratuity scheme of the company, Mr. X, Mr. Y
and Mr. Z wanted to refer their own known Actuaries. Due to difference of opinion, all the joint auditors
consulted their respective Actuaries. Subsequently, major difference was found in the actuarial reports.
However, Mr. X agreed to Mr. Y’s actuary report, though Mr. Z did not. Mr. X contends that Mr. Y’s actuary
report shall be considered in audit report due to majority of votes. Now, Mr. Z is in a dilemma. Explain
the responsibility of auditors, in case, report made by Mr. Y’s actuary, later, was found faulty.
Answer 2
Using the work of an Auditor’s Expert: As per SA 620 “Using the Work of an Auditor’s Expert”, the expertise
of an expert may be required in the actuarial calculation of liabilities associated with insurance contracts or
employee benefit plans etc., however, the auditor has sole responsibility for the audit opinion expressed, and
that responsibility is not reduced by the auditor’s use of the work of an auditor’s expert.
The auditor shall evaluate the adequacy of the auditor’s expert’s work for the auditor’s purposes, including
the relevance and reasonableness of that expert’s findings or conclusions, and their consistency with other
audit evidence as per SA 500.
Further, in view of SA 620, if the expert’s work involves use of significant assumptions and methods, then the
relevance and reasonableness of those assumptions and methods must be ensured by the auditor and if the
expert’s work involves the use of source data that is significant to that expert’s work, the relevance,
completeness, and accuracy of that source data in the circumstances must be verified by the auditor.
In the instant case, Mr. X, Mr. Y and Mr. Z, jointly appointed as auditors of KRP Ltd., referred their own known
Actuaries for valuation of gratuity scheme. Actuaries are an auditor’s expert as per SA 620. Mr. Y’s referred
actuary has provided the gratuity valuation report, which later on was found faulty. Further, Mr. Z is not in
agreement with this report, therefore, he submitted a separate audit report specifically for such gratuity
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 CA SANIDHYA SARAF 3.2

valuation.
In such situation, it was duty of Mr. X, Mr. Y and Mr. Z, before using the gratuity valuation report of Actuary,
to ensure the relevance and reasonableness of assumptions and methods used. They were also required to
examine the relevance, completeness and accuracy of source data used for such report before expressing their
opinion.
Mr. X and Mr. Y will be held responsible for gross negligence and using such faulty report without examining
the adequacy of expert actuary’s work whereas Mr. Z will not be held liable for the same due to separate
opinion expressed by him.

Question 3
A & Co. was appointed as auditor of Great Airways Ltd. As the audit partner what factors shall be
considered in the development of overall audit plan?
Answer 3
Development of an overall plan - Overall plan is basically intended to provide direction for audit work
programming and includes the determination of timing, manpower development and co-ordination of work
with the client, other auditors and other experts. The auditor should consider the following matters in
developing his overall plan for the expected scope and conduct of the audit:
(i) Terms of his engagement and any statutory responsibilities
(ii) Nature and timing of reports or other communications.
(iii) Applicable Legal or Statutory requirements.
(iv) Accounting policies adopted by the clients and changes, if any, in those policies.
(v) The effects of new accounting and auditing pronouncement on the audit.
(vi) Identification of significant audit areas.
(vii) Setting of materiality levels for the audit purpose.
(viii) Conditions requiring special attention such as the possibility of material error or fraud or
involvement of parties in whom directors or persons who are substantial owners of the entity are
interested and with whom transactions are likely.
(ix) Degree of reliance to be placed on the accounting system and internal control.
(x) Possible rotation of emphasis on specific audit areas.
(xi) Nature and extent of audit evidence to be obtained.
(xii) Work of the internal auditors and the extent of reliance on their work, if any in the audit.
(xiii) Involvement of other auditors in the audit of subsidiaries or branches of the client and involvement
of experts.
(xiv) Allocation of works to be undertaken between joint auditors and the procedures for its control and
review.
(xv) Establishing and coordinating staffing requirements.

Question 4
As an auditor of a garment manufacturing company for the last five years, you have observed that new
venture of online shopping has been added by the company during current year. What factors would be
considered by you in formulating the audit strategy of the company?

Answer 4
Formulation of Audit Strategy: While formulating the audit strategy for a company, following factors may be
considered -
General Factors: Refer Par
Overall audit strategy would involve-
(i) Determination of Characteristics of Audit: Identify the characteristics of the engagement that defines
its scope.

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 CA SANIDHYA SARAF 3.3

(ii) Reporting Objectives: Ascertain the reporting objectives of the engagement to plan the timing of the
audit and the nature of the communications required.
(iii) Team’s Efforts: Consider the factors that, in the auditor’s professional judgment, are significant in
directing the engagement team’s efforts.
(iv) Considering result of preliminary engagement activities: Consider the results of preliminary
engagement activities and, where applicable, whether knowledge gained on other engagements
performed by the engagement partner for the entity is relevant.
(v) Nature, timing and Extent of Resources: Ascertain the nature, timing and extent of resources
necessary to perform the engagement.
Specific Factors for Online Shopping:
The auditor shall also obtain an understanding of the information system including the related business
processes due to new venture of online shopping in the following areas:
(i) The classes of transactions in the entity’s operations that are significant to the financial statements;
(ii) The procedures, within both information technology (IT) and manual systems, by which those
transactions are initiated, recorded, processed, corrected as necessary, transferred to the general
ledger and reported in the financial statements;
(iii) The related accounting records, supporting information and specific accounts in the financial
statements that are used to initiate, record, process and report transactions; this includes the
correction of incorrect information and how information is transferred to the general ledger. The
records may be in either manual or electronic form;
(iv) How the information system captures events and conditions, other than transactions, that are
significant to the financial statements;
(v) Controls surrounding journal entries, including non-standard journal entries used to record non-
recurring, unusual transactions or adjustments.

Question 5
During the audit of FMP Ltd, a listed company, Engagement Partner (EP) completed his reviews and also
ensured compliance with independence requirements that apply to the audit engagement. The
engagement files were also reviewed by the Engagement Quality Control Reviewer (EQCR) except the
independence assessment documentation. Engagement Partner was of the view that matters related to
independence assessment are the responsibility of the Engagement Partner and not Engagement Quality
Control Reviewer. Engagement Quality Control Reviewer objected to this and refused to sign off the
documentation. Please advise as per SA 220.
Answer 5
As per SA 220, Engagement Partner shall form a conclusion on compliance with independence requirements
that apply to the audit engagement. In doing so, Engagement Partner shall:
 Obtain relevant information from the firm and, where applicable, network firms, to identify and
evaluate circumstances and relationships that create threats to independence;
 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
 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.
Engagement Partner shall take responsibility for reviews being performed in accordance with the firm’s
review policies and procedures.
As per SA 220, “Quality Control for Audit of Financial Statements”, for audits of financial statements of listed

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 CA SANIDHYA SARAF 3.4

entities, Engagement Quality Control Reviewer (EQCR), on performing an engagement quality control
review, shall also consider the engagement team’s evaluation of the firm’s independence in relation to the
audit engagement.
In the given case, Engagement Partner is not right. The independence assessment documentation should
also be given to Engagement Quality Control Reviewer for his review.fgt
Question 6
AKJ Ltd is a small-sized 30 years old company having business of manufacturing of pipes. Company has a
plant based out of Dehradun and have their corporate office in Delhi. Recently the company appointed
new firm of Chartered Accountants as their statutory auditors.
The statutory auditors want to enter into an engagement letter with the company in respect of their
services but the management has contended that since the statutory audit is mandated by law,
engagement letter may not be required. Auditors did not agree to this and have shared a format of
engagement letter with the management for their reference before getting that signed. In this respect
management would like to understand that as per SA 210 (auditing standard referred to by the auditors),
if the agreed terms of the engagement shall be recorded in an engagement letter or other suitable form
of written agreement, what should be included in terms of agreed audit engagement letter?
Answer 6
As per SA 210 ‘Agreeing the Terms of Audit Engagements’, the auditor shall agree the terms of the audit
engagement with management or those charged with governance, as appropriate.
The agreed terms of the audit engagement shall be recorded in an audit engagement letter or other suitable
form of written agreement and shall include:
(i) The objective and scope of the audit of the financial statements;
(ii) The responsibilities of the auditor;
(iii) The responsibilities of management;
(iv) Identification of the applicable financial reporting framework for the preparation of the financial
statements; and
(v) Reference to the expected form and content of any reports to be issued by the auditor and a
statement that there may be circumstances in which a report may differ from its expected form and
content.

Question 7
A private company is engaged in the business of real estate. The auditor of the company requested the
information from the management to review the outcome of accounting estimates (like estimated costs
considered for percentage completion etc.) included in the prior period financial statements and their
subsequent re-estimation for the purpose of the current period.
The management has refused the information to the auditor saying that the review of prior period
information should not be done by the auditor. Please advise.
Answer 7
As per SA 540, “Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related
Disclosures”, the auditor shall review the outcome of accounting estimates included in the prior period
financial statements, or, where applicable, their subsequent re- estimation for the purpose of the current
period. The nature and extent of the auditor’s review takes account of the nature of the accounting
estimates, and whether the information obtained from the review would be relevant to identifying and
assessing risks of material misstatement of accounting estimates made in the current period financial
statements.
The outcome of an accounting estimate will often differ from the accounting estimate recognized in the
Chapter 3 Audit Planning, Strategy & Execution
 CA SANIDHYA SARAF 3.5

prior period financial statements. By performing risk assessment procedures to identify and understand the
reasons for such differences, the auditor may obtain:
 Information regarding the effectiveness of management’s prior period estimation process, from
which the auditor can judge the likely effectiveness of management’s current process.
 Audit evidence that is pertinent to the re-estimation, in the current period, of prior period accounting
estimates.
 Audit evidence of matters, such as estimation uncertainty, that may be required to be disclosed in the
financial statements.
The review of prior period accounting estimates may also assist the auditor, in the current period, in
identifying circumstances or conditions that increase the susceptibility of accounting estimates to, or
indicate the presence of, possible management bias. The auditor’s professional skepticism assists in
identifying such circumstances or conditions and in determining the nature, timing and extent of further
audit procedures.
However, the review is not intended to call into question the judgments made in the prior periods that were
based on information available at that time.
In the given case, the management is not correct in refusing the relevant information to the auditor.

Question 8
X Ltd had a net worth of INR 1300 crores because of which Ind AS became applicable to them. The
company had various derivative contracts – options, forward contracts, interest rate swaps etc. which
were required to be fair valued for which company got the fair valuation done through an external third
party. The statutory auditors of the company involved an auditor’s expert to audit valuation of
derivatives. The auditor and auditor’s expert were new to each other i.e., they were working for the first
time together but developed a good bonding during the course of the audit. The auditor did not enter
into any formal agreement with the auditor’s expert. Please advise.
Answer 8
As per SA 620, Using the work of an Auditor’s Expert, the nature, scope and objectives of the auditor’s
expert’s work may vary considerably with the circumstances, as may the respective roles and responsibilities
of the auditor and the auditor’s expert, and the nature, timing and extent of communication between the
auditor and the auditor’s expert. It is therefore required that these matters are agreed between the auditor
and the auditor’s expert.
In certain situations, the need for a detailed agreement in writing is required like -
 The auditor’s expert will have access to sensitive or confidential entity information.
 The matter to which the auditor’s expert’s work relates is highly complex.
 The auditor has not previously used work performed by that expert.
 The greater the extent of the auditor’s expert’s work, and its significance in the context of the audit.
In the given case, considering the complexity involved in the valuation and volume of derivatives and also
due to the fact that the auditor and auditor’s expert were new to each other, auditor should have signed a
formal agreement/ engagement letter with the auditor’s expert in respect of the work assigned to him.

Question 9
Cineplex, a movie theatre complex, is the foremost theatre located in Delhi. Along with the sale of tickets
over the counter and online booking, the major proportion of income is from the cafe, shops, pubs etc.
located in the complex. Its other income includes advertisements exhibited within/outside the premises
such as hoardings, banners, slides, short films etc. The facility for parking of vehicles is also provided in
the basement of the premises.
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 CA SANIDHYA SARAF 3.6

Cineplex appointed your firm as the auditor of the entity. Being the head of the audit team, you are,
therefore, required to draw an audit programmer initially in respect of its revenue and expenditure
considering the above mentioned facts along with other relevant points relating to such complex.
Answer 9
Audit Programme of Movie Theatre Complex:
(i) Peruse the Memorandum of Association and Articles of Association of the entity.
(ii) Ensure the object clause permits the entity to engage in this type of business.
(iii) In the case of income from sale of tickets:
(1) Verify the control system as to how it is ensured that the collections on sale of tickets of various
shows are properly and accurately accounted.
(2) Verify the system relating to online booking of various shows and the system o f realization of
money.
(3) Check that there is overall system of reconciliation of collections with the number of seats
available for different shows in a day.
(iv) Verify the internal control system and its effectiveness relating to the income from café, shops, pubs,
game zone etc., located within the multiplex.
(v) Verify the system of control exercised relating to the income receivable from advertisements exhibited
within the premises and inside the hall such as hoarding, banners, slides, short films etc.
(vi) Verify the system of collection from the parking areas in respect of the vehicles parked by the
customers.
(vii) In the case of payment to the distributors verify the system of payment which may be either through
out right payment or percentage of collection or a combination of both. Ensure at the time of
settlement, any payment of advance made to the distributor is also adjusted against the amount due.
(viii) Verify the system of payment of salaries and other benefits to the employees and ensure that statutory
requirements are complied with.
(ix) Verify the payments effected in respect of the maintenance of the building and ensure the same is in
order.
(x) Verify the insurance premium paid and ensure it covers the entire assets.

Question 10
XWL Limited was engaged in dealing in commodity futures trading based in Surat. CA P, based at Delhi,
was auditor of the company. The auditor did not even once visit office of the company and failed to
understand the nature of business of the company. All the papers and account books were received on
emails and audit was concluded.
There were also included in his working papers checklists which had a requirement of test checking of
cost of raw material consumed & cost of stores and spares. There was nothing in his working papers
showing understanding of the nature of business of company. What does it reflect upon planning of audit
by CA P?
Answer 10
SA 300 requires the auditor to plan the audit in such a manner that it is performed effectively. It also
requires auditor to establish overall audit strategy including identifying the characteristics of the
engagement, facilitating him to define its scope and planning of nature, timing and extent of audit
procedures required to be performed to achieve the objective of audit.
SA 300 further requires the auditor to document the overall audit strategy, the audit plan and any significant
Chapter 3 Audit Planning, Strategy & Execution
 CA SANIDHYA SARAF 3.7

changes made during the audit engagement to such plans.

In the given situation, auditor didn’t even once visit the company and failed to understand about business
of the company. Therefore, he has flouted requirement of SA 300 to plan the audit in such a manner that it
is performed effectively. The auditor has to plan the audit commensurate to the nature and complexity of
the business of the entity and identify and assess the risk of material misstatement.
Further, working papers of auditor also do not show his understanding of nature of business which is again
a blatant violation of requirement of SA 300 which requires the auditor to document the overall audit
strategy, the audit plan and any significant changes made during the audit engagement to such plans.
Inclusion of a checklist in working papers having requirement of test checking of cost of raw material
consumed & cost of stores and spares shows that it was a general checklist and specifics of business were
never understood and audit was not planned to be conducted in an effective manner in accordance with
requirements of SA 300.

Question 11
CA. Pradyuman is planning for audit of a listed company headquartered in NOIDA. While doing this
exercise, he has made a list of various procedures intended to be performed by him during the course of
audit. He has further made up his mind to decide about sample size at time of performing various planned
procedures. Is the above approach of CA Pradyuman proper?
Answer 11
SA 300 states that audit plan shall include description about nature, timing and extent of audit procedures.
The extent of audit procedures also includes deciding about sample sizes to be tested for performing audit
procedures. Therefore, the said approach is not proper. Various procedures planned to be undertaken
should also include considerations relating to sample sizes to be tested.

Question 12
CA. Nikita is conducting audit of a leading society engaged in promoting awareness regarding usefulness
of internet among the disadvantaged sections of society through easily understandable means and
methods. The society is also registered under FCRA, 2010 for receipt of foreign contributions. During the
course of audit, she embarked upon extensive procedures relating to verification of receipt of foreign
contributions to rule out “round-tripping” in comparison to procedures originally thought of. She is
documenting various procedures performed by her including relevant audit findings.
However, she doesn’t not feel need for putting into writing about how she planned the whole exercise.
Does she require refreshening of her knowledge?
Answer 12
SA 300 requires auditor to document audit plan and significant changes made during the audit engagement
to the audit plan. It also requires auditor to document 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 audit plan along with reasons thereof due to embarking upon extensive procedures
related to verification of foreign contributions in comparison to what was originally envisaged need to be
documented.
Failure to document audit plan could entail risk of not conducting audit according to professional standards
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 CA SANIDHYA SARAF 3.8

in a qualitative manner.

Question 13
CA Sourabh, an engagement partner, is conducting statutory audit of BBI Bank for SBT & Associates. The
bank has 1034 branches spread all over the country which are audited by branch auditors. In respect of
one large branch audited by a branch auditor, there were errors in NPA classification of many advances
which were not pointed out by branch auditor in his report through memorandum of changes and NIL
memorandum of changes was reported electronically.
During overall review of financial statements of bank by statutory auditor, the above said errors did not
come into light. The statutory auditor had also called soft copies of internal inspection report and
concurrent audit reports of above branch as part of overall review procedures. However, these reports
did not point towards any irregularities in such accounts.
Would the statutory auditor of bank be liable for above lapses? What precautions have to be taken by
him while expressing opinion considering possibilities of such situations?

Answer 13
SA 600 states that the principal auditor would not be responsible in respect of the work entrusted to the
other auditors, except in circumstances which should have aroused his suspicion about the reliability of the
work performed by the other auditors. When the principal auditor has to base his opinion on the financial
information of the entity as a whole relying upon the statements and reports of the other auditors, his
report should state clearly the division of responsibility for the financial information of the entity by
indicating the extent to which the financial information of components audited by the other auditors have
been included in the financial information of the entity, e.g., the number of divisions/branches/subsidiaries
or other components audited by other auditors.
In the given situation, nothing has come to light of statutory auditor which would arouse his suspicion about
reliability of work performed by branch auditor. Therefore, he would not be responsible for work performed
by branch auditor.
Further, it should be clearly stated in the report that 1034 branches of bank have been audited by branch
auditors

Question 14
CA. Keshavraj is conducting statutory audit of a listed company “Live with Nature Limited”. The company
is engaged in producing environment-friendly niche products for new-born babies. There is also a well-
functioning internal audit department in the company. On perusal of internal audit reports, he finds that
not only verification of inventories was attended by internal auditor at regular intervals during the year,
workings were also made in respect of inventory valuation as at year end.
He has also attended inventory count at end of financial year and no prima facie adverse inferences were
drawn by him. However, ongoing through inventory reports, he gathers that inventories are being held
for considerably long period before being sold. The internal audit reports have not taken this aspect into
consideration. Should he choose to rely upon inventory valuation work performed by internal auditor?
Answer 14
For a particular account balance, class of transaction or disclosure, the higher an assessed risk of material
misstatement at the assertion level, the more judgment is often involved in planning and performing the
audit procedures and evaluating the results thereof. In such circumstances, the external auditor will need
to perform more procedures directly and accordingly, make less use of the work of the internal audit

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 CA SANIDHYA SARAF 3.9

function in obtaining sufficient appropriate audit evidence. Furthermore, as explained in SA 200, the higher
the assessed risks of material misstatement, the more persuasive the audit evidence required by the
external auditor will need to be, and, therefore, the external auditor will need to perform more of the work
directly.
In the given situation, inventories are being held for considerably long period before being sold. As company
is dealing in niche products for new-born babies, there is a risk of inventory obsolescence due to changes in
customer preferences. It carries a significant risk of material misstatement and requires more judgment on
part of statutory auditor in planning and performing procedures.
In such circumstances, statutory auditor needs to perform procedures directly like comparing net realizable
value of products with costs to verify completeness of provisions, recomputing of provisions for obsolete
stocks etc.
Therefore, in the given situation, he should perform procedures directly in accordance with SA 610.

Illustrations
Question 15
CA. Amboj, a practicing chartered accountant has been appointed as an internal auditor of Textile Ltd. He
conducted the physical verification of the inventory at the year end and handed over the report of such
verification to CA. Kishore the statutory auditor of the Company, for his view and reporting. Can CA. Kishor
rely on such report?
Using the Work of Internal Auditor As per SA 610 “Using the Work of Internal Auditors”, while determining
whether the work of the internal auditors can be used for the purpose of the audit, the external auditor
shall evaluate-
(a) The extent to which the internal audit function’s organizational status and relevant policies and
procedures support the objectivity of the internal auditors;
(b) The level of competence of the internal audit function; and
(c) Whether the internal audit function applies a systematic and disciplined approach, including
quality control.
Further, the external auditor shall not use the work of the internal audit function if the external auditor
determines that:
(a) The function’s organizational status and relevant policies and procedures do not adequately
support the objectivity of internal auditors;
(b) The function lacks sufficient competence; or
(c) The function does not apply a systematic and disciplined approach, including quality control.

In the instant case, CA. Kishore should ascertain the internal auditor’s scope of verification, area of coverage
and method of verification. He should review the report on physical verification taking into consideration
these factors. If possible, he should also test check few items and he can also observe the procedures
performed by the internal auditors.
If the statutory auditor is satisfied about the appropriateness of the verification, he can rely on the report
but if he finds that the verification is not in order, he has to decide otherwise. The final responsibility to
express opinion on the financial statement remains with the statutory auditor.

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Question 16
While doing audit, Ram, the Auditor requires reports from experts for the purpose of Audit evidence. What
types of reports/opinions he can obtain and to what extent he can rely upon the same?
Using the Work of an Auditor’s Expert: As per SA 620, “Using the Work of an Auditor’s Expert”, during the
audit, the auditor may seek to obtain, in conjunction with the client or independently, audit evidence in the
form of reports, opinions, valuations and statements of an expert.
While doing audit, Ram, the auditor can obtain the following types of reports, or options or statements
of an expert for the purpose of audit evidence:

(i) The valuation of complex financial instruments, land and buildings, plant and machinery, jewelry,
works of art, antiques, intangible assets, assets acquired and liabilities assumed in business
combinations and assets that may have been impaired.

(ii) The actuarial calculation of liabilities associated with insurance contracts or employee benefit
plans.

(iii) The estimation of oil and gas reserves.

(iv) The valuation of environmental liabilities, and site clean-up costs.

(v) The interpretation of contracts, laws and regulations.

(vi) The analysis of complex or unusual tax compliance issues.

When the auditor intends to use the work of an expert, he shall evaluate the adequacy of the auditor’s
expert’s work, including the relevance and reasonableness of that expert’s findings or conclusions, and their
consistency with other audit evidence; if that expert’s work involves use of significant assumptions and
methods, the relevance and reasonableness of those assumptions and methods in the circumstances; and
if that expert’s work involves the use of source data that is significant to his work, the relevance,
completeness, and accuracy of that source data.
If the auditor determines that the work of the auditor’s expert is not adequate for the auditor’s purposes,
he shall agree with that expert on the nature and extent of further work to be performed by that expert; or
perform further audit procedures appropriate to the circumstances

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Chapter 4
Materiality, Risk Assessment & Internal Control

Question 1
While assessing the impact of uncorrected misstatements in the audit of MINI Builders Private Limited,
Mr. Gautam encountered a significant issue related to the calculation of materiality on revenue. The initial
materiality calculation was based on estimated figures provided by the management. Management, to
estimate full-year revenue, extrapolated the sales for 11 months to arrive at a figure for 12 months.
However, given the nature of MINI Builders as a company in the construction sector, where monthly sales
exhibit substantial variations, a unique challenge emerged.
The actual sales for the last month deviated significantly from the estimated sales due to an unexpected
slowdown in project completions. As a result, the last month's actual sales represented only 30% of the
estimated sales. Now, Mr. Gautam is confronted with a dilemma regarding the appropriate approach to
evaluate uncorrected misstatements using the previously calculated materiality. Kindly Guide Mr. Gautam
in the light of relevant Standards on Auditing.
Answer 1
As per SA 450, “Evaluation of Misstatements Identified during the Audit”, the auditor is required to
reassess materiality, in accordance with SA 320, “Materiality in Planning and Performing an Audit”, before
evaluating the impact of uncorrected misstatements. This reassessment is crucial to confirm the ongoing
appropriateness of materiality in light of the entity's actual financial results.
The determination of materiality under SA 320 often relies on estimates of the entity's financial results,
given that the actual results may not be known during the early stages of the audit. Therefore, before the
auditor proceeds to assess the effect of uncorrected misstatements, it becomes necessary to adjust the
materiality calculated under SA 320 based on the now available actual financial results.
SA 320 outlines that, as the audit progresses, materiality may be revised for the financial statements as a
whole or for specific classes of transactions, account balances, or disclosures. This revision is prompted
by the auditor's awareness of information that would have led to a different initial determination.
Typically, significant revisions occur before the evaluation of uncorrected misstatements. However, if the
reassessment of materiality under SA 320 results in a lower amount, the auditor must reconsider
performance materiality and the appropriateness of the audit procedures' nature, timing, and extent.
This is crucial for obtaining sufficient and appropriate audit evidence on which to base the audit opinion.
In the present case involving MINI Builders Private Limited, it has been identified that the materiality
calculated at the beginning of the audit for revenue was based on estimates provided by the
management. The management extrapolated sales for the full year using the actual amount of 11 months,
but since the company experiences significant monthly variations in sales, the actual sales for the last
month were only 30% of the estimated figure. This discrepancy arose due to an unexpected slowdown in
project completion.
In this audit scenario, Mr. Gautam, the auditor, must review and reassess the materiality initially
determined under SA 320 to ensure its continued validity in light of the actual financial results. If the re -
assessed materiality is lower than the previously calculated amount, Mr. Gautam must reconsider
performance materiality and the appropriateness of the nature, timing, and extent of further audit
procedures. This meticulous approach is essential to gather sufficient and appropriate audit evidence,
enabling Mr. Gautam to form an independent and objective opinion on the financial statements of MINI
Builders Private Limited.

Question 2
Deepti & Co., Chartered Accountants, during the audit of Magma Ltd. found that certain machinery had
been imported for the production of a new product. Although the auditors have applied the concept of
materiality to the financial statements as a whole, they now want to re-evaluate the materiality concept
for the said transaction involving foreign exchange. Give your views in this regard?

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Answer 2
As per SA 320, “Materiality in Planning and Performing an Audit”, when establishing the overall audit
strategy, the auditor shall determine materiality for the financial statement as a whole. If, in the specific
circumstances of the entity, there is one or more particular classes of transactions, account balances or
disclosures for which misstatements of lesser amounts than the materiality for the financial statements
as a whole could reasonably be expected to influence the economic decisions of users taken on the basis
of the financial statements, the auditor shall also determine the materiality level or levels to be applied
to those particular classes of transactions, account balances or disclosures.
The auditor shall revise materiality for the financial statements as a whole (and, if applicable, the
materiality level or levels for particular classes of transactions, account balances or disclosures) in the
event of becoming aware of information during the audit that would have caused the auditor to have
determined a different amount (or amounts) initially.
If the auditor concludes a lower materiality for the same, he shall determine whether it is necessary to
revise performance materiality and whether the nature, timing and extent of the further audit procedures
remain appropriate.
In the given case, Deepti & Co., as an auditor has applied the concept of materiality for the financial
statements as a whole. But they want to re-evaluate the materiality concept on the basis of additional
information of import of machinery for production of new product which draws attention to a particular
aspect of the company’s business.
Thus, Deepti & Co. can re-evaluate the materiality concepts after considering the necessity of such
revision.

Question 3
AMRO Ltd. is a manufacturing and trading Company of leather goods since last 10 years. You are the
internal auditor of the company for the year 2023-24. In order to review internal controls of the company,
you visited the departments and noticed:
(1) The head of procurement, Mr. Amit, has complete control over purchasing, receiving goods, and
approving payments to suppliers. His actions are not reviewed by any other person in the company.
(2) The company's staff has been working in the same roles for over five years without any rotation. The
finance manager, Mr. Sachin, in particular, has never had his duties rotated since joining the company.
(3) The store manager, Mr. Gupta, who is responsible for maintaining the inventory, also keeps the
inventory records.
(a) Briefly discuss the general conditions pertaining to the internal check system to be ensure by you as an
auditor.
(b) Do you think that general conditions pertaining to the internal check system are violated in the given
situation?
Answer 3
(a) Internal Check System: The general condition pertaining to the internal check system may be summarized as
under:
(i) no single person should have complete control over any important aspect of the business operation.
Every employee’s action should come under the review of another person.
(ii) Staff duties should be rotated from time to time so that members do not perform the same function
for a considerable length of time.
(iii) Every member of the staff should be encouraged to go on leave at least once a year.
(iv) Persons having physical custody of assets must not be permitted to have access to the books of
accounts.
(v) There should exist an accounting control in respect of each class of assets, in addition, there should be
periodical inspection so as to establish their physical condition.
(vi) Mechanical devices should be used, wherever practicable, to prevent loss or misappropriation of cash.
(vii) Budgetary control should be exercised, and wide deviations observed should be reconciled.
(viii) For inventory taking, at the close of the year, trading activities should, if possible be suspended, and it
should be done by staff belonging to several sections of the organization.

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(ix) The financial and administrative powers should be distributed very judiciously among different officers
and the manner in which those are actually exercised should be reviewed periodically.
(x) Procedures should be laid down for periodical verification and testing of different sections of
accounting records to ensure that they are accurate.
(b) Yes, in the given situation general conditions pertaining to the internal check system are violated as follows:
(1) The head of procurement, Mr. Amit, having complete control over the procurement process without
oversight violates the principle that no single person should control any important aspect of the
business operation.
(2) The lack of staff rotation for over five years violates the principle that staff duties should be rotated
periodically to prevent any single person from performing the same function for too long.
(3) Allowing Mr. Gupta, the store manager, to maintain inventory records while also having custody of
the inventory violates the principle that those with physical custody of assets should not have access
to accounting records.

Question 4
CA. B was appointed as the auditor of ABC Limited for the financial year 2023-24. During the course of
planning for the audit, CA. B intends to apply the concept of materiality for the financial statements as a
whole. Please guide him with respect to the factors that may affect the identification of an appropriate
benchmark for this purpose.
What benchmark should be adopted by CA. B, if ABC Limited is engaged in:
(i) the manufacture and sale of air conditioners and is having regular profits.
(ii) the construction of large infrastructure projects and incurred losses in the previous two
financial years, due to pandemic.
Answer 4
Use of Benchmarks in Determining Materiality for the Financial Statements as a Whole: As per SA 320,
determining materiality involves the exercise of professional judgment. A percentage is often applied to
a chosen benchmark as a starting point in determining materiality for the financial statements as a whole.
Factors that may affect the identification of an appropriate benchmark include the following:
• The elements of the financial statements (for example, assets, liabilities, equity, revenue,
expenses);
• Whether there are items on which the attention of the users of the particular entity’s financial
statements tends to be focused (for example, for the purpose of evaluating financial performance
users may tend to focus on profit, revenue or net assets);
• The nature of the entity, where the entity is at in its life cycle, and the industry and economic
environment in which the entity operates;
• The entity’s ownership structure and the way it is financed (for example, if an entity is financed
solely by debt rather than equity, users may put more emphasis on assets, and claims on them,
than on the entity’s earnings); and
• The relative volatility of the benchmark.
Determining a percentage to be applied to a chosen benchmark involves the exercise of professional
judgment. There is a relationship between the percentage and the chosen benchmark, such that a
percentage applied to profit before tax from continuing operations will normally be higher than a
percentage applied to total revenue.
In case if ABC Limited is engaged in manufacture and sale of air conditioner, and is having regular profits:
CA. B, the auditor may consider profit before tax /Earnings.
In case ABC Limited is engaged in the construction of large infrastructure projects and incurred losses in
the previous two financial years, due to pandemic: CA B, the auditor may consider Revenue or Gross Profit
as benchmarking.
Alternatively, CA B, the auditor may consider the criteria relevant for audit of the entities doing public utility
programs/ projects, Total cost or net cost (expenses less revenues or expenditure less receipts) may be
appropriate benchmarks for that particular program/project activity. Where an entity has custody of the
assets, assets may be an appropriate benchmark.
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 CA SANIDHYA SARAF 4.4

Question 5
What are the components of an internal control framework?
Answer 5
There are five components of an internal control framework. They are as follows:
• Control Environment;
• Risk Assessment;
• Information & Communication;
• Monitoring;
• Control Activities.

Question 6
During the audit, auditor noticed material weaknesses in the internal control system, and he wishes to
communicate the same to the management. You are required to elucidate the important points the auditor
should keep in mind while drafting the letter of weaknesses in internal control system.
Answer 6
Important Points to be kept in Mind While Drafting Letter of Weakness: As per SA 265, “Communicating
Deficiencies in Internal Control to Those Who Charged with Governance and Management”, the auditor
shall include in the written communication of significant deficiencies in internal control -
(i) A description of the deficiencies and an explanation of their potential effects; and
(ii) Sufficient information to enable those charged with governance and management to understand the
context of the communication.
In other words, the auditor should communicate material weaknesses to the management or the audit
committee, if any, on a timely basis. This communication should be, preferably, in writing through a letter of
weakness or management letter. Important points with regard to such a letter are as follows-
(1) The letter lists down the area of weaknesses in the system and offers suggestions for improvement.
(2) It should clearly indicate that it discusses only weaknesses which have come to the attention of the
auditor as a result of his audit and that his examination has not been designed to determine the
adequacy of internal control for management.
(3) This letter serves as a valuable reference document for management for the purpose of revising the
system and insisting on its strict implementation.
(4) The letter may also serve to minimize legal liability in the event of a major defalcation or other loss
resulting from a weakness in internal control.

Question 7
Explain briefly the Flow Chart technique for evaluation of the Internal Control system.
Answer 7
The flow-charting technique can also be resorted to for evaluation of the internal control system. It is a graphic
presentation of internal controls in the organisation and is normally drawn up to show the controls in each
section or sub-section. As distinct from a narrative form, it provides the most concise and comprehensive way
for reviewing the internal controls and the evaluator’s findings. In a flow chart, narratives, though cannot
perhaps be totally banished are reduced to the minimum and by that process, it can successfully bring the
whole control structure, especially the essential parts thereof, in a condensed but wholly meaningful manner.
It gives a bird’s eye view of the system and is drawn up as a result of the auditor’s review thereof. It should,
however, not be understood that details are not reflected in a flow chart. Every detail relevant from the control
point of view and the details about how an operation is performed can be included in the flow chart. Essentially
a flow chart is a diagram full with lines and symbols and, if judicious use of them can be made, it is probably
the most effective way of presenting the state of internal controls in the client’s organisation.
A properly drawn up flow chart can provide a neat visual picture of the whole activities of the section or
department involving flow of documents and activities. More specifically it can show-

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 CA SANIDHYA SARAF 4.5

(i) at what point a document is raised internally or received from external sources;
(ii) the number of copies in which a document is raised or received;
(iii) the intermediate stages set sequentially through which the document and the activity pass;
(iv) distribution of the documents to various sections, department or operations;
(v) checking authorization and matching at relevant stages;
(vi) filing of the documents; and
(vii) final disposal by sending out or destruction.
As a matter of fact, a very sound knowledge of internal control requirements is imperative for adopting flow-
charting technique for evaluation of internal controls; also, it demands a highly analytical mind to be able to
see clearly the inter division of a job and the appropriate control at relevant points.
It has been stated earlier that flow charts should be made section-wise or department-wise. This suggestion
has been made to ensure the readability and intelligibility of the flow charts.

Question 8
As auditor of Z Ltd., you would like to limit your examination of account balance tests. What are the control
objectives you would like the accounting control system to achieve to suit your purpose?
Answer 8
Basic Accounting Control Objectives: The basic accounting control objectives which are sought to be
achieved by any accounting control system are -
(i) Whether all transactions are recorded;
(ii) Whether recorded transactions are real;
(iii) Whether all recorded transactions are properly valued;
(iv) Whether all transactions are recorded timely;
(v) Whether all transactions are properly posted;
(vi) Whether all transactions are properly classified and disclosed;
(vii) Whether all transactions are properly summarized.

Question 9
New Life Hospital is a multi-speciality hospital which has been facing a lot of pilferage and troubles regarding
their inventory maintenance and control. On investigation into the matter it was found that the person in
charge of inventory inflow and outflow from the store house is also responsible for purchases and
maintaining inventory records. According to you, which basic system of control has been violated? Also list
down the other general conditions pertaining to such system which needs to be maintained and checked by
the management.
Answer 9
Basic system of Control: Internal Checks and Internal Audit are important constituents of Accounting
Controls. Internal check system implies organization of the overall system of book-keeping and arrangement
of Staff duties in such a way that no one person can carry through a transaction and record every aspect
thereof.
In the given case of New Life Hospital, the person-in-charge of inventory inflow and outflow from the store
house is also responsible for purchases and maintaining inventory records. Thus, one of the basic system of
control i.e. internal check which includes segregation of duties or maker and checker has been violated where
transaction processing are allocated to different persons in such a manner that no one person can carry
through the completion of a transaction from start to finish or the work of one person is made complimentary
to the work of another person.
The general condition pertaining to the internal check system may be summarized as under-
(i) No single person should have complete control over any important aspect of the business operation.
Every employee’s action should come under the review of another person.
(ii) Staff duties should be rotated from time to time so that members do not perform the same function
for a considerable length of time.
(iii) Every member of the staff should be encouraged to go on leave at least once a year.
(iv) Persons having physical custody of assets must not be permitted to have access to the books of

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 CA SANIDHYA SARAF 4.6

accounts.
(v) There should exist an accounting control in respect of each class of assets, in addition, there should
be periodical inspection so as to establish their physical condition.
(vi) Mechanical devices should be used, wherever practicable, to prevent loss or misappropriation of
cash.
(vii) Budgetary control should be exercised and wide deviations observed should be reconciled.
(viii) For inventory taking, at the close of the year, trading activities should, if possible be suspended, and
it should be done by staff belonging to several sections of the organization.
(ix) The financial and administrative powers should be distributed very judiciously among different
officers and the manner in which those are actually exercised should be reviewed periodically.
(x) Procedures should be laid down for periodical verification and testing of different sections of
accounting records to ensure that they are accurate.

Question 10
Compute the overall Audit Risk if looking to the nature of business there are chances that 40% bills of
services provided would be defalcated, inquiring on the same matter management has assured that internal
control can prevent such defalcation to 75%. At his part the Auditor assesses that the procedure he could
apply in the remaining time to complete Audit gives him satisfaction level of detection of frauds & error to
an extent of 60%. Analyse the Risk of Material Misstatement and find out the overall Audit Risk.
Answer 10
According to SA-200, “Overall Objectives of the Independent Auditor and the Conduct of an Audit in
Accordance with Standards on Auditing”, the Audit Risk is a risk that Auditor will issue an inappropriate
opinion while Financial Statements are materially misstated.
Audit Risk has two components: Risk of material Misstatement and Detection Risk. The relationship can be
defined as follows.
Audit Risk = Risk of material Misstatement X Detection Risk
Risk of material Misstatement: - Risk of Material Misstatement is anticipated risk that a material
Misstatement may exist in Financial Statement before start of the Audit. It has two components Inherent
risk and Control risk. The relationship can be defined as
Risk of material Misstatement = Inherent risk X control risk
Inherent risk: it is a susceptibility of an assertion about account balance; class of transaction, disclosure
towards misstatements which may be either individually or collectively with other Misstatement becomes
material before considering any related internal control which is 40% in the given case.
Control risk: it is a risk that there may be chances of material Misstatement even if there is a control applied
by the management and it has prevented defalcation to 75%.
Hence, control risk is 25% (100%-75%)
Risk of material Misstatement: Inherent risk X control risk i.e., 40% X 25 % = 10%
Chances of material Misstatement are reduced to 10% by the internal control applied by management.
Detection risk: It is a risk that a material Misstatement remained undetected even if all Audit procedures
applied, Detection Risk is 100-60=40%
In the given case, overall Audit Risk can be reduced up to 4% as follows:
Audit Risk: Risk of Material Misstatement X Detection Risk = 10X 40% = 4%

Question 11
ST Ltd is a growing company and currently engaged in the business of manufacturing of tiles. The company
is planning to expand and diversify its operations. The management has increased the focus on the internal
controls to ensure better governance. The management had a discussion with the statutory auditors to
ensure the steps required to be taken so that the statutory audit is risk based and focused on areas of
greatest risk to the achievement of the company’s objectives. Please advise the management and the
auditor on the steps that should be taken for the same.

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 CA SANIDHYA SARAF 4.7

Answer 11
The auditor’s objective in a risk-based audit is to obtain reasonable assurance that no material misstatements
whether caused by fraud or errors exist in the financial statements.
This involves the following three key steps:
• Assessing the risks of material misstatement in the financial statements
• Designing and performing further audit procedures that respond to assessed risks and reduce the risks
of material misstatements in the financial statements to an acceptably low level; and
• Issuing an appropriate audit report based on the audit findings.
The risk-based audit process is presented in three distinct phases:
Risk Assessment
The risk assessment phase of the audit involves the following steps:
• Performing client acceptance or continuance procedures;
• Planning the overall engagement;
• Performing risk assessment procedures to understand the business and identify inherent and control
risks;
• Identifying relevant internal control procedures and assessing their design and implementation (those
controls that would prevent material misstatements from occurring or detect and correct
misstatements after they have occurred);
• Assessing the risks of material misstatement in the financial statements;
• Identifying the significant risks that require special audit consideration and those risks for which
substantive procedures alone are not sufficient;
• Communicating any material weaknesses in the design and implementation of internal control to
management and those charged with governance; and
• Making an informed assessment of the risks of material misstatement at the financial statement
level and at the assertion level.
Risk Response
This phase of the audit is to design and perform further audit procedures that respond to the assessed
risks of material misstatement and will provide the evidence necessary to support the audit opinion
Some of the matters the auditor should consider when planning the audit procedures include:
• Assertions that cannot be addressed by substantive procedures alone. This can occur where there is
highly automated processing of transactions with little or no manual intervention.
• Existence of internal control that, if tested, could reduce the need/scope for other substantive
procedures.
• The potential for substantive analytical procedures that would reduce the need/scope for other types
of procedures.
• The need to incorporate an element of unpredictability in procedures performed.
• The need to perform further audit procedures to address the potential for management override of
controls or other fraud scenarios.
• The need to perform specific procedures to address “significant risks” that have been identified.
Audit procedures designed to address the assessed risks could include a mixture of:
• Tests of the operational effectiveness of internal control; and
• Substantive procedures such as tests of details and analytical procedures
Reporting
The final phase of the audit is to assess the audit evidence obtained and determine whether it is
sufficient and appropriate to reduce the overall Audit Risk to an acceptably low level.
It is important at this stage to determine:
• If there had been a change in the assessed level of risk;
• Whether conclusions drawn from work performed are appropriate; and
• If any suspicious circumstances have been encountered.
• Any additional risks should be appropriately assessed, and further audit procedures performed as
required.

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 CA SANIDHYA SARAF 4.8

When all procedures have been performed and conclusions reached:

• Audit findings should be reported to management and those charged with governance; and
• An audit opinion should be formed, and a decision made on the appropriate wording for the auditor’s
report.

Question 12
Y Co. Ltd. has five entertainment centers to provide recreational facilities for public especially for children
and youngsters at 5 different locations in the peripheral of 200 kilometers. Collections are made in cash.
Specify the adequate system towards collection of money.
Answer 12
Control System over Selling and Collection of Tickets: In order to achieve proper internal control over the
sale of tickets and its collection by the Y Co. Ltd., following system should be adopted -
(i) Printing of tickets: Serially numbered pre-printed tickets should be used and designed in such a way
that any type of ticket used cannot be duplicated by others in order to avoid forgery. Serial numbers
should not be repeated during a reasonable period, say a month or year depending on the turnover.
The separate series of the serial should be used for such denomination.
(ii) Ticket sales: The sale of tickets should take place from the Central ticket office at each of the 5 centers,
preferably through machines. There should be proper control over the keys of the machines.
(iii) Daily cash reconciliation: Cash collection at each office and machine should be reconciled with the
number of tickets sold. Serial number of tickets for each entertainment activity/denomination will
facilitate the reconciliation.
(iv) Daily banking: Each day’s collection should be deposited in the bank on the next working day of the
bank. Till that time, the cash should be in the custody of properly authorized person preferably in
joint custody for which the daily cash in hand report should be signed by the authorized persons.
(v) Entrance ticket: Entrance tickets should be cancelled at the entrance gate when the public enters the
center.
(vi) Advance booking: If advance booking of facility is made available, the system should ensure that all
advance booked tickets are paid for.
(vii) Discounts and free pass: The discount policy of the Y Co. Ltd. should be such that the concessional
rates, say, for group booking should be properly authorized and signed forms for such authorization
should be preserved.
(viii) Surprise checks: Internal audit system should carry out periodic surprise checks for cash counts, daily
banking, reconciliation and stock of unsold tickets etc.

Question 13
The effectiveness of controls cannot rise above the integrity and ethical values of the people who create,
administer, and monitor them. Explain.
Answer 13
Communication and enforcement of integrity and ethical values: The effectiveness of controls cannot rise
above the integrity and ethical values of the people who create, administer, and monitor them. Integrity and
ethical behavior are the product of the entity’s ethical and behavioral standards, how they are communicated,
and how they are reinforced in practice. The enforcement of integrity and ethical values includes, for example,
management actions to eliminate or mitigate incentives or temptations that might prompt personnel to
engage in dishonest, illegal, or unethical acts. The communication of entity policies on integrity and ethical
values may include the communication of behavioral standards to personnel through policy statements and
codes of conduct and by example

Question 14
Your engagement team is seeking advice from you as engagement partner regarding steps for risk
identification. Elaborate.

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 CA SANIDHYA SARAF 4.9

Answer 14
➢ Assess the significance of the assessed risk, impact of its occurrence and also revise the materiality
accordingly for the specific account balance.
➢ Determine the likelihood for assessed risk to occur and its impact on our auditing procedures.
➢ Document the assertions that are affected.
➢ Consider the impact of the risk on each of the assertions
➢ (completeness, existence, accuracy, validity, valuation and presentation) relevant to the account
balance, class of transactions, or disclosure.
➢ Identify the degree of significant risks that would require separate attention and response by the
auditor. Planned audit procedures should directly address these risks.
➢ Enquire and document the management’s response.
➢ Consider the nature of the internal control system in place and its possible effectiveness in mitigating
the risks involved. Ensure the controls:
❖ Routine in nature (occur daily) or periodic such as monthly.
❖ Designed to prevent or detect and correct errors.
❖ Manual or automated.
➢ Consider any unique characteristics of the risk.
➢ Consider the existence of any particular characteristics (inherent risks) in the class of transactions,
account balance or disclosure that need to be addressed in designing further audit procedures.
➢ Examples could include high value inventory, complex contractual agreements, absence of a paper
trail on certain transaction streams or a large percentage of sales coming from a single customer.

Question 15
BSF Limited is engaged in the business of trading leather goods. You are the internal auditor of the company
for the year 2023-24. In order to review internal controls of the Sales Department of the company, you
visited the Department and noticed the work division as follows:
(1) An officer was handling the sales ledger and cash receipts.
(2) Another official was handling dispatch of goods and issuance of Delivery challans.
(3) One more officer was there to handle customer/ debtor accounts and issue of receipts.
As an internal auditor, you are required to briefly discuss the general condition pertaining to the internal
check prevalent in internal control system. Do you think that there was proper division of work in BSF
Limited? If not, why?
Answer 15
The general condition pertaining to the internal check system may be summarized as under:
(i) no single person should have complete control over any important aspect of the business operation.
Every employee’s action should come under the review of another person.
(ii) Staff duties should be rotated from time to time so that members do not perform the same function for
a considerable length of time
(iii) Every member of the staff should be encouraged to go on leave at least once a year.
(iv) Persons having physical custody of assets must not be permitted to have access to the books of accounts.
(v) There should exist an accounting control in respect of each class of assets, in addition, there should be
periodical inspection so as to establish their physical condition.
(vi) Mechanical devices should be used, wherever practicable to prevent loss or misappropriation of cash.
(vii) Budgetary control should be exercised, and wide deviations observed should be reconciled
(viii) For inventory taking, at the close of the year, trading activities should, if possible be suspended, and it
should be done by staff belonging to several sections of the organization.
(ix) The financial and administrative powers should be distributed very judiciously among different officers
and the manner in which those are actually exercised should be reviewed periodically.
(x) Procedures should be laid down for periodical verification and testing of different sections of accounting
records to ensure that they are accurate.
In the given scenario, Company has not done proper division of work as:
(i) the receipts of cash should not be handled by the official handling sales ledger and

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 CA SANIDHYA SARAF 4.10

(ii) delivery challans should be verified by an authorised official other than the officer handling despatch
of goods

Question 16
CA. R is conducting statutory audit of a Divisional office (DO) of a public sector insurance company. On
going through delegation of powers laid down by company’s head office, it is noticed that surveyors in
in claims under property insurance policies beyond estimated amounts of `30 lac are to be appointed by
Divisional Claims Committee (DCC). However, ongoing through surveyor appointment details of 10 such
claims during the year, 5 instances have come to his notice where above delegation of powers has not
been followed and appointments were made by Divisional manager in place of DCC.
In the beginning, the auditor had assessed risks of material misstatement to be low. Describe why the
above finding would change auditor’s assessment in relation to above.
Answer 16
Evaluation of internal controls influences auditor’s assessment of risks of material misstatement. Risks of
material misstatement also consists of control risk.
In the given situation of statutory audit of a Divisional office of a public sector insurance company, it is
noticed that procedure relating to delegation of powers has not been followed and surveyor appointments
have been made in violation of laid down procedures. It is a serious violation and shows that controls are
not operating effectively as laid down by company management.
Such deviations from established controls may lead auditor to conclude that control risk needs to be
revised. Revision of control risk assessment is likely to lead to revision in risks of material misstatement. It
may also result in modification of nature, timing and extent of planned substantive procedures.

Question 17
You have recently been appointed as an auditor of NGO working in the field of “upholding democracy”
for the first time. The last year accounts of NGO were unaudited and its activities were limited at a small
scale. However, it is only in the current year that NGO has received substantial donations including
foreign funds. The said NGO is also crowdfunding its donations. The government has now legislative
power to cancel FCRA certificate of NGO. Since it is working in a field which encompasses political and
social fields, accusations and counter-accusations are flying thick and fast.
What factors you may consider for assessing audit risk?
Answer 17
For assessing audit risk, auditor shall consider all components of audit risk. The said NGO is working in a
political-cum-social field which can make its activities inherently risky. Crowd funding donations may have
to be seen in relation to the constitution of NGO which may make these risky. Since the NGO is in receipt
of foreign funds, it may make transactions inherently risky. The credibility and integrity of persons behind
NGO is important. Shady NGOs can be involved in money laundering activities and m ay be involved in mis
utilizing funds from donors. Since last year’s accounts were unaudited, it also increases the inherent risk
due to the probable effect of misstatements, if any, of last year. Non-compliance with strict laws has the
potential to make activities of NGO inherently risky.
Since NGO has received substantial donations in the current year and its activities were on a relatively
small scale during last year, formal controls may not be in place. Lack of formal controls may lead to non -
compliance with laws. Non-compliance with FCRA can have serious consequences including cancelling such
certificate of NGO. Therefore, control risk could be high.
Further, audit for NGO has been accepted for the first time. There may be a lack of understanding of
activities of NGO. It may lead to higher detection risk due to inappropriate sampling procedures or faulty
application of audit procedures.

Question 18
RK Living Limited is engaged in manufacturing and processing of textile fabrics. It purchases its raw material
from a company based in Silvassa taxable @ 12%. It takes about 3-4 days for raw materials to reach the
company’s plant. Recently, the company has revamped its internal control system for recording its

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 CA SANIDHYA SARAF 4.11

transactions. You have also assumed charge as head of the internal audit department of the company a few
days before.
It is noticed that the information system requires booking of purchases in purchase ledger and stock records
from date of purchase invoice only. How would you deal with the above matter as internal auditor of the
company?
Answer 18
Internal audit involves continuous and critical appraisal of functioning of an entity with a view to suggest
improvements thereto and add value to and strengthen the overall governance mechanism of the entity
including its strategic risk management and internal control system. Internal audit also involves evaluation
of internal control to provide assurance to management regarding design, implementation and operating
effectiveness of control.
In the given situation, the information system requires booking of purchases in purchase ledger and stock
records from date of invoice. Such a control system is likely to present a distorted picture of stocks of the
company. It would show stocks of raw material as received whereas these goods could be in transit.
Therefore, the design of the control itself is faulty, which allows booking from date of purchase invoice
only. Further, such a system can have implications with respect to GST laws.
The internal auditor should report on the above matter asking management for corrective action.

Question 19
A company as part of its internal control set up has a system under which quarterly budgeted targets in
respect of sales are analysed with respect to actual performance achieved. It also involves fixing
responsibilities of different product departmental heads and taking timely correction. In case of product
departmental heads not achieving quarterly budgeted targets, they have to give a detailed justification
for the same and also lay down how shortfalls would be compensated in ensuing quarters.
Identify and explain component of internal control alluded to in above scenario.
Answer 19
The above referred component of internal control is “Control activities”. Control activities that may be
relevant to an audit include policies and procedures that pertain to “performance reviews”.
Such control activities include reviews and analyses of actual performance versus budgets, forecasts, and
prior period performance; relating different sets of data – operating or financial – to one another, together
with analyses of the relationships and investigative and corrective actions; comparing internal data with
external sources of information; and review of functional or activity performance.
The control activities pertaining to analysis of budgeted target of sales with respect to actual performance,
fixing of responsibilities and taking timely corrective action falls in nature of performance reviews. Such
performance reviews are part of control activities which is a component of internal control.

Question 20
CA. S is statutory auditor of a listed company. On reviewing internal controls of the company, he is of
the view that there can be possible situations where insurance premiums for keeping insurance policies
current in respect of various assets of company may have become due and payable but internal control
systems established by the company may not be able to capture it.
Elaborate how he should proceed to deal with the above matter.
Answer 20
A deficiency in internal control exists when: -
(i) A control is designed, implemented or operated in such a way that it is unable to prevent, or
detect and correct, misstatements in the financial statements on a timely basis or
(ii) A control necessary to prevent, or detect and correct, misstatements in the financial statements
on a timely basis is missing.
In the above situation, there is a possibility that internal control systems established by the company
may not be able to capture insurance premiums which may have become due and payable. It is a
significant deficiency as failure to keep insurance policies current would render assets of the company
uninsured. It may lead to losses for the company in case of any eventuality.

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CA SANIDHYA SARAF 4.12

Further, in accordance with SA 265, the significance of a deficiency or a combination of deficiencies in

internal control depends not only on whether a misstatement has actually occurred, but also on the
likelihood that a misstatement could occur and the potential magnitude of the misstatement.
Significant deficiencies may, therefore, exist even though the auditor has not identified misstatements
during the audit.
The susceptibility to loss of an asset is a factor in determining whether a deficiency constitutes
significant deficiency in internal control.
The auditor shall communicate in writing significant deficiency in internal control to those charged
with governance and include in the written communication of significant deficiencies in internal
control: -
(a) A description of the deficiencies and an explanation of their potential effects and
(b) Sufficient information to enable those charged with governance and management to understand
the context of the communication.

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 CA SANIDHYA SARAF 5.1

Chapter 5
Audit Evidence
Question 1
Mr. Atharv, while conducting the audit of Black Mountain Mining Ltd., which is involved in phosphate
mining, decided to engage an auditor’s expert to assess environmental liabilities and site clean-up costs.
Black Mountain Mining Ltd. re-appointed Mr. Aman as an independent expert for this task. For the past
five years, the management has consistently re-appointed Mr. Aman. He calculated the environmental
liabilities for both completed mining sites and sites scheduled for closure in the near future, including
provisions for clean-up costs. Management accepted his assessment.
Mr. Atharv, after performing the inquiries with management, was of the opinion that the objectivity of
the independent expert cannot be questioned just because he was appointed by management as their
expert. Hence, there is no need to raise a question on the objectivity of Mr. Aman or on his work
performed for the company. However, the audit partner was of the opinion that the audit team needs
to evaluate the objectivity of an expert engaged by the entity, irrespective of the fact that he was
appointed as an independent expert.
Guide the audit partner and Mr. Atharv with respect to requirements pertaining to evaluating the
objectivity of the management expert.
Answer 1
As per SA 500 “Audit Evidence”, when information to be used as audit evidence has been prepared using
the work of a management’s expert, the auditor shall, to the extent necessary, have regard to the
significance of that expert’s work for the auditor’s purposes evaluate the competence, capabilities and
objectivity of that expert.
A broad range of circumstances may threaten objectivity, for example, self-interest threats, advocacy
threats, familiarity threats, self-review threats and intimidation threats. Safeguards may reduce such
threats and may be created either by external structures (for example, the management’s expert’s
profession, legislation or regulation), or by the management’s expert’s work environment (for example,
quality control policies and procedures). Although safeguards cannot eliminate all threats to a management
expert’s objectivity, threats such as intimidation threats may be of less significance to an expert engaged
by the entity than to an expert employed by the entity, and the effectiveness of safeguards such as quality
control policies and procedures may be greater. Because the threat to objectivity created by being an
employee of the entity will always be present, an expert employed by the entity cannot ordinarily be
regarded as being more likely to be objective than other employees of the entity.
When evaluating the objectivity of an expert engaged by the entity, it may be relevant to discuss with
management and that expert any interests and relationships that may create threats to the expert’s
objectivity and any applicable safeguards, including any professional requirements that apply to the expert;
and to evaluate whether the safeguards are adequate. Interests and relationships creating threats may
include:
• Financial interests.
• Business and personal relationships.
• Provision of other services.
In the current case, Black Mountain Mining Ltd. re-appointed Mr. Aman for this engagement as an
independent expert. The audit team was of the view that the objectivity of the independent expert cannot
be questioned just because he was appointed by management as their expert. However, the audit partner
had a contrary view.
Hence, the audit team should evaluate the objectivity of an expert engaged by the entity as the threat to
objectivity, created by being an employee of the entity, will always be present. An expert appointed by the
entity cannot ordinarily be regarded as being more likely to be objective than other employees of the entity.
As a result, audit partner Atharva is correct in his view.

Question 2
While conducting the statutory audit of Tasty Foods Limited, CA. Careful has planned attendance at
physical inventory count of the company from 29th March to 31st March 2024. The company is engaged
in the business of extracting rice from paddy grains and caters to domestic as well as international market
particularly in Gulf region. It has its plant spread in an area of about 20 acres located in National Capital
Region (NCR). Paddies contained in jute bags of nearly standard sizes is purchased from dealers/agents.

Chapter 5 Audit Evidence

 CA SANIDHYA SARAF 5.2

It is stored in heaps on pallets (kind of wooden structures) in an open area covered by protective sheets
and in steel silos (silos are huge steel containers with measuring strain gauges) in company’s premises.
The company mainly produces three rice brands viz. “Raja” and “Shehzada” (both for the domestic
market) and “Badshah” (for the international market). The process of obtaining rice from paddy consists
of various steps like cleaning of paddy, removing outer husk layer from paddy grains to obtain brown
rice, whitening, polishing, grading and sorting, packaging which is accomplished by means of various
types of machineries installed in plant.
The company’s management has prepared a set of instructions and procedures to be followed for
recording and controlling results of company’s physical inventory counting which are listed as under: -
 The physical inventory count process is to be supervised by a responsible officer of company
responsible for storage functions.
 There should be no disturbance to the routine process of receiving goods and despatch during the
counting time period.
 Counting process is to be undertaken by constituting different teams of 3 members each for
counting/verifying raw material, work in progress and finished goods.
 Paddy in steel silos is to be estimated using their capacity.
 Quantity of work in progress is to be estimated considering plant capacity as whole.
 The responsible officer should ensure that stocks have been counted/verified in all areas.
Before proceeding to attend physical inventory count process of company, evaluate management’s
instructions and procedures sent to CA Careful as stated above. You may suggest modification, addition
or removal of such instructions to ensure effective count process.
Answer 2
The set of instructions and procedures given in the case scenario are incomplete and not properly followed,
which are discussed as under:
 The physical inventory count process should be supervised by a responsible officer of the company,
preferably from finance department. The supervision of the count process should not be done by person
responsible for storage function. However, storage in-charge of each area should be present during
inventory count process for co-ordination and facilitation.
 During inventory count process, inward and outward movement of goods should not be allowed as
allowing such movement may distort the results or make it difficult to arrive at proper results.
 The instruction relating to the constitution of teams for counting process does not specify that counting
shall be undertaken by members drawn from departments not connected with storage function. For
example, these members may be from the finance department. Further, within each team, duties should
be fixed separately for counting and recording on serially numbered count sheets. It is nowhere stated
that once counting in an area is complete, certain distinctive marks or tags are required to be put.
 Count sheets should contain description of products in accordance with inventory records of company.
 The management’s instructions are silent about how team members would proceed with their work.
Team members should be provided with lay out plans for different sections/ storage areas so that all
areas are covered.
 The management’s instructions are silent on how paddy lying in open is to be counted and verified.
Paddy in jute bags lying in open in heaps should be verified by counting number of bags in one heap. As
each bag is of nearly standard size, the quantity of paddy can be determined by counting number of
bags in a heap and correlating it with the weight of standard bag.
 Paddy in steel silos should be determined using measuring strain gauges on silos. Determining quantity
in silos based on silo capacity may lead to wrong results as paddy may have been used from such silos.
 Quantities of work in progress should be estimated at each stage of production and not for the plant as
a whole. Estimating WIP inventories for plant as a whole would give inaccurate picture of work in
progress inventories.
 Finished goods inventories need to be counted category wise. Rice bags should be verified by checking
the name of brand.
 There is no instruction regarding damaged or obsolete stock items particularly in the case of finished
goods i.e. rice. Damaged/obsolete inventories should be counted and shifted to a separate area for
assessment of their condition and to prevent mix-up with other standard inventories.
 Count sheets need to be signed by each team member.
The responsible officer should ensure that stocks have been counted/verified in all areas and distinctive
Chapter 5 Audit Evidence
 CA SANIDHYA SARAF 5.3

marks are put to confirm completion of counting.

Question 3
Coccyx Ltd. supplies navy uniforms across the country. The company has 3 warehouses at different
locations throughout the India and 5 warehouses at the borders. The major stocks are generally supplied
from the borders. Coccyx Ltd. appointed M/s OPAQE & Co. to conduct its audit for the financial year
2023-24. Mr. P, partner of M/s OPAQE & Co., attended all the physical inventory counting conducted
throughout the India but could not attend the same at borders due to some unavoidable reason.
You are required to advise M/s OPAQE & Co.,
I. How sufficient appropriate audit evidence regarding the existence and condition of inventory
may be obtained?
II. How is an auditor supposed to deal when attendance at physical inventory counting is
impracticable?
Answer 3
(i) Special Consideration with Regard to Inventory: 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:
(1) Attendance at physical inventory counting, unless impracticable, to:
(i) Evaluate management’s instructions and procedures for recording and controlling the results of
the entity’s physical inventory counting;
(ii) Observe the performance of management’s count procedures;
(iii) Inspect the inventory; and
(iv) Perform test counts; and
(2) Performing audit procedures over the entity’s final inventory records to determine whether they
accurately reflect actual inventory count results.
(ii) Attendance at Physical Inventory Counting Not Practicable: In some cases, attendance at physical
inventory counting may be impracticable. This may be due to factors such as the nature and location of
the inventory, for example, where inventory is held in a location that may pose threats to the safety of
the auditor. The matter of general inconvenience to the auditor, however, is not sufficient to support a
decision by the auditor that attendance is impracticable. Further, as explained in SA 200 “Overall
Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on
Auditing”, the matter of difficulty, time, or cost involved is not in itself a valid basis for the auditor to
omit an audit procedure for which there is no alternative or to be satisfied with audit evidence that is
less than persuasive.
Further, where attendance is impracticable, alternative audit procedures, for example, inspection of
documentation of the subsequent sale of specific inventory items acquired or purchased prior to the
physical inventory counting, may provide sufficient appropriate audit evidence about the existence and
condition of inventory.
In some cases, though, it may not be possible to obtain sufficient appropriate audit evidence regarding the
existence and condition of inventory by performing alternative audit procedures. In such cases, SA 705 on
Modifications to the Opinion in the Independent Auditor’s Report, requires the auditor to modify the
opinion in the auditor’s report as a result of the scope limitation.

Question 4
GHK Associates, Chartered Accountants, conducting the audit of PBS Ltd., a listed company for the year
ended 31-03-2024 is concerned with the presentation and disclosure of segment information included in
Company's Annual Report. GHK Associates want to ensure that methods adopted by management for
determining segment information have resulted in disclosure in accordance with the applicable financial
reporting framework. Guide GHK Associates with 'Examples of Matters' that may be relevant when
obtaining an understanding of the methods used by the management with reference to the relevant
Standards on Auditing
Answer 4
The auditors, GHK Associates wanted to ensure and obtain sufficient appropriate audit evidence regarding
the presentation and disclosure of segment information in accordance with the applicable financial
reporting framework by obtaining an understanding of the methods used by management in determining
segment information. SA 501 guides in this regard. As per SA 501- “Audit Evidence—Specific Considerations
Chapter 5 Audit Evidence
 CA SANIDHYA SARAF 5.4

for Selected Items”, example of matters that may be relevant when obtaining an understanding of the
methods used by management in determining segment information and whether such methods are likely
to result in disclosure in accordance with the applicable financial reporting framework include:
(i) Sales, transfers and charges between segments, and elimination of inter-segment amounts.
(ii) Comparisons with budgets and other expected results, for example, operating profits as a percentage
of sales.
(iii) The allocation of assets and costs among segments.
(iv) Consistency with prior periods, and the adequacy of the disclosures with respect to inconsistencies.

Question 5
Chintamani Ltd appoints Chintan & Mani as statutory auditors for the financial year 2023-24. Chintan &
Mani seem to have different opinions on the Audit approach to be adopted for audit of Chintamani Ltd.
Mani is of the opinion that 100% checking is not required and they can rely on Audit Sampling techniques
in order to provide them a reasonable basis on which they can draw conclusions about the entire
population.
Chintan is concerned that whether the use of audit sampling has provided a reasonable basis for
conclusions about the population that has been tested.
You are required to guide Chintan about his role if audit sampling has not provided a reasonable basis
for conclusions about the population that has been tested in accordance with SA 530.
Answer 5
As per SA 530, “Audit Sampling”, the auditor shall evaluate:
(a) The results of the sample; and
(b) Whether the use of audit sampling has provided a reasonable basis for conclusions about the
population that has been tested.
If the auditor concludes that audit sampling has not provided a reasonable basis for conclusions about the
population that has been tested, the auditor may:
(I) Request management to investigate misstatements that have been identified and the potential for
further misstatements and to make any necessary adjustments; or
(II) Tailor the nature, timing and extent of those further audit procedures to best achieve the required
assurance. For example, in the case of tests of controls, the auditor might extend the sample size, test
an alternative control or modify related substantive procedures.

Question 6
During the audit of Star Ltd., a company engaged in the production of paper, the auditor received certain
confirmation for the balances of trade payables outstanding in the balance sheet through external
confirmation by "Negative Confirmation Request". In the list of trade payables, there are number of small
balances except one which is an old outstanding of ₹ 20 lakhs for which no confirmation was received.
Comment with respect to Standards of Auditing relating to the confirmation process and how to deal
with the non-receipt of confirmation.
Answer 6
External Confirmation: As per SA 505, “External Confirmation”, negative confirmation is a request that the
confirming party respond directly to the auditor only if the confirming party disagrees with the information
provided in the request. Negative confirmations provide less persuasive audit evidence than positive
confirmations.
The failure to receive a response to a negative confirmation request does not explicitly indicate receipt by
the intended confirming party of the confirmation request or verification of the accuracy of the information
contained in the request.
Accordingly, a failure of a confirming party to respond to a negative confirmation request provides
significantly less persuasive audit evidence than does a response to a positive confirmation request.
Confirming parties also may be more likely to respond indicating their disagreement with a confirmation
request when the information in the request is not in their favour, and less likely to respond otherwise.
In the instant case, while performing audit of Star Limited, the auditor sent the negative confirmation
requesting the trade payables having outstanding balances in the balance sheet. One of the old outstanding
of ₹ 20 lakh has not sent the confirmation on the credit balance. In case of non-response, the auditor may
examine subsequent cash disbursements or correspondence from third parties, and other records, such as
goods received notes. Further non-response for negative confirmation request does not mean that there
Chapter 5 Audit Evidence
 CA SANIDHYA SARAF 5.5

is some misstatement as negative confirmation request itself is to respond to the auditor only if the
confirming party disagrees with the information provided in the request.

Question 7
The auditor of BBNS Ltd. accepted the gratuity liability valuation based on the certificate issued by a
qualified actuary. However, the auditor noticed that the retirement age adopted is 65 years as against
the existing retirement age of 60 years. The company is considering a proposal to increase the retirement
age to 65 years. Comment.
Answer 7
Evaluating the Work of Management’s Expert: As per SA 500 “Audit Evidence”, when information to be
used as audit evidence has been prepared using the work of a management’s expert, the auditor shall, to
the extent necessary, having regard to the significance of that expert’s work for the auditor’s purposes,
(a) Evaluate the competence, capabilities and objectivity of that expert;
(b) Obtain an understanding of the work of that expert; and
(c) Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion.
The auditor may obtain information regarding the competence, capabilities and objectivity of a
management’s expert from a variety of sources, such as personal experience with previous work of that
expert; discussions with that expert; discussions with others who are familiar with that expert’s work;
knowledge of that expert’s qualifications; published papers or books written by that expert.
Aspects of the management’s expert’s field relevant to the auditor’s understanding may include what
assumptions and methods are used by the management’s expert, and whether they are generally accepted
within that expert’s field and appropriate for financial reporting purposes.
The auditor may also consider the following while evaluating the appropriateness of the management’s
expert’s work as audit evidence for the relevant assertion:
(i) The relevance and reasonableness of that expert’s findings or conclusions, their consistency with other
audit evidence, and whether they have been appropriately reflected in the financial statements.
(ii) If that expert’s work involves use of significant assumptions and methods, the relevance and
reasonableness of those assumptions and methods; and
(iii) If that expert’s work involves significant use of source data, the relevance, completeness, and accuracy
of that source data.
In the instant case, BBNS Ltd. accepted the gratuity liability valuation based on the certificate issued by an
expert i.e., a qualified actuary who is management’s expert. Here the basis for computation and valuation
is taken as age 65 years by the actuary, which is not correct as company is considering proposal to increase
the retirement age from existing age to 65 years. Therefore, assumptions and methods used by the
management’s expert are not appropriate for financial reporting purposes. Hence, the auditor may qualify
the report accordingly.

Question 8
CA Prabhjot has planned to observe the physical count of inventories at the plant of a company located
in the remote area in the state of Uttarakhand, as part of a statutory audit exercise, few days before
completion of the financial year 2023-24. He already informed his intention to management that he is
planning to visit the plant site on 29th March 2024. He plans to inspect inventories, observe the counting
process and perform test counts among other matters.
The management has made all the necessary arrangements to facilitate the above exercise. However,
an agitation in Himalayan hills started on 28th March 2024 for the announcement of a strict law
regarding the conversion of agricultural land for commercial use. Many civil society groups are
participating in the agitation. NH-7 leading to the plant site is blocked by protestors. The plant is not
accessible through any other mode. The blockade is lifted one month after the state government
announced the formation of a committee to look into protestors’ demands.
Does the above case highlight a situation of “impracticability of attendance” at inventory counting in
terms of requirements of SA 501?
How should the auditor proceed in the above situation?
Answer 8
The given situation does not highlight the impracticability of attendance at inventory counting. It only
shows that the auditor is unable to attend physical inventory counting due to unforeseen circumstances

Chapter 5 Audit Evidence

 CA SANIDHYA SARAF 5.6

arising out of agitation by protestors. It has led to the inaccessibility of the plant site for a month. The
blockade is lifted after a month.
SA 501 states that if the auditor is unable to attend physical inventory counting due to unforeseen
circumstances, the auditor shall make or observe some physical counts on an alternative date and perform
audit procedures on intervening transactions. Therefore, the auditor should attend the physical inventory
count after the blockade is lifted and perform audit procedures on intervening transactions.

Question 9
On reviewing legal expenses account of Zed Ltd., CA. Sunitha, auditor of company, finds that legal fees
amounting to ₹ 10 lac was paid to B. George, a reputed lawyer, during the year 2023-24. On inquiry with
management regarding the purpose of such expenditure, evasive reply was received from management
stating that a lot of work is performed by the said lawyer on behalf of the company. However, no specific
details were provided.
She finds it proper to correspond directly with the lawyer. She obtains the address and mail id of the
lawyer from his professional services bill. She shoots off an inquiry letter asking for the nature and status
of litigation claims against the company on her letterhead.
Is her approach proper? Irrespective of the merits of the approach followed by her, what is she trying to
achieve by corresponding with the lawyer of the company?
Answer 9
SA 501 states that when audit procedures performed indicate that material litigation or claims may exist,
the auditor shall seek direct communication with the entity’s external legal counsel. The auditor shall do so
through a letter of inquiry prepared by management and sent by the auditor, requesting the entity’s
external legal counsel to communicate directly with the auditor.
Therefore, her approach in communicating with an external lawyer is not correct. She needs to make
management aware of her intention to communicate directly with the lawyer. The letter of inquiry has to
be prepared by management and sent by her.
Her purpose in corresponding with the lawyer of the company is to identify litigation and claims involving
the entity which may give rise to a risk of material misstatement. It is due to the reason that litigation and
claims involving the entity may have a material effect on the financial statements and thus may be required
to be disclosed or accounted for in the financial statements.

Question 10
During the audit of TS Ltd., CA Tanmaya finds that substantial inventories of the company consisting of
mast lighting poles remain with “Super Industries” for certain finishing works. While planning audit
procedures, he had planned about seeking confirmation from “Super Industries” regarding existence and
condition of such mast lighting poles belonging to TS Ltd. lying with them as on 31st March, 2024.
However, the premises of “Super Industries” were raided by DGGI officials (Director General of GST
Intelligence) in connection with the busting of a fake billing scam. The proprietor of the firm was arrested
in November 2023 and came out on bail in the month of March 2024. The details of the proprietor and
his firm were flashed prominently in local newspapers of the city where company is located. CA. Tanmaya
also belongs to the same place. Discuss how he should proceed in the above matter as auditor of TS Ltd.
Answer 10
SA 501 states that when inventory under the custody and control of a third party is material to the financial
statements, the auditor shall obtain sufficient appropriate audit evidence regarding the existence and
condition of that inventory by performing one or both of the following:
(a) Request confirmation from the third party as to the quantities and condition of inventory held on
behalf of the entity.
(b) Perform inspection or other audit procedures appropriate in the circumstances.
It further states that where information is obtained that raises doubt about the integrity and objectivity of
the third party, the auditor may consider it appropriate to perform other audit procedures instead of, or in
addition to, confirmation with the third party.
Examples of other audit procedures include:
 Attending, or arranging for another auditor to attend, the third party’s physical counting of inventory, if
practicable.
 Obtaining another auditor’s report, or a service auditor’s report, on the adequacy of the third party’s
internal control for ensuring that inventory is properly counted and adequately safeguarded.
Chapter 5 Audit Evidence
 CA SANIDHYA SARAF 5.7

Inspecting documentation regarding inventory held by third parties

In the given case, the integrity of the third party appears to be doubtful in view of DGGI raids and his
possible involvement in a fake billing scam. He has already been behind bars.
Keeping in view the above, besides obtaining confirmation from such party, he may attend a third party’s
physical counting or ask some other auditor to attend physical counting as on reporting date, depending
upon practical considerations. He can also inspect the record of goods sent and received back from such
party by tracing it to challans, e-ways bills etc. and correlate the above information

Question 11
As auditor of Groom Limited, you have sent positive confirmation requests to 30 creditors of the
company in March 2024. All the creditors in the informal sector are small concerns. You selected to send
positive confirmation requests to all the above parties at their business addresses stated on respective
bills after discussing the matter with the CFO of the company. The CFO is cooperative and does not raise
any hassles in the matter.
Responses to confirmation requests are received within a week’s time. Your article assistant informs you
that out of 30 creditors, GST registrations of 25 creditors have been cancelled during financial year 2023-
24 itself by collating information from GST portal. He further informs you that there are no fresh
registrations pertaining to PANs of these parties.
How would you proceed to deal with the situation as an auditor of the company
Answer 11
SA 505 states that if the auditor determines that a response to a confirmation request is not reliable, the
auditor shall evaluate the implications on the assessment of the relevant risks of material misstatement,
including the risk of fraud, and on the related nature, timing and extent of other audit procedures.
In the instant case, GST registrations of 25 concerns have been cancelled in the year 2023-24. It indicates
that businesses on those addresses were closed. Further, there are no fresh registrations pertaining to the
PANs of these parties. However, the auditor sent external confirmation requests in March 2024, which
were duly responded. It raises questions on the reliability of responses received.
SA 500 indicates that even when audit evidence is obtained from sources external to the entity,
circumstances may exist that affect its reliability. All responses carry some risk of interception, alteration
or fraud. Such risk exists regardless of whether a response is obtained in paper form or by electronic or
other medium. Factors that may indicate doubts about the reliability of a response include:
 Was received by the auditor indirectly or
 Appeared not to come from the originally intended confirming party.
Keeping in view the circumstances described in the case situation, there is a risk that the response has not come
from the originally intended confirming party.
Unreliable responses may indicate a fraud risk factor that requires evaluation.

Question 12
CA M. Hussain is appointed as auditor of a firm for the year 2023-24 on 31st July, 2023. The accounts of
the firm were unaudited in the year 2022-23. The firm had material inventories reflected in its financial
statements even as on close of 31st March, 2023.
He is performing audit procedures, including attending physical inventory count as on 31st March 2024.
However, there is a lingering doubt in his mind regarding opening inventories reflected in financial
statements.
Does there exist any responsibility on his part in such a situation?
Answer 12
SA 510 states that in conducting an initial audit engagement, one of the objectives of the auditor with
respect to opening balances is to obtain sufficient appropriate audit evidence about whether opening
balances contain misstatements that materially affect the current period’s financial statements. The
auditor has to evaluate whether audit procedures performed in the current period provide evidence
relevant to the opening balances or specific audit procedures are required to be performed to obtain
evidence regarding the opening balances.
In the case of inventories, however, the current period’s audit procedures on the closing inventory balance
provide little audit evidence regarding inventory on hand at the beginning of the period. Therefore,
additional audit procedures may be necessary, and one or more of the following may provide sufficient
appropriate audit evidence
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 CA SANIDHYA SARAF 5.8

 Observing a current physical inventory count and reconciling it to the opening inventory quantities
 Performing audit procedures on the valuation of the opening inventory items.
 Performing audit procedures on gross profit and cut-off.

Question 13
CA. Ritesh has drawn some samples during the audit of a manufacturing company for testing controls as
well as for tests of details. On the basis of the samples selected, he reaches an erroneous conclusion that
access controls on applications are less effective.
Further, on the basis of samples selected, he concludes erroneously that work-in progress inventories
amounting to ₹ 5 crore in financial statements are materially misstated.
Outlining the above risk involved, discuss how it is going to affect his audit of the company.
Answer 13
The described risk is sampling risk. It is a risk that the auditor’s conclusion based on a sample may be
different from the conclusion if the entire population were subjected to the same audit procedure.
In the given case, the auditor has arrived at erroneous conclusions on the basis of the samples selected. In
the case of a test of controls, he has concluded that access controls are less effective than they actually are.
In the case of a test of details, he has concluded erroneously that a material misstatement exists when in
fact, it does not. This type of erroneous conclusion affects audit efficiency as it would usually lead to
additional work to establish that initial conclusions were incorrect.

Question 14
“Living Well Private Limited” is engaged in the manufacturing and export of floor coverings. Such
products are labour-intensive and do not require much capital investment in machinery. The company
has no plans to diversify in other product lines. Its directors are also holding significant interest in another
company “My Living Private Limited” engaged in manufacturing of blankets using capital intensive
machinery.
During the audit of “My Living Private Limited”, it was noticed that the company has sold machinery of
₹ 1 crore to “Living Well Private Limited” during the year. The transaction has been done at normal
market rates applicable to such used machinery.
How do you view the above transaction as auditor of “My Living Private Limited”?
Answer 14
In respect of significantly related party transactions outside the normal course of business of an entity, it is
the responsibility of the auditor, in accordance with SA 550, to evaluate the business rationale or lack
thereof of transactions that may have been entered to indulge in fraudulent financial reporting or conceal
misappropriation of assets.
The auditor has to seek to understand the business rationale of such a transaction from a related party’s
perspective. It would help him understand the economic reality of such a transaction and why it was carried
out.
In the given situation, there is no primary rationale for such a transaction. Living Well Private Limited does
not manufacture blankets, and the purchase of part of old machinery pertaining to blanket manufacturing
has no rationale for it primarily. A business rationale from the related party’s perspective that appears
inconsistent with the nature of its business may represent a fraud risk factor.

Integrated Case Scenario

1. Black & White Ltd. is into the business of manufacturing readymade garments in Amritsar. It procures all
the raw material required for its production from Punjab, Himachal Pradesh & J&K. Its sales market,
however, covers almost all the northern parts of the country. CA Anu is the engagement partner of
Maheshwari & Co appointed as the statutory auditor of the company. She calls for a meeting of the
engagement team to delegate work and responsibilities. During the audit, the engagement team comes
across the following facts: -
 Woolen Private Limited is one of the vendors of the company from which the company has been
purchasing wool for many years on a current account basis, but no single purchase has been made
in the last nine months, and the outstanding balance stands as it is in the books of accounts. CA
Anu wants to confirm the balance and requests the CFO of the company for sending a balance
confirmation request to Woolen Private Ltd., to which he refuses and is not willing.
 The Fashion Jingo Ltd. is one of the customers of the company and hasn’t replied to CA Anu’s
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 CA SANIDHYA SARAF 5.9

positive balance confirmation request sent.

 Mr. X, one of the fashion designers, had sold his designs to the company but owing to a dispute,
the contract got cancelled, and now both the parties are under litigation in the local court of law.
The engagement team is guided as to the procedures to be designed and performed to identify this
matter.
 CA Anu simultaneously seeks direct communication with the company’s external legal counsel
sensing the risk of material misstatement. However, it ends up in vain as the external legal counsel,
Mr. Chadha, refuses to comment. She is unable to obtain sufficient appropriate audit evidence in
this regard through alternative audit procedures either.
The team documents all the relevant information w.r.t. the above facts, and CA Anu issues the audit
report accordingly.
1. Fashion Jingo Ltd. has not responded to CA Anu’s request. What would be proper course of action for her in
such a situation
(a) Perform alternative audit procedures
(b) Consider it as a negative confirmation
(c) Give a Qualified opinion
(d) Should visit the customer company premises herself and confirm the balance on the spot.
Ans: (a)

2. With respect to advocate Chadha’s cold shoulder to CA Anu’s request, what she should do?
(a) Modify her audit opinion
(b) Give an unqualified opinion
(c) Give a disclaimer of opinion
(d) Withdraw from this engagement
Ans: (a)

3. What should be CA Anu’s first and foremost response in the case of request made relating to balance
confirmation from Woolen Pvt. Ltd.?
(a) Perform alternate audit procedures.
(b) Withdraw from the engagement.
(c) Communicate with Those charged with Governance telling the effects on his audit opinion.
(d) Inquire as to the reasons behind the management’s response and seek audit evidence as to its
validity and reasonableness
Ans: (d)

4. Which of the following procedures will not be performed by the engagement team as audit procedures while
dealing with the case of Mr. X?
(a) Inquiry of Management.
(b) Inquiry of Mr. X
(c) Reviewing Minutes of Meetings
(d) Reviewing Legal expenses account
Ans: (b)

Case Study 2
Honest Speciality Chemicals Private Limited is a company with a turnover of ₹ 1,000 crore having plants
in Khopoli, Mahad, and Ankleshwar for manufacturing various products for fertilizer units, cosmetics and
paint industry, etc. The company has built up a good reputation, and apart from the domestic market, it
exports to the European market and the Middle East. The company is a closely held company owned by
three friends and their family members. The types of materials handled and produced are hazardous.
Following further latest information relating to the company is as under: -
 The company needs to import key raw materials and is exposed to high risk of price fluctuations
and currency risks.
 The company carries high inventory due to the long import cycle and seasonal sales pattern.
 The working capital is almost 60% blocked in inventory and rest in receivables.
 The company has huge investments in plant and machinery financed through term loans from
financial institutions.
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 CA SANIDHYA SARAF 5.10

 Since the company has large imports, it buys import licenses from the open market.
 The company has received notices from the custom department for using fake licenses for
importing materials without paying duty. The company has filed an appeal against the said
notice and the same is pending with the Appellate Tribunal. The amount involved is material
and, along with interest and penalty, could be more than 10% of turnover.
 The company has liquid chemicals stored in huge tanks.
 The powdered form of chemicals is stored in standard-sized drums.
 Few items of stock like coal, sulphur are lying in the open area.
 The company has huge domestic sales on a consignment basis, and vast quantities of finished
inventories are lying with the consignees across India.
 The company has received an order from NGT to pay a fine of INR 1.5 crores for the emission of
toxic chemicals into the air and water. The company has filed an appeal against the said order.
 The type of plant is such that it has to be a continuous process, and at any time, huge quantities
of materials are in process.
 Raw Materials are stored in huge tanks located 2 kilometers from the plant, and to transport the
chemicals (liquid), there is a network of pipes connecting them, and at any point in time, there
are huge quantities of materials lying in the pipeline.
 The company has prepared its inventory details by involving a management expert.
 During the year, the previous auditor resigned, and a new auditor got appointed
Based on the case study, please advise the auditor on the important aspects of carrying out the audit
procedures to obtain sufficient appropriate audit evidence in respect of the following: -

Question 1
Which audit procedures are required for verifying the existence and condition of company’s inventories
with specific reference to its nature of operations

Answer 1
The auditor needs to obtain sufficient appropriate audit evidence regarding existence and condition of
inventory.
For the above, the auditor needs to do all the following: -
(a) Attendance at physical inventory counting to:
(i) Evaluate management's instructions and procedures for recording and controlling the results of the
entity’s physical inventory counting like:
- The existence of appropriate control activities: collection of used physical inventory count records,
accounting for unused physical inventory count records, count and recount procedures.
- The accurate identification of the stage of completion of work-in- progress, of slow moving, obsolete,
or damaged items and of inventory lying in tanks, in pipes and in open areas.
- The procedures used to estimate physical quantities, for liquid chemicals lying in process, tanks,
pipelines, in open areas like coal pile, sulphur pile, etc.
- Control over the moment of inventory between areas and the shipping and receipt of inventory
before and after the cutoff date.
(b) Observe the performance of Management's count procedure by observing the control over the
movement of inventory before, during and after the count to determine adequacy and effectiveness of
count procedure.
(c) Inspect the inventory to assist in identifying obsolete, damaged or ageing of inventory.
(d) Perform the test counts to obtain the sufficient appropriate audit evidence
(i) By tracing items selected from the physical inventory to management's count records,
(ii) By obtaining copies of Management's completed physical inventory count records
(e) Cross matching the final inventory records with the actual inventory count results.

Question 2
The company has prepared inventory details by involving a management’s expert. Elaborating upon its
rationale, discuss responsibilities of auditor in regard to information prepared by company involving such
an expert.
Answer 2
The company deals with speciality chemicals which are in liquid condition, powdered condition, lying in
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 CA SANIDHYA SARAF 5.11

huge tanks or in plants under process, lying in pipelines or lying in open areas like coal and sulphur. The
unit of measurement for each of the above categories may be different and could involve technical and
mathematical principles involving technical and scientific expertise. Keeping these matters in view,
inventory details have been prepared by involving management’s expert.
When information to be used as audit evidence has been prepared using the work of a management’s
expert, the auditor shall, having regard to the significance of that expert’s work for the auditor’s purposes:
(a) Evaluate the competence, capabilities and objectivity of that expert
(b) Obtain an understanding of the work of that expert and
(c) Evaluate the appropriateness of that expert’s work as audit evidence for the relevant assertion.

Question 3
What additional procedures does the auditor need to carry out in respect of stocks lying with consignees
all over the country?
Answer 3
Apart from obtaining the confirmation from the third party as to the quantities and condition of the
inventory held on behalf of the entity, the auditor may perform the following other audit procedures:
- Attending, or arranging for another auditor to attend, the third party's physical counting of inventory,
- Obtaining another auditor's report or a service auditor’s report on the adequacy of the third party's
internal control for ensuring that inventory is properly counted and adequately safeguarded.
- Inspecting documentation regarding inventory held by third parties

Question 4
What procedures should the auditor need to undertake for litigation matters?
Answer 4
The auditor shall design and perform audit procedures in order to identify litigation and claims involving
the entity by: -
- Inquiry of management and, where applicable, others within the entity including in- house legal
counsel.
- Reviewing minutes of meetings of those charged with governance and correspondence between the
entity and its external legal counsel.
- Reviewing legal expense account.
The legal claims involving customs and fines of NGT are material. In such circumstances if auditor assesses
risk of material misstatements regarding litigation, he can seek letter of specific inquiry from the external
legal counsel including:-
 A list of litigation and claims
 Where applicable, management's assessment of the outcome of each of the identified litigation
and claims and its estimate of the financial implications, including cost involved and
 A request that the entity's external legal counsel confirm the reasonableness of management's
assessments and provide the auditor with further information if the list is considered incomplete
or incorrect.
 The auditor may seek a meeting with the external legal counsel if the matter is having significant
risk, it is complex or there is disagreement between management assertion and legal counsel's
views.
 Obtaining written representation from the management and where appropriate those charged
with governance that all the known actual or possible litigation and claims whose effects should be
considered when preparing the financial statement have been disclosed to the auditor and
appropriately accounted for and disclosed in accordance with the applicable financial reporting
framework.
MULTIPLE CHOICE QUESTIONS (MCQS)

1) The objectivity of the management’s expert is likely to be lesser if:

a) The expert is competent
b) The expert is capable
c) The expert has relevant experience
d) The expert is employed by the entity
Ans: (d)
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 CA SANIDHYA SARAF 5.12

2) Which of the following matter is irrelevant for auditor in planning attendance at physical inventory counts?
(a) Nature of inventory
(b) The timing of physical inventory counting
(c) The nature of the internal control related to inventory
(d) Whether 100% of inventory is covered in the count
Ans: (d)

3) External confirmations for receivables are not reliable if:

(a) The response directly received by the auditor
(b) The confirmation has come from the address of the confirming party
(c) The confirmation is signed by the plant manager
(d) The confirmation is positive confirmation
Ans: (c)

4) The new auditor planned certain procedures with respect to opening balances. Which of the following
procedures is not in accordance with SA 510?
(a) Reading the most recent financial statements and audit report
(b) Where the prior period report is modified, the impact on the current period
(c) Correctly bringing forward of prior period closing balances
(d) Ascertaining whether predecessor auditor had attended physical inventory count
Ans: (d)

Case Study 3
“Trustworthy Real Estate Private Limited” with Mr. Bharose Lal as MD along with his wife, Maya, owned
the company.
The company had floated one SPV “Real Trust Developers Private Limited” in which a foreign entity became
a Joint Venture partner with a 50% stake.
The venture was formed with its Head Office in Mumbai to invest in SRA projects (Slum Rehabilitation
Authority) and develop them into commercial units for sale.
Mr. Bharose Lal was going through a rough patch in his life. He was in financial difficulty and had mounting
dues and huge outstanding exposure to banks and suppliers in his companies. He approached one of his
rich friends Mrs. Maya. Mrs. Maya had an expensive lifestyle and was always short of funds to maintain her
lifestyle. Mr. Bharose Lal sensed a golden opportunity in the new venture because the foreign partner had
no knowledge of Indian regulations and how the SRA projects worked and was solely dependent on the
local partner to get all the permissions, scouting for the projects, getting consents from the slum dwellers
for the project, giving contracts for the construction of projects and such matters.
M/S ABC and Company, Chartered Accountants were appointed as the auditor of the joint venture, and the
engagement team was headed by CA Sceptic, who had, in his stint with the firm, was instrumental in
unearthing two major frauds and had the ability to sniff out any such scenarios.
Mr. Bharose Lal has a dominant personality and a powerful influence on functioning, and everybody looks
to him for guidance. The governance structure was very poor in the organization, and Mr. Bharose Lal used
to dictate the decisions. Even though as part of the Joint Venture, there was a detailed governance
structure and policies and procedures in place for the decision-making process at the joint venture.
However, the representative on the board of the Joint Venture of the foreign partner who had shifted to
India to supervise the SRA project had grown friendly with Mr. Bharose Lal, and Mr. Bharose Lal had even
gone out of the way to help him get good accommodation and second- hand Mercedes. Often, they both
go to a club in the evening for a drink.
The dealings in the SRA project are not very transparent and above board but are very opaque. Given the
above situation, CA Sceptic wants to discuss with the audit team areas and situations where the risk of
material misstatement is possible and there are chances of having an undisclosed related party relationship
to misappropriate the funds.

Question 1
Please guide the engagement team on the further course of action as per SA 550.

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 CA SANIDHYA SARAF 5.13

Answer 1
The engagement team shall include specific consideration of the susceptibility of the financial statements
to material misstatement due to fraud or error that could result from the entity’s related party relationships
and transactions.
- The nature and extent of the entity’s relationships and transactions with related parties as
identified independently by the Auditor by verification of MBP-1 data and data available on MCA
website relating to directors and companies, etc.
- An emphasis on the importance of maintaining Professional Skepticism throughout the audit
regarding the potential for material misstatement associated with related party relationships and
transactions.
- The circumstances or conditions of the entity that may indicate the existence of related party
relationships or transactions that management has not identified or disclosed to the auditor (e.g.,
a complex organisational structure, use of special purpose entities off-balance sheet transactions,
or an inadequate information system).
- The records or documents that may indicate the existence of related party relationships or
transactions.
- The importance of management and those charged with governance attached to the
identification, appropriate accounting for, and disclosure of related party relationships and
transactions (if the applicable financial reporting framework establishes related party
requirement), and the related risk of Management override of relevant controls.
- In addition, the discussion in the context of fraud may include specific consideration of how
related parties may be involved in fraud. For example:
(a) How special-purpose entities controlled by management might be used to facilitate earnings
management
(b) How transactions between the entity and a known business partner of a key member of management
could be arranged to facilitate misappropriation of the entity's assets

- An exchange of ideas among engagement team members about how and where they believe the
entity's financial statements may be susceptible to material misstatement due to fraud, how
management could perpetrate and conceal fraudulent financial reporting, and how assets of the
entity could be misappropriated.
- A consideration of circumstances that might be indicative of earnings management and the
practices that might be followed by management to manage earnings that could lead to
fraudulent financial reporting.
- A consideration of the known external and internal factors affecting the entity that may create an
incentive or pressure for management or others to commit fraud, provide the opportunity for
fraud to be perpetrated, and indicate a culture or environment that enables management or
others to rationalize committing fraud.
- A consideration of management's involvement in overseeing employees with access to cash or
other assets susceptible to misappropriation.
- A consideration of any unusual or unexplained changes in behaviour or lifestyle of management
or employees which have come to the attention of the engagement team.
- An emphasis on the importance of maintaining a proper state of mind throughout the audit
regarding the potential for material misstatement due to fraud.
- A consideration of the types of circumstances that, if encountered, might indicate the possibility
of fraud.
- A consideration of how an element of unpredictability will be incorporated into the nature, timing
and extent of the audit procedures to be performed.
- A consideration of the audit procedures that might be selected to respond to the susceptibility of
the entity's financial statement to material misstatement due to fraud and whether certain types
of audit procedures are more effective than others.
- A consideration of any allegations of fraud that have come to the auditor's attention.
- A consideration of the risk of management override of controls.
Question 2
What are fraud risk factors in given case?

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 CA SANIDHYA SARAF 5.14

Answer 2
The fraud risk factors are the events or conditions that indicate an incentive or pressure to commit fraud
or provide an opportunity to commit fraud.
The fraud risk factors are classified based on the three conditions that are generally present when fraud
exists:
(i) An incentive or pressure to commit fraud
(ii) A perceived opportunity to commit fraud
(iii) An ability to rationalize the fraudulent action.
In the given case scenario following fraud risk factors can be segregated in the 2 conditions of incentive
or pressure to commit fraud in a perceived opportunity to commit fraud.
1) An incentive or pressure to commit fraud:
- Financial difficulty with huge outstanding dues towards vendors and Financial Institutions.
- Expensive lifestyle.
- Requirement to fund ₹ 5 crore as equity contribution in the SPV.
2) A perceived opportunity to commit fraud:
- Dependency of the foreign partner and no knowledge of the foreign partner of local laws and
the SRA business model in India
- The risk is due to the way the real estate industry functions and particularly risk due to the SRA
business model.
- Dominant personality of MD, which can lead to management override of controls for
undisclosed business relationships with M/s. Useless and Sons (P) Ltd.

Question 3
Given the situation that each partner in the joint venture has to bring into the entity a contribution of 5
crores each and given the situation that Mr. Bharose Lal had appointed one agency, the name Useless &
Sons Private Limited to get consent from the slum dwellers, for which the agency was paid 20 crores as
Kitty to get the job done.
CA Sceptic inclines that there is some connection between the 20 crores paid and, simultaneously, within
a short span, the infusion of INR 5 crores as equity contribution by Mr. Bharose Lal.
Please guide CA Sceptic in establishing this link based on the guidance available in SA 550 and SA 240.
What additional audit procedures does his team need to undertake for the conclusion?
Answer 3
If the auditor identifies arrangements or information that suggests the existence of related party
relationships or transactions that management has not previously identified or disclosed to the auditors,
the auditor shall determine whether the underlying circumstances confirm the existence of those
relationships or transactions.
In such situations, the auditor shall:
- Promptly communicate the relevant information to the other members of the engagement team in
order to assist them in determining whether this information affects the results of and conclusions
drawn from risk assessment procedures already performed, including whether the risk of material
misstatement needs to be reassessed.
- Where the applicable financial reporting framework establishes related party requirements:
i. Request management to identify all transactions with the newly identified related parties for the auditor's
further evaluation; and
- Inquire as to why the entity's controls over related party relationships and transactions failed to enable
the identification or disclosure of the related party relationships or transactions;
- Perform appropriate substantive audit procedures relating to such newly identified related parties or
significant related party transactions.
- Reconsider the risk that other related parties or significant related party transactions may exist that
management has not previously identified or disclose to the auditor, and perform additional audit
procedures as necessary; and
- If the non-disclosure by management appears intentional (and therefore indicative of a risk of material
misstatement due to fraud), evaluate the implications for the audit. In such cases, the requirements
and guidance in SA-240 regarding the auditor's responsibilities relating to fraud in an audit of financial
statements are relevant where management appears to have intentionally failed to disclose related
parties or significant related party transactions to the auditor. The auditor may also consider whether
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 CA SANIDHYA SARAF 5.15

it is necessary to re-evaluate the reliability of management's responses to the auditor's inquiries and
management's representations to the auditor.
- The Auditor needs to carry out verification and inspection of the ownership structure and the review
of the financial statements of M/s. Useless and Sons (P) Ltd through the MCA website and establish
the nexus between the two.
- The Auditor needs to carry out an inspection of the data filed by Mr. Bharose Lal for his group
companies to establish any past transactions/relationships between the two entities.
- The Auditor needs to ask for all the documents for the utilization of INR 20 crore and can investigate
by visiting the parties involved and asking for confirmation directly.

Question 4
If, based on additional audit procedures undertaken by CA Sceptic, it is established that there is a
likelihood of misappropriation of funds and the financial statements as a whole may be materially
misstated, how CA Sceptic needs to plan the future course of action?
Answer 4
The Auditor needs to reassess the reliability of evidence previously obtained as there are doubts about the
completeness and truthfulness of representations made and about the genuineness of accounting records
and documentation.
(a) Determine the professional and legal responsibilities applicable in the circumstances, including
whether there is the requirement for the auditor to report to the person or persons who made the
audit appointment or, in some cases, to regulatory authorities;
(b) Consider whether it is appropriate to withdraw from the engagement, where withdrawal from the
engagement is legally permitted; and
(c) If the auditor withdraws:
(i) Discuss with the appropriate level of management and those charged with governance the
auditor’s withdrawal from the engagement and the reasons for the withdrawal; and
(ii) Determine whether there is a professional or legal requirement to report to the person or persons
who made the audit appointment or, in some cases, to regulatory authorities, the auditor’s
withdrawal from the engagement and the reasons for the withdrawal.

MULTIPLE CHOICE QUESTIONS (MCQS)

1) Which of the following best describes the method that Mr. Bharose Lal can indulge to commit fraud?
(a) Concealing and not disclosing facts that could affect the amounts recorded in financial
statements.
(b) Engaging in complex transactions that are structured to misrepresent the financial position or
financial performance of the entity.
(c) Causing an entity to pay for goods or services not received.
(d) Using undisclosed business partners to misappropriate funds in the garb of Making a business
transaction and thus siphoning off the funds.
Ans: (d)
2) In the given case scenario, the main factor giving rise to risk of material misstatement is:
(a) The expensive lifestyle of owners.
(b) Appointment of an auditor having experience in unearthing of frauds
(c) The deteriorating financial condition of the owner’s business.
(d) The vulnerability and dependence of the foreign partner on the local partner.
Ans: (d)
3) In the given case scenario, which is the most important red flag for auditor:
(a) Expensive lifestyle
(b) Undisclosed related party relationships to siphon off the funds.
(c) Financial crunch
(d) The dominant influence of the owners
Ans: (b)
4) Which of the following is not a fraud risk factor?
(a) Dominant influence of the owners
(b) Expensive lifestyle
(c) Fraud risk due to the nature of the industry
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 CA SANIDHYA SARAF 5.16

(d) Floating of a new SPV itself

Ans: (d)

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 CA SANIDHYA SARAF 6.1

Chapter 6
Completion and Review
Question 1
CA Shobit is conducting an audit of XYZ Ltd. for the year 2023-24. The company is engaged in the export
of handicraft items in Europe. The audit is nearing completion in the month of July 2024. However, it
becomes known to CA Shobit that one of overseas buyers has made a legal claim against the company
on 1st June 2024 for injury caused to a customer of one European buyer due to sub-standard dyes used
in rugs of one lot of order shipped in August 2023. The management of the company has decided to
agree to an out of court settlement of ` 4 crore to protect its reputation. The financial statements of the
company are silent on this issue. Discuss, how, CA Shobit should proceed to deal with above issue.
Answer 1
In the given case, the auditor has come to know the legal claim against the company before the issuance
of the audit report. It has also come to his knowledge that the management of the company has agreed
to an out of court settlement of ₹ 4 crore.
This is an example of a subsequent event between the date of the financial statements and the date of
the auditor’s report. It provides evidence of conditions that existed at the date of the financial statements
and requires adjustment in financial statements.
Further as per SA 560, “Subsequent Events”, the auditor shall request management and, where
appropriate, those charged with governance, to provide a written representation in accordance with SA
580, “Written Representations” that all the events occurring subsequent to the date of the financial
statements and for which the applicable financial reporting framework requires adjustment or disclosure
have been adjusted or disclosed.
CA Shobit should ensure that appropriate adjustments and disclosures are made by the management. In
the absence of the same, he should consider the impact of the said event and report accordingly.

Question 2
CA N is carrying out an audit of restated financial statements of BQR Limited for past 3 financial years
i.e. 2023-24, 2022-23 and 2021-22 for onward submission to SEBI pursuant to their upcoming IPO (Initial
Public Offer). CA N is planning to issue an Audit Report on 5th August, 2024 covering these restated
financial statements. Before issuing the audit report, CA N requested Management Representation
Letter from the management of the Company for this assignment. The Management of the Company
provided Management Representation Letter dated 1st April, 2024 covering the period of financial year
2023-24 only as they were not in position to provide for the financial year 2022-23 and 2021-22 because
they were not in place during that period. How would CA N deal with the above situation as per relevant
Standard on Auditing?
Answer 2
In the given situation, CA N is carrying out an audit of restated financial statements of BQR Limited for
past 3 financial years i.e., 2023-24, 2022-23 and 2021-22 so he requested Management Representation
Letter from the management of the Company for this assignment before issuance of the report. The
management of the Company provided the Management Representation Letter only for the financial year
2023-24 as they were not in place during that period.
As per SA 580, “Written Representations”, as written representations are necessary audit evidence, the
auditor’s opinion cannot be expressed, and the auditor’s report cannot be dated before the date of the
written representations.
As per SA 560, “Subsequent Events”, the auditor is concerned with events occurring up to the date of the
auditor’s report that may require adjustment to or disclosure in the financial statements, the written
representations are dated as near as practicable to, but not after, the date of the auditor’s report on the
financial statements.
In some circumstances it may be appropriate for the auditor to obtain a written representation about a
specific assertion in the financial statements during the course of the audit. Where this is the case, it may
be necessary to request an updated written representation.
The written representations are for all periods referred to in the auditor’s report because management
needs to reaffirm that the written representations it previously made with respect to the prior periods
remain appropriate. The auditor and management may agree to a form of written representation that
updates written representations relating to the prior periods by addressing whether there are any

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 CA SANIDHYA SARAF 6.2

changes to such written representations and, if so, what they are.

Situations may arise where current management were not present during all periods referred to in the
auditor’s report. Such persons may assert that they are not in a position to provide some or all the written
representations because they were not in place during the period. This fact, however, does not diminish
such persons’ responsibilities for the financial statements as a whole.
Accordingly, the requirement for the auditor to request from them written representations that cover the
whole of the relevant period(s) still applies. Therefore, as per the above requirement of SA 580 CA N
should take written representation letter from management of BQR Limited for the financial year 2022-
23 and 2021-22 also.
In case the management of BQR Limited does not provide written representation as requested, the
auditor shall discuss with the management, re-evaluate the integrity of management, and take
appropriate actions including the impact on the audit report as per SA 705.

Question 3
Mudit & Associates is appointed as Statutory Auditors of GRF Private Limited for the financial year 2023-
24. The company is into the business of Health Club, Fitness Centre and gym costumes. CA M is the
Engagement Partner for the audit assignment. CA M observed the following points while auditing:
i. Customer's base is reducing continuously due to tough competition and discount war existing in
the market.
ii. Payments of creditors are delayed and made with overdue interest.
iii. Company has not been able to pay the salaries of staff and trainers on time.
iv. Key financial ratios of the company, like current ratio, debt-service coverage ratio, are in the red
and have deteriorated considerably as compared to last year.
v. The company has requested its bankers to provide it with additional working capital credit
facilities of ` 1.5 Crores, but bankers are not considering the company's proposal favorably.
What audit procedures should be followed by CA M considering the above circumstances as per SA 570
- "Going Concern"? How auditor should deal if the use
of going concern basis of accounting is appropriate, but a material uncertainty exists, and adequate
disclosure of material uncertainty is made in the financial statements?
Answer 3
As per SA 570, “Going Concern”, if events or conditions have been identified that may cast significant
doubt on the entity’s ability to continue as a going concern, the auditor shall obtain sufficient appropriate
audit evidence to determine whether or not a material uncertainty exists related to events or conditions
that may cast significant doubt on the entity’s ability to continue as a going concern through performing
additional audit procedures, including consideration of mitigating factors. These procedures shall include:
(a) Where management has not yet performed an assessment of the entity’s ability to continue as a going
concern, requesting management to make its assessment.
(b) Evaluating management’s plans for future actions in relation to its going concern assessment, whether
the outcome of these plans is likely to improve the situation and whether management’s plans are feasible
in the circumstances.
(c) Where the entity has prepared a cash flow forecast, and analysis of the forecast is a significant factor
in considering the future outcome of events or conditions in the evaluation of management’s plans for
future actions:
(i) Evaluating the reliability of the underlying data generated to prepare the forecast; and
(ii) Determining whether there is adequate support for the assumptions underlying the forecast.
(d) Considering whether any additional facts or information have become available since the date on
which management made its assessment.
(e) Requesting written representations from management and, where appropriate, those charged with
governance, regarding their plans for future actions and the feasibility of these plans.
In the given case, CA M has observed such points that may cast significant doubt on the entity’s ability to
continue as a going concern. Therefore, CA M should follow audit procedures such as:
• Review of management’s assessment of the company's ability to continue as a going concern.
• Examine and challenge the reasonableness of the company's cash flow forecasts and key
assumptions.
• Review events after the reporting period that might affect the going concern assumption, such as
further financial deterioration or inability to secure financing.
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• Analysis of the company's key financial ratios and compliance with loan agreements to assess
liquidity and solvency.
• Review of the company’s challenges and efforts to secure additional financing and the reasons for
the bank's reluctance to provide further credit.
• Assess the impact of declining customer base, delayed payments, and other operational challenges
on the company’s ability to continue as a going concern.
Further, as per SA 570 if adequate disclosure about the material uncertainty is made in the financial
statements, the auditor shall express an unmodified opinion and the auditor’s report shall include a
separate section under the heading “Material Uncertainty Related to Going Concern” to:
(a) Draw attention to the note in the financial statements that discloses the matters set out in paragraph
19; and
(b) State that these events or conditions indicate that a material uncertainty exists that may cast
significant doubt on the entity’s ability to continue as a going concern and that the auditor’s opinion is
not modified in respect of the matter.

Question 4
The audit report of Rare (P) Ltd for F.Y. 2023-24 was issued by SRM & Co. on 23rd July, 2024. However, a
case was filed against Rare (P) Ltd on 9th August, 2024, with the Civil Court, with respect to an incident
caused in its factory on 24th January, 2024, the future outcome of which may result into paying heavy
penalty by Rare (P) Ltd, which was informed to Mr. Rishabh Pandey, the partner of SRM & Co.
Mr. Rishabh discussed the said matter with the management, and it was determined to amend the
financial statements for F.Y. 2023-24. Further, Mr. Rishabh inquired how the management intended to
address the said matter in the financial statements to which he was told that the said matter was going
to be disclosed as a “Contingent Liability for a Court case” to the foot note in the balance sheet with no
additional disclosures.
The management told Mr. Rishabh that such disclosure was enough as he would be further going to
provide description of the said court case and its outcome in the ‘Emphasis of Matter’ paragraph in his
amended audit report.
In the context of aforesaid case-scenario, please answer to the following questions: -
(i) Whether Mr. Rishabh on behalf of SRM & Co., has properly adhered to his responsibilities in
accordance with SA 560, on becoming aware of the court case filed against Rare (P) Ltd?
(ii) Whether the contention of management of Rare (P) Ltd is valid with respect to the disclosure of court
case in the financial statements?
Answer 4
As per SA 560, ‘Subsequent Events’, the auditor has no obligation to perform any audit procedures
regarding the financial statements after the date of the auditor’s report. However, when, after the date of
the auditor’s report but before the date the financial statements are issued, a fact becomes known to the
auditor that, had it been known to the auditor at the date of the auditor’s report, may have caused the
auditor to amend the auditor’s report, the auditor shall:
(1) Discuss the matter with management and, where appropriate, those charge
(2) Determine whether the financial statements need amendment and, if so,
(3) Inquire how management intends to address the matter in the financial statements.
In the given case, on becoming aware of the court case filed against Rare (P) Ltd., Mr. Rishabh discussed
the said matter with the management, and was determined to amend the financial statements. Also, he
inquired how the management intended to address the said matter in the financial statements.
Thus, it can be said that Mr. Rishabh has properly adhered to his responsibilities in accordance with SA
560, on becoming aware of the court case filed against Rare (P) Ltd.
(ii) As per SA 706, ‘Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent
Auditor’s Report’, an Emphasis of Matter paragraph is not a substitute for:
(a) A modified opinion in accordance with SA 705 (Revised) when required by the circumstances of a
specific audit engagement;
(b) Disclosures in the financial statements that the applicable financial reporting framework requires
management to make, or that are otherwise necessary to achieve fair presentation; or
(c) Reporting in accordance with SA 570 (Revised) when a material uncertainty exists relating to events or
conditions that may cast significant doubt on an entity’s ability to continue as a going concern.

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 CA SANIDHYA SARAF 6.4

In the given case, the management of Rare (P) Ltd. has presumed that as the auditor was going to provide
a description of the said court case and its outcome in the ‘Emphasis of Matter’ paragraph in his amended
audit report, there was no further need for it to provide additional disclosures about the court case in the
financial statements.
The said contention of management of Rare (P) Ltd. is not valid as ‘Emphasis of Matter’ paragraph cannot
be used as a substitute for disclosures required to be made in the financial statements as per the applicable
financial reporting framework or that is otherwise necessary to achieve fair presentation, which is the
responsibility of the management.

Question 5
Ramadhan & Co. are the auditors of XYZ Company Ltd. for the year ended on 31/03/2024. The Audit
Report for that year was signed by Ramadhan & Co. on 04/05/2024. The Annual General Meeting was
decided to be held during the month of August 2024. On 06/05/2024, the Company had received a
communication from the Central Government that an amount of ₹ 5800 crore kept pending on account
of incentives pertaining to Financial Year 2023-24 had been approved and the amount would be paid to
the Company before the end of May 2024. To a query to Chief Financial officer of the Company by the
Board, it was informed that this amount had not been recognised in the Audited Financial Statements
in view of the same not being released before the close of the Financial Year and due to uncertainty of
receipt. Now, having received the amount, the Board of Directors wished to include this amount in the
Financial Statements of the Company for the Financial Year ended on 31/03/2024. On 08/05/2024, the
Board amended the accounts, approved the same and requested the Auditor to consider this event and
issue a fresh audit report on the Financial Statements for the year ended on 31/03/2024. Analyse the
issues involved and give your views as to whether or not the Auditors could accede to the request of
the Board of Directors.
Answer 5
Facts Which Become Known to the Auditor After the Date of the Auditor’s Report but Before the Date
the Financial Statements are Issued: As per SA 560, “Subsequent Events”, the auditor has no obligation
to perform any audit procedures regarding the financial statements after the date of the auditor’s report.
However, when, after the date of the auditor’s report but before the date the financial statements are
issued, a fact becomes known to the auditor that, had it been known to the auditor at the date of the
auditor’s report, may have caused the auditor to amend the auditor’s report, the auditor shall
(i) Discuss the matter with management and, where appropriate, those charged with governance.
(ii) Determine whether the financial statements need amendment and, if so,

(iii) Inquire how management intends to address the matter in the financial statements.

If management amends the financial statements, the auditor shall carry out the audit procedures
necessary in the circumstances on the amendment. Further, the auditor shall extend the audit procedures
and provide a new auditor’s report on the amended financial statements. However, the new auditor’s
report shall not be dated earlier than the date of approval of the amended financial statements.
In the instant case, XYZ Company Ltd. received an amount of ₹ 5800 crore on account of incentives
pertaining to the year 2023-24 in the month of May 2024 i.e. after finalisation of financial statements and
signing of audit report. The Board of Directors of XYZ Ltd. amended the accounts, approved the same and
requested Ramadhan & Co. (auditor) to consider this event and issue a fresh audit report on the financial
statements for the year ended on 31-03-2024.
After applying the conditions given in SA 560, Ramadhan & Co. can issue new audit report subject to date
of audit report which should not be earlier than the date of approval of the amended financial statements.
Question 6
M/s Airlift Ltd., carrying on the business of Passenger Transportation by air is running into continuous
financial losses as well as reduction in Sales due to stiff competition and frequent break down of its
own aircrafts. The Financial Statements for the Year ended on 31/03/2024 are to be now finalized. The
Management is quite uncertain as to its ability to continue in near future and has informed the Auditors
that having seized of this matter, it had constituted a committee to study this aspect and to give
suggestions for recovery, if any, from this bad situation. Till the study is completed, according to the
Management, the issue involves uncertainty as to its ability to continue its business and it informs the
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 CA SANIDHYA SARAF 6.5

Auditor that the fact of uncertainty clamping on the "Going Concern" would suitably be disclosed in
notes to accounts. State the reporting requirement if any, in the Independent Auditor's Report in
respect of this matter.
Answer 6
Reporting requirements in case of Uncertainty clamping on the Going Concern : As per SA 570 “Going
Concern”, if the auditor concludes that management’s use of the going concern basis of accounting is
appropriate in the circumstances but a material uncertainty exists, the auditor shall determine whether
the financial statements : (i)adequately disclose the principal events or conditions that may cast significant
doubt on the entity’s ability to continue as a going concern and management’s plans to deal with these
events or conditions; and (ii) disclose clearly that there is a material uncertainty related to events or
conditions that may cast significant doubt on the entity’s ability to continue as a going concern and,
therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of
business.
If adequate disclosure about the material uncertainty is made in the financial statements, the auditor shall
express an unmodified opinion and the auditor’s report shall include a separate section under the heading
“Material Uncertainty Related to Going Concern” to:
(i) Draw attention to the note in the financial statements that discloses the matters set out above;
and
(ii) State that these events or conditions indicate that a material uncertainty exists that may cast
significant doubt on the entity’s ability to continue as a going concern and that the auditor’s
opinion is not modified in respect of the matter.
In the instant case, M/s Aircraft Ltd. is running into continuous financial losses as well as reduction in sales
due to stiff competition and frequent break down of its own aircrafts and management of Aircraft Ltd. is
uncertain as of its ability to continue in near future. Therefore, a committee has been constituted to study
this aspect and till the time study is completed management accordingly decided to suitable disclose this
aspect in notes to accounts. Therefore, the auditor should disclose about the material uncertainty and
express an unmodified opinion and in his audit report shall include a separate section under the heading
“Material Uncertainty Related to Going Concern” to draw attention to the note in the financial statements
that discloses the matters set out above; and state that these events or conditions indicate that a material
uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern
and that the auditor’s opinion is not modified in respect of the matter.

Question 7
PRSH & Co is the statutory auditor of Make My Journey Ltd. The company is in the business of tours and
travels. The annual turnover of the company is ₹ 2000 crores and profits are ₹ 190 crores. During the
planning meeting of the management and the auditors, it was discussed that the management needs
to provide written representation letter to the auditors for the preparation of the financial statements
and for the completeness of the information provided to the auditor. At the time of closure of the audit,
there has been some confusion about the requirements of the written representation letter.
Management argued that representation need not be written, it can also be verbal which has been
provided to the audit team during the course of their audit. Auditors have completed their
documentation and hence in a way, representation based on verbal discussions with the auditors has
also got documented. Auditors explained that this is mandatory to obtain written representation in
accordance with the requirements of SA 580. However, still some confusion remains regarding the date
and period covered by the written representation. You are required to advise about the date of, and
period covered by written representation in view of SA 580.
Answer 7
As per SA 580, “Written Representations”, as written representations are necessary audit evidence, the
auditor’s opinion cannot be expressed, and the auditor’s report cannot be dated, before the date of the
written representations. Furthermore, because the auditor is concerned with events occurring up to the
date of the auditor’s report that may require adjustment to or disclosure in the financial statements, the
written representations are dated as near as practicable to, but not after, the date of the auditor’s report
on the financial statements.
In some circumstances it may be appropriate for the auditor to obtain a written representation about a

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 CA SANIDHYA SARAF 6.6

specific assertion in the financial statements during the course of the audit. Where this is the case, it may
be necessary to request an updated written representation.
The written representations are for all periods referred to in the auditor’s report because management
needs to reaffirm that the written representations it previously made with respect to the prior periods
remain appropriate. The auditor and management may agree to a form of written representation that
updates written representations relating to the prior periods by addressing whether there are any
changes to such written representations and, if so, what they are.
Situations may arise where current management were not present during all periods referred to in the
auditor’s report. Such persons may assert that they are not in a position to provide some or all of the
written representations because they were not in place during the period. This fact, however, does not
diminish such persons’ responsibilities for the financial statements as a whole. Accordingly, the
requirement for the auditor to request from them written representations that cover the whole of the
relevant period(s) still applies.

Question 8
“Move Fast Limited” is engaged in the manufacturing of shoes and slippers located in Bahadurgarh in
Haryana. Due to unprecedented rains in the area in the month of September 2023, many areas of the
town got inundated due to the choking of sewer systems. As a result of the above, the company’s
premises located in town were also affected, resulting in damage of stocks.
The company has lodged a claim with the insurance company for ₹ 1 crore, and the same is shown as a
claim receivable as of 31st March 2024, as the claim was not settled at year end.
The insurance surveyor appointed in the case submitted a report to the insurance company
recommending a claim of ₹45 lacs in the month of April 2024. The company has also given its consent
for the same, and the settled amount of ₹45 lacs was transferred to the bank account of the company
on 15th May 2024.
You have just finished performing substantive procedures of the company by the end of May 2024. Is
there any responsibility cast upon you as auditor of the company in the above situation?
Answer 8
The given situation provides evidence of conditions that existed at the date of financial statements.
Initially, the company had lodged claim of ₹1 crore and the same is reflected as claim receivable in
financial statements as on 31st March, 2024.
However, subsequent events occurring have provided evidence that claim was settled for ₹ 45 lacs only.
Such a settled amount has already been accepted by the company by providing its consent. Therefore,
such events have provided fresh information about items included in financial statements.
Further, the performance of substantive procedures has been finished implying that the audit report is
not yet issued.
Therefore, financial statements as on 31st March, 2024 should be adjusted to reflect fresh information
emanating from described events and management should be asked to take appropriate action in this
regard so that adjustment pertaining to above is properly reflected in financial statements in accordance
with applicable financial reporting framework.

Question 9
CA Anuj is the auditor of a listed company, and he is in the midst of conducting an audit of the said
company for the financial year ending 31st March 2024. At a meeting of the Board of Directors held on
17th April 2024, a dividend of ₹ 1 crore is proposed to equity shareholders @ ₹10/- per share, and such
a proposal has a good chance of being approved in the AGM of the company to be held after few
months.
His audit procedures are near completion. He is contemplating finalizing the audit report by 31st July
2024. Is there any responsibility thrust upon him as an auditor of the company?
Answer 9
In the given situation, dividend has been proposed by Board of Directors on 17th April, 2024. It is an
example of conditions that arose after the reporting period. No liability exists for the company on the
reporting date because there is no obligation to pay at the reporting date in accordance with Ind AS 1.
Therefore, the above situation does not require recognition of the above proposed dividend in financial
statements. It is an example of events which do not require adjustments. However, it should be disclosed
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 CA SANIDHYA SARAF 6.7

in financial statements in notes to accounts. Therefore, it should be ensured that it is disclosed in notes
to accounts in financial statements. He should verify in accordance with SA 560 that it is disclosed in notes
to accounts.

Question 10
CA. Somya is auditor of a company engaged in rearing of poultry birds and obtaining eggs therefrom.
The company has performed very well since its incorporation in 2013. Its sales had also grown and the
company had expanded its market from the native northern state of promoters to far-flung areas in
eastern parts of country.
However, since last two years, company’s fortunes have nosedived. First, due to the effects of the
pandemic and then due to recurrent outbreaks of bird flu thrice in a span of two years. The company’s
sales have dipped from around ₹ 50 crores to ₹10 crores. Further, a major part of its livestock was also
wiped off during bird flu. She is not optimistic about the going concern assumption followed by
management.
The management now wants to start with new batches of birds. The earlier working capital facilities of
the company granted by bank have also been restructured to support the business. She was informed
that the repayments of restructured working capital term loans are to begin from ensuing year. No fresh
credit facilities have been granted by the bank. The company also plans longer credits from animal feed
suppliers.
The company plans to take additional measures to prevent the safety of live stocks, including aggressive
vaccination, preventive health check-ups, and more frequent visits of veterinary staff.
The villagers in surrounding areas have accused the company of spreading air pollution.
The management has prepared a cash flow forecast for her examination. Discuss the approach to be
adopted by her in examining the “going concern” assumption keeping in view above with specific
reference to cash flow forecast.
Answer 10
In accordance with SA 570,"Going Concern”, if events or conditions have been identified that may cast
significant doubt on the entity’s ability to continue as a going concern, the auditor shall obtain sufficient
appropriate audit evidence to determine whether or not a material uncertainty exists related to events
or conditions that may cast significant doubt on the entity’s ability to continue as a going concern by
performing additional audit procedures, including consideration of mitigating factors.
Where the entity has prepared a cash flow forecast, and analysis of forecast is a significant factor in
considering the future outcome of events or conditions in the evaluation of management’s plans for
future actions, it includes

(i) Evaluating the reliability of the underlying data generated to prepare the forecast and

(ii) Determining whether there is adequate support for the assumptions underlying the forecast.
In the above situation, cash flow forecast has been prepared by management. Therefore, she should
carefully evaluate assumptions underlying forecast and also reliability of data to prepare the forecast. For
example: -
 She should verify assumption regarding fresh batch of livestock. The bankers have not provided
fresh credit facilities. How funds from the same would be arranged? The reasonability of
assumption in cash flow forecast needs to be looked into.
 She needs to check loan sanction letters/agreement to verify when repayments are beginning
to see their accuracy in cash flow forecasts.
 The company plans to avail longer credits from animal feed suppliers. In the downturn
situation of the company, how would suppliers extend longer credits? This is going to have
effect on the cash flow forecast.
 Whether company has accounted for increased expenditure on preventive health check-up,
vaccination and more frequent visits of veterinary staff in cash flow forecast.
 Since villagers have accused the company of spreading air pollution, how does the company
plan to deal with the same? Whether any proposed expenditure in this regard is accounted for
in the cash flow statement. She may also consider other implications of this issue and possible
effect on cash flows.

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 CA SANIDHYA SARAF 6.8

Question 11
CA Sooraj finds that key financial ratios of a company, like current ratio, debt-service coverage ratio,
inventory turnover ratio, and trade receivables turnover ratio, are in red and have deteriorated
considerably as compared to last year. The company is also not able to pay to its creditors on time. The
company is requesting time and again to its bankers to grant additional credit facilities, but bankers are
not listening.
There have been significant losses to the company due to the lack of response of the company’s
products in the market. As a result of it, many products are sold at below cost price. There have been
situations where the company is not able to pay the salaries of staff on time.
All these negative findings have led him to conclude that the use of going concern as the basis of
accounting is not appropriate. He brings this matter to the knowledge of CFO of the company. What is
reporting duty cast upon him in such a scenario?
The CFO informs him that the management, in turn, is ready to include in the disclosures the
inappropriateness of its use of going concern assumption of accounting.
How should it impact the auditor’s opinion in case management itself discloses the inappropriateness
of its use of going concern assumption of accounting now?
Answer 11
If the financial statements have been prepared using the going concern basis of accounting but, in the
auditor’s judgment, management’s use of the going concern basis of accounting in the financial
statements is inappropriate, the auditor shall express adverse opinion.
The requirement for an auditor to express an adverse opinion applies regardless of whether or not the
financial statements include disclosure of the inappropriateness of management’s use of the going
concern basis of accounting.
Therefore, even if management discloses that its use of going concern assumption of accounting is
inappropriate, it would have no impact on auditor’s opinion. He would need to express adverse opinion.

Question 12
Following is a written representation given by RES Limited to its statutory auditors i.e. M/s CTK &
Associates for audit of financial year 2023-24. The audit was completed and report dated 31-07-2024
was issued.
Point out, if there is any, anomaly in written representation reproduced below. 15th April, 2024
To
CTK & Associates
Chartered Accountants
Dear Sir,
This representation letter is provided in connection with your audit of the financial statements of RES
Limited for the year ended March 31, 2024 for the purpose of expressing an opinion as to whether the
financial statements give a true and fair view in accordance with the applicable accounting standards
in India.
We confirm that (to the best of our knowledge and belief, having made such inquiries as we considered
necessary for the purpose of appropriately informing ourselves):
Financial Statements
 We have fulfilled our responsibilities, as set out in the terms of the audit engagement dated 17th
August 2023 for the preparation of the financial statements in accordance with financial reporting
Standards, in particular, the financial statements give a true and fair view in accordance with the
applicable accounting standards in India.
 Significant assumptions used by us in making accounting estimates, including those measured at
fair value, are reasonable.
 Related party relationships and transactions have been appropriately accounted for and disclosed
in accordance with the requirements of applicable accounting standards in India. (SA 550)
 All events subsequent to the date of the financial statements and for which applicable accounting
standards in India require adjustment or disclosure have been adjusted or disclosed. (SA 560)
 The effects of uncorrected misstatements are immaterial, both individually and in the aggregate,
to the financial statements as a whole. A list of the uncorrected misstatements is attached to the
representation letter. (SA 450)
Information provided
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 CA SANIDHYA SARAF 6.9

 We have provided you with: -

- Access to all information of which we are aware that is relevant to the preparation of the
financial statements such as records, documentation and other matters;
- Additional information that you have requested from us for the purpose of the audit; and
- Unrestricted access to persons within the entity from whom you determined it necessary to
obtain audit evidence.
 All transactions have been recorded in the accounting records and are reflected in the financial
statements.
 We have disclosed to you the results of our assessment of the risk that the financial statements
may be materially misstated as a result of fraud.
 We have disclosed to you all information in relation to fraud or suspected fraud that we are aware
of and that affects the entity and involves: -
- Management;
- Employees who have significant roles in internal control; or
- Others where the fraud could have a material effect on the financial statements.
 We have disclosed to you all information in relation to allegations of fraud, or suspected fraud,
affecting the entity’s financial statements communicated by employees, former employees,
analysts, regulators or others.
 We have disclosed to you all known instances of non-compliance or suspected non- compliance
with laws and regulations whose effects should be considered when preparing financial
statements.
 We have disclosed to you the identity of the entity’s related parties and all the related party
relationships and transactions of which we are aware. (SA 550)
Chief Financial Officer
Answer 12
The date of the written representations shall be as near as practicable to, but not after, the date of the
auditor’s report on the financial statements. As the auditor is concerned with events occurring up to the
date of the auditor’s report that may require adjustment to or disclosure in the financial statements, the
written representations are dated as near as practicable to, but not after, the date of the auditor’s report
on the financial statements.
In the given situation, written representation is dated 15th April 2024. The audit report is dated 31st July
2024. There is a considerable lag between date of written representations and date of audit report.
It could signify that all subsequent events after date of financial statements requiring adjustments or
disclosure may not have been adjusted or disclosed in the financial statements by management.
As audit report is dated 31St July, 2024, it reflects that auditor has considered subsequent events
occurring between date of financial statements and date of auditor’s report. However, written
representations pertain to 15th April 2024.

Case Study 1
Infinity Hospitality Private Limited was established in 1996 and was in the business of running hotels in
tourist destinations in state of Kerala. It took leased properties on long-term leases ranging from 10 to 12
years, most with a lock-in of a whole term. The terms did not cover the force majeure clause The company
was family-owned business and had created a good reputation as value for a money- budget hotel. Most
of the time, hotels clocked 60 to 75% occupancy rate, and during the festive season/ vacations, hotel
business clocked 100% Occupancy.
The capital structure of the company was debt oriented and over-leveraged.
Primary working capital was blocked in maintaining and upkeeping the leased properties, running the
restaurant, leases, food and beverages, salary, Director's remuneration etc.
The owners looked at the business as a cash cow and did not plough back the funds to expand the business
but were content with the decent profits the hotels were generating.
As the properties were leased and not owned, most of the cash flow generated from operations was used
in servicing the property and huge loans from financial institutions. What was left was withdrawn as
Directors' remuneration and dividend.
Everything was going on smoothly. However, there were flash floods in Kerala due to unprecedented
rains. There were landslides and roads were blocked. The entire tourist season was washed away due to
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 CA SANIDHYA SARAF 6.10

infrastructural challenges. Accessibility to resorts and hotels was badly hindered. Logistics support took
time to reach in far flung areas. Visit to the “The God’s own country” was last on the mind of tourists. The
company was hardly trying to get back to some semblance of normalcy when pandemic struck. It was
double whammy for the company.
The impact on travel, tourism and hospitality business was very severe. The management of Infinity
Hospitality Private Limited believed that bad days would end soon and the business would be back to
normal. They also were optimistic about the government coming up with support for the industry and
were hopeful of negotiating with lessors and Financial Institutions for relief. They decided on
humanitarian grounds not to terminate the employees and continued paying them a regular salary, maybe
deferring 25% to be paid after one year. The immediate fallout was on the top line as suddenly, the
business stopped.
The auditors, M/s XYZ and Associates, were conducting the audit of the company and were grappling with
the situation and are seeking your guidance for the course of action they need to follow.

Based on the case scenario, you are required to provide your answers to the following: -
Question 1
What additional audit procedures must the auditor undertake as per requirements of SA 570 based on
the facts given in the case?
Answer 1
In the given case scenario the events and conditions have been identified which cast significant doubt on
the entity's ability to continue as a Going Concern, the auditor needs to obtain sufficient appropriate audit
evidence to determine whether or not material uncertainty and gather evidence including of mitigating
factors. It can be done by performing following additional procedures: -
 Analyzing and discussing cash flow, profit and other relevant forecast with management.
 Analyzing and discussing the entity's latest available interim financial statement.

 Reading the terms of loan agreements and determining whether any have been breached.
 Reading minutes of the meetings of shareholders, those charged with governance and relevant
committees for reference to financing difficulties.
 Inquiring of the entity's legal counsel regarding the existence of litigation and claims and the
reasonableness of management's assessments of their out come and the estimate of their financial
implications
 Confirming the existence, legality and enforceability of arrangements to provide or maintain financial
support with related and third party and assessing the financial ability of such parties to provide
additional funds.
 Performing audit procedures regarding subsequent events to identify those that either mitigate or
otherwise affect the entity's ability to continue as a going concern.
 Confirming the existence, terms and adequacy of borrowing facilities.

 Where management has not yet performed an assessment of the entity's ability to continue as a
going concern, requesting management to make its assessment.
 Evaluating management's plans for further actions in relation to its going concern assessment,
whether the outcome of these plan is likely to improve the situation and whether the management's
plans are feasible in the circumstances.
 Evaluating management's plans for future actions may include inquiries of management as to its plan
for future action, including, for example, its plan to liquidate assets, borrow money or restructure
debt, reduce or delay expenditures, or increase capital.
 Considering whether any additional facts or information have become available since the date on
which management made it assessment.
 Requesting written representation from management and, where appropriate, those charged with
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 CA SANIDHYA SARAF 6.11

governance, regarding their plans for future actions and the feasibility of these plans.

Question 2
According to your judgment, what risk assessment procedures should the auditor consider for arriving
at a conclusion based on the management assertion of the entity being Going Concern?
Answer 2
When performing risk assessment procedures as required by SA 315, the auditor shall consider whether
events or conditions exist that may cast significant doubt on the entity's ability to continue the going
concern. In so doing, the auditor shall consider whether management has already performed a
preliminary assessment of the entity's ability to continue as a going concern.
 The auditor shall discuss the assessment with management and determine whether management
has identified events and conditions that, individually or collectively, cast significant doubt on the
entity's ability to continue as a going concern and if so, management's plan to address them.
 The auditor shall specifically draw attention of Management on following events or condition and
get the response on how they plan to address them:
The company is debt heavy and over leveraged. The leased properties are having considerable lock-in
period with absence of force majeure clause. There are no contingency reserves available with company.
All these factors shall be taken into account while performing risk assessment procedures.

Question 3
What should be approach of the auditor if the management agrees that the material uncertainly exists,
but the entity is a Going Concern? Also discuss reporting requirements
Answer 3
If the auditor concludes that the management's use of going concern basis of accounting is appropriate
in the circumstances but a material uncertainty exists, the auditors shall determine whether the financial
statements:
(a) Adequately disclose the principal events or conditions that make a significant doubt on the entity's
ability to continue as a going concern and management's plan to deal with these events or
conditions, and
(b) Disclose clearly that there is a material uncertainty related to events or conditions that may cast
significant doubt on entity's ability to continue as a going concern and therefore, that it may be
unable to realize its assets, and discharge its liabilities in the normal course of business.
(c) The disclosures may include:
i. Management's evaluation of the significance of the events or conditions relating to the entity's ability
to meet its obligations; or
ii. Significant judgements made by management as a part of its assessment of the entity's ability to
continue as a going concern
iii. Disclosures about the magnitude of the potential impact of the principal events or conditions, and the
likelihood and timing of the occurrence.
iv. The auditor shall express and unmodified opinion and the auditor’s reports shall include a separate
section under the heading "Material Uncertainty Related to Going Concern" to:
 Draw attention to the note in the financial statement that discloses the events or conditions and
 State that these events are conditions indicate that a material uncertainty exists that may cast
significant doubt on the entity's ability to continue as a going concern and the auditor's opinion is
not modified in respect of the matter and how the matter was addressed in the audit.

Question 4
What if the auditor believes, on the basis of his additional audit procedures conducted to conclude that
the entity is not a Going Concern, but the management is not accepting the same? What course of action
the auditor needs to undertake?
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 CA SANIDHYA SARAF 6.12

Answer 4
If management has prepared financial statements using the Going Concern assertion to which auditor
differs as according to his judgement, the Going Concern assertion by the management is not appropriate,
then the auditor is required to express an adverse opinion.

Question 5
What kind of written representation does the auditor need to obtain in case of the scenario covered in
Q3 above?
Answer 5
The auditor needs to obtain written representation from management and where appropriate, those
charged with governance, regarding their plans for future action and the feasibility of these plans.

MULTIPLE CHOICE QUESTIONS (MCQS)

1. Which of the following is not a financial event/ condition that may cast significant doubt on companies
ability to continue as a going concern as per SA 570?
(a) Change from credit to cash on delivery model with suppliers
(b) Arrears or discontinuance of dividend
(c) Opening of a new chain of hotels by renowned competitor near the entity's area
(d) Adverse key financial ratios

Ans: (c)

2. Please choose the mitigating measure as the management is unable to pay lease rentals.
(a) Cancel the lease
(b) Restructure the lease agreement and negotiate for deferment and relief
(c) Terminate the employees and pay the lessor
(d) All the above

Ans: (b)

3. Which one of the following is not a responsibility of the auditor relating to communicating events or
conditions identified that may cast significant doubt on the entity’s Going Concern assertion?
(a) Perform additional audit procedures to identify events/ conditions beyond 12 months from the date of
financial statements
(b) Whether the events constitute a material uncertainty
(c) The adequacy of related discloses in the financial statements
(d) The implications for the auditor's report

Ans: (a)

4. Written Representation need to be mandatorily obtained from:

(a) Audit Committee
(b) Client relationship Managers
(c) Company Secretary
(d) CFO

Ans: (d)

5. Which of the following is not main pillar of written representations?

(a) The management responsibility for preparation of financial statement
(b) Assertion related to completeness
(c) Assertion related to access to data and information
(d) Written representation provides sufficient appropriate audit evidence

Ans: (d)

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 CA SANIDHYA SARAF 6.13

Case Scenario 2
CA Sneha, a partner in M/s J & Associates, is carrying out a statutory audit of M/s ABC Stores Ltd. for the
Financial Year 2023-24, and she is ready to sign her audit report on 01.07.2024. There are some written
representations which are pending with the management of the company pertaining to such an audit,
and she sent Deepak (her articled trainee), who is also a member of the engagement team, to the
company’s office for collection of the same.
On returning back, Deepak tells CA Sneha that major stocks of the company got destroyed because of a
fire in their plant on 27.0024, and it has affected the company’s operations badly. However, the business
operations are likely to be resumed by management at an alternate place.
CA Sneha postponed the issuance of the audit report to consider the impact of such an event on the
financial state of affairs of the company. She wants the management to disclose the impact of this
unfortunate event in financial statements for the year 2023-24, to which management is disinclined. After
the management’s refusal, she issued her audit report on 15.07.2024.
The management of the company seeks an appointment from CA Sneha to discuss an important matter
on 20.07.2024. They informed her that the company had lost a lawsuit filed against it by one of the
creditors on 18.07.2024 in a fast-track court, and now the company has to pay the plaintiff a huge amount
of ₹ 2 crores. The events causing this lawsuit arose after 31.03.2024.
CA Sneha is a bit perplexed, and her first question to the people from management visiting her office was
whether audited financial statements have been made available to any third parties or filed with the
regulator. The management responded negatively.
Now, CA Sneha wants them to amend the financial statements to include the impact of this lawsuit on the
financial affairs of the company. This time, they agreed and amended the financial statements accordingly
to cover the impact of both the events – that of the fire in the plant and losing the lawsuit, but they
requested CA Sneha to issue a new audit report against the earlier one dated 15.7.2024. The management
amends the financial statements, which are finally approved on 25.7.2024. CA Sneha issues a new audit
report.
Considering the above situation, answer the following questions: -
1. What would be the appropriate date of signing of the new audit report?
(a) 20.07.2024
(b) Anytime between 15.07.2024 & 18.07.2024
(c) On or after 25.07.2024
(d) Anytime between 15.07.2024 & 25.07.2024
Ans: (c)
2. CA Sneha would have taken into account a lot of procedures to get knowledge of the events occurring
after the balance sheet date up to the date of the audit report relating to the company. Which of the
following does not fall under such audit procedures as per SA 560?
(a) Obtaining an understanding of the management’s procedures set up to identify subsequent events.
(b) Inquiring of the management w.r.t the occurrence of any such subsequent events.
(c) Reading the minutes of the meetings of the board held after the balance sheet date during this
period.
(d) Getting the Interim financial statements prepared till the date of the audit report mandatorily as a
condition to issue the audit report
Ans: (d)
3. W.r.t the first audit report dated 15.07.2024, which type of opinion was most likely provided by her?
(a) Modified opinion
(b) Unqualified opinion
(c) Disclaimer of opinion
(d) Including a statement in Emphasis of Matter/Other matters para.
Ans: (a)
4. W.r.t the new audit report issued, which type of opinion is most appropriate?
(a) Disclaimer of opinion
(b) Unqualified opinion

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 CA SANIDHYA SARAF 6.14

(c) Adverse opinion

(d) Unqualified opinion and a statement in Emphasis of Matter/Other matters para.
Ans: (d)

5. The fire event occurring on 27.024 in the company’s plant requires the following action on part of
management: -
(a) Disclosure in notes to accounts
(b) Adjustment in financial statements
(c) Waiting for the insurance company to settle the claim
(d) Preparing financial statements afresh
Ans: (a)

Case Scenario 3
CA Namit, a partner in M/s J & Associates, is carrying out a statutory audit of M/s XYZ Gears Ltd. for the
Financial Year 2023-24 and is in the process of issuing an audit report. His articled trainee, Manpreet, is
very curious about knowing the various facts relating to the consideration of Standards on Auditing while
carrying out an audit and issuing the audit report.
She asks CA Namit about the relevance of the Going concern assumption in their audit and further
reporting to which CA Namit explains to her that both parties have got their own responsibilities w.r.t this
accounting assumption. The management of the company has its own set of responsibilities while
reporting upon the same is a very strict and sensitive matter for the auditor as per the requirement of the
relevant standard on auditing.
He tells Manpreet to prepare a list of procedures as she thinks that an auditor should carry out when he
identifies that the company is facing a downfall in business never seen before due to newer technology
in the market and other competitors having sprung up swiftly adopting new technology.
He finds that this condition may cast significant doubt on the company’s ability to continue as a going
concern.
Manpreet thinks and researches and hands over a list of audit procedures to CA Namit for a final
discussion. CA Namit clarifies accordingly. CA Namit concludes that the use of a going concern basis of
accounting is appropriate in this company’s case, but a material uncertainty exists as to the future
prospects of the current business. However, the management has made an appropriate disclosure w.r.t
such material uncertainty in the financial statements.
Manpreet’s list of audit procedures includes: -.

Manpreet’s list of audit procedures includes: -

(i) Requesting management to make its assessment relating to the company's ability to continue
as a going concern.
(ii) Evaluating management's plan of future actions.
(iii) Make a specific assessment of the company’s ability to continue as a going concern.
(iv) Analyzing the cashflow forecast of the company.
(v) Considering the additional facts or information available from the date of management’s
assessment
(vi) Make appropriate disclosures in the financial statements in connection with going concerns.
(vii) Requesting Written Representation from management regarding the plans for future actions
and the feasibility of these plans.
(viii) Writing a para addressed to the stakeholders in the audit report citing the results of procedures
adhered to relating to the going concern assumption.
Keeping in view above, answer the following questions: -

1. CA Namit Namit tells Manpreet about the auditor’s responsibilities in the above case on the matter under
discussion. Which of the following doesn’t fall under the auditor’s responsibilities?
(a) Obtaining sufficient and appropriate audit evidence on the matter under discussion.
(b) Conclude on the appropriateness of the management’s use of going concern.
(c) Assessing whether a material uncertainty exists about the company’s ability to continue as a going
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 CA SANIDHYA SARAF 6.15

concern.
(d) Guarantee the company’s ability to continue as a going concern based upon his audit procedures.
Ans: (d)

2. Identify which set of audit procedures are relevant in the above case scenario as per the list prepared by
Manpreet.
(a) (I), (II), (IV), (V) & (VII)
(b) (I), (III) & (V)
(c) (II), (IV), (VI), (VII) & (VIII).
(d) (I), (II), (III), (IV) & (V).
Ans: (a)

3. CA Namit’s conclusion in the above case will lead him to give which type of audit opinion from the
following?
(I) Modified opinion
(II) Unmodified opinion.
(III) A separate section “Material uncertainty w.r.t. Going concern” in his audit report.
(a) (I) only
(b) (II) only
(c) I) & (III)
(d) (II) & (III)
Ans: (d)

4. Consider the following statements: -

Statement I: - The Management is under a responsibility to make specific assessment of the company's
ability to continue as a going concern.
Statement I: I -. The Management is under a responsibility to make appropriate disclosures in connection
with going concern in the financial statements.
(a) Statement I is correct only.
(b) Statement II is correct only as Statement I falls under the auditor’s responsibilities.
(c) Both statements are correct.
(d) Both statements are incorrect.
Ans: (c)

5. Which of the following is most appropriate regarding “going concern” assumption?

(a) It signifies that company is reflecting net losses in its financial statements.
(b) It signifies that company is not modernising its plant and machinery.
(c) It signifies that company has no intention of curtailing materially the scale of its operations in
foreseeable future.
(d) It signifies that assets are likely to be recorded at the prices they would fetch.
Ans: (c)

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 CA SANIDHYA SARAF 7.1

Chapter 7
Reporting

Question 1
Neptune Ltd. is a company that holds significant investments in a portfolio of equity securities. Due to
a decline in market value, the company's investments have suffered a notable diminution in value. For
the financial year ended 31st March 2023, the audit report of Neptune Ltd. included a qualification
regarding the non-provision of ₹ 70 lakh for the diminution in the value of these investments. As the
auditor for the financial year 2023-24, how would you report in the following situations:
(i) If the company does not make a provision for the diminution in the value of investments in the year
2023-24?
(ii) If the company makes an adequate provision for the diminution in the year 2023-24?
Answer 1
As per SA 710, “Comparative Information – Corresponding Figures and Comparative Financial
Statements”, when the auditor’s report on the prior period, as previously issued, included a qualified
opinion, a disclaimer of opinion, or an adverse opinion and the matter which gave rise to the modified
opinion is resolved and properly accounted for or disclosed in the financial statements in accordance with
the applicable financial reporting framework, the auditor’s opinion on the current period need not refer
to the previous modification.
SA 710 further states that if the auditor’s report on the prior period, as previously issued, included a
qualified opinion and the matter which gave rise to the modification is unresolved, the auditor shall
modify the auditor’s opinion on the current period’s financial statements. In the Basis for Modification
paragraph in the auditor’s report, the auditor shall either:
(i) Refer to both the current period’s figures and the corresponding figures in the description of the
matter giving rise to the modification when the effects or possible effects of the matter on the current
period’s figures are material; or
(ii) In other cases, explain that the audit opinion has been modified because of the effects or possible
effects of the unresolved matter on the comparability of the current period’s figures and the
corresponding figures.
In the instant case, if Neptune Ltd. does not make a provision for a diminution in the value of investment
to the extent of ` 70 lakh, the auditor will have to modify his report for both the current and previous
year’s figures as mentioned above. If, however, the provision is made, the auditor need not refer to the
earlier year’s modification.

Question 2
During the course of audit of PEC Limited, CA Guru has reason to believe that a fraud involving ₹ 75
lakhs has been committed in the company by its employees. Is CA Guru under statutory obligation to
report the above matter to Central government by filing prescribed form on MCA Portal? How should
he proceed to report above said matter?
Answer 2
As per section 143(12) of the Companies Act, 2013 read with Rule 13 of the Companies (Audit and
Auditors) Rules, 2014, if an auditor of a company in the course of the performance of his duties as auditor,
has reason to believe that an offence of fraud, which involves or is expected to involve individually an
amount of ` 1 crore or above, is being or has been committed in the company by its officers or employees,
the auditor shall report the matter to the Central Government within such time and in such manner as
prescribed.
In the given case, CA Guru has reason to believe that a fraud involving ` 75 lakhs has been committed in
the company by its employees. Therefore, he is under no statutory obligation to report this matter to
Central Government by filing prescribed Form (ADT-4) on MCA portal.
In case of a fraud involving lesser than the specified amount [i.e. less than ` 1 crore], the auditor shall
report the matter to the audit committee constituted under section 177 or to the Board in other cases
within such time and in such manner as prescribed. Besides, auditor has obligation to report matters
pertaining to fraud under clause (xi) of paragraph 3 of CARO, 2020.
Chapter 7 Reporting
 CA SANIDHYA SARAF 7.2

Question 3
Discuss the reporting responsibilities of statutory auditor in the following situations for year 2023-24
under CARO, 2020:
(i) In the financial year 2023-2024, Candy Ltd. decided to upgrade its registered office, located at a
prime spot in Bangalore. As a part of this upgrade, the company sought to acquire an adjacent plot
of land owned by Mr. Sidhant, who is also a director of Candy Ltd. Initially hesitant to sell, Mr.
Sidhant was persuaded to transfer his property to the company in exchange for a larger plot owned
by Candy Ltd. This plot, located on a nearby street, is double the size of Mr. Sidhant’s land.
Satisfied with the exchange, Mr. Sidhant agreed to transfer the property, and the exchange was
formalised in a deed executed by the company's authorised representatives and Mr. Sidhant. The
registration of the properties was completed by December 31, 2023.
(ii) On 15th May, 2023, a TDS survey was carried out in premises of SSO Industries Limited in
accordance with the provisions of the Income Tax Act, 1961.The survey team pointed out certain
lapses regarding non-deduction of tax at source and subsequently Deputy Commissioner of Income
Tax (TDS) raised a demand of ₹ 25 lacs on the company treating it as “assessee in default”. The
company has not deposited demand raised and filed appeal against impugned order on 01st March,
2024 under e-appeals scheme with JCIT (Appeals).
Answer 3
(i) The auditor is required to report the transaction as per Clause (xv) of Paragraph 3 of the CARO, 2020
which states that whether the company has entered into any non-cash transactions with directors or
persons connected with him and if so, whether the provisions of section 192 of the Companies Act
have been complied with.
Further, as per Clause (xiii) of Paragraph 3 of the CARO, 2020, auditor should report whether all
transactions with the related parties are in compliance with sections 177 and 188 of Companies Act
where applicable and the details have been disclosed in the financial statements, etc., as required by
the applicable accounting standards.
In the given situation, Candy Ltd. has entered into non-cash transactions with one of the directors, Mr.
Sidhant during the year, by transferring the property (by Mr. Sidhant) in favour of the Company in a
deed of exchange of a site owned by the company.
Thus, the auditor is required to report the same as per Clause (xv) and Clause (xiii) of Paragraph 3 of
the CARO, 2020.
(ii) As per clause (vii) (b) of Paragraph 3 of CARO,2020, the auditor is required to report where statutory
dues have not been deposited on account of any dispute, then the amounts involved and the forum
where dispute is pending shall be mentioned.
In the given situation, the survey team pointed out certain lapses regarding non-deduction of TDS and
demand raised by DCIT(TDS). TDS dues are in the nature of statutory dues and the company has filed
appeal against order of DCIT (TDS) raising a demand of ₹ 25 lacs with JCIT (Appeals). Therefore, these
are in the nature of disputed statutory dues. Thus, it should be reported in accordance with Clause
(vii) (b) of Paragraph 3 of CARO, 2020.

Question 4
Fancy Limited is a foreign company providing software support services having its Branch Office at
Delhi. During the year 2023-24, Fancy Limited incorporated a subsidiary Nancy Private Limited in
Gurgaon. For furtherance of objectives, Fancy Limited entered into a Business Transfer Agreement
dated 5th October 2023 with Nancy Private Limited for transfer of all assets and liabilities along with
the business of Delhi Branch to Nancy Private Limited on a going concern basis effective from 01st April,
2023. Further necessary approval from regulatory authorities is also received on 20th December, 2023
for such transfer. Fancy Limited promised that it shall provide continuing financial and operational
support to Delhi Branch and further confirmed that any losses incurred post the date of transfer shall
be borne by Fancy Limited.

Chapter 7 Reporting
 CA SANIDHYA SARAF 7.3

During the year 2023-24, Delhi Branch of Fancy Limited have prepared its financial statements on the
basis that the Branch Office does not continue to be a going concern and all its assets are carried in the
books of accounts at the values likely to be recovered at the time of closure of operations, to the extent
ascertainable at the time of preparation of the financial statements. Delhi Branch has incorporated
above matter in detailed form in Note XX to the financial statements.
You are the statutory auditor of Delhi Branch of Fancy Limited for the financial year 2023-24. According
to you, Delhi Branch has correctly disclosed about the matter in Note XX to the Financial Statements
regarding management's intention to close the operations of the branch office. Further you have
obtained sufficient appropriate audit evidence concerning audit and on the verge of finalization of audit
report.
Draft a suitable opinion paragraph and basis thereof in the given case along with disclosure of Note XX
with suitable place in audit report in terms of relevant auditing standard.
Answer 4
Drafting of Opinion Paragraph and basis thereof along with disclosure of Note XX:
INDEPENDENT AUDITOR’S REPORT
To the Members of Delhi Branch Office of Fancy Limited
Report on the Audit of the Standalone Financial Statements
Opinion
We have audited the standalone financial statements of Delhi Branch Office of Fancy Limited (“the
Company”), which comprise the balance sheet as at March 31, 2024, and the statement of Profit &
Loss, (statement of changes in equity) and the statement of cash flows for the year then ended, and
notes to the financial statements, including a summary of significant accounting policies and other
explanatory information.
In our opinion, and to the best of our information and according to the explanations given to us the
aforesaid financial statements, give a true and fair view, in conformity with the accounting principles
generally accepted in India, of the state of affairs of the Delhi Branch Office of the Company as at
March 31, 2024 and profit/loss, (changes in equity) and its cash flows for the year ended on that date.
Basis for Opinion
We conducted our audit in accordance with Standards on Auditing (SAs). Our responsibilities under
those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial
Statements section of our report. We are independent of the Company in accordance with the ethical
requirements that are relevant to our audit of the financial statements as per the ICAI’s Code of Ethics
and the provisions of the Companies Act, 2013, and we have fulfilled our other ethical responsibilities
in accordance with these requirements. We believe that the audit evidence we have obtained is
sufficient and appropriate to provide a basis for our opinion.
Emphasis of Matter
We draw attention to Note XX regarding Delhi Branch Office management’s intention to close the
operations of the Branch Office subject to regulatory approvals. Accordingly, the financial statements
have been prepared on the basis that the Delhi Branch Office does not continue to be a going concern
and provisions have been made in the books of account for the losses arising or likely to arise on
account of closure of operations including the losses on the realizability of current assets.
Our opinion is not modified in respect of this matter.

Question 5
You are appointed as a Statutory Auditor of SDA Limited for the year 2023-24 in the place of CA T.
During the audit you found an order dated 01.05.2023 under section 148 of the Income-tax Act, 1961
wherein tax of ₹ 50 lakhs were demanded owing to undisclosed cash sales of ₹ 150 lakhs for the financial
year 2020-21 which was accepted by the company and the applicable tax was paid by the Company
during the year 2023-24. The company has not recorded such undisclosed income in their books of
account during the year 2023-24. On further inquiring the matter with CA T, you came to know that CA
T resigned due to non-recording of such transaction by the company. Is there any reporting
responsibility cast on you regarding the above matters under CARO, 2020 for the year 2023-24?
Answer 5
Reporting under Paragraph 3 of CARO, 2020: Clause (viii) of Paragraph 3 of CARO, 2020 requires the
auditor to report whether any transactions not recorded in the books of account have been
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 CA SANIDHYA SARAF 7.4

surrendered or disclosed as income during the year in the tax assessments under the Income-tax Act,
1961 (43 of 1961), if so, whether the previously unrecorded income has been properly recorded in the
books of account during the year.
In addition, Clause (xviii) of Paragraph 3 of CARO, 2020 requires the auditor to report whether there
has been any resignation of the statutory auditors during the year, if so, whether the auditor has taken
into consideration the issues, objections or concerns raised by the outgoing auditors.
In the given situation, during audit an order dated 01.05.2023 under section 148 of the Income-tax
Act, 1961 was noticed wherein tax of ` 50 lakh were demanded owing to undisclosed cash sales of 150
lakh for the financial year 2020-21 which was accepted by the company and the applicable tax was
paid by the company during the year 2023-24. The company has not recorded such undisclosed income
in their books of account during the year 2023-24. The auditor would be required to report as per
Clause (viii) of Paragraph 3 of CARO, 2020.
Further CA T, the auditor of SDA Limited resigned due to non-recording of such undisclosed income in
their books of account. The auditor would be required to report the same in CARO, 2020 as per Clause
(xviii) of Paragraph 3 of CARO, 2020.
Hence, the auditor would be required to report as per Clause (viii) and Clause (xviii) of Paragraph 3 of
CARO 2020 for the year 2023-24

Question 6
While conducting audit of CGX Limited, a listed company, for year 2023-24, CA Srishti notices that
company has extinguished following material liabilities unilaterally without entering into settlement
with creditors and reported these amounts as gains under “Other income”. The details in this respect
are as under: -
S. No. Particulars Amount involved
(i) Liabilities for purchases of raw material were written back on account ` 3.50 crores
of poor quality of raw material and difference in rates
(ii) Liabilities for capital goods were written back on account of defects in ` 2.00 crores
machinery supplied by creditors
The management is of the opinion that these dues are no longer payable. Therefore, retaining these
liabilities on financial statements would lead to overstatement of liabilities. Extinguishment of
liabilities was made by company in accordance with normal trade practices and outstandings were
written back after stopping dealing with such creditors. She wanted to send external confirmation
requests to such creditors. However, management informed her that sending such requests may be
used by creditors as proof of existence of liability.
She is contemplating inclusion of above matters under “Key audit matters" in audit report. Analyse the
situation threadbare.
Answer 6
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, for example: -
(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 Srishti 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
Chapter 7 Reporting
 CA SANIDHYA SARAF 7.5

such risks. Besides, she should consider implications of same for her audit opinion.
Further, 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 above, her contemplation of including above matters under “Key audit matters” is not
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.

Question 7
Naresh & Co., Chartered Accountants, have been appointed Statutory Auditors of Suchi Ltd. for the F.Y.
2023-24. The audit team has completed the audit and is in the process of preparing audit report. The
management of the company has also prepared draft annual report. The audit in-charge was going
through the draft annual report and observed that the company has included an item in its Annual
Report indicating a downward trend in market prices of key commodities/raw material as compared to
previous year. However, the actual profit margin of the company as reported in financial statements
has gone in the reverse direction. The Audit Manager discussed this issue with a partner of the firm
who in reply said that auditors are not covered with such disclosures made by the management in its
annual report, it being the responsibility of the management.
Do you think that the partner is correct in his approach on this issue?
Discuss the Auditor's duties with regard to reporting with reference to the relevant Standards on
Auditing.
Answer 7
Responding When the Auditor Concludes That a Material Misstatement of the Other Information Exists:
As per SA 720, “The Auditor’s Responsibility in Relation to Other Information”, descriptions of trends in
market prices of key commodities or raw materials is an example of amounts or other Items that may be
included in the other information.
The auditor’s discussion with management about a material inconsistency (or other information that
appears to be materially misstated) may include requesting management to provide support for the basis
of management’s statements in the other information. Based on management’s further information or
explanations, the auditor may be satisfied that the other information is not materially misstated. For
example, management explanations may indicate reasonable and sufficient grounds for valid differences
of judgment.
Auditor’s duties with regard to reporting in the given case are given hereunder:
As per SA 720, “The Auditor’s Responsibility in Relation to Other Information”, if the auditor concludes
that a material misstatement of the other information exists, the auditor shall request management to
correct the other information. If management:
(i) Agrees to make the correction, the auditor shall determine that the correction has been made; or
(ii) Refuses to make the correction, the auditor shall communicate the matter with those charged with
governance and request that the correction be made

Question 8
Nandini Ltd., a chemical manufacturing company, having its factory located at Kanawali Village, for the
year 2023-24 appointed Vasu & Co. as their statutory auditors. During the audit, Vasu & Co. identified

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 CA SANIDHYA SARAF 7.6

that Nandini Ltd. received a show cause notice from the National Green Tribunal based on the
investigation performed by the regional forest department for violating environmental laws. Upon
gathering a further understanding of the said matter, it was identified that Nandini Ltd. was dumping
toxic solid waste, without treating it, on the nearby grounds, and because of this, the nearby water
bodies were getting polluted. Based on the preliminary investigation carried out by the regional forest
department under the directions of the National Green Tribunal, it was identified that these practices
were carried out since 2009 and a lot of damage has been done to the environment by Nandini Ltd.. A
show cause notice was already issued to Nandini Ltd. by the National Green Tribunal for levying the
penalty of an amount of ` 700 crore. The unaudited profit for the financial year 2022-23 of Nandini Ltd.
was ` 49 crore and the unaudited turnover was ` 120 crore. Upon inquiry it was identified that Nandini
Ltd. has disclosed this matter in the financial statements by way of footnote, the extract of which is
provided below:
“The company has received a show cause notice from the National Green Tribunal for some potential
violation of environmental laws and the company’s legal department has assessed and found that the
judgment would be in favour of the company. Accordingly, no provision has been created for such
notices.”
In the light of the above scenario kindly provide what should be the appropriate option for the statutory
auditor of the company to report this matter.
Answer 8
As per SA 250, “Consideration of Laws and Regulations in an Audit of Financial Statements”, the auditor
is required to obtain an understanding and need to evaluate the impact of other laws and regulations
that do not have a direct effect on the determination of the amounts and disclosures in the financial
statements, but compliance with which may be fundamental to the operating aspects of the business, to
an entity’s ability to continue its business, or to avoid material penalties (for example, compliance with
the terms of an operating license, compliance with regulatory solvency requirements, or compliance with
environmental regulations); non-compliance with such laws and regulations may therefore have a
material effect on the financial statements.
The auditor shall perform the following audit procedures to help identify instances of non-compliance
with other laws and regulations that may have a material effect on the financial statements:
(a) Inquiring of management and, where appropriate, those charged with governance, as to whether
the entity is in compliance with such laws and regulations; and
(b) Inspecting correspondence, if any, with the relevant licensing or regulatory authorities
As per section 143(3)(j) read with Rule 11(a), the auditor is required to report whether the company
has disclosed the impact, if any, of pending litigations on its financial position in its financial statement.
As per SA 570, “Going Concern”, if the auditor concludes that management’s use of the going concern
basis of accounting is appropriate in the circumstances but a material uncertainty exists, the auditor
shall determine whether the financial statements:
(i) Adequately disclose the principal events or conditions that may cast significant doubt on the
entity’s ability to continue as a going concern and management’s plans to deal with these events
or conditions; and
(ii) Disclose clearly that there is material uncertainty related to events or conditions that may cast
significant doubt on the entity’s ability to continue as a going concern and, therefore, that it may
be unable to realize its assets and discharge its liabilities in the normal course of business.
If adequate disclosure about the material uncertainty is not made in the financial statements, the
auditor shall (a) Express a Qualified opinion or Adverse opinion, as appropriate, in accordance with SA
705; and (b) In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a
material uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going
concern and that the financial statements do not adequately disclose this matter.
In the current scenario, Nandini Ltd. has received a show cause notice from the National Green
Tribunal of an amount which is more than the net profit and the turnover of the company for the year.
In the event of an unfavourable order for Nandini Ltd., there will be an impact on Nandini Ltd.’s ability
to continue as a going concern.
As a result, appropriate disclosure should be provided by management for such events, which cast
significant doubt on the entity’s ability to continue as a going concern. As no appropriate disclosure
has been provided by Nandini Ltd. for such show cause notice, Vasu & Co. should report this matter in
their audit report under “Going Concern Para” as per SA 570 and under clause (j) of section 143(3) of
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 CA SANIDHYA SARAF 7.7

the Companies Act, 2013. Also, the auditor is required to issue an Adverse opinion as per SA 705,
“Modifications to the Opinion in the Independent Auditor’s Report”.

Question 9
BPMR and Associates, a renowned audit firm in the field of CA practice for the past three decades, was
appointed to conduct the statutory audit of Rexlon Ltd., an unlisted company engaged in the business
of paper manufacturing. The firm decided to commence the audit for the recently concluded financial
year. After making significant progress in the audit, the auditors made the following observations:
Observation 1: The management had disclosed in the financials that, during the year, one of the
warehouses of the Company was affected due to a major flood. As a result of the same, the Company
had incurred some losses. But the management was of the view that it was not material.
Observation 2: Due to the flood, few records maintained by the Company with respect to a particular
transaction was completely destroyed and there was no duplicate record maintained by the Company.
However, those details were not pervasive, but material.
You are required to advise whether BPMR and Associates should report Observation 1 and 2 in its audit
report? If so, under which heading should it be reported?
Answer 9
Observation 1 - The management had disclosed in the financials that, during the year, one of the
warehouses of the Company was affected due to a major flood. As a result of the same, the Company had
incurred some losses. But the management was of the view that it was not material. As per SA 706,
“Emphasis of Matter Paragraph & Other Matter Paragraph in the Independent Auditor’s Report”, an
Emphasis of Matter Paragraph refers to matter appropriately disclosed in the financials, that in the
auditor’s judgement is of such importance that it is fundamental to users’ understanding of the financials.
Hence, in this case, the auditor shall report about the consequences of the flood which affected the
company’s warehouse under Emphasis of Matter Paragraph.
Observation 2 - Due to flood, few records maintained by the Company with respect to a particular
transaction were destroyed and no duplicate records were maintained by the Company. However, those
details were not pervasive, but material. As per SA 705, “Modifications to the Opinion in the Independent
Auditor’s Report”, where the auditor is unable to obtain sufficient and appropriate audit evidence and
where such matter is material but not pervasive, the auditor shall issue a Qualified opinion.
Thus, in the given situation, on account of flood few records pertaining to particular transactions were
completely destroyed and in the absence of duplicate records, the auditor was unable to obtain sufficient
and appropriate audit evidence and those details were material but not pervasive. Therefore, in
accordance with SA 705, the auditor is required to issue Qualified opinion.

Question 10
Under the applicable Standards on Auditing, in what circumstances does the report of the statutory
auditor require modifications? What are the types of modifications possible to the said report?
Answer 10
SA 705 deals with the auditor’s responsibility to issue an appropriate report in circumstances when, in
forming an opinion in accordance with SA 700 (Revised), the auditor concludes that a modification to the
auditor’s opinion on the financial statements is necessary.
Types of Modified Opinions as per SA 705:
(i) Qualified Opinion
(ii) Adverse Opinion
(iii) Disclaimer of Opinion
The decision regarding which type of modified opinion is appropriate depends upon:
(a) The nature of the matter giving rise to the modification, that is, whether the financial statements
are materially misstated or, in the case of an inability to obtain sufficient appropriate audit
evidence, may be materially misstated; and
(b) The auditor’s judgment about the pervasiveness of the effects or possible effects of the matter on
the financial statements.
Qualified Opinion: The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that misstatements,
individually or in the aggregate, are material, but not pervasive, to the financial statements; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the opinion,
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 CA SANIDHYA SARAF 7.8

but the auditor concludes that the possible effects on the financial statements of undetected
misstatements, if any, could be material but not pervasive
Adverse Opinion: The auditor shall express an adverse opinion when the auditor, having obtained
sufficient appropriate audit evidence, concludes that misstatements, individually or in the aggregate, are
both material and pervasive to the financial statements.
Disclaimer of Opinion: 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.

Question 11
Write a short note on Emphasis of matter paragraph in Audit Reports.
Answer 11
Emphasis of Matter paragraph – A paragraph included in the auditor’s report that refers to a matter
appropriately presented or disclosed in the financial statements that, in the auditor’s judgment, is of such
importance that it is fundamental to users’ understanding of the financial statements.
If the auditor considers it necessary to draw users’ attention to a matter presented or disclosed in the
financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’
understanding of the financial statements, the auditor shall include an Emphasis of Matter paragraph in
the auditor’s report provided:
(a) The auditor would not be required to modify the opinion in accordance with SA 705 (Revised) as
a result of the matter; and
(b) When SA 701 applies, the matter has not been determined to be a key audit matter to be
communicated in the auditor’s report.
When the auditor includes an Emphasis of Matter paragraph in the auditor’s report, the auditor shall:
(a) Include the paragraph within a separate section of the auditor’s report with an appropriate
heading that includes the term “Emphasis of Matter”;
(b) Include in the paragraph a clear reference to the matter being emphasized and to where relevant
disclosures that fully describe the matter can be found in the financial statements. The paragraph
shall refer only to information presented or disclosed in the financial statements; and
(c) Indicate that the auditor’s opinion is not modified in respect of the matter emphasized.

Question 12
Write a short note on Certificate for Special Purpose vs. Audit Report.
Answer 12
Certificate for Special Purpose vs. Audit Report: A certificate is a written confirmation of the accuracy of
the facts stated therein and does not involve any estimate or opinion. The term ‘certificate’ is, therefore,
used where the auditor verifies the accuracy of facts. An auditor may thus, certify the circulation figures
of a newspaper or the value of imports or exports of a company. An auditor’s certificate represents that
he has verified certain figures and is in a position to vouch safe their accuracy as per his examination of
documents and books of account. A report, on the other hand, is a formal statement usually made after
an enquiry, examination or review of specified matters under report and includes the reporting auditor’s
opinion thereon. Thus, when a reporting auditor issues a certificate, he is responsible for the factual
accuracy of what is stated therein. On the other hand, when a reporting auditor gives a report, he is
responsible for ensuring that the report is based on factual data, that his opinion is in due accordance
with facts, and that it is arrived at by the application of due care and skill. The ‘report’ involves expression
of opinion which may differ from one professional to another. There is no question of exactitude in case
of a report since the information contained therein is based on estimates and involves judgement
element.

Question 13
Compare and explain the following:
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 CA SANIDHYA SARAF 7.9

(i) Reporting to Shareholders vs. Reporting to those Charged with Governance

(ii) Audit Qualification vs. Emphasis of Matter.

Answer 13
(i) Reporting to Shareholders vs. Reporting to those Charged with Governance:
REPORT
Reporting to Shareholders Reporting to those Charged with Governance
 Section 143 of the Companies Act, 2013  Standard on Auditing 260 deals with the
deals with the provisions relating to provisions relating to reporting to those
reporting to Shareholders. Thus, it is a Charged with Governance.
Statutory Audit Report which is addressed
to the members.
 Statutory Audit Report is on true and fair  It is a reporting on matters those charged
view and as per prescribed Format. with governance like scope of audit, audit
procedures, audit modifications, etc.
 Statutory Audit Reports are in public  Reporting to those Charged with Governance
domain. is an internal document i.e., private report.
(ii) Audit Qualification vs. Emphasis of Matter:
REPORT
Audit Qualification Emphasis of Matter
 Standard on Auditing 705  Standard on Auditing 706 “Emphasis of Matter
“Modifications to the Opinion in the Paragraphs and Other Matter Paragraphs in
Independent Auditor’s Report”, deals the Independent Auditor’s Report” deals with
with the provisions relating to Audit the provisions relating to Emphasis of Matter.
Qualification.

 Audit Qualifications are modifications  Emphasis of Matter is a paragraph which is

to the opinion of the Auditors opinion included in auditor’s report to draw users’
where the auditor concludes that attention to important matter(s) which are
there is a material misstatement in the already disclosed in Financial Statements and
financial statement due to which the are fundamental to users’ for understanding of
modification to the opinion of the Financial Statements.
auditor is necessary.  The Emphasis of matter pre- supposes that
there is Sufficient Appropriate audit evidence
and the matter has been correctly disclosed.

 Audit Qualifications are given when  Emphasis of Matter is a paragraph which is issued
auditor has concluded that the financial when the auditor feels that it is necessary to
statementsare materially misstated or invite attention to a particular mater which has
do not confirm to the financial been appropriately disclosed in the financial
reporting framework. Depending upon statements which in the opinion of the auditor is
the nature of material misstatement necessary for better understanding of the
being pervasive or otherwise the financial statement.
appropriate type of modified opinion is
issued.

Question 14
“When the auditor modifies the audit opinion, the auditor shall use the heading “Qualified Opinion,”
“Adverse Opinion,” or “Disclaimer of Opinion,” as appropriate, for the Opinion section.” As an expert
you are required to brief the special considerations required for expressing:
(a) Qualified Opinion;
(b) Adverse Opinion and
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 CA SANIDHYA SARAF 7.10

(c) Disclaimer of Opinion.

Answer 14
(i) When the auditor expresses a qualified opinion due to a material misstatement in the financial
statements, the auditor shall state that, in the auditor’s opinion, except for the effects of the matter(s)
described in the Basis for Qualified Opinion section:
(a) When reporting in accordance with a fair presentation framework, the accompanying financial
statements present fairly, in all material respects (or give a true and fair view of) […] in accordance
with [the applicable financial reporting framework]; or
(b) When reporting in accordance with a compliance framework, the accompanying financial
statements have been prepared, in all material respects, in accordance with [the applicable
financial reporting framework].
When the modification arises from an inability to obtain sufficient appropriate audit evidence, the
auditor shall use the corresponding phrase “except for the possible effects of the matter(s) ...” for the
modified opinion.

(ii) When the auditor expresses an adverse opinion, the auditor shall state that, in the auditor’s opinion,
because of the significance of the matter(s) described in the Basis for Adverse Opinion section:
(a) When reporting in accordance with a fair presentation framework, the accompanying financial
statements do not present fairly (or give a true and fair view of) […] in accordance with [the
applicable financial reporting framework]; or
(b) When reporting in accordance with a compliance framework, the accompanying financial
statements have not been prepared, in all material respects, in accordance with [the applicable
financial reporting framework].
(iii) When the auditor disclaims an opinion due to an inability to obtain sufficient appropriate audit evidence,
the auditor shall:
(a) State that the auditor does not express an opinion on the accompanying financial statements;
(b) State that, because of the significance of the matter(s) described in the Basis for Disclaimer of
Opinion section, the auditor has not been able to obtain sufficient appropriate audit evidence to
provide a basis for an audit opinion on the financial statements; and
(c) Amend the statement required in SA 700 (Revised), which indicates that the financial statements
have been audited, to state that the auditor was engaged to audit the financial statements.

Question 15
ADKS & Co LLP are the newly appointed statutory auditors of PKK Ltd. During the course of audit, the
statutory auditors have come across certain significant observations which they believe could lead to
material misstatement of financial statements. Management has a different view and does not concur
with the view of the statutory auditors. Considering this the statutory auditors are determining as to
how to address these observations in terms of their reporting requirement. Please advise.
Answer 15
As per SA 705 (Revised), if the auditor concludes that, based on the audit evidence obtained, the financial
statements as a whole are not free from material misstatement or the auditor is unable to obtain
sufficient appropriate audit evidence to conclude that the financial statements as a whole are free from
material misstatement, the auditor shall modify the opinion in his report.
The auditor in such a case needs to determine the modification as follows:
(i) Qualified Opinion: The auditor shall express a qualified opinion when:
(a) The auditor, having obtained sufficient appropriate audit evidence, concludes that
misstatements, individually or in the aggregate, are material, but not pervasive, to the financial
statements; or
(b) The auditor is unable to obtain sufficient appropriate audit evidence on which to base the
opinion, but the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be material but not pervasive.
(ii) Adverse Opinion: The auditor shall express an adverse opinion when the auditor, having obtained
sufficient appropriate audit evidence, concludes that misstatements, individually or in the
aggregate, are both material and pervasive to the financial statements
(iii) Disclaimer of Opinion: The auditor shall disclaim an opinion when the auditor is unable to obtain
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 CA SANIDHYA SARAF 7.11

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.

Question 16
KPI Ltd. is a joint venture of KPI Inc., a company based in US, and OPQ Ltd., a company based in Japan
(hereinafter referred to as ‘JV partners’). KPI Ltd. was registered in India and is operating as a marketing
support company for KPI Inc. All the costs of KPI Ltd. are incurred in India and entire revenue of KPI Inc. is
generated in USD. The entire funding requirements of KPI Ltd. are taken care of by the JV partners. Since KPI
Ltd. is based in India, hence it is also required to get its financial statements audited.
The company appointed new auditors for the audit of the financial statements for the year ended 31 March
2024 after doing all appointment formalities wherein auditors are required to ensure compliance with
Standards on Auditing and Internal Standards on Auditing.
As an expert you are required to advise the auditor about the requirements regarding the auditor’s report for
audits conducted in accordance with both Standards on Auditing issued by ICAI and International Standards
on Auditing.
Answer 16
An auditor may be required to conduct an audit in accordance with, in addition to the Standards on Auditing
issued by ICAI, the International Standards on Auditing or auditing standards of any other jurisdiction. If this is
the case, the auditor’s report may refer to Standards on Auditing in addition to the International Standards on
Auditing or auditing standards of such other jurisdiction, but the auditor shall do so only if:
(a) There is no conflict between the requirements in the ISAs or such auditing standards of other
jurisdiction and those in SAs that would lead the auditor:
(i) to form a different opinion, or
(ii) not to include an Emphasis of Matter paragraph or Other Matter paragraph that, in the
particular circumstances, is required by SAs; and
(b) The auditor’s report includes, at a minimum, each of the elements set out in Auditor’s Report Prescribed by
Law or Regulation discussed above when the auditor uses the layout or wording specified by the Standards
on Auditing. However, reference to “law or regulation” in above paragraph shall be read as reference to the
Standards on Auditing. The auditor’s report shall thereby identify such Standards on Auditing.
When the auditor’s report refers to both the ISAs or the auditing standards of a specific jurisdiction and the
Standards on Auditing issued by ICAI, the auditor’s report shall clearly identify the same including the
jurisdiction of origin of the other auditing standards.

Question 17
TUV Ltd. is a company engaged in the business of manufacturing spare parts. Saroj & Associates are the
statutory auditors of the company for the FY 2023-24. During the audit, CA Saroj noticed that the company
had a major customer, namely, Korean Mart from South Korea. Owing to an outbreak of war and subsequent
destruction leading to government ban on import and export in South Korea, the demand from Korean Mart
for the products of TUV Ltd. ended for an unforeseeable time period. When discussed with the management,
CA Saroj was told that the company is in the process of identifying new customers for their products. CA
Saroj understands that though the use of going concern assumption is appropriate, but a material
uncertainty exists with respect to the identification of new customers. This fact is duly reflected in the
financial statements of TUV Ltd. for FY 2023-24. How should CA Saroj deal with this matter in the auditor’s
report for the FY 2023-24?
Answer 17
As per SA 570, “Going Concern”, loss of a major market or a key customer is one of the operating indicators
that may cast significant doubt on the company’s ability to continue as a going concern.
In the present case, TUV Ltd. has a key customer in South Korea from which the demand for its products has
ended on account of outbreak of war, subsequent destruction and government ban on import and export in
South Korea. Further, the company has not yet identified new customers and is in the process of doing the

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 CA SANIDHYA SARAF 7.12

same. As such, the identification of new customers is a material uncertainty that cast a significant doubt on
the company’s ability to continue as a going concern.
However, this matter is duly disclosed by the management of TUV Ltd. in the financial statements for the
year ended 31-03-2024.
As such, considering that the going concern assumption is appropriate but a material uncertainty exists
with respect to identification of new customer, CA Saroj should:
(1) Express an unmodified opinion and
(2) Include in his audit report, a separate section under the heading “Material Uncertainty Related to
Going Concern” to:
(i) Draw attention to the note in the financial statements that discloses the matters and
(ii) State that these events or conditions indicate that a material uncertainty exists that may cast
significant doubt on the entity’s ability to continue as a going concern and that the auditor’s
opinion is not modified in respect of the matter.
Thus, CA Saroj should deal with this matter in his auditor’s report in the above mentioned manner.

Question 18
Sun Moon Ltd. is a power generating company which uses coal as raw material for its power generating
plant. The company has been allotted coal blocks in the state of Jharkhand and Odisha. During the FY
2023-24, a scam regarding allotment of coal blocks was unveiled leading to a ban on the allotment of
coal blocks to various companies including Sun Moon Ltd. This happened in the month of December
2023 and as such entire power generation process of Sun Moon Ltd, came to a halt in that month. As a
result of such ban, and the resultant stoppage of the production process, many key managerial
personnel of the company left the company. There were delays in the payment of wages and salaries
and the banks from whom the company had taken funds for project financing also decided not to
extend further finance or to fund further working capital requirements of the company.
Further, when discussed with the management, the statutory auditor understood that the company
had no action plan to mitigate such circumstances. Further, all such circumstances were not reflected
in the financial statements of Sun Moon Ltd. What course of action should the statutory auditor of the
company consider in such situation?
Answer 18
SA 570 - “Going Concern” deals with the auditor’s responsibilities in the audit of financial statements
relating to going concern and the implications for the auditor’s report.
The auditor’s responsibilities are to obtain sufficient appropriate audit evidence regarding, and conclude
on, the appropriateness of management’s use of the going concern basis of accounting in the preparation
of the financial statements, and to conclude, based on the audit evidence obtained, whether a material
uncertainty exists about the entity’s ability to continue as a going concern.
When the use of Going Concern Basis of Accounting Is Inappropriate i.e. if the financial statements have
been prepared using the going concern basis of accounting but, in the auditor’s judgment, management’s
use of the going concern basis of accounting in the preparation of the financial statements is
inappropriate, the auditor shall express an adverse opinion.
Also, when adequate Disclosure of a Material Uncertainty Is Not Made in the Financial Statements the
auditor shall:
(i) Express a qualified opinion or adverse opinion, as appropriate, in accordance with SA 705 (Revised);
and
(ii) In the Basis for Qualified (Adverse) Opinion section of the auditor’s report, state that a material
uncertainty exists that may cast significant doubt on the entity’s ability to continue as a going concern
and that the financial statements do not adequately disclose this matter.
In the present case, the following circumstances indicate the inability of Sun Moon Ltd. to continue as a
going concern:
 Ban on the allotment of coal blocks
 Halt in power generation
 Key Managerial Personnel leaving the company.
 Banks decided not to extend further finance and not to fund the working capital requirements of the
company.
 Non availability of sound action plan to mitigate such circumstances.

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 CA SANIDHYA SARAF 7.13

Therefore, considering the above factors it is clear that the going concern basis is inappropriate for the
company. Further, such circumstances are not reflected in the financial statements of the company. As
such, the statutory auditor of Sun Moon Ltd. should:
(1) Express an adverse opinion in accordance with SA 705 (Revised) and
(2) In the Basis of Opinion paragraph of the auditor’s report, the statutory auditor should state that
a material uncertainty exists that may cast significant doubt on the entity’s ability to continue as
a going concern and that the financial statements do not adequately disclose this matter.
The auditor is also required to report as per clause (xix) of CARO 2020 that on the basis of the financial
ratios, ageing and expected dates of realisation of financial assets and payment of financial liabilities,
other information accompanying the financial statements, the auditor’s knowledge of the Board of
Directors and management plans, whether the auditor is of the opinion that no material uncertainty
exists as on the date of the audit report that company is capable of meeting its liabilities existing at
the date of balance sheet as and when they fall due within a period of one year from the balance sheet
date.

Question 19
CA Omkar is the statutory auditor of Sabhyata Ltd. for the FY 2023-24. The company is engaged in the
business of manufacture of floor tiles. During the audit, CA Omkar obtained certain audit evidence
which were not consistent with the affirmation made in the financial statements. Discuss as to how CA
Omkar should deal with the situation in the auditor’s report.
Answer 19
SA 705 (Revised) deals with the auditor’s responsibility to issue an appropriate report in circumstances
when, in forming an opinion in accordance with SA 700, the auditor concludes that a modification to the
auditor’s opinion on the financial statements is necessary.
The decision regarding which type of modified opinion is appropriate depends upon:
(a) The nature of the matter giving rise to the modification, that is, whether the financial statements are
materially misstated or, in the case of an inability to obtain sufficient appropriate audit evidence,
may be materially misstated; and
(b) The auditor’s judgment about the pervasiveness of the effects or possible effects of the matter on
the financial statements.
Further, the auditor shall modify the opinion in the auditor’s report when the auditor concludes that
based on the audit evidence obtained, the financial statements as a whole are not free from material
misstatement.
In the present case, during the course of audit, CA Omkar obtained certain audit evidence which were not
consistent with the affirmation made in the financial statements. Therefore, CA Omkar should modify his
report in accordance with SA 705- “Modifications to The Opinion In The Independent Auditor’s Report.
CA Omkar should issue either a qualified opinion or an adverse opinion depending upon the
circumstances of the case:
(a) CA Omkar shall express a qualified opinion when, having obtained sufficient appropriate audit
evidence, he concludes that misstatements, individually or in the aggregate, are material, but not
pervasive, to the financial statements
(b) CA Omkar shall express an adverse opinion, when the auditor, having obtained sufficient appropriate
audit evidence, concludes that misstatements, individually or in the aggregate, are both material and
pervasive to the financial statements.
Thus, since CA Omkar has obtained audit evidence which is inconsistent with the affirmations made in
the financial statement, CA Omkar should modify his opinion as per the circumstances of the case.

Question 20
The auditors of a listed company have affirmed in their audit report communication of significant audit
findings including significant deficiencies in internal control of the company identified to those charged
with governance. Where are such matters included in the audit report of a listed company? Also dwell
upon the importance of such communication.
Answer 20
Such matters are in nature of auditor’s responsibilities and are stated in “The Auditor’s Responsibilities
for the Audit of the Financial Statements” section of the auditor’s report in accordance with SA 700.

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 CA SANIDHYA SARAF 7.14

Communication of significant audit findings and deficiencies identified in internal control to those charged
with governance is one of important responsibilities of auditor.
Such communication assists those charged with governance in fulfilling their responsibility to oversee the
financial reporting process and in fulfilling their oversight responsibilities.

Question 21
Below is draft extract of audit report of a listed company. Para (A) below reflects certain matters stated in
audit report communicated with CFO of company and Para (B) is in nature of auditor’s response to said
matter.
(A) The Company recognizes revenues when the control of goods is transferred to the customer at the
net consideration which the Company expects to receive for those goods from customers in
accordance with contracts terms and conditions.
The terms of sales arrangements based on the terms and conditions of relevant contracts and nature
of discount and rebates create complexities that require judgment in determining revenues.
(B) We read the Company’s revenue recognition policy and assessed its compliance in terms of Ind AS
115 “Revenue from contracts with customers”.
We assessed design and tested the operating effectiveness of internal controls related to sales and
rebates/discounts.
We tested on a sample basis that revenue has been recognized in the proper period with reference
to the supporting documents including confirmations from customers.
From the description given above, identify what auditors are trying to report and under what
heading such matter should be reflected in audit report of the company?
Answer 21
The above matter is in nature of Key audit matter and should be stated under heading “Key audit matters”
in audit report. Key audit matters are those matters that, in the auditor’s professional judgment, were of
most significance in the audit of the financial statements of the current period. Key audit matters are
selected from matters communicated with those charged with governance.
SA 701 states that the auditor shall determine, from the matters communicated with those charged with
governance, those matters that required significant auditor attention in performing the audit. In making
this determination, significant auditor judgments relating to areas in the financial statements that
involved significant management judgment including accounting estimates that have been identified as
having high estimation uncertainty be taken into account.
The above described matter relates to revenue recognition and creation of complexities requiring
judgment in revenues. Further, the description also describes how the matter was addressed by auditors
by performing various audit procedures in accordance with SA 701.

Question 22
PTD Limited is engaged in the business of executing construction contracts for its clients. There are non-
current receivables outstanding in the financial statements of the company as on 31st March, 2024 for
₹ 500 crore. Such amounts represent caused by claims raised by the company on its clients relating to
cost overruns necessitated due to delays clients, change in work specifications and related matters. Bes
des negotiations, the company has also gone for arbitration in some of the said cases. The management
of the company has considered the above amounts to be fully recoverable as stated in notes to
accounts.
CA. Piyush, auditor of the company, has relied only upon management representation in this regard.
Besides, he has decided to include the said matter in “Emphasis of Matter” Paragraph in audit report.
How do you view decision to include above matter in “Emphasis of Matter” Paragraph by auditor of
the company?
CA Piyush, auditor of the company, has relied only upon management representation in this regard. Besides,
he has decided to include the said matter in “Emphasis of Matter” Paragraph in audit report.
How do you view decision to include above matter in “Emphasis of Matter” Paragraph by auditor of the
company?

Answer 22
In accordance with SA 706, Emphasis of Matter Paragraph is a paragraph included in the auditor’s report
that refers to a matter appropriately presented or disclosed in the financial statements that, in the
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 CA SANIDHYA SARAF 7.15

auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial
statements.
As per SA 706, the objective of the auditor, having formed an opinion on the financial statements, is to
draw users’ attention, when in the auditor’s judgment it is necessary to do so, by way of clear additional
communication in the auditor’s report, to: -
(a) A matter, although appropriately presented or disclosed in the financial statements, that is of
such importance that it is fundamental to users’ understanding of the financial statements or
(b) As appropriate, any other matter that is relevant to users’ understanding of the audit, the
auditor’s responsibilities or the auditor’s report.
Further, the auditor shall include an Emphasis of Matter paragraph in the auditor’s report provided the
auditor would not be required to modify the opinion in accordance with SA 705 as a result of the matter.
In the given situation, auditor has relied upon management representation letter only. He has not
performed any other audit procedures like verifying contracts with customers, status of arbitration
proceedings etc. Since management representations by themselves do not constitute sufficient
appropriate evidence, performing necessary audit procedures may lead auditor to conclude that
modification in opinion is necessary. In such circumstances, matter cannot be included in Emphasis of
matter Paragraph.
Therefore, auditor should form his opinion by performing necessary audit procedures and obtaining
sufficient appropriate evidence. It is only when he concludes that modification of opinion is not required
as a result of said matter in terms of SA 705, the said matter may be included in Emphasis of Matter
paragraph.

ILLUSTRATION
Question 23
CA Sameer is the statutory auditor of Tram Fram Ltd. for the FY 2023-24. While concluding the audit CA
Sameer decided to issue an unmodified opinion, though he also concluded that a material uncertainty
exists with respect to the company’s ability to continue as a going concern on account of a pending
litigation related to labour laws. He is of the view that the company has made appropriate disclosures
with respect to such pending litigation in the notes to accounts annexed to the financial statements of
Tram Fram Ltd. for the FY 2023-24. Explain how CA Sameer will deal with the above situation in his
auditor’s report (draft the relevant portion of the auditor’s report).
Answer 23
Material Uncertainty Related to Going Concern
We draw attention to Note 10 in the financial statements, which indicates that the outcome of a litigation
on account of labour laws is pending in case of the company during the year 31 March, 2024. As stated in
Note 11, this event or condition, indicate that a material uncertainty exists that may cast significant doubt
on the Company’s ability to continue as a going concern. Our opinion is not modified in respect of this
matter.

Question 24
The following illustrates the presentation in the auditor’s report if the auditor has determined there
are no key audit matters to communicate:
Key Audit Matters
[Except for the matter described in the Basis for Qualified (Adverse) Opinion section or Material
Uncertainty Related to Going Concern section,] We have determined that there are no [other] key audit
matters to communicate in our report.]

Question 25
XYZ Ltd. is a company engaged in the manufacture of cranes. CA Sudhir is the statutory auditor of the
company for the FY 2023-24. The company has taken long term funding for fixed capital requirements
and short-term funding for its working capital requirements. During the course of audit, CA Sudhir
found that the company’s financing arrangements are about to expire and the company is unable to re-
negotiate or obtain the replacement financing. As such the company may be unable to realize its assets
and discharge its liabilities in the normal course of business. Notes to accounts annexed to the financial
statements discuss the magnitude of financing arrangements, the expiration and the total financing
arrangements; however, the financial statements do not include discussion on the impact or the
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 CA SANIDHYA SARAF 7.16

availability of refinancing. Thus, the financial statements (and notes thereto) do not fully disclose this
fact. What kind of opinion should CA Sudhir issue in case of XYZ Ltd.?
Answer 25
In the present case, XYZ Ltd. is unable to re- negotiate or obtain the replacement financing for its long
term and short-term funding requirements. This situation indicates the existence of a material uncertainty
that may cast significant doubt on the Company’s ability to continue as a going concern and therefore,
XYZ Ltd. may be unable to realize its assets and discharge its liabilities in the normal course of business.
Further, the financial statements of XYZ Ltd. do not disclose this fact adequately.
Thus, the financial statements of XYZ Ltd. are materially misstated due to the inadequate disclosure of
the material uncertainty. CA Sudhir will express a qualified opinion as the effects on the financial
statements of this inadequate disclosure are material but not pervasive to the financial statements.
The relevant extract of the Qualified Opinion Paragraph and Basis for Qualified Opinion paragraph is as
under:
Qualified Opinion
In our opinion and to the best of our information and according to the explanations given to us, except
for the incomplete disclosure of the information referred to in the Basis for Qualified Opinion section of
our report, the aforesaid standalone financial statements give the information required by the Act in the
manner so required and give a true and fair view in conformity with the accounting principles generally
accepted in India, of the state of affairs of XYZ Ltd. as at March 31, 2024, and profit/loss, for the year
ended on that date.
Basis for Qualified Opinion
As discussed in Note 6, the Company’s financing arrangements are about to expire and the Company has
been unable to conclude renegotiations or obtain replacement financing. This situation indicates that a
material uncertainty exists that may cast significant doubt on the Company’s ability to continue as a going
concern. The financial statements do not adequately disclose this matter.

Question 26
ABC Ltd. is a company engaged in the manufacture of iron and steel bars. PP & Associates are the
statutory auditors of ABC Ltd. for FY 2023-24. During the course of audit, CA Prakash, the engagement
partner, found that the Company’s financing arrangements have expired, and the amount outstanding
was payable on March 31, 2024. The Company has been unable to re-negotiate or obtain replacement
financing and is considering filing for bankruptcy. These events indicate a material uncertainty that may
cast significant doubt on the Company’s ability to continue as a going concern and therefore it may be
unable to realize its assets and discharge its liabilities in the normal course of business. The financial
statements (and notes thereto) do not disclose this fact. What opinion should CA Prakash express in
the case of ABC Ltd.?
Answer 26
In the present case based on the audit evidence obtained, CA Prakash has concluded that a material
uncertainty exists related to events or conditions that may cast significant doubt on the entity’s ability to
continue as a going concern, and the entity is considering bankruptcy. The financial statements of ABC
Ltd. omit the required disclosures relating to the material uncertainty.
In such circumstances, CA Prakash should express an adverse opinion because the effects on the financial
statements of such omission are material and pervasive.
The relevant extract of the Adverse Opinion Paragraph and Basis for Adverse Opinion paragraph is as
under:
Adverse Opinion
In our opinion, because of the omission of the information mentioned in the Basis for Adverse Opinion
section of our report, the accompanying financial statements do not present fairly, the financial position
of the entity as at March 31, 2024, and of its financial performance and its cash flows for the year then
ended in accordance with the Accounting Standards issued by the Institute of Chartered Accountants of
India.
Basis for Adverse Opinion
The financing arrangements of ABC Ltd. have expired, and the amount outstanding was payable on March
31, 2024. The entity has been unable to conclude re-negotiations or obtain replacement financing and is
considering filing for bankruptcy. This situation indicates that a material uncertainty exists that may cast
significant doubt on the Company’s ability to continue as a going concern. The financial statements do
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 CA SANIDHYA SARAF 7.17

not adequately disclose this fact.

Question 27
MNO Ltd. is a power generating company having its plants in the northeastern states of the country.
For the FY 2023-24, M/s PRT & Associates are the statutory auditors of the company. During the audit,
the audit team was unable to obtain sufficient appropriate audit evidence about a single element of
the consolidated financial statements. That is, the auditor was also unable to obtain audit evidence
about the financial information of a joint venture investment (in XYZ Ltd.) that represents over 90% of
the entity’s net assets. What kind of opinion should the statutory auditor’s issue in such case?
Answer 27
M/s PRT & Associates are unable to obtain sufficient appropriate audit evidence about the financial
information of a joint venture investment that represents over 90% of the entity’s net assets. The possible
effects of this inability to obtain sufficient appropriate audit evidence are both material and pervasive to
the consolidated financial statements.
Therefore, the statutory auditor should issue a disclaimer of opinion.
The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of Opinion
paragraph is as under:
Disclaimer of Opinion
We do not express an opinion on the accompanying financial statements of MNO Ltd. Because of the
significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have
not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on
these financial statements.
Basis for Disclaimer of Opinion
The Group’s investment in its joint venture XYZ Company is carried at ₹ 95 crores on the Group’s
consolidated balance sheet, which represents over 90% of the Group’s net assets as at March 31, 2024.
We were not allowed access to the management and the auditors of XYZ Company, including XYZ
Company’s auditors’ audit documentation. As a result, we were unable to determine whether any
adjustments were necessary in respect of the Group’s proportional share of XYZ Company’s assets that it
controls jointly, its proportional share of XYZ Company’s liabilities for which it is jointly responsible, its
proportional share of XYZ’s income and expenses for the year, (and the elements making up the
consolidated statement of changes in equity) and the consolidated cash flow statement.

Question 28
CA Yash is the statutory auditor of Laksmi Vardhan Limited for the FY 2023-24. In respect of loans and
advances of ₹ 55,00,000/- given to Sarvagya Private Limited, the Company has not furnished any
agreement to CA Yash and in absence of the same, he is unable to verify the terms of repayment,
chargeability of interest and other terms.
What kind of opinion should CA Yash give in such situation?
Answer 28
In the present case, with respect to loans and advances of ₹ 55,00,000/- given to Sarvagya Private Limited,
the Company has not furnished any agreement to CA Yash. In absence of such agreement, CA Yash is
unable to verify the terms of repayment, chargeability of interest and other terms. For an auditor, while
verifying any loans and advances, one of the most important audit evidences is the loan agreement.
Therefore, the absence of such a document in the present case, tantamount to a material misstatement
in the financial statements of the company. However, the inability of CA Yash to obtain such audit
evidence is though material but not pervasive so as to require him to give a disclaimer of opinion.
Thus, in the present case, CA Yash should give a qualified opinieon
The relevant extract of the Qualified Opinion Paragraph and Basis for Qualified Opinion paragraph is as
under:
Qualified Opinion
In our opinion and to the best of our information and according to the explanations given to us, except
for the possible effects of the matter described in the Basis for Qualified Opinion section of our report,
the financial statements of Laksmi Vardhan Limited give a true and fair view in conformity with the
accounting principles generally accepted in India, of the state of affairs of the Company as on 31.03.2024
and profit/ loss for the year ended on that date.
Basis for Qualified Opinion
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 CA SANIDHYA SARAF 7.18

The Company is unable to furnish the loan agreement with respect to loans and advances of ₹ 55,00,000/-
given to Sarvagya Private Limited. Consequently, in absence of such agreement, we are unable to verify
the terms of repayment, chargeability of interest and other terms.

Question 29
In the financial year 2023-24, MSD Ltd. faced an extraordinary event (earthquake), which destroyed a
lot of business activity of the company. These circumstances indicate material uncertainty about the
company’s ability to continue as going concern. Due to such an event, it may not be possible for the
company to realize its assets or pay off the liabilities during the regular course of its business. The
financial statement and notes to the financial statements of the company do not disclose this fact.
What kind of opinion should the statutory auditor of MSD Ltd. issue in such circumstances?
Answer 29
In the present case, there exists a material uncertainty that casts a significant doubt on the company’s
ability to continue as going concern and the same is not disclosed in the financial statements of MSD Ltd.

As such, the financial statements of MSD Ltd. for the FY 2023-24 are materially misstated and the effect
of the misstatement is so material and pervasive on the financial statements that giving only a qualified
opinion will be insufficient and therefore the statutory auditor of MSD Ltd. should issue an adverse
opinion.
The relevant extract of the Adverse Opinion Paragraph and Basis for Adverse Opinion paragraph is as
under: Adverse Opinion
In our opinion, because of the omission of the information mentioned in the Basis for Adverse Opinion
section of our report, the accompanying financial statements do not present fairly, the financial position
of MSD Ltd. as on March 31, 2024, and of its financial performance and its cash flows for the year then
ended in accordance with the Accounting Standards issued by the Institute of Chartered Accountants of
India.
Basis for Adverse Opinion
MSD Ltd. has faced an extraordinary event (earthquake), which destroyed a lot of business activity of the
company. Due to such an event, it may not be possible for the company to realize its assets or pay off the
liabilities during the regular course of its business. This situation indicates that a material uncertainty
exists that may cast significant doubt on the Company’s ability to continue as a going concern. The
financial statement and notes to the financial statements of the company do not disclose this fact.

Question 30
CA Abhimanyu is the statutory auditor of PQR Ltd. for the FY 2023-24. During the course of audit CA
Abhimanyu noticed the following:
1. With respect to the debtors amounting to ₹ 150 crores, no balance confirmation was received
by the audit team. Further, there have been defaults on the payment obligations by debtors on
the due dates during the year under audit. The Company has created a provision for doubtful
debts to the tune of ₹25 crores. during the year under audit. The Company has stated that the
provision is based on receivables which are older than 36 months, which according to the audit
team is inadequate and as such the audit team is unable to ascertain the carrying value of trade
receivables.
2. Further, in respect of Inventories (which constitutes 40% of the total assets of the company),
during the reporting period, the management has not undertaken physical verification of
inventories at periodic intervals. Also, the Company has not maintained adequate inventory
records at the factory. The audit team was unable to undertake the physical inventory count as
such the value of inventory could not be verified.
Under the above circumstances what kind of opinion should CA Abhimanyu give?
Answer 30
In the present case, CA Abhimanyu is unable to obtain sufficient and appropriate audit evidence with
respect to the following:
1. The balance confirmation with respect to debtors amounting to ₹ 150 crores is not available. Further
there has been default in payment by the debtors and the provision so made is not adequate. The
audit team is also unable ascertain the carrying value of trade receivables.
2. With respect to 40% of the company’s inventory, neither the physical verification has been done by
Chapter 7 Reporting
 CA SANIDHYA SARAF 7.19

the management nor are adequate inventory records maintained. The audit team is also unable to
undertake the physical inventory count as such the value of inventory could not be verified.
In the above two circumstances the auditor is unable to obtain sufficient appropriate audit evidence on
which to base the opinion, and the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive.
Thus, CA Abhimanyu should give a Disclaimer of Opinion.
The relevant extract of the Disclaimer of Opinion Paragraph and Basis for Disclaimer of Opinion
paragraph is as under:
Disclaimer of Opinion
We do not express an opinion on the accompanying financial statements of PQR Ltd. Because of the
significance of the matters described in the Basis for Disclaimer of Opinion section of our report, we have
not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion on
these financial statements.
Basis for Disclaimer of Opinion
We are unable to obtain balance confirmation with respect to the debtors amounting to ₹ 150 crores.
Further, there have been defaults on the payment obligations by debtors on the due dates during the
year under audit. The Company has created a provision for doubtful debts to the tune of ₹25 Crores during
the year under audit which is inadequate in the circumstances of the company. The carrying value of trade
receivables could not be ascertained.
Further, in respect of Inventories (which constitutes 40% of the total assets of the company), during the
reporting period, the management has not undertaken physical verification of inventories at periodic
intervals. Also, the Company has not maintained adequate inventory records at the factory. We were
unable to undertake the physical inventory count and as such the value of inventory could not be verified.

Question 31
In respect of the audit of BDS Ltd., the statutory auditor of the company noticed some matters. The
statutory auditor wants to draw the user’s attention towards such matters, though his opinion is not
modified in respect of such matters. Draft the relevant paragraphs of the audit report for the following
matters:
i. The company has a plan to resume its construction activities with respect to one of its thermal power
project, The activity of such power plant was suspended in the F Y 2021-22 . The thermal power
project comprises of the plant and equipment amounting to ₹ 5.95 crore and capital work in progress
of ₹ 147.50 crore.
ii. The financial statements of 5 branches are included in the Standalone Financial Statements of BDS
Ltd. whose financial statements reflect total assets of ₹ 90 crores as at 31.03.2024 and total revenue
from operations of ₹ 40 crores for the year ended on that date. The financial statements of these
branches have been audited by the branch auditors.
Answer 31
Emphasis of Matter
We draw attention to the following note of the standalone financial statements:
Note 27 regarding the plans of the Company to resume construction/developmental activities of a
thermal power project. The carrying amounts related to the project as at 31st March, 2024 comprise of
plant and equipment of ₹ 5.95 crore and capital work in progress of ₹ 147.50 crore.
Our opinion is not modified in respect of this matter.
Other Matter
We did not audited the financial statements of 5 branches included in the Standalone Financial
Statements of the company whose financial statements reflect total assets of ₹ 90 crores as at 31.03.2024
and total revenue from operations of ₹ 40 crores for the year ended on that date. The financial statements
of these branches have been audited by the branch auditors whose reports have been furnished to us,
and our opinion in so far as it relates to the amounts and disclosures included in respect of these branches,
is based solely on the report of the branch auditors.
Our opinion is not modified in respect of this matter.

Chapter 7 Reporting
 8.1
CA SANIDHYA SARAF

Chapter 8
Specialized Areas

Question 1
CA Y is the auditor of Stekk Ltd., a company that recently faced material misstatements in its financial
records, leading to an adverse opinion on the audited financial statements for the financial year 2023 -
24. Now, the management of the company has prepared summary financial statements derived from
the audited financial statements and requested CA Y to express his opinion on these summaries. What
additional points should CA Y consider when expressing an opinion on these summary financial
statements?
Answer 1
When the auditor’s report on the audited financial statements contains an adverse opinion or a disclaimer of
opinion, the auditor’s report on the summary financial statements shall, in addition to the elements
 State that the auditor’s report on the audited financial statements contains an adverse opinion or
disclaimer of opinion;
 Describe the basis for that adverse opinion or disclaimer of opinion; and
 State that, as a result of the adverse opinion or disclaimer of opinion on the audited financial statements,
it is inappropriate to express an opinion on the summary financial statements.
If the summary financial statements are not consistent, in all material respects, with or are not a fair summary
of the audited financial statements, in accordance with the applied criteria, and management does not agree
to make the necessary changes, the auditor shall express an adverse opinion on the summary financial
statements.

Question 2
Mr. BK has been engaged by XYZ Ltd. to report on summary financial statements derived from the
financial statements audited by him in accordance with SAs. Mr. BK wants to determine whether the
applied criteria are acceptable before accepting such assignment. Guide him the factors affecting
auditor's determination of the acceptability of applied criteria as per relevant Standard on Auditing.
Answer 2
In the given situation, Mr. BK has been engaged by XYZ Ltd. to report on summary financial statements
derived from the financial statements audited by him in accordance with SAs. Mr. BK wants to determine
whether the applied criteria are acceptable before accepting such assignment.
As per SA 810, “Engagements to Report on Summary Financial Statements”, before accepting an
engagement to report on summary of financial statements, the auditor shall determine whether applied
criteria are acceptable. ‘Applied criteria’ refers to the criteria applied by management in the preparation
of the summary financial statements.
Factors affecting the auditor’s determination of the acceptability of the applied criteria are:
 The nature of the entity;
 The purpose of the summary financial statements;
 The information needs of the intended users of the summary financial
statements; and
 Whether the applied criteria will result in summary financial statements that are
not misleading in the circumstances.

Question 3
When auditor’s report on the audited financial statements contains a qualified opinion, but the auditor
is satisfied that the summary financial statements are a fair summary of the audited financial
statements, in accordance with the applied criteria, which other matters shall the auditor’s report on
the summary financial statements contain in addition to elements of auditor’s report described in SA
810? If summary financial statements are not a fair summary of the audited financial statements, in
accordance with the applied criteria, and management does not agree to make the necessary changes,
what are implications for auditor’s opinion on summary financial statements?

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 8.2
CA SANIDHYA SARAF

Answer 3
If the auditor is satisfied that the summary financial statements are consistent, in all material respects,
with or are a fair summary of the audited financial statements, in accordance with the applied criteria, he
can issue an unmodified opinion. However, when auditor’s report on audited financial statements
contains a qualified opinion, the auditor’s report on the summary financial statements shall, also contain
following:
(a) State that the auditor’s report on the audited financial statements contains a qualified opinion
(b) Describe:
(i) The basis for the qualified opinion on the audited financial statements, and that qualified opinion in
the auditor’s report on the audited financial statements; and
(ii) The effect thereof on the summary financial statements, if any
If the auditor concludes that the applied criteria are unacceptable or is unable to obtain the agreement of
management as discussed above, the auditor shall not accept the engagement to report on the summary
financial statements, unless required by law or regulation to do so. An engagement conducted in
accordance with such law or regulation does not comply with this SA. Accordingly, the auditor’s report on
the summary financial statements shall not indicate that the
engagement was conducted in accordance with this SA. The auditor shall include appropriate
reference to this fact in the terms of the engagement. The auditor shall also determine the effect that this
may have on the engagement to audit the financial statements from which the summary financial
statements are derived.

Question 4
CA Madhur is auditor of a company and has issued audit report dated 15th June of a particular year. The
audit report on summary financial statements derived from such audited financial statements is dated
15th July of that particular year. Discuss whether there exists any additional reporting responsibility for
auditor in such a situation in respect of audit report on summary financial statements.
Answer 4
The audit report on summary financial statements derived from audited financial statements is dated 15th
July of that particular year. However, the audit report on audited financial statements is dated 15th June
of that year.
In the above situation, the auditor’s report on summary financial statements should state that the
summary financial statements and the audited financial statements do not reflect the effects of events
that occurred subsequent to the date of the auditor’s report on the audited financial statements.

Question 5
CA P is auditor of a company responsible for auditing the complete set of financial statements. He
intends to express adverse opinion on complete set of financial statements considering conclusions
drawn by him during course of audit. He is also auditing trade receivables of company for the same
period in a separate engagement. Can he express an unmodified opinion in respect of trade receivables?
If so, discuss those circumstances. (SA 805)
Answer 5
If the auditor undertakes an engagement to report on a single financial statement or on a specific element
of a financial statement in conjunction with an engagement to audit the entity’s complete set of financial
statements, the auditor shall express a separate opinion for each engagement.

If the auditor concludes that it is necessary to express an adverse opinion or disclaim an opinion on the
entity’s complete set of financial statements as a whole, Revised SA 705 does not permit the auditor to
include in the same auditor’s report an unmodified opinion on a single financial statement that forms part
of those financial statements or on a specific element of those financial statements. This is because such
an unmodified opinion would contradict the adverse opinion or disclaimer of opinion on the entity’s
complete set of financial statements as a whole.

If the auditor concludes that it is necessary to express an adverse opinion or disclaim an opinion on the
entity’s complete set of financial statements as a whole but, in the context of a separate audit of a specific

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CA SANIDHYA SARAF

element that is included in those financial statements, the auditor nevertheless considers it appropriate
to express an unmodified opinion on that element, the auditor shall only do so if:
a) The auditor is not prohibited by law or regulation from doing so;
b) That opinion is expressed in an auditor’s report that is not published together with the auditor’s
report containing the adverse opinion or disclaimer of opinion; and
c) The specific element does not constitute a major portion of the entity’s complete set of financial
statements.

Question 6
SA 800 deals with special considerations applicable in respect of audit of financial statements prepared
in accordance with special purpose framework. Explain, by giving examples, the meaning of special
purpose framework (SA 800)
Answer 6
SA 800 defines special purpose framework as a financial reporting framework designed to meet the
financial information needs of specific users. The financial reporting framework may be a fair presentation
framework or a compliance framework.
The requirements of the applicable financial reporting framework determine the form and content of the
financial statements and what constitutes a complete set of financial statements.
Examples of Special purpose framework: -
 The cash receipts and disbursements basis of accounting for cash flow information that an entity
may be requested to prepare for creditors.
 The financial reporting provisions established by a regulator to meet the requirements of that
regulator
 The financial reporting provisions of a contract, such as a bond indenture, a loan agreement, or a
project grant

Question 7
CA Y is auditor of a company. He has expressed adverse opinion on audited financial statements. What
additional points he has to keep in mind while expressing opinion on summary financial statements
derived from such audited financial statements? (SA 810)
Answer 7
When the auditor’s report on the audited financial statements contains a qualified opinion, an Emphasis
of Matter paragraph, or an Other Matter paragraph, but the auditor is satisfied that the summary financial
statements are consistent, in all material respects, with or are a fair summary of the audited financial
statements, in accordance with the applied criteria, the auditor’s report on the summary financial
statements shall, also contain followings: -
(a) State that the auditor’s report on the audited financial statements includes a qualified opinion,
an Emphasis of Matter paragraph, an Other Matter paragraph, a Material Uncertainty Related
to Going Concern section, communication of key audit matters, or a statement that describes
an uncorrected material misstatement of the other information; and
(b) Describe
(i) The basis for the qualified opinion on the audited financial statements and the
effect thereof, if any, on the summary financial statements;
(ii) The matter referred to in the Emphasis of Matter paragraph or the Other Matter
paragraph or the Material Uncertainty Related to Going Concern section in the
auditor’s report on the audited financial statements; and the effect(s) thereof, if
any, on the summary financial statements; or
(iii) The uncorrected material misstatement of the other information and the effect(s)
thereof, if any, on the information included in a document containing the summary
financial statements and the auditor’s report thereon.
When the auditor’s report on the audited financial statements contains an adverse opinion or a disclaimer
of opinion, the auditor’s report on the summary financial statements shall, in addition to the elements :
a) State that the auditor’s report on the audited financial statements contains an adverse
opinion or disclaimer of opinion;

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b) Describe the basis for that adverse opinion or disclaimer of opinion; and
c) State that, as a result of the adverse opinion or disclaimer of opinion on the audited financial
statements, it is inappropriate to express an opinion on the summary financial statements.

Question 8
CA Lalita is auditor of a company. She is also offered professional work of audit of financial statements
prepared specifically for meeting requirements of a loan agreement for the same period. She chooses
to accept work and has made up her mind to disclose this fact in “Emphasis of Matter Paragraph” in
audit report to be issued by her for this specific engagement. Is her approach proper? (SA 805)
Answer 8
In the given situation, the approach of CA Lalita is proper. There is no bar upon accepting such an
engagement even though she is the auditor of the company. Besides, she has intended to disclose this
fact in “Emphasis of Matter Paragraph” of the audit report to be issued by her for such specific
engagement.

Question 9
CA Lakshmi has prepared a draft audit report for financial statements of X Ltd. prepared in accordance
with financial reporting provisions of a contract with Y Ltd. She has drafted an unmodified opinion to
be given in audit report. Besides, she has also drawn attention in draft audit report to Note “A “to the
financial statements which describes the basis of accounting (under the heading “Basis of accounting”).
How she should ensure that report would not be misused? Draft a suitable para to be included in the
report for this purpose. (SA 800)
Answer 9
SHE may consider it appropriate to indicate that the auditor’s report is intended solely for specific users.
Depending on the law or regulation applicable, this may be achieved by restricting the distribution or use
of the auditor’s report. In these circumstances, the paragraph alerting the readers may be expanded to
include these other matters and the heading modified accordingly. The draft para should read as under: -
Basis of Accounting and Restriction on Distribution and Use
Without modifying our opinion, we draw attention to Note A to the financial statements, which describes
the basis of accounting. The financial statements are prepared to assist the company to comply with the
financial reporting provisions of the contract referred to above. As a result, the financial statements may
not be suitable for another purpose. Our report is intended solely for X Ltd. and Y Ltd. and should not be
distributed to or used by parties other than X Ltd. and Y Ltd.

Question 10
CA M. Surya is auditor for financial statements of an entity prepared in accordance with financial
reporting provisions of a contract. He is also offered an audit of trade receivables appearing in above
financial statements. Can he accept such an engagement? Discuss brief outline of his audit approach in
such a situation. (SA 805)
Answer 10
The single financial statement or the specific element, account or item of a financial statement may be
prepared in accordance with a general or special purpose framework. If prepared in accordance with a
special purpose framework, SA 800 also applies to the audit.
In the given case, financial statements of the entity are prepared in accordance with financial reporting
provisions of a contract. It is a special purpose framework. The auditor of financial statements prepared
in accordance with the special purpose framework is also offered to audit trade receivables appearing in
the above financial statements, which relate to the audit of the elements of financial statements prepared
in accordance with the special purpose framework. Hence, his audit approach should include considering
requirements of both SA 800 and SA 805.

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CA SANIDHYA SARAF

Question 11
CA G is offered appointment for audit of trade payables of financial statements of a company. However,
financial statements prepared under Companies Act, 2013 are audited by CA Jignesh. Discuss why it
would be practically difficult for CA G to perform such an audit. (SA 805)
Answer 11
Compliance with the requirements of SAs relevant to the audit of a single financial statement or of a
specific element of a financial statement may not be practicable when the auditor is not also engaged to
audit the entity’s complete set of financial statements. In such cases, the auditor often does not have the
same understanding of the entity and its environment, including its internal control, as an auditor who
also audits the entity’s complete set of financial statements. Accordingly, the auditor may need further
evidence to corroborate audit evidence acquired from the accounting records.
In the case of an audit of a specific element of a financial statement, certain SAs require audit work that
may be disproportionate to the element being audited. If the auditor concludes that an audit of a single
financial statement or of a specific element of a financial statement in accordance with SAs may not be
practicable, the auditor may discuss with management whether another type of engagement might be
more practicable.

Question 12
Consider that the audit report on financial statements issued by CA Madhur for above said company
contains qualified opinion. Can he issue an unmodified opinion on summary financial statements
derived from audited financial statements? Discuss. (SA 810)
Answer 12
If the auditor is satisfied that the summary financial statements are consistent, in all material respects,
with or are a fair summary of the audited financial statements, in accordance with the applied criteria, he
can issue an unmodified opinion.
However, when auditor’s report on audited financial statements contains a qualified opinion, the auditor’s
report on the summary financial statements shall, also contain following:
(a) State that the auditor’s report on the audited financial statements contains a qualified opinion
(b) Describe:
(i) The basis for the qualified opinion on the audited financial statements, and that qualified
opinion in the auditor’s report on the audited financial statements; and
(ii) The effect thereof on the summary financial statements, if any. Hence, above points should
be included by CA Madhur.

INTEGRATEDCASE SCENARIO
Given below is an extract of abridged financial statements of schemes of “Smart Investment Mutual
Fund”. The abridged financial statements have been derived from audited financial statements of the
schemes of “Smart Investment Mutual Fund” as at 31st March 20XX and for year ended 31st March,20XX.
Abridged Balance sheet as at 31st March 20XX (in ₹ Lacs)
Liabilities Smart investment equity and Smart investment equity
debt fund savings fund
Unit Capital 20000.00 15000.00
Reserve and Surplus 160000.00 80000.00
Other current liabilities & 100.00 100.00
provisions
Total 180100.00 95100.00
Assets
Investments 170000.00 90000.00
Deposits 100.00 100.00
Other Current assets 10000.00 5000.00
Total 180100.00 95100.00
Abridged revenue account for year ended 31st March 20XX (In₹ Lacs)

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CA SANIDHYA SARAF

Income Smart investment equity and Smart investment equity

debt fund savings fund
Income 34000.00 1000.00
Expenses and losses 3400.00 1500.00
Net realized gains 30600.00 (500.00)
Add: Change in unrealized 2000.00 700.00
appreciation in value of
investments
Net Surplus 32600.00 200.00
Dividend appropriation 3000.00 50.00
Retained Surplus 29600.00 150.00
The abridged financial statements of the Schemes of the Fund have been prepared by Board of Trustees
of Fund pursuant to SEBI regulations and in accordance with format prescribed by SEBI. Previous year
figures have been ignored for purpose of case.
Unmodified opinion has been expressed by auditor in audited financial statements of the schemes of
“Smart Investment Mutual Fund” as at 31st March 20XX and for year ended 31st March, 20XX.

MULTIPLE CHOICE QUESTIONS (MCQS)

1. Given the above extract of abridged financial statements and description, which of the following
statements is most appropriate?
(a) The auditor may presume that criteria applied by the Board of Trustees in the preparation of the
abridged financial statements are acceptable.
(b) The auditor cannot presume that criteria applied by the Board of Trustees in preparation of
abridged financial statements are acceptable.
(c) The abridged financial statements have been prepared by the Board of Trustees. The auditor cannot
ordinarily accept criteria applied by them for the preparation of such abridged financial statements
before detailed evaluation.
(d) The auditor is duty bound to accept the criteria applied by the Board of Trustees in the preparation
of abridged financial statements.
Ans: (a)

2. Which of the following statements in reference to abridged financial statements is not in accordance with
the requirements of SA 810?
(a) The notes to accounts should specifically disclose that these abridged financial statements have
been derived from audited financial statements.
(b) The Board of Trustees has disclosed that audited financial statements are available on the website
of the company.
(c) It should be should be stated in the auditor’s report that abridged financial statements have been
compared with the related information in the audited financial statements to determine whether
the abridged financial statements agree with or can be recalculated from the related information
in the audited financial statements.
(d) It should be stated in auditor’s report that reading the abridged financial statements is not a
substitute for reading the audited financial statements of the Schemes of the Fund.
Ans: (c)

3. Which of the following paras is most appropriate to be included under heading “Auditor’s responsibility”
in the auditor’s report?
(a) Our responsibility is to express an opinion on the Abridged financial statements based on our
procedures, which were conducted in accordance with Standards on Auditing issued by the Institute
of Chartered Accountants of India.
(b) Our responsibility is to express an opinion on the Abridged financial statements based on our
procedures, which were conducted in accordance with Standard on Auditing (SA) 810,
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CA SANIDHYA SARAF

“Engagements to Report on Summary Financial Statements” issued by the Institute of Chartered

Accountants of India.
(c) Our responsibility is to express an opinion on the Abridged financial statements based on our
procedures, which were conducted in accordance with Standards on Auditing adapted in
circumstances including (SA) 810, “Engagements to Report on Summary Financial Statements”
issued by the Institute of Chartered Accountants of India.
(d) Our responsibility is to express an opinion on the Abridged financial statements based on our
procedures, which were conducted in accordance with SEBI regulations and Standards on Auditing
adapted in circumstances including (SA) 810, “Engagements to Report on Summary Financial
Statements” issued by the Institute of Chartered Accountants of India.
Ans: (b)

4. Which of the following paras is most appropriate to be included under heading “Opinion” in auditor’s
report?
(a) In our opinion, the abridged financial statements, derived from the audited financial statements of
the Schemes of the Fund as at March 31, 20XX and for the year ended March 31, 20XX are a fair
summary of those financial statements, and are in accordance with the accounting policies and
standards specified in SEBI regulations and generally accepted accounting principles in India to the
extent applicable.
(b) In our opinion, the abridged financial statements, as at March 31, 20XX and for the year ended
March 31, 20XX are a fair summary of those financial statements.
(c) In our opinion, the abridged financial statements, derived from the audited financial statements of
the Schemes of the Fund as at March 31, 20XX and for the year ended March 31, 20XX are consistent
with audited financial statements and are in accordance with the accounting policies and standards
specified in SEBI regulations and generally accepted accounting principles in India to the extent
applicable.
(d) In our opinion, the abridged financial statements, derived from the audited financial statements of
the Schemes of the Fund as at March 31, 20XX and for the year ended March 31, 20XX are consistent
with audited financial statements
Ans: (a)
.
5. Which of the following is usually not an element of audit report on abridged financial statements in
accordance with SA 810?
(a) Emphasis of matter paragraph.
(b) Other matter paragraph.
(c) Management’s responsibility for abridged financial statements.
(d) Key audit matters.
Ans: (d)

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Chapter 9
Audit – related Services

Question 1
MNC Limited has engaged CA Lalit to help the company in compilation of the financial information. CA
Lalit explained his team members, the scope of work and the responsibilities under this engagement.
The team members have done mostly audit engagements and do not have exposure to compilation
engagements. Discuss the key issues that CA Lalit should deliberate and guide his team members with
respect to this engagement and the manner it differs from assurance engagements. Give your views on
the applicability of SQC 1 to this engagement.
Answer 1
As per SRS 4410, Compilation engagement is an engagement in which a practitioner applies accounting
and financial reporting expertise to assist management in the preparation and presentation of financial
information of an entity in accordance with an applicable financial reporting framework and issues a
report.
Management may request a professional accountant in public practice to assist with the preparation and
presentation of financial information of an entity. Financial information that is the subject of a compilation
engagement may be required for various purposes including: -
 To comply with mandatory periodic financial reporting requirements established in law or regulation,
if any or
 For purposes unrelated to mandatory financial reporting under relevant law or regulation, including
for example
 For management or those charged with governance, prepared on a basis appropriate for their
particular purposes (such as preparation of financial information for internal use).
 For periodic financial reporting undertaken for external parties under a contract or other form of
agreement (such as financial information provided to a funding body to support provision or
continuation of a grant).
 For transactional purposes, for example to support a transaction involving changes to the entity’s
ownership or financing structure (such as for a merger or acquisition).
“Assurance engagement” means an engagement in which a practitioner expresses a conclusion designed
to enhance the degree of confidence of the intended users other than the responsible party about the
outcome of the evaluation or measurement of a subject matter against criteria. It means that the
practitioner gives an opinion about specific information due to which users of information are able to
make confident decisions knowing well that chance of information being incorrect is diminished.
A compilation engagement is not an assurance engagement. A compilation engagement does not require
the practitioner to verify the accuracy or completeness of the information provided by management for
the compilation, or otherwise to gather
evidence to express an audit opinion or a review conclusion on the preparation of the financial
information.
Further, SQC 1 is applicable to all Engagement and Quality Control Standards. Since SRS 4410 is also one
of Engagement and Quality Control Standards, SQC 1 applies to firms in respect of firm’s compilation
engagements too which is covered in Related Services.

Question 2
Brown Enterprises Limited has huge funds locked up in its trade receivables standing at around ` 100
crores as on 31st December, 2023. The management of the company wants to evaluate the validity of
the trade receivables to ensure reliability of financial reporting at the year end. The accounts
department has provided a list of trade receivables to the management containing about 1000 names,
their balances and contact/communication details spread in different parts of the country. The
company’s management has requested CA Kamna to take up this assignment and prepare a report for
management in accordance with professional standards. Despite not being statutory auditor of the
company, she decides to accept the above engagement.
(a) By explaining the nature of engagement described above, discuss whether it was proper for her to
accept such engagement.

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 CA SANIDHYA SARAF 9.2

(b) While reporting, which precautions should be taken by her so that readers of the report do not
misunderstand its scope?
Answer 2
(a) The above situation involves an engagement to perform agreed-upon procedures. In such an
engagement, the auditor is engaged by the client to issue a report of factual findings based on
specified procedures performed on specified subject matter of specified elements, accounts or items
of a financial statement.
The management has requested CA Kamna to take up the assignment and prepare a report for
management in accordance with professional standards. Such type of engagement and its reporting
falls in purview of SRS 4400. The reference to auditor in SRS 4400 does not imply that a person
performing related services need necessarily be the auditor of entity’s financial statements. Hence,
a person performing related services need not necessarily be auditor of entity’s financial statements.
Therefore, it was proper for CA Kamna to accept the above engagement.
While reporting, she should take following precautions so that readers of report do not
misunderstand its scope: -
 A statement that the procedures performed do not constitute either an audit or a review and, as
such, no assurance is expressed.
 A statement that had the auditor performed additional procedures, an audit or a review, other
matters might have come to light that would have been reported.
 A statement that the report is restricted to those parties that have agreed to the procedures to
be performed.
 A statement (when applicable) that the report relates only to the elements, accounts, items or
financial and non-financial information specified and that it does not extend to the entity’s
financial statements taken as a whole.

Question 3
You have been appointed to compile the financial statements of Kings & Company (a partnership firm)
for tax purposes. During the course of your work, you discover that the inventory is grossly understated,
and the company has failed to apply applicable standards. On pointing out the same, the partners of
Kings & Company inform you that it is outside your scope since you are not conducting an audit and the
said figures duly certified by the firm should be accepted. Comment.
Answer 3
As per SRS 4410, “Compilation Engagements”, if the practitioner is unable to complete the engagement
because management has failed to provide records, documents, explanations or other information,
including significant judgments, as requested, the practitioner shall withdraw from the engagement and
inform management and those charged with governance of the reasons for withdrawing. If the
practitioner becomes aware during the course of the engagement that:
(a) The compiled financial information does not adequately refer to or describe the applicable financial
reporting framework
(b) Amendments to the compiled financial information are required for the financial information not to
be materially misstated; or
(c) The compiled financial information is otherwise misleading the practitioner shall propose the
appropriate amendments to management
If management declines or does not permit the practitioner to make the proposed amendments to the
compiled financial information, the practitioner shall withdraw from the engagement and inform
management and those charged with governance of the reasons for withdrawing.
If withdrawal from the engagement is not possible, the practitioner shall determine the professional and
legal responsibilities applicable in the circumstances.
The practitioner shall obtain an acknowledgement from management or those charged with governance,
as appropriate, that they have taken responsibility for the final version of the compiled financial
information

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 CA SANIDHYA SARAF 9.3

Question 4
List out few intended purposes of a “compilation engagement.” (SRS 4410)
Answer 4
a compilation engagement may be required
Financial information that is the subject of

for various purposes including-

For management or those charged with

governance, prepared on abasis
To comply with mandatory periodic appropriate for their particular purposes
finance reporting requirements (such as preparation of financial
established in law or regulation, if any or information for internal use).

For periodic financial reporting

For purposes unrelated to mandatory undertake for external parties under a
financial reporting under relevant law or contract or other form of agreement
regulation, including for example: - (such as financial information provided to
a funding body to support provisioner or
continuation of a grant).

For transactional purposes, for example

to support a transaction involving
changes to the entity’s ownership or
financing structure (such as for a merger
or acquisition).

Question 5
A Chartered Accountant is offered appointment for a compilation engagement to be performed under
SRS 4410. Is he required to comply with the ethical requirements of the Code of Ethics? Discuss briefly
(SRS 4410)
Answer 5
The practitioner shall comply with relevant ethical requirements. In complying with the Code of Ethics,
threats to the practitioner’s compliance with relevant ethical requirements are required to be identified
and appropriately addressed.
Being in nature of non-assurance engagement, independence requirements do not apply to compilation
engagements. However, laws or regulations may specify requirements or disclosure rules pertaining to
independence.

Question 6
How do “related services” differ from assurance engagements? (4400)
Answer 6
“Assurance engagement” means an engagement in which a practitioner expresses a conclusion designed
to enhance the degree of confidence of the intended users other than the responsible party about the
outcome of the evaluation or measurement of a subject matter against criteria. It means that the
practitioner gives an opinion about specific information due to which users of information are able to
make confident decisions knowing well that chance of information being incorrect is diminished.
Not all engagements performed by practitioners are assurance engagements. Other frequently performed
engagements that do not meet the definition of assurance engagements include: -
 The preparation of tax returns where no conclusion conveying assurance is expressed.
 Consulting (or advisory) engagements such as management and tax consulting.
 Engagements covered by Standards for Related Services, such as agreed-upon procedures
engagements and compilations of financial or other information.

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 CA SANIDHYA SARAF 9.4

Question 7
Discuss main documentation requirements to be taken care of by a practitioner while performing a
compilation engagement under SRS 4410.
Answer 7
The practitioner shall include in the engagement documentation
(a) Significant matters arising during the compilation engagement and how those matters were
addressed by the practitioner
(b) A record of how the compiled financial information reconciles with the underlying records,
documents, explanations and other information, provided by management and
(c) A copy of the final version of the compiled financial information for which management or those
charged with governance, as appropriate, has acknowledged their responsibility, and the
practitioner’s report.
The practitioner may consider also including in the engagement documentation a copy of the entity’s trial
balance, summary of significant accounting records or other information that the practitioner used to
perform the compilation.

Question 8
CA P has been appointed to compile the financial information of X Limited. CA P is confused whether
he should apply the same procedures which are required to be applied to conduct an audit or there are
some other procedures to discharge the duties under such an engagement. Define the characteristics
of Compilation Engagement. What should be the approach of CA P for performing the Engagement?
(4410)
Answer 8
Compilation engagement is an engagement in which a practitioner applies accounting and financial
reporting expertise to assist management in the preparation and presentation of financial information of
an entity in accordance with an applicable financial reporting framework and issues a report.
A compilation engagement is not an assurance engagement. A compilation engagement does not require
the practitioner to verify the accuracy or completeness of the information provided by management for
the compilation, or otherwise to gather evidence to express an audit opinion or a review conclusion on
the preparation of the financial information.
 The practitioner shall obtain an understanding of the following matters sufficient to be able to
perform the compilation engagement: -
a) The entity’s business and operations, including the entity’s accounting system and accounting
records and
b) The applicable financial reporting framework, including its application in the entity’s industry.
 The practitioner shall compile the financial information using the records, documents,
explanations and other information, including significant judgments, provided by management

 The practitioner shall discuss with management, or those charged with governance as
appropriate, those significant judgments, for which the practitioner has provided assistance in the
course of compiling the financial information.
 Prior to completion of the compilation engagement, the practitioner shall read the compiled
financial information in light of the practitioner’s understanding of the entity’s business and
operations, and of the applicable financial reporting framework.
 If, in the course of the compilation engagement, the practitioner becomes aware that the records,
documents, explanations or other information, including significant judgments, provided by
management for the compilation engagement are incomplete, inaccurate or otherwise
unsatisfactory, the practitioner shall bring that to the attention of management and request the
additional or corrected information.
 If the practitioner is unable to complete the engagement because management has failed to
provide records, documents, explanations or other information, including significant judgments, as
requested, the practitioner shall withdraw from the engagement and inform management and
those charged with governance of the reasons for withdrawing.
 If the practitioner becomes aware during the course of the engagement that: -
(a) The compiled financial information does not adequately refer to or describe the applicable
financial reporting framework
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 CA SANIDHYA SARAF 9.5

(b) Amendments to the compiled financial information are required for the financial information
not to be materially misstated; or
(c) The compiled financial information is otherwise misleading, the practitioner shall propose
the appropriate amendments to management.
 If management declines, or does not permit the practitioner to make the proposed amendments
to the compiled financial information, the practitioner shall withdraw from the engagement and
inform management and those charged with governance of the reasons for withdrawing.
 If withdrawal from the engagement is not possible, the practitioner shall determine the
professional and legal responsibilities applicable in the circumstances.
 The practitioner shall obtain an acknowledgement from management or those charged with
governance, as appropriate, that they have taken responsibility for the final version of the compiled
financial information.

Question 9
A company asks you to carry out the process of confirmation of its accounts receivables having balances
in excess of ₹ 10 lacs as per its books of accounts at the close of the year. The work to be performed
only involves preparing and sending confirmation requests to such parties, analysis of variations on
receipt of confirmations and submission of a report in accordance with professional standards. What
points have to be kept in mind for inclusion in the report specifically for such engagement? (4400)
Answer 9
The described engagement is an agreed-upon procedures engagement. Following points have to be kept
in mind for being included in the report: -
 A statement that the procedures performed were those agreed-upon with recipient
 A statement that the engagement was performed in accordance with the Standard on Related
Services applicable to agreed-upon procedures engagements
 Identification of the purpose for which the agreed-upon procedures were performed
 A listing of the specific procedures performed
 A description of the auditor’s factual findings including sufficient details of errors and exceptions
found
 A statement that the procedures performed do not constitute either an audit or a review and, as
such, no assurance is expressed
 A statement that had the auditor performed additional procedures, an audit or a review, other
matters might have come to light that would have been reported
 A statement that the report is restricted to those parties that have agreed to the procedures to
be performed
 A statement that the report relates only to the elements, accounts, items or financial and non-
financial information specified and that it does not extend to the entity’s financial statements
taken as a whole

Question 10
During the course of performing a compilation engagement in accordance with SRS 4410, it becomes
known to you that the client had suffered a theft loss of ₹ 100 lacs of its inventories over a period of
time at a storage location visited infrequently. A claim was lodged by the client with the insurance
company which was repudiated due to certain technical reasons relating to coverage of policy. The
client has not preferred a complaint or an appeal against said repudiation. The amount is reflected
under the head “current assets” in trial balance of the client. Discuss how you should proceed to deal
with the matter? (4410)
Answer 10
In this instant case, amount of ₹ 100 lacs is reflected under the head “current assets” in trial balance. Since
our client’s claim has been repudiated and no appeal has been preferred, it is a loss for the client and
should be dealt with accordingly. Therefore, amendments are required for the financial information not
to be materially misstated.
If the practitioner becomes aware during the course of the engagement that amendments to the compiled
financial information are required for the financial information not to be materially misstated or the
compiled financial information is otherwise misleading, the practitioner shall propose the appropriate

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 CA SANIDHYA SARAF 9.6

amendments to management.
If management declines or does not permit the practitioner to make the proposed amendments to the
compiled financial information, the practitioner shall withdraw from the engagement and inform
management and those charged with governance of the reasons for withdrawing.
If withdrawal from the engagement is not possible, the practitioner shall determine the professional and
legal responsibilities applicable in the circumstances

INTEGRATEDCASE SCENARIO
KM Limited has engaged your firm for compilation of financial statements in accordance with
requirements of SRS 4410. You also come to know that company is setting up a new unit in Rourkela,
Odisha. The company management has provided you with draft trial balance and requires assistance in
preparation and presentation of its financial statements for year ended 31st March, 2024. The
management requires such a preparation and presentation for its internal use.
During the course of engagement, it is noticed that: -
1) There are apparent errors in few opening balances brought forward from previous year relating
to some outstanding incentives receivable from government authorities. These have been
swapped with some other balances in trial balance. However, there are no credit transactions in
such incentive accounts or accounts whose balances have been swapped during the year.
2) One of the team members suggests that it is one of the duties to ensure that revenue figures
stated in trial balance, at least, are verified to ensure that all revenues required to be booked by
the company have, in fact, been booked.
3) It is also suggested by this team member that even though it is a compilation engagement, quality
control aspects like adhering to appropriate Standards needed to be followed.
4) Before signing and issuing report under SRS 4410, you once again read the financial information.
It comes to your notice that figures relating to setting up of a new unit of the company coming up
in Rourkela in Odisha have not been properly disclosed in compiled financial statements. The
expenditure was incurred from a bank account maintained in Rourkela and was omitted to be
shown under appropriate heads. You are vacillating regarding above considering scope of
compilation engagement.
5) The team has prepared detailed documentation during the course of engagement.

MULTIPLE CHOICE QUESTIONS (MCQS)

1. In respect of errors in some of opening balances noticed as described in case, which of the following
statements is most appropriate?
(a) Such errors should straight away lead to the qualification of a report to be issued.
(b) Such errors should be brought to the knowledge of management.
(c) Knowledge of such type of errors has no effect on compliance of ethical requirements by the firm.
(d) The above said matter relates to SA 510 Initial Audit Engagements-Opening Balances and has no
effect on reporting obligations in a compilation engagement.
Ans: (b)

2. As regards the suggestion of one of the team members regarding the verification of all revenues of the
company, which of the following statements is most appropriate?
(a) Suggestion of team member is proper as such verification is part and parcel of such an engagement.
(b) Suggestion of team member is proper as the absence of such verification may make financial
statements misleading.
(c) Suggestion of team member is not proper as verifying the accuracy or completeness of the
information provided by management is not required in such engagement.
(d) Suggestion of team member is not proper as compliance with qualitative requirements is not
required in such engagement.
Ans: (c)

3. In view of the team member’s suggestion relating to adherence to appropriate Standards for quality
control, which of the following statements is relevant in the context of above said engagement?
(a) SA 220 is applicable in this engagement and has to be followed by the engagement partner
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 CA SANIDHYA SARAF 9.7

meticulously.
(b) SQC 1 is applicable in this engagement.
(c) Both SA 220 and SQC 1 are applicable in this engagement.
(d) SA 220 and SQC 1 are not applicable in this engagement. However, SRS 4410 lays down detailed
quality control requirements for such type of engagement.
Ans: (b)

4. Which of the following statements is most appropriate as regards omission of expenditure under
appropriate heads pertaining to the Rourkela unit in compiled financial statements?
(a) The above-noted omission can be misleading. By disregarding such an omission, the fundamental
principle of integrity is violated and engagement cannot be performed in accordance with ethical
requirements.
(b) The above-noted omission can be misleading. By disregarding such an omission, the fundamental
principle of objectivity is violated and engagement cannot be performed in accordance with ethical
requirements.
(c) The above noted omission has no effect on performing such compilation engagement.
(d) The above-noted omission has no effect on performing and issuing reports under such compilation
engagement.
Ans: (a)

5. The detailed documentation is maintained during the course of compilation engagement. Which of the
following statements is most appropriate regarding the assembly of the final engagement file?
a) Final engagement file should be assembled in not more than 60 days after the date of the report.
b) Final engagement file should be assembled in not more than 120 days after the date of the report.
c) Final engagement file should be assembled on a timely basis after the engagement report has been
finalised in accordance with the time limits set by the firm.
d) There is no requirement of assembling of final engagement file in a compilation engagement
Ans: (c)

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 CA SANIDHYA SARAF 10.1

Chapter 10
Review of Financial Information
Question 1
A review of financial statements includes consideration of the entity’s ability to continue as a going
concern. If, during the performance of the review, the practitioner becomes aware of events or
conditions that may cast significant doubt about the entity’s ability to continue as a going concern.
Enumerate the steps to be taken by the practitioner for the same.
Answer 1
A review of financial statements includes consideration of the entity’s ability to continue as a going concern.
If, during the performance of the review, the practitioner becomes aware of events or conditions that may
cast significant doubt about the entity’s ability to continue as a going concern, the practitioner shall
(a) Inquire of management about plans for future actions affecting the entity’s ability to continue as a going
concern and about the feasibility of those plans, and also whether management believes that the
outcome of those plans will improve the situation regarding the entity’s ability to continue as a going
concern.
(b) Evaluate the results of those inquiries, to consider whether management’s responses provide a sufficient
basis to: -
(i) Continue to present the financial statements on the going concern basis if the applicable financial
reporting framework includes the assumption of an entity’s continuance as a going concern; or
(ii) Conclude whether the financial statements are materially misstated, or are otherwise misleading
regarding the entity’s ability to continue as a going concern; and
(c) Consider management’s responses in light of all relevant information of which the practitioner is aware
as a result of the review.

Question 2
GAK Limited has compiled the interim financial information, as per the Listing agreement requirements,
and submitted it to the auditors for their review. CA Reena has been assigned on the engagement to
review the interim financial information of GAK Limited. Based on the inquiries and other review
procedures carried out, CA Reena assessed that GAK Limited has been facing continuous working capital
shortages. No financial institutions or banks are ready to lend additional funding limits to GAK Limited,
since the company has been continuously incurring losses for over 3 years and the company has defaulted
payment of loan instalments & interest over the last one year and operations have been curtailed
significantly.
Under such circumstances CA Reena, who is doing the review for the first time, noted that GAK Limited
has not disclosed any information in the interim financial information relating to material uncertainties.
Given the situation, please advise CA Reena, what kind of review report is required to be issued? If, GAK
Limited has disclosed information relating to material uncertainty, can CA Reena give a clean report?
Discuss
Answer 2
Going Concern and Significant Uncertainties: As per SRE 2410, “Review of Interim Financial Information
Performed by the Independent Auditor of the Entity”, if, as a result of inquiries or other review procedures,
a material uncertainty relating to an event or condition comes to the auditor’s attention that may cast
significant doubt on the entity’s ability to continue as a going concern, and adequate disclosure is made in
the interim financial information the auditor modifies the review report by adding an emphasis of matter
paragraph.
The auditor may have modified a prior audit or review report by adding an emphasis of matter paragraph
to highlight a material uncertainty relating to an event or condition that may cast significant doubt on the
entity’s ability to continue as a going concern.

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 CA SANIDHYA SARAF 10.2

If a material uncertainty that casts significant doubt about the entity’s ability to continue as a going concern
is not adequately disclosed in the interim financial information, the auditor should express a qualified or
adverse conclusion, as appropriate. The report should include specific reference to the fact that there is
such a material uncertainty.
In view of the above, in the given situation, GAK Limited has compiled the interim financial information, as
per the Listing agreement requirements, and submitted it to the auditors for their review. CA Reena has
been assigned on the engagement to review the interim financial information of GAK Limited. CA Reena
noticed that GAK Limited has not disclosed any information in the interim financial information relating to
material uncertainties that casts significant doubt about the entity’s ability to continue as a going concern.
Thus, the auditor should express a qualified or adverse conclusion, as appropriate. The report should
include specific reference to the fact that there is such a material uncertainty.
If the material uncertainty still exists and adequate disclosure is made in the interim financial information,
the auditor modifies the review report on the current interim financial information by adding a paragraph
to highlight the continued material uncertainty. If GAK Limited has disclosed information relating to
material uncertainties, CA Reena should modify the review report by adding an emphasis of matter
paragraph.

Question 3
(a) In a review engagement performed under SRE 2400, practitioner relies mainly on certain procedures.
Naming such procedures, discuss the importance of these procedures in a review engagement.
(b) Practitioner’s report containing outcome of review engagement in form of “conclusion” also contains a
description of a review of financial statements and its limitations. Which statements in this respect are
to be included in the practitioner’s report in accordance with SRE 2400?
Answer 3
(a) Evidence from inquiry is a key source for understanding management intent, but supporting
information may be limited. In such cases, management’s history of following through on stated
intentions, reasons for decisions, and ability to act provide relevant corroboration. Applying
professional skepticism is crucial to assess whether financial statements may be materially misstated.
Inquiry procedures help practitioners understand the entity and its environment, identifying areas
where material misstatements are likely. Analytical procedures further assist by:
• Enhancing understanding of the entity and its environment.
• Identifying inconsistencies or variances from expected trends.
• Corroborating other inquiries or procedures.
• Acting as additional procedures when potential misstatements are detected.
For example, a comparative analysis of monthly revenue and costs across business segments can
provide evidence for financial statement disclosures. Analytical procedures range from simple
comparisons to complex statistical analyses, with expectations developed using industry data and
relevant sources.
(b) A description of a review of financial statements and its limitations, and the following statements:
(1) A review engagement under this SRE is a limited assurance engagement;
(2) The practitioner performs procedures, primarily consisting of making inquiries of management and
others within the entity, as appropriate, and applying analytical procedures, and evaluates the evidence
obtained; and
(3) The procedures performed in a review are substantially less than those performed in an audit conducted
in accordance with Standards on Auditing (SAs), and, accordingly, the practitioner does not express an audit
opinion on the financial statements;

Question 4
Discuss why “inquiry” is important as an audit procedure in an engagement to review financial
statements. (SRE 2400)

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 CA SANIDHYA SARAF 10.3

Answer 4
Inquiry: In a review, inquiry includes seeking information from management and other persons within the
entity, as the practitioner considers appropriate in the engagement circumstances.
Inquiries may include matters such as those relating to making of accounting estimates, identification of
related parties, about significant, complex or unusual transactions, existence of any actual, suspected or
alleged fraud, events occurring between the date of the financial statements and practitioner’s report, basis
for management’s assessment of the entity’s ability to continue as a going concern, events or conditions
that appear to cast doubt on the entity’s ability to continue as a going concern, material commitments,
contractual obligations or contingencies that have affected or may affect the entity’s financial statements
including disclosures and material non-monetary transactions or transactions for no consideration in the
financial reporting period under consideration.
The practitioner may also extend Inquiries to obtain non-financial data if appropriate. Evaluating the
responses provided by the management is integral to the inquiry process.
Depending on the engagement circumstances, inquiries may also include inquiries about:
• Actions taken at meetings of owners, those charged with governance and committees thereof,
and proceedings at other meetings, if any, that affect the information and disclosures contained
in the financial statements.
• Communications the entity has received, or expects to receive or obtain, from regulatory
agencies.
• Matters arising in the course of applying other procedures.
When performing further inquiries in relation to identified inconsistencies, the practitioner considers the
reasonableness and consistency of management’s responses in light of the results obtained from other
procedures, and the practitioner’s knowledge and understanding of the entity and the industry in which it
operates.

Question 5
CA. Aditya Jain is auditor of a listed company. He is also required to carry out quarterly review of financial
statements of company in terms of regulatory requirements is He already well versed with business of
company and has deep understanding of the company. Discuss, any five procedures, by which he can
update his understanding of the company for carrying out quarterly review. (SRE 2410)
Answer 5
Some of the procedures performed by the auditor to update the understanding of the entity and its
environment, including its internal control, ordinarily include the following
• Reading the documentation, to the extent necessary, of the preceding year’s audit and reviews of
prior interim period(s) of the current year and corresponding interim period(s) of the prior year,
to enable the auditor to identify matters that may affect the current-period interim financial
information.
• Considering any significant risks, including the risk of management override of controls, that were
identified in the audit of the prior year’s financial statements.
• Reading the most recent annual and comparable prior period interim financial information.
• Considering materiality with reference to the applicable financial reporting framework as it relates
to interim financial information to assist in determining the nature and extent of the procedures
to be performed and evaluating the effect of misstatements.
• Considering the nature of any corrected material misstatements and any identified uncorrected
immaterial misstatements in the prior year’s financial statements.
• Considering significant financial accounting and reporting matters that may be of continuing
significance such as material weaknesses in internal control.
• Considering the results of any audit procedures performed with respect to the current year’s
financial statements.
• Considering the results of any internal audit performed and the subsequent actions taken by the
management.
• Inquiring of management about the results of management’s assessment of the risk that the
Chapter 10 Review of Financial Information
 CA SANIDHYA SARAF 10.4

interim financial information may be materially misstated as a result of fraud.

• Inquiring of management about the effect of changes in the entity’s business activities.
• Inquiring of management about any significant changes in internal control and the potential effect
of any such changes on the preparation of interim financial information.
• Inquiring of management of the process by which the interim financial information has been
prepared and the reliability of the underlying accounting records to which the interim financial
information is agreed or reconciled.

Question 6
What is significance of “date of report in” a review report? (SRE 2400)
Answer 6
The date of the practitioner’s repo: the practitioner shall date the report no earlier than the date on which
the practitioner has obtained sufficient appropriate evidence as the basis for the practitioner’s conclusion
on the financial statements, including being satisfied that: -
(1) All the statements that comprise the financial statements under the applicable financial reporting
framework, including the related notes where applicable, have been prepared and
(2) Those with the recognized authority have asserted that they have taken responsibility for those
financial statements.

Question 7
CA. Pankaj Chaturvedi has issued a review report dated 28.7.2024 for financial results of a company for
quarter ending 30.6.2024. Describe his responsibility, if any, for events occurring from 1.7.2024 till date
of review report in accordance with SRE 2410.
Answer 7
The auditor should inquire whether management has identified all events up to the date of the review
report that may require adjustment to or disclosure in the interim financial information.

Question 8
Roma Limited has entered into a contract with Dorma Limited. There is a condition in the contract by
virtue of which Roma Limited is required to get its financial statements reviewed for a year on a quarterly
basis in accordance with the financial reporting provisions of the contract. Can Roma Limited get its
financial statements reviewed from a professional accountant in practice?
Answer 8
The above financial statements are prepared in accordance with special purpose framework in accordance
with requirements of a contract. Financial statements prepared in accordance with special purpose
framework can also be reviewed by a professional accountant in practice and review report may be issued
in accordance with SRE 2400.

Question 9
You are conducting a review of the financial statements of a company. It is gathered upon inquiry that
there is a possibility of material misstatements in financial statements. Discuss, how you would proceed
further in the matter under SRE 2400.
Answer 9
If the practitioner becomes aware of matters that causes the practitioner to believe the financial statements
may be materially misstated, the practitioner shall design and perform additional procedures sufficient to
enable the practitioner to: -
a) Conclude that the matter(s) is not likely to cause the financial statements as a whole to be materially
misstated or
b) Determine that the matter(s) causes the financial statements as a whole to be materially misstated.

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 CA SANIDHYA SARAF 10.5

Additional procedures focus on obtaining sufficient appropriate evidence to enable the practitioner to form
a conclusion on matters that the practitioner believes may cause the financial statements to be materially
misstated. The procedures may be:
• Additional inquiry or analytical procedures, for example, being performed in greater detail or being
focused on the affected items (i.e., amounts or disclosures concerning the affected accounts or
transactions as reflected in the financial statements); or
• Other types of procedures, for example, substantive test of details or external confirmations.

Question 10
During review of quarterly results of a company of which you are auditor, it is gathered on inquiries made
that there has been a major fire in fabric processing plant of the company during the quarter. It has
resulted in massive disruption in operations of the company. Worse still, machinery and inventories of
plant were uninsured due to carelessness of concerned staff leading to substantial losses. The matter has
been disclosed in interim financial information appropriately. Discuss, how you would proceed to deal
with the same in review report?
Answer 10
Uninsured assets in a disaster are examples of events or conditions that, individually or collectively, may
cast significant doubt about the going concern assumption. As a result of fire, there is massive disruption in
operations of the company. Besides, the company would have to bear losses as its damaged assets are
uninsured.
In accordance with SRE 2410, if, as a result of inquiries or other review procedures, a material uncertainty
relating to an event or condition comes to the auditor’s attention that may cast significant doubt on the
entity’s ability to continue as a going concern, and adequate disclosure is made in the interim financial
information, the auditor modifies review report by adding an emphasis of matter paragraph.
Therefore, Emphasis of matter paragraph should be added in review report.

Question 11
CA. Seerat is conducting review of the quarterly financial information of a company of which she is also
auditor. She believes that it is necessary to make a material adjustment to the quarterly financial
information for it to be prepared, in all material respects, in accordance with the applicable financial
reporting framework. She has communicated the matter to CFO and audit committee. However, no
response was received even after waiting for a reasonable time. What are the options available to her?
Answer 11
In such a case, options available to her in accordance with SRE 2410 are: -
a) Whether to modify the report or
b) The possibility of withdrawing from the engagement and
c) The possibility of resigning from the appointment to audit the annual financial statements.

Integrated Case Scenario 1

Below is given an incomplete draft text of the review report on the review of financial results of Fast
Operations Limited, a listed company in accordance with SEBI regulations. The review is a compulsory
requirement under SEBI (Listing Obligations and Disclosure Requirements) Regulations. The incomplete
areas of the report have been marked as XXXX.
INDEPENDENT AUDITOR’S REVIEW REPORT ON REVIEW OF INTERIM STANDALONE FINANCIAL RESULTS
TO XXXX
1. We have reviewed the accompanying Statement of Standalone unaudited financial results of Fast
Operations Limited (“the Company”), for the quarter and six months ended September 30, 2024 (“the
Statement”), being submitted by the Company pursuant to the requirement of Regulation 33 of the
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended.
2. This Statement, which is the responsibility of the Company’s Management and approved by the
Company’s Board of Directors, has been prepared in accordance with the recognition and
measurement principles laid down in the Indian Accounting Standard 34 “Interim Financial Reporting”
Chapter 10 Review of Financial Information
CA SANIDHYA SARAF 10.6

(“Ind AS 34”), prescribed under Section 133 of the Companies Act, 2013 read with relevant rules issued
thereunder and other accounting principles generally accepted in India. Our responsibility
XXXXXXXXXXX.
3. We conducted our review of the Statement in accordance with the Standard XXXX, issued by the
Institute of Chartered Accountants of India (ICAI). A review of interim financial information consists
of making inquiries, primarily of the company’s personnel responsible for financial and accounting
matters, and applying analytical and other review procedures. A review is substantially
XXXXXXXXXXXXXXXXXXXXXXX.
4. Based on our review conducted as stated in paragraph 3 above, XXXXXXXXXXXXXXXXXX Using your
knowledge, answer the following questions to complete the draft text of review report of Fast
Operations Limited-

MULTIPLE CHOICE QUESTIONS (MCQS)

1. The name of addressee is missing from text of draft review report. Identify the appropriate option: 10.2
a) Audit Committee
b) Board of Directors
c) CFO
d) Stock exchange on which shares of company are listed
Ans: (b)

2. Under para 2 of the case study, choose the appropriate sentence beginning with “Our responsibility
XXXX”: 10.2
a) Our responsibility is to express an opinion on the Statement based on our review.
b) Our responsibility is to express a conclusion on the Statement based on our review.
c) Our responsibility is to provide a reasonable assurance on the Statement based on our review.
d) Our responsibility is to express a compliance statement on the Statement based on our review.
Ans: (b)

3. Given the description of case study which of the following engagement standards is most appropriate to
be stated in para 3? 10.2
a) SRE 2410 ‘Review of Interim Financial Information Performed by the Independent Auditor of the
Entity’.
b) SRE 2400 Engagements to Review Historical Financial Statements.
c) SA 700 Forming an Opinion and Reporting on Financial Statements.
d) SA 810 Engagements to Report on Summary Financial Statements.
Ans: (a)

4. Which of the following statements is most appropriate to be inserted in sentence beginning with“ A
review is substantially XXXX” in para 3? 10.2
a) A review is substantially broader in scope than an audit conducted in accordance with Standards
on Auditing specified under section 143(10) of the Companies Act, 2013 and consequently does not
enable us to obtain assurance that we would become aware of all significant matters that might be
identified in a review. Accordingly, we do not express an audit opinion.
b) A review is substantially broader in scope than an audit conducted in accordance with Standards
on Auditing specified under section 143(10) of the Companies Act, 2013 and consequently does not
enable us to obtain assurance that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit opinion.
c) A review is substantially narrower in scope than an audit conducted in accordance with Standards
on Auditing specified under section 143(10) of the Companies Act, 2013 and consequently does not
enable us to obtain assurance that we would become aware of all significant matters that might be
identified in a review. Accordingly, we do not express an audit opinion

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CA SANIDHYA SARAF 10.7

d) A review is substantially less in scope than an audit conducted in accordance with Standards on
Auditing specified under section 143(10) of the Companies Act, 2013 and consequently does not
enable us to obtain assurance that we would become aware of all significant matters that might be
identified in an audit. Accordingly, we do not express an audit opinion.
Ans: (d)

5. Complete the paragraph 4 of case study from following options: - 10.2

a) Nothing has come to our attention that causes us to believe that the accompanying Statement,
prepared in accordance with the recognition and measurement principles laid down in the
aforesaid Indian Accounting Standard and other accounting principles generally accepted in India,
has not disclosed the information required to be disclosed in terms of Regulation 33 of the SEBI
(Listing Obligations and Disclosure Requirements) Regulations, 2015, as amended, including the
manner in which it is to be disclosed, or that it contains any material misstatement.
b) Nothing has come to our attention that causes us to believe that the accompanying Statement,
prepared in accordance with the recognition and measurement principles laid down in the
aforesaid Indian Accounting Standard and other accounting principles generally accepted in India,
has disclosed the information required to be disclosed in terms of Regulation 33 of the SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015, as amended, including the manner in
which it is to be disclosed, or that it does not contain any material misstatement.
c) The accompanying Statement, prepared in accordance with the recognition and measurement
principles laid down in the aforesaid Indian Accounting Standard and other accounting principles
generally accepted in India, has disclosed the information required to be disclosed in terms of
Regulation 33 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as
amended, including the manner in which it is to be disclosed, or that it does not contain any
material misstatement.
d) The accompanying Statement, prepared in accordance with the recognition and measurement
principles laid down in the aforesaid Indian Accounting Standard and other accounting principles
generally accepted in India, has disclosed the information required to be disclosed in terms of
Regulation 33 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, as
amended, including the manner in which it is to be disclosed, or that it does not contain any
material misstatement and gives a true and fair view of the state of affairs of the company as on
date of interim financial statements.
Ans: (a)

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 CA SANIDHYA SARAF 11.1

Chapter 11
Prospective Financial Information and other Assurance Services
Question 1
The practitioner shall not accept the compilation engagement unless the practitioner has agreed to the
terms of engagement with management, and the engaging party if different. In view of the above, mention
the responsibilities of the management to be agreed on for the compilation engagement in accordance
with SRS 4410.
Answer 1
The practitioner shall not accept the compilation engagement unless the practitioner has agreed to the terms
of engagement with management, and the engaging party if different. In accordance with SRS 4410,
“Compilation Engagement”, the responsibilities of the management to be agreed on for the compilation
engagement are that:
(i) The financial information, and for the preparation and presentation thereof, in accordance with a
financial reporting framework that is acceptable in view of the intended use of the financial information
and the intended users;
(ii) Design, implementation and maintenance of such internal control as management determines is
necessary to enable the preparation of financial statements that are free from material misstatement,
whether due to fraud or error;
(iii) The accuracy and completeness of the records, documents, explanations and other information
provided by management for the compilation engagement; and
(iv) Judgments needed in the preparation and presentation of the financial information, including those for
which the practitioner may provide assistance in the course of the compilation engagement.

Question 2
STAR Limited has outsourced its payroll processing functions to a service organization - Little Solutions
Private Limited. Little Solutions Private Limited is responsible for accurate preparation of payrolls and
timely remittance of statutory dues to the government authorities on behalf of the company. Little
Solution Private Limited’s controls related to timely remittance of payroll deductions to government
authorities are relevant to the company as late remittances could result in interest and penalties resulting
in liabilities for the company.
The auditors of STAR Limited want to be sure about description, design and operating effectiveness of
controls at Little Solutions throughout the year. In this regard, they require an assurance report from
auditors of Little Solutions Private Limited
(a) Why the auditors of STAR Limited require an assurance report from the auditors of Little Solutions
Private Limited? Which Engagement and Quality Control Standard casts such kind of responsibility upon
the auditor?
(b) Which type of report should be provided by the auditors of Little Solutions? Justify with reasons.
(c) State matters on which opinion is to be provided by the auditors of Little Solutions.
Answer 2
When the user entity uses the services of a service organisation, objectives of auditor of user entity are:
(a) To obtain an understanding of the nature and significance of the services provided by the service
organisation and their effect on the user entity’s internal control relevant to the audit, sufficient to
identify and assess the risks of material misstatement and
(b) To design and perform audit procedures responsive to those risks.
Therefore, it is in line with the above requirements that auditors of STAR Limited require an assurance
report from auditors of Little Solutions Private Limited. SA 402 casts such responsibility on user auditors.
In accordance with requirements of SAE 3402, auditors of Little Solutions Private Limited should provide
a type 2 report to auditors of STAR Limited. As auditors of STAR Limited want to be sure about description,
design and operating effectiveness of controls at Little Solutions Pvt. Ltd. throughout the year and type 2
report deals with such matters, type 2 report should be provided by the auditors of the Little Solutions
Pvt. Ltd. Type 2 report is a report on the description, design and operating effectiveness of controls at a
Chapter 11 Prospective Financial Information and other Assurance Services
 CA SANIDHYA SARAF 11.2

service organization whereas type 1 report is a report on the description and design of controls at a service
organization.
(c) The opinion of auditors of Little Solutions Pvt. Ltd. would state whether, in all material respects, based on
suitable criteria: -
• The description fairly presents the service organization’s system that had been designed and
implemented throughout the specified period;
• The controls related to the control objectives stated in the service organization’s description of its
system were suitably designed throughout the specified period and
• The controls tested, which were those necessary to provide reasonable assurance that the control
objectives stated in the description were achieved, operated effectively throughout the specified
period.

Question 3
Mr. Vineet, an auditor, has been approached by Qub Ltd. to examine the prospective financial information
of the company. What factors should an auditor consider before accepting an engagement to examine
prospective financial information, and under what conditions should the auditor decline or withdraw from
such an engagement? Additionally, what steps should be taken to formalize the terms of the engagement?
Answer 3
Before accepting an engagement to examine prospective financial information, the auditor would consider,
amongst other things:
• The intended use of the information;
• Whether the information will be for general or limited distribution;
• The nature of the assumptions, that is, whether they are best estimates or hypothetical assumptions;
• The elements to be included in the information; and
• The period covered by the information.
The auditor should not accept, or should withdraw from, an engagement when the assumptions are clearly
unrealistic or when the auditor believes that the prospective financial information will be inappropriate for
its intended use. The auditor should consider the extent to which reliance on the entity’s historical financial
information is justified.
To formalize the terms of the engagement, it is essential to agree on the terms with the client by sending an
engagement letter, like in other engagements.

Question 4
SAE 3400 explains that prospective financial information can take the form of a forecast, a projection, or a
combination of both. In this context, how do you differentiate a forecast from a projection? Also provide
an example. Additionally, explain the nature of assurance provided by the practitioner regarding
prospective financial information in accordance with SAE 3400.
Answer 4
Prospective financial information can be in the form of a forecast, a projection, or a combination of both, for
example, a one year forecast plus a five- year projection
“Forecast” means prospective financial information prepared on the basis of:
• Assumptions as to future events which management expects to take place and
• The actions management expects to take as of the date the information is prepared (best-estimate
assumptions- an assumption that reflects anticipated experience with no provision for risk of adverse
deviation).
Example- In present market conditions, supply availability, historical buying patterns and seasonal trends,
the CFO of X Ltd. expects sales to increase by 5% over the next quarter. Therefore, a 5% sales increase is his
financial forecast for the period.
“Projection” means prospective financial information prepared on the basis of:
• Hypothetical assumptions about future events and management actions which are not necessarily
expected to take place, such as when some entities are in a start-up phase or are considering a major
Chapter 11 Prospective Financial Information and other Assurance Services
 CA SANIDHYA SARAF 11.3

change in the nature of operations; or

• A mixture of best-estimate and hypothetical assumptions (imagined or suggested)
Example- X Ltd. may project a course of action to take when one or more hypothetical situations arise, such
as creating a new product to meet the demand of expected market growth. As a result of assuming the
possibility of different events occurring, financial projections typically serve as an outline for evaluating the
desired outcomes X Ltd. expects to see, including its financial, cash flow and operational outcomes.
Prospective financial information relates to events and actions that have not yet occurred and might not
occur. While evidence may be available to support the assumptions on which the prospective financial
information is based, such evidence is itself generally future- oriented and, therefore, speculative in nature,
as distinct from the evidence ordinarily available in the examination of historical financial information.
Therefore, an opinion as to whether the results shown in the prospective financial information will be
achieved cannot be expressed.

Question 5
You are engaged by M/s Viva Limited to examine and report on prospective financial information which
the management of the company has prepared for presentation at an Investor meet program organized
by a State Government to attract investment in their state.
The company in its vision document described various plans and proposals of the company with projected
financial goals and means to achieve the same and various benefits accruing to the economic development
of the State. What important matters will be considered by you while determining the nature, timing, and
extent of examination procedure to be applied in the review of the same?
Answer 5
When determining the nature, timing and extent of examination procedures, the following matters should
be considered such as: -
Examination Procedures
(a) the knowledge obtained during any previous engagements
(b) management’s competence regarding the preparation of prospective financial information
(c) the likelihood of material misstatement
(d) the extent to which the prospective financial information is affected by the management’s judgment
(e) the sources of information considered by the management for the purpose, their adequacy,
reliability of the underlying data, including data derived from third parties, such as industry statistics,
to support the assumptions
(f) the stability of entity’s business and
(g) the engagement team’s experience with the business and the industry in which the entity operates
and with reporting on prospective financial information.

Question 6
Ayurda Ltd.is a fast growing and award-winning SaaS software company which is headquartered in
Mumbai. It also has offices in the UK and provides cloud base professional services automation (PSA)
software solutions to professional services organizations around the world. They want to engage you to
provide assurance report for one of its major clients over the controls it operates as a service organization.
Can you provide such an assurance report? (SAE 3402)
Answer 6
SAE 3402 applies only when the service organization is responsible for, or otherwise able to make an assertion
about, the suitable design of controls. It does not deal with assurance engagements
(a) To report only on whether controls at a service organization operated as described or
(b) To report only on controls at a service organization other than those related to a service that is likely
to be relevant to user entities’ internal control as it relates to financial reporting (for example, controls
that affect user entities’ production or quality control).
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Hence Yes, we can provide such an Assurance Report.

Question 7
Discuss the significance of Pro forma financial information included in prospectus of a company.
Answer 7
Pro forma financial information refers to financial information shown together with adjustments to illustrate
the impact of an event or transaction on unadjusted financial information as if the event had occurred or the
transaction had been undertaken at an earlier date selected for purposes of the illustration.
The Pro forma financial information is, normally, used in the offer documents to demonstrate the effect of a
transaction on the financial statements of a company as if those transactions had occurred at an earlier date.
The Pro forma financial information may take the form of Statement of Profit and Loss and Balance Sheet to
illustrate how the transactions might have affected the assets, liabilities and earnings of the Issuer. They also
include notes in relation to the significant aspects of the transactions, assumptions used to prepare the Pro
forma financial information and the adjustments made.

Question 8
Discuss the term “Pro forma adjustment” under SAE 3420.
Answer 8
In relation to unadjusted financial information, Pro forma adjustments include
(a) Adjustments to unadjusted financial information that illustrate the impact of a significant event or
transaction as if the event had occurred or the transaction had been undertaken at an earlier date
selected for purposes of the illustration and
(b) Adjustments to unadjusted financial information that are necessary for the pro forma financial
information to be compiled on a basis consistent with the applicable financial reporting framework of
the reporting entity and its accounting policies under that framework.

Question 9
Discuss, how, a Chartered Accountant can be associated with prospective financial information without
violating relevant provisions of the Chartered Accountants Act, 1949 (SAE 3400)
Answer 9
Traditionally, the attest function performed by a Chartered Accountant in practice has been in relation to
“historical financial information”. Recognizing the professional skill and competence of Chartered
accountants, varied stakeholders like banks, financial institutions and prospective investors intend to place
greater reliance on reports of projected cash flow and profitability statements examined and signed by
Chartered accountants.
Clause 3 of the Second Schedule to the Chartered Accountants Act, 1949 states that that a chartered
accountant in practice shall be deemed to be guilty of professional misconduct, if he permits his name or the
name of his firm to be used in connection with an estimate of earnings contingent upon future transactions
in a manner which may lead to the belief that he vouches for the accuracy of the forecast.
The above clause does not preclude Chartered accountant from associating his name with prospective
financial statements. A chartered accountant can participate in the preparation of profit or financial forecasts
and can review them, provided he indicates clearly in his report the sources of information, the basis of
forecasts and also the major assumptions made in arriving at the forecasts and so long as he does not vouch
for the accuracy of the forecasts.
The same also applies to projections made on the basis of hypothetical assumptions about future events and
management actions which are not necessarily expected to take place so long as vouching for the accuracy
of the projection is not made.

Question 10
A company has approached CA. Hemant for an assurance report in respect of prospective financial
information of a project. On going through the project details, it is noticed that depreciation reflected on
proposed fixed assets to be acquired in prospective financial information has been calculated in
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accordance with provisions of the Income Tax Act. No disclosure is made in this respect too. How the
matter should be proceeded with?
Answer 10
In such types of engagements, it is the duty of a professional accountant to see that prospective financial
information is based on a consistent basis with historical financial statements using appropriate accounting
principles.
In the case of a company, historical financial statements are prepared considering the requirements of the
Companies Act, and depreciation is calculated accordingly. However, in the given situation, depreciation has
been calculated in accordance with Income Tax Act which is not consistent with historical financial
statements. Therefore, it is not proper.
The fact that the projection has not been prepared on a consistent basis with the historical financial
statements, using appropriate accounting principles needs to be stated.
Further, when presentation and disclosure are not adequate, a qualified or adverse opinion should be given
or withdrawal from engagement should be made as appropriate.

Question 11
Bansi Group is a leading institution running prestigious post graduate courses in the field of management.
Its financial statements are audited by an independent auditor. Before the start of this academic session,
the Board of the institution had outsourced its entire process of inviting student applications, submission
of applications, and collection of application fees including late fees and such matters to Easy Solutions
Limited.
The auditors of Bansi Group want to be sure about the design and operating effectiveness of controls at
Easy Solutions Limited. What should be the nature of the report to be provided by auditors of Easy
Solutions Limited specifically for use by Bansi Group and its auditors in this regard in terms of SA 3402?
Answer 11
In such a case, the auditors of Bansi Group want to be sure about the design and operating effectiveness of
controls at the organization which is providing services to their client. Type 2 report is a report on the
description, design and operating effectiveness of controls operating at the service organization. Auditors of
Easy Solutions Limited should provide such a report giving assurance on these matters. It should also include
details of tests of controls performed and details of deviations, if any.

Question 12
The management of S Ltd. requests you to accept an engagement to report on the compilation of pro forma
financial information to be included in a prospectus. In light of SAE 3420, what factors you will consider
regarding the company acknowledging and understanding its responsibility in this matter before accepting
engagement?
Answer 12
The company’s responsibility has to be acknowledged for the following matters: -
(i) Adequately disclosing and describing the applicable criteria to the intended users if these are not
publicly available
(ii) Compiling the pro forma financial information on the basis of the applicable criteria and
(iii) Providing the practitioner with: -
a) Access to all information (including, when needed for purposes of the engagement, information
of the acquiree(s) in a business combination), such as records, documentation and other material,
relevant to evaluating whether the pro forma financial information has been compiled, in all
material respects, on the basis of the applicable criteria
b) Additional information that the practitioner may request from the responsible party for the
purpose of the engagement
c) Access to those within the entity and the entity’s advisors from whom the practitioner determines
it necessary to obtain evidence relating to evaluating whether the pro forma financial information
has been compiled, in all material respects, on the basis of the applicable criteria; and
d) When needed for purposes of the engagement, access to appropriate individuals within the
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acquiree(s) in a business combination.

Integrated Case Scenario

Below is given draft text of the “Report on Examination of Prospective Financial formation” of Top Edge
Limited in relation to the company’s upcoming project prepared by a staff member in a CA firm unfamiliar
with drafting such reports. The report has been drafted in a casual manner and may consist of omissions
and errors.
Report on Examination of Prospective Financial Information
To
The Board of Directors Top Edge Limited
We have examined the projection of the upcoming project to come up at Ratnagiri of Top Edge Limited for
the period from April 2023 to March 2030 as given in the Prospective Financial Information from page 1 to
250 in accordance with Standard on Assurance Engagement 3400, “The Examination of Prospective
Financial Information issued by the Institute of Chartered Accountants of India. e

The preparation and presentation of the projection is the responsibility of the Management and has been
approved by the Board of Directors of the company.

Our responsibility is to examine the evidence supporting the assumptions (excluding the hypothetical
assumption) and other information in the prospective financial information.

The projection has been prepared using a set of assumptions that include hypothetical assumptions about
future events and management’s actions that are not necessarily expected to occur.

We have carried out our examination of the prospective financial information thoroughly.

Further, in our opinion the projection is properly prepared on the basis of the assumptions as set out in
Note 1 to 50 to the Prospective Financial Information and on a consistent basis with the historical financial
statements, using appropriate accounting principles. Even if the events anticipated under the hypothetical
assumptions described above occur, actual results are still likely to be different from the projection since
other anticipated events frequently do not occur as expected and the variation may be material.

For PCK & Co.

Chartered Accountants
Signature
Designation
Membership number

Based on your knowledge and description of the case, answer the following question
1) Whose responsibility is to list out assumptions underlying prospective financial information? 11.1
a) Professional Accountant issuing report on prospective financial information.
b) Auditor of Company issuing report on prospective financial information.
c) Management of company.
d) Banker of company.
Ans: (c)

2) Which of the following statements is most appropriate regarding “use of prospective financial
information” to be included in such report? 11.1
a) Intended use of projection is required to be disclosed. It is further necessary to caution the users
regarding inappropriateness of projections for other purposes.
b) It is discretionary to state intended use of projection in such a report.
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c) Intended use of projection is required to be disclosed. It is not necessary to caution the users
regarding inappropriateness of projections for other purposes.
d) It is prerogative of management to use report in the manner it deems fit.
Ans: (a)

3) Which of the following statements is most appropriate regarding the examination of prospective
financial information by a Chartered accountant in accordance with SAE 3400? 11.1
a) Accuracy of projections is vouched for based upon performing procedures thoroughly.
b) Projections can go haywire; It depends upon the professional judgment of the Chartered Accountant
to vouch for the accuracy of projections.
c) Accuracy of projections is not at all vouched for in an assurance report on prospective financial
information.
d) The matter of accuracy of projections or otherwise is not domain of such an examination. Therefore,
there is no reporting requirement under SAE 3400.
Ans: (c)

4) Which of the following statements is most appropriate regarding UDIN in context examination of
prospective financial information by a Chartered Accountant? 11.1
a) It is mandatory to state UDIN in such type of reports.
b) It is desirable to state UDIN in such type of reports.
c) It is not required to state UDIN in such type of reports as it is not an audit engagement.
d) It is not required to state UDIN in such type of reports as it is not an engagement related to historical
financial information.
Ans: (a)

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Chapter 12
Digital Auditing and Assurance
Question 1
CA Kabir, an auditor assigned to conduct a remote audit of Beetal Limited. The audit will be conducted
virtually using online platforms, with the client sharing documents and participating in video
conferences. What key considerations should CA Kabir address to ensure the effectiveness and security
of the remote audit?
Answer 1
Considerations for remote audit
Feasibility and Planning
• Planning includes agreeing on audit timelines, meeting platforms (Zoom, Teams, Google Meet), data
exchange mechanisms, and access authorization.
• Feasibility ensures suitable technology, auditor and auditee competencies, and resource availability.
• Execution involves video/teleconferencing with auditees and transferring audit evidence via a document-
sharing platform.
Confidentiality, Security, and Data Protection
• Document-sharing access must be restricted and encrypted; reviewed data is removed and archived per
standards.
• Auditors must follow regulations, requiring agreements (e.g., no recording, authorization for images).
• No screenshots of auditees; document screenshots need authorization.
• Auditors accessing IT systems must use VPNs for secure, encrypted remote connections.
Risk Assessment
• Communication must be clear and consistent during remote audits.
• Audit risks are identified, assessed, and managed.
• The sufficiency of a remote audit to meet objectives must be evaluated and documented with input from
the audit team and the audited organization.

Question 2
Certain studies have suggested that the increase in cyber-attacks and rise in global payment processing
cost have hit global banking and finance industries enormously. Therefore, such industries are going to
place reliance on new technologies such as Blockchain. Blockchain is based on a decentralized and
distributed ledger that is secured through encryption. Each transaction is validated by the blockchain
participants, creating a block of information that is replicated and distributed to all participants.
However, such technology comes with its weaknesses and associated risks. What are common risks for
Blockchain technology? Also discuss probable audit implications where such technology can be used.
Answer 2
Common Risks for Blockchain Technology
• Blockchain’s security strengths can also be weaknesses, such as irreversible transactions and restricted
data access without keys, requiring strict protocols and contingency plans.
• Network nodes expose organizations to cyber-attacks and data breaches, making security crucial.
• Organizations must have regulatory-compliant data management processes.
• As regulations evolve, compliance managers must stay updated and adapt processes accordingly.
Audit Implications
• Auditors should assess governance and security around transactions, considering cryptography risks.
• Risks arise from blockchain interactions with legacy systems, APIs, and data privacy concerns.
• Weak blockchain application protocols and cross-border data regulations require scrutiny.
• Auditors must ensure blockchain data does not lead to regulatory noncompliance.

Question 3
IT dependencies also arise due to “system generated reports” and “interfaces”. How do such IT
dependencies arise? Why it is important to identify IT dependencies to develop an effective and efficient
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audit approach?
Answer 3
IT dependencies are created when IT is used to initiate, authorize, record, process, or report transactions or
other financial data for inclusion in the financial statements.
System generated reports are the information generated by the IT systems. These reports are often used in an
entity's execution of a manual control, including business performance reviews, or may be the source of entity
information used by us when selecting items for the testing, performing substantive tests of details or
performing a substantive analytical procedure. e.g. (Vendor master report, customer ageing report).
Interfaces are programmed logic that transfer the data from one IT system to another. For example, an
interface may be programmed to transfer data from a payroll subledger to the general ledger.
In this manner, IT dependencies arise due to “system generated reports” and “interfaces”.
Identifying and documenting the entity's IT dependencies in a consistent, clear manner helps to identify the
entity's reliance upon IT, understand how IT is integrated into the entity's business model, identify potential
risks arising from the use of IT, identify related IT General Controls and enables us to develop an effective and
efficient audit approach

Question 4
Mr. Karan is a consultant tasked with helping a mid-sized manufacturing company modernize its
operations by integrating Internet of Things (IoT) technology. The company wants to connect various
devices such as manufacturing equipment, smart home security systems for their facility, and invento ry
management systems. They aim to leverage IoT to improve operational efficiency, predict equipment
maintenance needs, and enhance overall security. However, they are concerned about the potential risks
and the impact on their audit processes. Describe the key components and benefits of IoT, the risks
associated with IoT implementation, and the implications for the company's audit processes. How should
the company address these concerns to ensure a smooth transition?
Answer 4
IoT is the concept of connecting any device (cell phones, coffee makers, washing machines, and so on) to the
internet. Key components of IoT are data collection, analytics, connectivity, and people and process. IoT not
only changes the business model, but also affects the strategic objectives of the organization. The risk profile
of the entity changes with exposure to new laws and regulations
Audit Implications
A shift to connected devices and systems may result in auditors not being able to rely only on manual controls.
Instead, auditors may need to scope new systems into their audit. Audit firms may need to train and upskill
auditors to evaluate the design and operating effectiveness of automated controls.
Consumer-facing tools that connect to business environments in new ways can impact the flow of transactions
and introduce new risks for management and auditors to consider. Consider payment processing tools that
allow users to pay via credit card at a retail location through a mobile device. This could create a new path for
incoming payments that may rely, in part, on a new service provider supplying and routing information
correctly. Auditors would need to consider the volume of those transactions and the processes and controls
related to it.
Common risks of IoT:
The key risks associated with IoT, including, device hijacking, data siphoning, denial of service attacks, data
breaches and device theft.

Question 5
Gravity Ltd. is a medium-sized manufacturing company that is planning to implement a new digital
system to streamline its production processes and improve efficiency. The company appointed Mr. Ravi
as IT manager. However, he is aware that merging technologies can bring significant benefits but also
pose various risks to the organization. In this context, he needs to identify examples of technological
risks associated with the implementation of the new digital system and the control considerations
necessary to mitigate these risks effectively.

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Answer 5
Refer Para 8. Further Mr. Ravi should focus on the following control considerations to mitigate risks effectively:
1. Auditors should gain a holistic understanding of changes in the industry and the information technology
environment to effectively evaluate management’s process for initiating, processing, and recording
transactions and then design appropriate auditing procedures.
2. Auditors, as appropriate, should consider risks resulting from the implementation of new technologies and
how those risks may differ from those that arise from more traditional, legacy systems.
3. Auditors should consider whether digital upskilling or specialists are necessary to determine the impact of
new technologies and to assist in the risk assessment and understanding of the design, implementation,
and operating effectiveness of controls. E.g., cybersecurity control experts, IT specialists in the team etc.
Question 6
Remote audit is an audit where the auditor uses online or electronic means to conduct the same. It could
be partially or completely virtual, auditor engages using technology to obtain the audit evidence or to
perform documentation review with the participation of the auditee. For example, an auditor might use
video conferencing and cloud-based file sharing to review financial records remotely. What are the
advantages and disadvantages of remote auditing?
Answer 6
ADVANTAGES DISADVANTAGES
Cost and time effective: No travel time Due to network issues, interviews and meetings can be
and travel costs involved. interrupted.
Comfort and flexibility to the audit team Limited or no ability to visualize facility culture of the
as they would be working from home organization, and the body language of the auditees. Time
environment, zone issues could also affect the efficiency of remote audit
session
Time required to gather evidence can The opportunity to present doctored documents and to omit
spread over several weeks, instead of relevant information is increased. This may call for additional
concentrated into a small period that planning, some additional/different audit procedures,
takes personnel from their daily Security and confidentiality violation.
activities.
Auditor can get first-hand evidence Remote access to sensitive IT systems may not be allowed.
directly from the IT system as direct Security aspects related to remote access and privacy needs to
access may be provided. be assessed
Widens the selection of auditors from Cultural challenges for the auditor. Lack of knowledge for local
global network of experts. laws and regulations could impact audit. Audit procedures like
physical verification of assets and stock taking cannot be
performed.
Question 7
MNC Limited is engaged in manufacture & sale of FMCG products. It has manufacturing locations across
various states in India and engages dealer channels to sell it products. One dealer is appointed for each
district within the state and products are despatched from the nearest manufacturing location to the
dealer. Considering the voluminous transactions, MNC Limited has a robust ERP network, for recording
the transactions. As statutory auditors of MNC Ltd., your firm is about to commence the current year’s
audit. The audit team includes certain IT experts and discussions are underway amongst the team
members. As an IT manager of the engagement team, explain the key areas for an auditor to understand
IT environment.
Answer 7
Key Areas for an Auditor to Understand the IT Environment
1. Understanding the Flow of Transactions The auditor must identify IT applications and aspects relevant to
transaction flow and information processing. Changes in transaction flow may result from modifications to IT
programs or direct database changes affecting transaction storage and processing.

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2. Identification of Significant Systems Auditors need to determine the IT applications and supporting
infrastructure involved in significant transactions, balances, and disclosures. Understanding how information
moves through these systems is crucial for assessing financial reporting accuracy.
3. Identification of Manual and Automated Controls An entity’s internal control system consists of both manual
and automated controls. The mix of these elements depends on the organization’s IT complexity. Auditors must
evaluate how this combination impacts the risk of material misstatement.
4. Identification of Technologies Used Understanding emerging technologies and their role in financial reporting is
essential. Given the complexity of these technologies, auditors may need specialists to assess IT-related risks
and their impact on financial reporting.
5. Assessing IT Environment Complexity The complexity of an IT environment varies based on factors such as
automation, system reliance, IT application customization, business model, significant changes during the year,
and the implementation of emerging technologies. After considering these factors, auditors assess the overall
complexity of the IT environment.

Question 8
Briefly describe the advantages and challenges of Auditing digitally.
Answer 8
Following are key features or advantages of Auditing Digitally:
(i) Improved Quality of Audits: The impact on quality is evident, through automation, data analytics
techniques we can easily move from sample auditing to full population of transactions being reviewed
or re-performed. This ultimately free up time for audit teams to analyses the information and better
understand the business they audit. Technology requires an element of upfront investment, and it can
be challenging to implement with regards to resources and people, but the value once it is up and
running is undeniable.
(ii) Decreasing human dependency: Using technology minimizes the manual intervention which ultimately
results in reducing the risk of manual errors. Technology helps in streamlining the process of testing for
auditors which decreases the errors which occur from the judgement of different individuals.
(iii) Increases Transparency: With the technological advancement transparency has been increased. New
ERPs and tools have audit trail feature available to trace the transaction end to end. It helps the
management or auditors to review the details like the date on which any change is made, who made the
change, what has been changed, all such details are captured and can be used while performing audit.
(iv) Automation and Ease: Automating tasks like recording work in repositories, extracting data and
sampling have improved the quality of audit and reduced the manual error. Using dashboards (e.g.,
Power BI) for reporting helps in understanding the position and helps the auditor to form his opinion.
(v) Improved Efficiency: What used to take weeks to learn and programme using deep experts, is now easily
available to auditors after some simple training and digital upskilling. The result may be increased
efficiency and fewer errors, but the benefits are wider reaching and personal. This also results in
improved retention of talent and confidence.
(vi) Better risk assessment: With usage of automation and technology in audit, auditor may focus on the
real challenges and assess the potential risk precisely. It gives time to auditors to focus on the bigger
picture rather than being involved with repetitive tasks. Dashboards, visual presentations and other
tools helps in understanding where the risk lies and what all areas need more attention.
Challenges – Reluctance to change, challenges with data security and governance, choosing the right tool and
automating the right process, ensuring standardization and correct configurations to avoid error and bias,
evaluating business benefits the organization wants to achieve with automation and the roadmap for digital
strategy.

Question 9
What are the stages involved in understanding the IT environment and what key considerations auditor
should consider?
Answer 9
Key Areas for an Auditor to Understand IT Environment are as follows:
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1. Understand the flow of transaction: The auditor's understanding of the IT environment may focus on
identifying and understanding the nature and number of the specific IT applications and other aspects of
the IT environment that are relevant to the flows of transactions and processing of information in the
information system. Changes in the flow of transactions, or information within the information system may
result from program changes to IT applications, or direct changes to data in databases involved in
processing or storing those transactions or information.
2. Identification of Significant Systems: The auditor may identify the IT applications and supporting IT
infrastructure concurrently with the auditor's understanding of how information relating to significant
classes of transactions, account balances and disclosures flows into, through and out the entity's
information system.
3. Identification of Manual and Automated Controls: An entity's system of internal control contains manual
elements and automated elements (i.e., manual and automated controls and other resources used in the
entity's system of internal control). An entity's mix of manual and automated elements varies with the
nature and complexity of the entity's use of IT. The characteristics of manual or automated elements are
relevant to the auditor's identification and assessment of the risks of material misstatement.
4. Identification of the technologies used: The need to understand the emerging technologies implemented
and the role they play in the entity's information processing or other financial reporting activities and
consider whether there are risks arising from their use.
Given the potential complexities of these technologies, there is an increased likelihood that the
engagement team may decide to engage specialists and/or auditor's experts to help understand whether
and how their use impacts the entity's financial reporting processes and may give rise to risks from the use
of IT.
Some examples of emerging technologies are:
• Blockchain, including cryptocurrency businesses (e.g., token issuers, custodial services, exchanges,
miners, investors)
• Robotics
• Artificial Intelligence
• Internet of Things
• Biometrics
• Drone
5. Assessing the complexity of the IT environment: Not all applications of the IT environment have the same
level of complexity. The level of complexity for individual characteristics differs across applications.
Complexity is based on the following factors – automation used in the organization, entity’s reliance on
system generated reports, customization in IT applications, business model of the entity, any significant
changes done during the year and implementation of emerging technologies.
After considering the above factors for each application the over complexity is assessed of the IT
environment.

Question 10
Auditor should scope in ITGCs to tests when there are IT dependencies identified in the system. Briefly
describe the types of IT dependencies.
Answer 10
There are five types of IT dependencies as described below:

Type Description
Automated Automated controls are designed into the IT environment to enforce business rules. For
Controls example,
Purchase order approval via workflow or format checks (e.g., only a particular date
format is accepted), existence checks (e.g., Duplicate customer number cannot exist),
and/or reasonableness checks (e.g., maximum payment amount) when a transaction is
entered.

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Reports System generated reports are information generated by IT systems. These reports are
often used in an entity's execution of a manual control, including business performance
reviews, or may be the source of entity information used by us when selecting items for
testing, performing substantive tests of details or performing a substantive analytical
procedure. E.g. (Vendor master report, customer ageing report)
Calculations Calculations are accounting procedures that are performed by an IT system instead of
a person. For example, the system will apply the 'straight-line' depreciation formula to
calculate depreciation of an asset (i.e., cost of the asset, less the residual value of the
asset at the end of its useful life divided by the useful life of the asset) or the system
will calculate the value of the amount invoiced to a customer by multiplying the item
price times the quantity shipped.
Security Security including segregation of duties is enabled by the IT environment to restrict
access to information and to determine the separation of roles and responsibilities that
could allow an employee to perpetrate and conceal errors or fraud, or to process errors
that go undetected.
Interfaces Interfaces are programmed logic that transfer data from one IT system to another. For
example, an interface may be programmed to transfer data from a payroll sub- ledger
to the general ledger.

Question 11
What does cyber risk explain it with some examples?
Answer 11
A cyber-attack is an attempt to gain unauthorized access to a computing system or network with the intent to
cause damage, steal, expose, alter, disable, or destroy data.
Regulators across the globe have placed the topic of cyber risk management under increasing scrutiny,
requiring financial institutions to assess the maturity of their cybersecurity program, manage cyber risks, and
enhance resiliency against cyber-attacks. Most common types of cyber- attacks are:
• Malware: Malware or malicious software is any program or code that is created with the intent to do harm to
a computer, network or server. Malware is the most common type of cyberattack, its subsets are ransomware,
fileless Malware trojans, viruses etc.
Type Description
Ransomware In a ransomware attack, an adversary encrypts a victim’s data and offers to
provide a decryption key in exchange for a payment. Ransomware attacks are
usually launched through malicious links delivered via phishing emails, but
unpatched vulnerabilities and policy misconfigurations are used as well.
Fileless Malware Fileless malware is a type of malicious activity that uses native, legitimate tools
built into a system to execute a cyber-attack. Unlike traditional malware, fileless
malware does not require an attacker to install any code on a target’s system,
making it hard to detect.
Trojan A trojan is malware that appears to be legitimate software disguised as native
operating system programs or harmless files like free downloads. Trojans are
installed through social engineering techniques such as phishing or bait websites.
Mobile Malware Mobile malware is any type of malware designed to target mobile devices. Mobile
malware is delivered through malicious downloads, operating system
vulnerabilities, phishing, smishing, and the use of unsecured Wi-Fi.
domain appears to be legitimate at first glance, but a closer look will reveal subtle
differences.
Email Spoofing Email spoofing is a type of cyberattack that targets the businesses by using emails
with forged sender addresses. Because the recipient trusts the alleged sender,
they are more likely to open the email and interact with its contents, such as a
malicious link or attachment.
• Identity-Based Attacks: When a valid user’s credentials have been compromised and an adversary is pretend
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to be that user. For e.g., people often use the same user ID and password across multiple accounts. Therefore,
possessing the credentials for one account may be able to grant access to other, unrelated account.
• Insider Threats: When current or former employees that pose danger to an organization because they have
direct access to the company network, sensitive data, and intellectual property (IP), as well as knowledge of
business processes, company policies or other information that would help carry out such an attack.
• DNS Tunneling: DNS Tunneling is a type of cyberattack that leverages domain name system (DNS) queries and
responses to bypass traditional security measures and transmit data and code within the network. This tunnel
gives the hacker a route to unleash malware and/or to extract data, IP or other sensitive information by
encoding it bit by bit in a series of DNS responses.
• IoT-Based Attacks: An IoT attack is any cyberattack that targets an Internet of Things (IoT) device or network.
Once compromised, the hacker can assume control of the device, steal data, or join a group of infected devices

Question 12
Briefly describe the cyber security Framework.
Answer 12
Cybersecurity framework includes how management is identifying the risk, protecting and safeguarding its
assets (including electronic assets) from the risk. Management preparedness to detect the attacks, anomalies
and responsiveness to the adverse event.
Identify the risk:
Auditor has to determine whether the entity's risk assessment process considers cybersecurity risks.
Entity should conduct a periodic risk assessment & develop a management strategy which identifies
cybersecurity risks around IT system failure affecting the entity's primary business or potential loss of data or
inability to access data as required, Risk of unauthorized access to the IT network.
The entity should maintain and periodically reviews an inventory of their information assets- i.e., Asset
Management (e.g., intellectual property, patents, copyrighted material, trade secrets and other intangibles).
The entity should classify and prioritize protection of their information assets based on sensitivity and business
value and periodically reviews the systems connected to the network on which digital assets reside.
From the governance perspective management should review how cybersecurity risks affect internal controls
over financial reporting. In case of adverse attack how management is going to assess the impact on the
recoverability of financial data and impact on revenue recognition.
Management needs to identify if any established a risk-based cybersecurity program can be leveraged e.g.
(NIST, ISO etc.)
To determine overall responsibility for cybersecurity in the business environment entity should establish roles
and responsibilities over cybersecurity (CISO, CIO). Further the risk assessment should be discussed with those
charged with governance (e.g., the Audit Committee or Board of Directors).
Protect the risk
Obtained an understanding of the entity's processes for safeguarding of assets subject to cybersecurity. Entity
monitors whether there has been unauthorized access to electronic assets and any related impact on financial
reporting.
Formal training should be conducted to make the teams aware of the risk associated with cyber- attacks. Entity
should implement effective controls for data security. Entity should have a process & procedures in place for
identifying material digital/electronic assets on the balance sheet subject to cybersecurity risk (e.g., intellectual
property, patents, copyrighted material, trade secrets) and prioritizing their protection based on criticality.
Detect The risk
Entity should have controls and procedures that enable it to identify cybersecurity risks and incidents and to
assess and analyse their impact on the entity’s business, evaluate the significance associated with such risks
and incidents, and consider timely disclosures.
Review entity's processes to monitor and detect security breaches or incidents. If management has
implemented anti-virus in the system to secure it from anomalies or if firewall logs are being continuously
monitored to detect any repetitive attacks. A monitoring process should be established to review how many
such events have been denied by the firewall. Monitoring process should also include if any upgrades or
updates are required to safeguard the systems from vulnerabilities.
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Respond to the risk

In case of material cybersecurity or data breach has been identified management should capture the details
of nature of incident and how the incident or data breach was identified. Entity should have a response
planning in place to capture the details of nature of incident and the same needs to be communicated with
those who are ultimately responsible for this framework and with those charge with governance.
The security incident response plan helps in analysing the impact and severity of the attack and helps the
organisation in taking the appropriate actions. Management should assess Litigation costs, Regulatory
investigation costs and Remediation costs as a part of mitigation process and improvement management
should assess the future action plans that needs to be taken to safeguard the organisation from such attacks.
Recover from risk
Entity should undertake appropriate actions to recover from the attack and make sure the business is up and
running.
Once the impact evaluated and communicated with the regulators the recovery plan needs to be implemented
to overcome the impact. Necessary improvements – like patch upgrades, better controls, improved technology
in terms of firewall, anti-virus, tools etc needs to be implemented to safeguard the entity.

Question 13
In an automated environment, the data stored and processed in systems can be used to get various
insights into the way business operates. This data can be useful for preparation of management
information system (MIS) reports and electronic dashboards that give a high- level snapshot of business
performance. In view of above you are required to briefly discuss the meaning of data analytics and
example of such data analytics techniques.
Answer 13
Generating and preparing meaningful information from raw system data using processes, tools, and
techniques is known as Data Analytics. Audit analytics or audit data analytics involves analyzing large sets of
data to find actionable insights, trends, draw conclusions and for informed decision making. The use of audit
analytics enables greater efficiencies and more accurate findings from the review process.
As a result, businesses will be able to create strategies based on verifiable data and professional assumptions
and auditors can improve the audit quality. It allows auditors to more effectively audit the large amounts of
data held and processed in IT systems in larger clients.
Some of the popular tools used across the industry as part of CAATs are listed below:
1. ACL - Audit Command Language (ACL) Analytics is a data extraction and analysis software used for fraud
detection and prevention, and risk management. It samples large data sets to find irregularities or patterns
in transactions that could indicate control weaknesses or fraud.
2. Alteryx - Alteryx is used to consolidate financial or operational data to assess controls. A fully transparent
audit trail of every action is performed in Alteryx in form of a workflow which makes it easier for the user
to learn as no prior knowledge of coding or scripting is required. Alteryx can also be leveraged to automate
analytics and perform Machine Learning to search for patterns indicative of fraud or irregularities speed up
your processes like accounting close, tax filings, regulatory reporting, forecast creation etc. It can also be
used to automate set procedures that are performed periodically like reconciliations, consolidations,
marketing workflows, system integrations, continuous audits etc.
3. Power BI – Power Bi is a business intelligence (BI) platform that provides nontechnical business users with
tools for aggregating, analyzing, visualizing and sharing data. From audit perspective, such visualization
tools can be used to find the outliers in the population, it can also be used for reporting purpose (audit
reports) in an interactive dashboard to the higher management.
4. CaseWare – CaseWare is a data analysis software & provide tools that helps in conducting audit and
assurance engagements quickly, accurately and consistently. It shares analytical insights which help in
taking better informed decisions. It helps in streamlining processes and eliminating the routine tasks. Used
by accounting firms, governments and corporations worldwide, this trusted platform integrates everything
you need to conduct assurance and reporting engagements.

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Question 14
Enterprises are adopting emerging technologies at a rapid pace to create synergies and harness the latest
technologies. Give 3 examples of automated tools used as a part of emerging technologies along with
the risk and audit considerations associated with these tools.
Answer 14
Enterprises are adopting emerging technologies at a rapid pace to create synergies and harness the latest
technologies.
Robotic process automation (RPA), blockchain, machine learning, Internet of Things (IOT) and artificial
intelligence (AI) are some prime examples of automation.
Internet of Things
IoT is the concept of connecting any device (cell phones, coffee makers, washing machines, and so on) to the
internet. Key components of IoT are data collection, analytics, connectivity, and people and process. IoT not
only changes the business model, but also affects the strategic objectives of the organization. The risk profile
of the entity changes with exposure to new laws and regulations.
Audit Implications
A shift to connected devices and systems may result in auditors not being able to rely only on manual controls.
Instead, auditors may need to scope new systems into their audit. Audit firms may need to train and upskill
auditors to evaluate the design and operating effectiveness of automated controls.
Consumer-facing tools that connect to business environments in new ways can impact the flow of transactions
and introduce new risks for management and auditors to consider. Consider payment processing tools that
allow users to pay via credit card at a retail location through a mobile device This could create a new path for
incoming payments that may rely, in part, on a new service provider supplying and routing information
correctly. Auditors would need to consider the volume of those transactions and the processes and controls
related to it.
Common risks of IoT:
The key risks associated with IoT, including, device hijacking, data siphoning, denial of service attacks, data
breaches and device theft.
AI (Artificial intelligence)
Artificial intelligence (AI) refers to a system or a machine that can think and learn. AI systems utilize data
analysis and algorithms to make decisions based on predictive methods. Complex algorithms are developed to
propose decisions based on a pattern or behavior learned over time.
Siri to help find your Air Pods or told Amazon Alexa to turn off the lights, quick commands to open a phone
camera or start a particular playlist, AI to predict when to book the lowest prices for flights, hotels, car and
vacation home rentals. Using historical flight and hotel data, AI will also recommend to the user whether the
booking has reached its lowest price point or if the user should hold out a bit longer for the price to drop.
Auditor Implications
Given the invisible nature of algorithms, audits must focus on the logical flow of processes. A review of AI
should ascertain whether unintended bias has been added to the algorithms. Auditors should assess the
effectiveness of algorithms and whether their output is appropriately reviewed and approved. Because AI is
built on software modules, auditors must also consider cybersecurity and search for possible bugs and
vulnerabilities that can be exploited to impact AI functionality. Auditors should confirm their understanding of
how the use of AI affects the entity’s flows of transactions, including the generation of reports or analytics
used by management. Auditors also should consider whether the AI is making decisions—or being utilized by
management as part of the decision-making process.
If management shifts its focus on oversight by relying on AI, auditors should understand what shift occurred,
how new risks might be addressed, and whether existing risks may not be getting the same level of attention.
Understanding these changes could drive changes in the audit approach.
Common risks for AI
AI comes with list of risks. Security is one of the key risks – the more data the system uses, from more sources,
the more entry points and connections are formed and the greater the potential risks. Inappropriate
configuration - AI may also be used to diagnose medical conditions. If it is badly configured or malfunctions, it
could harm people before the problem is spotted. Data privacy - The data used and shared should have the
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necessary explicit consent from data providers.

Blockchain
Blockchain is based on a decentralized and distributed ledger that is secured through encryption. Each
transaction is validated by the blockchain participants, creating a block of information that is replicated and
distributed to all participants. All blocks are sequenced so that any modification or deletion of a block
disqualifies the information.
Despite resistance, the benefits associated with blockchain technology are being recognized across a variety
of other industries.
Audit Implications
Auditors should consider the appropriate governance and security transactions around the transactions.
Although blockchain’s core security premise rests on cryptography, there are risk factors associated with it. As
blockchain interacts with legacy systems and business partners, concerns related to insecure application
programming interfaces (APIs), data confidentiality and privacy cannot be ignored.
Weak blockchain application development protocols are something auditors cannot overlook. Similarly, data
privacy laws and regulations may be area of concern as data are communicated across geographic boundaries.
Auditors must be able to determine whether the data put on blockchain will expose the enterprise to liability
for noncompliance with applicable laws and regulations.
Common risks for blockchain technology
The strengths of blockchain can also be its weaknesses. The inability to reverse transactions and to access data
without the required keys make the system secure, but also mean that organisations need specific protocols
and management processes to ensure that they are not locked out and have clear contingency plans. Operating
through network nodes could also expose the organisation to cyber-attacks and data hacks, so security issues
are important. Auditors should also ensure that the organisation has the necessary data management
processes and complies with regulations. The regulatory landscape is still evolving for blockchain, so audit
teams should check that compliance managers are following developments constantly and adapting processes
accordingly.

Question 15
Emerging technologies can bring great benefits, but they also come with a varied set of substantial risks.
Give some examples of technology risks of digital system and the control considerations to consider while
assessing technology risk.
Answer 15
The strength of the auditing profession is the assessment of risks and controls. As they address the challenge
of assessing technology risk, auditors can and should focus on the following control considerations:
1. Auditors should gain a holistic understanding of changes in the industry and the information technology
environment to effectively evaluate management’s process for initiating, processing, and recording
transactions and then design appropriate auditing procedures.
2. Auditors, as appropriate, should consider risks resulting from the implementation of new technologies and
how those risks may differ from those that arise from more traditional, legacy systems.
3. Auditors should consider whether digital upskilling or specialists are necessary to determine the impact of
new technologies and to assist in the risk assessment and understanding of the design, implementation,
and operating effectiveness of controls. E.g., cybersecurity control experts, IT specialists in the team etc.
• Reliance on systems or programs that are inaccurately processing data, processing inaccurate data, or
both
• Unauthorized access to data that might result in destruction of data or improper changes to data, including
the recording of unauthorized or non-existent transactions or inaccurate recording of transactions
(specific risks might arise when multiple users access a common database)
• The possibility of information technology personnel gaining access privileges beyond those necessary to
perform their assigned duties, thereby leading to insufficient segregation of duties
• Unauthorized or erroneous changes to data in master files
• Unauthorized changes to systems or programs
• Failure to make necessary or appropriate changes to systems or programs
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• Inappropriate manual intervention

• Potential loss of data or inability to access data as required
• Risks introduced when using third-party service providers
• Cybersecurity risks

Question 16
Give example of emerging technologies available for Next Generation Audit along with the risks
associated with it
Answer 16
Examples of Emerging Technologies available for Next Generation Audit:
1. Drone Technology: Using drone technology in the remote locations for stock counts. Drones have great
payload capacity for carrying sensors and cameras, thus they can photograph and physically examine the
count of large quantities of fixed assets and inventory.
Drone captured audit information can be combined with various alternative sources of information such
as QR code readers, handheld bar scanners, manual counts etc. to optimise quality of deliverables,
consolidate audit information and enhance the execution speed while ensuring correctness and
completeness of data.
2. Augmented reality: The technology allows users to view the real-world environment with augmented
(added) elements, generated by digital devices.
One famous example was Pokémon Go, a game for mobile devices in which players chase imaginary digital
creatures (visible on their mobile phones) around physical locations.
3. Virtual reality: VR goes a step forward and replaces the real world entirely with a simulated environment,
created through digitally generated images, sounds, and even touch and smell. Using special equipment,
such as a custom headset, the user can explore a simulated world or simulate experiences such as flying
or skydiving.
4. Metaverse: The metaverse is the emerging 3-D digital space that uses virtual reality, augmented reality,
and other advanced internet technology to allow people to have lifelike personal and business
experiences online. It represents a convergence of digital technology to combine and extend the reach
and use of Cryptocurrency, Artificial Intelligence (AI), Augmented Reality (AR) and Virtual Reality (VR)
The internet offers many experiences today, but tomorrow’s Metaverse will feel more interconnected
than ever before. We are heading towards mature landscape of virtual spaces with transferable identities
and assets enabled by blockchains (NFTs) that are interoperable or interchangeable. It further includes
highly automated systems, immersive interfaces, hyperconnected networks and digital reflections.
5. Virtual Banking and Transactions: A forward-thinking financial institution, establishes a presence in the
metaverse to offer virtual banking services. Users can create virtual bank accounts, access personalized
financial dashboards, and perform transactions using virtual currencies. Customers can seamlessly
transfer funds, make virtual purchases, and engage in virtual commerce, all within the immersive
environment of the metaverse. XYZ Bank leverages the metaverse to provide a convenient and interactive
banking experience, attracting tech-savvy customers who value digital innovation.
6. Digital Asset Management: A digital asset management company, recognizes the growing popularity of
virtual assets in the metaverse. They launch a virtual asset trading platform within the metaverse, allowing
users to buy, sell, and trade NFTs and other digital assets. Investors can diversify their portfolios,
participate in virtual auctions, and even showcase their virtual art collections in virtual galleries. Crypto
Investments Ltd. leverages the metaverse's decentralized and secure infrastructure to facilitate
transparent and efficient transactions of virtual assets.
7. Virtual Financial Education and Training: A Financial Learning Academy aims to enhance financial literacy
using the metaverse. They create a virtual classroom environment where participants can attend
interactive financial education sessions. Students can engage in simulated investment activities, learn
about budgeting and financial planning, and gain hands- on experience through virtual trading
simulations. Financial Learning Academy leverages the immersive nature of the metaverse to provide an
engaging and practical financial education platform, preparing individuals for real-world financial
challenges.
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8. Virtual Meetings and Conferences: For a leading industry even an organisation hosts a virtual conference
within the metaverse. Participants from around the world can access the conference through their virtual
avatars. They can attend keynote speeches, panel discussions, and networking events in virtual
conference halls. Attendees can interact with industry experts, explore virtual exhibition booths, and
establish valuable connections in the financial sector. Global Finance Summit leverages the metaverse to
create a global and inclusive conference experience, fostering collaboration and knowledge sharing.
9. Data Visualization and Analytics: A company utilizes the metaverse to offer advanced data visualization
and analytics tools to financial professionals. Their virtual analytics platform allows users to visualize
complex financial data in interactive and immersive 3D environments. Users can explore data trends,
conduct simulations, and analyze financial performance through intuitive interfaces within the metaverse.
Analytics Solutions Inc. leverages the metaverse's immersive capabilities to enhance data-driven decision-
making, enabling financial professionals to gain deeper insights into market trends and make informed
investment decisions.
Common Risks associated:
Beyond their potential, these technologies also come with challenges such as public safety, cybersecurity, data
privacy, data protection, lack of standards and technical challenges. Since they often track movements and
data, massive amounts of data are generated about the whereabouts of users. It also raises questions about
taxation, jurisdiction, and customer protection. Regulators and auditors have to think of the controls around
privacy, data security, governance to make it more regulated.

Question 17
Sukanya, a CA final student, is of the view that cyber risks are issues of IT and result only in information
loss to an entity. She also feels that many cyber-attacks are not directly targeted at financial systems and
do not pose risk of material misstatements to financial statements of an entity.
Is her view proper?
Answer 17
The cyber risks are not an issue of IT alone. Rather, it is a business risk and has an effect on whole business
organization. It affects entity’s reputation and can lead to many other consequences which are listed below: -
• Regulatory costs
• Business interruptions causing an operational challenge for an organization.
• Data loss, reputational loss and litigation.
• Ransomware - more common these days where entire systems are encrypted
• Intellectual property theft which may not only take the competitive advantage, but we may also result in
any impairment/impediment charge because of the loss of IP.
• Incident response cost which could be for investigations & remediation’s
• Breach of Privacy, if personal data of a consumer is hacked it could have a significant impact on the
organization.
• Fines and penalties

It may happen that many cyber-attacks are not directly targeted at financial systems. However, the access
gained by the attackers may provide them the ability to:
• Manipulate or modify financial records
• Modify key automated business rules
• Modify automated controls relied upon by the management.
Further, auditor should consider whether cyber risk (like other business risks) represents a risk of material
misstatement to the financial statement as part of the audit risk assessment activities. Focus should be on
understanding the cyber risks affecting the entity and the actions being taken to address these risks.

Question 18
CA Y is planning to use CAATs extensively in audit of a company-be it for compliance tests or substantive
tests. Can you list out examples of few situations (in brief) of tests performed by him using CAATs?

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Answer 18
(i) Identify exceptions: Identify exceptional transactions based on set criteria. For example, cash transactions
above ` 10,000
(ii) Identify errors: Identify data, which is inconsistent or erroneous. For e.g.: account number which is not
numeric.
(iii) Verify calculations: Re-perform various computations in audit software to confirm the results from
application software confirm with the audit software. For e.g.: TDS rate applied as per criteria.
(iv) Existence of records: Identify fields, which have null values. For example: invoices which do not have vendor
name.
(v) Data completeness: Identify whether all fields have valid data. For example: null values in any key field such
as date, invoice number or value or name.
(vi) Data consistency: Identify data, which are not consistent with the regular format. For example: invoices
which are not in the required sequence.
(vii) Duplicate payments: Establish relationship between two or more tables as required. For example, duplicate
payment for same invoice.
(viii) Accounts exceeding authorized limit: Identify data beyond specified limit. For example, transactions
entered by user beyond their authorized limit or payment to vendor beyond amount due or overdraft
allowed beyond limit.

Question 19
A company is planning to use Robotics process automation (RPA) to streamline its hiring process. Earlier,
the company used to hire from campuses of various management institutes leading to high recruitment
costs, inefficient hire yield and resultant lack of diversity. How RPA can be used to automate the hiring
process? List out tentative few such steps. What could be likely benefits of using RPA in hiring process?
Answer 19
RPA can be used to streamline hiring process in a company. The tentative steps could include: -
• Place advertisements on social media/career advice sites.
• Link redirects candidate to a career site.
• Career site pulls information of candidate.
• An algorithm scans applicants for desired and suitable roles.
• Selected candidates may be asked to play online games to assess their skills.
• A certain percentage of those applicants are called for a video interview using an interview software.
The automated hiring process will reduce full time effort involvement, provide with a wider assessment range,
reduce the impact of recruiter biases, increase the efficiency of mapping of interested candidates, reduce
recruiting costs, increase hire yield, reduce time to hire, increase diversity.

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Chapter 13
Group Audits
Question 1
Limited is a listed company engaged in manufacture of round bars. The company is having investment in
the following components:
(i) 2 Subsidiary Companies
(ii) 1 Joint Venture Company
(iii) 2 Associate Companies
(iv) 3 Business entities under common control
(v) Interest in assets, liabilities, revenues, and expenses in a joint operation with 1 Company
R Limited and all its components are required to present their accounts as per Ind AS. While preparing
consolidated financial statements, R Limited consolidated its components on a line-by-line basis by adding
together like items of assets, liabilities, income, expenses, and cash flows.
R Limited seeks your advice on the accounting treatment in respect of the above components for
consolidation in accordance with the Companies (Indian Accounting Standards) Rules, 2015.
Answer 1
Refer Para 5 point (b) in table
In the given situation, R Limited is, a listed company having investment in the (i) 2 Subsidiary Companies, (ii) 1
Joint Venture Company, (iii) 2 Associate Companies, (iv) 3 Business entities under common control, (v) Interest
in assets, liabilities, revenues, and expenses in a joint operation with 1 Company. R Limited and all its
components are required to present their accounts as per Ind AS. In view of above, R Limited consolidated its
components on a line-by-line basis by adding together like items of assets, liabilities, income, expenses, and
cash flows while preparing its consolidated financial statements which is correct for the subsidiaries, however
the treatment is not correct for other components as per abovementioned Companies (Indian Accounting
Standards) Rules, 2015.

Question 2
CA H was appointed as a Statutory Auditor of MNL Limited, a listed company, which has three subsidiaries
namely M Ltd., N Ltd., L Ltd. and also 15 branches across India.
The Auditors are duly appointed for all the subsidiaries and branches. What should be the considerations of
CA H regarding determination of materiality during the audit of consolidated financial statements? How he
should deal in his report if there are observations (for instance modification and/or emphasis of matter
paragraph in accordance with SA 705/706) made by component auditors?
Answer 2
CA H should consider the requirement of SA 600, “Using the Work of Another Auditor”, if he decides to use
the work of another auditor in relation to the audit of consolidated financial statements and he should comply
with the requirements of SA 600.
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:
(i) 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) that are made by the management in the
preparation of CFS.
(ii) 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.

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(iii) 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.
(iv) The principal auditor also obtains certain confirmations from component auditors 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 i.e. CA H (the parent auditor) should comply with the
requirements of SA 600, “Using the Work of Another Auditor”.

Question 3
Whether preparation of consolidated financial statements is mandatory? If yes, please elaborate on the
requirements under the statute.
Answer 3
According to Section 129(3) of the Companies Act, 2013, where a company has one or more subsidiaries,
including associate company and joint venture, it shall, in addition to its own financial statements prepare a
consolidated financial statement of the company and of all the subsidiaries in the same form and manner as
that of its own. Further, section 129(4) of the said Act, provides that the provisions applicable to the
preparation, adoption and audit of the financial statements of a holding company shall, mutatis mutandis, also
apply to its the consolidated financial statements.
However, the requirement related to preparation of consolidated financial statements shall not apply to a
company if it meets the following conditions:
(i) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another company and all its
other members, including those not otherwise entitled to vote, having been intimated in writing and
for which the proof of delivery of such intimation is available with the company, do not object to the
company not presenting consolidated financial statements;
(ii) it is a company whose securities are not listed or are not in the process of listing on any stock
exchange, whether in India or outside India; and
(iii) its ultimate or any intermediate holding company files consolidated financial statements with the
Registrar which are in compliance with the applicable Accounting Standards.

Question 4
Please elaborate on the situations wherein the requirement related to preparation of consolidated financial
statements may not apply.
Answer 4
The requirement related to preparation of consolidated financial statements shall not apply to a company if it
meets the following conditions:
(i) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of another company and all its other
members, including those not otherwise entitled to vote, having been intimated in writing and for which
the proof of delivery of such intimation is available with the company, do not object to the company not
presenting consolidated financial statements;
(ii) it is a company whose securities are not listed or are not in the process of listing on any stock exchange,
whether in India or outside India; and
(iii) its ultimate or any intermediate holding company files consolidated financial statements with the
Registrar which are in compliance with the applicable Accounting Standards.

Question 5
While doing the audit of Consolidated Financial Statements, which current period consolidation
adjustments are to be taken into account?

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Answer 5
Current period consolidation adjustments primarily relate to the elimination of intra-group transactions and
account balances including:
(a) intra-group interest paid and received, or management fees, etc.;
(b) unrealised intra-group profits on assets acquired/ transferred from/ to other subsidiaries;
(c) record deferred taxes on unrealised intercompany profits elimination in accordance with Ind AS 12;
(d) intra-group indebtedness;
(e) adjustments related to harmonising the different accounting policies being followed by the parent and
its components;
(f) adjustments to the financial statements (of the parent and the components being consolidated) for
recognized subsequent events or transactions that occur between the balance sheet date and the date
of the auditor’s report on the consolidated financial statements of the group.
(g) adjustments for the effects of significant transactions or other events that occur between the date of the
components balance sheet and not already recognised in its financial statements and the date of the
auditor’s report on the group’s consolidated financial statements when the financial statements of the
component to be used for consolidation are not drawn upto the same balance sheet date as that of the
parent;
(h) In case of a foreign component, adjustments to convert a component’s audited financial statements
prepared under the component’s local GAAP to the GAAP under which the consolidated financial
statements are prepared;
(i) determination of movement in equity attributable to the minorities interest/non-controlling interest
since the date of acquisition of the subsidiary. It should also be noted that under Ind AS, non-controlling
interest can also result in negative balance. Unlike earlier AS, as per paragraph 28 of Ind AS 27, if the net
worth of subsidiary is negative, non-controlling interest could have deficit balance;
(j) adjustments of deferred tax on account of temporary differences arising out of elimination of profit and
losses resulting from intragroup transactions and undistributed profits of the component in case of
consolidated financial statements prepared under Ind AS.

Question 6
Write a short note on
a) Responsibility of holding company for preparation of Consolidated Financial Statements.
b) Permanent Consolidated Adjustments.
Answer 6
(a) The responsibility for the preparation and presentation of consolidated financial
statements, among other things, is that of the management of the parent. This includes:
(a) identifying components, and including the financial information of the components to be
included in the consolidated financial statements;
(b) where appropriate, identifying reportable segments for segmental reporting;
(c) identifying related parties and related party transactions for reporting;
(d) obtaining accurate and complete financial information from components;
(e) making appropriate consolidation adjustments;
(f) harmonization of accounting policies and accounting framework; and
(g) GAAP conversion, where applicable.
Apart from the above, the parent ordinarily issues instructions to the management of the component
specifying the parent’s requirements relating to financial information of the components to be included in
the consolidated financial statements. The instructions ordinarily cover the accounting policies to be
applied, statutory and other disclosure requirements applicable to the parent, including the identification
of and reporting on reportable segments, and related parties and related party transactions, and a
reporting timetable.

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(b) Permanent consolidation adjustments are those adjustments that are made only on the first occasion or
subsequent occasions in which there is a change in the shareholding of a particular entity which is
consolidated. Permanent consolidation adjustments are:
1. Determination of goodwill or capital reserve as per applicable accounting standards
2. Determination of amount of equity attributable to minority/ non- controlling interests
The auditor should verify that the above calculations have been made appropriately.
 The auditor should pay particular attention to the determination of pre-acquisition reserves of the
components. Date(s) of investment in components assumes importance in this regard.
 The auditor should also examine whether the pre-acquisition reserves have been allocated
appropriately between the parent and the minority interests/ non-controlling interests of the
subsidiary.
 The auditor should also verify the changes that might have taken place in these permanent
consolidation adjustments on account of subsequent acquisition of shares in the components, disposal
of the components in the subsequent years.
It may happen that while working out the permanent consolidation adjustments, in the case of one
subsidiary, goodwill arises and in the case of another subsidiary, capital reserve arises. The parent may
choose to net off these amounts to disclose a single amount in the consolidated balance sheet where
permitted by the applicable financial reporting framework. In such cases, the auditor should verify that
the gross amounts of goodwill and capital reserves arising on acquisition of various subsidiaries have been
disclosed in the notes to the consolidated financial statements to reflect the excess/shortage over the
parents’ portion of the subsidiary’s equity.

Question 7
R Ltd. owns 51% voting power in S Ltd. It however, holds and discloses all the shares as "Stock-in-trade" in
its accounts. The shares are held exclusively with a view to their subsequent disposal in the near future. R
Ltd. represents that while preparing Consolidated Financial Statements, S Ltd. can be excluded from the
consolidation. As a Statutory Auditor, how would you deal?
Answer 7
Consolidation of Financial Statement: As per Ind AS 110, there is no such exemption for ‘temporary control’,
or “for operation under severe long-term funds transfer restrictions” and consolidation is mandatory for Ind
AS compliant financial statement in this case. Paragraph 20 of Ind AS 110 states that “Consolidation of an
investee shall begin from the date the investor obtains control of the investee and cease when the investor
loses control of the investee”.
However, as per Section 129(3) of the Companies Act, 2013 read with rule 6 of the Companies (Accounts)
Rules, 2014, where a company having subsidiary, which is not required to prepare consolidated financial
statements under the Accounting standards, it shall be sufficient if the company complies with the provisions
on consolidated financial statements provided in Schedule III to the Act.
In the given case, R Ltd’s intention is to dispose off the shares in the near future as shares are being held as
stock in trade and it is quite clear that the control is temporary, Therefore, R Ltd. is required to prepare
Consolidated Financial Statements in accordance with Ind AS 110 as exemption for ‘temporary control’ is not
available under Ind AS 110.

Question 8
A Ltd. holds the ownership of 10% of voting power and control over the composition of Board of Directors
of B Ltd. While planning the statutory audit of A Ltd., what factors would be considered by you as the
statutory auditors of A Ltd for the audit of its consolidated financial statements prepared under Ind AS?
Answer 8
10% Voting Power and Control over the composition of Board of Directors: In this case, A Ltd. holds only 10
percent of the voting power but has control over the composition of the Board of Directors of B Ltd.
In such a case, A Ltd shall be considered as a parent of B Ltd and, therefore, it would consolidate B Ltd in its
consolidated financial statements as a subsidiary.

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The auditor should verify A Ltd’s management’s assessment of having control in B Ltd despite having only 10%
voting power as per the requirements of Ind AS 110. Auditor would need to verify as to how A Ltd controls the
composition of the Board of Directors or corresponding governing body of B Ltd.
There can be various means by which such kind of control can be established. In this regard, the auditor may
verify the minutes of Board meetings, shareholder agreement entered into by the parent, agreements with B
Ltd to which the parent might have provided any technology or know how, enforcement of statute, etc.
Further, the auditor should verify that the adjustments warranted by Ind AS 110 have been made wherever
required and have been properly authorised by the management of the parent. The preparation of
consolidated financial statements gives rise to permanent consolidation adjustments and current period
consolidation adjustments. The auditor should make plan, among other things, for the understanding of
accounting policies of the A Ltd and B Ltd and determining and programming the nature, timing, and extent
of the audit procedures to be performed etc.
Further, the duties of an auditor with regard to reporting of transactions with any other related parties are
given in SA 550 on Related Parties. As per SA 550 on, “Related Parties”, the auditor should review information
provided by the management of the entity identifying the names of all known related parties. A person or
other entity that has control or significant influence, directly or indirectly through one or more intermediaries,
over the reporting entity are considered as Related Party.
In forming an opinion on the financial statements, the auditor shall evaluate whether the identified related
party relationships and transactions have been appropriately accounted for and disclosed in accordance with
Ind AS 110 and Schedule III and whether the effects of the related party relationships and transactions prevent
the financial statements from achieving true and fair presentation (for fair presentation frameworks) or cause
the financial statements to be misleading (for compliance frameworks).

Question 9
You are appointed as an auditor of Nawab Limited, a listed company who is a main supplier to the UK
building and construction market. With a turnover of ` 2.9 billion, the company operates through 11
business units and has nearly 180 branches across the countries.
As an auditor, how will you draft the report in case:
a) When the Parent’s Auditor is also the Auditor of all its Components?
b) When the Parent’s Auditor is not the Auditor of all its Components?
c) When the Component(s) Auditor Reports on Financial Statements under an Accounting Framework
Different than that of the Parent?
d) When the Component(s) Auditor Reports under an Auditing Framework Different than
that of the Parent?
e) Where the financial statements of one or more components is not audited?
Answer 9
a) When the Parent’s Auditor is also the Auditor of all its Components
While drafting the audit report, the auditor should report:
• Whether principles and procedures for preparation and presentation of consolidated financial statements
as laid down in the relevant accounting standards have been followed.
• In case of any departure or deviation, the auditor should consider the requirements given in SA 705,
Modifications to the Opinion in the Independent Auditor’s reports in the audit report so that users of the
consolidated financial statements are aware of such deviation.
• Auditor should issue an audit report expressing opinion whether the consolidated financial statements give
a true and fair view of the state of affairs of the Group as on balance sheet date and as to whether
consolidated profit and loss statement gives true and fair view of the results of consolidated profit or losses
of the Group for the period under audit.
• Where the consolidated financial statements also include a cash flow statement, the auditor should also
give his opinion on the true and fair view of the cash flows presented by the consolidated cash flow
statements.

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b) When the Parent’s Auditor is not the Auditor of all its Components
In a case where the parent’s auditor is not the auditor of all the components included in the consolidated
financial statements, the auditor of the consolidated financial statements should also consider the
requirement of SA 600.
As prescribed in SA 706, if the auditor considers it necessary to make reference to the audit of the other
auditors, the auditor’s report on the consolidated financial statements should disclose clearly the
magnitude of the portion of the financial statements audited by the other auditor(s).
This may be done by stating aggregate rupee amounts or percentages of total assets, revenues and cash
flows of components included in the consolidated financial statements not audited by the parent’s auditor.
Total assets, revenues and cash flows not audited by the parent’s auditor should be presented before giving
effect to permanent and current period consolidation adjustments.
Reference in the report of the auditor on the consolidated financial statements to the fact that part of the
audit of the group was made by other auditor(s) is not to be construed as a qualification of the opinion but
rather as an indication of the divided responsibility between the auditors of the parent and its subsidiaries.
c) When the Component(s) Auditor Reports on Financial Statements under an Accounting Framework
Different than that of the Parent
The parent may have components located in multiple geographies outside India applying an accounting
framework (GAAP) that is different than that of the parent in preparing its financial statements. Foreign
components prepare financial statements under different financial reporting frameworks, which may be
a well-known framework (such as US GAAP or IFRS) or the local GAAP of the jurisdiction of the component.
Local component auditors may be unable to report on financial statements prepared using the parent’s
GAAP because of their unfamiliarity with such GAAP.
When a component’s financial statements are prepared under an accounting framework that is different
than that of the framework used by the parent in preparing group’s consolidated financial statements,
the parent’s management perform a conversion of the components’ audited financial statements from
the framework used by the component to the framework under which the consolidated financial
statements are prepared. The conversion adjustments are audited by the principal auditor to ensure that
the financial information of the component(s) is suitable and appropriate for the purposes of
consolidation.
A component may alternatively prepare financial statements on the basis of the parent’s accounting
policies, as outlined in the group accounting manual, to facilitate the preparation of the group’s
consolidated financial statements. The group accounting manual would normally contain all accounting
policies, including relevant disclosure requirements, which are consistent with the requirements of the
financial reporting framework under which the group’s consolidated financial statements are prepared.
The local component auditor can then audit and issue an audit report on the components financial
statements prepared in accordance with “group accounting policies”.
When applying the approach of using group accounting policies as the financial accounting framework for
components to report under, the principal/parent auditors should perform procedures necessary to
determine compliance of the group accounting policies with the GAAP applicable to the parent’s financial
statements. This ensures that the information prepared under the requirements of the group accounting
policies will be directly usable and relevant for the preparation of consolidated financial statements by
the parent entity, eliminating the need for auditing by the auditor, the differences between the basis used
for the component’s financial statements and that of the consolidated financial statements. The Principal
auditor can then decide whether or not to rely on the components’ audit report and make reference to it
in the auditor’s report on the consolidated financial statements.
d) When the Component(s) Auditor Reports under an Auditing Framework Different than that of the Parent
Normally, audits of financial statements, including consolidated financial statements, are performed
under auditing standards generally accepted in India (“Indian GAAS”).

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In order to maintain consistency of the auditing framework and to enable the parent auditor to rely and
refer to the other auditor’s audit report in their audit report on the consolidated financial statements, the
components’ financial statements should also be audited under a framework that corresponds to Indian
GAAS.
e) Components Not Audited
Generally, the financial statements of all components included in consolidated financial statements
should be audited or subjected to audit procedures in the context of a multi-location group audit. Such
audits and audit procedures can be performed by the auditor reporting on the consolidated financial
statements or by the components’ auditor.
Where the financial statements of one or more components continue to remain unaudited, the auditor
reporting on the consolidated financial statements should consider unaudited components in evaluating
a possible modification to his report on the consolidated financial statements. The evaluation is necessary
because the auditor (or other auditors, as the case may be) has not been able to obtain sufficient
appropriate audit evidence in relation to such consolidated amounts/balances. In such cases, the auditor
should evaluate both qualitative and quantitative factors on the possible effect of such amounts
remaining unaudited when reporting on the consolidated financial statements using the guidance
provided in SA 705, “Modifications to the Opinion in the Independent Auditor’s Report”.

Question 10
M Ltd. acquired 51 % shares of S Ltd. on 01-04-20123 and sold 25% of these shares during the financial year
2023-24. M Ltd. did not prepare Consolidated Financial Statements for the financial year 2023-24 on the
plea that the control was only temporary. Do you agree with the view of M Ltd.? Decide, assuming, that M
Ltd. is required to prepare its financial statements under Ind AS.
Answer 10
Consolidation of Financial Statement: As per Ind AS 110, there is no such exemption for ‘temporary control’,
or “for operating under severe long-term funds transfer restrictions” and consolidation is mandatory for Ind
AS compliant financial statement in this case.
Ind AS 110 states that “Consolidation of an investee shall begin from the date the investor obtains control of
the investee and cease when the investor loses control of the investee”.
In the given case, M Ltd acquired 51% shares of S Ltd on 01.04.2019 and sold 25% shares during the year ended
2019-20. M Ltd did not consolidate the financial statements of S Ltd for the year ended 31.03.2020 on the plea
that control was only temporary. The intention of M Ltd. is quite clear that the control in S Ltd. is temporary
as the former company disposed of the acquired shares in the same year of its purchase.
However, even though the intention of M Ltd. is for temporary holding of shares in S Ltd. as per Ind AS, M Ltd
is required to prepare Consolidated Financial Statements in accordance with Ind AS 110 as exemption for
‘temporary control’ is not available under Ind AS 110. However, “Consolidation of an investee shall begin from
the date the investor obtains control of the investee and cease when the investor loses control of the
investee”. Here, due to sale of investment in S Ltd. up to 25%, M Ltd. loses control of S Ltd.
Accordingly, M Ltd., is required to prepare consolidated statement till the date of disposal of the 25% shares
to comply with the same.

Question 11
H Limited is an Investment Company preparing its Financial Statements in accordance with Ind AS. The
Company obtains funds from various investors and commits its performance for fair return and capital
appreciation to its investors. During the year under audit, it had been observed that the Company had
invested 25% in S1 Ltd., 50% in S2 Ltd. and 60% in S3 Ltd. of the respective share capitals of the Investee
Companies. When checking the investment schedule of the Company, an issue cropped as to whether there
would arise any need to consolidate accounts of any such investee companies with those of H Limited in
accordance with section 129(3) of the Companies Act, 2013 which contains no exclusion from consolidation.
Analyse the issues involved and give your views.

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Answer 11
Consolidated Financial Statements: According to Section 129(3) of the Companies Act, 2013, where a
company has one or more subsidiaries, including associate company and joint venture, it shall, in addition to
its own financial statements prepare a consolidated financial statement of the company and of all the
subsidiaries in the same form and manner as that of its own.
Further, as per Companies (Accounts) Rules, 2014, the consolidation of financial statements of the company
shall be made in accordance with the provisions of Schedule III to the Act and the applicable accounting
standards. However, a company which is not required to prepare consolidated financial statements under the
Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial
statements provided in Schedule III of the Act.
owever, an investment entity need not present consolidated financial statements if it is required, in
accordance with Ind AS 110‘Consolidated Financial Statements’, to measure all of its subsidiaries at fair value
through profit or loss. A parent shall determine whether it is an investment entity.
(An investment entity is an entity that(a) obtains funds from one or more investors for the purpose of providing
those investor(s) with investment management services; (b) commits to its investor(s) that its business
purpose is to invest funds solely for returns from capital appreciation, investment income, or both; and (c)
measures and evaluates the performance of substantially all of its investments on a fair value basis.)
In the given case, H Limited is an investment company preparing its financial statements in accordance with
Ind AS and the company had invested 25% in SI Ltd., 50% in S2 Ltd. and 60% in S3 Ltd. of the respective share
capitals of the investee companies. In view of provisions discussed in Ind AS 110, the Company is not required
to prepare consolidated financial statements however, for the compliance of Companies (Accounts) Rules,
2014, it shall be sufficient if the company complies with provisions on consolidated financial statements
provided in Schedule III of the Act.
Thus, it can be concluded that ultimate authority on consolidation is AS / Ind AS as prescribed by law and if
they give some exemption it should be followed. If out of exemption some subsidiaries are not consolidated,
then list should be disclosed in notes to accounts with reason.

Question 12
Venus Ltd. is a company engaged in the manufacture of stainless steel items. The company operates through
5 business units and has 35 branches across India. Manglam & Associates are being appointed as the
principal auditor of the company. While accepting the audit assignment as the principal auditor, what will
be the points of consideration for the principal auditor of the company?
Answer 12
Acceptance as Principal Auditor: The principal auditor, Manglam & Associates, should consider whether their
own participation is sufficient to be able to act as the principal auditor. For this purpose, the auditor would
consider:
a) the materiality of the portion of the financial information which the principal auditor audits;
b) the principal auditor's degree of knowledge regarding the business of the components;
c) the risk of material misstatements in the financial information of the components audited by the other
auditor; and
d) the performance of additional procedures as set out in this SA regarding the components audited by other
auditor resulting in the principal auditor having significant participation in such audit.

Question 13
CA. Mukund is in the second year of his term as statutory auditor of Style Marks Limited (Holding company),
its subsidiaries and joint ventures. At the time of planning audit, he wants to be sure that all the components
have been included in the consolidated financial statements. List out some
procedures he should perform to verify completeness of this information.

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 CA SANIDHYA SARAF 13.9

Answer 13
The auditor should verify that all the components have been included in the consolidated financial statements
unless these components meet criterion for exclusion. In respect of completeness of this information, the
auditor should perform the following procedures:
(a) review his working papers for the prior years for the known components
(b) review the parent’s procedures for identification of various components
(c) make inquiries of management to identify any new components or any component which goes out of
consolidated financial statements
(d) review the investments of parent as well as its components to determine the shareholding in other
entities
(e) review the joint ventures and joint arrangements as applicable
(f) review the other arrangements entered into by the parent that have not been included in the consolidated
financial statements of the group
(g) review the statutory records maintained by the parent, for example registers under section 186, 190 of
the Companies Act, 2013
(h) also identify the changes in the shareholding that might have taken place during the reporting period.

Question 14
CA. Kajal Gupta is nearing completion of audit of consolidated financial statements of Rubic Paints and
Chemicals Limited. She requires written representations from the parent’s management on matters
material to the consolidated financial statements. What specific matters such written
representations can include?
Answer 14
The auditor of the consolidated financial statements should obtain written representations from parent ‘s
management on matters material to the consolidated financial statements. Examples of such representations
include:
(a) Completeness of components included in the consolidated financial statements;
(b) Identification of reportable segments for segment reporting
(c) Identification of related parties and related party transactions for reporting
(d) Appropriateness and completeness of permanent and current period consolidation adjustments,
including the elimination of intra-group transactions.

Question 15
CA.M is auditor of consolidated financial statements of “D and D Limited” for year 2022-23. The consolidated
financial statements consist of financial statements and financial information of 8 subsidiaries audited by
other auditors. Such financial statements, financial information and auditor’s reports of subsidiaries have
been furnished by management of the “D and D Limited” to him. Following further information is also
available in respect of these 8 subsidiaries for year 2023-24: -
Total assets ` 1500 crore
Total revenues ` 1000 crore
Net cash outflows ` 10 crore
Two of these subsidiaries are located outside India whose financial statements have been prepared in
accordance with accounting principles generally accepted in their respective countries and which have been
audited by other auditors under generally accepted auditing standards applicable in their respective
countries.
Where and how such information should be included in independent auditor’s report on consolidated
financial statements of company? Also draft a suitable para by making necessary assumptions.
Answer 15
In a case where the parent‘s auditor is not the auditor of all the components included in the consolidated
financial statements, then as prescribed in SA 706, if the auditor considers it necessary to make reference to
the audit of the other auditors, the auditor’s report on the consolidated financial statements should disclose

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 CA SANIDHYA SARAF 13.10

clearly the magnitude of the portion of the financial statements audited by the other auditors. This may be
done by stating aggregate rupee amounts or percentages of total assets, revenues and cash flows of
components included in the consolidated financial statements not audited by the parent‘s auditor.
It should be included in Other Matter paragraph of independent auditor’s report. The draft “Other Matter
Paragraph” is as under: -
Other Matter Paragraph
We did not audit the financial statements and other financial information, in respect of eight
(8) subsidiaries, whose financial statements include total assets of Rs.1500 crores as at March 31, 2023, and
total revenues of Rs.1,000 crores and net cash outflow of Rs. 10 crores for the year ended on that date. These
financial statements and other financial information have been audited by other auditors and such financial
statements, other financial information and auditor’s reports have been furnished to us by the management
of the Holding Company.
Our opinion on the consolidated financial statements, in so far as it relates to the amounts and disclosures
included in respect of these subsidiaries and joint ventures, and our report in terms of sub-sections (3) of
Section 143 of the Act, in so far as it relates to the aforesaid subsidiaries is based solely on the reports of such
other auditors.
Two of these subsidiaries are located outside India whose financial statements and other financial information
have been prepared in accordance with accounting principles generally accepted in their respective countries
and which have been audited by other auditors under generally accepted auditing standards applicable in their
respective countries. The Holding Company’s management has converted the financial statements of such
subsidiaries from accounting principles generally accepted in their respective countries to accounting
principles generally accepted in India.
We have audited these conversion adjustments made by the Holding Company’s management. Our opinion
in so far as it relates to the balances and affairs of such subsidiaries is based on the report of other auditors
and the conversion adjustments prepared by the management of the Holding Company and audited by us.
Our opinion on the consolidated financial statements, and our report on Other Legal and Regulatory
Requirements is not modified in respect of the above matters with respect to our reliance on the work done
and the reports of the other auditors and the financial statements and other financial information certified by
the Management.

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CA SANIDHYA SARAF

Chapter 14.1
Special Features of Audit of Banks
Question 1
NRF Bank Ltd. is suffering from huge number of NPAs. During the month of April 2024, the management of
the bank decided to sell some of its NPAs. Bank is doing this exercise for the first time. The management
has selected following NPA accounts for sale:
Name NPA since F.Y. Amount (₹ In Lakh)
Fin Pvt. Ltd. 2020-21 36.55
Dairy Works 2022-23 55.24
Book Store 2019-20 29.85
Fancy Corp. 2018-19 61.42
RSM and Associates 2021-22 19.25
Being internal auditor of the bank, you are required to scrutinize the proposal made by the branch and help
them by providing specific points to be considered.
Answer 1
In case of Sale of NPA by Bank, the auditor should examine that:
• The policy laid down by the Board of Directors in this regard relating to procedures, valuation and
delegation of powers including non- performing financial assets that may be sold, norms or such sale,
valuation procedure and accounting policy.
• Only such NPA has been sold which has remained NPA in the books of the bank for at least 2 years.
• The assets have been sold “without recourse’ only i.e., the entire credit risk -performing asset should be
transferred to the purchasing bank.
• Subsequent to the sale of the NPA, the bank does not assume any legal, operational or any other type of
risk relating to the sold NPAs.
• The NPA has been sold at cash basis only. Under no circumstances, NPA can be sold to another bank at a
contingent price. The entire sale consideration has to be received on upfront basis.
• The bank has not purchased an NPA which it had originally sold.
• On the sale of the NPA, the same has been removed from the books of the account of selling bank on
transfer.
• If the sale is at a price below the net book value (NBV) (i.e., book value less provisions held), the shortfall
should be debited to the profit and loss account of that year.
• If the sale is for a value higher than the NBV, the excess provision shall not be reversed but will be utilised
to meet the shortfall/ loss on account of sale of other non-performing financial assets.
In the given situation, management of NRF Bank Ltd. is considering to sell following NPAs, during the month
of April, 2024:
Name NPA since F.Y. Amount (₹ in lakh)
Fin Pvt. Ltd. 2020-21 36.55
Dairy Works 2022-23 55.24
Book Store 2019-20 29.85
Fancy Corp. 2018-19 61.42
RSM and Associates 2021-22 19.25
In view of above-mentioned conditions, the auditor is required to ensure that only such NPA has been sold
which has remained NPA in the books of the bank for at least 2 years.
Considering the facts given in the question all the NPAs, except for Dairy Works, are prior to April 2021 i.e., 2
years prior to April 2024. In view of the above provisions, management of NRF Bank Ltd. can sell all the NPAs
except for NPA of 55.24 lakh rupees of Dairy Works as it has remained NPA in the books of the banks less than
2-year duration.

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CA SANIDHYA SARAF

Question 2
PDSJ & Associates are Statutory Auditors of a scheduled Commercial Bank for the year 2023-24. While
evaluating internal control over advances, it came to their notice that classification of term loan borrower
accounts into SMA as well as NPA is done in the system on the following lines:
• In case full dues are not received on a particular due date, a borrower account is immediately considered
as overdue on the very next day. For example, if due date of loan account is 31st March, 2023 and dues
are not received on 31st March, 2023, it shall be considered as overdue on 1st April, 2023.
• If it continues to remain overdue, then account is tagged as SMA-1 on 1st May, 2023.
• If it continues to remain overdue further, then account is tagged as SMA-2 on 31st May, 2023.
• If it continues to remain overdue even after being tagged as SMA-2, it is classified as NPA on 30th June,
2023.
Evaluate above control designed by bank in the system for the purpose of exercising control over such
advances in compliance with regulatory guidelines.
Answer 2
The design of the above control instituted by the bank in its system is not in accordance with the regulatory
guidelines. Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date
which is fixed by the bank, the borrower accounts are flagged as overdue by the banks as part of their day-
end processes for the due date.
Classification of borrower accounts as SMA as well as NPA is done as part of day-end process for the relevant
date. SMA or NPA classification date is the calendar date for which the day end process is run. In other words,
the date of SMA/NPA reflects the asset classification status of an account at the day-end of that calendar date.
In the given situation, the due date of a loan account is March 31, 2024, and full dues are not received by the
bank before it runs the day-end process for this date, the date of overdue shall be March 31, 2024, and not
1st April, 2024.
If it continues to remain overdue, then this account shall get tagged as SMA-1 upon running day-end process
on April 30, 2024 [i.e. upon completion of 30 days of being continuously overdue]. Accordingly, the date of
SMA-1 classification for that account shall be April 30, 2024.
Similarly, if the account continues to remain overdue, it shall get tagged as SMA-2 upon running day-end
process on May 30, 2024, and if continues to remain overdue further, it shall get classified as NPA upon running
day-end process on June 29, 2024.

Question 3
RML & Associates are one of the joint auditors of IND Bank for the year 2023-24. While auditing IND Bank,
they are analysing industry data relating to NPAs in select public sector banks as part of risk assessment
procedures:
Name of Bank Gross NPAs (in ₹ crore) Net NPAs (in ₹ crore) Ratio of Net NPAs to Net advances
BIC Bank 55,000 13,000 1.72%
ABD Bank 45,000 10,000 2.34%
RIN Bank 55,000 18,000 2.65%
IND Bank 28,000 6,500 3.97%
CRB Bank 35,000 8,800 2.27
In the above context, what do you understand by “Gross NPAs” and “Net NPAs” as on reporting date in the
context of financial statements of a Bank? As an auditor of IND Bank, what inference would you draw by
comparing the “Ratio of net NPAs to net advances” with other public sector banks?
Answer 3
Gross NPAs represent opening balances of NPAs as increased by fresh NPAs during the year and reduced by
upgradations, recoveries and write-offs during the year.
Net NPAs are arrived at after deducting amounts on account of the total provision held against NPAs, balance
in the interest suspense account to park accrued interest on NPAs and certain other adjustments.
The Net NPAs to Net advances ratio is higher in the case of IND Bank as compared to other public sector banks.
This indicates that there is a risk that the bank may not have made the required provisions in accordance with
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 14.1.3
CA SANIDHYA SARAF

RBI guidelines. A higher net NPAs to Net advances ratio indicates the probability and risk of under-provisioning.
Keeping in view of the above, audit procedures have to be tailored towards the examination and verification
of this crucial area.

Question 4
CA J is the statutory auditor of the branch of a nationalized bank. During the audit, he is also focusing upon
verification of Current Accounts & Savings Accounts (CASA) maintained at the branch. Suggest a few audit
procedures he should follow.
Answer 4
• Verify on a sample basis current account and saving accounts opened during the year for adherence to KYC
norms. Verify that saving accounts are opened in name of individuals, HUF, some approved institutions like
trusts, educational institutes etc. Remember that saving accounts are not opened for business or
professional concern. The business transactions are carried in current accounts which can be opened for all
kind of customers like companies, individuals, partnership firms etc.
• Verify the balances in individual accounts on a sample basis.
• Check the calculations of interest on a test check basis. Remember that no interest is paid generally on
current accounts by banks.
• Examine whether the procedure for obtaining balance confirmation periodically has been followed
consistently. Examine, on a sampling basis, the confirmations received.
• Ensure that debit balances in current accounts are not netted out on the liabilities side but are appropriately
included under the head ‘advances’.
• Inoperative accounts (both current and saving) are a high-risk area of frauds in banks. As per RBI guidelines,
a savings/ current account should be treated as inoperative/dormant if there are no transactions in the
account for over a period of two years. Verify on a sample basis some of inoperative accounts revived/closed
during the year. Ensure that inoperative accounts are revived only with proper authority. In this regard, cases
where there is significant reduction in balances of such accounts as compared to previous year, examine
authorisation for withdrawals.

Question 5
Your firm has been appointed as Central Statutory Auditors of a Nationalized Bank. The Bank follows
financial year as accounting year. Your Audit Manager informed that the bank has recognized on accrual
basis income from dividends on securities and Units of Mutual Funds held by it as at the end of financial
year. The dividends on securities and Units of Mutual Funds were declared after the end of financial year.
comment.
Answer 5
Banks may book income from dividend on shares of corporate bodies on accrual basis, provided dividend on
the shares has been declared by the corporate body in its annual general meeting and the owner's right to
receive payment is established. This is also in accordance with AS 9. In this case the dividends have been
declared after the financial year end. Therefore, the recognition of income by the bank on accrual basis is not
in order.
In respect of income from government securities and bonds and debentures of corporate bodies, where
interest rates on these instruments are pre-determined, income could be booked on accrual basis, provided
interest is serviced regularly and as such is not in arrears. It was further, however, clarified that banks may
book income on accrual basis on securities of corporate bodies/public sector undertakings in respect of which
the payment of interest and repayment of principal have been guaranteed by the central government or a
State government.

Question 6
As statutory central auditors of a Nationalized bank, what special points are to be borne in mind in the audit
of compliance with "Statutory Liquidity Ratio" (SLR) requirements?

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Answer 6
Statutory Liquidity Ratio (SLR) Requirement–s SLR is the requirement that every scheduled commercial bank
in India is required to maintain in the form of certain liquid assets such as gold, cash and government approved
securities before providing credit to the customers. The Reserve Bank of India requires statutory central
auditors of banks to verify the compliance with SLR requirements of 12 odd dates in different months of a fiscal
year not being Fridays. The objective of maintaining SLR is to have an amount in the form of liquid assets which
can be used to handle a sudden increase in demand for the amount from the depositors. The resultant report
is to be sent to the top management of the bank and to the Reserve Bank.
Area of Focus Suggested Audit Procedures
Compliance • Obtain an understanding of the relevant circulars/ instructions of the RBI, particularly
with CRR and regarding composition of items of DTL.
SLR • Request the branch auditors to send their weekly trial balance as on Friday and these
requirements are consolidated at the head office. Based on this consolidation, the DTL position is
determined for every reporting Friday. The statutory central auditor should request the
branch auditors to verify the correctness of the trial balances relevant to the dates
selected by him/her. The branch auditors should also be specifically requested to
examine the cash balance at the branch on the selected dates.
• Examine, on a test basis, the consolidations regarding DTL position prepared by the
bank with reference to the related returns received from branches. The auditor should
examine whether the valuation of securities done by the bank is in accordance with
the guidelines prescribed by the RBI.
• While examining the computation of DTL, specifically examine that items have been
excluded from liabilities as per RBI guidelines. Some of these items are:-
• Paid up capital, reserve, any credit balance in profit & loss account of bank, amount of
loan taken from RBI and amount of refinance taken from EXIM bank, NHB, SIDBI and
NABARD
✓ Part amounts of recoveries from the borrowers in respect of debts considered bad
and doubtful of recovery.
✓ Amounts received in Indian currency against import bills and held in sundry
deposits pending receipts of final rates.

Question 7
Explain the scope of concurrent audit of a bank with reference to Reserve Bank of India guidelines.
Answer 7
The detailed scope of the concurrent audit should be clearly and uniformly determined for the Bank as a whole
by the Bank’s Central Inspection and Audit Department in consultation with the Bank’s Audit Committee of
the Board of Directors (ACB). In determining the scope, importance should be given to checking high-risk
transactions having large financial implications as opposed to transactions involving lesser amounts. The
detailed scope of the concurrent audit may be determined and approved by the ACB.
Further, the guidelines issued by the RBI cover all the key areas of activities of the branch which is under
concurrent audit. Most banks have prepared an Audit Manual for this purpose. Broadly stated, the following
areas are covered by these guidelines:

Scope of Concurrent Foreign

Audit in Banks Exchange

Cash

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Question 8
In course of audit of Good Samaritan Bank as at 31st March,24 you observed the following.
a) In a particular account there was no recovery in the past 18 months. The bank has not applied the NPA
norms as well as income recognition norms to this particular account. When queried the bank
management replied that this account was guaranteed by the central government and hence these
norms were not applicable. The bank has not invoked the guarantee. Please respond. Would your
answer be different if the advance is guaranteed by a State Government?
b) The bank’s advance portfolio comprised of significant loans against Life Insurance Policies. Write
suitable audit program to verify these advances.
Answer 8
a) Government Guaranteed Advance: - A government guaranteed advance becomes NPA, then for the purpose
of income recognition, interest on such advance should not to be taken to income unless interest is realized.
However, for purpose of asset classification, credit facility backed by Central Government Guarantee, though
overdue, can be treated as NPA only when the Central Government repudiates its guarantee, when invoked.
Since the bank has not invoked the guarantee, the question of repudiation does not arise. Hence the bank is
correct to the extent of not applying the NPA norms for provisioning purpose. But this exemption is not
available in respect of income recognition norms. Hence the income to the extent not recovered should be
reversed.
The situation would be different if the advance is guaranteed by State Government because this exception is
not applicable for State Government Guaranteed advances, where advance is to be considered NPA if it
remains overdue for more than 90 days.
In case the bank has not invoked the Central Government Guarantee though the amount is overdue for long,
the reasoning for the same should be taken and duly reported in LFAR.
b) The Audit Programme to Verify Advances against Life Insurance Policies is as under-
(i) The auditor should inspect the policies and see whether they are assigned to the bank and whether such
assignment has been registered with the insurer.
(ii) The auditor should also examine whether premium has been paid on the policies and whether they are
in force.
(iii) Certificate regarding surrender value obtained from the insurer should be examined.
(iv) The auditor should particularly see that if such surrender value is subject to payment of certain premium,
the amount of such premium has been deducted from the surrender value.

Question 9
Your firm has been appointed as Central Statutory Auditors of a Nationalized Bank is a consortium member
of Cash Credit Facilities of 50 crores to X Ltd. Bank's own share is ₹ 10 crores only. During the last two
quarters against a debit of ₹1.75 crores towards interest the credits in X Ltd's account are to the tune of
1.25 crores only. Based on the certificate of lead bank, the bank has classified the account of X Ltd as
performing. The Bank follows financial year as accounting year. vise your views on the issue which were
brought to your notice by your Audit Manager.
Answer 9
The bank is a consortium member of cash credit facilities of ₹ 50 crores to X Ltd. Bank's own share is ₹ 10
crores only. During the last two quarters against a debit of ₹ 1.75 crores towards interest, the credits in X Ltd.’s
account are to the tune of ₹ 1.25 crores only. Sometimes, several banks form a group (the 'consortium') under
the leadership of a 'lead bank' to make advance to a large customer on same conditions and security with
proportionate rights. In such cases, each bank may classify the advance given by it according to its own
experience of recovery and other factors. Since in the last two quarters, the amount remains outstanding and,
thus, interest amount should be reversed. This is despite the certificate of lead bank to classify that the account
as performing. Accordingly, the amount should be shown as non-performing asset.

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Question 10
You have been appointed as an auditor of LCO Bank, a nationalized bank. LCO Bank also deals in providing
credit card facilities to its account holder. The bank is aware of the fact that there should be strict control
over storage and issue of credit cards. How will you evaluate the Internal Control System in the area of
Credit Card operations of a Bank?
Answer 10
• There should be effective screening of applications with reasonably good credit assessments.
• There should be strict control over storage and issue of cards.
• There should be a system whereby a merchant confirms the status of unutilised limit of a credit-card
holder from the bank before accepting the settlement, in case the amount to be settled exceeds a
specified percentage of the total limit of the card holder.
• There should be a system of prompt reporting by the merchants of all settlements accepted by them
through credit cards.
• Reimbursement to merchants should be made only after verification of the validity of merchant’s
acceptance of cards.
• All the reimbursement (gross of commission) should be immediately charged to the customer’s account.
• There should be a system to ensure that statements are sent regularly and promptly to the customer.
• There should be a system to monitor and follow-up customers’ payments
• Payments overdue beyond a reasonable period should be identified and attended to carefully. For
defaulting customers, credit should be stopped by informing the merchants through periodic bulletins,
as early as possible, to avoid increased losses
• There should be a system of periodic review of credit card holders’ accounts. On this basis, the limits of
customers may be revised, if necessary. The review should also include determination of doubtful
amounts and the provisioning in respect thereof.

Question 11
You have been appointed as Concurrent Auditor of a nationalized bank branch. The main business at the
branch is dealing in foreign exchange. Suggest the main areas of coverage with regard to foreign exchange
transactions of the said branch under concurrent audit.
Answer 11
• Check foreign bills negotiated under letters of credit.
• Check FCNR and other non-resident accounts whether the debits and credits are permissible under rules.
• Check whether inward/outward remittance have been properly accounted for.
• Examine extension and cancellation of forward contracts for purchase and sale of foreign currency.
Ensure that they are duly authorized and necessary charges have been recovered.
• Ensure that balances in Nostro accounts in different foreign currencies are within the limit as prescribed
by the bank.
• Ensure that the overbought/oversold position maintained in different currencies is reasonable,
considering the foreign exchange operations.
• Ensure adherence to the guidelines issued by RBI/HO of the bank about dealing room operations.
• Ensure verification/reconciliation of Nostro and Vostro account transactions/balances.

Question 12
While auditing FAIR Bank, you observed that a lump sum amount has been disclosed as contingent liability
collectively. You are, therefore, requested by the management to guide them about the disclosure
requirement of Contingent Liabilities for Banks. Kindly guide.
Answer 12
Contingent Liabilities for Banks: The Third Schedule to the Banking Regulation Act, 1949, requires the
disclosure of the following as a footnote to the balance sheet-
(A) Contingent liabilities
(i) Claims against the bank not acknowledged as debts.
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(ii) Liability for partly paid investments.

(iii) Liability on account of outstanding forward exchange contracts.
(iv) Guarantees given on behalf of constituents-
(1) In India.
(2) Outside India.
(v) Acceptances, endorsements and other obligations.
(vi) Other items for which the bank is contingently liable.
(B) Bills for collection.

Question 13
ABC Chartered Accountants have been appointed as concurrent auditors for the branches of Effective Bank
Ltd. for the year 2203-24. You are part of the audit team for Agra branch of the bank and have been
instructed by your senior to verify the advances of the audit period. You are required to guide your assistant
about the areas to be taken care while doing verification during the concurrent audit.
Answer 13
Verification of Advances as a Concurrent Auditor:
(i) Ensure that loans and advances have been sanctioned properly (i.e. after due scrutiny and at the
appropriate level).
(ii) Verify whether the sanctions are in accordance with delegated authority.
(iii) Ensure that securities and documents have been received and properly charged/ registered.
(iv) Ensure that post disbursement supervision and follow-up is proper, such as receipt of stock
statements, instalments, renewal of limits, etc.
(v) Verify whether there is any mis utilisation of the loans and whether there are instances indicative of
diversion of funds.
(vi) Check whether the letters of credit issued by the branch are within the delegated power and ensure
that they are for genuine trade transactions.
(vii) Check the bank guarantees issued, whether they have been properly worded and recorded in the
register of the bank. Whether they have been promptly renewed on the due dates.
(viii) Ensure proper follow-up of overdue bills of exchange.
(ix) Verify whether the classification of advances has been done as per RBI guidelines.
(x) Verify whether the submission of claims to DICGC and ECGC is in time.
(xi) Verify that instances of exceeding delegated powers have been promptly reported to
controlling/Head Office by the branch and have been got confirmed or ratified at the required level.
(xii) Verify the frequency and genuineness of such exercise of authority beyond the delegated powers by
the concerned officials.

Question 14
In the course of audit of Skip Bank Ltd., you found that the Bank had sold certain of its non-performing
assets. Draft the points of audit check that are very relevant to this area of checking.
Answer 14
• the policy laid down by the Board of Directors in this regard relating to procedures, valuation and delegation
of powers including non performing financial assets that may be purchased/sold, norms or such
purchase/sale, valuation procedure and accounting policy.
• only such NPA has been sold which has remained NPA in the books of the bank for at least 2 years.
• the assets have been sold/ purchased “without recourse’ only i.e the entire credit risk associated with the
non-performing asset should be transferred to the purchasing bank.
• subsequent to the sale of the NPA, the bank does not assume any legal, operational or any other type of
risk relating to the sold NPAs.
• the NPA has been sold at cash basis only. Under no circumstances, NPA can be sold to another bank at a
contingent price .The entire sale consideration has to be received on upfront basis.
• the bank has not purchased an NPA which it had originally sold.
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In case of sale of an NPA, the auditor should also ensure that:

• on the sale of the NPA, the same has been removed from the books of the account of selling bank on
transfer;
• If the sale is at a price below the net book value (NBV) (i.e., book value less provisions held), the shortfall
should be debited to the profit and loss account of that year.
• If the sale is for a value higher than the NBV, the excess provision shall not be reversed but will be utilised
to meet the shortfall/ loss on account of sale of other non-performing financial assets.
Similarly, in case of purchase of NPAs, the auditor should ver that:
• the NPA purchased has been subjected to the provisioning requirements appropriate to the classification
status in the books of the purchasing bank.
• any recovery in respect of an NPA purchased from other banks is first adjusted against its acquisition cost
and only the recovered amount in excess of the acquisition cost has been recognised as profit.
• for the purpose of capital adequacy, banks have assigned 100% risk weights to the NPAs purchased from
other banks.

Question 15
Banks, because of certain characteristics, are distinguished from other commercial enterprises and hence it
needs special audit consideration. As an auditor of a bank, specify the various peculiarities which may
necessitate special audit consideration to be taken care by you?
Answer 15
Special audit considerations arise in the audit of banks because of:
• the particular nature of risks associated with the transactions undertaken;
• the scale of banking operations and the resultant significant exposures which can arise within short period
of time;
• the extensive dependence on IT to process transactions;
• the effect of the statutory and regulatory requirements;
• the continuing development of new products and services and banking practices which may not be matched
by the concurrent development of accounting principles and auditing practices.
Evolution of technology and providing services through Net Banking and Mobiles has exposed banks to huge
operational and financial risk.
The auditor should consider the effect of the above factors in designing his audit approach. It is imperative for
Branch Auditors and SCAs (Statutory Central Auditors) to have detailed knowledge of the products offered and
risks associated with them, and appropriately address them in their audit plan to the extent they give rise to
the risk of material misstatements in the financial statements.
In today’s environment, the banks use different applications to carry out different transactions which may
include data flow from one application to other application; the auditor while designing his plans should also
understand interface controls between the various applications.

Question 16
ABC Bank had sanctioned credit limits of₹ 100 lakh to M/s Volkart Ltd on 1st September 2021. The renewal
of limits was due ons1t September 2023. While doing the statutory branch audit for the year ended 3s1t
March 2024, you find that the renewal has not been done even though180 days are over. The bank says that
the renewal process has been initiated on time and most of the document are received. The account is
operated regularly and is in order; balance is maintained within drawing power. It also shows a letter from
Volkat stating that due to a sudden death of their auditor, a new auditor had to be appointed. Procedure
for appointment took some time and the new auditor was doing the audit all over again. The limit was not
renewed till 31/3/202.3However, the audited financials are received on t1h 0April 2023 and the renewal
letter was issued immediately. Your assistant is insisting that the account must be classified as NPA since
the limit was not renewed as on 31/3/2023. what is your opinion?

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Answer 16
As per Guidelines of Reserve Bank of India the account should be classified as NPA if renewal is not done in
180 days. However, in the present case, operations in the account are excellent. The bank has shown a letter
from that company that due to certain reasons the audited financial statements are delayed. Further, the limit
has been renewed before signing the audit report.
Thus, even if the sanction was issued after the balance sheet date, it relates to the position as on the balance
sheet date. Therefore, it is an adjusting event under AS 4, Contingencies and Events Occurring After the
Balance Sheet Date. It is also a matter of substance over form.
The auditor would consider classifying the account as a standard asset.

Question 17
You are auditing a small bank branch with staff strength of the manager, cashier and three other staff S1
,S2 and S3. Among allocation of work for other areas, S1 who is a also opens all the mail and forwards it to
the concerned person. He does not have a signature book so as to check the signatures on important
communications. S2 has possession of all bank forms (e.g. Cheque books, demand draft/pay order books,
travelers’ cheque, foreign currency cards etc.) He maintains a record meticulously which you have test
checked also. However, no one among staff regularly checks that. You are informed that being a small
branch with shortage of manpower, it is not possible to always check the work and records. Give your
comments.
Answer 17
Banks are required to implement and maintain a system of internal controls for mitigating risks, maintain good
governance and to meet the regulatory requirements. Given below are examples of internal controls that are
violated in the given situation:
In the instant case, S1 who is a peon opens all the mail and forwards it to the concerned person. Further, he
does not have a signature book so as to check the signatures on important communications is not in
accordance with implementation and maintenance of general internal control. As the mail should be opened
by a responsible officer. Signatures on all the letters and advices received from other branches of the bank or
its correspondence should be checked by an officer with the signature book.
All bank forms (e.g. Cheque books, demand draft/pay order books, travelers’ cheque, foreign currency cards
etc.) should be kept in the possession of an officer, and another responsible officer should verify the issuance
and stock of such stationery. In the given case, S2 has possession of all bank forms (e.g. cheque books, demand
draft/pay order books, travelers’ cheque, foreign currency cards etc.). He maintains a record meticulously
which were also verified on test check basis.
Further, contention of bank that being a small branch with shortage of manpower they are not able to check
the work and records on regular basis, is not tenable as such lapses in internal control pose risk of fraud.
The auditor should report the same in his report accordingly.

Question 18
CA. Harshit is conducting statutory audit of branch of a public sector bank. On examining 20 large advances
of the branch, he finds that in 5 examined cases, loan applications have been filled up scantily with
important details left out. In these cases, it is also noticed that cash credit limits to the borrowers were
enhanced during the year but there are no records pertaining to assessment of enhanced working capital
requirements in respective borrower files. The branch is unable to show such assessments/workings in
system either.
However, all the five accounts are operating satisfactorily. These accounts have been classified as standard
assets by branch. Would above information prompt auditor to suggest change in asset classification of
above accounts? What does depicted situation reflect?
Answer 18
An account becomes NPA when it ceases to generate income for bank. In the given situation, all the examined
five accounts are operating satisfactorily. There is no reason for suggesting changes in their classification.

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The matter of scantily filling up loan applications and lack for record for assessment of enhanced working
capital requirements shows that internal control over advances in branch is not proper. The above said
situation shows deficiencies in “credit appraisal” at branch level. Such deficiencies need to be highlighted by
auditor in LFAR.

Question 19
You are conducting concurrent audit of branch of a public sector bank. It is a large branch having advances
of about ₹ 500 crores including export advances of ₹ 300 crores. Some borrowers also get LCs issued from
branch for importing raw diamonds from diamond hubs of Belgium. You want to be sure that there is no
revenue leakage in branch. For the time being, you are focusing upon advances. Discuss any five areas
pertaining to advances of the branch which you would verify to ensure no revenue leakage.
Answer 19
(i) Interest rates fed in the system need to be verified with respect to corresponding sanction letters. It would
help ensure that correct rate of interest is fed into the system and interest is applied properly at stipulated
intervals on advances.
(ii) Processing fees in respect of freshly sanctioned advances and renewed limits need to be levied in
accordance with bank guidelines and these need to be verified. Any revision in processing fees from time
to time has to be given effect to in accordance with circulars/manual of bank.
(iii) Sanction of cash credit limits is generally accompanied with stipulation to submit stock statements. Non-
submission of stock statements can involve levying of penal interest. Verification of this aspect is required.
(iv) Verification of overdue interest on export bills purchased and packing credit facilities for overdue period.
(v) Verification of charges/commission in respect of letters of credit issued in accordance with Bank’s
circulars/manual.

Question 20
CA. Seema is appointed as stock auditor of Bhawani Rice Mills Pvt. Ltd. availing credit facilities from R.K.
Puram Branch, Near Tamil Educational Society, New Delhi.
The borrower is enjoying cash credit limit of ₹ 12 crore from branch against security of paid stocks and
debtors up to 90 days against margin of 25%. She proceeds to visit premises of Bhawani Rice Mills Pvt. Ltd.
located on outskirts of Delhi. She verifies books of accounts and stock records of the company and also test
checks quantity of paddy and rice of 20000 quintals and 8000 bags lying in premises of the company.
Drawing power of ₹ 12.05 crore is computed in stock audit report and report stands submitted to bank.
After about a week, regular internal inspector appointed by Inspection department of bank also happened
to visit premises of the borrower and found that rice contained in about 5000 bags included in stocks having
approx. value of ₹ 1.50 crore was fungus ridden. The company was holding this stock for last 15 months.
How do you view the above situation? Discuss
Answer 20
The above situation reflects that professional work of stock audit was not performed diligently by stock
auditor. It is one of the important responsibilities of stock auditor to verify condition of stocks. The auditor’s
role is not limited to verify physical quantities only.
In given case, she should have got opened rice bags on test check basis. In the process, she could have come
to know about fungus ridden condition of rice. Value of such rice should have been excluded while arriving at
value of stocks for purpose of computation of drawing power. It shows that she has failed to perform her work
diligently and drawing power calculated in the report submitted to bank is not proper.

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Chapter 14.2
Special Features of Audit of Non-Banking Financial Companies

Question 1
Yo-Yo Finance Limited is NBFC-ML as per the revised categorisation of NBFC done by RBI. YAK & Associates,
a firm of chartered accountants, are appointed as Statutory Auditors of the Company for the year 2023-24.
The audit team consists of CA Y, 1 Audit Manager and 3 junior assistants. The Audit Manager has been
recently appointed, who does not have much exposure in the field of Auditing of NBFCs. During the
engagement team meeting, the Audit Manager asked CA Y, regarding the audit procedures to be undertaken
to verify whether the aforesaid Company has followed Prudential Norms? As an Engagement partner
suggest any four procedures to the Audit Manager.
Answer 1
(i) Check compliance with prudential norms encompassing income recognition, income from investments,
accounting standards, accounting for investments, asset classification, provisioning for bad and doubtful
debts, capital adequacy norms, prohibition on granting of loans by NBFC against its own shares, prohibition
on loans and investments for failure to repay public deposits and norms for concentration of
credit/investments.
(ii) An auditor should ensure that the Board of Directors of every NBFC granting/intending to grant
demand/call loans shall frame and implement a policy for the company.
(iii) An auditor should assess on the basis of examinations conducted by him whether the NBFC has complied
with the prudential norms. In particular, he should verify that advances and other credit facilities have been
properly classified as standard/substandard/doubtful/loss and that proper provision has been made in
accordance with the Directions.
(iv) In respect of Non-Performing Assets, an auditor should check whether the unrealised income in respect of
such assets has not been taken to the Profit & Loss Account on an accrual basis. Income from NPAs should
be accounted for on realisation basis only.
(v) Check whether all accounts which have been classified as NPAs in the previous year also continue to be
shown as such in the current year also. If the same is not treated as an NPA in the current year, the auditor
should specifically examine such accounts to ascertain whether the account has become regular and the
same can be treated as performing as per the Directions.

Question 2
Singh Ltd. is a company registered under the Companies Act, 2013. The company is engaged in the business
of loans and advances, acquisition of shares / stocks / bonds / debentures/securities issued by government
or local authorities. For the year ended 31st March 2024, the following are some extracts from the financial
statements:
(i) Paid-up share capital ₹ 50 Cr.
(ii) Non-Current Assets - Loans & Advances ₹ 61.75 Cr.
(iii) Current Assets - Loans and advances ₹ 312.25 Cr.
(iv) Total assets of the company ₹ 620 Cr.
(v) Intangible assets ₹ 12 Cr.
(vi) Profit for the Year ₹ 7.25 Cr.
(vii) Income from interest and dividends ₹ 68 Cr.
(viii) Gross income ₹ 118.75 Cr.
Directors intend to apply for registration as Non-Banking Financial Company (NBFC) under Section 45-IA of
the Reserve Bank of India (Amendment) Act, 1997. Advise.

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Answer 2
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 audited balance sheet of the previous year to decide its principal
business. The company will be treated as NBFC when
(i) Financial assets of the company constitute more than 50 percent of the total assets (netted off by intangible
assets) and
(ii) Income from financial assets of the company constitutes 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.
In the given case of Singh Ltd, its financial assets are ₹ 374 Crore i.e., (₹ 61.75 + ₹ 312.25)
Total Assets (netted off by intangible assets) = ₹ 608 Crore
Income from financial assets = ₹ 68 Crore
Gross Income = ₹ 118.75 Crore
From the above, it can be concluded that financial assets of Singh Ltd. constitute more than 50 per cent of the
total assets (netted off by intangible assets) and income from financial assets of Singh Ltd. constitutes more
than 50 per cent of the gross income. Hence, Singh Ltd. fulfills both the criteria to qualify as an NBFC.
Thus Singh Ltd. can apply for registration under Section 45-IA of the Reserve Bank of India (Amendment) Act,
1997 in prescribed form along with the necessary documents

Question 3
Define NBFC. Also give a brief description about types of NBFCs covering any five NBFCs.
Answer 3
Definition of NBFC:45 I(f) of Reserve Bank of India (Amendment) Act, 1997 define non-banking financial
company as:
(i) A financial institution which is a company;
(ii) A non-banking institution which is a company and which has as its principal business the receiving of
deposits, under any scheme or arrangement or in any other manner, or lending in any manner;
(iii) Such other non-banking institution or class of such institutions, as the Bank may, with the previous
approval of the Central Government and by notification in the Official Gazette, specify;”
NBFCs mandated to register under RBI
NBFCs registered with RBI are categordizaes follows:
(a) in terms deposit acceptance or otherwise into Deposit and Non-Deposit accepting NBFCs;
(b) non deposit taking NBFCs by their size into systemically important and non-systemically
important (NBFC-NDSI and NBFC-ND); and
(c) by the kind of activities, they conduct.
Within the categorization mentioned in (c) above, (i.e. by the kind of activity they conduct)
the different types of NBFCs are as follows:
Types of NBFCs
Investment Infrastructure Core Infrastructure Non- Non- NBFC- Asset Finance
and Credit Finance Investment Debt Fund- Banking Banking Non- Company,
Company Company Company Non- Banking Financial Financial Operative Investment
(ICC) (IFC) (CIC) Financial Company - Company Financial Company, Loan
Company Micro – Factors Holding Company,
(IDF-NBFC Finance (NBFC- Company Mortgage
Institution Factors) (NOFHC) Guarantee
(NBFC-MFI) Companies etc
All NBFCs are either deposit taking or non-deposit taking. If they are non-deposit taking, ND is
suffixed to their name (NBFC-ND).
Companies exempted from registration under RBI
Companies that do financial business but are regulated by other regulators are given specific exemption by the
Reserve Bank from its regulatory requirements for avoiding duality of regulation.

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 CA SANIDHYA SARAF 14.2.3

Following NBFCs have been exempted from the requirement of registration under Section 45-IA of the RBI Act,
1934 subject to certain conditions.
➢ Housing Finance Institutions (regulated by National Housing Bank);
➢ Merchant Banking Companies (regulated by Securities and Exchange Board of India);
➢ Stock Exchanges (regulated by Securities and Exchange Board of India);
➢ Companies engaged in the business of stock-broking/sub-broking (regulated by Securities and
Exchange Board of India);
➢ Venture Capital Fund Companies (regulated by Securities and Exchange Board of India);
➢ Nidhi Companies (regulated by Ministry of Corporate Affairs, Government of India);
➢ Insurance companies (regulated by Insurance Regulatory and Development Authority); and
➢ Chit Companies (as defined in clause (b) of section 2 of the Chit Funds Act, 1982 (Act 40 of
1982)).
➢ Specified Micro Finance Companies
➢ Securitisation and Reconstruction Companies
➢ Mutual Benefit Companies
➢ Core Investment Companies
➢ Alternative Investment Fund (AIF) Companies

Question 4
Shubham & Associates are going to start the audit of NBFCs. They have not performed much work for the
NBFCs in the past years. You are required to explain the requirements related to registration and regulation
of NBFCs which an auditor needs to keep his in mind while planning the audit of NBFC which would help
this firm.
Answer 4
An auditor should know following points regarding registration and regulation of NBFCs: Under Section 45–IA
of the RBI Act, 1934, no NBFC shall commence or carry on the business of a non-banking financial institution
without
• obtaining a certificate of registration issued by the RBI; and
• having a net owned fund (NOF) of ₹ 25 lakhs (₹ Two crore since April 1999) not exceeding two hundred
lakhs rupees, as the RBI may, by notification in the Official Gazette, specify.
(The RBI (Amendment) Act (1997) provided an entry point norm of ₹ 25 lakh as the minimum NOF which was
revised upwards to ₹ 2 crore for new NBFCs seeking grant of certificate of registration (CoR) on or after 21
April 1999).
A company incorporated under the Companies Act and desirous of commencing business of non-banking
financial institution as defined under Section 45–IA of the RBI Act, 1934 can apply to the RBI in prescribed form
along with necessary documents for registration. The RBI issues CoR after satisfying itself that the conditions
as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied.
However, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are
exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking
companies/Stock Broking Companies registered with SEBI, Insurance Company holding a valid CoR issued by
IRDA, Nidhi Companies as notified under Section 406 of the Companies Act, 2013, Chit Companies as defined
in clause (b) of Section 2 of the Chit Funds Act, 1982 or Housing Finance Companies regulated by National
Housing Bank.
The RBI has issued directions to NBFCs on acceptance of public deposits, prudential norms like capital
adequacy, income recognition, asset classification, provision for bad and doubtful debts, risk exposure norms
and other measures to monitor the financial solvency and reporting by NBFCs.
Directions were also issued to auditors to report non-compliance with the RBI Act and regulations to the
Reserve Bank, Board of Directors and shareholders.

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 CA SANIDHYA SARAF 14.2.4

Question 5
Satyam Pvt Ltd is a company engaged in trading activities, it also has made investments in shares of other
Companies and advanced loans to group companies amounting to more than 50% of its total assets.
However, trading income constitutes majority of its total income. Whether the Company is an NBFC?
Answer 5
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 financial assets constitute more than 50 per
cent of the total assets (netted off by intangible assets) and income from financial assets constitute more than
50 per cent 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 Reserve Bank of India.
In the given case, though Satyam Pvt Ltd is fulfilling the criteria on the asset side, but however is not fulfilling
the criteria on the income side, the company cannot be classified as a deemed NBFC.

Question 6
Shivam & Co LLP are the auditors of NBFC (Investment and Credit Company). Some of the team members of
the audit team who audited BFC have left the firm and the new team members are in discussion with the
previous team members who are still continuing with the firm regarding the verification procedures to be
performed. In this context, please explain what verification procedures should be performed in relation to
audit o NBFC- Investment and Credit Company (NBF-CICC).
Answer 6
i. Physically verify all the shares and securities held by a NBFC. Where any security is lodged with an
institution or a bank, a certificate from the bank/institution to that effect must be verified.
ii. Verify whether the NBFC has not advanced any loans against the security of its own shares.
iii. Verify that dividend income wherever declared by a company, has been duly received by an NBFC and
interest wherever due [except in case of NPAs] has been duly accounted for. NBFC Prudential Norms
require dividend income on shares of companies and units of mutual funds to be recognised on cash basis.
However, the NBFC has an option to account for dividend income on accrual basis, if the same has been
declared by the body corporate in its Annual General Meeting and its right to receive the payment has
been established. Income from bonds/debentures of corporate bodies is to be accounted on accrual basis
only if the interest rate on these instruments is predetermined and interest is serviced regularly and not
in arrears.
iv. Test check bills/contract notes received from brokers with reference to the prices vis-à-vis the stock
market quotations on the respective dates.
v. Verify the Board Minutes for purchase and sale of investments. Ascertain from the Board resolution or
obtain a management certificate to the effect that the investments so acquired are current investments
or Long-Term Investments.
vi. Check whether the investments have been valued in accordance with the NBFC Prudential Norms and
adequate provision for fall in the market value of securities, wherever applicable, have been made there
against, as required by the Directions.
vii. Obtain a list of subsidiary/group companies from the management and verify the investments made in
subsidiary/group companies during the year. Ascertain the basis for arriving at the price paid for the
acquisition of such shares and whether the Valuation is as per Prudential norms.
viii. Check whether investments in unquoted debentures/bonds have not been treated as investments but as
term loans or other credit facilities for the purposes of income recognition and asset classification.
ix. An auditor will have to ascertain whether the requirements of AS 13 “Accounting for Investments” or
other accounting standard, as applicable, (to the extent they are not inconsistent with the Directions)
have been duly complied with by the NBFC.
x. In respect of shares/securities held through a depository, obtain a confirmation from the depository
regarding the shares/securities held by it on behalf of the NBFC.

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 CA SANIDHYA SARAF 14.2.5

xi. Verify that securities of the same type or class are received back by the lender/paid by the borrower at
the end of the specified period together with all corporate benefits thereof (i.e. dividends, rights, bonus,
interest or any other rights or benefit accruing thereon).
xii. Verify charges received or paid in respect of securities lend/borrowed.
xiii. Obtain a confirmation from the approved intermediary regarding securities deposited with/borrowed
from it as at the year end.
xiv. An auditor should examine whether each loan or advance has been properly sanctioned. He should verify
the conditions attached to the sanction of each loan or advance i.e. limit on borrowings, nature of security,
interest, terms of repayment, etc.
xv. An auditor should verify the security obtained and the agreements entered into, if any, with the concerned
parties in respect of the advances given. He must ascertain the nature and value of security and the net
worth of the borrower/guarantor to determine the extent to which an advance could be considered
realisable.
xvi. Obtain balance confirmations from the concerned parties.
xvii. As regards bill discounting, verify that proper records/documents have been maintained for every bill
discounted/rediscounted by the NBFC. Test check some transactions with reference to the documents
maintained and ascertain whether the discounting charges, wherever, due, have been duly accounted for
by the NBFC.
xviii. Check whether the NBFC has not lent/invested in excess of the specified limits to any single borrower or
group of borrowers as per NBFC Prudential Norms.
xix. An auditor should verify whether the NBFC has an adequate system of proper appraisal and follow up of
loans and advances. In addition, he may analyse the trend of its recovery performance to ascertain that
the NBFC does not have an unduly high level of NPAs.
xx. Check the classification of loans and advances (including bills purchased and discounted) made by a NBFC
into Standard Assets, Sub-Standard Assets, Doubtful Assets and Loss Assets and the adequacy of provision
for bad and doubtful debts as required by NBFC Prudential Norms.

Question 7
You are appointed as the auditor of a NBFC registered with the RBI and which is accepting and holding public
deposits. You are considering your reporting requirement addition to your report made under Section 143
of the Companies Act, 2013 on the accounts of this NBFC as per the prescribed Directions.
Please explain what points are required to be known in respect of separate report to be given by you tothe
Board of Directors of this NBFC.
Answer 7
Material to be included in the Auditor’s report to the Board Doirfectors:
following matters, namely
(A) In the case of a non-banking financial companies accepting/holding public deposits
Apart from the matters enumerated in (A) above, the auditor shall include a statement on the following
matters, namely-
(i) Whether the public deposits accepted by the company together with other borrowings
indicated below viz.
(a) from public by issue of unsecured non-convertible debentures/bonds;
(b) from its shareholders (if it is a public limited company); and
(c) from entities which are not excluded from the definition of ‘public deposit’ in the Non-Banking
Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016, are within the
limits admissible to the company as per the provisions of the Non-Banking Financial Companies
Acceptance of Public Deposits (Reserve Bank) Directions, 2016;
(ii) Whether the public deposits held by the company in excess of the quantum of such deposits permissible
to it under the provisions of Non-Banking Financial Companies Acceptance of Public Deposits (Reserve
Bank) Directions, 2016 are regularised in the manner provided in the said Directions;

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 CA SANIDHYA SARAF 14.2.6

(iii) Whether the non-banking financial company is accepting "public deposit” without minimum investment
grade credit rating from an approved credit rating agency as per the provisions of Non-Banking Financial
Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016;
(iv) Whether the capital adequacy ratio as disclosed in the return submitted to the Bank in terms of the,
Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation)
Directions 2023 has been correctly determined and whether such ratio is in compliance with the minimum
CRAR prescribed therein;
(v) In respect of non-banking financial companies referred to in clause (iii) above,
(a) whether the credit rating, for each of the fixed deposits schemes that has been assigned by one of the
Credit Rating Agencies listed in Non- Banking Financial Companies Acceptance of Public Deposits
(Reserve Bank) Directions, 2016 is in force; and
(b) whether the aggregate amount of deposits outstanding as at any point during the year has exceeded
the limit specified by the such Credit Rating Agency;
(vi) Whether the company has violated any restriction on acceptance of public deposit as provided in Non-
Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016;
(vii) Whether the company has defaulted in paying to its depositors the interest and/or principal amount of
the deposits after such interest and/or principal became due;
(viii) Whether the company has complied with the prudential norms on income recognition, accounting
standards, asset classification, provisioning for bad and doubtful debts, and concentration of
credit/investments as specified in the Directions issued by the Bank in terms of the Master Direction –
Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) Directions, 2023;
(ix) Whether the company has complied with the liquid assets requirement as prescribed by the Bank in
exercise of powers under section 45-IB of the RBI Act and whether the details of the designated bank in
which the approved securities are held is communicated to the office concerned of the RBI in terms of
NBS 3; Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016;
(x) Whether the company has furnished to the RBI within the stipulated period the return on deposits as
specified in the DNBS 01 to – Master Direction – Reserve Bank of India (Filing of Supervisory Returns)
Directions - 2024; Whether the company has furnished to the RBI within the stipulated period the
quarterly return on prudential norms as specified in the Non-Banking Financial Company Returns (Reserve
Bank) Directions, 2024;
(xi) Whether, in the case of opening of new branches or offices to collect deposits or in the case of closure of
existing branches/offices or in the case of appointment of agent, the company has complied with the
requirements contained in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve
Bank) Directions, 2026.
Reasons to be stated for unfavorable or qualified statements: Where, in the auditor’s report, the
statement regarding any of the items referred to in paragraph 3 above is unfavorable or qualified, the
auditor’s report shall also state the reasons for such unfavorable or qualified statement, as the case may
be. Where the auditor is unable to express any opinion on any of the items referred to in paragraph 3
above, his report shall indicate such fact together with reasons therefor.

Question 8
Kamna & Co LLP, a firm of Chartered Accountants, was appointed as auditor of an NBFC. The audit work has
been completed. The audit team which was involved in the fieldwork came across various observations
during the course of audit of this FNCB and have also limited understanding about the exceptions which are
required to be reported in the audit report. They would like to understand in detail regarding the obligations
on the part of an auditor in respect of exceptions in his reports that they can conclude their work. Please
explain.

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 CA SANIDHYA SARAF 14.2.7

Answer 8
Obligation of auditor to submit an exception report to RBI
Where, in the case of a non-banking financial company, the statement regarding any of the items referred to
in paragraph 3 above, is unfavorable or qualified, or in the opinion of the auditor the company has not
complied with:
(a) the provisions of Chapter III B of RBI Act (Act 2 of 1934); or
(b) Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016; or
(c) Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve
Bank) Directions, 2016 and Non-Banking Financial Company - Systemically Important Non-Deposit taking
Company and Deposit taking Company (Reserve Bank) Directions, 2016.
It shall be the obligation of the auditor to make a report containing the details of such unfavourable or qualified
statements and/or about the non-compliance, as the case may be, in respect of the company to the concerned
Regional Office of the Department of Non-Banking Supervision of the RBI under whose jurisdiction the
registered office of the company is located as per first Schedule to the Non-Banking Financial Companies
Acceptance of Public Deposits (Reserve Bank) Directions, 2016.
The duty of the Auditor under sub-paragraph (I) shall be to report only the contraventions of the provisions of
RBI Act, 1934, and Directions, Guidelines, instructions referred to in sub-paragraph (1) and such report shall
not contain any statement with respect to compliance of any of those provisions.

Question 9
The Statutory Auditor of the NBFC company is required to give a report to the Board of Directors. What shall
be the content of the Auditor’s Report to the Board.
Answer 9
The statutory auditor of Karma Pvt Ltd, being a Non-Deposit Taking Non-Systemically Important NBFC is
required to submit separate report to the Board of Directors on the matters as specified as below:
1. Conducting Non-Banking Financial Activity without a valid Certificate of Registration (CoR) granted by the
RBI is an offence under chapter V of the RBI Act, 1934. Therefore, if the company is engaged in the business
of non-banking financial institution as defined in section 45-I (a) of the RBI Act and meeting the Principal
Business Criteria (Financial asset/income pattern) as laid down vide the RBI’s press release dated April 08,
1999, and directions issued by DNBR, auditor shall examine whether the company has obtained a Certificate
of Registration (CoR) from the RBI.
2. In case of a company holding CoR issued by the RBI, whether that company is entitled to continue to hold
such CoR in terms of its Principal Business Criteria (Financial asset/income pattern) as on March 31 of the
applicable year.
3. Whether the non-banking financial company is meeting the required net owned fund requirement as laid
down in Master Direction - Master Direction – Reserve Bank of India (Non-Banking Financial Company –
Scale Based Regulation) Directions, 2023 Apart from the aspects enumerated above, the auditor shall
include a statement on the following matters, namely: -
(i) Whether the Board of Directors has passed a resolution for non- acceptance of any public deposits;
(ii) Whether the company has accepted any public deposits during the relevant period/year;
(iii) Whether the company has complied with the prudential norms relating to income recognition, accounting
standards, asset classification and provisioning for bad and doubtful debts as applicable to it in terms of
Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation)
Directions, 2023;
Where, in the auditor’s report, the statement regarding any of the items referred to matters specified
above is unfavorable or qualified, the auditor’s report shall also state the reasons for such unfavorable or
qualified statement, as the case may be. Where the auditor is unable to express any opinion on any of
the items referred above, his report shall indicate such fact together with reasons there of.

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 CA SANIDHYA SARAF 14.2.8

Question 10
Krishna Pvt Ltd is primarily into the business of selling computer parts. However, the company is fulfilling
the Principal Business Criteria as at the balance sheet date i.e. Financial Assets are more than 50 % of total
assets and Financial Income is more than 50% of Gross Income. What shall be the obligation of the Statutory
Auditor in such a scenario?
Answer 10
In the given case, Krishna Pvt Ltd is fulfilling the Principal Business Criteria i.e. Financial Assets are more than
50 % of total assets and Financial Income is more than 50 % of Gross Income. The company which fulfils both
these criteria shall qualify as an NBFC and hence is required to obtain Certificate of Registration (CoR) with
Reserve Bank of India. In such a scenario, the statutory auditor has an obligation to submit exception report
to the RBI on the following matters:
1. Where, in the case of a non-banking financial company, the statement regarding any of the items referred
to in paragraph 3 of the Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions,
2016, is unfavourable or qualified, or in the opinion of the auditor the company has not complied with:
a) the provisions of Chapter III B of RBI Act (Act 2 of 1934); or
b) Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 2016; or
c) Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve
Bank) Directions, 2016 and Non-Banking Financial Company - Systemically Important Non-Deposit
taking Company and Deposit taking Company (Reserve Bank) Directions, 2016.
It shall be the obligation of the auditor to make a report containing the details of such unfavourable or
qualified statements and/or about the non-compliance, as the case may be, in respect of the company to
the concerned Regional Office of the Department of Non-Banking Supervision of the RBI under whose
jurisdiction the registered office of the company is located as per first Schedule to the Non-Banking
Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 2016.
2. The duty of the Auditor under sub-paragraph (I) shall be to report only the contraventions of the provisions
of RBI Act, 1934, and Directions, Guidelines, instructions referred to in sub-paragraph (1) and such report
shall not contain any statement with respect to compliance of any of those provisions.

Question 11
Mr. G. has been appointed as an auditor of LMP Ltd., a NBFC company registered with RBI. Mr. G is
concerned about whether the format of financial statements prepared by LMP Ltd. is as per notification
issued by the Ministry of Corporate Affairs (MCA) dated October 11, 2018. The notification prescribed the·
format in Division III under Schedule III of the Companies Act, 2013 applicable to NBFCs complying with Ind-
AS. Mr. G wants to know the differences in the presentation requirements between Division II and Division
III of Schedule of the Companies Act, 2013. Help Mr. G.
Answer 11
The presentation requirements under Division III for NBFCs are similar to Division II (Non NBFC) to a large
extent except for the following:
(a) NBFCs have been allowed to present the items of the balance sheet in order of their liquidity which is not
allowed to companies required to follow Division II.
(b) An NBFC is required to separately disclose by way of a note any item of ‘other income’ or ‘other
expenditure’ which exceeds 1 per cent of the total income. Division II, on the other hand, requires
disclosure for any item of income or expenditure which exceeds 1 per cent of the revenue from operations
o₹r10 lakhs, whichever is higher.
(c) NBFCs are required to separately disclose under ‘receivables’, the debts due from any Limited Liability
Partnership (LLP) in which its director is a partner or member.
(d) NBFCs are also required to disclose items comprising ‘revenue from operations’ and ‘other comprehensive
income’ on the face of the Statement of profit and loss instead of showing those only as part of the notes.
(e) Separate disclosure of trade receivable which have significant increase in credit risk & credit impaired

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 CA SANIDHYA SARAF 14.2.9

(f) The conditions or restrictions for distribution attached to statutory reserves have to be separately disclose
in the notes as stipulated by the relevant statute.

Question 12
Abhimanyu Finance Ltd. is a Non-Banking Finance Company and was in the business of accepting public
deposits and giving loan since 2015. The company was having net owned funds of₹ 1,50,00,000/(-one crore
fifty lakhs) and was not having registration certificate from RBI and applied for it on 30 th March 2023. The
company appointed Mr. Kabra as its statutory auditors for the year 2022-2.3Advise the auditor with
reference to auditor procedures to be taken and reporting requirements on the same in view of CARO 2020?
Answer 12
As per Clause (xvi) of Paragraph 3 of CARO 2020, the auditor is required to report that “whether the company
is required to be registered under section 45-IA of the Reserve Bank of India Act, 1934 and if so, whether the
registration has been obtained.”
The auditor is required to examine whether the company is engaged in the business which attract the
requirements of the registration. The registration is required where the financing activity is a principal business
of the company. The RBI restrict companies from carrying on the business of a non-banking financial institution
without obtaining the certificate of registration.
Audit Procedures and Reporting:
1. The auditor should examine the transactions of the company with relation to the activities covered under
the RBI Act and directions related to the Non-Banking Financial Companies.
2. The financial statements should be examined to ascertain whether company’s financial assets constitute
more than 50 per cent of the total assets and income from financial assets constitute more than 50 per
cent of the gross income.
3. Whether the company has net owned funds as required for the registration as NBFC.
4. Whether the company has obtained the registration as NBFC, if not, the reasons should be sought from
the management and documented.
5. The auditor should report incorporating the following: -
(i) Whether the registration is required under section 45-IA of the RBI Act, 1934.
(ii) If so, whether it has obtained the registration.
(iii) If the registration not obtained, reasons thereof.
In the instant case Abhimanyu Finance Ltd. is a Non-Banking Finance Company and was in the business of
accepting public deposits and giving loans since 2015. The company was having net owned funds of ₹
1,50,00,000/-(one crore fifty lakhs) which is less in comparison to the prescribed limit i.e. 2 crore rupees and
was also not having registration certificate from RBI (though applied for it on 30th March 2024). The auditor
is required to report on the same as per Clause (xvi) of Paragraph 3 of CARO 2020.

Question 13
“Fin crazy” is a P2P online platform owned by Future Technologies Pvt Limited which is registered with RBI
as NBFC. Peer to Peer Platform (P2P) means an intermediary providing the services of loan facilitation via
online medium or otherwise to the participants.
Participants have to enter into an arrangement with NBFC-P2P to lend on its platform or avail loan
facilitation services provided by it. It provides only as a medium connecting lenders and borrowers. It also
carries out the credit assessment and risk profiling of the participants on the platform. It also provides
services relating to loan documentation and loan recovery. The company falls outside purview of upper
layer.
Where does such NBFC fit into in accordance with scale-based regulations? Suggest few audit procedures
for above NBFC-P2P.

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 CA SANIDHYA SARAF 14.2.10

Answer 13
NBFC-P2P falls in base layer in accordance with scale-based regulations of RBI. Few audit procedures for NBFC-
P2P are as under: -
• Gaining an understanding of business conducted by NBFC-P2P. It should be verified that company
undertakes only permissible activities applicable to such type of NBFCs like providing online marketplace to
participants for lending and borrowing. It should not be engaged in business of lending funds on its own.
• Verifying certificate of registration obtained from RBI for carrying business of P2P platform.
• Verifying Board approved policy setting out eligibility criteria for participants i.e. lenders and borrowers.
• Verifying board approved policy for pricing of services provided by P2P platform
• Verification of adherence to lending and borrowing guidelines prescribed by RBI
• Verifying appropriate arrangements have been entered into among participants and NBFC-P2P.
• Compliance with reporting requirements of RBI
• Verifying board approved policy for grievance redressal and complaints

Question 14
Sugam Housing Finance Limited is in the business of housing finance activities having asset size of ₹ 800
crores. Its principal business is of providing finances for housing mainly to individuals. It is not identified by
RBI in upper layer. Under scale-based regulations introduced by RBI, what should be appropriate
classification for such a company?
Is there any specific reporting requirement under CARO, 2020 for statutory auditor of a company engaged
in housing finance activities?
Answer 14
The said company is not identified in upper layer by RBI. Under scale based regulations introduced by RBI,
NBFCs undertaking housing finance activities constitute “middle layer”. The asset size is not relevant in such a
case. All housing finance companies not identified in upper layer would constitute middle layer due to nature
of such activities undertaken by them.
There is specific reporting requirement under CARO, 2020 under clause 3 (xvi)(b) which requires auditor to
report whether the company has conducted any non-Banking financial or housing finance activities without a
valid Certificate of Registration (CoR) from the Reserve Bank of India as per the Reserve Bank of India Act,
1934.

Question 15
You are auditor of a deposit taking NBFC (NBFC-D). The NBFC is identified by RBI in its upper layer and its
financial statements are required to prepared in accordance with requirements of Ind AS. The following is
extract of statement of profit and loss for year ending 31St March, 2023 in accordance with Division III of
Schedule III of Companies Act, 2013. Previous year figures are ignored.
Particulars Note No. Figures for year ended 31st
March, 2024 (in ₹ Crores)
Revenue from Operations
(i) Interest income 15 9500
(ii) Dividend income -
(iii) Rental Income 150
(iv) Fees and commission income 16 100
(v) Net gain on fair value changes 17 150
(vi) Net gain on derecognition of financial instruments
under amortised category
(I) Total revenue from operations 9900
(II) Other Income 18 100
(III) Total Income 10000

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 CA SANIDHYA SARAF 14.2.11

Ongoing through details of head “other expenditure” in expenses side of statement of profit and loss, it is
noticed that there is an expenditure relating to manpower outsourcing cost amounting to ₹99.50 crores
included under “other expenditure”
Does it meet the requirements of Division III of Schedule III of Companies Act, 2013?
Answer 15
An NBFC is preparing financial statements in accordance with requirements of Division III of Schedule III of
Companies Act, 2013 has to separately disclose by way of note any item of “other expenditure” exceeding 1%
of total income.
The said expenditure of ₹99.50 crore does not exceed 1% of total income. Hence, it meets requirements of
Division III of Schedule III of Companies Act, 2013.

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 CA SANIDHYA SARAF 15.1

Chapter 15
Overview of Audit of Public Sector Undertakings
Question 1
During the course of an audit of a state government department, the Office of the Comptroller & Auditor
General of India (CAG) observed that the prescribed law in the state defined a "flat" based on the following
two criteria in a premises:
• Dwelling units exceeding a threshold limit
• Buildings with a total area surpassing a threshold limit
However, it was noted during the audit that the relevant database did not include a column for entering the
area of the building. Consequently, a certain number of buildings were identified as flats even though they
had fewer dwelling units than the threshold limit. In the absence of data regarding the area, the audit team
directed physical verification of these flats. The physical verification confirmed that these buildings were
incorrectly classified as flats, resulting in the department undercollecting water charges.
Identify type and nature of audit being performed by Office of Comptroller & Auditor General of India. To
whom report of such audit was likely to have been submitted.
Answer 1
In the given case, it is a “Compliance Audit” performed by Office of Comptroller & Auditor General of India.
Compliance audit is the independent assessment of whether a given subject matter is in compliance with the
applicable criteria.
This audit is carried out by assessing whether activities, financial transactions and information comply in all
material respects with the regulatory and other rules which govern the audited entity. Compliance auditing is
concerned with: -
(a) Regularity- adherence of the subject matter to the formal criteria emanating from relevant laws,
regulations, and agreements applicable to the entity.
(b) Propriety- observance of the general principles governing sound financial management and the ethical
conduct of public officials
While regularity is emphasized in compliance auditing, propriety is equally pertinent in the public sector
context, in which there are certain expectations concerning financial management and the conduct of officials.
Under Article 151, audit reports of the C&AG relating to the accounts of the Central/ State Government should
be submitted to the President/Governor of the State who shall cause them to be laid before Parliament/State
Legislative Assemblies.
In the given situation, the report relates to the State Department. Therefore, report was likely to have been
submitted to Governor of state to be laid before State legislative assembly.

Question 2
Direct Benefit Transfer (DBT) is a major reform initiative of the Government of India to ensure better and
timely delivery of benefits from Government to people. It marks a paradigm shift in the process of delivering
benefits like wage payments, fuel subsidies, food grain subsidies, etc. directly into the bank accounts of the
beneficiaries removing leakages and enhancing financial inclusion.
The office of C & AG of India is likely to undertake a performance audit for a block of years in a state of some
selected social security pension schemes and scholarship schemes under DBT. What are likely to be
objectives of such performance audit? Explain the meaning of “audit criteria” and also discuss how these
can be determined in above case.
Answer 2
The likely objectives of performance audit to be conducted by office of C & AG of India of some selected social
security pension schemes and scholarship schemes in a state could be: -
• Whether proper planning and process were in place to capture data of beneficiaries under above schemes
• Whether necessary steps were taken for implementation of DBT like preventing delay in payments to the
intended beneficiaries and pilferage and duplication
• Whether the infrastructure, organization and management of DBT were adequate and effective.
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 CA SANIDHYA SARAF 15.2

“Audit criteria” are standards used to determine whether a programme meets or exceeds expectations. It
provides a context for understanding the results of the audit. Audit criteria are reasonable and attainable
standards of performance against which economy, efficiency and effectiveness of programmes and activities
can be assessed.
In the above situation, various documents issued by Government of India and state government like circulars,
instructions, Standard operating procedure manuals, guidelines of schemes on identification and
authentication of beneficiaries etc, general management and subject matter literature can be used to
determine “audit criteria”.

Question 3
The reports of the Comptroller and Auditor General of India on the audit of PSUs are presented to the
Parliament and to various state legislatures to facilitate a proper consideration. Enumerate the contents of
Audit Report presented by C & AG.
Answer 3
To facilitate a proper consideration, the reports of the C&AG on the audit of PSUs are presented to the
Parliament in several parts consisting of the following :
(a) Introduction containing a general review of the working results of Government
companies, deemed Government companies and corporations;
(b) Results of comprehensive appraisals of selected undertakings conducted by the Audit Board;
(c) Resume of the company auditors’ reports submitted by them under the directions issued by the C&AG
and that of comments on the accounts of the Government companies; and
(d) Significant results of audit of the undertakings not taken up for appraisal by the Audit Board.
For certain specified states, the C&AG submits a separate audit report (commercial) to the legislature, while
for other States/Union Territories with legislature, there is a commercial chapter in the main audit report. The
State audit reports, contains both the results of audit appraisal of performance of selected
companies/corporations as well as important individual instances of financial irregularities, wasteful
expenditure, system deficiencies noticed by the statutory auditors, and a general review of the working results
of Government companies and corporations.

Question 4
ABG & Co., a Chartered Accountant firm has been appointed by C & AG for performance audit of a Sugar
Industry. What factors should be considered by ABG & Co., while planning a performance audit of Sugar
Industry?
Answer 4
The following steps are suggested to the auditors for planning while conducting the performance audit:
(A) Understanding the Entity/Programme - It is the starting point for planning individual performance audit.

The auditor may use the following sources for understanding the entity:
(i) Documents of the entity: Documents on administration and functions of the entity, policy files,
annual reports, budget documents, accounts, minutes of meetings, information on the website,
internal audit reports, electronic databases and MIS reports, RTI material etc.
(ii) Legislative documents: Legislation, parliamentary questions and debates, reports of the Public
Accounts Committee, the Committee on Public Undertakings, the Estimates Committee and letters
from Members of Parliament.
Chapter 15 Overview of Audit of Public sector Undertakings
 CA SANIDHYA SARAF 15.3

(iii) Policy documents: Documents of Planning Commission, Ministry of Finance etc.

(iv) Academic or special research: Independent evaluations on the entity, academic research and similar
work done by other governments and other SAIs.
(v) Past audits: Past financial and performance audits of the entity provide a major source of information
and understanding.
(vi) Media coverage: Print and electronic media - their systematic documentation on regular basis in a
transparent manner.
(vii) Special focus groups: Audit Advisory Committee concerns, annual and special reports of World Bank,
Reserve Bank of India, reports by special interest groups, NGOs, etc.
(B) Defining the Objectives and the Scope of Audit - The audit objectives should be defined in a crisp & clear
manner as they will impact the nature of the audit, govern its conduct and affect audit conclusions. Setting
audit objectives ensures good quality performance audits. It facilitates clarity, demonstrates consistent
quality of audit and serves as a measure of quality assurance of the audit.
Defining the scope constricts the audit to significant issues that relate to the audit objectives. It mainly
focuses on the extent, timing and nature of the audit.
(C) Determining Audit Criteria - Audit criteria are the standards used to determine whether a program meets
or exceeds expectations. It provides a context for understanding the results of the audit. Audit criteria are
reasonable and attainable standards of performance against which economy, efficiency and effectiveness
of programmes and activities can be assessed.
The audit criteria may be sought to be obtained from the following sources:
(i) procedure manuals of the entity.
(ii) policies, standards, directives and guidelines.
(iii) criteria used by the same entity or other entities in similar activities or programmes.
(iv) independent expert opinion and know how.
(v) new or established scientific knowledge and other reliable information.
(vi) general management and subject matter literature and research papers.
(D) Deciding Audit Approach - There is no uniform audit approach prescribed that can be applicable to all
types of subjects of performance audits. Selection of approach also determine methods and means used
for conducting the audit.

Some of the methods which could be used in conducting performance audits include:

(i) Analysis of procedures: It involves review of the systems in place for planning, conducting, checking
and monitoring the activity. This would consist of examination of documents such as financial
reports, budgets, programme guidelines, procedure manuals, etc.
(ii) Case studies: A case study is a descriptive analysis of an entity, scheme or a programme. It involves
analysis of a particular issue within the context of the whole area under review.
(iii) Use of existing data: The audit staff should investigate the data held by entity management and by
other relevant sources. Audit conclusions based on testing of available data for correctness and
completeness enhances the assurance level.
(iv) Surveys: Survey is a method of collecting information from members of a population to assess the
interrelation of events and conditions. Surveys on predetermined parameters can supplement the
audit findings and conclusions adding value to the performance audits.
(v) Analysis of results: It requires the auditor to carry out actual output-input analysis to determine
Chapter 15 Overview of Audit of Public sector Undertakings
 CA SANIDHYA SARAF 15.4

the efficiency of the programme.

(vi) Quantitative analysis: It involves examination of available data relating to financials like earnings,
revenue, or data relating to programme implementation like details of beneficiaries etc. However,
it may not be possible for the auditor to work with complete data due to its high volume. In such
cases, sampling techniques are required to be used.
(E) Developing Audit Questions - Subsequent to designing of audit objectives and determination of audit
criteria, the audit team is required to prepare a list of questions to which they would seek answers. The
questions should be framed in comprehensive manner involving detailed hierarchy of questions.
(F) Assessing Audit Team Skills and whether Outside Expertise required - It is essential that the performance
auditors possess special aptitude and knowledge. The Auditing Standards of C&AG of India provide that
the audit institution should develop and train the auditors to enable them to perform their tasks
effectively & efficiently and should prepare manuals & other written guidance notes & instructions
concerning conduct of audits.
Given the diverse range of subjects of performance auditing, the audit team needs to develop sound
understanding of the programme or entity proposed to be audited.
The audit team needs to decide at the planning stage on which aspect expertise is required. Though, the
Accountant General may use the work of an expert, he retains full responsibility for the expression of
opinion in the auditor’s report.
(G) Preparing Audit Design Matrix (ADM) - Having determined the audit objective, audit criteria, audit
approach, data collection etc., audit team should prepare an Audit Design Matrix. It is a structured and
highly focused approach to designing a performance audit study.
The ADM highlights the data collection and analysis method as well as the type and sources of evidence
required to support audit opinion/findings.
(H) Establishing Time Table and Resources - It is significant to determine the timetable and desirable
resources. Selection of appropriate audit team is the most vital component in planning an audit.
Considerations for selection of an appropriate audit team should be recorded along with the proposed
timelines for various activities to be undertaken as a part of audit process. The progress should also be
monitored against these timelines. The Accountant General would be liable for ensuring that the
performance audit is completed on time. The variations between the required and actual time spent
should be compared and approved from the competent authority.
The team should build time for translation, approval and possible delays in their own schedule in order to
meet the targets.
(I) Intimation of Audit Programme to Audit Entities - Audited entities must be intimated about the intention
of taking up planned performance audit with the scope and extent of audit including the constitution of
audit team and the tentative time schedule, well before the commencement of Audit. Acknowledgement
of this may be requested and placed on record.
It may be required to refine an audit's objectives as the audit progresses for gathering the requisite
information to fulfill the audit. The reasons for such changes in the objectives should also be recorded
and approved from the competent authority.
The audit programme should be flexible and reviewed from time to time as it is not possible to anticipate
all the contingencies at the early stage.
The Accountant General should share all significant refinements in the approach and additional tests and
findings, concurrently with other audit teams when different persons conduct the audit at different
locations. The system of sharing of the significant field audit experience should be documented and
reviewed.

Question 5
Sunlight Limited is a public sector undertaking engaged in production of electricity from solar power. It had
commissioned a new project near Goa with a new technology for a cost of ₹ 5,750 crore. The project had
seen delay in commencement and cost overrun. State the matters that a Comprehensive Audit by C&AG
may cover in reporting on the performance and efficiency of this project.

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 CA SANIDHYA SARAF 15.5

Answer 5
Propriety requires the transactions, and more particularly expenditure, to conform to certain general
principles. These principles are:
(i) that the expenditure is not prima facie more than the occasion demands and that every official exercises
the same degree of vigilance in respect of expenditure as a person of ordinary prudence would exercise
in respect of his own money;
(ii) that the authority exercises its power of sanctioning expenditure to pass an order which will not directly
or indirectly accrue to its own advantage;
(iii) that funds are not utilised for the benefit of a particular person or group of persons and
(iv) that, apart from the agreed remuneration or reward, no other avenue is kept open to indirectly benefit
the management personnel, employees and others.
It may be stated that it is the responsibility of the executive departments to enforce economy in public
expenditure. The function of audit is to bring to the notice of the proper authorities of wastefulness in public
administration and cases of improper, avoidable and infructuous expenditure.
The functions of Auditor in the context of Propriety Audit may be specified as under as to:
 see that all expenditure incurred are properly planned.
 see that the size and channels of expenditure are rightful and expected to give maximum results.
 appraise whether those expenditure are likely to give optimum result.
 see that any substitute plan of action can bring about an improvement on current operation and as well as
return from capital expenditure.
 examine the actions and decisions of the management to see that they are conductive to public interests
and that they meet the standards of conduct.

Question 6
“A performance audit is an objective and systematic examination of evidence for the purpose of providing
an independent assessment of the performance of a government organization, program, activity, or
function in order to provide information to improve public accountability and facilitate decision-making by
parties with responsibility to oversee or initiate corrective action.” Briefly discuss the issues addressed by
Performance Audits conducted in accordance with the guidelines issued by C&AG.
Answer 6
According to the guidelines issued by the C&AG, Performance Audits usually address the issues of:
(i) Economy- It is minimising the cost of resources used for an activity, having regard to appropriate quantity,
quality and at the best price.
(ii) Efficiency- It is the input-output ratio. In the case of public spending, efficiency is achieved when the
output is maximised at the minimum of inputs, or input is minimised for any given quantity and quality of
output. When the audit objective of efficiency considers outputs, focus is usually on processes by which
an organisation transforms inputs into outputs.
Auditing efficiency embraces aspects such as whether:
(a) sound procurement practices are followed;
(b) resources are properly protected and maintained;
(c) human, financial and other resources are efficiently used;
(d) optimum amount of resources (staff, equipment, and facilities) are used in producing or delivering the
appropriate quantity and quality of goods or services in a timely manner;
(e) public sector Programmes, entities and activities are efficiently managed, regulated, organised and
executed;
(f) efficient operating procedures are used; and
(g) the objectives of public sector programmes are met cost-effectively.
(iii) Effectiveness- It is the extent to which objectives are achieved and the relationship between the intended
impact and the actual impact of an activity.
In auditing effectiveness, performance audit may, for instance:
(h) assess whether the objectives of and the means provided (legal, financial, etc.) for a new or ongoing
public sector programme are proper, consistent, suitable or relevant to the policy;
Chapter 15 Overview of Audit of Public sector Undertakings
 CA SANIDHYA SARAF 15.6

(i) determine the extent to which a program achieves a desired level of program results;
(j) assess and establish with evidence whether the observed direct or indirect social and economic
impacts of a policy are due to implementation of the policy or to other causes;
(k) identify factors inhibiting satisfactory performance or goal-fulfilment;
(l) assess whether the programme complements, duplicates, overlaps or counteracts other related
programmes;
(m) assess the effectiveness of the program and/or of individual program components;
(n) determine whether management has considered alternatives for carrying out the program that might
yield desired results more effectively or at a lower cost;
(o) assess the adequacy of the management control system for measuring, monitoring and reporting a
programme's effectiveness;
(p) assess compliance with laws and regulations applicable to the program; and
(q) identify ways of making programmes work more effectively.

Question 7
BT Ltd , a company wholly owned by central government was disinvested during the previous year, resulting
in 40% of the shares being held by public. The shares were also listed on the BSE. Since the shares were
listed, all the listing requirements were applicable, including publication of quarterly results, submission of
information to the BSE etc.
Sam, the FM of the company is of the opinion that now the company is subject to stringent control by BSE
and the markets, therefore the auditing requirements of a limited company in private sector under the
Companies Act 2013 would be applicable to the company and the C&AG will not have any role to play.
Comment.
Answer 7
Section 2(45) of the Companies Act, 2013, defines a “Government Company” as a company in which not less
than 51% of the paid-up share capital is held 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, and includes
a company which is a subsidiary company of such a Government company. The auditors of these government
companies are firms of Chartered Accountants, appointed by the Comptroller & Auditor General, who gives
the auditor directions on the manner in which the audit should be conducted by them. The listing of company’s
shares on a stock exchange is irrelevant for this purpose and hence Sam’s opinion is not correct.

Question 8
You have been appointed as auditor of a AKY Ltd. After having determined the audit objectives, now you
have been requested to draft audit criteria. What are the sources that you will use while doing the task?
Answer 8
The audit criteria may be sought to be obtained from the following sources:
(i) procedure manuals of the entity.
(ii) policies, standards, directives and guidelines.
(iii) criteria used by the same entity or other entities in similar activities or programmes.
(iv) independent expert opinion and know how.
(v) new or established scientific knowledge and other reliable information.
(vi) general management and subject matter literature and research papers.

Question 9
Comptroller & Auditor General appointed Verma & Associates, a chartered accountant firm, to conduct
Performance audit of MAP Ltd., a public sector undertaking of Government of India. The firm conducted the
audit with a view to check all the expenses of the unit are in conformity with the public interest and publicly
accepted customs. The audit report submitted by audit firm was rejected by C&AG. Give your opinion on
the action of C&AG.

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 CA SANIDHYA SARAF 15.7

Answer 9
In the given scenario, C&AG appointed Verma & Associates, a chartered accountant firm, to conduct
Performance Audit of MAP Ltd., a PSU of Government of India. The firm conducted audit with a view to check
all the expenses of the unit are in conformity to the public interest and publicly accepted customs which is not
Performance Audit.
A performance audit is an objective and systematic examination of evidence for the purpose of providing an
independent assessment of the performance of a government organization, program, activity, or function in
order to provide information to improve public accountability and facilitate decision-making by parties with
responsibility to oversee or initiate corrective action.
Performance audit in PSUs is conducted by the C&AG (Supreme Audit Institutions) through various
subordinate offices of Indian Audit and Accounts Department (IAAD). In conducting performance audit, the
subordinate offices are guided by manual and auditing standards prescribed by C&AG.
Therefore, the objectives of performance auditing are evaluation of economy, efficiency, and effectiveness of
policy, Programmes, organization and management. It also promotes accountability by assisting those charged
with governance and oversight responsibilities to improve performance; and transparency by affording
taxpayers, those targeted by government policies and other stakeholders an insight into the management and
outcomes of different government activities.
Performance auditing focuses on areas in which it can add value which have the greatest potential for
development. It provides constructive incentives for the responsible parties to take appropriate action.
Regulations on Audit and Accounts issued by C&AG lay down that the responsibility for the development of
measurable objectives and performance indicators as also the systems of measurement rests with the
Government departments or Heads of entities. They are also required to define intermediate and final outputs
and outcomes in measurable and monitor able terms, standardize the unit cost of delivery and benchmark
quality of outputs and outcomes.
Thus, rejection of audit report (submitted by audit firm) by C&AG is in order as audit with a view to mere check
all the expenses of the unit are in conformity to the public interest and publicly accepted customs done by
audit firm is not performance audit in all aspects.

Question 10
The objectives of audit in connection with a State Electricity Distribution Company were to ascertain
whether the:
(i) total cost of providing electricity is being recovered by timely submissions to the State Electricity
Regulatory Commission;
(ii) tariff orders, sales circulars and sales instructions were issued timely, without any ambiguity. They were
implemented in time;
(iii) metering, billing and collection was managed efficiently and effectively;
(iv) monitoring and internal controls were efficient.
What kind of audit is referred in the above scenario? Also briefly discuss the steps suggested to the auditors
for planning such an audit.
Answer 10
In the given scenario, in view of the objectives discussed, performance audit is being referred.
The following steps are suggested to the auditors for planning while conducting the performance audit:

Chapter 15 Overview of Audit of Public sector Undertakings

 CA SANIDHYA SARAF 15.8

A) Understanding the Entity/Programme - It is the starting point for planning individual performance audit.
The auditor may use the following sources for understanding the entity:
i) Documents of the entity: Documents on administration and functions of the entity, policy files, annual
reports, budget documents, accounts, minutes of meetings, information on the website, internal audit
reports, electronic databases and MIS reports, RTI material etc.
ii) Legislative documents: Legislation, parliamentary questions and debates, reports of the Public
Accounts Committee, the Committee on Public Undertakings, the Estimates Committee and letters
from Members of Parliament.
iii) Policy documents: Documents of Planning Commission, Ministry of Finance etc.
iv) Academic or special research: Independent evaluations on the entity, academic research and similar
work done by other governments and other SAIs.
v) Past audits: Past financial and performance audits of the entity provide a major source of information
and understanding.
vi) Media coverage: Print and electronic media - their systematic documentation on regular basis in a
transparent manner.
vii) Special focus groups: Audit Advisory Committee concerns, annual and special reports of World Bank,
Reserve Bank of India, reports by special interest groups, NGOs, etc.
B) Defining the Objectives and the Scope of Audit - The audit objectives should be defined in a crisp & clear
manner as they will impact the nature of the audit, govern its conduct and affect audit conclusions. Setting
audit objectives ensures good quality performance audits. It facilitates clarity, demonstrates consistent
quality of audit and serves as a measure of quality assurance of the audit.
Defining the scope constricts the audit to significant issues that relate to the audit objectives. It mainly
focuses on the extent, timing and nature of the audit.
C) Determining Audit Criteria - Audit criteria are the standards used to determine whether a program meets
or exceeds expectations. It provides a context for understanding the results of the audit. Audit criteria are
reasonable and attainable standards of performance against which economy, efficiency and effectiveness
of programmers and activities can be assessed.
The audit criteria may be sought to be obtained from the following sources:
i) procedure manuals of the entity.
ii) policies, standards, directives and guidelines.
iii) criteria used by the same entity or other entities in similar activities or programmes.
iv) independent expert opinion and know how.
v) new or established scientific knowledge and other reliable information.
vi) general management and subject matter literature and research papers.
D) Deciding Audit Approach - There is no uniform audit approach prescribed that can be applicable to all
types of subjects of performance audits. Selection of approach also determine methods and means used
for conducting the audit.
Some of the methods which could be used in conducting performance audits include:

i) Analysis of procedures: It involves review of the systems in place for planning, conducting, checking
and monitoring the activity. This would consist of examination of documents such as financial
reports, budgets, programme guidelines, procedure manuals, etc.
ii) Case studies: A case study is a descriptive analysis of an entity, scheme or a programme. It involves
analysis of a particular issue within the context of the whole area under review.

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 CA SANIDHYA SARAF 15.9

iii) Use of existing data: The audit staff should investigate the data held by entity management and by
other relevant sources. Audit conclusions based on testing of available data for correctness and
completeness enhances the assurance level.
iv) Surveys: Survey is a method of collecting information from members of a population to assess the
interrelation of events and conditions. Surveys on predetermined parameters can supplement the
audit findings and conclusions adding value to the performance audits.
v) Analysis of results: It requires the auditor to carry out actual output-input analysis to determine the
efficiency of the programme.
vi) Quantitative analysis: It involves examination of available data relating to financials like earnings,
revenue, or data relating to programme implementation like details of beneficiaries etc. However, it
may not be possible for the auditor to work with complete data due to its high volume. In such cases,
sampling techniques are required to be used.
E) Developing Audit Questions - Subsequent to designing of audit objectives and determination of audit
criteria, the audit team is required to prepare a list of questions to which they would seek answers. The
questions should be framed in comprehensive manner involving detailed hierarchy of questions.
F) Assessing Audit Team Skills and whether Outside Expertise required - It is essential that the performance
auditors possess special aptitude and knowledge. The Auditing Standards of C&AG of India provide that
the audit institution should develop and train the auditors to enable them to perform their tasks
effectively & efficiently and should prepare manuals & other written guidance notes & instructions
concerning conduct of audits.
Given the diverse range of subjects of performance auditing, the audit team needs to develop sound
understanding of the programme or entity proposed to be audited.
The audit team needs to decide at the planning stage on which aspect expertise is required. Though, the
Accountant General may use the work of an expert, he retains full responsibility for the expression of
opinion in the auditor’s report.
G) Preparing Audit Design Matrix (ADM) - Having determined the audit objective, audit criteria, audit
approach, data collection etc., audit team should prepare an Audit Design Matrix. It is a structured and
highly focused approach to designing a performance audit study.
The ADM highlights the data collection and analysis method as well as the type and sources of evidence
required to support audit opinion/findings.
A specimen of ADM is given as under:
Audit Objective Audit Questions Audit Criteria Evidence Data Collection and
(1) (2) (3) (4) Analysis Method
(5)
An ADM is prepared on the basis of information and knowledge obtained during the planning stage. A
well-designed ADM leads to effective audits thus providing highest assurances to the auditing entities. It
is desirable to prepare ADM for each of the audit objectives
H) Establishing Time Table and Resources - It is significant to determine the timetable and desirable
resources. Selection of appropriate audit team is the most vital component in planning an audit.
Considerations for selection of an appropriate audit team should be recorded along with the proposed
timelines for various activities to be undertaken as a part of audit process. The progress should also be
monitored against these timelines. The Accountant General would be liable for ensuring that the
performance audit is completed on time. The variations between the required and actual time spent
should be compared and approved from the competent authority.
The team should build time for translation, approval and possible delays in their own schedule in order to
meet the targets.
I) Intimation of Audit Programme to Audit Entities - Audited entities must be intimated about the intention
of taking up planned performance audit with the scope and extent of audit including the constitution of
audit team and the tentative time schedule, well before the commencement of Audit. Acknowledgement
of this may be requested and placed on record.
It may be required to refine an audit's objectives as the audit progresses for gathering the requisite
information to fulfill the audit. The reasons for such changes in the objectives should also be recorded

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 CA SANIDHYA SARAF 15.10

and approved from the competent authority.

The audit programme should be flexible and reviewed from time to time as it is not possible to anticipate
all the contingencies at the early stage.
The Accountant General should share all significant refinements in the approach and additional tests and
findings, concurrently with other audit teams when different persons conduct the audit at different
locations. The system of sharing of the significant field audit experience should be documented and
reviewed.

Question 11
PGC & Associates are statutory auditors of BNPC Limited, a PSU in power sector. It is engaged in building
large sized thermal power stations to accelerate development of power sector in the country. One of the
financial committees of Parliament has decided to examine its physical and financial performance. It has
also examined audit findings of C&AG in respect of which action is yet to be taken by the said PSU. The
committee also proposes to include in its report performance of the company in various operational
matters.
Which financial committee of Parliament deals with such matters? Outline its main functions.
Answer 11
The said matters are dealt by Committee on Public Undertakings (COPU). The functions of the Committee are -
(i) to examine the reports and accounts of public undertakings.
(ii) to examine the reports of the C&AG on public undertakings.
(iii) to examine the autonomy and efficiency of public undertakings and to see whether they are being
managed in accordance with sound business principles and prudent commercial practices.
(iv) to exercise such other functions vested in the PAC and the Estimates Committee as are not covered
above and as may be allotted by the Speaker from time to time.
The examination of public enterprises by the Committee takes the form of comprehensive appraisal or
evaluation of performance of the undertaking. It involves a thorough examination, including evaluation of the
policies, Programmes and financial working of the undertaking.

Question 12
PS & Associates are statutory auditors of a Central government owned company for a particular year. The
statutory auditors were required to examine the following areas mandatorily, provide their specific replies
and also their impact on financial statements for that particular year in their audit report.
1) Whether the company has system in place to process all the accounting transactions through IT
system? If yes, the implications of processing of accounting transactions outside IT system on the
integrity of the accounts along with the financial implications, if any, may be stated.
2) Whether there is any restructuring of an existing loan or cases of waiver / write off of debts / loans/
interest etc. made by a lender to the company due to the company’s inability to repay the loan? If
yes, the financial impact may be stated. Whether such cases are properly accounted for?
3) Whether funds (grants/subsidy etc.) received / receivable for specific schemes from Central
government or its agencies were properly accounted for / utilized as per its term and conditions? List
the cases of deviation.
Can you gauge likely nature of such responsibility thrust upon auditors of above PSU?
Answer 12
The above areas for which statutory auditors of PSU were required to examine, report and indicate impact of
these matters in financial statements are likely to relate to directions issued by C&AG to statutory auditors
under section 143(5) of Companies Act, 2013.
In terms of section 143(5), in case of a government company, the C&AG has the power to direct the auditor
the manners in which accounts of company are required to be audited and auditor shall submit audit report
which among other things, include the directions, if any, issued by the C&AG the action taken thereon and its
impact on the accounts and financial statements of the company.

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 CA SANIDHYA SARAF 16.1

Chapter 16
Internal Audit
Question 1
One of the independent directors sought information regarding the appointment of internal auditors for
the following Group Companies in accordance with the Companies Act, 2013 of which certain financial
information is given below:
Figures are in ₹ crore and correspond to the previous year.
Name Nature Equity Turnover Loan Public
Share from Deposits
Capital Bank and
PFI
XYX Listed 100 230 20 48
Limited
MNM Unlisted 60 100 50 24
Limited Public
GFG Unlisted 70 180 80 -
Limited Private
You are required to evaluate the requirements regarding the appointment of internal Auditors for the Group
Companies. Discuss.
Answer 1
As per section 138 of the Companies Act, 2013, following class of companies (prescribed in Rule 13 of the
Companies (Accounts) Rules, 2014) shall be required to appoint an internal auditor or a firm of internal
auditors, namely:-
(A) every listed company;
(B) every unlisted public company having-
(1) paid up share capital of fifty crore rupees or more during the preceding financial year; or
(2) turnover of two hundred crore rupees or more during the preceding financial year; or
(3) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore
rupees or more at any point of time during the preceding financial year; or
(4) outstanding deposits of twenty five crore rupees or more at any point of time during the preceding
financial year; and
(C) every private company having-
(1) turnover of two hundred crore rupees or more during the preceding financial year; or
(2) outstanding loans or borrowings from banks or public financial institutions exceeding one hundred crore
rupees or more at any point of time during the preceding financial year.
In the given case, XYX Limited is a listed company. As per section 138 of the Companies Act, 2013, every listed
company is required to appoint an internal auditor or a firm of internal auditors. Thus, in view of the above,
XYX Limited is required to appoint an internal auditor.
Further, MNM Limited is unlisted public company. The company is having ₹ 60 crore as equity share capital
which is exceeding the prescribed limit of rupees fifty crore as per section 138. Thus, MNM Limited is required
to appoint an internal auditor as per section 138 of the Companies Act, 2013.
GFG Limited is unlisted private company and having ₹ 70 crore as equity share capital, ₹ 180 crore as turnover
and ₹ 80 crore loan from Bank and PFI. In view of provisions of section 138 of the Companies Act, 2013
discussed above, all the limits are below the prescribed limit for a private company. Therefore, GFG Limited is
not required to appoint an internal auditor.
It can be concluded that XYX Limited and MNM Limited are required to appoint the internal auditor as per the
provisions of the Companies Act, 2013 whereas GFG Limited is not required to do the same.

Question 2
Rishi is appointed as internal auditor for SPOM Limited, a medium-sized manufacturing company, while CA
Nitin is the statutory auditor of SPOM Limited.

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(a) During the review, Rishi notices several discrepancies in the disbursement records and suspects there
might be weaknesses in the internal control system. Additionally, there have been recent changes in
the company's business policies that he was not informed about. Rishi is concerned about maintaining
his independence and objectivity while ensuring that management is aware of these issues. What are
the responsibilities of Rishi as an Internal Auditor with respect to the accounting function and financial
records of the organisation?
(b) CA Nitin asked Rishi to provide direct assistance to him regarding evaluating the appropriateness of
management’s use of the going concern assumption. In view of Standards on Auditing, whether Nitin
can ask direct assistance from Rishi as stated above?
Answer 2
(a) In the given case, Rishi notices several discrepancies in the disbursement records and suspects there might
be weaknesses in the internal control system. He is concerned about maintaining his independence and
objectivity while ensuring that management is aware of these issues. Responsibilities of Rishi as an Internal
Auditor with respect to the accounting function and financial records of the organisation include:
• to ascertain adequacy of system of internal control by a continuous examination of accounting
procedures, receipts and disbursements, and to provide adequate safeguards against misappropriation
of assets.
• to operate independently of the accounting staff and must not in any way divest any of the
responsibilities placed upon him.
• not to involve in the performance of executive functions in order that the objective outlook does not
get obscured by the creation of the vested interest.
• to observe facts and situations and bring them to notice of authorities who would otherwise never
know them; also, critically appraise various policies of the management and draw its attention to any
deficiencies, wherever these require to be corrected.
• to associate closely with management and keep knowledge up to date by being informed about all
important occurrences and events affecting the business, as well as the changes that are made in
business policies.
• at all times, the internal auditor must enjoy an independent status
(b) As per SA 610, “Using the Work of Internal Auditor”, the external auditor shall not use internal auditors to
provide direct assistance to perform procedures that involve making significant judgments in the audit.
Since the external auditor has sole responsibility for the audit opinion expressed, the external auditor
needs to make significant judgments in the audit engagement.
Significant judgments include the following:
• Assessing the risks of material misstatement;
• Evaluating the sufficiency of tests performed;
• Evaluating the appropriateness of management’s use of the going concern assumption;
• Evaluating significant accounting estimates; and
• Evaluating the adequacy of disclosures in the financial statements, and other matters affecting the
auditor’s report.
In view of the above, CA Nitin cannot ask direct assistance from internal auditors regarding evaluating the
appropriateness of management’s use of the going concern assumption in accordance with SA 610.

Question 3
CA Sanjana has recently joined as Chief Internal Auditor of Up Scale Limited, a listed company. Her
subordinate staff in the internal audit department brings to her knowledge many prior audit issues
highlighted in the previous internal audit reports which are still open. Does she have any responsibilities in
this regard? How should she proceed in this situation?
Answer 3
In the given situation, CA Sanjana has recently joined as Chief Internal Auditor in Up Scale Limited, a listed
company. As a Chief Internal Auditor, CA Sanjana is responsible for continuously monitoring the closure of
prior audit issues through timely implementation of action plans included in past audits. This shall be done
with a formal monitoring process, elements of which are pre-agreed with management and those charged
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with governance. The responsibility to implement the action plans remains with the management. In
monitoring and reporting of prior audit issues, the responsibility of the CA Sanjana as internal auditor is usually
in the form of an “Action Taken Report (ATR) of previous audits”. The term “Monitoring and Reporting” refers
to the periodic tracking of issues raised during prior audits and evaluation of the corrective actions undertaken
by the auditee to resolve them and to report any open and pending matters to the management and those
charged with governance.
CA Sanjana should review whether follow-up action is taken by the management on the basis of his report. If
no action is taken within a reasonable time, she should draw the management’s attention to it. Where the
management has not acted upon the suggestions or not implemented the prescribed recommendations, she
should ascertain the reasons thereof.
Where the management has accepted recommendations of the CA Sanjana and initiated the necessary action,
she should periodically review the manner and the extent of implementation of the recommendations and
report to the management highlighting the recommendations which have not been implemented fully or
partly.

Question 4
STU & Associates have been the statutory auditors of the listed company "First and Last Ltd.," operating in
the petrochemical industry, for the past three years. CA K, the engagement partner, had designed certain
substantive procedures on some selected assertions in response to the assessed risk of material
misstatements for the year under audit. These assertions were not examined by him in previous years due
to materiality or risk considerations.
Mr. X leads the internal audit department of the company and reports to the company’s audit committee.
During the audit, a senior member of the engagement team decides to engage Mr. X to provide direct
assistance in performing the above substantive procedures. Comment with respect to the relevant
Standards on Auditing.
Also, indicate the activities to be performed by the statutory auditor prior to using internal auditor for
providing direct assistance.
Answer 4
SA 610, "Using the Work of Internal Auditor” states that in determining the nature of work that may be
assigned to internal auditors, the external auditor is careful to limit such work to those areas that would be
appropriate to be assigned. Examples of activities and tasks that would not be appropriate to use internal
auditors to provide direct assistance include the discussion of fraud risks, determination of unannounced audit
procedures as addressed in SA 240 etc.
In the above case, engagement partner had designed certain substantive procedures on some selected
assertions in response to assessed risk of material misstatements in year under audit. Such assertions were
not tested by him in the previous years due to materiality or risk considerations. It is being done now for
incorporating an element of unpredictability in audit procedures to be performed as individuals within the
company who are familiar with the audit procedures normally performed on engagements may be more able
to conceal fraudulent financial reporting.
Therefore, in such matters, using an internal auditor to provide direct assistance could prove to be counter-
productive and defeat the very purpose of designing such substantive procedures. Hence, decision of senior
engagement team member to use Mr. X to provide direct assistance on above said matters is not in accordance
with SA 610 and is not proper.
Prior to using internal auditors to provide direct assistance for purposes of the audit, the external auditor shall:
(a) Obtain written agreement from an authorized representative of the entity that the internal auditors will
be allowed to follow the external auditor’s instructions, and that the entity will not intervene in the work
the internal auditor performs for the external auditor; and
(b) Obtain written agreement from the internal auditors that they will keep confidential specific matters as
instructed by the external auditor and inform the external auditor of any threat to their objectivity.

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Question 5
The management of High Limited is concerned with the reporting requirement cast through Rule 11 of the
Companies (Audit and Auditors) Rules, 2014 for the financial year 2023-24 with regard to the Audit Trail
(edit log). Audit trails may be enabled at the accounting software level depending on the features available
in such software or same may be captured directly in the database underlying such accounting software.
Consequently, the management of the company approached CA J and asked him to suggest them list of
internal controls which may be required to be implemented and operated to demonstrate that the Audit
trail (or Edit Log) feature was functional, operated and was not disabled. Guide CA J.
Answer 5
List of internal controls which may be required to be implemented and operated are given below
• Controls to ensure that the audit trail feature has not been disabled or deactivated.
• Controls to ensure that User IDs are assigned to each individual and that User IDs are not shared.
• Controls to ensure that changes to the configurations of the audit trail are authorized and logs of such
changes are maintained.
• Controls to ensure that access to the audit trail (and backups) is disabled or restricted and access logs,
whenever the audit trails have been accessed, are maintained.
• Controls to ensure that periodic backups of the audit trails are taken and archived as per the statutory
period specified under the provisions of the Act.

Question 6
Write a short note on Internal Audit Report.
Answer 6
The internal auditor should carefully review and assess the conclusions drawn from the audit evidence
obtained, as the basis for his findings contained in his report and suggest remedial action. However, in case
the internal auditor comes across any actual or suspected fraud or any other misappropriation of assets, it
would be more appropriate for him to bring the same immediately to the attention of the management.
As per Standard on Internal Audit (SIA) 370 Reporting Results, reporting of internal audit results is generally
undertaken in two stages:
1. At the end of a particular audit assignment, an “Internal Audit Report” covering a specific area, function or
part of the entity is prepared by the Internal Auditor highlighting key observations arising from those
assignments. This report is generally issued with details of the manner in which the assignment was
conducted and the key findings from the audit procedures undertaken. This report is issued to the auditee,
with copies shared with local and executive management, as agreed during the planning phase.
2. On a periodic basis, at the close of a plan period, a comprehensive report of all the internal audit activities
covering the entity and the plan period is prepared by the Chief Internal Auditor (or the Engagement
Partner, in case of external service provider). Such reporting is normally done on a quarterly basis and
submitted to the highest governing authority responsible for internal audits, generally the Audit
Committee. Some part of the aforementioned Internal Audit Reports may form part of the periodic (e.g.
Quarterly) report shared with the Audit Committee.
This Standard on Internal Audit (SIA) deals with the internal auditor’s responsibility to issue only the first
type of reports, the Internal Audit Report pertaining to specific audit assignments and not to t he periodic
(e.g. Quarterly) reporting for the whole entity as per the Annual/Quarterly audit plan.
On the basis of the internal audit work completed, the Internal Auditor shall issue a clear, well documented
Internal Audit Report which includes the following key elements
(a) An overview of the objectives, scope and approach of the audit assignments;
(b) The fact that an internal audit has been conducted in accordance the Standards of Internal Audit;
(c) An executive summary of key observations covering all important aspects, and specific to the scope of
the assignment;
(d) A summary of the corrective actions required (or agreed by management) for each observation; and
(e) Nature of assurance, if any, which can be derived from the observations.
The content and form of the Internal Audit Report are to be established by the Internal Auditor based on
his best professional judgement, in consultation with the auditee and, if necessary, with inputs from other
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 CA SANIDHYA SARAF 16.5

key stakeholders. No internal audit report shall be issued in final form unless a written draft of the report
has previously been shared with the auditee.
The internal audit report shall be issued within a reasonable time frame from the completion of the internal
audit work.
1. Basis of Internal Audit Report: Each internal audit report is prepared on the basis of the audit
procedures conducted and the analysis of the audit evidence gathered. Conclusions reached shall be
based on all the findings rather than on a few deviations or issues noted. Controls operating effectively
have their own importance and should be acknowledged, while the risk and significance of
observations noted have a role to play in prioritising the matters to be reported.
2. Conducted in Accordance with SIAs: Where the internal audit is conducted in compliance with the
Standards of Internal Audit, (within the Framework governing Internal Audits), and the internal auditor
can substantiate the same with supporting evidence and documentation, the internal audit report shall
include a statement confirming that “the internal audit was conducted in accordance with the
Standards of Internal Audit issued by the Institute of Chartered Accountants of India”.
3. Content and Format of Internal Audit Report: The manner in which the internal audit report is drafted
and presented is a matter of professional judgment and choice and could be influenced by the
preferences of the recipients. The SIA does not mandate any particular format or list of contents since
the Internal Auditor is expected to exercise his best professional judgement on matters regarding how
and what to report. Where some level of assurance is being provided, the form and content of the
report shall be as per SIA 380, “Issuing Assurance Reports”. A typical internal audit report should
include the following:
 Audit Scope performed
 Audit period Covered
 Executive Summary
 Summary of the critical findings
 Detailed audit findings with elaboration on business impact and root cause of such issues
 Rating of the highlighted issues (E.g High / Medium / Low) in accordance to the rating criteria
approved by Audit Committee
 Audit recommendation to improve control environment and address the highlighted finding
Response received from the responsible functional authority containing action plan and target
timelines for action
4. Documentation: To confirm compliance of audit procedures with this SIA, the list of documents
required is as follows:
(a) Copies of draft and final internal audit reports to be maintained, appropriately cross referenced
to specific observations.
(b) If appropriate, management action plans may be counter signed by respective management
personnel.

Question 7
State the important aspects to be considered by the External auditor in the evaluation of the Internal Audit
Function.
Answer 7
Evaluation of Internal Audit Functions by External Auditor: The external auditor’s general evaluation of the
internal audit function will assist him in determining the extent to which he can place reliance upon the work
of the internal auditor. The external auditor should document his evaluation and conclusions in this respect.
The important aspects to be considered in this context are:
a) Organizational Status - Whether internal audit is undertaken by an outside agency or by an internal audit
department within the entity itself, the internal auditor reports to the management. In an ideal situation,
his reports to the highest level of management and are free of any other operating responsibility. Any
constraints or restrictions placed upon his work by management should be carefully evaluated. In
particular, the internal auditor should be free to communicate fully with the external auditor.

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 CA SANIDHYA SARAF 16.6

b) Scope of Function - The external auditor should ascertain the nature and depth of coverage of the
assignment which the internal auditor discharges for management. He should also ascertain to what
extent the management considers, and where appropriate, acts upon internal audit recommendations.
c) Technical Competence - The external auditor should ascertain that internal audit work is performed by
persons having adequate technical training and proficiency. This may be accomplished by reviewing the
experience and professional qualifications of the persons undertaking the internal audit work.
d) Due Professional Care - The external auditor should ascertain whether internal audit work appears to be
properly planned, supervised, reviewed and documented. An example of the exercise of due professional
care by the internal auditor is the existence of adequate audit manuals, audit Programmes and working
papers.

Question 8
AB Pvt. Ltd. company has outstanding loans or borrowings from banks exceeding one hundred crore rupees
wants to appoint an internal auditor. Please guide him for the applicability of the same and who can be
appointed as an internal auditor and what work would be reviewed by him.
Answer 8
Applicability of Internal Audit: Section 138 of the Companies Act, 2013 states that every private limited
company is required to conduct internal audit if its outstanding loans or borrowings from banks or public
financial institutions exceeding one hundred crore rupees or more at any point of time during the preceding
financial year.
In view of above provisions, AB Pvt. Ltd. is under compulsion to conduct internal audit as its loans or
borrowings are falling under the prescribed limit.
Who can be appointed as Internal Auditor- The internal auditor shall either be a chartered accountant or a
cost accountant, whether engaged in practice or not, or such other professional as may be decided by the
Board to conduct internal audit of the functions and activities of the companies.
The internal auditor may or may not be an employee of the company.
Work to be reviewed by Internal Auditor-
In addition, each of the managerial functions should be reviewed by the internal auditor. The scope of internal
auditor’s work should also include a review of-
(i) Review of Internal Control System and Procedures -
(a) The review of internal control system and procedures involves assessing the design and operational
efficiency and effectiveness of the internal control system to strengthen the overall internal control
environment of the entity. The objective to review is to minimise the overall residual risk by suggesting
the appropriate controls to reduce the inherent risk.
As far as possible, controls should be in-built in the operating functions for prevention or timely
detection of the fraud and errors and minimize the cost of control.
(b) Internal Control System should be reviewed considering the limitations of internal controls, i.e., cost-
benefit comparison, human errors, collusion, and abuse by process owners.
It should also be seen whether the internal controls were in use throughout the period of intended
reliance. A break-down in internal controls for a specific portion of intended reliance would need
special attention.
(ii) Review of Custodianship and Safeguarding of Assets -
➢ This involves verifying the existence of the assets.
➢ The internal auditor should review the segregation of duties is in place.
➢ The internal auditor should review the control systems to ensure that all assets are accounted for
fully. He should review the means used for safeguarding assets against losses e.g. fire, improper
or negligent activity, theft and illegal acts, etc.
➢ He should review the control systems for intangible assets e.g. the procedures relating to credit
control. Where an enterprise uses electronic data processing equipment, the physical and
systems control on processing facilities as well as on data storage should be examined and tested.

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 CA SANIDHYA SARAF 16.7

(iii) Review of Compliance with Policies, Plans, Procedures and Regulations - It is essential that the various
functional segments of an enterprise comply with the relevant policies, plans, procedures, laws and
regulations so that the operations are carried out in a coordinated manner. He should examine the system
of periodical review of existing policies particularly when there is a change in the method and nature of
operations of the enterprise. By combining the results of his review of the adequacy of the systems with
the result of his compliance tests, the internal auditor should be able to evaluate the effectiveness of the
former. He should point out specific weaknesses and suggest remedial action.
(iv) Review of Relevance and Reliability of Information - The internal auditor should review the information
systems to evaluate the reliability and integrity of financial and operating information given to
management and to external agencies such as governmental bodies, investors, trade organisations,
labour unions, etc. He should examine the accuracy and reliability of financial and operational records.
The usefulness of the reports as well as of the records should be evaluated with reference to their costs.
The internal auditor should examine whether the reporting is by exception i.e. the reports highlight the
significant and distinct ive features. In case of automated management information system, where
relevant information used for critical decision making is generated from the computer system, then
adequacy of the controls build in the system should be reviewed to ensure data integrity and reliability
of such information.
(v) Review of the Organisation Structure - The internal auditor should conduct an appraisal of the
organisation structure to ascertain whether it is in harmony with the objectives of the enterprise and
whether the assignment of responsibilities is in consonance therewith. For this purpose:
➢ He should review the manner in which the activities of the enterprise are grouped for managerial
control. It is also important to review whether responsibility and authority are in harmony with the
grouping pattern.
➢ The internal auditor should examine the organisation chart to find out whether the structure is simple
and economical and that no function enjoys an undue dominance over the others.
➢ He should particularly see that the responsibilities of managerial staff at headquarters do not overlap
with those of chief executives at operating units. He should examine whether there is a satisfactory
balance between the authority and responsibility of important executives.
➢ The internal auditor should examine the reasonableness of the span of control of each executive (the
number of subordinates that an executive controls). He should examine whether there is a unity of
command i.e., whether each person reports only to one superior.
➢ Where dual responsibilities cannot be avoided, the primary one should be specified and the specific
responsibility to each senior fixed. This must be made known to all concerned.
➢ He should review adequate segregation of duties is considered while defining the organization
structure.
➢ Finally, he should evaluate the process of managerial development in the enterprise.
(vi) Review of Utilisation of Resources –
➢ The internal auditor should check whether proper operating standards and norms have been
established for measuring the economical and efficient use of resources.
➢ They should be detailed enough to be identifiable with specific operating responsibilities and should
be capable of being used by operating personnel for monitoring and evaluating their performance.
➢ The internal auditor should review the methods of establishing operating standards and norms. He
should carefully examine the assumptions made while setting the standards to ensure that they are
appropriate and necessary.
➢ Where there is a wide divergence between actual performance and the corresponding standards,
reasons may be considered. As a part of evaluating resources utilisation, identifying the facilities
which are under-utilized is an important function of the internal auditor.

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 CA SANIDHYA SARAF 16.8

(vii) Review of Accomplishment of Goals and Objectives - The internal auditor should review the overall
objectives of the enterprise to evaluate whether they are clearly stated and are attainable. The internal
auditor should examine whether, to the extent possible, objectives are expressed in precise quantifiable
terms (both monetary and non-monetary) to facilitate detailed planning to be made for achieving them.
Budgeting forms an important part of such planning. This will ensure that plans anticipate the problem
areas. There should also be sufficient flexibility in the plans to permit such improvements in their
implementation, as would benefit the enterprises as a whole.

Question 9
Moon Ltd. of which you are the Statutory Auditor, have an internal audit being conducted by an outside
agency. State the factors that weigh considerations in opting to make use of direct assistance of the internal
auditors for the purpose of statutory audit.
Answer 9
The external auditor shall not use the work of the internal audit function if the external auditor determines
that the function’s organizational status and relevant policies and procedures do not adequately support the
objectivity of internal auditors; the function lacks sufficient competence or the function does not apply a
systematic and disciplined approach, including quality control.
The external auditor shall consider
Nature & scope of work done & its
Determining the relevance to overall Strategy &
Nature & Extent of Audit Plan (i) Objectivity of the
work of Internal internal audit functions.
Audit function that (ii) Level of
Determine adequacy of Internal
can be used competence of internal
Audit work for external auditors
audit function.
purpose
(iii) Whether a systematic

Question 10
Mr. A is appointed as a statutory auditor of XYZ Ltd. XYZ Ltd is required to appoint an internal auditor as per
statutory provisions given in the Companies Act, 2013 and appointed Mr. B as its internal auditor. The
external auditor Mr. A asked internal auditor to provide direct assistance to him regarding evaluating
significant accounting estimates by the management and assessing the risk of material misstatements.
a) Discuss whether Mr. A, statutory auditor, can ask direct assistance from Mr. B, internal auditor as
stated above in view of auditing standards.
b) Will your answer be different if Mr. A asks direct assistance from Mr. B, internal auditor with respect
to external confirmation requests and evaluation of the results of external confirmation procedures?
Answer 10
a) Direct Assistance from Internal Auditor: As per SA 610 “Using the Work of Internal Auditor”, the external
auditor shall not use internal auditors to provide direct assistance to perform procedures that Involve
making significant judgments in the audit.
Since the external auditor has sole responsibility for the audit opinion expressed, the external auditor needs
to make the significant judgments in the audit engagement.
Significant judgments include the following:
• Assessing the risks of material misstatement;
• Evaluating the sufficiency of tests performed;
• Evaluating the appropriateness of management’s use of the going concern assumption;
• Evaluating significant accounting estimates; and
• Evaluating the adequacy of disclosures in the financial statements, and other matters affecting the
auditor’s report.
In view of above, Mr. A cannot ask direct assistance from internal auditors regarding evaluating significant
accounting estimates and assessing the risk of material misstatements.

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 CA SANIDHYA SARAF 16.9

b) Direct Assistance from Internal Auditor in case of External Confirmation Procedures: SA 610 “Using the
Work of Internal Auditor”, provide relevant guidance in determining the nature and extent of work that
may be assigned to internal auditors. In determining the nature of work that may be assigned to internal
auditors, the external auditor is careful to limit such work to those areas that would be appropriate to be
assigned.
Further, in accordance with SA 505, “External Confirmation” the external auditor is required to maintain
control over external confirmation requests and evaluate the results of external confirmation procedures,
it would not be appropriate to assign these responsibilities to internal auditors. However, internal auditors
may assist in assembling information necessary for the external auditor to resolve exceptions in
confirmation responses.

Question 11
The XYZ Ltd has to appoint Mr. A as Chief Internal Auditor to lead the internal audit function for the
Company. The Managing Director of the Company has asked the HR head to define the reporting structure
of the Chief Internal Auditor, so that he can discharge his duties objectively? Suggest the ideal reporting
structure of the Chief Internal Auditor that HR head may propose to the Managing Director?
Answer 11
HR Head need to evaluate multiple options and identify most suitable option in light of the relevant provisions,
guidance and overall governance of the organization. HR head also need to evaluate different option for his
administrative reporting and various options for functional reporting of Chief Internal Auditor. The possible
options to be considered and evaluated include Board of Directors, Audit Committee, Managing Director of
the Company, Chief Executive Officer or Chief Financial Officer.
As per section 138 of the Companies Act 2013, the internal auditor shall either be a chartered accountant or
a cost accountant (whether engaged in the practice or not), or such other professional as may be decided by
the Board to conduct an internal audit of the functions and activities of the company.
As per the revised definition of the term ‘Internal Audit’ as per para 3 of the ICAI’s Framework Governing
Internal Audits, “Internal audit provides independent assurance on the effectiveness of internal controls and
risk management processes to enhance governance and achieve organizational objectives”.
The Internal Auditor shall be free from any undue influences which force him to deviate from the truth. This
independence shall be not only in mind but also in appearance. Also, the internal auditor shall resist any undue
pressure or interference in establishing the scope of the assignments or the manner in which these are
conducted and reported, in case these deviate from set objectives.
As per the requirement of the above stated provision, Chief Internal Auditor need to be independent of the
operational activities and report of Audit Committee / Board of Directors to enjoy his true status of
independent auditor. He may administratively report to CEO or Managing Director for his administrative
reporting purpose or any other similar authority till the time it is approved by Board of Directors and it does
not impact his independence to be able to perform his duties and report to audit committee / Board of
Director independently.

Question 12
The XYZ Ltd is has appointed Mr. A to conduct their internal audit for new financial year. The Audit
committee requested Mr. A to present their Internal Audit plan for next financial year? What approach
would Mr. A follow to prepare the internal audit plan for next year?
Answer 12
The internal auditor should, in consultation with those charged with governance, including the audit
committee, develop and document a plan for each internal audit engagement to help him conduct the
engagement in an efficient and timely manner.
Internal audit plan should be developed in such a manner that all the business processes covering both
financial as well as operational activities are reviewed by internal audit function within a defined time cycle.
Also, ensuring that appropriate consideration is made and adequate balance is ensured to the following:
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 CA SANIDHYA SARAF 16.10

• Risk underlying the business process

• Value that the internal audit can provide to the organization
• Effort involved in conducting the internal audit for a particular business process
• Risk Appetite of the organization.
• Coverage of all auditable areas within the defined time range

Question 13
The XYZ Ltd is has appointed Mr. A to conduct their internal audit for new financial year. The Audit
committee requested Mr. to perform detailed analysis of their expenses in previous year and report all risks
and underlying gaps? What audit approach should Internal Auditor follow to identify such gaps?
Answer 13
Typical internal audit engagement comprises of following five steps:
Step 1 – Obtain knowledge of the Business and its Environment
Internal Auditor must conduct meetings with key stakeholders, Board of Directors and Key management
personals to obtain understanding of the organization’s business environment, its operations, organization’s
vision, mission and top management’s expectations from the audit functions.
Internal auditor must obtain understanding of various business documents – Standard Operating Procedures
and Financial Statement Etc.
Internal auditor must also obtain understanding of the underlying Information Technology landscape, various
applications and ERP systems of the organization and Management Information System of the organization.
Internal auditor must also obtain understanding of the regulatory landscape and various laws and regulations
that are applicable to the organization.
Step 2 – Perform Audit Planning
Internal Auditor must plan the audit engagement as per the Standard on Internal Audit (SIA) 310, Planning the
Internal Audit Assignment. Audit scope must be approved by Audit Committee and Board of Directors.
Once approved, Internal Auditor must share detailed Audit Plan with the key managerial personals and plan
in advance the detailed schedule of the Internal Audit to be conducted.
Internal Auditor must conduct the opening meeting with key stakeholders before start of audit engagement
and share details of Information and System Access required to perform the audit.
Detailed work plan must be prepared by the audit managers and approved with Head of Internal Audit / Chief
Internal Auditor. The work plan must be prepared after performing the evaluation of all major underlying risks
in the process being reviewed and the audit checks to be performed to assess the adequacy of the control
environment to mitigate such risks.
Step 3 – Gather required information
Internal Auditor must obtain the required information and perform checks to ensure correctness and integrity
of information received. To the extent possible, Internal Auditor must obtain the information directly from the
source.
Adequate planning should be done and advance intimation should be made for any interim information
needed for performing audit checks.
Step 4 – Perform audit checks
Internal Auditor should collate all data and perform analytical procedures to identify key trends and outliers.
Analytical procedures should be performed in accordance with the Standard on Internal Audit (SIA) 6,
Analytical Procedures. To the extent possible, relevant analytical tools may be used to perform review of the
complete data for the audit period.
Wherever needed, Internal Auditor must select the sample in accordance with Standard on Internal Audit (SIA)
5, Sampling.
Detailed audit testing must be performed as per the audit work plan. Internal Auditor must ensure adequate
evidences must be collected and stores in accordance to Standard on Internal Audit (SIA) 320, Internal Audit
Evidence
Internal Auditor must prepare detailed listed of the Identified audit issues and controls gaps. Interim reports
may be issued after proper review of the work performed as per the Standard on Internal Audit (SIA) 350,
Review and Supervision of Audit Assignments.
Chapter 16 Internal Audit
 CA SANIDHYA SARAF 16.11

Adequate document of the internal audit work papers needs to be ensured as per Standard on Internal Audit
(SIA) 330, Internal Audit Documentation
Step 5 – Reporting of Internal Audit Issues
Internal Auditor must prepare a draft report of Internal Audit issues comprising of the business process/
function reviewed as per scope, detailed audit coverage and exclusions, if any, audit period covered during
the audit, summary along with detailed issues over the gaps noted along with implication of the business and
recommendation to mitigate the identified gaps.
Management Action Plan should be agreed along with responsibility of action and timelines for actions.
Internal Auditor must also review the status of actions taken by the management against the actions agreed
during previous audits and report the status of such follow up in the audit report.
Internal Auditor should thereafter circulate Final Report and presentation his findings to the Audit Committee.
Internal auditor must adhere to Standard on Internal Audit (SIA) 360, Communication with Management and
Standard on Internal Audit (SIA) 370, Reporting Results while sharing the result of internal audit with the
stakeholders.

Question 14
The XYZ Ltd is has appointed Mr. A to conduct their internal audit for new financial year. The Audit
committee requested Mr. to present detailed report on their finding and areas where immediate action is
needed to mitigate critical risks? What should be the content of internal audit report to address this
requirement of the Audit Committee?
Answer 14
As per Standard on Internal Audit (SIA) 370 Reporting Results, reporting of internal audit results is generally
undertaken in two stages:
• At the end of a particular audit assignment, an “Internal Audit Report” covering a specific area, function or
part of the entity is prepared by the Internal Auditor highlighting key observations arising from those
assignments. This report is generally issued with details of the manner in which the assignment was
conducted and the key findings from the audit procedures undertaken. This report is issued to the auditee,
with copies shared with local and executive management, as agreed during the planning phase.
• On a periodic basis, at the close of a plan period, a comprehensive report of all the internal audit activities
covering the entity and the plan period is prepared by the Chief Internal Auditor (or the Engagement
Partner, in case of external service provider). Such reporting is normally done on a quarterly basis and
submitted to the highest governing authority responsible for internal audits, generally the Audit
Committee. Some part of the aforementioned Internal Audit Reports may form part of the periodic (e.g.
Quarterly) report shared with the Audit Committee.
Accordingly, a typical internal audit report should include the following:
• Audit Scope performed;
• Audit period Covered;
• Executive Summary;
• Summary of the critical findings;
• Detailed audit findings with elaboration on business impact and root cause of such issues;
• Rating of the highlighted issues (E.g. High / Medium / Low) in accordance to the rating criteria approved by
Audit Committee;
• Audit recommendation to improve control environment and address the highlighted finding;
• Response received from the responsible functional authority containing action plan and target timelines
for action.

Question 15
The XYZ Ltd is has appointed Mr. A to conduct their internal audit for new financial year. The Audit
committee requested Mr. A to present their analysis on the implementation of recommendation of previous
audit report and highlight critical areas which need immediate attention of Audit Committee? What should
be the steps followed by internal auditor to address this requirement of Audit Committee?

Chapter 16 Internal Audit

 CA SANIDHYA SARAF 16.12

Answer 15
As per SIA 390 Monitoring and Reporting of Prior Audit Issues, the Chief Internal Auditor is responsible for
continuously monitoring the closure of prior audit issues through timely implementation of action plans
included in past audits. This shall be done with a formal monitoring process, elements of which are pre-agreed
with management and those charged with governance. The responsibility to implement the action plans
remains with the management.
In monitoring and reporting of prior audit issues, the responsibility of the Internal Auditor is usually in the
form of an “Action Taken Report (ATR) of previous audits”.
To address the requirement of Audit Committee in the given situation, Internal Auditor should assess the
action taken against the previous audit findings and report a summary of the action taken by the management.
Typical Action Taken Report may include the following:
• Reference to the previous audit reporting containing the reported issues
• Implementation Action agreed by the management along with target implementation date
• Status of action taken by management. The same may be classified under Implemented / Not Implemented
• Residual risk and rating for any unimplemented action
• Audit findings not implemented for long period of time
• Any critical audit finding that require immediate action for action or implementation.

Question 16
After an illustrious career in Indian Audit & Accounts Service for about 25 years, Parteek, a post graduate in
law, has taken voluntary retirement from government service. Being in fine spirits, he wants to take
responsibilities in corporate sector as Chief internal auditor. On looking at attractive compensation
packages, he applied for such position in a leading listed company engaged in oil refining business. The
Board of company is keen on him due to his impressive credentials.
Can he be appointed in this leading position of said company?
Answer 16
As per section 138 of Companies Act, 2013 the internal auditor shall either be a chartered accountant or a cost
accountant (whether engaged in the practice or not), or such other professional as may be decided by the
Board to conduct an internal audit of the functions and activities of the company.
The Board can appoint any professional as may be decided by it. The applicant in question is a law post
graduate and he has spent 25 years of his career in Indian Audit & Accounts Service. Therefore, he has got the
necessary experience and skills required for the said vacancy. The Board would be in a position to appoint
such a competent and experienced person in the field of auditing as its Chief Internal auditor.

Question 17
CA Deva is internal auditor of a listed company. The company wants to make sure that it is in compliance
with SEBI requirements at all times and it is never on the wrong side of law. It asks its internal auditor to
manage its compliance tracking system including directly corresponding with regulator in this regard. The
profile and scope of internal audit agreed at time of appointment included “compliance with laws and
regulations.”
Can he perform such type of activities in capacity of internal auditor of company?
Answer 17
The Internal Auditor does not assume any responsibility to manage or operate the compliance framework or
to take compliance related decisions. It is not responsibility of the Internal Auditor to execute or resolve
compliance related risks (e.g., engaging directly with regulators, etc.).
Although internal audit function provides independent assurance to enhance governance (which includes
compliance with laws and regulations), it does not assume operational responsibility of its compliance
framework. It is the responsibility of the management. He is responsible for auditing the compliance

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 CA SANIDHYA SARAF 16.13

framework and not managing it. Similarly, he does not accept compliance related risks like directly engaging
with regulator.

Question 18
Up Down Limited is in doldrums since last two years. The demand for its products has declined drastically.
The statutory auditor is of the view that situation has put into question going concern assumption of the
company. Its internal auditor has helped management in devising a strategy to deal with such risks and
come out of the situation. The plan includes venturing into different product lines using same plant with
minor modifications. Further, internal auditor has also prepared estimates of revenue generation along with
cash flows.
Can statutory auditor place total reliance on work performed by internal auditor in this regard?
Answer 18
The greater the judgment needed to be exercised in planning and performing the audit procedures and
evaluating the audit evidence, the external auditor will need to perform more procedures directly because
using the work of the internal audit function alone will not provide the external auditor with sufficient
appropriate audit evidence.
The appropriate use of going concern assumption requires significant judgment on part of statutory auditor.
Therefore, statutory auditor cannot place total reliance on internal auditor’s work in this regard and he should
perform more procedures directly.

Illustration

Illustration 19
The Managing Director of X Ltd is concerned about high employee attrition rate in his company. As the
internal auditor of the company he requests you to analyze the causes for the same. What factors would
you consider in such analysis?
Answer 19
The factors responsible for high employee attrition rate are as under:
a) Job Stress & work life imbalance;
b) Wrong policies of the Management;
c) Unbearable behavior of Senior Staff;
d) Safety factors;
e) Limited opportunities for promotion;
f) Low monetary benefits;
g) Lack of Labour welfare schemes;
h) Whether the organization has properly qualified and experienced personnel for the various levels of
works?
i) Is the number of people employed at various work centers excessive or inadequate?
j) Does the organization provide facilities for staff training so that employees and workers keep themselves
abreast of current techniques and practices?

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 CA SANIDHYA SARAF 17.1

Chapter 17
Due Diligence, Investigation and Forensic Audit
Question 1
CA Rajpal is performing a forensic accounting engagement involving gathering of evidence in relation to
suspected fraud of substantial amount in a company. He has been appointed under the terms of a
contractual agreement with the company.
The company operates in an electronic environment. While performing engagement, his team has gathered
evidence from electronic records in Enterprise Resource Planning system (ERP), messages in company’s e-
mail system and also from system
logs and audit trails generated by company’s computer systems. However, while doing so, the team has
failed to take care of aspects such as keeping records of each person in team gathering relevant evidence,
date and time of collection and storage of such evidence. What implications may it have on forensic
accounting engagement as such?
Answer 1
In a forensic accounting engagement, professional undertakes a scrutiny and detailed examination of all
transactions and balances relevant to the mandate so that evidence gathered is suitable in a Court of Law i.e.
in compliance with legal requirements where it can be challenged through cross-examination by the defending
party.
It is important that team is skilled in collecting evidence that can be used in a court case keeping a clear chain
of custody till evidence is presented in court. If there are gaps in chain of custody, then the evidence may be
challenged in court or even become inadmissible.
In the given case, team has failed to keep record of matters such as persons gathering relevant evidence, date
and time of collection and storage of evidence. Therefore, team has failed to maintain the chain of custody.
It can, therefore, defeat the objective of forensic accounting engagement as evidence may be challenged in
Court of law by defending parties and may become inadmissible.

Question 2
Mr. Rajat, while reviewing the anti-fraud controls for a construction company, found that the company has
witnessed a few frauds in the past mainly in the nature of material theft from the sites and fake expense
vouchers.
Mr. Rajat is evaluating options for verifying the process to reveal fraud and the corrective action to be taken
in such cases. As an expert in fraud prevention, you have been asked to brief Mr. Rajat about the inventory
fraud and verification procedure with respect to defalcation of inventory.
Answer 2
Inventory Frauds
Inventory fraud involves misappropriation of goods and their concealment. Employees may remove goods
from the premises, disguise theft by writing off stolen items as damaged, or manipulate inventory records to
match book quantities with actual stock. Fraud may also occur through inflating production material usage,
failing to record dispatched stock in sales accounts, or colluding to steal inventory over time.
Verification Procedures for Defalcation of Inventory
Fraud may involve trading stock, raw materials, manufacturing stores, tools, or any items easily converted to
cash. Theft is often difficult to detect, especially when collusion is involved. To identify fraud, the entire
system of receipts, storage, and dispatch must be reviewed to locate system weaknesses.
Detecting fraud requires an effective inventory control system and detailed records of inventory movements.
Investigators should first reconcile physical inventory counts with book records. They must assess employee
duties related to stock handling and identify excessive control concentrated in one person.
All recorded inventory receipts and issues should be cross-verified with Goods Inward and Outward Registers,
purchase and sales documents, and returns records. Discrepancies in physical stock must be reconciled with
book discrepancies. In industrial settings, verification should extend to raw material issuance, store tools, and
finished goods receipts.

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 CA SANIDHYA SARAF 17.2

Management can also commit inventory fraud by diverting production and covering shortages by inflating
wastage figures or falsely increasing issued material quantities. Detecting such fraud may require assistance
from an engineer who can assess expected versus actual wastage levels, machine production capacity, and
material requirements based on past records.

Question 3
Sid is a financial analyst working for a large corporation that is considering the acquisition of a mid-sized
manufacturing company. The initial financial statements provided by the target company appear to be in
order, showing profits and a solid asset base. However, his team is concerned about potential risks that may
not be immediately visible in the financial documents provided.
Guide Sid on what specific aspects should be focused during due diligence to ensure that there are no hidden
liabilities in this deal?
Answer 3
Hidden Liabilities:
• The company may not show any show cause notices which have not matured into
• demands, as contingent liabilities. These may be material and important.
• The company may have given “Letters of Comfort” to the banks and Financial Institutions. Since these
are not “guarantees”, these may not be disclosed in the Balance sheet of the target company.
• The Company may have sold some subsidiaries/businesses and may have agreed to take over and
indemnify all liabilities and contingent liabilities of the same prior to the date of transfer. These may not
be reflected in the books of accounts of the company.
• Product and other liability claims; warranty liabilities; product returns/discounts; liquidated damages for
late deliveries etc. and all litigation.
• Tax liabilities under the direct and indirect taxes.
• Long pending sales tax assessments.
• Pending final assessments of customs duty where provisional assessment only has been completed.
• Agreement to buy back shares sold at a stated price.
• Future lease liabilities.
• Environmental problems/claims/third party claims.
• Unfunded gratuity/superannuation/leave salary liabilities; incorrect gratuity valuations.
• Huge labour claims under negotiation when the labour wage agreement has already expired.
• Unresolved labour litigations

Question 4
Quality Ltd. is engaged in the business of manufacturing and distribution of various Ready to cook products
like vegetables, Noodles etc. The government made certain changes in rules and regulations relating to this
sector, consequently management decided to go for expansion. Management was looking for some financial
investor who can fund some part of the proposed expansion. Mr. Aman is interested in the venture and
appoints you to act as an advisor to the proposed investment in the business of Quality Ltd. You have to
investigate the audited financial statements and ensure that the valuation of shares of the company on the
basis of audited financial statements is appropriate. What process will be used for checking and can reliance
be placed on the already audited statement of accounts?
Answer 4
In the instant case, Quality Ltd. is engaged in the business of manufacturing and distribution of various ready-
to-cook products like vegetables, noodles etc. Further, management was looking for some financial investor
to fund some part of the proposed expansion. Aman is interested in funding; therefore, he initiated
investigation of audited financial statements to ensure the appropriateness of the valuation of the shares. For
initiating the same it may be considered that if the investigation has been launched because of some doubt in
the audited statement of account, no question of reliance on the audited statement of account arises.
However, if the investigator has been requested to establish value of a business or a share or the amount of
goodwill payable by an incoming partner, ordinarily the investigator would be entitled to put reliance on
audited materials made available to him unless, in the course of his test verification, he finds the audit to have
Chapter 17 Due Diligence, Investigation and Forensic Audit
 CA SANIDHYA SARAF 17.3

been carried on very casually or unless his terms of appointment clearly require to test everything afresh.
• If the statements of account produced before the investigator were not audited by a qualified accountant,
then of course there arises a natural duty to get the figures in the accounts properly checked and verified.
• However, when the accounts produced to the investigator have been specially prepared by a professional
accountant, who knows or ought to have known that these were prepared for purposes of the
investigation, he could accept them as correct relying on the principle of liability to third parties.
• It would be prudent to see first that such accounts were prepared with objectivity and that no bias has
crept in to give advantage to the person on whose behalf these were prepared.

Question 5
Core Limited submitted a credit proposal XYZ Bank Limited for the sanction of a Term Loan of ` 150.00 crore
required for procuring and installing a latest Plant and machinery for their upcoming project. Based on the
application, XYZ Bank Limited approached CA P to investigate the profitability of the business for judging
the accuracy of the schedule of repayment furnished by Core Limited, as well as the value of the security in
the form of assets of the business already possessed and those which will be created out of the loan.
Elucidate the steps that should be undertaken by CA P?
Answer 5
Investigating Business Profitability
To assess the accuracy of the borrower’s repayment schedule and the value of business assets, the
investigating accountant must first prepare a condensed income statement from the Profit and Loss
Statements of the past five years. This statement should separately highlight income, expenses, gross and net
profits, and annual taxes paid. Maintainable profits should be adjusted to reflect projected increases from
borrowed funds.
Next, key financial ratios should be computed to analyze trends and financial health. These include sales-to-
inventory, sales-to-fixed-assets, equity-to-fixed-assets, current assets-to-liabilities, quick assets-to-liabilities,
equity-to-long-term-loans, sales-to-book-debts, and return on capital employed. A product-wise breakdown
of annual sales should also be included to observe sales trends.
Verification of Assets and Liabilities in the Balance Sheet
The investigating accountant must prepare detailed schedules of assets and liabilities, ensuring transparency
and accuracy.
(a) Fixed Assets: Each asset’s description, gross value, depreciation rate, and accumulated depreciation
should be reviewed. If depreciation rates are inadequate, the fact must be noted. Any encumbrance or
recent revaluation should be disclosed, along with its impact and basis of valuation.
(b) Inventory: The value of raw materials, work-in-progress, and finished goods should be stated, along with
valuation methods used. Slow-moving or obsolete stock should be reported separately, with any
allowances made for their reduced value. Inventory movements after the Balance Sheet date, including
conversions to finished goods or sales, should be considered. If any inventory is pledged as loan security,
the loan amount must be disclosed.
(c) Trade Receivables: The composition of outstanding debts should be analyzed, ensuring they are collected
within the credit period. Doubtful debts and provisions against them should be identified. Debts from
directors, employees, subsidiaries, and affiliates must be separately disclosed. Recoveries made after the
Balance Sheet date should be included.
(d) Investments: A detailed investment schedule should specify purchase dates, costs, nominal and market
values. If any investments are pledged as security, full loan details must be provided.
(e) Secured & Unsecured Loans: A separate schedule must list debentures and secured loans, showing
outstanding amounts and repayment due dates. Any debentures issued as collateral security should be
disclosed. Assets pledged as loan security must be identified. Loans from promoters, directors, and
related parties should be detailed separately. If any unsecured loans require repayment before the bank
loan, their terms must be verified.
(f) Other Liabilities: The accountant must verify that all actual and contingent liabilities are correctly
disclosed. A trade payables aging analysis should confirm the company’s ability to meet obligations
without over-reliance on trade credit for working capital.
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 CA SANIDHYA SARAF 17.4

(g) Insurance: A schedule of insurance policies should outline risks covered, premium payments, and
coverage adequacy relative to asset values.
(h) Contingent Liabilities: Through direct inquiries, document reviews, and discussions with staff,
undisclosed contingent liabilities should be identified. These should be detailed in a separate schedule
attached to the report.
(i) Provision of Taxation - The previous year’s up to which taxes have been assessed or assessment order
received should be ascertained. If provision for taxes not assessed appears to be inadequate, the fact
should be stated along with the extent of the shortfall

Question 6
Sri Rajan is above 80 years old and wishes to sell his proprietary business of manufacture of specialty
chemicals. Ceta Ltd. wants to buy the business and appoints you to carry out a due diligence audit to decide
whether it would be worthwhile to acquire the business.
What procedures you would adopt before you could render any advice to Ceta Ltd.?
Answer 6
If a full-fledged financial due diligence is conducted, it would include the following matters, inter alia, in its
scope
(a) Brief history of the target company and background of its promoters - The accountant should begin the
financial due diligence review by looking into the history of the company and the background of the
promoters.
The details of how the company was set up and who were the original promoters has to be gone into,
before verification of financial data in detail. An eye into the history of the target company may reveal its
turning points, survival strategies adopted by the target company from time to time, the market share
enjoyed by the target company and changes therein, product life cycle and adequacy of resources. It
could also help the accountant in determining whether, in the past, any regulatory requirements have
had an impact on the business of the target company. Broadly, the accountant should make relevant
enquiries about the history of target's business products, markets, suppliers, expenses, operations. This
could, inter alia, include the following:
 Nature of business(es)
 Location of production facilities, warehouses, offices.
 Employment
 Products or services and markets
 History of the business with important suppliers of goods and services
 Inventories
 Franchises, licenses, patents.
 Important expense categories.
 Research and development.
 Foreign currency assets, liabilities and transactions.
 Legislation and regulation that significantly affect the entity.
 Information systems.
(b) Accounting policies - The accountant should study the accounting policies being followed by the target
company and ascertain whether any accounting policy is inappropriate.
The accountant should also see the effects of the recent changes in the accounting policies. The target
company might have changed its accounting policies in the recent past keeping in view its intention of
offering itself for sale.
The overall scope has to be based on the accounting policies adopted by the management. The
accountant has to look at any material effect of accounting policies on the overall profitability and their
correctness. It is reiterated that the accountant should have a detailed look at all material changes in
Accounting Policies in the period subjected to review very carefully.
The accountant's report should include a summary of significant accounting policies used by the target
company, that changes that have been made to the accounting policies in the recent past, the areas in
which accounting policies followed by the target company are different from those adopted by the
Chapter 17 Due Diligence, Investigation and Forensic Audit
 CA SANIDHYA SARAF 17.5

acquiring enterprise, the effect of such differences.

(c) Review of Financial Statements - Before commencing the review of each of the aspect covered by the
financial statements, the accountant should examine whether the financial statements of the target
company have been prepared in accordance with the Statute governing the target company, Framework
for Preparation and Presentation of the Financial Statements and the relevant Accounting Standards. If
not, the accountant should record the deviations from the above and consider whether it warrant an
inclusion in the final report on due diligence.
After having an overall view of the financial statements, as mentioned in the above paragraphs, the
accountant should review the operating results of the target company in great detail. It is important to
make an evaluation of the profit reported by the target company. The reason being that the price of the
target company would be largely based upon its operating results.
The accountant should consider the presence of an extraordinary item of income or expense that might
have affected the operating results of the target company.
It is advisable to compare the actual figures with the budgeted figures for the period under review and
those of the previous accounting period. This comparison could lead the accountant to the reasons
behind the variations. It is important that the trading results for the past four to five years are compared
and the trend of normal operating profit arrived at.
The normal operating profits should further be benchmarked against other similar companies. Besides
the above, and based on the trend of operating results, the accountant has to advise the acquiring
enterprise, through due diligence report, on the indicative valuation of the business.
In the case of many enterprises, the valuation is mainly based on the value of net worth only. For valuation
of immovable properties and plant, if required, the assistance of expert valuers could also to be taken.
The exercise to evaluate the balance sheet of the target company has to take into consideration the basis
upon which assets have been valued and liabilities have been recognised. The net worth of the business
has to be arrived at by taking into account the impact of over/under valuation of assets and liabilities.
The accountant should pay particular attention to the valuation of intangible assets.
(d) Taxation - Tax due diligence is a separate due diligence exercise but since it is an integral component of
the financial status of a company, it is generally included in the financial due diligence. It is important to
check if the company is regular in paying various taxes to the Government. The accountant has to also
look at the tax effects of the merger or acquisition.
(e) Cash Flow - A review of historical cash flows and their pattern would reflect the cash generating abilities
of the target company and should highlight the major trends. It is important to know if the company is
able to meet its cash requirements through internal accruals or does it have to seek external help from
time to time.
(f) Financial Projections - The accountant should obtain from the target company the projections for the
next five years with detailed assumptions and workings. He should ask the target company to give
projections on optimistic, pessimistic and most likely bases.
(g) Management and Employees - In most of the companies which are available for take over the problem
of excess work force is often witnessed. It is important to work out how much of the labour force has to
be retained. It is also important to judge the job profile of the administrative and managerial staff to
gauge which of these matches the requirements of the new incumbents. Due to complex set of labour
laws applicable to them, companies often have to face protracted litigation from its workforce, and it is
important to gauge the likely impact of such litigation.
The assumptions regarding increase in salaries, interest rate, retirement etc. have to be gone into to see
if they are reasonable. It is also necessary to see if the basic salary /wage considered for the valuation is
correct and includes all elements subject to payment of Gratuity. In the case of PF, ESI etc. the accountant
has to see if all eligible employees have been covered.
It is very important to consider the pay packages of the key employees as this can be a crucial factor in
future costs. One has to carefully look at Employees Stock Option Plans; deferred compensation plans;
Economic Value Addition and other performance linked pay; sales incentives that have been promised
etc. It is also important to identify the key employees who will not continue after the acquisition either
because they are not willing to continue or because they are to be transferred to another company within
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 CA SANIDHYA SARAF 17.6

the 'group' of the target company.

(h) Statutory Compliance - During a due diligence this is one aspect that has to be investigated in detail. It is
important therefore, to make a list of laws/ statues that are applicable to the entity as well as to make a
checklist of compliance required from the company under those laws. If the company has not been
regular in its legal compliance it could lead to punitive charges under the law. These may have to be
quantified and factored into the financial results of the company.

Question 7
An American Company engaged in the business of manufacturing and distribution of industrial gases, is
interested in acquiring a listed Indian Company having a market share of more than 65% of the industrial
gas business in India. It requests you to conduct a “Due Diligence” of this Indian Company and submit your
Report. List out the contents of your Due Diligence Review Report that you will submit to your USA based
Client.
Answer 7
The contents of a due diligence report will always vary with individual circumstances. Following headings are
illustrative:
Example of Headings of a Due Diligence Report
 Executive Summary
 Introduction
 Background of Target company
 Objective of due diligence
 Terms of reference and scope of verification
 Brief history of the company
 Share holding pattern
 Observations on the review
 Assessment of management structure
 Assessment of financial liabilities
 Assessment of valuation of assets
 Comments on properties, terms of leases, lien and encumbrances.
 Assessment of operating results
 Assessment of taxation and statutory liabilities
 Assessment of possible liabilities on account of litigation and legal proceedings against the
company
 Assessment of net worth
 Interlocking investments and financial obligations with group / associates companies, amounts
receivables subject to litigation, any other likely liability which is not provided for in the books of
account
 SWOT Analysis
 Comments on future projections
 Status of charges, liens, mortgages, assets and properties of the company
 Suggestion on ways and means including affidavits, indemnities, to be executed to cover
unforeseen and undetected contingent liabilities
 Suggestions on various aspects to be taken care of before and after the proposed
merger/acquisition.

Question 8
KDK Bank Ltd., received an application from a pharmaceutical company for takeover of their outstanding
term loans secured on its assets, availed from and outstanding with a nationalized bank. KDK Bank Ltd.,
requires you to make a due diligence audit in the areas of assets of pharmaceutical company especially with

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 CA SANIDHYA SARAF 17.7

reference to valuation aspect of assets. State what may be your areas of analysis in order to ensure that the
assets are not stated at overvalued amounts.
Answer 8
Over-Valued Assets:
• Uncollected/uncollectable receivables.
• Obsolete, slow non-moving inventories or inventories valued above NRV; huge inventories of packing
materials etc. with name of company.
• Underused or obsolete Plant and Machinery and their spares; asset values which have been impaired due
to sudden fall in market value etc.
• Assets carried at much more than current market value due to capitalization of expenditure/foreign
exchange fluctuation, or capitalization of expenditure mainly in the nature of revenue.
• Litigated assets and property.
• Investments carried at cost though realizable value is much lower.
• Investments carrying a very low rate of income / return.
• Infructuous project expenditure/deferred revenue expenditure etc.
• Group Company balances under reconciliation etc
• Intangible assets of no value.

Question 9
“Due diligence is different from audit” – Explain the difference between due diligence and audit.
Answer 9
It needs be underlined that due diligence is different from audit. Audit is an independent examination and
evaluation of the financial statements on an organization with a view to express an opi nion thereon. Whereas
due diligence refers to an examination of a potential investment to confirms all material facts of the
prospective business opportunity. It involves review of financial and non- financial records as deemed relevant
and material. Simply put, due diligence aims to take the care that a reasonable person should take before
entering into an agreement or a transaction with another party.

Question 10
PB Ltd. entered into a deal with SV Ltd. for buying its business of manufacturing wooden products/ goods.
PB Ltd. has appointed your firm for conducting due diligence review and they want to know the cash
generating abilities of SV Ltd. What points will you check in order to ensure that the manufacturing unit of
SV Ltd. will be able to meet the cash requirements internally?
Answer 10
In order to ensure that the manufacturing unit of SV Ltd. will be able to meet the cash requirements internally,
one is required to verify:
a) Is the company able to honor its commitments to its trade payables, to the banks, to the government and
other stakeholders?
b) How well is the company able to convert its trade receivables and inventories?
c) How well the Company deploys its funds?
d) Are there any funds lying idle or is the company able to reap maximum benefits out of the available funds?
e) What is the investment pattern of the company and are they easily realizable?

Question 11
CA. Sanjana is acting as Credit manager in branch of DFC Bank Limited. A company has approached the
branch for a request to sanction credit facilities worth ₹10 crore for meeting usual business requirements.
It is a prospective new client. She checks past history of the company, back ground of promoters & directors,
shareholding pattern and nature of business. Assessment of financial results of past years and future
projections is also undertaken. She also carries out SWOT analysis of the company.
Besides, assessment of net worth of directors is also undertaken. Status of CIBIL score and position of name
of promoters/directors in RBI defaulter list is also verified.

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She also makes discreet inquiries from few clients of the branch engaged in similar line of activity regarding
credit worthiness of company, its promoters and directors.
Based on above-
a) Identify activity being performed by CA Sanjana and discuss its nature.
b) Would your answer be different if this activity was to be performed by a person not qualified as a
Chartered Accountant? Can a non-CA perform such activity? State reason.
c) Name any three other areas where identified activity can be undertaken.
Answer 11
a) The activity described in the situation is Due diligence. Due diligence is a measure of prudence activity, or
assiduity, as is properly to be expected from, and ordinarily exercised by, a reasonable and prudent person
under the particular circumstance, not measured by any absolute standard but depending upon the relative
facts of the case. It involves a careful study of financial and non-financial possibilities. It implies a general duty
to take care in any transaction.
Due diligence is a process of investigation, performed by investors, into the details of a potential investment
such as an examination of operations and management and the verification of material facts. It entails
conducting inquiries for the purpose of timely, sufficient and accurate disclosure of all material
statements/information or documents, which may influence the outcome of the transaction. Due diligence
involves a careful study of the financial as well as non-financial possibilities for successful implementation of
restructuring plans.
Due diligence involves an analysis carried out before acquiring a controlling interest in a company to determine
that the conditions of the business conform with what has been presented about the target business. Also,
due diligence can apply to recommendation for an investment or advancing a loan/credit.
b) There would be no difference in answer if above activity was to be performed by a person who is not a
Chartered Accountant. The activity would remain due diligence. Due diligence can be performed by any
person. It is not necessary that due diligence can only be carried out by a Chartered Accountant. As due
diligence involves exercise of prudence and general duty to take care in any transaction, it can be undertaken
by any person.
c) The areas where due diligence may be undertaken are: -
(i) Corporate restructuring
(ii) Venture capital financing
(iii) Public offerings

Question 12
A nationalized bank received an application from an export company seeking sanction of a term loan to
expand the existing sea food processing plant. In this connection, the General Manager, who is in charge of
Advances, approaches you to conduct a thorough investigation of this limited company and submit a
confidential report based on which he will decide whether to sanction this loan or not.
List out the points you will cover in your investigation before submitting your report to the General
Manager.
Answer 12
The investigating accountant, in the course of his enquiry, should attempt to collect information on the under-
mentioned points (Make into points)
(i) The purpose for which the loan is required and the manner in which the borrower proposes to invest the
amount of the loan.
(ii) The schedule of repayment of loan submitted by the borrower, particularly the assumptions made therein
as regards amounts of profits that will be earned in cash and the amount of cash that would be available
for the repayment of loan to confirm that they are reasonable and valid in the circumstances of the case.
Institutional lenders now-a- days rely more, for repayment of loans, on the annual profits and loss, and
on the values of assets mortgaged to them.

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(iii) The financial standing and reputation for business integrity enjoyed by directors and officers of the
company.
(iv) Whether the company is authorized by the Memorandum or the Articles of Association to borrow money
for the purpose for which the loan will be used.
(v) The history of growth and development of the company and its performance during the past 5 years.
(vi) How the economic position of the company would be affected by economic, political and social changes
that are likely to take place during the period of loan.
(vii) Whether any loan application to any other Bank or Financial Institution was made, and if so, the reasons
for rejection thereof.

Question 13
What are the important steps involved while conducting Investigation on behalf of an Incoming Partner?
Answer 13
Broadly, the steps involved are the following:
a) Ascertainment of the history of the inception and growth of the firm.
b) Study of the provisions of the deed of partnership, particularly for composition of partners, their capital
contribution, drawing rights, retirement benefits, job allocation, financial management, goodwill, etc.
c) Scrutiny of the record of profitability of the firm’s business over a suitable number of years, with usual
adjustments that are necessary in ascertaining the true record of business profits. Particular attention
should, however, be paid to the nature of partners’ remuneration, which may be excessive or inadequate
in relation to the nature and profitability of the business, qualification and expertise of the partners and
such other factors as may be relevant.
d) Examination of the asset and liability position to determine the tangible asset backing for the partner’s
investment, appraisal of the value of intangibles like goodwill, know how, patents, etc. impending liabilities
including contingent liabilities and those pending for tax assessment. In case of firms rendering services,
the question of tangible asset backing usually is not important, provided the firm’s profit record, business
coverage and standing of the partners are of the acceptable order.
e) Position of orders at hand and the range and quality of clientele should be thoroughly examined, which the
firm is presently operating.
f) Position and terms of loan finance would call for careful scrutiny to assess its usefulness and implication
for the overall financial position; reason for its absence or negative impact should be studied.
g) It would be interesting to study the composition and quality of key personnel employed by the firm and
any likelihood of their leaving the organisation in the near future.
h) Various important contractual and legal obligations should be ascertained and their nature studied. It may
be the case that the firm has standing agreement with the employees as regards salary and wages, bonus,
gratuity and other incidental benefits. Full impact of such standing agreements would be gauged before a
final decision is reached.
i) Reasons for the offer of admission to a new partner should be ascertained and it should be determined
whether the same synchronises with the retirement of any senior partner whose association may have had
considerable bearing on the firm’s success.
j) Appraisal of the record of capital employed and the rate of return. It is necessary to have a comparison
with alternative business avenues for investments and evaluation of possible results on a changed capital
and organisation structure, if any, envisaged along with the admission of the partner.
k) It would be useful to have a firsthand knowledge about the specialisation, if any, attained by the firm in
any of its activities.
l) Manner of computation of goodwill on admission as also on retirement, if any, should be ascertained.
m) Whether any special clause exists in the deed of partnership to allow admission in future of a new partner,
who may be specified, on concessional terms.
n) Whether the incomplete contracts which will be transferred to the reconstituted firm will be a liability or a loss.

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Question 14
Mr. Clean who proposes to buy the proprietary business of Mr. Perfect, engages you as investigating
accountant. Specify the areas which you will cover in your investigation.
Answer 14
We discuss below the factors to be considered by a professional accountant while carrying out the
investigation for attaining satisfactory results:
(a) Studying the overall picture
(b) Statement of Profit and Loss
(c) Turnover
(d) Wage structure
(e) Depreciation and Maintenance
(f) Managerial Remuneration
(g) Exceptional and non-recurring items
(h) Repairs and maintenance
(i) Unusual year
(j) Balance Sheet - Fixed Assets
(k) Investments
(l) Inventories
(m) Trade Receivables
(n) Other liquid assets
(o) Idle assets
(p) Liabilities
(q) Taxation
(r) Capital
(s) Interpretation of figures - Fixed Assets
(t) Turnover
(u) Working Capital
(v) Estimating Future Maintainable Profits
Scope of investigation - The objective of such an investigation is to collect such information as would enable
the purchaser to decide whether it is worthwhile to buy the business and if so, for what amount. The
investigation should proceed broadly on the same lines as for valuation of shares.
Additional matters which must receive the attention of the investigating accountant on which, if appropriate,
information to the client should be given.
In case of proprietary concerns or partnerships -
(i) Reasons for the sale of the business and the effect on turnover and profits that there would be on
retirement of the present proprietor (or partners).
(ii) The length of lease under which the premises are held, the prospects of its renewal or extension.
(iii) The unexpired period of any patents owned by the vendors.
(iv) The age of the present managerial staff and the prospects of continuing in service under the new
proprietorship and the possible liability, not already provided for that would arise as regards payment of
pensions or gratuities in case of old and aged employees/ retrenched employees.
(v) If the bulk of sales are made to customers whose number is small, the profitability of the business would
be greatly shaken on withdrawing their support. This would be an element of weakness which should be
investigated as it might affect future profitability.
(vi) The valuation that could be placed on goodwill to determine whether that appearing in the book is less
or more; if none is included to determine the amount that should be included, if at all.

Question 15
In a Company, it is suspected that there has been embezzlement in cash receipts. As an investigator, what
are the areas that you would verify?

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Answer 15
(a) Cash receipts - In cases like holding back cash sales, collections by travelling salesmen, V.P.P receipts, or
casual receipts, e.g., sales of scrap, recoveries out of debts written off earlier, etc., the amount or amounts
of receipts embezzled may be subsequently covered up by the perpetrator adopting one or other of the
under-mentioned devices:
(i) Issuing a receipt to the payee for the full amount collected and entering only a part of the amount
on the counterfoil.
(ii) Showing a larger cash discount than actually allowed.
(iii) Adjusting a fictitious credit in the account of a customer for the value of goods returned by him.
(iv) Adjusting a cash sale as a credit sale, and raising a debit in the account of the customer.
(v) Writing off a good debt as bad and irrecoverable to cover up the amount collected which has been
misappropriated.
(vi) Short-debiting the customer’s account in the ledger with an intention to withdraw the difference
when the full amount payable by him is collected.
(vii) Under-casting the receipts side of the Cash Book or over-casting the payment side.
(viii) Carrying over a shorter total of the receipts from one page of the Cash Book to the next or over-
carrying the total of the payment from one page of the Cash Book to the next with a view to covering
up misappropriation; either short banking of cash collection or a part of the amount of withdrawal
from the bank.
Verification of Cash Receipts: On the assumption that some of these may have been diverted before being
entered in the books, evidence as regards income received from different sources should be scrutinised, e.g.,
inventory, sales summaries, rental registers, correspondence with customers, advices of travelling salesmen
and counterfoils or receipts. Carbon copies of receipts marked ‘duplicate’, should be scrutinised to confirm
that they are in fact copies of receipts issued earlier. In addition, by recalling paying-in-slips from the bank the
details of cash deposited on each day should be compared with those shown in the Cash Book. The record of
sales of scrap of waste paper, that of collection of rents from labourers temporarily accommodated in the
company’s quarters, that of refunds of amounts deposited with the electric supply co., or any other
Government authorities should be examined for finding out if any of these amounts have been
misappropriated. Cash sales should be vouched in detail. Recoveries from customers and sundry parties should
be checked with the copies of receipts issued to them; deductions made on account of cash discounts should
be reviewed. All withdrawals from the bank should be checked by reference to corresponding entries in the
bank pass book.

Question 16
J Ltd. is interested in acquiring S Ltd. The valuation of S Ltd. is dependent on future maintainable sales. As
the person entrusted to value S Ltd., what factors would you consider in assessing the future maintainable
turnover?
Answer 16
In assessing the turnover which the business would be able to maintain in the future, the following factors
should be taken into account:
(i) Trend: Whether in the past, sales have been increasing consistently or they have been fluctuating. A
proper study of this phenomenon should be made.
(ii) Marketability: Is it possible to extend the sales into new markets or that these have been fully exploited?
Product wise estimation should be made.
(iii) Political and economic considerations: Are the policies pursued by the Government likely to promote
the extension of the market for goods to other countries? Whether the sales in the home market are
likely to increase or decrease as a result of various emerging economic trends?
(iv) Competition: What is the likely effect on the business if other manufacturers enter the same field or if
products which would sell in competition are placed on the market at cheaper price? Is the demand for
competing products increasing? Is the company’s share in the total trade constant or has it been
fluctuating?

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Question 17
MF. Ltd., engaged in the manufacturing of various products in its factory, is concerned with shortage in
production and there arose suspicion of inventory fraud. You are appointed by MF Ltd. To evaluate the
options for verifying the process to reveal fraud and the corrective action to be taken. As an investigating
accountant what will be your areas of verification and the procedure to be followed for verification of
defalcation of inventory?
Answer 17
(a) Inventory Frauds-Inventory frauds are many and varied but here we are concerned with misappropriation
of goods and their concealment.
(i) Employees may simply remove goods from the premises.
(ii) Theft of goods may be concealed by writing them off as damaged goods, etc.
(iii) Inventory records may be manipulated by employees who have committed theft so that book
quantities tally with the actual quantities of inventories in hand.
(iv) Inflating the quantities issued for production is another way of defalcating raw materials and store
items.
(v) Stocks actually dispatched but not entered in sales/ debtor’s account.
Verification Procedure for Defalcation of inventory - It may be of trading stock, raw materials, manufacturing
stores, tools or of other similar items (readily) capable of conversion into cash. The loss may be the result of a
theft by an employee once or repeatedly over a long period, when the same have not been detected. Such
thefts usually are possible through collusion among a number of persons. Therefore, for their detection, the
entire system of receipts, storage and dispatch of all goods, etc. should be reviewed to localise the weakness
in the system.
The determination of factors which have been responsible for the theft and the establishment of guilt would
be difficult in the absence of: (a) a system of inventory control, and existence of detailed record of the
movement of inventory, or (b) availability of sufficient data from which such a record can be constructed. The
first step in such an investigation is to establish the different items of inventory defalcated and their quantities
by checking physically the quantities in inventory held and those shown by the Inventory Book. Investigating
accountant should ascertain the exact duties of persons handling the stocks received in and issued from store
for production/ sale or any other purpose. Identify the excessive control in the hands of a single person,
without any supervision as it will widen the scope of investigation.
Afterwards, all the receipts and issues of inventory recorded in the Inventory Book should be verified by
reference to entries in the Goods Inward and Outward Registers and the documentary evidence as regards
purchases and sales. This would reveal the particulars of inventory not received but paid for as well as that
issued but not charged to customers. Further, entries in respect of returns, both inward and outward, recorded
in the financial books should be checked with corresponding entries in the Inventory Book. Also, the totals of
the Inventory Book should be checked. Finally, the shortages observed on physical verification of inventory
should be reconciled with the discrepancies observed on checking the books in the manner mentioned above.
In the case of an industrial concern, issue of raw materials, stores and tools to the factory and receipts of
manufactured goods in the go down also should be verified with relative source documents.
Defalcations of inventory, sometimes, also are committed by the management, by diverting a part of
production and the consequent shortages in production being adjusted by inflating the wastage in production;
similar defalcations of inventories and stores are covered up by inflating quantities issued for production. For
detecting such shortages, the investigating accountant should take assistance of an engineer. For that he will
be more conversant with factors which are responsible for shortage in production and thus will be able to
correctly determine the extent to which the shortage in production has been inflated. In this regard, guidance
can also be taken from past records showing the extent of wastage in production in the past. Similarly, he
would be able to better judge whether the material issued for production was excessive and, if so to what
extent. The per hour capacity of the machine and the time that it took to complete one cycle of production,
also would show whether the issues have been larger than those required.

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 CA SANIDHYA SARAF 17.13

Question 18
In a Public Limited Company, it is suspected by the Management that there has been embezzlement in
supplier's ledger. As an auditor of the Company, you have been asked to investigate the matter. What are
the major areas that you would verify in this regard?
Answer 18
(a) Frauds through suppliers’ ledger -
(i) Adjusting fictitious or duplicate invoices as purchases in the accounts of suppliers and subsequently
misappropriating the amounts when payments are made to the suppliers in respect of these invoices.
(ii) Suppressing the Credit Notes issued by suppliers and withdrawing the corresponding amounts not
claimed by them.
(iii) Withdrawing amounts unclaimed by suppliers, for one reason or another by showing that the same
have been paid to them.
(iv) Accepting purchase invoices at prices considerably higher than their market prices and collecting the
excess amount, paid in cash, from the suppliers.
Verification of balances in suppliers’ ledger - The Purchase Journal should be vouched by reference to
entries in the Goods Inward Book and the suppliers’ invoices to confirm that amounts credited to the
accounts of suppliers were in respect of goods, which were duly received and the suppliers’ accounts had
been credited correctly. All the suppliers should be requested to furnish statements of their accounts to
see whether or not any balance is outstanding or due so as to confirm that allowances and rebates given
by them have been correctly adjusted and were duly authorized by the authorized person/ officer. Examine
the system of internal control in relation to purchase orders issued and identify possibilities of collusion
with suppliers.

Question 19
General objective of an audit is to find out whether the financial statements show true and fair view. On
the other hand, investigation implies systematic, critical and special examination of the records of a business
for a specific purpose.
In view of the above, you are required to brief out the difference between Audit and Investigation.
Answer 19
Basis of Difference Investigation Audit
(i) Objective An investigation aims at establishing The main objective of an audit is to
a fact or a happening or at assessing a verify whether the financial
particular situation. statements display a true and fair view
of the state of affairs and the working
results of an entity.
(ii) Scope The scope of investigation may be The scope of audit is wide and in case
governed by statute or it may be non- of statutory audit the scope of work is
statutory. determined by the provisions of
relevant law.
(iii) Periodicity The work is not limited by rigid time The audit is carried on either quarterly,
frame. It may cover several years, as half-yearly or yearly.
the outcome of the
same is not certain.
(iv) Nature Requires a detailed study and Involves tests checking or sample
examination of facts and figures. technique to draw evidences for
Investigation is voluntary in nature. forming a judgement and expression of
opinion. It is mandatory for
companies.
(v) Inherent No inherent limitation owing to its Audit suffers from inherent
Limitations nature of engagement. limitation.
(vi) Evidence It seeks conclusive evidence. Audit is mainly concerned with prima-
facie evidence.
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 CA SANIDHYA SARAF 17.14

(vii) Observance It is analytical in nature and requires Is governed by compliance with

of Accounting a thorough mind, capable of generally accepted accounting
Principles observing, collecting principles, audit procedures and
and evaluating facts. disclosure requirements.
(viii) Appointing Even third party can appoint Auditor is appointed by owner/
Agency Investigator shareholders of company/
enterprise
(ix) Reporting The outcome is reported to the The outcome is reported to the owners
person(s) on whose behalf of the business entity.
investigation is carried out.

Question 20
Enumerate the steps to be undertaken in case of forensic accounting process.
Answer 20
Each Forensic Accounting assignment is unique. Accordingly, the actual approach adopted and the procedures
performed will be specific to it. However, in general, many Forensic Accounting assignments will include the
steps detailed below.
Step 1. Initialization
It is vital to clarify and remove all doubts as to the real motive, purpose and utility of the assignment. It is
helpful to meet the client to obtain an understanding of the important facts, players and issues at hand. A
conflict check should be carried out as soon as the relevant parties are established. It is often useful to carry
out a preliminary investigation prior to the development of a detailed plan of action. This will allow subsequent
planning to be based upon a more complete understanding of the issues.

Step 2. Develop Plan

This plan will take into account the knowledge gained by meeting with the client and carrying out the initial
investigation and will set out the objectives to be achieved and the methodology to be utilized to accomplish
them.

Step 3. Obtain Relevant Evidence

Depending on the nature of the case, this may involve locating documents, economic information, assets, a
person or company, another expert or proof of the occurrence of an event. In order to gather detailed
evidence, the investigator must understand the specific type of fraud that has been carried out, and how the
fraud has been committed. The evidence should be sufficient to ultimately prove the identity of the
fraudster(s), the mechanics of the fraud scheme, and the amount of financial loss suffered. It is important that
the investigating team is skilled in collecting evidence that can be used in a court case within the stipulated
time period, and in keeping a clear chain of custody until the evidence is presented in court. If any evidence is
inconclusive or there are gaps in the chain of custody, then the evidence may be challenged in court, or even
become inadmissible. Investigators must be alert to documents being falsified, damaged or destroyed by the
suspect(s).
Step 4. Perform the analysis
The actual analysis performed will be dependent upon the nature of the assignment and may involve:
• calculating economic damages;
• summarizing a large number of transactions;
• performing a tracing of assets;
• performing present value calculations utilizing appropriate discount rates;
• performing a regression or sensitivity analysis;
• utilizing a computerized application such as a spread sheet, data base or computer
model; and
• utilizing charts and graphics to explain the analysis.
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Step 5. Reporting
Issuing an report is the final step of a forensic accounting. Accountant / Investigators will include information
detailing the fraudulent activity, if any has been found. The client will expect a report containing the findings
of the investigation, including a summary of evidence, a conclusion as to the amount of loss suffered as a result
of the fraud and to identify those involved in fraud. The report may include sections on the nature of the
assignment, scope of the investigation, approach utilized, limitations of scope and findings and/or opinions.
The report will include schedules and graphics necessary to properly support and explain the findings.
The report will also discuss how the fraudster set up the fraud scheme, and which controls, if any, were
circumvented. It is also likely that the investigative team will recommend improvements to controls within the
organization to prevent any similar frauds occurring in the future.

Step 6. Court proceedings

The investigation is likely to lead to legal proceedings against the suspect, and members of the investigative
team will probably be involved in any resultant court case. The evidence gathered during the investigation will
need to be presented at court, and team members may be called to court to describe the evidence they have
gathered and to explain how the suspect was identified.

Question 21
Briefly discuss the key content of Forensic Accounting and Investigation Report.
Answer 21
Key Elements of the Report: The Professional shall consider the inclusion of the following key elements in the
report (indicative list):
• Title, addressee and distribution list (if any)
• Scope and objectives of the assignment
• Approach and broad work procedures undertaken
• An Executive Summary of the results, covering all important aspects and the essence of the findings
• Reference to use of an expert, where applicable
• The fact that the assignment has been conducted in accordance with FAIS, or any material departures
therefrom
• List of findings supported by key evidences, sources of evidences, and other relevant matter;
• Assumptions, limitations and disclaimers of the assignment
• Conclusions (if any) drawn from the assessment undertaken.

Question 22
ABC Ltd. is a listed company having turnover of 50 crores & plans expansion by installation of new machines
at new building-having total additional project cost of ₹ 20 crore
Rupees (In crore) Purpose
10.0 - for Building
8.5 - for Machinery
1.5 - for Working Capital
20 Crore Total
Project gets implemented in 2022-23 and one of the accountants report to the Managing Director that some
suspicious transactions are noticed in the purchase of building material. But the Management is confused
as to whether they should get an audit or Forensic Accounting done for the same. Advise Management
about the difference in forensic accounting and audit.
Answer 22
Sr. Particulars Other Audits Forensic Accounting
No.
1. Objectives Express an opinion as to ‘True & Whether fraud has actually

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 CA SANIDHYA SARAF 17.16

Fair’ presentation taken place in books

2. Techniques Substantive & Compliance. Investigative, substantive or in-
Sample based depth checking
3. Period Normally for a particulars No such limitations
accounting period.
4. Verification of stock, Relies on the management Independent/verification of
Estimation realizable value certificate/Management suspected/selected items where
of assets, provisions, Representation misappropriation in suspected
liability etc.
5. Off balance sheet items Used to vouch the arithmetic Regulatory & propriety of these
(like contracts etc.) accuracy & compliance with transactions/contracts are
procedures. examined.
6. Adverse findings if any Negative opinion or qualified Legal determination of fraud
opinion expressed with/without impact and identification of
quantification perpetrators depending on
scope.

Question 23
CA. Y is employed with a leading private sector BDFP Bank posted in NOIDA branch. One of the existing
borrowers has approached branch with a proposal to sanction fresh term loan of ₹5 crore with
commensurate increase in working capital credit facilities relating to expansion of its garment
manufacturing unit. While performing due diligence, he notices that company was formed just two years
ago and had availed term loan of ₹ 10 crore and cash credit facilities of ₹5 crore respectively. Its sales have
increased from ₹ 25 crores in first year to ₹45 crores in year just ended. It is generating cash profits and is
timely servicing its debts.
The borrower was earlier catering to domestic market. However, now it is in process of procuring export
orders and working assiduously in this regard. The expansion plans are in line with development in area of
marketing relating to exports.
However, there are a large number of units catering to domestic and export market of garments in NOIDA,
Delhi and surrounding areas. There is also demand slump in biggest US market.
Besides, the unit is family-based and relies upon marketing skills of its main promoter. There is lack of well-
paid qualified staff with the borrower to deal effectively with its customers both domestic as well as foreign.
He starts jotting down and elaborating above points. Identify what he is trying to do as part of due diligence.
Answer 23
As part of due diligence exercise, he is performing SWOT analysis of borrower. He is making analysis of
strengths, weaknesses, opportunities and threats (SWOT) pertaining to borrower. Features such as rise in
sales, generation of cash profits and timely service of debts represent borrower strengths. Lack of well-paid
qualified staff to deal effectively with its domestic and foreign customers is an area of weakness. Entering into
export market presents opportunity for borrower and presence of large number of competitors and demand
slump in US market reflect threats.

Question 24
A company has installed an Effluent treatment plant (ETP) in compliance with pollution control regulations
of the state government. The authority structure in the company is fairly decentralized and top
management of the company has given considerable leeway to different departments for meeting their
manpower requirements in accordance with emerging and changing needs from time to time. Of late, the
top management has grown suspicious over manpower expenditure in section maintaining and beautifying
area around ETP. There is a system in the company where time cards are punched by all employees to mark
attendance.
Suggest any one procedure you would perform as an investigator to bring out the facts.

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Answer 24
The attendance record of employees pertaining to that section can be analyzed with regards to in and out
time. Further, surprise visit to the site can be conducted to see the actual number of workers at a point of
time. It may reveal ghost workers. Discrepancies in attendance records vis-à-vis actual number of workers
present could reveal dummy workers. Such a visit would also give indication of actual work done in the area
and give an inkling of productivity of employees.

Question 25
X Limited engaged in manufacturing of floor coverings has taken a Product Liability Insurance policy (PLI).
Such a policy covers risk of liabilities for damages for bodily injury resulting from sale and distribution of
floor coverings by vendors of X Limited’s products. The policy is also subject to “claim series” clause. A
Claims Series event is a series of two or more claims arising from one specific common cause which are
attributable to the same fault in design or manufacture of products or to the supply of the same products
showing the same defect. A claim series event is deemed to be one claim under the terms & conditions of
PLI policy.
The company has been asked to shell out damages of `5 crore due to supply of faulty products to one of its
vendors. The vendor had sold floor coverings to a 5 -star hotel which has alleged that harmful chemicals
used in dyeing of floor coverings have resulted in skin ailments to some of its guests.
Being in capacity of forensic accountant Professional appointed by insurance company, what special issues
you would keep in mind while dealing with claims involving PLI policy covering such matters?
Answer 25
(i) In claims involving product liability insurance policies, many documents are required from third parties. The
third party may be unwilling to provide relevant documents to forensic accountant concerning the very
organization responsible for causing damages.
(ii) Independence of forensic accountant become paramount in such types of assignments because it involves
engagement with parties who are not directly claiming from insurance company. Forensic accountant needs
to resist any pressure or interference in establishing the scope of the assignments or the manner in which
the work is conducted and reported.
(iii) The company might be willing to negotiate it to salvage its reputation. It can lead to additional complexities.
(iv) Quantification of legal liability under the policy can prove to be a challenging task and it has to be determined
in accordance with policy terms & conditions.
(v) Careful analysis of date of loss when first claim occurred in accordance with “claim series” clause and
whether the same falls under the policy.

Chapter 17 Due Diligence, Investigation and Forensic Audit

 CA SANIDHYA SARAF 18.1

Chapter 18
Sustainable Development Goals (SDG) and Environment, Social and Governance
(ESG) Assurance
Question 1
CTO Limited is engaged in the fintech business. It is a member of few prominent industry chambers and
trade associations and has come under mandatory purview of Business Responsibility and Sustainability
Reporting (BRSR) for year 2022-23.
The company had submitted inputs on draft digital personal data protection bill to concerned Ministry
during year 2022-23. It had also submitted to one of the industry chambers during the same year certain
key inputs on leveraging India’s digital public infrastructure for creating solutions by banks and fintechs
together as its taskforce member on the subject. Considering the above, discuss how above information
would likely be disclosed by company in “Principle-wise performance disclosures” as part of BRSR for year
2022-23? Whether information discussed above would require to be disclosed mandatorily?
Answer 1
The given case highlights that CTO Limited, engaged in Fintech business, is a member of Chamber of
Commerce/associations. Such information needs to be disclosed under Principle 7 of Principle-wise
Performance Disclosures.
Principle 7 recognizes that businesses, when engaging in influencing public and regulatory policy, operate
within the framework of statutory and legislative policies of the governing authority. Collective associations
such as trade groups and industry chambers have to be utilized when moving ahead with policy advocacy and
formulation.
The information under each principle is to be disclosed under Essential indicators (mandatory disclosures) and
Leadership indicators (optional disclosures).
Information relating to membership of Chamber/associations is in the nature of Essential Indicators and
requires mandatory disclosures.
Information relating to inputs provided by company to the Ministry on a legislative bill and inputs provided to
one of the prominent chambers on leveraging India’s digital public infrastructure for creating solutions by
banks and Fintechs together as a taskforce member on the subject are in nature of leadership positions taken
by the company. These are in the nature of Leadership Indicators and are optional disclosures.

Question 2
SEBI has made Business Responsibility and Sustainability Report (BRSR) mandatory for certain listed
companies. It is an evolutionary step in Environment, Social and Governance (ESG) reporting. Discuss the
nature of ESG reporting. How can corporates contribute to Sustainable Development Goals (SDGs)?
Answer 2
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.
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 achievement of Sustainable Development Goals.

Question 3
SU Limited is amongst the top 1000 listed entities. With the introduction of new reporting requirements by
SEBI on ESG parameters called the Business Responsibility and Sustainability Report (BRSR), it requires SU

Chapter 18 Sustainable Development Goals (SDG) and Environment, Social and Governance (ESG) Assurance
 CA SANIDHYA SARAF 18.2

Limited to make disclosures on their performance against the various principles of the "National Guidelines
on Responsible Business Conduct". One of the principles emphasizes that the business decisions in an
organization should be open to disclosure and accessible to the relevant interested parties. Elucidate the
essence of core elements associated with the aforesaid principle?
Answer 3
The essence of the core elements associated with the first principle are:
a) The entities’ governing structure should develop policies, procedures, and practices for their offices,
factories, and work areas, ensuring that ethics is not compromised.
b) The information relating to the policies, procedures, and practices along with the performance should be
made available to the stakeholders.
c) In case of adverse effects, more care has to be taken for transparent disclosures.
d) The entities in the value chain should be encouraged to adopt these principles by the governance structure.
e) The entities should proactively respond to the outside entities that violate the nine principles of the BRSRs.
This includes their suppliers, distributors, sub-contractors, or regulatory officers that may engage with the
business concern.

Question 4
What type of companies are required to mandatorily furnish the Business Responsibility and Sustainability
Report (BRSR) as per the SEBI circular with effect from FY 2022-23 ?
Answer 4
The BRSR seeks disclosures from listed entities on their performance against the nine principles of the
‘National Guidelines on Responsible Business Conduct’ (NGBRCs) and reporting under each principle is divided
into essential and leadership indicators.
The essential indicators are required to be reported on a mandatory basis while the reporting of leadership
indicators is on a voluntary basis. Listed entities should endeavour to report the leadership indictors also.
Reporting under BRSR is mandatory from financial year 2022-23. However, disclosure was voluntary in
financial year 2021-22.

Question 5
What are the nine principles of BRSR? How are the nine principles of BRSR linked with the 17 UN Sustainable
Development Goals?
Answer 5
1. Ethics, Transparency, and Accountability
• Businesses must uphold ethical policies, transparency, and responsible disclosures.
• Governance structures should ensure ethics across the value chain and address BRSR
violations.
• Adverse impacts should be openly disclosed.
2. Influence on Public and Regulatory Policy
• Businesses should engage in fair policy advocacy through industry associations.
• Ensure responsible influence on public policy and alignment with human rights principles.
3. Employee Well-being
• Compliance with labor laws and fair treatment of employees.
• Ensure freedom of association, fair wages, timely payments, and work-life balance.
• Maintain safe and hygienic workplaces; prevent child labor, bonded labor, harassment, and
violence.
• Support career growth, skill development, and employee welfare.
4. Stakeholder Engagement
• Businesses must identify and engage stakeholders.
• Ensure transparent communication about social & environmental impacts.
• Facilitate equitable benefit-sharing.

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 CA SANIDHYA SARAF 18.3

5. Human Rights
• Integrate human rights principles into policies in line with Indian laws and international
standards.
• Respect the rights of employees, communities, consumers, and vulnerable groups.
6. Environmental Protection and Restoration
• Assess, mitigate, and rectify environmental impacts across the product life cycle.
• Ensure efficient resource use, pollution prevention, and sustainable land use.
• Align with India’s climate commitments (e.g., Paris Agreement, National Action Plans on
Climate Change).
• Measure performance on waste reduction, energy use, deforestation, and carbon footprint.
• Promote Reduce, Reuse, and Recycle strategies.
7. Safe and Sustainable Goods & Services
• Adopt sustainable production methods and minimize resource exploitation.
• Promote consumer awareness on responsible consumption, waste management, and
recycling.
8. Inclusive Growth & Equitable Development
• Assess and mitigate social, economic, and environmental impacts of business operations.
• Ensure fair compensation in cases of displacement or land use.
• Respect intellectual property and traditional knowledge.
• Align CSR initiatives with local and regional development priorities.
9. Consumer Value & Protection
• Minimize negative product impacts on consumers, society, and the environment.
• Ensure fair competition, transparent disclosures, and data privacy.
• Prevent misleading advertisements and inform consumers about safe usage, recycling, and
disposal.
• Maintain accessible grievance redressal systems.
• Essential service providers must ensure non-discriminatory access to all.

Question 6
What are the global trends in sustainable reporting?
Answer 6
In March 2022, the US Securities and Exchange Commission (SEC) proposed climate-risk disclosure
requirements, which would expand the annual reporting requirements of publicly traded companies. In their
SEC filings, companies would be required to discuss financially material, climate-related risks guided by the
TCFD recommendations. Reporting would include:
• The company’s climate risk management processes
• How the risks identified would impact financial performance
• How these risks are managed and mitigated
• Any scenario analysis, transition plans, and publicly announced climate goals
In 2019, the UK passed a law targeting net zero greenhouse gas (GHG) emissions by 2050.
A key regulation for UK ESG disclosures is the Companies Act of 2006, which includes requirements for annual
reporting. These rules apply to large companies that are either listed, exceed £500 million in annual turnover,
or have more than 500 employees. Non-financial information has always been required in annual reports, but
in 2022, the Act was expanded to include sustainability matters. The new requirements align with the
recommendations from the Task Force on Climate-Related Financial Disclosure (TCFD). As such, companies are
required to discuss the strategy, processes, and due diligence regarding matters of:
- The environment (including the company’s impact on the environment)
- The company’s employees
- Social matters
- Respect for human rights
- Anti-corruption and anti-bribery

Chapter 18 Sustainable Development Goals (SDG) and Environment, Social and Governance (ESG) Assurance
 CA SANIDHYA SARAF 18.4

Specifically for the environment, climartel-ated disclosures must include:

- Climate change-related risks and opportunities
- How these risks and opportunities are managed through targets and KPIs
- How climate change is addressed in corporate governance
- How climate risk impacts strategy
Additionally, large UK companies are required to report on their UK energy use and carbon emissions within
their annual reports through the Streamlined Energy and Carbon Reporting.
Further, in 2023 ESG reporting in the UK will be further formalized through the Sustainability Disclosure
Requirements (SDRs). The SDRs will provide a framework for corporates to manage sustainability-related risks,
opportunities, and impacts, as well as set relevant metrics and targets.
Following table showcases the evolution of sustainable development reporting in the recent past:

March 2021
Sustainable Finance
Disclosures Regulation
(SFDR) go into effect for April 2021
asset managers and European comission
financial advisors adopts the CSRD
June 2022 operating in EU proposal, which will
China's Voluntary
require large
guidance for Enterprise
companies to report
ESG disclosure takes
on social and
effect
environmental
impacts starting in
2024

April 2022
European Finacial
Reporting Advisory Board October 2021
Issues exposure draft of GRI Standards
the European Updated
Sustainbility Reporting
Standard (ESRS) for public
commentary

November 2021
IFRS Foundation
announces the
formation of its
March 2022 global reporting
US SEC announces standarization
climate change intiative through the
disclosure proposal ISSB
ISSB exposure draft UK Financial conduct
for public authority releases
commentary sustainablity
February 2022 requirements
THe EU adopts a proposal disclosure paper
for a directive on
corporate sustainablity December 2021
Due Diligence with Rules The European
for companies to respect Commission published
human rights and the the first delegated act
environment in their on sustainablity
global value chains activities for the first
two evironmental
objectives of the EU
territory

Chapter 18 Sustainable Development Goals (SDG) and Environment, Social and Governance (ESG) Assurance
 CA SANIDHYA SARAF 18.5

Question 7
What are the 6 C’s of Integrated reporting?
Answer 7
There are 6 Cs of Integrated Reporting – also known as 6 capitals:
(i) Financial Capital:
- Pool of funds that is available to the organization for use in the production of goods or provision of
services.
- Obtained through financing, such as debt, equity, or grants, or generated through operations or
investments.
(ii) Manufactured Capital:
- Seen as human-created, production-oriented equipment and tools.
- Available to the organization for use in the production of goods or the provision of services, including
buildings, equipment, infrastructure (such as roads, ports, bridges & waste, and water treatment
plants).
(iii) Natural Capital:
- Is an input to the production of goods or the provision of services.
- An organization’s activities also impact, positively or negatively, on natural capital.
- Includes water, land, minerals and forests, biodiversity, and ecosystem health.
(iv) Human Capital:
- People’s skills and experience, their capacity, and motivations to innovate, including their:
- Alignment with and support of the organization’s governance framework & ethical values such as its
recognition of human rights.
- Ability to understand and implement an organization’s strategy.
- Loyalties and motivations for improving processes, goods, and services, including their ability to lead
and to collaborate.
(v) Social Capital:
- Institutions and relationships established within and between each community, group of stakeholders
and other networks to enhance individual and collective well-being.
Includes:
o Common values and behaviour.
o key relationships, the trust and loyalty that an organization has developed and strives to build and
protect with customers, suppliers, and business partners.
o an organization’s social license to operate.
(vi) Intellectual Capital:
Key element in an organization’s future earning potential, with a tight link and contingency between
investment in R&D, innovation, human resources, and external relationships, which can determine the
organization’s competitive advantage.
Asia Pacific region continues to dominate in presenting sustainability data in annual reports.
Approximately with 60% of Companies reporting in 2022. Integrated reporting is strong in the Middle
East.

Question 8
What is the methodology of providing assurance in BRSR?
Answer 8 Prepration of
Assessment /
Submission of Verification
findings of report
Review of the the on-site including final
responses assessment
Issuance of results of
and and
Assessment Assessment /
clarifications document
On-site Report and Recommenda
on the review
Assessment/ Assessment tionn
Preliminary findings
Verification Statement
Review of of ESG Report
ESG report,
parameters
Chapter 18 Sustainable Development Goals (SDG) and Environment, Social and Governance (ESG) Assurance
 CA SANIDHYA SARAF 18.6

Question 9
What is the auditor’s role on ESG aspects in an audit of financial statements of the Company?
Answer 9
The role of the auditor is to obtain reasonable assurance about whether the financial statements as a whole
are free from material misstatement, whether due to fraud or error, to enable auditor to report whether the
financial statements are prepared and presented fairly, in all material respects, in accordance with the
applicable financial reporting framework.
In developing the understanding of an entity, the auditor should include the consideration of climate- related
risks and how these risks may be relevant to the audits. The climate-related risks could be more relevant in
certain sectors or industries, e.g., banks and insurance, energy, transportation, materials and buildings,
agriculture, food, and forestry products.
Many investors and stakeholders are seeking information from auditor’s reports about how climate- related
risks were addressed in the audit. With this increased user focus on climate change, auditor need to be aware
of, and may face, increasing pressure for transparency about climate matters in our auditor’s reports.
However, the auditor’s reports must follow the requirements of applicable auditing standards.
The auditor’s report is a key mechanism of communication to users about the audit that was performed. In
addition to the audit opinion, it provides information about auditor’s responsibilities and, when required, an
understanding of the matters of most significance in our audit and how they were addressed.
In some circumstances, it may warrant inclusion of an Emphasis of matter paragraph to draw attention to
disclosures that are of fundamental importance to users’ understanding of the financial statements. The
auditor should also determine whether the entity has appropriately disclosed relevant climate-related
information in the financial statements in accordance with the applicable financial reporting framework e.g.,
Indian Accounting Standards or Accounting Standards, when relevant before considering climate-related
matters in the auditor’s report.
The auditor should also read the other information for consistency with information disclosed in the financial
statements and information that may be publicly communicated to stakeholders outside the financial
statements, such as management report narratives in the annual report, press releases, or investor updates.
This is a requirement under ISA 720 and SA 720, The Auditor’s Responsibilities Relating to Other Information.

Question 10
You have recently joined a listed company after qualifying CA final exams through campus placement
programmed conducted by CMI&B at ICAI. Although the company you have joined in is not amongst top
1000 listed companies in the country, it wants to include “Sustainability reporting” in accordance with
Global Reporting Initiative framework (GRI) in its annual report on voluntary basis. “Sustainability
reporting” seems to be new buzzword in corporate circles and you are assigned responsibility for collating
all the information required for such reporting.
In above context, dwell upon what is your understanding of “Sustainability reporting”? Can you list some of
its expected benefits?
Answer 10
Sustainability reporting is an organization’s practice of reporting publicly on its economic, environmental,
and/or social impacts, and hence its contributions – positive or negative – towards the goal of sustainable
development.
Sustainability reporting refers to the information that companies provide about their performance to the
outside world on a regular basis in a structured way. It is the comprehensive mechanism of measuring and
disclosing sustainability data with performance indicators and management disclosures.
Expected Benefits: It can help stakeholders to understand organizations performance vis a vis sustainability
and impacts. The reporting process emphasizes the link between financial and non-financial performance.
Such reporting can help entities to focus on long-term value creation, by addressing environmental, social and
governance (ESG) issues. Since investors are increasingly recognizing that environmental and social issues
provide both risks and opportunities in respect of their investments and are seeking disclosures on

Chapter 18 Sustainable Development Goals (SDG) and Environment, Social and Governance (ESG) Assurance
 CA SANIDHYA SARAF 18.7

environmental and social performance of businesses, they can use ESG performance of companies to make
investment decisions.
Investing in social and environmental issues will not only improve own business continuity of companies but
also put them in a better position with their B2B (Business to Business) customers as well as enable them to
acquire new ones.

Question 11
Trustworthy Industries Limited (a listed company) has already been preparing and disclosing its
sustainability report based upon internationally accepted reporting framework of “Integrated Reporting”
on a voluntary basis even some years before BRSR reporting became mandatory. Even after BRSR reporting
became mandatory, it is cross-referencing disclosures made under such reporting to disclosures sought
under BRSR. The key thrust of “Integrated Reporting” is how company creates value over short, medium
and long term.
Following further information is provided in respect of the above company: -
(i) It has increased the number of customers using digital customer mobile app of the company from 2
lac users to 4 lac users. There is 100% increase in digital collection. It has benefitted customers of the
company and resulted in use of digital methods for business operations of the company.
(ii) It has increased the number of beneficiaries under its flagship CSR Programmes from previous 10000
to 75000. It has provided value for communities and provided sustainable livelihood to them.
Discussing above information, identify which of the capitals of “Integrated Reporting” are being referred to
at [i] and [ii] respectively?
Answer 11
The information at [i] states that company has increased the number of customers using digital mobile app.
Besides, it has led to 100% increase in digital collection. Therefore, it involves use of technology for deriving
business benefits. It has invested in innovation deriving business benefits from digitization. The capital
referred to at [i] is “Intellectual Capital”.
Increase in number of beneficiaries under flagship CSR Programmes providing value for communities and
sustainable livelihood is an example of relationships established within and between each community, group
of stakeholders and other networks to enhance individual and collective well-being. The capital referred to at
[ii] is “Social and Relationship Capital.”
Integrated Case Scenario
“Quick Push Finance Limited one of the top listed 1000 companies by market capitalization. As per a SEBI
circular, Business Responsibility and Sustainability Report (BRSR) based on ESG parameters is mandatory from
financial year 2022-23 for top listed 1000 companies. The company is an NBFC and is engaged mainly in
providing finance for commercial vehicles.
The report is to be prepared in three sections- Section A, B and C. Whereas Section A and B relate to general
disclosures and management & process disclosures respectively, Section C of the report relates to principle
wise performance disclosures. Under this section C, information is sought on each of the 9 principles of
“National Guidelines on Responsible Business Conduct” (NGBRCs). This information is categorized on two
indicators i.e., “Essential indicators” and “Leadership indicator.
The said company has an anti-corruption/anti-bribery policy which is available on its website. Besides, the
company has regularly conducted awareness Programmes for its dealers highlighting relevant governance
practices of the company.
The company is sensitive to environmental concerns. It has established mechanisms to recycle hazardous e-
waste in accordance with applicable laws. Further, disposal of paper waste is also made responsibly. It is also
a member of 5 prominent industry chambers/trade associations including FICCI, CII and ASSOCHAM. Besides,
regular inputs to government are provided by the company through various forums for improvement in
administrative processes relating to automobile and financial sectors.

Chapter 18 Sustainable Development Goals (SDG) and Environment, Social and Governance (ESG) Assurance
 CA SANIDHYA SARAF 18.8

One of the NGBRC principles states that businesses should promote inclusive growth and equitable
development. The scope of this principle is wide and quite encompassing. Many activities of company could
fall under promotion of inclusive growth and equitable development.
The CFO of company is clueless as to preparation of BRSR. Help him out by answering the following questions.

MULTIPLE CHOICE QUESTIONS (MCQS)

1. As regards anti-corruption/anti-bribery policy and organization of awareness Programmes for dealers

conducted during the year, which of the following is most likely to be true?
a) Having an anti-corruption/anti-bribery policy and organization of awareness Programmes for dealers
are in nature of essential indicators.
b) Having an anti-corruption/anti-bribery policy and organization of awareness Programmes for dealers
are in nature of leadership indicators.
c) Having an anti-corruption/anti-bribery policy is in nature of essential indicators. Organization of
awareness Programmes for dealers is in nature of leadership indicators.
d) Having an anti-corruption/anti-bribery policy is in nature of leadership indicators. Organization of
awareness Programmes for dealers is in nature of essential indicators.
Answer 1 (c)

2. As regards established mechanisms for recycle of hazardous e- waste and disposal of paper waste by
company, which of the NGBRC principle(s) are involved?
a) Principle 5 only
b) Principle 9 only
c) Principles 6 and 9
d) Principles 2 and 6
Answer 2 (d)

3. Considering description of membership of various industry chambers/Trade associations and providing of

inputs to government from improvement in administrative processes, which of the NGBRC principle is
referred to?
a) Principle 8
b) Principle 4
c) Principle 3
d) Principle 7
Answer 3 (d)

4. Which of the following activities relates to the principle that businesses should pro inclusive growth and
equitable development?
a) CSR projects undertaken by the company in designated aspirational districts of country
b) Carrying out real time digital Net Promoter score (NPS) with all public customers to gauge customer
reactions and satisfaction
c) Getting conducted “energy audits” in the company
d) Conducting Programmes to assist employees in finding employment after retirement.
Answer 4 (a)

5. Which of the following statements is true in respect of essential indicators and leadership indicators as far as
their reporting in BRSR is concerned?
a) Both types of indicators are mandatorily required to be disclosed.
b) Essential indicators require mandatory disclosure whereas leadership indicators require voluntary
disclosure.
c) Essential indicators require voluntary disclosure whereas leadership indicators require mandatory
disclosure.
Chapter 18 Sustainable Development Goals (SDG) and Environment, Social and Governance (ESG) Assurance
 CA SANIDHYA SARAF 18.9

d) All indicators based information whether relating to essential indicators or leadership indicators is
voluntary.
Answer 5 (b)

Case Study

The agrochemical sector is about a $35 billion industry in India. The Indian agrochemicals market is
segmented by product type (fertilizers, pesticides, adjuvants, and plant growth regulators) and application
(crop-based and non-crop-based). India is one of the most prominent exporters of agrochemicals in the
world and is being keenly looked at as an ideal hub for export-oriented production of agrochemicals. There
has been a recent surge in the production of agrochemicals to overcome problems such as lack of right
nutritious elements required for proper growth of crops, etc. While there is low awareness about the use
and impact of agrochemicals, there is also a push from the industries to use more agrochemicals, linking it
to better yield. The continuous and increased use of agrochemicals seems to have an adverse effect on
humans, animals, and nature in whole.
The toxicity levels of the agrochemicals are harmful, not only to the workers in the manufacturing process
but also to farmers, the soil, and the end consumers. The Central Insecticide Board (CIB) of India has
categorized agrochemical toxicity levels based on a labeling system—using red, yellow, blue, and green
labels—where red is the most toxic and green is the least. Most of the red-labeled products are banned
abroad but are being sold in India due to the lack of a strong regulatory environment.
In India, it is estimated that almost 25% of the total amount of agrochemicals sold are counterfeit products.
The quality and the efficacy of these counterfeit products differ from the original products, which can lead
to reputational damages for the companies. Agrochemical companies need to add barcodes or other
identifying technologies to their product packaging, to allow end- use consumers to check for authenticity.
Also, since India is a multilingual country, the companies will have to publish the usage instructions in
multiple languages.
Company A and B are both listed companies and part of top 1000 listed companies. They are engaged in the
production of agrochemicals. Company A has been looking for opportunities to comply with the recently
launched and evolving guidelines for ESG in India while Company B on the other hand is just focused to
increase revenue and profits. In December 2022, Company A made a decision to eliminate red-labeled
products from its portfolio and to increase its research and development (R&D) spending to safeguard itself
from the market shift due to the new regulatory norms; in 2022, it also discontinued yellow-labeled
products. Company A is also planning to incur a small expenditure to improve their backend systems and
provide for all its products a unique labeling system that is user friendly and interactive. At the other end of
the spectrum, 14% of Company B’s top-selling products are derived from red- and yellow labeled products.
Initially, Company A’s phasing out of its toxic products negatively affected its revenues by 8%. But as the
country’s regulatory landscape evolves toward more stringent norms, Company A will be cushioned for
regulatory changes and thus, would not face potential future downsides. Company B has recently witnessed
a 9% year on year growth in revenue from the last financial year and is planning to increase the production
of its bestselling product, an insecticide DDT, categorized as red labelled by the Central Insecticide Board.
Company B has recently been approached by the regulatory authority for an investigation for its products
which include performing additional tests and studies to testify that its products have no adverse effects.

1. What would be the reporting requirements for each of the two companies?
Answer
Both Companies A and B are among part of top 1000 listed companies. Hence, these companies have to
mandatorily provide BRSR reporting (Business responsibility and Sustainability reporting) in accordance with 9
principles of NGBRC as mandated by SEBI.

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 CA SANIDHYA SARAF 18.10

2. Which Company has absorbed the impacts of possible future regulatory changes? What are the steps taken
by that Company for complying with the regulatory standards?
Answer
Company A has absorbed impact of regulatory changes. It has decided to eliminate red- labelled and yellow-
labelled products from its portfolio which are toxic in nature. Besides, it has increased its expenditure on R &
D to meet with new regulatory norms. It has also incurred expenditure for improving its labelling system which
would help end users to know about the nature of the product. All these steps have been taken by Company
A for complying with regulatory standards.
Company A is trying to meet with requirements of Principle 2 by making R & D expenditure. Further, it has also
eliminated red-labelled/yellow-labelled products from its portfolio. Principle 2 relates to the requirement that
businesses should provide goods and services in a manner that is sustainable and safe. Besides, by adopting a
friendly bar-coded packaging labelling system, company is adhering to requirements of Principle 9 which states
that businesses should engage with and provide value to their consumers in a responsible manner. Steps taken
by a company to inform its consumers about safe and responsible usage of products fall in its domain.
Since toxic agrochemicals are also harmful to workers engaged in their manufacturing process, their
discontinuation bodes well for workers in the company A in line with Principle 3 which states that businesses
should respect and promote the well-being of all employees including those in their value chains. By
discontinuing products which are harmful to soil, company A is meeting requirements of Principle 6 which
states that businesses should respect and make efforts to protect and restore the environment.

3. What would be the consideration by the auditors of Company A and B in the audit of financial statements?
Answer
Company A is complying with regulatory norms whereas 14% of company B’s revenue are derived from red
and yellow labelled products. In fact, company B is planning to increase production of its red labelled product
i.e., insecticide DDT which has been categorized as such by Central Insecticide Board. The auditor of Company
B would have to keep in mind requirements of SA 250 in this regard. Non-compliance with laws and regulations
may result in fines, litigation or other consequences for the entity that may have a material effect on the
financial statements. It can result in material misstatements. Central Insecticide Board has already launched
its investigation into products of company. All these factors would be taken into consideration by auditor of
Company B.
Auditors of Company A and Company B need to obtain audit evidence regarding compliance with laws and
regulations and audit procedures have to be designed accordingly. Auditor of Company A can obtain assurance
from regulatory compliance by the company. Fall of revenue by 8% in one year is not a matter of concern to
them as it is a transitory phase.
However, auditors of Company B would also have to take into consideration requirements of SA 570 as non-
compliance with regulatory requirements could result into claims from such proceedings which the company
may not be able to satisfy.

Chapter 18 Sustainable Development Goals (SDG) and Environment, Social and Governance (ESG) Assurance
 CA SANIDHYA SARAF 19.1

Chapter 19
Professional Ethics and Liabilities of Auditors

Question 1
P, a Chartered Accountant in practice provides management consultancy and other services to his
clients. During 2023, looking to the growing needs of his clients to invest in the stock markets, he also
advised them on Portfolio Management Services whereby he managed portfolios of some of his clients.
Is P guilty of professional misconduct?
Answer 1
Advising on Portfolio Management Services: The Council of the Institute of Chartered Accountants of India
(ICAI) pursuant to Section 2(2)(iv) of the Chartered Accountants Act, 1949 has passed a resolution permitting
“Management Consultancy and other Services” by a Chartered Accountant in practice. A clause of the
aforesaid resolution allows Chartered Accountants in practice to act as advisor or consultant to an issue of
securities including such matters as drafting of prospectus, filing of documents with SEBI, preparation of
publicity budgets, advice regarding selection of brokers, etc. It is, however, specifically stated that Chartered
Accountants in practice are not permitted to undertake the activities of broking underwriting and portfolio
management services. Thus, a chartered accountant in practice is not permitted to manage portfolios of his
clients.
In view of this, P would be guilty of misconduct under the charted Accounts Act, 1949.

Question 2
Mr. G, a Chartered Accountant in practice as a sole proprietor has an office in Mumbai near Church Gate.
Due to increase in professional work, he opens another office in a suburb of Mumbai which is
approximately 80 kilometers away from the municipal limits of the city. For running the new office, he
employs three retired Income-tax Officers. Is Mr. G guilty of professional misconduct?
Answer 2
In terms of section 27 of the Chartered Accountants Act, 1949, if a chartered accountant in practice has more
than one office in India, each one of these offices should be in the separate charge of a member of the
Institute. There is however an exemption for the above if the second office is located in the same premises,
in which the first office is located; or the second office is located in the same city, in which the first office is
located; or the second office is located within a distance of 50 kms from the municipal limits of a city, in which
the first office is located. Since the second office is situated beyond 50 kms of municipal limits of Mumbai
city, he would be liable for committing a professional misconduct.

Question 3
Write a short note on Other Misconduct.
Answer 3
Other misconduct has been defined in part IV of the First Schedule and part III of the Second Schedule. These
provisions empower the Council to inquire into any misconduct of a member even it does not arise out of his
professional work. This is considered necessary because a chartered accountant is expected to maintain the
highest standards of integrity even in his personal affairs and any deviation from these standards, even in his
non-professional work, would expose him to disciplinary action.
Other misconduct would also relate to conviction by a competent court for an offence involving moral
turpitude punishable with transportation or imprisonment to an offence not of a technical nature committed
by the member in his professional capacity. [See section 8(v) of the Act].

Question 4
Mr. K, a practicing Chartered Accountant gave 50% of the audit fees received by him to a non-Chartered
Accountant, Mr. L, under the nomenclature of office allowance and such an arrangement continued for
a number of years. Discuss this in the light of Professional Ethics issued by ICAI.

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Answer 4
Sharing of Audit Fees with Non-Member: As per Clause (2) of Part I of First Schedule to the Chartered
Accountants Act, 1949 a member shall be held guilty if a Chartered Accountant in practice pays or allows or
agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees or profits of his
professional business, to any person other than a member of the Institute or a partner or a retired partner
or the legal representative of a deceased partner, or a member of any other professional body or with such
other persons having such qualification as may be prescribed, for the purpose of rendering such professional
services from time to time in or outside India.
In the instant case, Mr. K, a practising Chartered Accountant gave 50% of the audit fees received by him to a
non-Chartered Accountant, Mr. L, under the nomenclature of office allowance and such an arrangement
continued for a number of years. In this case, it is not the nomenclature to a transaction that is material but
it is the substance of the transaction, which has to be looked into.
The Chartered Accountant had shared his profits and, therefore, Mr. K will be held guilty of professional
misconduct under the Clause (2) of Part I of First Schedule to the Chartered Accountants Act, 1949.

Question 5
Mr. X who passed his CA examination of ICAI on 18th July, 2022 and started his practice from August 15,
2022. On 16th August 2022, one female candidate approached him for article ship. In addition to monthly
stipend, Mr. X also offered her 1 % profits of his CA firm. She agreed to take both 1 % profits of the CA
firm and stipend as per the rate prescribed by the ICAI. The Institute of Chartered Accountants of India
sent a letter to Mr. X objecting the payment of 1 % profits. Mr. X replies to the ICAI stating that he is
paying 1 % profits of his firm over and above the stipend to help the articled clerk as the financial position
of the articled clerk is very weak. Is Mr. X liable to professional misconduct?
Answer 5
Sharing Fees with an Articled Clerk: As per Clause (2) of Part I of First Schedule to the Chartered Accountants
Act 1949, a Chartered Accountant in practice shall be deemed to be guilty of professional misconduct if he
pays or allows or agrees to pay or allow, directly or indirectly, any share, commission or brokerage in the fees
or profits of his professional business, to any person other than a member of the Institute or a partner or a
retired partner or the legal representative of a deceased partner, or a member of any other professional body
or with such other persons having such qualification as may be prescribed, for the purpose of rendering such
professional services from time to time in or outside India.
In view of the above, the objections of the Institute of Chartered Accountants of India, as given in the case,
are correct and reply of Mr. X, stating that he is paying 1 % profits of his firm over and above the stipend to
help the articled clerk as the position of the articled clerk is weak is not tenable.
Hence, Mr. X is guilty of professional misconduct in terms of Clause (2) of Part I of First Schedule to the
Chartered Accountants Act 1949.

Question 6
M/s XYZ, a firm in practice, develops a website “xyz.com”. The colour chosen for the website was a very
bright green and the web-site was to run on a “push” technology where the names of the partners of
the firm and the major clients were to be displayed on the web-site without any disclosure obligation
from any regulator. Is this website in compliance with guidelines issued by ICAI in this regard?
Answer 6
Posting of Particulars on Website: The Council of the Institute had approved posting of particulars on website
by Chartered Accountants in practice under Clause (6) of Part I of First Schedule to the Chartered Accountants
Act, 1949 subject to the prescribed guidelines. The relevant guidelines in the context of the website hosted
by M/s XYZ are:
• No restriction on the colours used in the website;
• The websites are run on a “pull” technology and not a “push” technology;
• Names of clients and fees charged not to be given.

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However, disclosure of names of clients and/or fees charged, on the website is permissible only where it is
required by a regulator, whether or not constituted under a statute, in India or outside India, provided that
such disclosure is only to the extent of requirement of the regulator. Where such disclosure of names of
clients and/or fees charged is made on the website, the member/ firm shall ensure that it is mentioned on
the website [in italics], below such disclosure itself, that “This disclosure is in terms of the requirement of
[name of the regulator] having jurisdiction in [name of the country/area where such regulator has
jurisdiction] vide [Rule/ Directive etc. under which the disclosure is required by the Regulator].
In view of the above, M/s XYZ would have no restriction on the colours used in the website but failed to satisfy
the other two guidelines. Thus, the firm would be liable for professional misconduct since it would amount
to soliciting work by advertisement.

Question 7
A partner of a firm of chartered accountants during a T.V. interview handed over a bio-data of his firm
to the chairperson. Such bio-data detailed the standing of the international firm with which the firm was
associated. It also detailed the achievements of the concerned partner and his recognition as an expert
in the field of taxation in the country. The chairperson read out the said bio-data during the interview.
Discuss whether this action by the Chartered Accountant would amount to misconduct or not.
Answer 7
Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949 prohibits solicitation of client
or professional work either directly or indirectly by circular, advertisement, personal communication or
interview or by any other means since it shall constitute professional misconduct. The bio-data was handed
over to the chairperson during the T.V. interview by the Chartered Accountant which included details about
the firm and the achievements of the partner as an expert in the field of taxation. The chairperson simply
read out the same in detail about association with the international firm as also the achievements of the
partner and his recognition as an expert in the field of taxation. Such an act would definitely lead to the
promotion of the firms’ name and publicity thereof as well as of the partner and as such the handing over of
bio-data cannot be approved. The partner would be held guilty of professional miscount under Clause (6) of
Part I of the First Schedule to the Chartered Accountants Act, 1949.

Question 8
a) An advertisement was published in a Newspaper containing the photograph of Mr. X, a member
of the institute wherein he was congratulated on the occasion of the opening ceremony of his
office.
b) Mr. X, a Chartered Accountant and the proprietor of X & Co., wrote several letters to the Assistant
Registrar of Co-operative Societies stating that though his firm was on the panel of auditors, no
audit work was allotted to the firm and further requested him to look into the matter.
Answer 8
a) Publishing an Advertisement Containing Photograph: As per Clause (6) of Part I of the First Schedule
to the Chartered Accountants Act, 1949, a Chartered Accountant in practice shall be deemed to be
guilty of misconduct if he solicits clients or professional work either directly or indirectly by a circular,
advertisement, personal communication or interview or by any other means.
In the given case, Mr. X published an advertisement in a Newspaper containing his photograph on
the occasion of the opening ceremony of his office. On this context, it may be noted that the
advertisement which had been put in by the member is quite prominent. If soliciting of work is
allowed, the independence and forthrightness of a Chartered Accountant in the discharge of duties
cannot be maintained.
The above therefore amounts to soliciting professional work by advertisement directly or indirectly.
Mr. X would be therefore held guilty under Clause (6) of Part I of the First Schedule to the Chartered
Accountants Act, 1949.
b) Soliciting Professional Work: As per Clause (6) of Part I of the First Schedule to the Chartered
Accountants Act, 1949, a Chartered Accountant in practice shall be deemed to be guilty of
misconduct if he solicits clients or professional work either directly or indirectly by a circular,
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advertisement, personal communication or interview or by any other means.

In the given case, Mr. X, a Chartered Accountant and proprietor of M/s X and Co., wrote several
letters to the Assistant Registrar of Co-operative Societies, requesting for allotment of audit work. In
similar cases, it was held that the Chartered Accountant would be guilty of professional misconduct
under Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949. The writing
of continuous letter to ascertain the reasons for not getting the work is quite alright but in case such
either amount to request for allowing the work then Mr. X will be liable for professional misconduct.
Consequently, Mr. X would therefore be held guilty under Clause (6) of Part I of the First Schedule to
the Chartered Accountants Act, 1949.

Question 9
A practicing Chartered Accountant uses a visiting card in which he designates himself, besides as
Chartered Accountant, Cost Accountant. Is this a misconduct?
Answer 9
Cost Accountant: As stated in the Illustration given in clause 7 with reference to tax consultant, this would
also constitute misconduct under section 7 of the Act read with Clause (7) of Part I of the First Schedule to
the Chartered Accountants Act, 1949. A chartered accountant in practice cannot use any other designation
than that of a chartered accountant. Nevertheless, a member in practice may use any other letters or
descriptions indicating membership of accountancy bodies which have been approved by the Council. Thus,
it is improper for a chartered accountant to state in his documents that he is a “Cost Accountant”. However
as per the Chartered Accountants Act, 1949, the Council has resolved that the members are permitted to use
letters indicating membership of the Institute of Cost and Works Accountants but not the designation "Cost
Accountant".

Question 10
Mr. Nigal, a Chartered Accountant in practice, delivered a speech in the national conference organized
by the Ministry of Textiles. While delivering the speech, he told to the audience that he is a management
expert and his firm provides services of taxation and audit at reasonable rates. He also requested the
audience to approach his firm of chartered accountants for these services and at the request of audience
he also distributed his business cards and telephone number of his firm to those in the audienc e.
Comment.
Answer 10
Using Designation Other Than a CA and Providing Details of Services Offered: Clause (6) of Part I of the First
Schedule to the Chartered Accountants Act, 1949 states that a Chartered Accountant in practice shall be
deemed to be guilty of misconduct if he solicits clients or professional work either directly or indirectly by a
circular, advertisement, personal communication or interview or by any other means. Such a restraint has
been put so that the members maintain their independence of judgment and may be able to command
respect from their prospective clients.
Section 7 of the Chartered Accountants Act, 1949 read with Clause (7) of Part I of the First Schedule to the
said Act prohibits advertising of professional attainments or services of a member. It also restrains a member
from using any designation or expression other than that of a chartered accountant in documents through
which the professional attainments of the member would come to the notice of the public. Under the clause,
use of any designation or expression other than chartered accountant for a chartered accountant in practice,
on professional documents, visiting cards, etc. amounts to a misconduct unless it be a degree of a university
or a title indicating membership of any other professional body recognized by the Central Government or the
Council.
Member may appear on television and films and agree to broadcast in the Radio or give lectures at forums
and may give their names and describe themselves as Chartered Accountants. Special qualifications or
specialized knowledge directly relevant to the subject matter of the programmed may also be given but no
reference should be made, in the case of practicing member to the name and address or services of his firm.

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What he may say or write must not be promotional of his or his firm but must be an objective professional
view of the topic under consideration.
Thus, it is improper to use designation "Management Expert" since neither it is a degree of a University
established by law in India or recognized by the Central Government nor it is a recognized professional
membership by the Central Government or the Council. Therefore, he is deemed to be guilty of professional
misconduct under both Clause (6) and Clause (7) as he has used the designation “Management Expert” in his
speech and also he has made reference to the services provided by his firm of Chartered Accountants at
reasonable rates. Distribution of cards to audience is also a misconduct in terms of Clause (6).

Question 11
Mr. A is a practicing Chartered Accountant working as proprietor of M/s A & Co. He went abroad for 3
months. He delegated the authority to Mr. Y a Chartered Accountant his employee for taking care of
routine matters of his office. During his absence Mr. Y has conducted the under mentioned jobs in the
name of M/s A & Co.
a) He issued the audit queries to client which were raised during the course of audit.
b) He issued production certificate to a client under the GST Act.
c) He attended the Income Tax proceedings for a client as authorized representative before Income
Tax Authorities.
Please comment on eligibility of Mr. Y for conducting such jobs in name of M/s A & Co. and liability of
Mr. A under the Chartered Accountants Act, 1949.
Answer 11
Delegation of Authority to the Employee: As per Clause (12) of Part I of the First Schedule of the Chartered
Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional misconduct
“if he allows a person not being a member of the Institute in practice or a member not being his partner to
sign on his behalf or on behalf of his firm, any balance sheet, profit and loss account, report or financial
statements”.
In this case CA A proprietor of M/s A & Co., went to abroad and delegated the authority to another Chartered
Accountant Mr. Y, his employee, for taking care of routine matters of his office who is not a partner but a
member of the Institute of Chartered Accountants.
The Council has clarified that the power to sign routine documents on which a professional opinion or
authentication is not required to be expressed may be delegated and such delegation will not attract
provisions of this clause like issue of audit queries during the course of audit, asking for information or issue
of questionnaire, attending to routing matters in tax practice, subject to provisions of Section 288 of Income
Tax Act etc.
(i) In the given case, Mr. Y, a chartered accountant being employee of M/s A & Co. has issued audit queries
which were raised during the course of audit. Here Y is right in issuing the query, since the same falls
under routine work which can be delegated by the auditor. Therefore, there is no misconduct in this case
as per Clause (12) of Part I of First schedule to the Act.
(ii) Further, issuance of production certificate to a client under GST Act by Mr. Y being an employee of M/s
A & Co. (an audit firm), is not a routine work and it is outside his authorities. Thus, CA A is guilty of
professional misconduct under Clause (12) of Part I of First Schedule of the Chartered Accountants Act,
1949.
(iii) In this instance, Mr. Y, CA employee of the audit firm M/s A & Co. has attended the Income tax
proceedings for a client as authorized representative before Income Tax Authorities. Since the council
has allowed the delegation of such work, the chartered accountant employee can attend to routine
matter in tax practice as decided by the council, subject to provisions of Section 288 of the Income Tax
Act. Therefore, there is no misconduct in this case as per Clause (12) of Part I of First schedule to the Act.

Question 12
XYZ Co. Ltd. has applied to a bank for loan facilities. The bank on studying the financial statements of
the company notices that you are the auditor and requests you to call at the bank for a discussion. In
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the course of discussions, the bank asks for your opinion regarding the company and also asks for
detailed information regarding a few items in the financial statements. The information is available in
your working paper file. What should be your response and why?
Answer 12
As per Clause (1) of Part I of the Second Schedule of the Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct if he discloses information acquired
in the course of his professional engagement to any person other than his client, without the consent of the
client or otherwise than as required by law for the time being in force. SA 200 on " Overall Objectives of the
Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing" also reiterates
that, "the auditor should respect the confidentiality of information acquired in the course of his work and
should not disclose any such information to a third party without specific authority or unless there is a legal
or professional duty to disclose".
In the instant case, the bank has asked the auditor for detailed information regarding few items in the
financial statements available in his working papers. Having regard to the position stated earlier, the auditor
cannot disclose the information in his possession without specific permission of the client. As far as working
papers are concerned, working papers are the property of the auditor. The auditor may at his discretion,
make portions of or extracts from his working papers available to his client".
Thus, there is no requirement compelling the auditor to divulge information obtained in the course of audit
and included in the working papers to any outside agency except as and when required by any law.

Question 13
Mr. A, a newly qualified Chartered Accountant, started his practice and sought clients through telephone
calls from his family and friends, almost all of them employed in one or the other retail trade business.
One of his friends Mr. X gave him an idea to start online services and give stock certifications to traders
with Cash Credit Limits in Banks. Mr. A started a website with colorful catchy designs and shared the
website address on his all social media posts and stories and tagged 30 traders of his local community
with the caption “Easy Online Stock Certification Services”. Besides, Mr. A entered in an agreement with
a Digital Marketer to give him 5% commission on each service procured through him. Discuss if the
actions of Mr. A are valid in the light of the Professional Ethics and various pronouncements and
guidelines issued by ICAI.
Answer 13
As per Clause (6) of Part I of the First Schedule of the Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct if he solicits clients or professional
work either directly or indirectly by circular, advertisement, personal communication or interview or by any
other means.
Mr. A is wrong in seeking clients through family and friends. Creating a website is not a non- compliance
provided it is in line with the guidelines issued by the Institute in this regard. One of the guidelines is that the
website should not be in push mode. Further, mentioning of clients’ names is also prohibited as per the
guidelines.
In the given situation, Mr. A shared the website address on his all social media posts and stories and tagged
30 traders of his local community with the caption “Easy Online Stock Certification Services” mentioning his
current clients as well. This is in complete contravention of the guidelines on website issued by the ICAI.
Thus, CA A would be held guilty of professional misconduct under clause 6 of Part 1 of First Schedule of the
Chartered Accountants Act, 1949.

Question 14
Mr. D, a practicing CA, is appointed as a Director Simplicitor in XYZ Pvt. Ltd. After one year of
appointment, Mr. D resigned as the Director and accepted the Statutory Auditor position of the
company. Is Mr. D right in accepting the auditor position?

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Answer 14
As per Clause (4) of Part I of the Second Schedule of the Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct if he expresses his opinion on
financial statements of any business or enterprise in which he, his firm, or a partner in his firm has a
substantial interest.
Section 141 of the Companies Act, 2013 specifically prohibits a member from auditing the accounts of a
company in which he is an officer or employee. Although the provisions of the aforesaid section are not
specifically applicable in the context of audits performed under other statutes, e.g. tax audit, yet the
underlying principle of independence of mind is equally applicable in those situations also. Therefore, the
Council’s views are clarified in the following situations.
As per the clarifications issued by the Council, a member shall not accept the assignment of audit of a
Company for a period of two years from the date of completion of his tenure as Director, or resignation as
Director of the said Company.
In the instant case, Mr. D, a practicing CA, is appointed as a Director Simplicitor in XYZ Pvt. Ltd. After one year
of appointment, Mr. D resigned as the Director and accepted the Statutory Auditor position of the company.
In view of above provisions Mr. D cannot accept the Directorship of the company until the completion of two
years after his resignation.
Thus, CA D would be held guilty of professional misconduct under clause 4 of Part 1 of Second Schedule of
the Chartered Accountants Act, 1949.

Question 15
Mr. F, a Chartered Accountant, gave advisory services to PQR Pvt. Ltd. Further, he gave them GST
consultancy, compilation engagement for historical financial information and helped in ERP set up. Later,
the company turned out to be a part of a group of companies involved in money laundering. Mr. F was
asked to provide details of the companies. Mr. F refused on the grounds that he gave only consultancy
services to the company and wasn’t supposed to keep any information about the company. Is Mr. F right
as per the guidelines issued by the ICAI?
Answer 15
The financial services industry globally is required to obtain information of their clients and comply with Know
Your Client Norms (KYC norms). Keeping in mind the highest standards of Chartered Accountancy profession
in India, the Council of ICAI issued such norms to be observed by the members of the profession who are in
practice.
In the given situation, CA. F, gave GST consultancy, compilation engagement for historical financial
information and helped in ERP set up along with advisory services to PQR Pvt. Ltd. Mr. F was asked to provide
details of the companies as the company, turned out to be a part of a group of companies, involved in money
laundering. Contention of Mr. F that he gave only consultancy services and compilation engagement for
historical financial information to the company and wasn’t supposed to keep any information about the
company is not valid as Mr. F should have kept following information in compliance with KYC Norms which
are mandatory in nature and shall apply in all assignments pertaining to attestation functions.
In the given case of PQR Pvt. Ltd., a Corporate Entity, Mr. F should have kept following information:
A. General Information
• Name and Address of the Entity
• Business Description
• Name of the Parent Company in case of Subsidiary
• Copy of last Audited Financial Statement
B. Engagement Information
• Type of Engagement
C. Regulatory Information
• Company PAN No.
• Company Identification No
• Directors’ Names & Addresses
• Directors’ Identification No
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Question 16
Mr. S, the auditor of ABC Pvt. Ltd. has delegated following works to his articles and staff:
(i) Issue of audit queries during the course of audit.
(ii) Issue of memorandum of cash verification and other physical verification.
(iii) Letter forwarding draft observations/financial statements.
(iv) Issuing acknowledgements for records produced.
(v) Signing financial statements of the company.
Is this correct as per the Professional Ethics and ICAI’s guidelines and pronouncements?
Answer 16
As per Clause (12) of Part I of the First Schedule of the Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty of professional misconduct if he allows a person not being a
member of the institute in practice or a member not being his partner to sign on his behalf or on behalf of
his firm, any balance sheet, profit and loss account, report or financial statements.
The Council has clarified that the power to sign routine documents on which a professional opinion or
authentication is not required to be expressed may be delegated in the following instances and such
delegation will not attract provisions of this clause:
(i) Issue of audit queries during the course of audit.
(ii) Asking for information or issue of questionnaire.
(iii) Letter forwarding draft observations/financial statements.
(iv) Initiating and stamping of vouchers and of schedules prepared for the purpose of audit.
(v) Acknowledging and carrying on routine correspondence with clients.
(vi) Issue of memorandum of cash verification and other physical verification or recording
the results thereof in the books of the clients.
(vii) Issuing acknowledgements for records produced. Raising of bills and issuing
acknowledgements for money receipts.
(viii) Attending to routine matters in tax practice, subject to provisions of Section 288 of
Income Tax Act.
(ix) Any other matter incidental to the office administration and routine work involved in
practice of accountancy
In the instant case, Mr. S, the auditor of ABC Pvt. Ltd. has delegated certain task to his articles and staff such
as issue of audit queries during the course of audit, issue of memorandum of cash verification and other
physical verification, letter forwarding draft observations/financial statements, issuing acknowledgements
for records produced and signing financial statements of the company.

Therefore, Mr. S is correct in allowing first four tasks i.e. issue of audit queries during the course of audit,
issue of memorandum of cash verification and other physical verification, letter forwarding draft
observations/financial statements, issuing acknowledgements for records produced to his staff and articles.
However, if the person signing the financial statements on his behalf is not a member of the institute in
practice or a member not being his partner to sign on his behalf or on behalf of his firm, Mr. S is wrong in
delegating signing of financial statements to his staff.
Conclusion: In view of this, S would be guilty of professional misconduct for allowing the person signing the
financial statements on his behalf to his articles and staff under Clause 12 of Part 1 of First Schedule of the
Chartered Accountants Act, 1949.

Question 17
Mr. S is a practising chartered accountant based out of Chennai. During the weekends, he involved himself
in equity research and used to advise his friends, relatives and other known people who are not his clients.
Apart from this, he was also involved as a paper-setter for Accountancy subject in the school in which he
studied. He also owned agricultural land and was doing agriculture during his free time. During the year
20X1, heavy losses were incurred in agricultural activity due to natural calamities and misfortune, and he

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lost almost all of his wealth and became undischarged insolvent. After a few court hearings, finally, in the
year 20X3, he was declared discharged insolvent and obtained a certificate from the court stating that his
insolvency was caused by misfortune without any misconduct on his part. You are required to comment
on the above situation with reference to the Chartered Accountants Act, 1949 and Schedules thereto,
(especially from the point of section 8: Entry of name in Register of Members).
Answer 17
Given situation can be visualized in following parts:
(A) Mr. S used to involve himself in equity research and used to advise his friends, relatives and other
known people: 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) Mr. S is involved in paper-setting for the Accountancy subject in the school where he studied. He also
owns agricultural land and does agriculture activities: As per Clause 11 of Part I of First Schedule of
Chartered Accountants Act and regulation 190A of 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 Council is required. Those cases include:
- Valuation of papers, acting as paper-setter, head examiner or a moderator, for any examination.
- Owning agricultural land and carrying out agricultural activities.
(C) Mr. S was discharged insolvent: Disabilities for the Purpose of Membership: 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. Here it may 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.
In addition, failure on the part of a person to disclose the fact that he suffers from any one of the
aforementioned 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

Question 18
CA Pankaj accepted professional work of acting as valuer under direct taxes. He charges fees on a
percentage of the property valued. Comment with reference to the Chartered Accountants Act, 1949 and
schedules thereto.
Answer 18
Restriction on fees based on a Percentage: According to Clause (10) of Part I of First Schedule to the Chartered
Accountants Act, 1949, a Chartered Accountant in practice shall be deemed to be guilty of professional
misconduct if he charges or offers to charge, accepts or offers to accept in respect of any professional
employment fees which are based on a percentage of profits or which are contingent upon the findings, or
results of such employment, except as permitted under any regulations made under this Act.
However, Regulation 192 exempts Chartered Accountants in practice to charge fees based on a percentage
of profits or contingent upon findings or results for professional work for certain professional services.
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Regulation 192 specifically states that in the case of a valuer for the purposes of direct taxes and duties, the
fees may be based on a percentage of the value of the property valued.
Conclusion: Consequently, CA Pankaj shall not be deemed to be guilty of professional misconduct, as he is
within the permissible scope of charging fees based on a percentage of the property valued.

Question 19
Mr. Johny, a chartered accountant, was invited to a seminar on bank audits to give a presentation on the
process of conducting such audits. During his presentation, he provided examples from his clients’
experiences and shared the significant information about clients with the intention of aid in understanding
of audience on the topic. Does above situation have implications in relation to the professional ethics?
Answer 19
Disclosure of Client’s Information: Confidentiality is one of fundamental principles governing professional
ethics. Clause (1) of Part I of the Second Schedule to the Chartered Accountants Act, 1949, addresses
professional misconduct related to the disclosure of information by a chartered accountant in practice
concerning the business of their clients. Such disclosure to any person other than the client, without the
client's consent or unless mandated by prevailing law, is considered a breach of conduct. The Code of Ethics
emphasizes that this duty continues even after the completion of the assignment, except when disclosure is
necessary for the performance of professional duties.
In the provided case, CA Johny disclosed significant information about his client's business without obtaining
the client's consent, believing that it would enhance the audience's understanding of the topic.
Conclusion: Therefore, this action of CA Johny constitutes professional misconduct under Clause (1) of Part I
of the Second Schedule to the Chartered Accountants Act, 1949.

Question 20
CA Vaayu is the auditor of Viva Limited having a turnover of more than ₹ 200 Crores. The audit fee for the
year is fixed at ₹ 80 Lakhs. During the year, the company offers CA Vaayu an assignment of representation
before Income Tax Appellate Tribunal for certain matter for remuneration of ₹ 1.75 crores. CA Vaayu
accepted the assignment. Discuss action of CA Vaayu with reference to the provisions of the Chartered
Accountants (Amendment) Act, 2006 and Schedules thereto.
Answer 20
As per the Council General Guidelines 2008, under Chapter IX on appointment as statutory auditor a member
of the Institute in practice shall not accepts the appointment as a statutory auditor of a PSUs’/Govt
company(ies)/Listed company(ies) and other public company(ies) having a turnover of ₹ 50 crores or more
in a year and where he accepts any other work(s) or assignment(s) or service(s) in regard to same
undertaking(s) on a remuneration which in total exceeds the fee payable for carrying out the statutory audit
of the same undertaking. For this purpose, the other work/services include Management Consultancy and all
other professional services permitted by Council excluding audit under any other statute, Certification work
required to be done by the statutory auditor and any representation before an authority.

In the given case, the company offers CA Vaayu, the statutory auditor, an assignment of representation
before Income Tax Appellate Tribunal for remuneration of ` 1.75 Crores.
Conclusion: In view of the above provision, it would not be misconduct on Vaayu’s part if he accepts the
assignment of representation before Income Tax Appellate Tribunal for remuneration of ₹1.75 crore.

Question 21
Sanjeev & Associates, a firm of Chartered Accountants responded to a tender from a PF Office, Chembur
for filing quarterly e-TDS returns. The terms of tender are as follows:
(i) Earnest Money Deposit of ₹ 7,500/-
(ii) It is open for all categories
(iii) Maximum fees of ₹ 7,500/- per quarter
Discuss whether Sanjeev and Associates can respond to the said tender with reference to provisions of the
Chartered Accountants (Amendment) Act, 2006 and Schedules thereto.
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Answer 21
As per Clause 6 of Part I of the First Schedule to the Chartered Accountants Act, 1949, a Chartered Accountant
in practice shall be guilty of professional misconduct if he solicits clients or professional work either directly
or indirectly by circular, advertisement, personal communication or interview or by any other means.
Provided that nothing herein contained shall be construed as preventing or prohibiting -
(i) Any Chartered Accountant from applying or requesting for or inviting or securing professional work from
another chartered accountant in practice; or
(ii) A member from responding to tenders or enquiries issued by various users of professional services or
organisations from time to time and securing professional work as a consequence.
However, as per the Guidelines issued by the Council of the Institute of Chartered Accountants of India, a
member of the Institute in practice shall not respond to any tender issued by an organisation or user of
professional services in areas of services which are exclusively reserved for chartered accountants, such as
audit and attestation services. However, such a restriction shall not be applicable where minimum fee of the
assignment is prescribed in the tender document itself or where the areas are open to other professionals
along with the Chartered Accountants.
In the given case, Sanjeev & Associates responded to a tender from a PF Office, Chembur, filing quarterly e-
TDS returns.
Conclusion: Sanjeev & Associates can respond to the said tender as the tender is open to all the categories
i.e. it is open to other professionals along with the Chartered Accountants.

Question 22
CA Shubh, a Chartered Accountant in practice specializing in the field of Information Systems Audit. He is
considered to be one of the experts in this field because of his command over the subject. ZX Limited, a
company engaged in rendering management consultancy offered him to appoint as its managing director.
CA Shubh accepted the position of managing director without obtaining prior permission from the
Institute. One of his friends, CA Varun informed him that now he cannot retain full time certificate of
practice, thus cannot do attestation function and train articled assistants. Comment with reference to the
provisions of the Chartered Accountants Act, 1949 and Schedules thereto.
Answer 22
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 the Chartered Accountant unless permitted by the Council so to engage.
As per the Guidelines for Corporate Form of Practice, the Council has allowed the members in practice to
hold the office of Managing Director, Whole-time Director or Manager of a body corporate within the
meaning of the Companies Act, 2013 provided that the body corporate is engaged exclusively in rendering
Management Consultancy and Other Services permitted by the Council in pursuant to Section 2(2)(iv) of the
Chartered Accountants Act, 1949 and complies with the conditions(s) as specified by the Council from time
to time in this regard. The name of the Management Consultancy Company is required to be approved by
the Institute and such a Company has to be registered with the Institute.
The members can retain a full-time Certificate of Practice besides being the Managing Director, Whole-time
Director or Manager of such management consultancy company. There will be no restriction on the quantum
of the equity holding of the members, either individually and/ or along with the relatives, in such a company.
Such members shall be regarded as being in full- time practice and therefore can continue to do attest
function either in individual capacity or in Proprietorship/Partnership firm in which capacity they practice
and wherein they are also entitled to train articled/audit assistants.
In the given case, CA Shubh, a Chartered Accountant specializing in Information Systems Audit and
considered an expert in the field, was offered the position of Managing Director by ZX Limited, a management
consultancy firm. He accepted the role without obtaining prior permission from the Institute of Chartered
Accountants of India
From the above provisions, it can be concluded that the action of CA Shubh is valid.

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Question 23
Pitch Private Limited requested CA Angad, a practicing Chartered Accountant, to digitally sign the form
related to resignation of Mr. Ravi, one of the Director of Pitch Private Limited, along with the copy of
resignation letter to be uploaded on the website of Registrar of Companies. The signature of Mr. Ravi was
simply copied and pasted by another Director of Pitch Private Limited. CA Angad, without verifying the
genuineness of the resignation letter, digitally signed the form and the said form was uploaded on the
website of Registrar of Companies. Comment with reference to the provisions of the Chartered
Accountants Act, 1949 and Schedules thereto.
Answer 23
As per Clause (7) of Part I of the Second Schedule to the Chartered Accountants Act, 1949, a Chartered
Accountant in practice is deemed to be guilty if he does not exercise due diligence or is grossly negligent in
the conduct of this professional duties.
In the given case, Pitch Private Limited requested CA Angad, a practicing Chartered Accountant, to digitally
sign the form related to resignation of Mr. Ravi, one of the Director of Pitch Private Limited, along with the
copy of Resignation Letter to be uploaded on the website of Registrar of Companies. The signature of Mr.
Ravi was simply copied and pasted by another Director of Pitch Private Limited.
CA Angad, without verifying the genuineness of the Resignation Letter, digitally signed the Form and the said
form was uploaded on the website of Registrar of Companies
Due to forged resignation letter, the resignation of Mr. Ravi from directorship of the Pitch Private Limited
had been occurred. It was noted that CA Angad had not taken any step to verify forged signature on
resignation letter which anyone would have taken in normal circumstances.
Hence, CA Angad would be held liable for professional misconduct as per Clause (7) of Part I of the Second
Schedule to the Chartered Accountants Act, 1949.

Question 24
Shri Limited, a listed Company, having its registered office at Mumbai is engaged in manufacturing of
various types of yarns to be supplied to the textile mills. The Company has installed pollution control
equipment for processing the pollutants so that before discharge of effluents outside the factory, the level
of pollution is kept at a level below the prescribed standard. The company managed to get the pollution
clearance certificate by unfair means, while still there continues to be breach of pollution control laws in
matters of discharge of polluting effluents. The amount of ₹ 18.75 Lacs had been incurred for arranging
clearance certificate and the amount incurred unlawfully had been booked as pollution recycling
expenditure. The matter had not reached those in governance, and the Director-Finance, who is a
Chartered Accountant, came to know of these matters on review of major expenditure incurred during the
period. Comment on the action/responses expected of Director - Finance (CA Gopal) referring to any
applicable requirements of Responses for NOCLAR under Code of Ethics
Answer 24
In the given situation, Shri Limited, a listed company, has installed pollution control equipment for processing
the pollutants to keep the level of pollution below the prescribed standard. The company managed to get
pollution certificate by unfair means whereas breach of pollution control laws still continues. For arranging
clearance certificate amount of ₹ 18.75 lacs had been incurred unlawfully. CA Gopal, Director Finance, came
to know about these matters on review of the same during the period.
NOCLAR, under Code of Ethics, is applicable on professional accountants in service, and in practice. Among
those in practice, it applies to Auditors, as well as professional services other than Audit.
It is applicable to Senior Professional Accountants in service, being employees of listed entities. Senior
professional accountants in service (“senior professional accountants”) includes directors.
NOCLAR takes into account non-compliance that causes substantial harm resulting in serious consequences
in financial or non-financial terms.
As per NOCLAR, in exceptional circumstances, the professional accountant might become aware of an
imminent breach of a law or regulation that would cause substantial harm to investors, creditors, employees
or the general public. Having first considered whether it would be appropriate to discuss the matter with
management or those charged with governance of the company, the accountant shall exercise professional
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judgment and determine whether to disclose the matter immediately to an appropriate authority in order to
prevent or mitigate the consequences of such imminent breach. If disclosure is made, that disclosure is
permitted.
CA Gopal, Director-Finance is expected of taking the following action/responses:
• Obtaining an understanding of the Matter.
• Addressing the matter.
• Seeking advice.
• Determining whether further action is needed.
• Determining whether to disclose the matter to an Appropriate Authority.
• Imminent breach.
• Documentation.

Question 25
CA Kapila, in practice, is desirous of filling Multi-purpose Empanelment Form (MEF) for inclusion of her
name in panel for allotment of statutory audit of bank branches web hosted by Professional Development
Committee (PDC) of ICAI for financial year 2023-24. The form requires applicants to upload XML files of
their personal income tax returns along with computation of income. During relevant year for which
information is being sought by PDC, CA Kapila has transacted in futures and options derivatives (equity)
and has reflected income from such transactions in her return of income as “Business Income”. Analyse
the above situation with reference to the provisions of the Chartered Accountants Act, 1949.
Would it make any difference if CA Kapila had earned income from transacting in currency derivatives and
commodity derivatives?
Answer 25
Clause 11 of Part I of First Schedule to the Chartered Accountants Act, 1949 states that a Chartered
Accountant in practice shall be deemed to be guilty of professional misconduct, if he engages in any business
or occupation other than the profession of Chartered Accountants unless permitted by the Council so to
engage.
Provided that nothing contained herein shall disentitle a Chartered accountant from being a director of a
Company, (not being a managing director or a whole-time director), unless he or any of his partners is
interested in such company as an auditor.
Ethical Standards Board of ICAI has announced that it is permissible for a member in practice to engage in
derivative transactions in his personal capacity but not in professional capacity i.e. for clients. Such
engagements in derivatives are not violative of provisions of Clause 11 of Part I of First Schedule to the
Chartered Accountants Act, 1949. Further, members are allowed to transact in equity and currency
derivatives. There is no requirement to take permission of Council in this matter.
Therefore, there is no difference if CA Kapila had earned income from currency derivatives. However, in
accordance with the announcement of Ethical Standards Board of ICAI, it is not permissible for members in
practice to transact in commodity derivative transactions. In such a case, CA Kapila would be held guilty of
professional misconduct for engaging in business other than profession of Chartered Accountancy.

Question 26
In terms of subsection 114 of Revised Code of Ethics, a professional accountant shall comply with the
principle of confidentiality, which requires an accountant to respect the confidentiality of information
acquired as result of professional and employment relationships. Confidentiality serves the public interest
because it facilitates the free flow of information from the professional accountant's client or employing
organization to the accountant in knowledge that the information will not be disclosed to a third party. In
this context, enumerate the circumstances where professional accountants are or might be required to
disclose confidential information or when such disclosure might be appropriate. In deciding whether to
disclose confidential information what are the points that should be kept in the mind of professional
accountants?

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Answer 26
Principle of Confidentiality: In terms of subsection 114 of Revised Code of Ethics, a professional accountant
shall comply with the principle of confidentiality, which requires an accountant to respect the confidentiality
of information acquired as a result of professional and employment relationships. Confidentiality serves the
public interest because it facilitates the free flow of information from the professional accountant’s client or
employing organization to the accountant in the knowledge that the information will not be disclosed to a
third party. Nevertheless, the following are circumstances where professional accountants are or might be
required to disclose confidential information or when such disclosure might be appropriate:
(1) Disclosure is required by law,
(2) Disclosure is permitted by law and is authorized by the client or the employing organisation;
(3) There is a professional duty or right to disclose, when not prohibited by law:
(i) To comply with the requirements of Peer Review or Quality Review of the Institute;
(ii) To respond to an inquiry or investigation by a professional or regulatory body;
(iii) To protect the professional interests of a professional accountant in legal proceedings; or
(iv) To comply with technical and professional standards, including ethics requirements.
In deciding whether to disclose confidential information, professional accountants should consider the
following points:
(1) Whether the interests of any party, including third parties whose interests might be affected, could be
harmed if the client or employing organization consents to the disclosure of information by the professional
accountant;
(2) Whether all the relevant information is known and substantiated, to the extent it is practicable; and
(3) The proposed type of communication, and to whom it is addressed;
(4) Whether the parties to whom the communication is addressed are appropriate recipients

Question 27
CA Raj, a practicing chartered accountant, is offered to take up an appointment as a "Secretary" in his
professional capacity by the Central Government for a Metro Project for a term of 2 years not on a salary-
cum-full-time basis. After giving deep thought to the offer, CA Raj accepted the appointment. Comment in
terms of the Chartered Accountant Act, 1949 and Schedules thereto.
Answer 27
As per Section 2(2)(iv) of the Chartered Accountant Act, 1949 as amended from time to time, a member of
the Institute shall be deemed ‘to be in practice’ when individually or in partnership with Chartered
Accountants in practice, or in partnership with members of such other recognized professional as may be
prescribed, he, in consideration of remuneration received or to be received, renders such other services as,
in the opinion of the Council, are or may be rendered by a Chartered Accountant in practice.
As per Clause (11) of Part I of First Schedule of Chartered Accountants Act, 1949, 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.
However, the Council of the Institute is empowered to permit chartered accountants in practice to engage
in any other business or occupation considered fit and proper. Accordingly, the Council formulated
Regulations 191 to the Chartered Accountants Regulations, 1988 specifying the activities with which a
member in practice can associate himself with or without the permission of the Council. As per Regulation
191 a Chartered Accountant in practice may take up an appointment that may be made by the Central
Government or a State Government or a court of law or any other legal authority or may act as a secretary
in his professional capacity, provided his employment is not on a salary-cum-full-time basis”.
In the instant case, CA Raj, a practicing-chartered accountant has been appointed as a “Secretary” in his
professional capacity by the Central Government for a metro project for a term of 2 years not on a salary-
cum-full-time basis.
Conclusion: In view of above, in the given scenario, CA Raj will not be held liable for misconduct for
acceptance of appointment as Secretary in terms of compliance of Regulations 191 read with Clause (11) of
Part I of First Schedule of Chartered Accountants Act, 1949.

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Question 28
TP Limited is a listed company engaged in the business of manufacturing of kids garments under the brand
name of MM. M/s R & Associates, firm of chartered accountants, are appointed as a Statutory Auditor of
the Company for the year 2023-24. CA R is looking after the audit of the Company. During the audit, CA R
observed that there are number of notices received from GST Department and Income-tax Department for
various issues. Further during plant visit, CA R observed that few child labourers are engaged in some of
the activity. In response to the observation made, CA R followed the procedure as envisaged in SA 250,
"Consideration of Laws and Regulations in an Audit of Financial Statements". According to CA R, the
provisions of SA 250 and the provisions of NOCLAR (Non-Compliance with Laws and Regulations) under
Revised Code of Ethics are one and the same. Do you agree? If not, give your comments.
Answer 28
In the given situation, CA R is looking after the audit of TP Limited, a listed company. During the audit, CA R
observed that there are a number of notices received from GST Department and Income-tax Department for
various issues. Further during plant visit, CA R observed that few child labourers are engaged in some of the
activity. In response to the observation made, CA R followed the procedure as envisaged in SA 250,
"Consideration of Laws and Regulations in an Audit of Financial Statements". assuming the provisions of SA
250 and the provisions of NOCLAR (Non-Compliance with Laws and Regulations) under Revised Code of Ethics
are one and the same. However, following points indicates that the provisions of SA 250 and NOCLAR (Non-
Compliance with Laws and Regulations) under the Revised Code of Ethics are not one and same:
(i) SA 250 is applicable only on Audit, and not on other Assurance engagements. However, NOCLAR is
applicable on professional accountants in service, and in practice.
(ii) SA 250 talks of auditor’s responsibilities for laws having direct effect on the determination of material
amounts and disclosures in the financial statements (such as tax and labour laws); and other laws and
regulations that do not have a direct effect on the determination of the amounts and disclosures in the
financial statements, but compliance with which may be fundamental to the operating aspects of the
business. NOCLAR, while being alike to SA 250 till this point, is further ahead of it in that it takes into account
non-compliance that causes substantial harm resulting in serious consequences in financial or non-financial
terms.
(iii) SA 250 does not define stakeholders. NOCLAR is related to affect of non-compliance on investors,
creditors, employees as also the general public.
(iv) As per NOCLAR, in exceptional circumstances, the professional accountant might become aware of an
imminent breach of a law or regulation that would cause substantial harm to investors, creditors, employees
or the general public. Having first considered whether it would be appropriate to discuss the matter with
management or those charged with governance of the company, the accountant shall exercise professional
judgment and determine whether to disclose the matter immediately to an appropriate authority in order to
prevent or mitigate the consequences of such imminent breach. If disclosure is made, that disclosure is
permitted. This provision is not existent in SA 250

Question 29
CA Kumar, a practicing-chartered accountant, is well known in the field of pleading of Income-tax cases at
Income-tax Tribunal and does not provide any assurance services. Considering the long standing in the
field, CA Kumar is approached by XYZ Limited to file an appeal in the Tribunal against the Income-tax
Demand of ₹ 10 crore which was added by the CIT(A) and to plead on behalf of XYZ Limited in the matter.
CA Kumar offers to accept the case with the following fee structure:
The fees for filing an appeal and to plead at the Income-tax Tribunal will be 10% of Tax Demand Reduced.
Comment on the act of CA Kumar in terms of the Chartered Accountant Act, 1949 and Schedules thereon
Answer 29
Restriction on Fees based on a Percentage: According to Clause (10) of Part I of First Schedule to the
Chartered Accountants Act, 1949, a Chartered Accountant in practice shall be deemed to be guilty of
professional misconduct if he charges or offers to charge, accepts or offers to accept in respect of any
professional employment fees which are based on a percentage of profits or which are contingent upon the
findings, or results of such employment, except as permitted under any regulations made under this Act.
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However, Regulation 192 allow the Chartered Accountant in practice to charge the fees in respect of any
professional work which are based on a percentage of profits, or which are contingent upon the findings or
results of such work, in the case of a non-assurance services to non-audit clients, and the fees may be based
on a percentage of Tax Demand Reduced.
In the given case, CA Kumar, a practicing Chartered Accountant, provides non-assurance services. He is
approached by XYZ Limited, a non-audit client, to file an appeal in Tribunal against Income-tax Demand of
₹10 crore which was added by the CIT(A) and to plead on behalf of XYZ Limited in the matter. CA Kumar offers
to accept the case and agrees to charge fees 10% of Tax Demand reduced. Conclusion: Therefore, Mr. Kumar
will not be held guilty of professional misconduct since he is not providing any assurance services to non-
audit clients pursuant to Regulation 192 read with Clause 10 of Part I of First Schedule

Question 30
GeM (e-market place) is a public procurement portal which provides opportunities to start-ups,
entrepreneurs etc. to showcase their innovative products and services to government buyers and engage
in public procurement. The Government e Marketplace Special Purpose Vehicle (GeM SPV), a 100%
government owned and section 8 (Non-Profit) company under the Ministry of Commerce, Government of
India has been incorporated under the Companies Act, 2013 to develop, manage and maintain GeM
platform. Whether a firm of Chartered Accountants can register on GeM portal for rendering professional
services to government departments?
Answer 30
As per provisions of Council Guidelines for Advertisement, 2008, it is not permissible for members to list
themselves with online application based service provider Aggregators, wherein other categories like
businessmen, technicians, maintenance workers, event organizers etc. are also listed.
Further, as per explanation to Clause (6) of Part I of First Schedule to the Chartered Accountants Act, 1949,
the government departments, government Companies/ corporations, courts, cooperative societies and
banks and other similar institutions prepare panels of Chartered Accountants for allotment of audit and other
professional work. Where the existence of such a panel is within the knowledge of a member, he is free to
write to the concerned organization with a request to place his name on the panel. However, it would not be
proper for the Chartered Accountant to make roving enquiries by applying to any such organization for having
his name included in any such panel. It is permissible to quote fees on enquiries being received or respond
to tenders from the organizations requiring professional services, which maintain such panel.
Getting registered on GeM portal by members does not appear to amount either to empanelment or listing
on Aggregator. In Aggregator, it is the third party which is operating, and not the client itself. GeM is operated
by the client itself.
It is a pre-requirement of rendering professional services to the Government departments, as stipulated by
them, and be considered as ancillary requirement to providing services to the Government departments.
Firms of Chartered Accountants are permitted to register on GeM Portal for rendering professional services
as there is no violation of the ethical norms of the Institute in registering on the GeM portal and such
registration on the Portal is a pre-requirement for providing services to the Government departments/
organisations.
However, firms should ensure compliance with the tender guidelines issued by the Institute while
participating in tender or bid floated through GeM Portal. The ICAI has made an announcement in relation
to the above.

Question 31
CA Gyan is a Chartered Accountant in practice and also an engineer by qualification. He wants to pursue a
registered valuer course and work as a registered valuer for plant and machinery under the Companies
Act, 2013. Comment on above with reference to provisions of the Chartered Accountants Act, 1949
Answer 31
As per section 2(2)(iv) of the Chartered Accountants Act, 1949, a member of the Institute shall be deemed
“to be in practice” when individually or in partnership with the Chartered Accountants in practice or in
partnership with members of such other recognised professions as may be prescribed, he, in consideration
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of remuneration received or to be received, renders such other services as, in the opinion of the Council, are
or may be rendered by a Chartered Accountant in practice.
Pursuant to section 2(2) (iv) above, the Council has passed a resolution permitting a Chartered Accountant
in practice to render entire range of “Management Consultancy and other Services” which, inter alia, includes
rendering services of valuation of shares and business and advice regarding amalgamation, merger and
acquisition, acting as Registered Valuer under the Companies Act, 2013 read with the Companies (Registered
Valuers and Valuation) Rules, 2017. In this regard, such rules qualify Chartered Accountants for valuation of
the securities or the financial Assets only and not for the Plant and Machinery. Therefore, valuation of plant
and machinery does not form part of Management Consultancy and other services permitted by the council.
Further, in accordance with the resolution passed under Regulation 190A of the Chartered Accountant
Regulations, 1988, members in practice are generally permitted for attending classes and appearing for any
examination. There is no need to take prior permission of ICAI in this regard. Therefore, it is generally
permitted for a member in practice to attend classes and appear for any examination, and accordingly, doing
the Registered valuer course would be deemed as permissible.
Hence, keeping in view above and in terms of the provisions of the Chartered Accountants Act, 1949 and
Code of Ethics, it is not permissible for a Chartered Accountant in practice to work as an Engineer/ valuer in
plant & machinery simultaneously.

Question 32
CA Evan has been in practice for two years and runs his proprietorship firm in the name of “Evan & Co.”.
He maintains notes in his mobile where he records the fees received from various clients. Using these
records, he prepares and files his income tax return. Comment with respect to the provisions of the
Chartered Accountant Act, 1949.
Answer 32
Maintenance of Books of Account by a CA in Practice: Chapter V of the Council General Guidelines, 2008
specifies that a member of the Institute in practice or the firm of Chartered Accountants of which he is a
partner, shall maintain and keep in respect of his professional practice, proper books of accounts including
the following-
(i) a Cash Book
(ii) a Ledger
Thus, a Chartered Accountant in practice is required to maintain proper books of accounts.
In the instant case, CA Evan does not maintain proper books of accounts and writes the fees received from
various clients in notes on his mobile. Notes maintained by him in mobile cannot be treated as books of
accounts.
Hence, CA Evan, being a practicing Chartered Accountant will be held guilty of misconduct for violation of
Council General Guidelines, 2008.

Question 33
The manager of Miskin (P) Ltd. approached CA Rahul in need of a certificate in respect of a consumption
statement of raw material. Without having a certificate of practice (CoP), CA Rahul issued the certificate
to the manager of the company, acting as a CA in practice and applied for the CoP to the Institute on very
next day to avoid any dispute.
Answer 33
Issuing Certificate without having Certificate of Practice: As per Clause (1) of Part II of Second Schedule to the
Chartered Accountants Act, 1949, a member of the Institute, whether in practice or not, shall be deemed to
be guilty of professional misconduct, if he contravenes any of the provisions of this Act or the Regulations
made thereunder or any Guidelines issued by the Council.
This clause requires every member of the Institute to act within the framework of the Chartered Accountants
Act,1949 and the Regulations made thereunder. Any violation either of the Act or the Regulations by a
member would amount to misconduct.
In the given case, CA Rahul has issued a certificate in respect of a consumption statement of raw material to
the manager of Miskin (P) Ltd., as a Chartered Accountant in practice when he had not even applied for the
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CoP to the Institute, thereby contravening the provisions of section 6 of the Chartered Accountants Act, 1949.
Therefore, CA Rahul will be held guilty of professional misconduct in terms of Clause (1) of Part II of Second
Schedule to the Chartered Accountants Act, 1949 for contravention of provisions of this Act.

Question 34
A special notice has been issued for a resolution at 4th annual general meeting of TRIM Ltd., providing
expressly that CA Lucky shall not be re-appointed as an auditor of the· company. Consequently, CA Lucky
submitted a representation in writing to the company with a request to circulate to the members. In the
detailed representation, CA Lucky included the contributions made by him in strengthening the control
procedures of the company during his association with the company and also indicated his willingness to
continue as an auditor if reappointed by the shareholders of the company. Comment with reference to the
Chartered Accountants Act, 1949 and schedules thereto.
Answer 34
Soliciting Clients: As per Clause (6) of Part I of First Schedule to the Chartered Accountants Act, 1949, a
Chartered Accountant in practice is deemed to be guilty of professional misconduct if he solicits clients or
professional work either directly or indirectly by circular, advertisement, personal communication or
interview or by any other means except applying or requesting for or inviting or securing professional work
from another Chartered Accountant in practice and responding to tenders.
Further, section 140(4)(iii) of the Companies Act, 2013, provides a right to the retiring auditor, to make
representation in writing to the company. The retiring auditor has the right for his representation to be
circulated among the members of the company and to be read out at the meeting. However, the content of
letter should be set out in a dignified manner how he has been acting independently and conscientiously
through the term of his office and may, in addition, indicate, if he so chooses his willingness to continue as
auditor, if re- appointed by the shareholders.
The proposition of the auditor to highlight contributions made by him in strengthening the control
procedures in the representation should not be included in such representations because the representation
letter should not be prepared in a manner to seek publicity.
Thus, highlighting contributions made by him in strengthening the control procedures, while submitting
representation u/s 140(4)(iii) of the Companies Act, 2013 would amount to canvassing or soliciting for his
continuance as auditor.
Therefore, CA Lucky will be held guilty of professional misconduct under Clause (6) of Part I of the First
Schedule to the Chartered Accountants Act, 1949.

Question 35
CA Anita joined as an audit executive in a CA firm on April 1, 2024. Despite receiving multiple reminders
from ICAI, she has failed to respond with her appointment date and submit her membership certificate.
Comment with reference to the Chartered Accountants Act, 1949 and schedules thereto
Answer 35
Failed to Supply Information Called For: In accordance with Clause (2) of Part III of the First Schedule to the
Chartered Accountants Act, 1949, a member, whether in practice or not, is considered to be engaged in
professional misconduct if he fails to provide the information requested or does not comply with the
requirements set forth by the Institute, Council, or any of its Committees, including the Director (Discipline),
Board of Discipline, Disciplinary Committee, Quality Review Board, or the Appellate Authority.
Conclusion: Therefore, in the given scenario, CA Anita has neglected to respond to the Institute's letters
seeking confirmation of her appointment date and has not submitted her membership certificate.
Consequently, she is deemed to be guilty of professional misconduct as given in Clause (2) of Part III of the
First Schedule to the Chartered Accountants Act, 1949.

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Illustrations

Question 36
A Chartered Accountant in practice has been suspended from practice for a period of 6 months and he had
surrendered his Certificate of Practice for the said period. During the said period of suspension, though the
member did not undertake any audit assignments, he undertook representation assignments for income
tax whereby he would appear before the tax authorities in his capacity as a Chartered Accountant.
Answer 36
Undertaking Tax Representation Work: A chartered accountant not holding certificate of practice cannot
take up any other work because it would be violation of the relevant provisions of the Chartered Accountants
Act, 1949.
In case a member is suspended and is not holding Certificate of Practice, he cannot in any other capacity take
up any practice separable from his capacity to practice as a member of the Institute. This is because once a
person becomes a member of the Institute; he is bound by the provisions of the Chartered Accountants Act,
1949 and its Regulations.
If he appears before the income tax authorities, he is only doing so in his capacity as a chartered accountant
and a member of the Institute. Having bound himself by the said Act and its Regulations made there under,
he cannot then set the Regulations at naught by contending that even though he continues to be a member
and has been punished by suspension, he would be entitled to practice in some other capacity.
Conclusion: Thus, in the instant case, a chartered accountant would not be allowed to represent before the
income tax authorities for the period he remains suspended. Accordingly, in the present case he is guilty of
professional misconduct.

Question 37
Mr. A, a practicing Chartered Accountant agreed to select and recruit personnel, conduct training
programmes for and on behalf of a client where he is not providing any assurance service. Is this a
professional misconduct?
Answer 37
Providing Management Consultancy and Other Services: Under Section 2(2)(iv) of the Chartered Accountants
Act, 1949, a member of the Institute shall be deemed “to be in practice” when individually or in partnership
with Chartered Accountants in practice, he, in consideration of remuneration received or to be received
renders such other services as, in the opinion of the Council, are or may be rendered by a Chartered
Accountant in practice. Pursuant to Section 2(2)(iv) above, the Council has passed a resolution permitting a
Chartered Accountant in practice to render entire range of “Management Consultancy and other Services”.
The definition of the expression “Management Consultancy and other Services” includes Personnel
recruitment and selection. Personnel Recruitment and selection includes, development of human resources
including designing and conduct of training Programmes, work study, job description, job evaluation and
evaluations of workloads.
Conclusion: Therefore, Mr. A is not guilty of professional misconduct.

Question 38
Mr. X & Mr. Y, partners of a Chartered Accountant Firm, one in-charge of Head Office and another in-charge
of Branch at a distance of 80 km. from the municipal limits, puts up a name-board of the firm in both
premises and also in their respective residences.
Answer 38
Putting Name Board of the Firm at Residence: The council of the Institute has decided that with regard to
the use of the name-board, there will be no bar to the putting up of a name-board in the place of residence
of a member with the designation of chartered accountant, provided, it is a name-plate or board of an
individual member and not of the firm.
In the given case, partners of XY & Co., put up a name board of the firm in both offices but not in their
respective residences.

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Conclusion: Thus, the chartered accountants are guilty of misconduct. Distance given in the question is not
relevant for deciding.

Question 39
Mr. K, Chartered Accountant practicing as a sole proprietor has an office in the suburbs of Chennai. Due to
increase in the income tax assessment work, he opens another office near the income tax office, which is
within the city and at a distance of 30 km. from his office in the suburb. For running the new office, he has
employed a retired Income Tax Commissioner who is not a Chartered Accountant.
Answer 39
Maintenance of Branch Office in the Same City: As per section 27 of the Chartered Accountants Act, 1949 if
a chartered accountant in practice has more than one office in India, each one of these offices should be in
the separate charge of a member of the Institute. However, a member can be in charge of two offices if the
second office is located in the same premises or in the same city, in which the first office is located; or the
second office is located within a distance of 50 km. from the municipal limits of a city, in which the first office
is located.
In the given case, Mr. K, Chartered Accountant in practice as a sole proprietor at Chennai has an office in
suburbs of Chennai, and due to increase in the work he opened another branch within the city near the
income tax office. He also employed a retired income tax commissioner to run the new office and the second
office is situated within a distance of 30 kilometers from his office in the suburb.
Conclusion: In view of above provisions, there will be no misconduct if Mr. K will be in - charge of both the
offices. However, he is bound to declare which of the two offices is the main office.

Question 40
Mr. C, Chartered Accountant, in practice allowed his brother-in-law Mr. P who is not a Chartered
Accountant, to practice in the name of CA. C. He also allowed Mr. T who is employee in his firm to practice
in the name. Whether Mr. C is correct in allowing his brother-in-law Mr. P and Mr. T employee of his firm
to practice in his name.
Answer 40
Allowing to Practice in a Chartered Accountant’s name: As per Clause (1) of Part I to the First Schedule to
Chartered Accountants’ Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional
misconduct if he allows any person to practice in his name as a chartered accountant unless such person is
also a chartered accountant in practice and is in partnership with or employed by him.
In the given situation Mr. C, Chartered Accountant who is in practice allowed a non-Chartered Accountant his
brother-in-law Mr. P to practice in the name of CA. C is not correct in view of Clause 1 of Part I to the First
Schedule. However, he can allow Mr. T who is employee in his firm to practice in his name.
Conclusion: Thus, CA. C will be held guilty of professional misconduct for allowing Mr. P who is not a Chartered
Accountant to practice in his name as a chartered accountant as per Clause (1) of Part I to the First Schedule.

Question 41
Mr. Qureshi, Chartered Accountant, in practice died in a road accident. His widow proposes to sell the
practice of her husband to Mr. Pardeshi, Chartered Accountant, for ₹ 5 lakhs. The price also includes right
to use the firm name - Qureshi and Associates. Can widow of Qureshi sell the practice and can Mr. Pardeshi
continue to practice in that name as a proprietor?
Answer 41
Sale of Goodwill: With reference to Clause (2) of Part I to the First Schedule to Chartered Accountants’ Act,
1949, the Council of the Institute of Chartered Accountants of India considered whether the goodwill of a
proprietary concern of chartered accountant can be sold to another member who is otherwise eligible, after
the death of the proprietor.
It lays down that the sale is permitted subject to certain conditions discussed in the above flowchart. It further
resolved that the legal heir of the deceased member has to obtain the permission of the Council within a year
of the death of the proprietor concerned.

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Conclusion: Thus, in a given case, the widow of Mr. Qureshi, who has proposed to sell the practice for ₹ 5
lakhs is in effect proposing the sale of goodwill. Thus, the act of Mrs. Qureshi is permissible and Mr. Pardeshi
can continue to practice in that name as a proprietor.

Question 42
Mr. S, a Chartered Accountant published a book and gave his personal details as the author. These details
also mentioned his professional experience.
Answer 42
Soliciting Professional Work: Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949
refers to professional misconduct of a member in practice if he solicits client or professional work either
directly or indirectly, by circular, advertisement, personal communication or interview or by any other means.
Therefore, members should not adopt any indirect methods to advertise their professional practice with a
view to gain publicity and thereby solicit clients or professional work. Such a restraint must be practiced so
that members may maintain their independence of judgement and may be able to command the respect of
their prospective clients. While elaborating forms of soliciting work, the Council has specified that a member
is not permitted to indicate in a book or an article, published by him, his association with any firm of chartered
accountants. In this case, Mr. S, a Chartered Accountant published the book and mentioned his professional
experience in detail in the same.
Conclusion: Mr. S being a chartered accountant in practice has committed the professional misconduct by
mentioning his professional experience.

Question 43
M/s XYZ, a firm of Chartered Accountants created a website “www.xyzindia.com”. The website besides
containing details of the firm and bio-data of the partners also contains the passport size photographs of
all the partners of the firm.
Answer 43
Hosting Details on Website: As per detailed guidelines of the ICAI laid down in Clause (6) of Part I of the First
Schedule to the Chartered Accountants Act, 1949, a chartered accountant of the firm can create its own
website using any format subject to guidelines. However, the website should be so designed that it does not
solicit clients or professional work and should not amount to direct or indirect advertisement. The guidelines
of the ICAI to allow a firm to put up the details of the firm, bio-data of partners and display of a passport size
photograph.
Conclusion: In the case of M/s XYZ, all the guidelines seem to have been complied and there appears to be
no violation of the Chartered Accountants Act, 1949 and its Regulations

Question 44
M/s LMN, a firm of Chartered Accountants responded to a tender from a State Government for
computerization of land revenue records. For this purpose, the firm also paid ₹ 50,000 as earnest deposit
as part of the terms of the tender.
Answer 44
Responding to Tenders: Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949 lays
down guidelines for responding to tenders, etc. As per the guidelines if a matter relates to any services other
than audit, members can respond to any tender. Further, in respect of a non-exclusive area, members are
permitted to pay reasonable amount towards earnest money/security deposits.
Conclusion: In the instance case, since computerization of land revenue records does not fall within exclusive
areas for chartered accountants, M/s LMN can respond to tender as well as deposit ₹ 50,000 as earnest
deposit and shall not have committed any professional misconduct

Question 45
Mr. Honest, a Chartered Accountant in practice, wrote two letters to M/s XY Chartered Accountants a firm
of CAs; requesting them to allot him some professional work. As he did not have a significant practice or
clients he also wrote a letter to M/s ABC, a firm of Chartered Accountants for securing professional work.
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 CA SANIDHYA SARAF 19.22

Mr. Clever, another CA, informed ICAI regarding Mr. Honest's approach to secure the professional work. Is
Mr. Honest wrong in soliciting professional work?
Answer 45
Securing Professional Work: Clause (6) of Part I of the First Schedule to the Chartered Accountants Act, 1949
states that a Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits clients
or professional work either directly or indirectly by a circular, advertisement, personal communication or
interview or by any other means. Provided that nothing herein contained shall be construed as preventing or
prohibiting any Chartered Accountant from applying or requesting for or inviting or securing professional
work from another chartered accountant in practice.
Such a restraint has been put so that the members maintain their independence of judgment and may be
able to command respect from their prospective clients.
Conclusion: In the given case, Mr. Honest wrote letters only to other Chartered Accountants, M/s XY and M/s
ABC requesting them to allot some professional work to him, which is not prohibited under Clause (6) as
explained above. Thus, Mr. Honest has not committed any professional misconduct by soliciting professional
work.

Question 46
A practicing Chartered Accountant uses a visiting card in which he designates himself, besides as Chartered
Accountant, as a Tax Consultant recognized professional membership by the Central Government or the
Council.
Answer 46
Tax Consultant: Section 7 of the Chartered Accountants Act, 1949 read with Clause (7) of Part I of the First
Schedule to the said Act prohibits advertising of professional attainments or services of a member. It also
restrains a member from using any designation or expression other than that of a chartered accountant in
documents through which the professional attainments of the member would come to the notice of the
public.
Under the clause, use of any designation or expression other than chartered accountant for a chartered
accountant in practice, on professional documents, visiting cards, etc. amounts to a misconduct unless it be
a degree of a university or a title indicating membership of any other professional body recognized by the
Central Government or the Council.
Conclusion: Thus, it is improper to use designation "Tax Consultant" since neither it is a degree of a University
established by law in India or recognized by the Central Government nor it is a recognized professional
membership by the Central Government or the Council.

Question 47
B, a Chartered Accountant in practice is a partner in 3 firms. While printing his personal letter heads, B
gave the names of all the firms in which he is a partner.
Answer 47
Advertisement of Professional Attainments: Clause (7) of Part I of the First Schedule to the Chartered
Accountants Act, 1949 prohibits advertising of professional attainments or services of a member. It also
restrains a member from using any designation or expression other than that of a Chartered Accountant in
documents through which the professional attainments of the member would come to the notice of the
public. Even a member is not permitted to specify the date of setting up of practice or establishment of firm
on letterheads. However, there is no prohibition for printing names of all the three firms on the personal
letterheads in which a member holding Certificate of Practice is a partner.
Conclusion: Thus, B is not guilty of any misconduct under the Chartered Accountants Act, 1949.

Question 48
The offer document of a listed company in which Mr. D, a practicing Chartered Accountant is a director
mentions the name of Mr. D as a director along with his various professional attainments and spheres of
specialization.

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Answer 48
Advertisement of Professional Attainments: The Council of the ICAI has in a communication to members
stated that if a public company, in which a chartered accountant in practice is a director, issues a prospectus
or gives any announcement that gives descriptions about the Chartered Accountant’s expertise, specialization
and knowledge in any particular field, it shall constitute a misconduct under Clauses (6) and (7) of Part I of
the First Schedule to the Chartered Accountants Act, 1949. The Council has further stated that in such cases
the member concerned has to take necessary steps to ensure that such prospectus or public announcements
or public communications do not advertise his professional attainments and also that such prospectus or
public announcements or public communications do not directly or indirectly amount to solicitation of clients
for professional work by the members.
Conclusion: Thus, in the instant case, Mr. D would be held to be guilty of professional mis- conduct and liable
for disciplinary action.

Question 49
A Chartered Accountant in practice, empanelled as an Insolvency Professional (IP) has mentioned the same
on his visiting cards, letter heads and other communications also. A person residing in his neighbourhood,
has filed a complaint for professional misconduct against the said member for such mention of IP.
Answer 49
Using Designation of Insolvency Professional: As per Clause (7) of Part I of First Schedule to the Chartered
Accountants Act, 1949, a CA in practice is deemed to be guilty of professional misconduct if he (i) advertises
his professional attainments or services or (ii) uses any designation or expressions other than ‘Chartered
Accountant” on professional documents, visiting cards, letter heads or sign boards unless it be a degree of a
university established by law in India or recognized by the Central Government or a title indicating
membership of the ICAI or of any other institution that has been recognized by the Central Government or
may be recognized by the council.
Here, a Chartered Accountant empaneled as IP (Insolvency Professional) can mention “Insolvency
Professional” on his visiting cards, letter heads and other communication, as this is a title recognized by the
Central Government in terms of Clause 7 of Part 1 of First Schedule to the Chartered Accountants Act, 1949.
Conclusion: Thus, complaint of neighbor is not enforceable/ valid.

Question 50
Mr. X, a Chartered Accountant accepted his appointment as tax auditor of a firm under Section 44AB, of
the Income-tax Act, and commenced the tax audit within two days of his appointment since the client was
in a hurry to file Return of Income before the due date. After commencing the audit, Mr. X realised his
mistake of accepting this tax audit without sending any communication to the previous tax auditor. In
order to rectify his mistake, before signing the tax audit report, he sent a registered post to the previous
auditor and obtained the postal acknowledgement. Will Mr. X be held guilty under the Chartered
Accountants Act?
Answer 50
Communication with the Previous Auditor: As per Clause (8) of Part I of First Schedule to the Chartered
Accountants Act, 1949, Mr. X will be held guilty since he has accepted the tax audit, without first
communicating with the previous auditor in writing. The object of the incoming auditor communicating in
writing with the retiring auditor is to ascertain whether there are any circumstances which warrant him not
to accept the appointment, for example, whether the previous auditor has been changed on account of
having qualified the report or he had expressed a wish not to continue on account of something inherently
wrong with the administration of the business. The retiring auditor may even give out information regarding
the condition of the accounts of the client or the reason that impelled him to qualify his report. Under all
circumstances, it would be essential for the incoming auditor to carefully consider the facts before deciding
whether or not he should accept the audit. As a matter of professional courtesy and professional obligation
it is necessary for the new auditor appointed to communicate with such earlier auditor.
Conclusion: Therefore, Mr. X will be held guilty of professional misconduct.

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Question 51
W, a Chartered Accountant had sent letters under certificate of posting to the previous auditor informing
him his appointment as an auditor before the commencement of audit by him.
Answer 51
Communication with the Previous Auditor: Clause (8) of Part I of the First Schedule to the Chartered
Accountants Act, 1949 requires communication by the incoming auditor with the previous auditor before
accepting a position by him. The Council of the Institute has taken the view that a mere posting of a letter
“under certificate of posting” is not sufficient to establish communication with the retiring auditor unless
there is some evidence to show that the letter has in fact reached the person communicated with. A
Chartered Accountant who relies solely upon a letter posted “under certificate of posting” therefore does so
at his own risk. Since the letters were sent by “W” to the previous auditor informing him of his appointment
as an auditor before the commencement of audit by him under Certificate of Posting is not sufficient to prove
communication with the retiring auditor. In the opinion of the Council, communication by a letter sent
“Registered Acknowledgement Due” or by hand against a written acknowledgement would in the normal
course provide positive evidence.
Conclusion: Hence “W” was guilty of professional misconduct under Clause (8) of Part I of First Schedule to
the Chartered Accountants Act, 1949.

Question 52
CA Raja was appointed as the Auditor of Castle Ltd. for the year 2022-23. Since he declined to accept the
appointment, the Board of Directors appointed CA Rani as the auditor in the place of CA Raja, which was
also accepted by CA Rani.
Answer 52
Appointment of Auditor by Board: Board can appoint the auditor in the case of casual vacancy under section
139(8) of the Companies Act, 2013. The non-acceptance of appointment by CA. Raja does not constitute a
casual vacancy to be filled by the Board. In this case, it will be deemed that no auditor was appointed in the
AGM.
Further, as per Section 139(10) of the Companies Act, 2013 when at any annual general meeting, no auditor
is appointed or re-appointed, the existing auditor shall continue to be the auditor of the company. The
appointment of the auditor by the Board is defective in law.
Clause (9) of Part I of First Schedule to the Chartered Accountants Act, 1949 states that a chartered
accountant is deemed to be guilty of professional misconduct if he accepts an appointment as auditor of a
company without first ascertaining from it whether the requirements of section 225 of the Companies Act,
1956 (now Section 139, 140 and 142 read with Section 141 of the Companies Act, 2013), in respect of such
appointment have been fully complied with.
Conclusion: Hence, CA. Rani is guilty of professional misconduct since she accepted the appointment without
verification of statutory requirements.

Question 53
Mr. X is a Chartered Accountant accepted the appointment as Statutory Auditor of the Company ABC Ltd.
without communicating with the previous auditor before accepting the audit. He also failed to ascertain
the compliance of requirement of Section 139 and 140 of the Companies Act, 2013 in respect of the
appointments have been duly complied with.
Answer 53
Communication by incoming auditor with previous auditor: Clause (8) of Part I of the First Schedule to the
Chartered Accountants Act, 1949 requires communication by the incoming auditor with the previous auditor
before accepting a position by him.
Clause (9) of Part I of the First Schedule to the Chartered Accountants Act, 1949, provides that a member in
practice shall be deemed to be guilty of professional misconduct if he accepts an appointment as auditor of
a company without first ascertaining from it whether the requirements of Section 225 of the Companies Act,
1956 (now Section 139 and 140 of the Companies Act, 2013), in respect of such appointment have been duly
complied with.
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Under this clause it is obligatory on the incoming auditor to communicate with previous auditor and ascertain
from the Company that the appropriate procedure in the matter of his appointment has been duly complied
with so that no shareholder or retiring auditor may, at a later date, challenge the validity of such appointment.
In this case Mr. X accepted the appointment as Statutory Auditor of the Company ABC Ltd. without
communicating with the previous auditor. Further, he accepted the appointment without first ascertaining
whether the requirement of Section 139 and 140 of the Companies Act, 2013 in respect of the appointments
have been duly complied with.
Conclusion: Therefore, Mr. X is liable for misconduct under clause 8 and Clause 9 since he accepted the
appointment without communicating with previous auditor as well as for not verifying the compliance of
statutory requirements.

Question 54
Mr. P a practicing chartered accountant acting as liquidator of AB & Co. charged his professional fees on
percentage of the realization of assets.
Answer 54
Restriction on fees based on a Percentage: According to Clause (10) of Part I of First Schedule to the
Chartered Accountants Act, 1949, a Chartered Accountant in practice shall be deemed to be guilty of
professional misconduct if he charges or offers to charge, accepts or offers to accept in respect of any
professional employment fees which are based on a percentage of profits or which are contingent upon the
findings, or results of such employment, except as permitted under any regulations made under this Act.
However, CA Regulation allow the Chartered Accountant in practice to charge the fees in respect of any
professional work which are based on a percentage of profits, or which are contingent upon the findings or
results of such work, in the case of a receiver or a liquidator, and the fees may be based on a percentage of
the realization or disbursement of the assets.
In the given case, Mr. P, a practicing Chartered Accountant, has acted as liquidator of AB & Co. and charged
his professional fees on percentage of the realisation of assets.
Conclusion: Therefore, Mr. P shall not be held guilty of professional misconduct as he is allowed to charge
fees on percentage of the realisation of assets being a liquidator.

Question 55
A chartered accountant holding certificate of practice and having four articled clerks registered under him
accepts appointment as a full-time lecturer in a college. Also, he becomes a partner with his brother in a
business. Examine his conduct in the light of Chartered Accountants Act, 1949 and the regulations
thereunder.
Answer 55
Specific Permission to be Obtained: Clause (11) of Part I of the First Schedule to the Chartered Accountants
Act, 1949 debars a chartered accountant in practice from engaging in any business or occupation other than
the profession of chartered accountancy unless permitted by the Council of the Institute so to engage. This
clause, in effect, has empowered the Council of the Institute to permit chartered accountants in practice to
engage in any other business or occupation considered fit and proper. Accordingly, the Council had
formulated Regulations 190A and 191 to the Chartered Accountants Regulations, 1988 to provide a basis for
considering applications of chartered accountants seeking permission to engage in other business or
occupation. A member can accept full- time lecturer-ship in a college only after obtaining the specific and
prior approval of the Council as also becoming a partner in a business with his brother would require specific
permission.
Conclusion: Thus, the chartered accountant is liable for professional misconduct since he failed to obtain
specific and prior approval of the Council in each case.

Question 56
Mr. A, a practicing Chartered Accountant, took over as the executive chairman of Software Company on
1.4.2023. On 10.4.2023 he applied to the Council for permission.

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Answer 56
Specific Permission to be Obtained: 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.
In the instant case, Mr. A took over as the executive chairman on 01.04.2023 and applied for permission on
10.04.2023. On the basis of these facts, he was engaged in other occupation between the period 01.04.2023
and 10.04.2023, without the permission of the Council.
Conclusion: Therefore, Mr. A is guilty of professional misconduct in terms of Clause (11) of Part I of First
Schedule to the Chartered Accountants Act, 1949.

Question 57
CA. Prabhu is a leading income tax practitioner and consultant for derivative products. He resides in
Mumbai near to the ABC commodity stock exchange and does trading in commodity derivatives. Every
day, he invests nearly 50% of his time to settle the commodity transactions. Is C.A. Prabhu liable for
professional misconduct?
Answer 57
Engaging into a Business: As per Clause (11) of Part I of First Schedule of Chartered Accountants Act, 1949, 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.
However, the Council has granted general permission to the members to engage in certain specific
occupation. In respect of all other occupations specific permission of the Institute is necessary.
In this case, CA. Prabhu is engaged in the occupation of trading in commodity derivatives which is not covered
under the general permission.
Conclusion: Hence, specific permission of the Institute has to be obtained otherwise he will be deemed to be
guilty of professional misconduct under Clause (11) of Part I of First Schedule of Chartered Accountants Act,
1949.

Question 58
S, a practicing chartered accountant gives power of attorney to an employee chartered accountant to sign
reports and financial statements on his behalf.
Answer 58
Power of Signing Reports and Financial Statements: Under Clause (12) of Part I of First Schedule to the
Chartered Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of professional
misconduct if he allows a person not being a member of the Institute in practice or a member not being his
partner to sign on his behalf or on behalf of his firm, any balance sheet, profit and loss account, report or
financial statements.
This clause read in conjunction with Section 26 of the Chartered Accountants Act, 1949 stipulates that no
person other than the member of the institute shall sign any document on behalf of a Chartered Accountant
in practice or a firm of Chartered Accountants in his or its professional capacity.
The term ‘Financial Statement’ for this purpose would cover an examination of the accounts or financial
statements given under a statutory enactment or otherwise.
Further, Clause (1) of Part II of the Second Schedule to the Chartered Accountants Act, 1949 states that a
member of the Institute, whether in practice or not, shall be deemed to be guilty of professional misconduct,
if he contravenes any of the provisions of this Act or the regulations made there under or any guidelines
issued by the Council.
Conclusion: Accordingly, S is guilty of professional misconduct under Clause (12) of Part I of First Schedule
and also under Clause (1) of Part II of Second Schedule for contravening Section 26.

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 CA SANIDHYA SARAF 19.27

Question 59
CA. Smart, a practicing Chartered Accountant was on Europe tour between 15-9-23 and 25-9-23. On 18-9-
23 a message was received from one of his clients requesting for a stock certificate to be produced to the
bank on or before 20-9-23. Due to urgency, CA. Smart directed his assistant, who is also a Chartered
Accountant, to sign and issue the stock certificate after due verification, on his behalf.
Answer 59
Allowing a Member Not Being a Partner to Sign Certificate: As per Clause (12) of Part I of the First Schedule
to the Chartered Accountants Act, 1949, a Chartered Accountant in practice is deemed to be guilty of
professional misconduct “if he allows a person not being a member of the Institute in practice or a member
not being his partner to sign on his behalf or on behalf of his firm, any balance sheet, profit and loss account,
report or financial statements”.
In this case, CA. Smart allowed his assistant who is not a partner but a member of the Institute of Chartered
Accountants of India to sign stock certificate on his behalf and thereby commits misconduct.
Conclusion: Thus, CA. Smart is guilty of professional misconduct under Clause (12) of Part I of First Schedule
to the Chartered Accountants Act, 1949.

Question 60
Mr. 'C', a Chartered Accountant holds a certificate of practice while in employment also, recommends a
particular lawyer to his employer in respect of a case. The lawyer, out of the professional fee received from
employer paid a particular sum as referral fee to Mr. 'C'.
Answer 60
Referral Fee from Lawyer: According to Clause (2) of Part II of First Schedule of the Chartered Accountant
Act, 1949, a member of the Institute(other than a member in practice) shall be guilty of professional
misconduct, if he being an employee of any company, firm or person accepts or agrees to accept any part of
fee, profits or gains from a lawyer, a chartered accountant or broker engaged by such company, firm or person
or agent or customer of such company, firm or person by way of commission or gratification.
In the present case, Mr. C who beside holding a certificate of practice, is also an employee and by referring a
lawyer to the company in respect of a case, he receives a particular sum as referral fee from the lawyer out
of his professional fee.
Conclusion: Therefore, Mr. C is guilty of professional misconduct by virtue of Clause (2) of Part II of First
schedule.

Question 61
Mr. 'G', while applying for a certificate of practice, did not fill in the columns which solicit information
about his engagement in other occupation or business, while he was indeed engaged in a business.
Answer 61
Disclosure of Information: As per Clause (2) of Part III of First Schedule to the Chartered Accountants Act,
1949 a member shall be held guilty if a Chartered Accountant, in practice or not, does not supply the
information called for, or does not comply with the requirements asked for, by the Institute, Council or any
of its Committees, Director (Discipline), Board of Discipline, Disciplinary Committee, Quality Review Board or
the Appellate Authority;
In the given case, Mr. “G”, a Chartered Accountant while applying for a certificate of practice, did not fill in
the columns which solicit information about his engagement in other occupation or business, while he was
indeed engaged in a business. Details of engagement in business need to be disclosed while applying for the
certificate of practice as it was the information called for in the application, by the Institute.
Conclusion: Thus, Mr. G will be held guilty for professional misconduct under the Clause (2) of Part III of First
Schedule of the Chartered Accountants Act, 1949.

Question 62
Mr. X, a Chartered Accountant, employed as a paid Assistant with a Chartered Accountant firm , leaves the
services of the firm on 31st December, 2023. Despite many reminders from ICAI he fails to reply regarding
the date of leaving the services of the firm.
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 CA SANIDHYA SARAF 19.28

Answer 62
Failed to Supply Information Called For: As per Clause (2) of Part III of the First Schedule to the Chartered
Accountants Act, 1949, a member, whether in practice or not, will be deemed to be guilty of professional
misconduct if he does not supply the information called for, or does not comply with the requirements asked
for, by the Institute, Council or any of its Committees, Director (Discipline), Board of Discipline, Disciplinary
Committee, Quality Review Board or the Appellate authority.
Conclusion: Thus, in the given case, Mr. X has failed to reply to the letters of the Institute asking him to
confirm the date of leaving the service as a paid assistant. Therefore, he is held guilty of professional
misconduct as per Clause (2) of Part III of the First Schedule to the Chartered Accountants Act, 1949.

Question 63
YKS & Co., a proprietary firm of Chartered Accountants was appointed as a concurrent auditor of a bank.
YKS, the proprietor, used his influence to get a loan and thereafter failed to repay the loan.
Answer 63
Disrepute to the Profession: This is a case which is covered under the expression in other misconduct of the
Chartered Accountants Act, 1949. As per Clause (2) of Part IV of First Schedule to the Chartered Accountants
Act, 1949, a member of the Institute, whether in practice or not, shall be deemed to be guilty of other
misconduct, if he, in the opinion of the Council, brings disrepute to the profession or the Institute as a result
of his action whether or not related to his professional work. Here the Chartered Accountant is expected to
maintain the highest standards of integrity even in his personal affairs and any deviation from these standards
calls for disciplinary action.
In the present case, YKS & Co, being a concurrent auditor used his position to obtain the funds and failed to
repay the same to the bank. This brings disrepute to the profession of a Chartered Accountant. This act of
YKS & Co is not pardonable.
Conclusion: Therefore, YKS & Co will be held guilty of other misconduct under Clause (2) of Part IV of First
Schedule to the Chartered Accountants Act, 1949.

Question 64
Mr. P, a Chartered Accountant was invited by the Chamber of Commerce to present a paper in a symposium
on the issues facing Indian Leather Industry. During the course of his presentation, he shared some of the
vital information of his client’s business under the impression that it will help the Nation to compete with
other countries at international level.
Answer 64
Disclosure of Client’s Information: Clause (1) of Part I of the Second Schedule to the Chartered Accountants
Act, 1949 deals with the professional misconduct relating to the disclosure of information by a chartered
accountant in practice relating to the business of his clients to any person other than his client without the
consent of his client or otherwise than as required by any law for the time being in force would amount to
breach of conduct. The Code of Ethics further clarifies that such a duty continues even after completion of
the assignment. The Chartered Accountant may however, disclose the information in case it is required as a
part of performance of his professional duties. In the given case, Mr. P has disclosed vital information of his
client’s business without the consent of the client under the impression that it will help the nation to compete
with other countries at International level.
Conclusion: Thus, it is a professional misconduct covered by Clause (1) of Part I of Second Schedule to the
Chartered Accountants Act, 1949.

Question 65
Mr. J, a Chartered Accountant during the course of audit of M/s XYZ Ltd. came to know that the company
has taken a loan of ₹ 10 lakhs from Employees Provident Fund. The said loan was not reflected in the
books of account. However, the auditor ignored this information in his report.
Answer 65
Failure to Disclose Material Facts: As per Clause (5) of Part I of Second Schedule to the Chartered Accountants
Act, 1949, a chartered Accountant in practice will be held liable for misconduct if he fails to disclose a material
Chapter 19 Professional Ethics and Liabilities of Auditors
 CA SANIDHYA SARAF 19.29

fact known to him, which is not disclosed in the financial statements but disclosure of which is necessary to
make the financial statements not misleading. In this case, Mr. J has come across information that a loan of
₹ 10 lakhs has been taken by the company from Employees Provident Fund. This is contravention of Rules
and the said loan has not been reflected in the books of accounts. Further, this material fact has also to be
disclosed in the financial statements. The very fact that Mr. J has failed to disclose this fact in his report, he is
attracted by the provisions of professional misconduct under Clause (5.
Conclusion: Mr. J will be liable of professional misconduct under Clause (5) of Part I of Second Schedule to
the Chartered Accountants Act, 1949.

Question 66
A practicing Chartered Accountant was appointed to represent a company before the tax authorities. He
submitted certain information and explanations to the authorities on behalf of his clients, which were
found to be false and misleading.
Answer 66
Submitting Information as Authorised Representative: As per Clause (5) of Part I of Second Schedule to the
Chartered Accountant Act, 1949, if a member in practice fails to disclose a material fact known to him which
is not disclosed in a financial statement, but disclosure of which is necessary to make the financial statement
not misleading, where he is concerned with that financial statement in a professional capacity, he will be held
guilty under Clause (5). As per Clause (6) of Part I of Second Schedule if he fails to report a material
misstatement known to him to appear in a financial statement with which he is concerned in a professional
capacity, he will be held guilty under Clause (6).
In given case, the Chartered Accountant had submitted the statements before the taxation authorities. These
statements are based on the data provided by the management of the company. Although the statements
prepared were based on incorrect facts and misleading, the Chartered Accountant had only submitted them
acting on the instructions of his client as his authorized representative.
Conclusion: Hence the Chartered Accountant would not be held liable for professional misconduct.

Question 67
CA C who conducted statutory audit of a Haryana daily ‘New Era’ certified the circulation figures based on
Management Information System Report (M.I.S Report) without examining the books of Account.
Answer 67
Failed to exercise Due Diligence: According to Clause (7) of Part I of Second Schedule of Chartered
Accountants Act, 1949, a Chartered Accountant in practice is 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”.
In the instant case, CA C did not exercise due diligence and is grossly negligent in the conduct of his
professional duties since he certified the circulation figures without examining the books of accounts.
To ascertain the number of paid copies verification of remittances from the agents, credit allowed to the
agents for unsold copies returned, examination of books of account is essential. Further certification of
circulation figures based on statistical information without cross verification with financial records amounts
to gross negligence and failure to exercise due diligence.
Conclusion: Hence, CA C is guilty of professional misconduct as per Clause (7) of Part I of Second Schedule of
Chartered Accountants Act, 1949.

Question 68
Mr. D, a practicing Chartered Accountant, did not complete his work relating to the audit of the accounts
of a company and had not submitted his audit report in due time to enable the company to comply with
the statutory requirements.
Answer 68
Not Exercising Due Diligence: According to Clause (7) of Part I of Second Schedule of Chartered Accountants
Act, 1949, a Chartered Accountant in practice is 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.
It is a vital clause which unusually gets attracted whenever it is necessary to judge whether the accountant
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 CA SANIDHYA SARAF 19.30

has honestly and reasonably discharged his duties. The expression negligence covers a wide field and extends
from the frontiers of fraud to collateral minor negligence.
Where a Chartered Accountant had not completed his work relating to the audit of the accounts a company
and had not submitted his audit report in due time to enable the company to comply with the statutory
requirement in this regard. He was guilty of professional misconduct under Clause (7).
Since Mr. D has not completed his audit work in time and consequently could not submit audit report in due
time and consequently, company could not comply with the statutory requirements.
Conclusion: Therefore, the auditor is guilty of professional misconduct under Clause (7) of Part I of the Second
Schedule to the Chartered Accountants Act, 1949.

Question 69
Mr. A, a Chartered Accountant was the auditor of 'A Limited'. During the financial year 2022-23, the
investment appeared in the Balance Sheet of the company of ₹ 12 lakh and was the same amount as in the
last year. Later on, it was found that the company' s investments were only ₹ 25,000, but the value of
investments was inflated for the purpose of obtaining higher amount of Bank loan.
Answer 69
Grossly Negligent in Conduct of Duties: As per Part I of Second Schedule to the Chartered Accountants Act,
1949, a Chartered Accountant in practice shall be deemed to 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 chartered accountant in practice, under Clause (2); does not exercise
due diligence, or is grossly negligent in the conduct of his professional duties, under Clause (7); or fails to
obtain sufficient information which is necessary for expression of an opinion or its exceptions are sufficiently
material to negate the expression of an opinion, under Clause (8).
The primary duty of physical verification and valuation of investments is of the management. However, the
auditor’s duty is also to verify the physical existence and valuation of investments placed, at least on the last
day of the accounting year. The auditor should verify the documentary evidence for the cost/value and
physical existence of the investments at the end of the year. He should not blindly rely upon the
Management’s representation.
In the instant case, such non-verification happened for two years. It also appears that auditors failed to
confirm the value of investments from any proper source. In case auditor has simply relied on the
management’s representation, the auditor has failed to perform his duty.
Conclusion: Accordingly, Mr. A, will be held liable for professional misconduct under Clauses (2), (7) and (8)
of Part I of the Second Schedule to the Chartered Accountants Act, 1949.

Question 70
A charitable institution entrusted ₹ 10 lakhs with its auditor’s M/s R & Co., a Chartered Accountant firm,
to invest in a specified security. The auditors deposited it in their Savings bank account and no investment
was made in the next three months.
Answer 70
Failure to Keep Money in Separate Bank Account: If a Chartered Accountant in practice fails to keep moneys
of his clients in a separate bank account or fails to use such moneys for purposes for which they are intended
then his action would amount to professional misconduct under Clause (10) of Part I of Second Schedule to
the Chartered Accountants Act, 1949. In the course of his engagement as a professional accountant, a
member may be entrusted with moneys belonging to his client. If he should receive such funds, it would be
his duty to deposit them in a separate banking account, and to utilize such funds only in accordance with the
instructions of the client or for the purposes intended by the client.
Conclusion: In the given case by depositing the client’s money by M/s R & Co., a firm of Chartered
Accountants, in their own savings bank account, the auditors have committed a professional misconduct.
Hence in the given case, M/s R & Co. will be held guilty of professional misconduct.

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 CA SANIDHYA SARAF 19.31

Question 71
L, a chartered accountant did not maintain books of account for his professional earnings on the ground
that his income is less than the limits prescribed u/s 44AA of the Income Tax Act, 1961.
Answer 71
Maintenance of Books of Account: As per the Council General Guidelines 2008, under Chapter 5 on
maintenance of books of accounts, it is specified that if a chartered accountant in practice or the firm of
Chartered Accountants of which he is a partner fails to maintain and keep in respect of his/its professional
practice, proper books of account including the Cash Book and Ledger, he is deemed to be guilty of
professional misconduct. Accordingly, it does not matter whether section 44AA of the Income Tax Act, 1961
applies or not.
Conclusion: Hence, Mr. L is guilty of professional misconduct.

Question 72
A member of the institute shall not accept in a year more than the specified number of tax audits under
section 44AB of the Income Tax Act.
Mr. G is a partner in M/s. XYZ & Co., a firm of Chartered Accountants with 6 partners.
During the assessment year 2022-23, Mr. G alone had signed 290 tax audit reports consisting of both
corporate and non-corporate assesses.
Answer 72
Ceiling limit for signing the Tax Audit Reports: As per Council General Guidelines 2008, a member of the
Institute in practice shall not accept, in a financial year, more than the “specified number of tax audit
assignments” under Section 44AB of the Income-tax Act, 1961. It is also provided further that where any
partner of a firm of Chartered Accountants in practice accepts one or more tax audit assignments in his
individual capacity, the total number of such assignments which may be accepted by him shall not exceed the
“specified number of tax audit assignments” in the aggregate.
In the case of firm of Chartered Accountants in practice “the specified number of tax audit assignments”
means, 60 tax audit assignments per partner in the firm, in a financial year, whether in respect of corporate
or non-corporate assesses.
Further, as per clarification issued by the Institute on Tax Audit Assignments, tax audit reports may be signed
by the partners in any manner whosoever in accordance with specified audit limits. Thus, one partner can
individually sign all the tax audit reports subject to specified tax audit assignment limits on behalf of all the
partners in the firm of Chartered Accountants in practice or all the partners of the firm can collectively sign
the tax audit reports.
In the instant case, there are 6 partners in M/s XYZ & Co., a Chartered Accountants firm, accordingly, specified
ceiling limit for the firm will be (60 tax audit assignments per partner X 6 partners) = 360. Therefore, all the 6
partners of the firm can collectively sign 360 tax audit reports. This maximum limit of 360 tax audit
assignments may be distributed between the partners in any manner whatsoever. For instance, 1 partner can
individually sign 360 tax audit reports in case remaining 5 partners are not signing any tax audit report.
Assuming Mr. G has signed 290 tax audit reports consisting of both corporate and non-corporate assesse on
behalf of firm and remaining partners are signing audit reports within the specified number of tax audit
assignments u/s 44AB i.e. up to 70.
Conclusion: Hence, Mr. G shall not be deemed to guilty of professional misconduct provided total number of
tax audit reports on behalf of firm do not exceeds 360.

Question 73
Mr. C accepted the statutory audit of M/s PSU Ltd., whose net worth is negative for the year 2022-23. The
audit was to be conducted for the year 2023-24. The audited accounts for the year 2023-24 showed liability
for payment of tax audit fees of ₹ 15,000 in favour of Mr. E, the previous auditor.
Answer 73
Accepting Appointment as an Auditor: As per Chapter 7 of Council General Guidelines 2008, a member of
the Institute of Chartered Accountants of India in practice shall be deemed to be guilty of professional
misconduct if he accepts appointment as auditor of an entity in case the undisputed audit fee of another
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 CA SANIDHYA SARAF 19.32

chartered accountant for carrying out the statutory audit under Companies Act or various other statutes has
not been paid.
As per the proviso, such prohibition shall not apply in case of a sick unit where a sick unit is defined to mean
“where the net worth is negative”.
Conclusion: In the instant case, though the undisputed fees are unpaid, Mr. C would still not be guilty of
professional misconduct since the M/s PSU Ltd. is a sick unit having negative net worth for the year 2022-23.

Question 74
A is the auditor of Z Ltd., which has a turnover of ₹ 200 crore. The audit fee for the year is fixed at ₹ 50
lakhs. During the year, the company offers A an assignment of management consultancy within the
meaning of Section 2(2)(iv) of the CA Act, 1949 for a remuneration of ₹ 1 crore. A seeks your advice on
accepting the assignment.
Answer 74
Appointment as a Statutory Auditor of a PSUs’/Govt Company(ies)/Listed Company(ies) and Other Public
Company(ies): As per the Council General Guidelines 2008, under Chapter IX on appointment as statutory
auditor a member of the Institute in practice shall not accepts the appointment as a statutory auditor of a
PSUs’/Govt company(ies)/Listed company(ies) and other public company(ies) having a turnover of ₹ 50 crores
or more in a year and where he accepts any other work(s) or assignment(s) or service(s) in regard to same
undertaking(s) on a remuneration which in total exceeds the fee payable for carrying out the statutory audit
of the same undertaking. For this purpose, the other work/services include Management Consultancy and all
other professional services permitted by Council excluding audit under any other statute, Certification work
required to be done by the statutory auditor and any representation before an authority.
Conclusion: In view of the above position it would be a misconduct on A’s part if he accepts the management
consultancy assignment for a fee of ₹ 1 crore.

Question 75
D, who conducts the tax audit u/s 44AB of the Income Tax Act, 1961 of M/s ABC, a partnership firm, has
received the audit fees of ₹ 2,50,000 on progressive basis in respect of the tax audit for the year ended
31.3.2023. The audit report was, however, signed on 25.5.2023.
Answer 75
Entire Audit Fees Received in Advance: As per Chapter X of Council General Guidelines, 2008 a member of
the Institute in practice or a partner of a firm in practice or a firm shall not accept appointment as auditor of
a concern while indebted to the concern or given any guarantee or provided any security in connection with
the indebtedness of any third person to the concern, for limits fixed in the statute and in other cases for
amount exceeding ₹ 1,00,000/-.
However, the Research Committee of the ICAI has expressed the opinion that where in accordance with the
terms of engagement of auditor by a client, the auditor recovers his fees on a progressive basis as and when
a part of the work is done without waiting for the completion of the whole job, he cannot be said to be
indebted to the company at any stage.
Conclusion: In the instant case, Mr. D is appointed to conduct a tax audit u/s 44AB of the Income Tax Act,
1961. He has received the audit fees of ₹ 2,50,000 in respect of the tax audit for the year ended 31.3.2023
which is on progressive basis. Therefore, Mr. D will not be held guilty for misconduct.

Chapter 19 Professional Ethics and Liabilities of Auditors

CA SANIDHYA SARAF

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