AUDITING & ETHICS

CHAPTER-8
SOLUTION
MARKS 30

A1. In an audit of financial statements, the two broad approaches to the auditor's reporting
responsibilities regarding comparative information are:

(a) Corresponding figures: In this approach, the auditor's opinion on the financial statements
refers to the current period only.

(b) Comparative financial statements: In this approach, the auditor's opinion refers to each
period for which financial statements are presented.

The essential difference in audit reporting between these approaches is that for corresponding
figures, the auditor's opinion is focused on the current period, while for comparative financial
statements, the auditor's opinion covers each period presented in the financial statements.

As per SA 710, the objectives of the auditor are:

(a) To obtain sufficient appropriate audit evidence about whether the comparative information
included in the financial statements has been presented, in all material respects, in accordance
with the requirements for comparative information in the applicable financial reporting
framework; and

(b) To report in accordance with the auditor’s reporting responsibilities.

(5 marks)

GMTESTSERIES.COM®
A2. Appointing joint auditors like CA Partners and CA Experts for the audit of ABC Corporation's
financial statements offers several advantages, including:

(i) Sharing of expertise.

(ii) Advantage of mutual consultation.

(iii) Lower workload.

(iv) Better quality of performance.

(v) Improved service to the client.

(vi) In respect of multi-national companies, the work can be spread using the expertise of the
local firms which are in a better position to deal with detailed work and the local laws and
regulations.

(vii) Lower staff development costs.

(viii) Lower costs to carry out the work.

(ix) A sense of healthy competition towards a better performance.

Appointing joint auditors like CA Partners and CA Experts for the audit of ABC Corporation's
financial statements several disadvantages, including:

(i) The fees being shared.

(ii) Psychological problem where firms of different standing are associated in the joint audit.

(iii) General superiority complex of some auditors.

(iv) Problems of co-ordination of the work.

(v) Areas of work of common concern being neglected.

(vi) Uncertainty about the liability for the work done.

GMTESTSERIES.COM®
In summary, while appointing joint auditors like CA Partners and CA Experts can offer
advantages such as enhanced expertise and resources, there are also challenges to consider,
including coordination difficulties and potential additional costs. The decision to appoint joint
auditors should be based on a careful assessment of the specific needs and circumstances of
the audited company.

(5 marks)

A3. In accordance with CARO, 2020, the examination and reporting on the company's Property,
Plant, and Equipment (PPE) and intangible assets involve several key points:

Maintaining Proper Records: I would assess whether the company is maintaining proper
records that provide full particulars, including quantitative details and the location of PPE and
intangible assets

Physical Verification: I would verify whether the management of the company has conducted
physical verification of the PPE and intangible assets at reasonable intervals. If any material
discrepancies are identified during this verification, I would assess whether they have been
adequately addressed in the books of account.

Title Deeds for Immovable Properties: I would scrutinize the title deeds for all immovable
properties disclosed in the financial statements. In cases where the properties are not held in
the name of the company, I would gather details about these properties, including their
description, carrying value, the individuals holding them (promoter, director, relative, or
employee), the duration of ownership, and reasons for not being held in the company's name.
Additionally, I would assess if any disputes exist regarding these properties.

Revaluation of Assets: I would investigate whether the company has revalued its PPE and
intangible assets during the year. If revaluation has occurred, I would determine if it was
conducted by a Registered Valuer. In cases where the revaluation resulted in a change of 10%

GMTESTSERIES.COM®
or more in the aggregate net carrying value of each class of assets, I would specify the amount
of change.

Benami Property Proceedings: I would inquire whether any legal proceedings have been
initiated or are pending against the company under the Benami Transactions (Prohibition) Act,
1988, and its related rules. If such proceedings exist, I would verify if the company has
appropriately disclosed the details in its financial statements.

In my audit report, I would address each of these points as required by CARO, 2020, providing a
comprehensive assessment of the company's compliance and adherence to the specified
reporting criteria.

(5 marks)

A4. In accordance with Standard on Auditing (SA) 705, "Modifications to the Opinion in the
Independent Auditor’s Report," there are three types of modified opinions that an auditor may
issue, each with its own characteristics and circumstances for use:

1. Qualified Opinion:

Description: A qualified opinion is issued when the auditor, based on the audit evidence
obtained, concludes that there are misstatements in the financial statements that are material
but not pervasive.

Circumstances: This opinion is used when the auditor has identified material misstatements in
the financial statements, but these misstatements do not have a widespread or pervasive
impact on the financial statements as a whole. The auditor believes that the financial
statements are still reliable, except for the identified material misstatements.

2. Adverse Opinion:

GMTESTSERIES.COM®
Description: An adverse opinion is expressed when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements in the financial statements, whether
individually or in the aggregate, are both material and pervasive.

Circumstances: This opinion is used when the auditor finds that the misstatements in the
financial statements are not only material but also have a widespread and pervasive impact
throughout the financial statements. In other words, the financial statements are not reliable
due to the significant and widespread nature of the misstatements.

3. Disclaimer of Opinion:

Description: A disclaimer of opinion is issued when the auditor is unable to obtain sufficient
appropriate audit evidence on which to base an opinion, and the auditor concludes that the
potential effects of undetected misstatements, if any, could be both material and pervasive.

Circumstances: This opinion is used when the auditor faces significant limitations in conducting
the audit, preventing them from obtaining the necessary audit evidence to form an opinion on
the financial statements. The auditor believes that there is a possibility of material and
widespread misstatements, but they cannot assess the extent or impact due to the limitations
encountered.

These three types of modified opinions allow auditors to clearly convey the reliability and
accuracy of financial statements when deviations from a standard unmodified opinion are
necessary due to identified misstatements or limitations in audit procedures.

(5 marks)

A6. MCQS

1. Answer: C) Verifying the accuracy of the financial data in all supporting documents.

GMTESTSERIES.COM®
Explanation: While the auditor is responsible for ensuring the accuracy and reliability of the
financial statements, the specific evaluations mentioned typically focus on disclosure adequacy,
policy consistency, reasonableness of estimates, relevance, reliability, comparability,
understandability, and appropriate terminology. The accuracy of financial data is indeed
essential but is generally addressed through various audit procedures and not typically
considered among these specific evaluations.

2. Answer: A) Report the matter as a violation of CARO, 2020, since short-term funds were used
for a long-term purpose.

Explanation:Clause (ix) (d) of CARO, 2020 requires auditors to report whether funds raised on a
short-term basis have been utilized for long-term purposes. In this case, even though the
company raised funds for working capital requirements, it used ₹1 crore for an investment in an
effluent treatment plant, which is essentially a long-term purpose. This action is in violation of
CARO, as short-term funds should not be diverted for long-term purposes without proper
disclosure and compliance with regulatory requirements. Therefore, Mr. Raj should report the
matter as a violation of CARO, 2020, to ensure transparency and adherence to financial
reporting standards.

3. Answer: B) To draw users' attention to matters that are fundamental to their understanding
of the financial statements.

Explanation: Option B accurately represents the objective of including an Emphasis of Matter

GMTESTSERIES.COM®
4. The correct option is (a): Statement 1 is correct.

Explanation:

The auditor's report shall indeed be signed by the auditor.

The report is typically signed by the auditor in his personal name to indicate his responsibility
for the audit opinion and the content of the report.

An "Other Matter" paragraph, on the other hand, is a paragraph included in the auditor's report
when necessary to provide additional information or explanations regarding specific matters
related to the audit. It is a part of the auditor's report, not separate from it.

5. C) The principal auditor is the primary auditor responsible for reporting on the financial
information of an entity when it includes information from one or more components audited by
another auditor. The other auditor is responsible for reporting on the financial information of
those individual components.

Reason:

The terms "principal auditor" and "other auditor" are used in the context of group audits or
audits of entities with multiple components. The principal auditor is responsible for the overall
audit of the entity, which may include multiple components. The other auditor, on the other
hand, is responsible for auditing specific components within the entity. This division of
responsibilities ensures that all aspects of the entity's financial information are properly
examined, and the results are consolidated into a single audit report by the principal auditor.
Option (C) accurately describes this relationship between the principal auditor and other
auditor.

(2×5 = 10 marks)

GMTESTSERIES.COM®
GMTESTSERIES.COM®