AUDITING & ETHICS

Details: Test 8 (Ch-8)

Question Paper

Total Marks: - 35

Q1. M/s R & Co. are the Statutory Auditors of Vision Ltd., a company engaged in the production
of electronic components. The auditor has finalized the audit and is in the process of forming an
opinion on the financial statements for the fiscal year 2021-2022. CA J, the engagement
partner, needs to determine whether the financial statements as a whole are free from
material misstatements, whether arising from fraud or error. What factors should he consider
to reach that conclusion?

(4 MARKS)

Q2. You are the statutory auditor of B Co. Ltd., listed company, and have audited the financial
statements for the financial year 2023-24. The company has included comparative financial
information in the financial statements prepared for the current financial year 2024-25. As an
auditor, you want to obtain sufficient appropriate audit evidence that the comparative financial
information has been presented, in all material respects, in accordance with the requirements
of the applicable financial reporting framework. List the audit procedures, as specified in the
relevant Auditing Standard, that you are required to follow for this purpose.

(5 MARKS)

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Q3. RST Ltd., an Indian manufacturing company specializing in electronic devices, appointed CA
Anjali as its statutory auditor for the financial year 2022-23. During the audit process, CA Anjali
discovered a significant issue related to RST Ltd.'s financing arrangements. The financing
arrangements had expired, and the outstanding amount was due for payment on March 31,
2023. Despite efforts, the company failed to renegotiate the financing terms or secure
replacement financing, leading to the consideration of filing for bankruptcy. However, this
critical information was not disclosed in the financial statements or the accompanying notes.
What opinion should CA Anjali express regarding RST Ltd.?

(5 MARKS)

Q4. ABC Ltd. is a listed company engaged in the manufacturing of consumer goods. During the
audit of the financial statements for the year ended March 31, 2023, CA Rahul, the statutory
auditor, discovered that the company's finance manager had misappropriated funds amounting
to ₹80 lakhs by circumventing internal controls. The finance manager had been colluding with
one of the company's suppliers to overstate the purchase invoices, and the excess amount was
being pocketed by the finance manager.

As the statutory auditor, what is CA Rahul's reporting responsibilities regarding this fraud under
the Companies Act, 2013?

(5 MARKS)

Q5. XYZ Limited is a construction company in India, engaged in executing construction contracts
for its clients. As of March 31, 2023, the company's financial statements show non-current
receivables outstanding amounting to ₹500 crore. These receivables represent claims raised by
the company against its clients due to cost overruns caused by delays, changes in work

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specifications, and related matters. The company's management, as stated in the notes to the
accounts, believes that these amounts are fully recoverable. CA. Rajesh, the auditor of the
company, has relied solely on management representations in this matter. He has also decided
to include this issue in an "Emphasis of Matter" paragraph in the audit report.

How do you view CA. Rajesh's decision to include the above matter in the "Emphasis of Matter"
Paragraph in the audit report?

(6 MARKS)

Q6. MCQS

1. "Before concluding the audit, there was a difference of opinion between the audit committee
and the auditors as to which among the following are the areas which the auditor should take
into account to determine "Key Audit Matter" as per SA 701:

(I) The effect on audit of significant transactions that took place in the FY.

(II) Areas of low risk as assessed and reported by management's expert.

(III) Significant auditor judgement relating to areas in the financials that involved significant
management judgement.

As per SA 701- Communicating Key audit matters in the Independent auditor's Report, which
among the above-mentioned areas should CA & Co. take into account to determine "Key Audit
Matter"?

a) (I) & (III)

b) (II) only

c) (I) & (II)

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d) (I), (II) & (III)

2. As per CARO, 2020, physical verification of inventory has been conducted at reasonable
intervals by the management and whether, in the opinion of the auditor, the coverage and
procedure of such verification by the management is appropriate; whether any discrepancies of
___ or more in the aggregate for each class of inventory were noticed and if so, whether they
have been properly dealt with in the books of account;

a) 5%

b) 10%

c) 1%

d) 20%

3. According to the definition of "pervasive" in the context of misstatements, which of the

a) Pervasive effects are confined to specific elements, accounts, or items of the financial
statements.

b) Pervasive effects are limited to disclosures and do not impact users' understanding of the
financial statements.

c) Pervasive effects represent or could represent a substantial proportion of the financial

d) Pervasive effects arise only when the auditor is unable to obtain sufficient appropriate audit
evidence due to management's restrictions.

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4. Which of the following is NOT listed as a disadvantage of appointing joint auditors in big
companies and corporations?

a) The fees being shared.

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

c) Improved service to the client.

d) Problems of co-ordination of the work.

5. In the context of auditing, who is defined as the auditor with responsibility for reporting on
the financial information of an entity when that financial information includes the financial
information of one or more components audited by another auditor?

a) Component auditor

b) Principal auditor

c) Other auditor

d) Internal auditor

(2×5= 10 MARKS)

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