NK ACADEMY FOR CA
Revision Exam-4
Subject: Audit Marks: 30
Code: Audit PL-1 RE-4
Note: Please write your Name and Mobile number on Answer Sheet Name:
Q1) CA Ram is the Statutory Auditor of RJ Ltd. for the financial year 2023-24. The company is
engaged in the production of electronic products. During the audit, CA Ram obtained certain audit
evidence of incorrect disclosure of related party transactions and structured finance deals which
was not considered with the affirmation leading to misstatement in the financial statements.
Discuss how CA Ram should deal with the situation in the auditor's report and the different options
which can be considered? (5 Marks)
Q2) Fun Fiesta Ltd., an entertainment company that operates a traveling circus, has been facing
a significant decline in popularity over the past few years, with attendance reportedly dropping by
as much as 75% in the current financial year. The circus has also been continuously targeted by
animal rights activists for its use of animals like elephants in performances. The CEO observed
that audiences were shifting to other entertainment options, making the business model
unsustainable due to the high costs of moving the show from city to city. As a result, several key
managerial personnel resigned, there were delays in the payment of wages and salaries, and the
bank from which the company had obtained funds decided not to extend further financing or fund
additional working capital requirements. During discussions with management, the statutory
auditor understood that Fun Fiesta Ltd. had no action plan to address these financial difficulties,
making the use of the going concern assumption inappropriate. However, these critical
circumstances were not disclosed in the company’s financial statements. What course of action
should the statutory auditor take in the auditor’s report in such situation? Discuss with reference
to the applicable Standards on Auditing. (5 Marks)
Q3) PMP Bank Ltd., received an application from a pharmaceutical company for the takeover of
their outstanding term loans secured on its assets, availed from and outstanding with a
nationalised bank. PMP Bank Ltd., requires CA Arpan to conduct due diligence for valuation
aspect of assets of the pharmaceutical company. State the areas of analysis in order to ensure
that the assets are not overvalued. (5 Marks)
Q4) CA. Jin, a recently qualified practicing Chartered Accountant, got his first audit assignment
of Ordinary (P) Ltd. for the financial year 2023-24. He obtained all the relevant appropriate audit
evidence for the items related to Statement of Profit and Loss. However, while auditing the
Balance Sheet items, CA. Jin left failed to obtain sufficient audit evidence, such as confirmations,
for the outstanding Accounts Receivable amounting to ` 250 lakhs, continued as it is from the last
year, on the affirmation of the management that there is no receipts and further credits during the
year.
Relying merely on the management’s affirmation that there were no receipts or further credits
during the year, CA Rohan excluded the audit of accounts receivable from his audit program,
assuming that the amount pertained to the prior year, which had already been audited by the
predecessor auditor. Comment on the appropriateness of CA Rohan’s approach. (5 Marks)
Q5) 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.
1
(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? (5 Marks)
MCQ’s: (5 x 1 = 5 Marks)
Q1) CA Ram identified that there was a misstatement last year and the same is still not corrected.
Although unmodified audit report was issued last year by CA Ram. Guide CA Ram on the audit
opinion considering the fact that the last year’s misstatement has been identified in the current
year and unmodified opinion was issued in the last year? (a) In accordance with SA 710, CA Ram
should give unmodified opinion, but include Other matters paragraph in the audit report as last
year’s profit is being reflected in reserve and surplus.
(b) In accordance with SA 710, CA Ram should seek legal opinion.
(c) In accordance with SA 710, CA Ram should qualify current period audit report with respect to
corresponding figures only.
(d) In accordance with SA 710, CA Ram should give unmodified opinion, but last period’s modified
opinion should be highlighted in Emphasis of matter paragraph.
Q2) JIN Ltd. which is based in Mumbai, is in the business of manufacturing leather products since
1995 and wants to acquire OM Leathers Private Limited, which is based in Pune and engaged in
the business of selling leather products manufactured by different companies. Before acquisition
JIN Ltd. wants to get a due diligence review to be done of OM Leathers. JIN Ltd. appointed S & S
Associates for conducting overall due diligence of OM Leathers. During review, the accountant
asked OM Leathers to provide financial projections of the company for next five years, but OM
leathers refused to provide the same and claimed that financial projections are not part of due
diligence review. Whether the objection raised by the management of OM Leathers is correct?
Give reason
(a) The objection raised by OM Leathers is correct, as due diligence doesn’t include review of
financial projections.
(b) The objection raised by OM Leathers is not correct, as due diligence refers to an examination
of a potential investment to confirm all material facts of the prospective business which a company
wants to acquire and financial projection is a part of same. (c) The objection raised by OM
Leathers is correct, as reviewer cannot comment on financial projections in his report.
(d) The objection raised by OM Leathers is not correct, as the target company cannot refuse in
providing any information required by the reviewer.
Q3) AB Ltd. which is based in Mumbai, is in the business of manufacturing leather products since
1995 and wants to acquire FC Leathers Private Limited, which is based in Pune and engaged in
the business of selling leather products manufactured by different companies. Before acquisition
AB Ltd. wants to get a due diligence review to be done of FC Leathers. AB Ltd. appointed S & S
Associates for conducting overall due diligence of FC Leathers. During the review the accountant
2
asked FC Leathers to provide financial projections of the company for next five years, but FC
leathers refused to provide the same and claimed that financial projections is not a part of due
diligence review. Whether the objection raised by the management of FC Leathers is correct?
Give reason.
(a) The objection raised by FC Leathers is correct, as due diligence doesn't include review of
financial projections.
(b) The objection raised by FC Leathers is not correct, as due diligence refers to an examination
of a potential investment to confirm all material facts of the prospective business which a company
wants to acquire and financial projection is a part of same. (c) The objection raised by FC Leathers
is correct, as reviewer cannot comment on financial projections in his report.
(d) The objection raised by FC Leathers is not correct, as the target company cannot refuse in
providing any information required by the reviewer.
Q4) CA Kamal is the statutory auditor of Auto cover Ltd. for the FY 2024-25. The company is
engaged in the business of manufacture of car accessories. CA Kamal noticed that the inventories
of the company amounting to Rs. 46 crores (equal to 25% of the total assets of the company) at
the end of the year do not exist. Also, sales amounting to Rs. 33 crores (equal to 10% of the total
sales during the year) have not actually occurred. CA Kamal noticed both the material
discrepancies just before the finalisation of the audit report for the year ending 31.03.2025. CA.
Kamal considers that the above misstatement would distort the true and fair view to a greater
extent. What is correct course of action that CA Kamal should consider in such a situation?
(a) CA Kamal should consider withdrawing from the audit engagement or issuing a disclaimer of
opinion for the FY 2024-25.
(b) CA Kamal should consider issuing an adverse opinion and mentioning both the material
discrepancies in the basis for adverse opinion paragraph of the auditor’s report. (c) CA Kamal
should ask the management to explain both the discrepancies in the notes to accounts and he
himself should highlight the matter in the Key Audit matter paragraph of the auditor’s report.
(d) CA Kamal should give a qualified opinion along with the specific mention of the matters in the
Emphasis of matter paragraph in the auditor’s report along with appropriate disclosure in the notes
to accounts to be made by the management of Auto cover Ltd.
Q5) APP Ltd. is listed on National Stock Exchange in India. Post audit rotation, KYP & Co LLP
have been appointed as the statutory auditors of APP Ltd. The company has a pending litigation
in respect of service tax matter which has been going on for long time now and exposure of the
company towards that litigation is very significant. The new auditors got the exposure of this case
evaluated by involving their in-house tax experts who have shared a view that the exposure of the
company would be medium. As per the requirements of accounting standards, medium exposure
would be considered as a possible impact for which probability is 50%. The company has been
disclosing this as a contingent liability in the previous years. However, the new auditors are of the
view that this is a significant matter that requires user’s attention by disclosing this in the financial
statements and it is of such importance that it is fundamental to user’s understanding of financial
statements. Further there is a material uncertainty in respect of this matter (i.e. demand raised by
service tax department).Basis this, auditors want to include Emphasis of matter (EOM) in their
report. Management is of the view that since this was not reported by previous auditors as EOM,
hence it should not be included by new auditors also and also being a listed company, it is not
appropriate to include EOM in the first year of audit by a new firm. Please suggest which of the
following is correct.
(a) EOM should be included by new auditors.
(b) EOM should not be included by new auditors if the previous auditors have not given that.
(c) EOM should not be given, however, there should be a disclosure of this matter in the financial
statements and also the fact that auditors are in the first year of audit and this matter would require
3
detailed evaluation.
(d) Auditors should quality the report instead of EOM.
