MODEL TEST PAPER 1

FINAL COURSE: GROUP I

PAPER-3: ADVANCED AUDITING, ASSURANCE AND
PROFESSIONAL ETHICS
Time Allowed- 3 hours Maximum Marks-100
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions
(MCQs)
3. Part II comprises questions which require descriptive type answers.
PART I - Case Scenario based MCQs (30 Marks)
Write the most appropriate answer to each of the following multiple-
choice questions by choosing one of the four options given. All MCQs
are compulsory and carries 2 Marks each.
1. Rohita & Co. Chartered Accountants, mainly into statutory audit and tax
audit, has received an order in writing from the Central Government, in
respect of one of its clients, to carry out an investigation. Rohita & Co. is
contemplating getting the assistance of an expert with respect to certain
matters.
Can Rohita & Co. take the assistance of experts in pursuing the
investigation? Choose the correct reasoning from the below?
(a) Yes, Rohita & Co. should consider whether the assistance of other
experts like engineers, lawyers, etc. is necessary in the interest of
a comprehensive and full proof examination of documents and
information.
(b) Yes, SA 620 – Using the work of experts, has a specific paragraph
on using an expert’s assistance for investigation.
(c) No, the objective of SA 620 is to use the work of an expert for
audit of historical financial statements and not for investigation
purposes.
(d) No, since investigation is analytical in nature and requires a
thorough mind, capable of observing, collecting and evaluating
facts, the usage of an expert will hinder the independence of the
investigator.

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2. During the audit of Good Bank Ltd., the auditors and the management
had a certain difference of opinion as to the amount and the items which
need to be disclosed under the head of contingent liabilities. However,
apart from that, the auditors had observed the following:
• 79 agricultural loan accounts (guaranteed by Government of
Delhi) amounting to ₹ 26 lakh were overdue for more than two
years.
• 93 (guaranteed by Government of India) agricultural loan
accounts amounting to ₹ 32 lakh were overdue for more than two
years.
• 6 corporate loans accounts (guaranteed three each by
Government of India and Government of Delhi) amounting to
₹ 29 lakh for each company were overdue for more than three
and a half months.
What is the total amount of loans that should be classified as NPA by
Good Bank?
(a) ₹ 58 lakh.
(b) ₹ 145 lakh.
(c) ₹ 113 lakh.
(d) ₹ 174 lakh.
3. Sam Ltd. appointed M/s Ajeet & Co., Chartered Accountants as
Statutory Auditor. The Statutory Auditor found the Internal Audit function
reliable and effective. The Statutory Auditor assigned the task of
assessing the inventory levels of a few branches where the Statutory
Auditor believed that there might be some risk of material misstatement
to one of the Internal Auditor Mr. Krushna. Since the Internal Auditor
had recently done such assessment as a part of their Internal Audit
program, therefore, the Statutory Auditor believed that they could rely on
the former’s report. Besides this, because of the paucity of time the
Statutory Auditors also requested Mr. Krushna to help them in some
paperwork including audit documentation.
Before the audit was concluded, Mr. Krushna got promoted and shifted
to another city. During the audit discussion stage, the lead Statutory
Auditor found out that the documentation delegated to Mr. Krushna was
not complete. Accordingly, Statutory Auditor further checked the

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 inventory work delegated to the Internal Auditor, however, it was found
to be satisfactory.
In view of the above case scenario, state which of the following
statement(s) hold true:
(a) The working of Internal Audit function was reliable and
satisfactory; therefore, the allocation of inventory level work was
within the authority of the Statutory Auditor. This was further
confirmed by the satisfactory work of Internal Auditor, as found out
later.
(b) The documentation would be considered complete as far as the
Statutory Auditor’s responsibility is concerned as the missing
documentation was because of the oversight of the Internal
Auditor.
(c) Since the Internal Audit had conducted the similar inventory level
checking activity recently, therefore, because of familiarity with the
audit the Statutory Auditor was right in delegating the same to the
Internal Auditor.
(d) The Statutory Auditor should not have delegated the inventory
level checking to the Internal Auditor, as the risk assessed was
material. Further, the audit documents are Statutory Auditor’s
property and responsibility. Also, the Statutory Auditor should
maintain confidentiality during all the stages of the audit.
Therefore, it was wrong on the part of the Statutory Auditor to
handover the task of audit documentation to the Internal Auditor.
Case Scenario I [MCQ 4-6]
ABC Limited is a public company listed on the National Stock Exchange,
having its registered office in Delhi. The company is primarily engaged in the
manufacturing of pharmaceutical products. During the preceding financial
year, the company recorded a remarkable turnover of ` 5000 crores,
accompanied by a net profit of ` 805 crores. Additionally, the company has
secured a loan facility from the State Bank of India amounting to ` 1000
crores.
PQR & Co., a firm of chartered accountants based in Delhi, has been
appointed as a joint auditor along with PK & Co. and XYZ & Co., an esteemed
chartered accountant’s firm in the same location i.e. Delhi. ABC Limited has
already completed the appointment-related formalities as well as they have

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also signed engagement letters. The engagement letter contains the details
on the objective and scope of the audit, responsibilities of the auditors,
management, and identification of the framework applicable. Moreover, while
planning the audit, joint auditors have divided the responsibility for conducting
audit in accordance with SA 299. Further, the audit team has established ` 50
Crore as the materiality threshold, calculated at 1% of turnover.
Now, during the audit, PK & Co. came to know that one of the employees of
the company had been involved in fraud amounting to ` 201 Lakhs.
Additionally, as a part of the audit procedure, the auditor has also sent
confirmation requests to 100 suppliers to confirm the year-end balance. The
said requests were designed in such a way that the supplier will directly
respond to the auditor indicating that the supplier agrees or disagrees with the
same. However, in this regard the confirmation responses were received only
from 37 Suppliers.
Moreover, as a part of the audit procedure, auditors of the ABC Limited also
wants external confirmation from the 37 Debtors to confirm the year-end
balance, however in this process, the management refuses auditors to allow
to send the confirmation and after asking the reason for such refusal, auditors
came to the conclusion that, such refusal is unreasonable and the auditor is
also unable to obtain relevant and reliable audit evidence from alternative
audit procedures.
In addition, while forming an opinion, PQR & Co. had a different opinion on
the valuation of inventories, but PK & Co. and XYZ & Co. had the same
opinion and accordingly, given their majority stance, both PK & Co. and XYZ
& Co. assert that PQR & Co. must endorse a Common audit report aligned
with their opinion.
Apart from this, XY Private Limited, an associate enterprise of ABC Limited,
the company XY Private Limited appoint ZMR & Co., another firm of chartered
accountants located in Rajasthan as a statutory auditor of XY Private Limited
for the first time for the current financial year. The financial statement of XY
Private Limited was audited by its predecessor auditor in the previous
financial year. During the audit for the current financial year, ZMR & Co. came
across a material misstatement in the opening balance, that affects the
current year financial statement. In this regard, the auditor also discusses the
said facts with the management. However, the management does not
accurately pay attention to the same and does not either adequately account

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during the year or disclose or present the same in the financial statement of
current year.
The Other Important financial information of XY Private Limited is as below:
(` in Crores)

Sr. Particulars Current Year Previous Year

No.
1. Paid up Share capital 2.00 2.00
2. Credit Balance of Profit & Loss 1.75 0.75
Account
3. Turnover 35.00 25.00
4. Borrowing from Banks and 3.50 2.50
Financial Institutions

On the basis of the above-mentioned facts, you are required to answer the
following MCQs,
4. In the above given case, what should be the next course of action on
the part of auditors of ABC Limited when the auditors conclude that the
reason for management’s refusal to allow to send the confirmation to the
debtors is unreasonable and auditor is unable to obtain relevant and
reliable audit evidence from alternative audit procedures?
(a) Auditor should have included the reason for refusal by the
management and fact of inability to obtain the relevant and reliable
audit evidence from alternative audit procedure in the Key Audit
Matter Paragraph as per SA 701.
(b) Auditor should have included the reason for refusal by the
management in the written representation received as per SA 580.
(c) Auditor shall communicate the matter with TCWG and also
determine the implications for the Audit and Auditor’s opinion in
accordance with SA 705.
(d) Auditor should have included the reason for refusal by the
management and fact of inability to obtain the relevant and reliable
audit evidence from alternative audit procedure in the Emphasis
on Matter Paragraph as per SA 706.

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5. Whether PQR & Co. should adhere to the opinion formulated by PK &
Co. and XYZ & Co. or explore alternative options.
(a) PQR & Co. will have to go with the opinion framed by the majority
of auditors.
(b) PQR & Co. has the option to incorporate a distinct audit opinion
paragraph within the Common audit report, accentuating its
importance through the emphasis of the matter paragraph.
(c) PQR & Co. can align with the opinion formed by the majority of
auditors. However, any dissenting viewpoint held by PQR & Co.
should be prominently highlighted within the emphasis of the
matter paragraph.
(d) PQR & Co. has the discretion to issue a distinct audit report
independently. In such a scenario, the reference to the other audit
report issued by the majority of auditors should be noted within the
'Other Matter Paragraph’.
6. In the above given case, what should be the course of the action on the
part of ZMR & Co., when they found material misstatement which has
not been accurately accounted or presented or disclosed in the financial
statement of current year?
(a) ZMR & Co. should not pay attention to the material misstatement
found in the opening balance, since they were not auditors for the
previous financial year.
(b) ZMR & Co. should express a qualified opinion or an adverse
opinion, as appropriate, in accordance with SA 705(Revised).
(c) ZMR & Co. should take such matter in the written representation
received from the management and no need to report such fact in
audit report.
(d) ZMR & Co. should disclose such a fact in the Emphasis of Matter
paragraph section in the audit report.
Case Scenario II [MCQ 7-10]
MN & Associates, a firm of Chartered Accountants, having CA. M and CA. N
as partners, is based at Mumbai. MN & Associates are appointed to conduct
statutory audit of Zinc Ltd. Zinc Ltd. is required to appoint an internal auditor
as per statutory provisions given in the Companies Act, 2013 and appointed

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CA. IA as its internal auditor. MN & Associates asked Mr. IA to provide direct
assistance to him regarding evaluating significant accounting estimates by the
management and assessing the risk of material misstatements. He also seeks
his direct assistance in assembling the information necessary to resolve
exceptions in confirmation responses with respect to external confirmation
requests and evaluation of the results of external confirmation procedures.
CA. M 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
appointment since the client was in a hurry to file Return of Income before the
due date. After commencing the audit, CA. M 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.
CA. N provides management consultancy and other services to its clients. CA.
N was also awarded ‘Best Speaker of the year’ as gratitude from the Institute.
Later on, CA. N posted his framed photograph on his website wherein he was
receiving the said award from the Institute.
Upon hearing about the efficient services provided by MN &
Associates Chartered accountants, they were approached by XYZ
Cooperative Society to act as their statutory auditor for the upcoming financial
years. The firm agreed to the offer and had the following options in mind with
respect to the fees to be charged from them:
(i) To charge fees as percentage of Net Profits, or
(ii) To charge fees of ₹ 501/-.
Based on the abovementioned facts, you are required to answer the following
MCQs:
7. With respect to the fees to be charged for its new assignment, which
option can be opted by MN & Associates.?
(i) To charge fees as percentage of Net Profits, or
(ii) To charge fees of ` 501/-.
(a) (i) Only.
(b) (ii) Only.
(c) Either (i) or (ii).

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 (d) Neither (i) nor (ii).
8. MN & Associates sought direct assistance from CA. IA, internal auditor
as stated in the above scenario. Advise as to whether he is permitted to
do so in accordance with relevant Standards on Auditing.
(a) CA. IA cannot assist MN & Associates in assembling information
necessary to resolve exceptions in confirmation responses.
However, MN & Associates can ask Mr. IA for direct assistance
regarding evaluating significant accounting estimates and
assessing the risk of material misstatements as per SA 610.
(b) MN & Associates cannot ask CA. IA for direct assistance regarding
evaluating significant accounting estimates and assessing the risk
of material misstatements. However, CA. IA may assist MN &
Associates in assembling information necessary to resolve
exceptions in confirmation responses as per SA 610
(c) MN & Associates cannot ask CA. IA for direct assistance regarding
evaluating significant accounting estimates and assessing the risk
of material misstatements and in assembling the information
necessary to resolve exceptions in confirmation responses as per
SA 610.
(d) MN & Associates can ask CA. IA for direct assistance regarding
evaluating significant accounting estimates and assessing the risk
of material misstatements and in assembling the information
necessary to resolve exceptions in confirmation responses as per
SA 610.
9. As per the Chartered Accountants Act, 1949, under which clause CA. N
is liable for misconduct?
(a) Clause (9) of Part I of the First Schedule to the Chartered
Accountants Act, 1949.
(b) Clause (6) of Part I of the First Schedule to the Chartered
Accountants Act, 1949.
(c) Clause (8) of Part I of the Second Schedule to the Chartered
Accountants Act, 1949.

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 (d) Clause (7) of Part I of the Second Schedule to the Chartered
Accountants Act, 1949.
10. Before signing the tax audit report, CA. M sent a registered post to the
previous auditor and obtained the postal acknowledgement. Will CA. M
be held guilty of professional misconduct under the Chartered
Accountants Act, 1949?
(a) As per Clause (8) of Part I of First Schedule to the Chartered
Accountants Act, 1949 CA. M will not be held guilty of professional
misconduct as he communicated with the previous tax auditor
before signing the audit report.
(b) As per Clause (8) of Part I of First Schedule to the Chartered
Accountants Act, 1949, CA. M will be held guilty of professional
misconduct since he has accepted the tax audit, without first
communicating with the previous auditor in writing.
(c) As per Clause (8) of Part I of First Schedule to the Chartered
Accountants Act, 1949, CA. M will not be held guilty of
professional misconduct since the requirement for communicating
with the previous auditor being a chartered accountant in practice
would apply to statutory audit only.
(d) As per Clause (8) of Part I of Second Schedule to the Chartered
Accountants Act, 1949, CA. M will be held guilty of professional
misconduct since he has accepted the tax audit, without first
communicating with the previous auditor in writing.
Case Scenario III [MCQ 11-15]
Sun Chemicals Ltd., a prominent player in India's industrial landscape, has
been etching its mark since its inception in 2008, headquartered in the
bustling city of Pune, Maharashtra. Listed on the Bombay Stock Exchange
(BSE) and the National Stock Exchange of India (NSE), the company has
steadily grown into a multi-faceted entity, catering to diverse industrial needs.
Sun Chemicals Ltd.'s core strength lies in its robust manufacturing
capabilities. Spread across multiple state-of-the-art facilities, the company
produces a wide range of industrial chemicals, including specialty chemicals,
performance chemicals, and basic chemicals. These products find application
in various sectors, from pharmaceuticals and textiles to paints and coatings,
construction, and agriculture.

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RKM & Co., a Chartered Accountancy firm, was appointed as to conduct the
statutory audit for F.Y. 2023-24 for the company. Mr. Rahul Dubey was the
engagement partner for the said assignment. In the organisational structure,
Mr. Rahul noticed that those charged with governance in the company are
also involved in managing the entity.
During the on-going engagement of the audit, at the end of the third quarter,
during which tenure already two limited review reports were issued by RKM &
Co., the management of the company imposed a limitation on the scope of the
audit that Mr. Rahul considered likely to result in the need to express a
qualified opinion or to disclaim an opinion on the financial statements, and
accordingly, he requested that management remove such limitation. But the
management refused to remove the said limitation.
After following the due procedures applicable in the circumstances, Finally,
Mr. Rahul with his engagement team, derived on a conclusion that the
possible effects on the financial statements of undetected misstatements,
could be material and pervasive so that a qualification of the opinion would be
inadequate to communicate the gravity of the situation and accordingly, he
proposed to withdraw from the engagement after consulting with the senior
partners of the firm as on 15th November, 2023. In its resignation letter, the
firm mentioned professional pre-occupation as the reason for the resignation.
11. What was the responsibility of Mr. Rahul when the management refused
to remove the said limitation?
(a) To determine whether it is possible to perform alternative
procedures to obtain sufficient appropriate audit evidence.
(b) To communicate the matter to those charged with governance and
determine whether it is possible to perform alternative procedures
to obtain sufficient appropriate audit evidence.
(c) To determine whether it is possible to perform additional
procedures to obtain sufficient appropriate audit evidence.
(d) To request for written representation from the management for the
matters on which limitation is imposed and also communicate the
matter to those charged with governance.
12. What was the responsibility of RKM & Co. with respect to the issue of
limited review report at the time of resignation?
(a) Limited review report for third Quarter was required to be issued.

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 (b) No further limited review report was required to be issued as
already it was issued for the second Quarter at the time of
resignation.
(c) Limited review report for third Quarter was required to be issued
and consequently, after its issue, audit report for the full year is
also required to be issued
(d) Limited review report for third Quarter was required to be issued
subject to the terms of the audit engagement.
13. Whether in the given circumstance withdrawal from engagement was
mandatory and if so, what is the responsibility of the auditor with respect
to such withdrawal?
(a) In the given circumstance withdrawal from engagement was not
mandatory and in case of withdrawal, the auditor was required to
withdraw from the audit, where practicable and possible under
applicable law or regulation.
(b) In the given circumstance withdrawal from engagement was
mandatory and in case of withdrawal, as the withdrawal from the
audit before issuing the auditor’s report was not practicable or
possible, he was required to disclaim an opinion on the financial
statements.
(c) In the given circumstance withdrawal from engagement
mandatory was and in case of withdrawal, the auditor was required
to withdraw from the audit, where practicable and possible under
applicable law or regulation.
(d) In the given circumstance withdrawal from engagement was not
mandatory and in case of withdrawal, as the withdrawal from the
audit before issuing the auditor’s report was not practicable or
possible, he was required to disclaim an opinion on the financial
statements.
14. Assuming Sun Chemicals Ltd. to be an unlisted company, whether the
reason for resignation by RKM & Co. was proper?
(a) No, the auditor should have clearly mentioned the reasons for the
resignation in the resignation letter issued to the Company.
(b) Yes, as the requirement for clear mention of reasons is not
applicable to unlisted company.

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 (c) Yes, in the given case, the reason was resignation was due to the
limitations imposed by the management and refusal to provide
reasons for the same and accordingly, though being an unlisted
company, it was totally upon the discretion of the auditor to
provide clear reasons or not for resignation.
(d) No, the reasons should have been a little lengthier and further the
exact reason must be provided to the new auditor to be appointed
by the company.
15. Assuming that the auditor proposed to resign on 14th November before
issue of LR for second Quarter, then what was the responsibility of RKM
&Co. with respect to withdrawal from engagement and issue of limited
review report at the time of resignation?
(a) The auditor shall communicate to those charged with governance
the matters regarding misstatements identified during the audit
that would have given rise to a modification of the opinion and the
imited review reports for second and third Quarter were required to
be issued.
(b) The auditor shall communicate to those charged with governance
the matters regarding misstatements identified during the audit
that would have given rise to a modification of the opinion and the
limited review report for second Quarter was required to be issued.
(c) The auditor shall communicate to management and those charged
with governance the matters regarding misstatements identified
during the audit that would have given rise to a modification of the
opinion and the limited review report was not required to be
issued.
(d) The auditor shall communicate to those charged with governance
that the possible effects on the financial statements of undetected
misstatements, if any, could be both material and pervasive so
that a qualification of the opinion would be inadequate to
communicate the gravity of the situation and the limited review
report for second Quarter was required to be issued.

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 PART II – Descriptive Question (70 Marks)
Question No.1 is compulsory.
Attempt any four questions from the rest.
1. (a) 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 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 area of about 20 acres
located in National Capital Region (NCR). Paddy contained in jute
bags of nearly standard sizes is purchased from dealers/agents. It
is stored in heaps on pallets (kind of wooden structures) in 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.

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  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 an
effective count process. (5 Marks)
(b) 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. Particulars Amount
No. involved
(i) Liabilities for purchases of raw material ` 3.50 crores
were written back on account of poor
quality of raw material and difference in
rates
(ii) Liabilities for capital goods were written ` 2.00 crores
back on account of defects in 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.
(5 Marks)

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 (c) 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? (4 Marks)
2. (a) 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 above situation from point of view of quality control
system in audit firm? Analyse. (5 Marks)
(b) 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 audit approach? (4 Marks)
(c) 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.
(5 Marks)

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3. (a) Jagdish Pvt. Ltd. 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. Comment (4 Marks)
(b) 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 Net NPAs Ratio of Net

(in ` crore) (in ` crore) 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? (5 Marks)
(c) Mr. Mayank, a Chartered Accountant was the auditor of 'Chew
Limited' for the year 2022-23 and 2023-24. During the financial
year, the investment appeared in the Balance Sheet of the
company amounting ₹ 7.5 lac and was the same amount as in the
last year 2022-23. Later it was found that the company's
investments were only for ₹ 56,000, however, the value of
investments was inflated for the purpose of obtaining higher
amount of Bank loan. Comment with reference to the Chartered
Accountants Act, 1949, and Schedules thereto. (5 Marks)

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4. (a) 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? (5 Marks)
(b) 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 2023-24.
The company had submitted inputs on draft Digital personal data
protection bill to concerned Ministry during year 2023-24. 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,

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 discuss how above information would likely be disclosed by
company in “Principle-wise performance disclosures” as part of
BRSR for year 2023-24?
Whether information discussed above would require to be
disclosed mandatorily? (4 Marks)
(c) CA. Navya is the statutory auditor of Lakshay Ltd. for the Financial
year 2023-24. In respect of loans and advances of ₹ 75 Lakh given
to Hariharan Pvt. Ltd., the Company has not furnished any
agreement to CA. Navya and in the absence of the same, he is
unable to verify the terms of repayment, chargeability of interest
and other terms.
Justify the type of opinion which CA. Navya should give in such a
situation. Also, Draft an appropriate Opinion paragraph and Basis
of Opinion paragraph. (5 Marks)
5. (a) Naresh & Co., Chartered Accountants, have been appointed
Statutory Auditors of Suchi Ltd. for the financial year 2023-24. The
audit team has completed the audit and is in the process of
preparing audit report 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 with reference to relevant Standard on Auditing the
Auditor's duties with regard to reporting. (5 Marks)

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 (b) 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 discuss how these can
be determined in above case. (5 Marks)
(c) 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? (4 Marks)
6. (a) 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? (5 Marks)

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 Or
In a review engagement performed under SRE 2400, practitioner
relies mainly on certain procedures. Naming such procedures,
discuss importance of these procedures in a review engagement.

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 practitioner’s report in accordance
with SRE 2400? (5 Marks)
(b) CA. Z, in practice, is desirous of filling Multi-purpose Empanelment
form (MEF) for inclusion of his 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 for by PDC,
CA. Z has transacted in futures and options derivatives (equity)
and has reflected income from such transactions in his 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. Z had earned income from
transacting in currency derivatives and commodity derivatives?
(5 Marks)
(c) CA. Puranjay 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
terms of a contractual agreement with the company.

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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, team has failed to take care of aspects
such as keeping record of each person in team gathering relevant
evidence, date and time of collection and storage of such
evidence. What implications it may have on forensic accounting
engagement as such? (4 Marks)

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 MODEL TEST PAPER 2
FINAL COURSE: GROUP I
PAPER-3: ADVANCED AUDITING, ASSURANCE AND
PROFESSIONAL ETHICS
Time Allowed- 3 hours Maximum Marks-100
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions
(MCQs)
3. Part II comprises questions which require descriptive type answers.
PART I - Case Scenario based MCQs (30 Marks)
Write the most appropriate answer to each of the following multiple-
choice questions by choosing one of the four options given. All MCQs
are compulsory and carries 2 Marks each.
1. An auditor was auditing the quarterly financial results prepared in
accordance with Regulation 33 of the SEBI (Listing Obligations and
Disclosure Requirements) Regulations, 2015. The financial results are
prepared using recognition and measurement norms of Ind AS 34 and
include disclosures as prescribed by SEBI. These financial results would
be hosted on the website of the entity and the stock exchange. Should
the auditor include Key Audit Matters in the audit report on such
financial results?
(a) No, SA 701 applies to audit of complete set of general-purpose
financial statements of a listed entity.
(b) Yes, SA 701 applies to audits of any entity.
(c) No, SA 701 applies to review of the complete set of general-
purpose financial statements of any entity.
(d) Yes, SA 701 applies to any audit of listed entity.
2. CA. Arvind and CA. Deepak were jointly appointed as auditors of
Pullcord Ltd. to ensure efficient audit and reporting, Arvind and Deepak
took the following steps:
i. After identification and allocation of work among themselves, the
work allocation document was signed by both of them. Since in
any case they were jointly responsible, they did not think it

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 necessary to inform those charged with governance about the
allocation.
ii. They decided to obtain a common engagement letter since their
appointment was common.
iii. Since their area of work was different, they decided to obtain a
separate management representation letter so as not to mix up the
matters.
Which of the above were not correct in view of SA 299?
(a) i, ii and iii
(b) i and iii
(c) i and ii
(d) ii and iii
3. Mr. L, (friend of Mr. M) a CA in practice invited Mr. M to set up a
‘Network Firm’ along with 2 more friends. All the four auditors agreed to
the same and decided to start a network firm by the name M/s LM & Co.
However, one of the auditors suggested that they cannot use the term ‘&
Co.’ and it needs to be changed. But Mr. L informed that there is no
such regulation regarding the firm’s name. After further discussion, a
suitable name, in accordance with the provisions of the Chartered
Accountant Act, 1949 and Regulation was accepted by all the four
partners.
Which among the name shall be suitable to the newly started ‘Network
Firm’?
(a) LM and Co.
(b) LM & Associates.
(c) LM & Affiliates.
(d) LM and Networks.
Case Scenario I [MCQ 4-8]
Maulik and Javeri Associates is a Firm of Chartered Accountants that
provides assurance services to many companies, including listed companies.
The Firm have offices across many locations in India, with subject matter
experts in most of these locations. The firm has established a comprehensive
quality management system covering leadership responsibilities for quality

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within the firm, ethical requirements, acceptance, and continuance of client
relationships and specific engagements based on the SQC 1 issued by the
ICAI. During the current year, the audit engagement of a listed company was
picked up for an inspection by an appropriate authority. The inspection
covered various aspects of the audit of financial statements and included an
assessment of the firm’s quality control system. The reviewer decided to
discuss the following with the audit team members:
1. The reviewer enquired about the roles and responsibilities of
CA Maulik. CA. Maulik explained that the engagement team is
comprised of him as the engagement partner and other professionals,
including the engagement in-charge. CA. Javeri was the engagement
control quality reviewer. As the engagement partner, he was responsible
for the direction, supervision and performance of the audit engagement
in compliance with professional standards and applicable legal and
regulatory requirements; and the auditor’s report being appropriate in
the circumstances take responsibility for reviews being performed in
accordance with the Firm’s review policies and procedures. He also
explained that he has already completed 7 years as an engagement
partner and has decided to continue as an engagement partner for the
next year as well. The Firm's policy permits that an engagement partner
can continue consecutively for 15 years.
2. The reviewer enquired about the roles and responsibilities of
CA. Javeri, the engagement control quality reviewer. CA. Javeri
explained that the EQCR plays an important role in the quality control
process of an audit and is key to safeguarding audit quality. The Firm
has established a comprehensive system that prescribes the eligibility of
EQCR, the need to maintain objectivity by EQCR, and considerations for
carrying out effective EQC reviews. Specifically, in this engagement,
CA. Javeri explained that he has rich experience in handling direct and
indirect tax matters and was selected by CA. Maulik. There was no
formal letter confirming his selection as EQCR. The listed company had
significant GST litigations. CA. Javeri ensured that he was involved in
forming the audit team’s judgments relating to these litigations, including
making relevant provisions. CA. Javeri confirmed that the EQC review
was conducted in periodic intervals, and the engagement team had
resolved all the observations raised during the EQC review.
3. The reviewer enquired about the areas that require discussion with
management/ those charged with governance or areas that require

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 significant efforts. CA. Maulik explained that during the current year, the
engagement team observed material prior errors in recognition of
revenue, including errors in recognition of revenue on a gross basis
instead of a net basis. These errors were identified after the year end
and required significant judgement and efforts by the engagement team.
After many deliberations, the management agreed to correct the
material prior to the period errors by restating the comparative
information as per applicable GAAP. Relevant internal controls were
accordingly modified after the year end. Considering the complexities
involved, the measurement of revenue was identified as a key audit
matter.
4. The reviewer enquired about the rationale for material difference
between the amount of revenue stated in the financial statements and
the corresponding amount in the Board report included as a part of the
Annual Report. CA. Maulik explained that auditors are required to
comment on the true and fair view of the financial statements and are
not required to comment on the Annual Report. He also explained that
the Board Report was not provided to the auditor till the date of the audit
report. Accordingly, after considering the requirements of SA 720, a
specific statement was made in the audit report regarding the non-
availability of the Board Report and that the auditor is not responsible to
consider the Board Report which is expected to be received the date of
the audit report. Thus, any discrepancy between the Board Report and
the audited financial statements does not require any consideration.
However, as good governance, CA. Maulik has obtained a reconciliation
of the amount of revenue between the Board Report and the financial
statements.
Based on the abovementioned facts, you are required to answer the following
MCQs
4. Whether the selection of EQCR is as per the requirements of SQC 1?
(a) No. EQCR's objectivity was not maintained since it was selected
by the engagement partner, and no formal communication was
made regarding such selection.
(b) Yes. CA. Javeri is a perfect match for the engagement team, as
his experience as a tax professional is directly relevant to the
company's tax litigations.

239
 (c) No. The EQCR's objectivity could not be maintained since it was
selected by the engagement partner and made decisions for the
engagement team.
(d) Yes. CA. Javeri is a perfect match for the engagement team, as
his experience as a tax professional is directly relevant to tax
litigation. The EQC review was conducted in a timely manner
before the issuance of the audit report.
5. In the given situation, which threat will be created if CA. Maulik serves
for the assurance engagement over a long period of time?
(a) Self-interest threat.
(b) Self-review threat.
(c) Familiarity threat
(d) Intimidation threat
6. Can CA. Maulik serve another year as the engagement partner?
(a) Yes. The Companies Act, 2013 do not provide for mandatory
rotation of engagement partner.
(b) No. SEBI (Listing Obligations and Disclosure Requirements)
Regulations require mandatory rotation of engagement partner
after completion of 5 years each.
(c) Yes. Since permitted as per Firm policies.
(d) No. Existing engagement partner of a listed company cannot serve
as engagement partner beyond 7 years.
7. The reviewer is of the view that the audit opinion on internal controls
under section 143(3)(i) of the Companies Act 2013 should have been
modified as material weakness existed in the comparative information.
Do you agree with the reviewer?
(a) Yes. Restatement of comparative information due to error is a
strong indicator of material weakness in internal controls. Also,
relevant internal controls were not corrected by the end of the
year.
(b) No. All prior-period errors were corrected as per applicable GAAP
by restating the comparative information.

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 (c) No. Judgemental matters, where divergent views are possible, are
not indicative of material weakness.
(d) No. Internal controls were corrected by the date of the audit report.
8. Whether CA. Maulik should consider the Board Report or not as the
audit report was already issued:
(a) The Board Report should not be considered as auditors don’t have
any obligation to consider Other Information obtained after such
date.
(b) The Board Report should be considered since auditors’
responsibility in relation to Other Information is uniform
irrespective of the point of their availability.
(c) The Board Report should be considered since subsequent events
are required to be assessed.
(d) The Board Report should not be considered to align with the audit
report, which specifically excludes Other Information obtained after
the date of the audit report.
Case Scenario II [MCQ 9-11]

Meera Films Ltd. is a distributor of movies in the state of West Bengal. The
Company has a significant interest in other operating segments and operates
through multiple subsidiaries. At the consolidated level, major operating
segments comprise of movie distribution, selling tea from self-owned tea
gardens at Darjeeling, real estate development for commercial purposes and
investment in start-up entities. The Group was founded jointly by Mr. Madan
Mohan (the Group Managing Director) and Mr. Kishore Kumar, an old
confidant of Mr. Madan Mohan.
Unfortunately, Mr. Madan Paul met with an accident and expired. His untimely
death rattled the entire Group and disrupted the business operations of the
Group. The Board of the Parent Company decided to induct his son – Mr.
Manish Paul – as the Managing Director of the Parent Company and the
Group. The appointment of Mr. Manish Paul enraged Mr. Kishore Kumar, and
he filed an application of oppression of mismanagement with the National
Company Law Tribunal alleging various wrongdoings, including inappropriate
related party transactions, siphoning off funds through connected entities and
manipulation of financial statements. Considering the gravity of the
allegations, the existing auditor of the Parent Company tendered its

241
resignation. The Board appointed Mukesh and Rafi LLP as the new auditors.
Mukesh and Rafi LLP informed the previous auditor over the phone and
accepted the appointment.
After 5 months, Mukesh and Rafi LLP sent an email to the previous auditor as
a professional courtesy stating that the appointment was for the auditor. The
previous auditor replied by stating ‘Received’.
To deal with these allegations, the Board of the Parent Company initiated a
forensic investigation covering all the major operating segments through an
independent professional services firm. The conclusion of the investigation
significantly delayed the submission of financial statements for the current
year of the Parent Company. The outcome of the forensic investigation
included the following:
1. SaltLake Ltd.—a subsidiary—is the real estate arm of the Group and
has significant receivables from various Partnership Firms/ LLPs. The
investigation revealed that these advances, which have been
outstanding for more than a decade, were given for the purchase of
land. Further, the identity of these entities could not be traced as no
PAN/ GST details were available with the subsidiary company. Any
attempt to contact these entities proved futile.
It was also noted that the auditors of SaltLake Ltd. had already
completed the audit under the Companies Act 2013. Hemant and Manna
LLP - the auditor of SaltLake Ltd. – informed the investigator that, in
their view, the allegations do not affect the financial statements of
SaltLake Ltd. and accordingly have issued an unmodified audit opinion
on the financial statements of the current year. The financial statements
and the audit report were adopted by the shareholders in the AGM.
2. Meera Films Ltd. - the parent company historically purchases music
rights from Gaana Ltd., which is approximately INR 20 crores per
annum. Gaana Ltd. is controlled by Mr. Kishore Kumar. At the beginning
of the current year, an advance of INR 50 crores was given to Gaana
Ltd. for the purchase of music rights. Any amount remaining unadjusted
would be repaid over a period of 5 years. The advance amount is highly
disproportionate to the expected purchase amount to be made, and the
credit period is not in line with normal credit terms. The investigation
revealed that the advance was given to provide financial support to
Gaana Ltd. as it was undergoing financial distress. At the end of the

242
 year, INR 30 crores remained unadjusted. No interest was charged on
the unadjusted amount.
3. Darjeeling Tea is a cash-generating unit of Chai Ltd., a subsidiary
company. The unit generates negative cash flows and is expected to do
so in the future. Accordingly, it should have been impaired. However,
the cash flow projection was fabricated to avoid recognition of
impairment expenses in the previous years.
There was a disagreement between the subsidiary management and its
auditor. The auditor in the audit report under the Companies Act 2013
issued a qualified opinion stating that impairment loss was under-
recorded. From the context, the consolidated financial statements
understatement of impairment expense would reduce the consolidated:
• Net Profit by 1%
• Total assets by 0.5%
• Net worth by 2%
Based on the abovementioned facts, you are required to answer the following
MCQs
9. Is Mukesh and Rafi LLP guilty of professional misconduct for accepting
the audit of Meera Films Ltd.?

(a) Yes, Mukesh and Rafi LLP are guilty of professional misconduct.
The email response of the previous auditor does not include
reasons for their resignation.
(b) Yes, Mukesh and Rafi LLP are guilty of professional misconduct.
As a matter of professional courtesy, Mukesh and Rafi LLP should
have intimated its appointment as auditor to the previous auditor
through registered post (instead of sending an email).
(c) Yes, Mukesh and Rafi LLP are guilty of professional misconduct.
As a matter of professional courtesy, Mukesh and Rafi LLP should
not have intimated its appointment by telephone.
(d) Yes, Mukesh and Rafi LLP are guilty of professional misconduct.
As a matter of professional courtesy, Mukesh and Rafi LLP should
have communicated to the predecessor auditor via email before
accepting appointment.

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10. Management of Meera Films (Parent Company) reconciled its balances
with the customers and vendors at an interim period. Mukesh and Rafi
LLP also decided to send independent requests to the customers and
vendors to confirm their balances as of the year's end. With the risk of
material misstatement assessed to be low, the top 15 parties,
comprising 5% of customers and 7% of vendors, were selected to obtain
external confirmations. Is the sampling strategy appropriate?
(a) Inappropriate. Sample size appears to be insufficient. Method of
sample selection does not allow each item in the population a
chance of selection.
(b) Inappropriate. Sampling method is judgmental and not statistical
based.
(c) Inappropriate. Considering the underlying audit risk, external
confirmation from all customers and vendors should have been
obtained.
(d) Inappropriate. Rely on confirmations obtained by management and
perform roll-forward procedures to arrive at the year-end balance.
11. Would the advance for purchasing music rights to the extent remaining
unadjusted as at the year-end (i.e. INR 30 crores) require reporting
under Clause 3(iii) of CARO 2020 (i.e. grant of loans, etc.)?
(a) No. Advance for purchase of goods is not a loan/ advance in the
nature of loans. Thus, it is not covered under the above clause.
(b) No. In the absence of interest charges, the advance would neither
qualify as a loan nor be an advance in the nature of a loan. Thus,
it is not covered under the above clause.
(c) Yes. The intent was to provide financial support, not purchase
goods. The amount of the advance and settlement period are
excessive and not as per normal trade practice. It should be
reported as an advance in the nature of a loan.
(d) Yes. Advance for purchase of goods is covered under the above
clause.
12. Mukesh and Rafi LLP considered the qualification of the auditor of Chai
Ltd. They conclude that the audit opinion on the consolidated financial
statements of the Group should be:

244
 (a) Unmodified as the effect of misstatement is not material to the
Group.
(b) Unmodified as the effect of misstatement is not material. However,
the subsidiary auditor's issued qualified opinion should be
highlighted in the audit report through an Emphasis of Matter
paragraph.
(c) Qualified as the subsidiary auditor has issued a qualified opinion.
(d) Qualified to the extent it relates to the subsidiary and unmodified
to the extent it relates to the remaining part of the Group.
Case Scenario III [MCQ 13-15]
M/s Vrinda & Associates (referred to as ‘auditor’) have been appointed as one
of the statutory central auditors of ICCB Bank, (referred to as ‘Bank’) for the
Financial Year 2023-24.
During the course of the audit, the auditor found that the bank has a balance
with a Swiss based bank. The auditor understands that such balance is a
matter of important consideration in the audit of the bank.
The engagement partner, Mr. Mitansh, has also advised the audit staff to
check in detail the following items appearing in the financial statements of the
bank during the year under audit.
Amount of interest accrued and not due on deposits amounting to
₹ 87,75,000/.
The balance of Interest rate swaps amounting to ₹ 81,26,500/-.
Further, the statutory auditors understand that one of the most important
areas to be checked in the audit of a bank is the compliance with CRR and
SLR requirements.
The audit staff apprised the engagement partners about the few unaudited
branches of the Bank and the course of action in this regard was discussed in
detail within the engagement team. The details with respect to unaudited
branches are as under:
Interest Income: ₹ 27,86,000/-.
Interest Expense: ₹ 13,38,220/-.
Total advances: ₹ 5,10,22,000/-.
Total deposits: ₹ 3,38,00,000/.

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The auditors also discussed the following with the audit staff and the bank
management during the course of the audit:
Computation of Demand and Time Liabilities.
Computation of Tier I & Tier II capital of the Bank.
Based on the abovementioned facts, you are required to answer the following
MCQs
13. What should be the treatment of Interest on deposits accrued but not
due amounting to ₹ 87,75,000/- appearing in the financial statements of
ICCB Bank.
(a) The amount should be included in deposits amount.
(b) The amount should not be included in amount of deposits.
(c) The amount should be shown under the head other liabilities and
provisions.
(d) Both b & c.
14. The amount of Interest Rate Swaps amounting to ₹ 81,26,500/- should
appear as ……… in the financial statements of the bank :-
(a) Contingent Liabilities.
(b) Other Liabilities and provisions.
(c) Current Liabilities.
(d) Deposits.
15. Which of the following is correct statement related to the requirement
laid down by the RBI for Vrinda & Associates while verifying the
compliance with the SLR requirements of the bank?
(a) M/s Vrinda & Associates are required to verify the compliance with
SLR requirements at the start and end date of the year under
audit.
(b) M/s Vrinda & Associates are required to verify the compliance with
SLR requirements at 12 odd dates in different months of the
financial year not being Fridays.
(c) M/s Vrinda & Associates are required to verify the compliance with
SLR requirements at 24 odd dates in different months of the
financial year not being Fridays.

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 (d) M/s Vrinda & Associates are required to verify the compliance with
SLR requirements at 10 odd dates in different months of the
financial year not being Saturdays.

PART II – Descriptive Question (70 Marks)

Question No.1 is compulsory.
Attempt any four questions from the rest.
1. (a) 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 course of the audit,
Vasu & Co. identified that Nandini Ltd. received a show cause
notice from 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 performed 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 2023-24 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. (5 Marks)

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(b) 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 (4 Marks)
(c) Aditya 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 Sanjay & 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. (5 Marks)

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2. (a) Suneel was appointed as the auditor of PCM Ltd. for the financial
year 2023-24. During the course of planning for the audit, CA.
Suneel 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. Suneel, if PCM Ltd. 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.
(5 Marks)
(b) 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.
(4 Marks)
(c) 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 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

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 comment on the above situation with reference to the Chartered
Accountants Act, 1949 and Schedules thereto. (5 Marks)
3. (a) 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? (4 Marks)
(b) NRF Bank Ltd. is suffering from huge number of NPAs. During the
month of April 2023, 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. 2019-20 36.55
Dairy Works 2021-22 55.24
Book Store 2018-19 29.85
Fancy Corp. 2017-18 61.42
RSM and Associates 2020-21 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. (5 Marks)

250
 (c) 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.
(5 Marks)
4. (a) Naveen Ltd. is a chair manufacturing company having its
corporate office in Maharashtra. The company is in the process of
expansion and has acquired five companies during the year. Soni
& Co. is the principal auditor of the company while the audit of all
the companies acquired during the year is being conducted by
Rahul K & Associates. During the course of audit, CA. Soni, the
engagement partner asked the management of Naveen Ltd. at the
corporate office that in order to conduct the audit of the
consolidated financial statements, his audit firm is required to
conduct audit of the financial statements of all the components
also (Companies acquired during the year). To this, the
management asked CA. Soni to consider the audit reports of the
component auditor already provided to his audit team and to
communicate with the component auditor for any discussion they
wish to have. CA. Soni contended that for the purpose of audit of
consolidated financial statements either his firm is required to
conduct an audit of all the component’s financial statements, or he
needs the working papers of the component auditors. Is the
contention of CA. Soni correct? (5 Marks)
(b) You have recently joined a listed company after qualifying CA final
exams through campus placement programme conducted by ICAI.
The company you have joined is not amongst top 1000 listed
companies in the country. However, 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.

251
 In above context, dwell upon what is your understanding of
“Sustainability reporting”? You are also required to list its expected
benefits. (4 Marks)
(c) 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 particular
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 course of
audit, a senior member of the engagement team decides to
engage Mr. X for providing 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. (5 Marks)
5. (a) Jinchandra & Co., Chartered Accountants, has been appointed
statutory auditor of Gurudeva Ltd. for the F.Y. 2023-24. The audit
team has completed the audit and is in the process of preparing
the audit report. 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 the 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 with reference to the relevant Standard on Auditing
the Auditor's duties with regard to reporting. (5 Marks)

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 (b) During the course of an audit of a state government department,
the Office of the Comptroller & Auditor General of India (C&AG)
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 under collecting
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 (5 Marks)
(c) 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. (4 Marks)
6. (a) You have been appointed to compile the financial statements of
the 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 accounting. On pointing out the same, the partners
of the Kings & Co., 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. (5 Marks)
Or
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

253
 assurance provided by the practitioner regarding prospective
financial information in accordance with SAE 3400. (5 Marks)
(b) 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 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. (4 Marks)
(c) 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? (5 Marks)

254
 MODEL TEST PAPER 3
FINAL COURSE: GROUP I
PAPER-3: ADVANCED AUDITING, ASSURANCE AND
PROFESSIONAL ETHICS
Time Allowed- 3 hours Maximum Marks-100
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions
(MCQs)
3. Part II comprises questions which require descriptive type answers.
PART I - Case Scenario based MCQs (30 Marks)
Write the most appropriate answer to each of the following multiple-
choice questions by choosing one of the four options given. All MCQs
are compulsory and carries 2 Marks each.
1. Pack Ltd. is a company engaged in the manufacture of iron and steel
bars. TN & Associates are the statutory auditors of Pack Ltd. for the FY
2023-24. During the course of audit, CA. Ashish, the engagement
partner, found that the Company’s financing arrangements have
expired, and the amount outstanding was payable on March 31, 2023.
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. Ashish express in the case of Pack
Ltd.?
(a) Unmodified opinion.
(b) Qualified opinion.
(c) Adverse opinion.
(d) Disclaimer of opinion.
2. M/s Jojo & Associates have been appointed as statutory auditors of
ZuZu Ltd. for FY 2023-24. During the year, the company has entered
into some related party transactions. CA. Sukrit, the engagement

255
 partner has taken a management representation letter regarding the
proper accounting, presentation and disclosure of such related party
transactions. Is there any further responsibility of CA. Sukrit with respect
to the other procedures to be performed for related party transactions?
(a) Yes, the audit firm has the responsibility to perform the audit
procedures to identify, assess and respond to the risk of material
misstatement arising from the entity’s failure to appropriately
account for related party relationships, transactions and balances.
(b) No, there is no further responsibility of CA. Sukrit as the audit firm
is responsible for verifying the balances and disclosure of related
party transactions. The identification of related party transactions
is the responsibility of the management of ZuZu Ltd.
(c) No, there is no further responsibility of CA. Sukrit as the best audit
evidence for the related party transaction is the management
representation letter.
(d) Yes, the auditor has the responsibility to detect fraud and error
with respect to the related party transactions.
3. Joy, an aspiring student of ICAI, approached Mr. Paul, a practicing
Chartered Accountant, for the purpose of articleship. Mr. Paul, the
principal, offered him stipend at the rate of ` 3,000 per month to be paid
every sixth month along with interest at the rate of 10% per annum
compounded monthly to compensate such late payment on the plea that
cycle of professional receipts from clients is six months. Joe agreed to
such late payment in the hope of getting extra stipend in the form of
interest. Mr. Paul, however, used to disburse salaries to all his
employees on time. As per the Chartered Accountants Act, 1949, under
which clause Mr. Paul is liable for misconduct.
(a) Clause (10) of Part I of the Second Schedule to the Chartered
Accountants Act, 1949.
(b) Clause (4) of Part I of the Second Schedule to the Chartered
Accountants Act, 1949.
(c) Mr. Paul is paying interest thus he is not liable for misconduct.
(d) Clause (1) of Part II of the Second Schedule to the Chartered
Accountants Act, 1949.

256
Case Scenario I [MCQ 4-6]
M/s IRIS & Associates, Chartered Accountants were acting as the statutory
auditors of M/s DMN Bank Limited. During the statutory audit for the relevant
financial year, the following observations were made:
• Interest income included the following:
- ` 8 lakh relating to a short-term crop loan where instalment was
overdue for one crop season.
- ` 10 lakh relating to an advance (guaranteed equally by
Government of India & Government of Tamil Nadu) where the
instalment was due for more than six months.
• A 25 month old NPA account worth ` 43 lakh (net book value) was sold to
an asset reconstruction company for ` 45 lakh. The profit from the above
transaction was taken to the P&L account. The above NPA was sold
‘without recourse’ and on a cash basis. The auditors noticed a
discrepancy in this transaction and hence decided to report the same.
After completing the bank audit, IRIS & Associates agreed to take up the
following management consultancy and other services for one of the start-up
companies based in Noida:
(i) Setting up executive incentive plan and wage incentive plan.
(ii) Price-fixation and other management decision making.
(iii) Conduct a periodical audit and advisor for tax matters.
Mr. Kartik, one of the partners of the firm felt that providing the above services
could result in professional misconduct. Hence, he resigned from the
partnership and became a sole practitioner. One of the clients of IRIS &
associates came to know about the issue and they approached Mr. Kartik to
conduct the statutory audit for the financial year. Mr. Kartik took up the
assignment without informing the previous firm. Annoyed by this, Mr. Jack
filed a complaint to ICAI regarding the act of Mr. Kartik. After inquiry, it was
decided that Mr. Kartik was guilty of professional misconduct.
After this incident, Mr. Kartik also decided to file a complaint against Mr. Jack.
When he was thinking about a reason for the same, he remembered that Mr.
Jack had entered into an agreement with two of his articled clerks to pay
stipend on an annual basis, while others were paid on monthly basis.
Realising that this act is in violation of Regulation 48 of the Act, he filed a
complaint to ICAI. After enquiry, it was found that Mr. Jack was guilty of
professional misconduct.

257
Based on the above facts, answer the following: -
4. From the above facts and details, what is the correct amount of interest
which the bank should account for in its financial statements?
(a) Nil.
(b) ` 8 lakh.
(c) ` 13 lakh.
(d) ` 5 lakh.
5. What could be the possible amount classified as NPA relating to the
accounts with respect to observation regarding the inclusion of interest
income given below:
- ` 8 lakh relating to a short-term crop loan where instalment was
overdue for one crop season.
- ` 10 lakh relating to an advance (guaranteed equally by
Government of India & Government of Tamil Nadu) where the
instalment was due for more than six months.
(a) ` 5 lakh.
(b) ` 13 lakh.
(c) ` 10 lakh.
(d) ` 18 lakh.
6. In NPA, sale to asset reconstruction company, what discrepancy auditor
might have noticed:
(a) The NPA had not completed 30 months.
(b) Sale was made ‘without recourse’.
(c) Sale was made for cash basis.
(d) The profit of ` 2 lakh was taken to Profit & Loss account.
7. Being guilty of professional misconduct, which among the following
punishment Mr. Jack will be subject to?
(a) Impose a penalty up-to ` 1 lakh.
(b) Remove his name from members register permanently.
(c) Impose a penalty up to ` 3 lakh.

258
 (d) Impose a penalty of ` 6 lakh.
8. After inquiry, it was decided that Mr. Kartik was guilty of professional
misconduct. Why Mr. Kartik was guilty of professional misconduct?
(a) He is guilty of professional misconduct as per Clause 7 of Part I of
Second Schedule for being grossly negligent in conduct of his
professional duty.
(b) He is guilty of professional misconduct as per Clause 8 of Part I of
First Schedule due to non-communication to previous auditor.
(c) He is guilty of professional misconduct as per Clause 8 of Part I of
Second Schedule due to non-communication to previous auditor.
(d) He is guilty of professional misconduct as per Clause 7 of Part I of
First Schedule for being grossly negligent in conduct of his
professional duty.
Case Scenario II [MCQ 9-12]
Honey & Co; a reputed Chartered Accountants firm is appointed as a statutory
auditor of Copperbox Limited. The Company is into manufacturing of copper
products. The company has advanced in all its endeavours by supplying
million Copper units. The company has incorporated another company
“Coppertile Private Limited” by investing 45% in the share capital of the
company and at the same time having 100% control over the Board of
Directors as per the agreement with the majority shareholder. The company is
listed in the US Stock Exchange but in the process of listing in the Indian
Stock Exchanges, having a net worth of ₹ 245 crore. The product is promoted
by Ali Baba, as its product Brand Ambassador. You are the audit manager
and your 1st year trainee asks you the following questions listed down. He
has also noted down some of the questions for you to answer to discuss the
impact on the planning stage after understanding the entity and its
environment:
• The company is required to appoint the Internal Auditor in accordance
with the provisions of the Companies Act, 2013 and the company
complied with the same by delegating the duties to an employee, who
joined the company as first year Architect. The audit team is planning to
use the work performed by the Internal Auditor as the reports given by
him are designed in a marvelous fashion. Even the Board of Directors
are astonished by the design of the Internal Audit report.

259
• The company is planning to use the working papers of the previous
auditor by demanding the audit working papers from him citing the
confidentiality clause. The auditor also plans to use the same for testing
the opening balances during the year. The previous year auditor having
been appointed as the auditor of subsidiary; the company plans to use
his work for verifying the investment balance during the year.
Based on the above facts, answer the following:-
9. The engagement partner has requested you to comment upon the
usage of work of Internal auditor by the engagement team in
accordance with relevant Standard on Auditing:
(a) As the work done by the internal auditor is marvelously designed
and presented the same can be considered to the extent the
statutory auditor can use it. As the work is highly appreciated even
by the Board of Directors, the same should be definitely used by
Honey & Co.
(b) The work done by the Internal Auditor need to be assessed for the
sufficiency and should be used to avoid the double work. The audit
team of Honey & Co. need to reduce the unnecessary work as the
same has been performed by the other auditor.
(c) The auditor is required to assess the competence and professional
care of the work performed by the Internal Auditor. Thus, the
auditor Honey & Co. needs to reconsider the audit strategy and
cannot use the work of the Internal Auditor.
(d) The work performed by the internal auditor can be used by the
External Auditor in this case if the architect is not an employee of
the company but is in private practice.
10. The Trainee asked whether the audit team is required to perform any
procedures for the investment in Coppertile Private Limited:
(a) The company need to prepare the consolidated financial
statements and the same need to be audited by the auditor and
the auditor needs to consider the financial information and also
assess regarding the need to use of the work of the component
auditor.
(b) The auditor needs to perform audit procedures on the investment
balances and transactions with related parties.

260
 (c) The auditor need not perform any procedures as the investment in
Coppertile Private Limited was already made in the previous year.
(d) Both (a) & (b).
11. The Trainee asked about role of auditor in case the investment in
Coppertile Private Limited is increased to 60% in the next year:
(a) The auditor need not do any additional procedures compared to
this year except for audit procedures over the increase in
Investment value and its disclosures in the Financial Statements.
(b) The auditor should also audit the group consolidated financial
statements as the consolidation becomes applicable for the
company being the investment is raised from 45% to 60%.
(c) The auditor needs to audit the subsidiary’s books of accounts to
get comfort over the balances in the material subsidiary. Thus, the
audit strategy will change for verifying the investment.
(d) The auditor can either on its own, audit the subsidiary or use the
work of another auditor to get comfort over the balances in the
subsidiary from the next year.
12. The company has requested its previous auditor to give back its audit
documentation (“working papers”) and warned the previous auditor with
legal notice to submit them back to the company showing the
confidentiality clause:
(a) The previous auditor is bound to return the workpapers as the
company has raised the confidentiality clause over the audit firm.
Thus, SA 230 is not applicable in such a scenario as the original
owner itself requests you to return the working papers.
(b) The auditor has a right over its working paper, and he is the owner
of the workpapers, but he cannot give the workpapers to any
person even at the request of the company.
(c) The auditor has a right over its working paper, and he is the owner
of the workpapers and he may give at his discretion make
available the workpapers to the company.
(d) The auditor has a right over its working papers but the owner of
them is the company. He should make available the workpapers to

261
 the company at its request and SQC 1 mandates the auditor to
make copies made available to its clients.
Case Scenario III [MCQ 13-15]
FinAp Deposit Limited, a NBFC registered with RBI under section 45-IA of the
RBI Act and listed on National Stock Exchange, appointed GRN & Co.
Chartered Accountants as their statutory auditor for the financial year ending
on 31 March 2023. Mr. Ankush the audit partner of GRN & Co. extracted the
monthly net owned fund position from the books of FinAp Deposit Limited.
Month Net Owned Funds (as calculated based on monthly position)
Month Net Owned Funds (as calculated
based on monthly position)
April 2022 ` 350 Lakh
May 2022 ` 350 Lakh
June 2022 ` 320 Lakh
July 2022 ` 310 Lakh
August 2022 ` 290 Lakh
September 2022 ` 250 Lakh
October 2022 ` 240 Lakh
November 2022 ` 190 Lakh
December 2022 ` 180 Lakh
January 2023 ` 240 Lakh
February 2023 ` 270 Lakh
March 2023 ` 310 Lakh

During the year, Mr. Ankush recommended to the Board and Audit Committee
the appointment of internal auditors. However, the Board rejected this
recommendation due to budget constraints. They assured that they would
consider establishing an internal audit department within the Company next
year.
Based on the above facts, answer the following:-
13. Mr. Ankush reported, under Clause 3(A)(III) of Master Direction - Non-
Banking Financial Companies Auditor’s Report (Reserve Bank)

262
 Directions, 2016, that Good Deposit Limited is not eligible to hold its
Certificate of Registration under section 45-IA of the RBI Act, as during
the year the Net Owned Funds went below the minimum required limit.
Management of the NBFC had a different opinion that a certificate
pertaining to the Net Owned Funds from the statutory auditor is required
with reference to the position of the Company as at the end of the
financial year ended 31 March and not based on each month’s position.
Kindly guide Mr. Ankush with respect to the requirement under Master
Direction.
(a) Every NBFC shall submit a certificate from its statutory auditor that
it is eligible to hold a Certificate of Registration under Section 45-
IA of the RBI Act. Such a certificate should be with reference to
the position of the company as of the end of the financial year
ended 31 March.
(b) Every NBFC shall submit a Certificate from its statutory auditor
that it is eligible to hold a Certificate of Registration under Section
45-IA of the RBI Act. Such a certificate should be with reference to
the position of the company as of the end of each month.
(c) Every NBFC shall submit a Certificate from its statutory auditor
that it is eligible to hold a Certificate of Registration under Section
45-IA of the RBI Act. Such a certificate should be with reference to
the position of the company throughout the financial year.
(d) Only NBFC-MFI shall submit a Certificate from its statutory auditor
that it is eligible to hold a Certificate of Registration under Section
45-IA of the RBI Act. Such a certificate should be with reference to
the position of the company throughout the financial year.
14. Mr. Ankush wants to highlight the matter with respect to the absence of
internal audit function in his audit report under the Emphasis of Matter
paragraph. However, management was of the view that the audit partner
was not right by disclosing the said matter in his audit report as it was
an internal matter, and the audit team had not identified any material
evidence which could impact the opinion of the auditor. Kindly guide Mr
Ankush whether proposed reporting under Emphasis of Matter (EOM)
para in the Audit Report is correct.
(a) EOM paragraph included in auditor’s report refers to a matter
appropriately presented or disclosed in the financial statements

263
 that, in the auditor’s judgment, is of such importance that it is
fundamental to users’ understanding of the financial statements.
Hence reporting under EOM is correct.
(b) EOM paragraph included in auditor’s report refers to a matter
other than those presented or disclosed in the financial statements
that, in the auditor’s judgment, is relevant to users’ understanding
of the audit, auditor’s responsibilities or auditor’s report. Hence
reporting under EOM is incorrect.
(c) EOM paragraph included in auditor’s report 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.
Hence reporting under EOM is incorrect.
(d) EOM paragraph included in auditor’s report refers to a matter
other than those presented or disclosed in the financial statements
that, in the auditor’s judgment, is relevant to users’ understanding
of the audit, auditor’s responsibilities or auditor’s report. Hence
reporting under EOM is correct.
15. Kindly guide Mr. Ankush regarding areas where he may need to report
the absence of internal audit function in the company in Audit Report.
(a) The auditor is required to report the matter in the Basis of
Qualification paragraph of his audit report as the Auditor was
unable to place reliance on the internal audit function of the
Company.
(b) The auditor is required to report the same under Para 3(xiii) of the
CARO (Companies Auditor’s Report Order), 2020.
(c) The auditor is required to report the same under Para 3(xiv) of the
CARO (Companies Auditor’s Report Order), 2020.
(d) The auditor is required to report the said matter in Key Audit
Matters as per SA 701, which requires significant professional
judgement and user attention.

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 PART II – Descriptive Question (70 Marks)
Question No.1 is compulsory.
Attempt any four questions from the rest.
1. (a) Whilst the Audit team has identified few matters, they need your
advice to conclude on the same. Engagement Partner have asked
them to review the Board minutes and other secretarial/ regulatory
records based on which the following additional matters were
brought to the attention of the Partner: -
(i) An amount of ₹4.75 Lakhs per month is paid to M/s. MNJ
Associates, a partnership firm, which is a 'related party' in
accordance with the provisions of the Companies Act, 2013
for the marketing services rendered by them. Based on an
independent assessment, the consideration paid is higher
than the arm's length pricing by ` 0.18 Lakh per month.
Whilst the transaction was accounted in the financial
statements based on the amounts' paid, no separate
disclosure of this related party transaction has been made in
the notes to accounts forming part of the financial statements
highlighting the same as a 'related party' transaction.
(ii) The long-term borrowings from the parent company has no
written terms and neither the interest nor the principal has
been repaid so far.
(iii) Certain computers were received from the parent company
free of cost, the value of which is ` 0.75 lakh and no
accounting or disclosure of the same has been made in the
notes to accounts.
Audit Manager has reported that she had asked certain
information relating to another 'related party' transaction
(amounting to approx. ` 35 lakh) but the CFO refused to provide
the same since the same is perceived to be confidential and
cannot be shared with the auditors.
You are required to advise about items to be reported to those
charged with governance, where applicable, based on your audit
findings in the given situation. (5 Marks)

265
 (b) It was observed from the modified audit report of the financial
statements of Param Limited for the year ended 31st March 2024
that depreciation of ₹ 3.75 crore for the year 2023-24 had been
charged off to the Statement of Profit and Loss instead of including
it in "carrying value of asset under construction". State in relation
to the audit for the year ended 31st March 2024, whether such
modification in the previous year's audit report would have any
audit implication for the current year and if yes, how would you
deal with it in your audit report? (5 Marks)
(c) While conducting the audit of Tex Limited, Mr. Dhanush observed
that a substantial amount is recognized in respect of obsolescence
of inventory and warranty obligation in the financial statements.
Mr. Dhanush wants to obtain written representation from the
management to determine whether the assumptions and estimates
used are reasonable. Guide Mr. Dhanush with reference to the
relevant Standard on Auditing. (4 Marks)
2. (a) JPG & Associates, Chartered Accountants, are statutory auditors
of VS Limited for the last three years. VS Limited is engaged in the
manufacturing and marketing of pharmaceutical goods in India.
During 2023-24, the Company has diversified and commenced
providing software solutions in "e-commerce" in India as well as in
certain European countries. JPG & Associates, while carrying out
the audit for the current financial year, came to know that the
company has expanded its operations into a new segment as well
as a new geography. JPG & Associates does not possess
necessary expertise and infrastructure to carry out the audit of this
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. (5 Marks)
(b) Mr. Sanket has been appointed as an auditor of XYZ Limited, a
rapidly growing tech company, has recently adopted a range of
new digital technologies to enhance its operations. These include
robotics, artificial intelligence and blockchain. He seeks guidance
on how to effectively conduct an audit in this technologically
advanced environment. Explain what are the key steps for auditors
in a changing technology environment? (4 Marks)

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 (c) CA. T, the statutory auditor of Race Limited, a PSU, for the year
2023-24. During the audit, CA. T did not detect any fraud having
been committed during that year. However, the C & AG audit
staffs, during their routine inspection, found that chief cashier of
the company committed fraud in debtor's ledger and absconded
with the amount. The investigation made in the fraud revealed that
the auditor did not exercise proper skill and care and performed
his work improperly.
Comment with reference to the provisions of the Chartered
Accountants Act, 1949. (5 Marks)
3. (a) Kavyanjali Limited appoints Ridhi & Sidhi as statutory auditors for
the financial year 2023-24. Ridhi & Sidhi seems to have different
opinions on audit approach to be adopted for audit of Kavyanjali
Limited. Sidhi 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.
Ridhi is concerned 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 Ridhi 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.
(4 Marks)
(b) CA. Ankit is conducting concurrent audit of branch of a public
sector bank. It is a large branch having advances of about ` 525
crores including export advances of ` 450 crores. Some borrowers
also get Letter of Credits issued from branch for importing gold
from Dubai. He wants to be sure that there is no revenue leakage
in branch. For the time being, he is focusing on advances. Discuss
any five areas pertaining to advances of the branch. (5 Marks)
(c) NIS Limited, a company registered under the Companies Act,
2013 has created a separate Trust "NIS Employees Gratuity Fund
Trust". Both the Company and Trust are under the same
management. Mr. Anuj is the auditor of both the entities. Mr. Anuj
has observed that some part of the expenditure was not applied

267
 towards the objects of the trust. He informed the matter to the
Board of Trustees through a separate report but did not qualify the
audit report of the Trust. Comment with reference to the Chartered
Accountants Act, 1949, and Schedules thereto. (5 Marks)
4. (a) Mr. Ashish was appointed as the engagement partner on behalf of
Legacy & Co., a Chartered Accountant Firm, to conduct statutory
audit assignment of Capital Limited, unlisted public company.
Mr. Sodi, one of the senior engagement team members, was given
the responsibility to audit the matters as per the requirements of
CARO, 2020 and in that connection, he made the following
observations, that may be relevant for reporting as per the said
order:-
Sr. Observations
No.
(i) One of the Plant and Equipment taken on a lease (‘right
of use’ asset) by Capital Limited was revalued based on
the valuation by a registered valuer and the net carrying
value of Plant and Equipment in aggregate was changed
from ` 3 crore to ` 3.35 crore.
(ii) During the year under consideration, the cash credit limit
of ` 5.10 crore was sanctioned to Capital Limited by BDD
Bank based on the security of current assets which was
reduced to ` 4.75 crore after 6 months. In this
connection, quarterly returns have been filed by the
company with the BDD bank which are in agreement with
Books of Accounts.

You are required to examine the contention of Mr. Sodi regarding

reporting of the above observations in accordance with CARO
2020. (5 Marks)
(b) The nine principles in BRSR are categorized into the ESG
components of Environment, Social and Governance with two of
the nine in Environment, three in social and four in Governance.
One of the principle relates to all the initiatives an entity has to
take for the benefit of its employees from the point of view of their
dignity, health, well-being. Elucidate the essence of core elements
associated with the aforesaid principle. (4 Marks)

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 (c) CA. Suchi is the statutory auditor of RJ Limited for the financial
year 2023-24. The company is engaged in the production of
electronic products. During the audit, CA. Suchi 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. Suchi should deal with the situation in the
auditor's report and the different options which can be considered?
(5 Marks)
5. (a) 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%.
On 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.
(5 Marks)
(b) One of the independent directors sought information regarding the
appointment of internal auditors for following Group Companies in
accordance with the Companies Act, 2013 of which certain
Financial Information are given below:
Figures are in ` crore and correspond to the previous year.
Name Nature Equity Turnover Loan from Public
Share Bank and Deposits
Capital PFI
IDI Limited Listed 100 190 50 24
TIJ Limited Unlisted 60 190 50 24
Public
MIN Unlisted 60 190 50 -
Limited Private

You are required to evaluate the requirements of the Companies

Act, 2013 regarding the appointment of internal Auditors for the
Group Companies. Discuss. (5 Marks)

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 (c) CA. Rishi is a newly qualified Chartered Accountant in practice
and in order to increase his professional practice and client base,
entered into an agreement with Mr. Krish, a qualified and
experienced registered valuer, to share 18% professional fees for
all cases of valuation referred to him by CA. Rishi. Based on this,
CA. Rishi received ` 1,15,000 during the year 2023-24 from Mr.
Krish. Is CA. Rishi guilty of misconduct under the Chartered
Accountants' Act, 1949? (4 Marks)
6. (a) You are engaged by M/s Anchor 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? (4 Marks)
Or
CA. Tripti 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 the CFO and
audit committee. However, no response was received even after
waiting for a reasonable time. What are the options available to
her? (4 Marks)
(b) The Director (Discipline) of the ICAI received information of
alleged misconduct against Mr. Nandkishore, the proprietor of NK
& Associates, where an event relating to Corporate Social
Responsibility was sponsored by NK & Associates, whereby in the
sponsorship banner, name of Mr. Nandkishore as ‘CA
Nandkishore, Proprietor, NK & Associates’ was mentioned.

270
 On the basis of above information and along with certain evidence
against Mr. Nandkishore, he was found guilty and so he was
reprimanded and a fine of ₹ 1 lakh was imposed by an order
passed against him dated 21st May, 2023.
Against the said order, Mr. Nandkishore preferred an appeal with
the Appellate Authority on 04th June, 2023 by submitting a
statement of appeal along with the application form of appeal.
During such appellate proceedings, it was discovered that the said
statement of appeal contained some facts which were false to
which Mr. Nandkishore admitted it to be false and apologized for it.
Mr. Nandkishore has violated which of the provisions of the
Chartered Accountants Act, 1949? Comment. (5 Marks)
(c) KBC nationalized bank received an application from a Limited
company seeking sanction of a term loan to expand its existing
business. In this connection, the Loan Manager of the Bank
approaches you to conduct a thorough investigation of the items of
the balance sheet 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 major steps an investigating
accountant would keep in mind while verifying assets and liabilities
included in the balance sheet of the borrower company which has
been furnished to the Bank. (5 Marks)

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 MODEL TEST PAPER 4
FINAL COURSE: GROUP I
PAPER-3: ADVANCED AUDITING, ASSURANCE AND
PROFESSIONAL ETHICS
Time Allowed- 3 hours Maximum Marks-100
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions
(MCQs)
3. Part II comprises questions which require descriptive type answers.
PART I - Case Scenario based MCQs (30 Marks)
Write the most appropriate answer to each of the following multiple-
choice questions by choosing one of the four options given. All MCQs
are compulsory and carry 2 Marks each.
1. Mr. Rajan, the CEO of a mid-sized company, has received an email
requesting him to urgently update his account details due to a supposed
security breach. The said email, appears to be received from the
Company’s bank accounts, looks official due to use of bank's logo and
branding. Such email also includes a link to a website that resembles
the bank's login page. Concerned about the security of the company's
finances, Mr. Rajan clicks on the link and enters his login credentials.
Later, the company’s IT department detects unauthorized access to the
company’s financial accounts and identifies that the CEO’s credentials
were compromised. Identify the type of cyberattack that Mr. Rajan fell
victim to:
(a) Smishing
(b) Whaling
(c) Spear Phishing
(d) Vishing
2. DFL Ltd. has invited tenders for the appointment of statutory auditors,
as M/s Cross Ltd., the previous auditor has retired due to completion of
terms of engagement. The tender is exclusively for Chartered

272
 Accountants. M/s SDS & Co. has submitted its tender quoting the fees
for audit engagement considering the size and nature of business. The
contract was awarded to M/s SDS & Co., and they were appointed as
statutory auditors for 3 years from the financial year 2023-24. Whether
M/s SDS & Co. will be held guilty of professional misconduct as per the
Chartered Accountants Act, 1949.
(a) Yes, SDS & Co. will be held guilty of professional misconduct
under clause (6) of Part-I of the First Schedule to the Chartered
Accountants Act, 1949.
(b) No, SDS & Co. will not be held guilty of professional misconduct
under clause (6) of Part-I of the First Schedule to the Chartered
Accountants Act, 1949.
(c) Yes, SDS & Co. will be held guilty of professional misconduct
under clause (7) of Part-I of the First Schedule to the Chartered
Accountants Act, 1949.
(d) No, SDS & Co. will not be held guilty of professional misconduct
under clause (7) of Part-I of the First Schedule to the Chartered
Accountants Act, 1949.
3. M/s Pihu & Associates are the statutory auditors of Brick Ltd. for FY
2023-24. During the audit, CA Arpit, the engagement partner noticed the
following:
• Notices received from various regulatory authorities.
• Payments of various fines and penalties.
• Unusual cash payments.
• Payments to various government employees not supported by any
document.
• Heavy payments to legal counsels.
CA Arpit should consider the above as indicative of:
(a) Doubt on Internal Controls of Brick Ltd.
(b) Doubt of non-compliance with laws by Brick Ltd.
(c) Doubt on the accounting system of Brick Ltd.

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 (d) Doubt on the going concern assumption of Brick Ltd.
Case Scenario I [MCQ 4-8]
MNO Ltd., incorporated in the financial year 1980-81, is a distinguished
company specialising in the manufacturing of nickel-based batteries. As one
of the oldest manufacturing companies in this sector, MNO Ltd. operates with
two manufacturing plants and a comprehensive distribution network that
spans across India. Remarkably, MNO Ltd. was among the first companies to
be listed on the stock exchange, underscoring its longstanding presence in
the market. The company has consistently adhered to the Securities and
Exchange Board of India (Listing Obligations and Disclosure Requirements)
Regulations 2015, ensuring compliance with all regulatory standards.
M/s KP & Co. were the statutory auditor in the previous year and resigned
from the role of statutory auditor. M/s JKL & Co. has been appointed as a
statutory auditor of MNO Ltd. in the FY 2023-24. In conducting initial audit
engagement, M/s JKL & Co. has simply placed reliance on the closing
balances of preceding period.
During the audit, the auditor observed that the company is unable to pay its
creditors on time. The company is also not able to properly comply with the
terms of the loan agreement with the banks. Moreover, several key ratios are
also adverse. In view of the above, the auditor asked management to provide
assessment of going concern, however the management did not provide the
same. Despite following up, the management did not provide the requested
assessment. As a result, the auditor documented the request and follow-up
regarding the going concern assessment in the working papers.
Apart from the above, the company has one accounting software for
maintaining its books of accounts, which does not have any feature of edit log
(Audit Trail). Accordingly, the auditor reported the said fact of not having the
facility of edit log under the heading Other Legal & Regulatory Requirements-
Rule 11(g) of the Companies (Audit and Auditors) Rules, 2014 in the main
audit report.
Apart from above facts, the several important financial information of MNO
Limited during the year ended 31st March 2024 are tabulated as below:

274
 (` In Crore)
Sr. No Particular Amount (`)
1. Paid Up Share Capital 10
2. Deficit balance in Profit & Loss Account 11.47
3. Turnover 85
4. Inventory* 15
5. Cash Loss 2.95
6. Operating Loss 1.97

*Out of Total inventory as above, inventory amounting to ` 12.35 Crore are

lying with third party.
Based on above facts, answer the following MCQs
4. As per the requirement of SA 570, how auditor should deal in the matter
of unwillingness of management to provide for the assessment relating
to going concern?
(a) Auditor should report such matters in the section of Key Audit
Matter.
(b) The auditor should properly document evidence relating to asking
management and its subsequent follow up with the management
for assessment on going concern and accordingly should express
unmodified opinion.
(c) Auditor should report such matters in Emphasis of Matter
Paragraph Section.
(d) Auditor should express modified opinion in his audit report.
5. As per SA 501, what is the correct audit procedure to be followed
regarding the existence and condition of inventory wherein an inventory
valued ` 12.35 crore is lying with the third party?
(a) The auditor should rely on the management explanation regarding
the inventory lying with the third party.
(b) The auditor should request confirmation from third party as to the
quantities and condition of the inventory held with them or perform
inspection or other audit procedures as appropriate.
(c) The auditor should verify the inventory lying with the company.

275
 (d) The auditor should take written representation only from the
management regarding the inventory lying with the third party.
6. State the amount required to be reported by the auditor of MNL Ltd.,
under clause 3(xvii) of Para 3 of CARO, 2020 on account of losses
during the year under consideration.
(a) ` 4.92 Crore
(b) ` 1.97 Crore
(c) ` 2.95 Crore
(d) ` 11.47 Crore
7. According to SA 510, which of the following audit procedures can be
implemented by M/s JKL & Co. to obtain sufficient and appropriate audit
evidence on the opening balances about whether it contain any material
misstatement that could affect financial statements of current year?
(i) Closing balances of the preceding period have been correctly
brought forward to the current period.
(ii) Performing specific audit procedures to obtain evidence regarding
its opening balances.
(iii) Determining whether the opening balances reflects the application
of appropriate accounting policies.
(a) Only (i)
(b) Only (iii)
(c) Only (i) and (iii)
(d) (i), (ii) and (iii)
Case Scenario II [MCQ 8-10]
EFG Ltd., incorporated in 1984-85, has distinguished itself as one of the most
rapidly growing non-banking financial companies (NBFCs) having principal
business of granting loans. Its head office is situated in Pune, a city renowned
for its dynamic financial and industrial sectors. Remarkably, EFG Ltd. holds
the notable achievement of being among the first NBFCs to be listed on the
stock exchange, which underscores its longstanding and influential presence
in the financial market. Over the years, the company has demonstrated an
unwavering commitment to regulatory compliance by consistently adhering to
the Securities and Exchange Board of India's (SEBI) Listing Obligations and

276
Disclosure Requirements Regulations of 2015. This steadfast adherence
ensures that all its operations align with the rigorous standards set by
regulatory authorities, thereby reinforcing its credibility and trustworthiness
among investors and stakeholders.
M/s SDS & Co. thoroughly obtained the knowledge and background of the
company, including an understanding of the legal and regulatory requirements
applicable to the company.
During the audit of the financial statements, auditor observed that, the
company has violated one of the prudential guidelines of RBI as applicable to
the company relating to the acceptance of public deposit. Since the company
was non deposit taking, and in one case during the year under consideration,
the company had accepted the public deposit. In this regard, the management
has also provided a detailed note in the financial statements and
subsequently also repaid the said deposit in the next financial year.
Considering the said note, the auditor feels that the matter is important and
required attention of the users of the financial statements.
The auditor of EFG Ltd. sent confirmation requests to 14 debtors (to whom
loan has been granted) to confirm the year-end balances as per SA 505. The
said requests were designed in such a way that debtors will directly respond
to the auditor only when they disagree with the same.
Based on above facts, answer the following MCQs
8. Considering the nature of the business, which Reporting clauses of
CARO, 2020 would be applicable from below: -
(i) 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
(ii) In respect of loans and advances in the nature of loans, whether
the schedule of repayment of principal and payment of interest has
been stipulated and whether the repayments or receipts are
regular;
(iii) 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.

277
 (iv) Whether the company has provided any loans, guarantee or
provided security to any other entity.
(a) Only (i) and (iii)
(b) Only (i), (ii) and (iii)
(c) Only (i) and (ii)
(d) Only (i), (ii) and (iv)
9. What is the auditor’s responsibility when the audit of EFG Ltd. for the
previous year has not been conducted by the current auditor i.e. M/s
SDS & Co.?
(i) The auditor needs to report such matters in the other matter
paragraph in the main audit report.
(ii) The auditor needs to report such matter in the emphasis of matter
paragraph.
(iii) The auditor shall be responsible for obtaining sufficient and
appropriate audit evidence that the opening balances does not
contain any material misstatement.
(a) Both (i) & (iii)
(b) Both (ii) & (iii)
(c) Only (ii)
(d) Only (i)
10. In the given case, what is the reporting requirement in relation to SA
250, on the part of auditor, with reference to violating guidelines by the
company relating to the acceptance of public deposit?
(a) The auditor is required to report such matters in the main audit
report under the head Other Matter paragraph section only.
(b) The auditor is required to report such matters in the main audit
report under the head Emphasis of Matter paragraph section only.
(c) Apart from reporting under the Emphasis of Matter paragraph, the
auditor is also required to report to RBI.
(d) Apart from reporting under the Other Matter paragraph, the auditor
is also required to report to RBI.

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Case Scenario III [MCQ 11-15]
CA Ram and CA Lakshman are close friends and are into practice as sole
proprietors. Both decided to expand their focus on taking up more
assignments in the field of Goods & Services Tax. On back of the same, they
both decided to conduct a joint training session for their clients on GST and
decided to share the total fee collected thereof. They invited another CA from
their professional circle to join the initiative, however, the person declined the
same informing that this act was against professional ethics and will lead to
disciplinary action from ICAI.
The partner of M/s AK & Associates is a close friend of CA Ram. The firm was
involved in an audit of a listed company which was required to submit
Business Responsibility and Sustainability Report (BRSR). The company
being audited was into thermal energy production business in India. They had
submitted details about the total emissions from its production outlets during
the year and a detailed energy consumption plan which it had devised for the
upcoming years. Since CA Ram had undergone a course on Sustainability
Reporting, he was approached for getting advice on what needs to be
reported in the BRSR of the company. As a gesture for helping the firm, the
partner of the firm suggested CA Ram’s name to the post of becoming a
member in the Board of Management of KYC Co-operative Bank, a Primary
(Urban) Co-operative Bank and a client of AK & Associates. Upon hearing the
same, CA Lakshman requested Ram not to take up the post as it would lead
to professional misconduct.
CA Ram was acting as an internal auditor of PL Technologies Private Limited.
The company decided to raise more funds for expanding its business across
the country by including new age technological services such as AI. Ram was
observing the business model and the way in which the company was
operating for quite some time, and he was keen on investing in the company.
As a result, he decided to invest in the company’s shares and ended up
acquiring 9.75% of the shares (total face value of the shares acquired was
` 4.75 lakhs) of the company during the financial year. CA Lakshman got to
know about this information, and he immediately urged Ram to resign from
the being the internal auditor of PL Technologies Private Limited, for the
reason that an internal auditor cannot hold any shares in the company, and it
will lead to professional misconduct and also failure to comply with the
provisions of the Companies Act, 2013. However, Ram did not accept the
argument of Lakshman, and he said that nothing will happen because of him

279
acquiring 9.75% shares in the company and continuing to act as its internal
auditor.
CA Lakshman was the statutory auditor for GH Finance Private Limited, a
NBFC head quartered in India. The company’s treasury department had
undergone changes in the recent past and the current set of team members
did not have much experience in handling the treasury functions. Due to this
situation, the company reached out to their auditor CA Lakshman who was
also into equity research advisory apart from CA practice, to support the
company and the members of its treasury department for a brief period by
giving Investment Advisory Services, to ensure efficient utilization and
management of the funds of the company. Before committing anything on the
offer, CA Lakshman wanted to consult with CA Ram as to whether the service
requested by the NBFC can be performed by him.
11. Whether the act of conducting joint training session on GST by CA Ram
& Lakshman and sharing of the fee collected leads to professional
misconduct as per the Chartered Accountants Act 1949?
(a) Yes, as per clause 2 of Part I of First Schedule, a CA in practice is
allowed only to pay / share the commission or brokerage or profits
from his professional business only with another practicing CA It
does not allow sharing of any fee collected from joint training
sessions. Hence both CA Ram & Lakshman are guilty of
professional misconduct.
(b) Yes, CA Ram & Lakshman will be held guilty of professional
misconduct for conducting the joint training session on GST as per
part IV (other misconduct) of the First Schedule of the Chartered
Accountants Act 1949.
(c) Yes, this is a case of solicitation of client whereby CA Ram can
influence clients of CA Lakshman and vice-versa. Hence the
conduct of the joint training session will lead to being guilty of
professional misconduct as per clause 6 of Part I of First
Schedule.
(d) No, as per the recent decisions of Ethical Standards Board, it is
permissible for 2 or more CA in practice collectively to have joint
training session for their clients on GST, and share the fee
collected from the clients thereof.

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12. With regards to the BRSR reporting on the data of total emissions & the
future energy consumption plans of the company, how do you treat
them?
(a) The details of the emission forms part of the Essential Indicators
and need to be mandatorily disclosed. However, the plan for future
energy consumption is only a Leadership Indicator and is
considered as optional disclosure.
(b) Both the details of the emission & future energy consumption
plans form part of the Essential Indicators and need to be
mandatorily disclosed in the BRSR.
(c) The details of the emission are a Leadership Indicator and is
considered as optional disclosure, whereas the plan for future
energy consumption is an Essential Indicator and needs to be
mandatorily disclosed in the BRSR.
(d) Both the details of the emission & future energy consumption
plans form part of the Leadership Indicators and are considered as
optional disclosure.
13. The futuristic plan which the company has for its energy consumption
can be categorized under which principle of National Guidelines on
responsible business conduct?
(a) Principle 1 – Ethics, Transparency and Accountability
(b) Principle 6 – Protection and Restoration of Environment
(c) Principle 4 – Respect for Stakeholder’s Interests and
Responsiveness
(d) Principle 7 – Influence on Public and Regulatory Policy
14. By accepting the offer to become a member of the Board of
Management of KYC Co-operative Bank, do you think that CA Ram
would be held guilty of professional misconduct?
(a) Yes. As per clause 11 of Part I of First Schedule CA Ram would
be held guilty of professional misconduct for engaging in another
profession/ occupation without the permission of ICAI.

281
 (b) It is permissible for a CA in practice to become a member of the
board of management in primary (Rural) co-operative banks.
Hence, CA Ram would be held guilty of professional misconduct if
he accepts the offer.
(c) It is permissible for a CA in practice to become a member of the
Board of management in primary (urban) co-operative banks.
Hence, CA Ram would not be held guilty of professional
misconduct if he accepts the offer.
(d) Yes. CA Ram would be held guilty of professional misconduct
under Part III (other misconduct in relation to members of the
Institute generally) of Second Schedule, as Ram is getting this
offer as a reciprocation for helping AK & Associates.
15. In the given case, it is mentioned that CA Lakshman is a practicing CA
and is also engaged as an Equity Research Advisor. Do you think that
CA Lakshman will be held guilty of professional misconduct as per the
provisions of the Chartered Accountant Act,1949?
(a) No. A CA in practice may be an equity research advisor, but he
cannot publish retail reports as it would amount to other business
or occupation. Thus, if CA Lakshman doesn’t publish any reports,
he will not be held guilty of professional misconduct.
(b) Yes. As per clause 11 of Part I of First Schedule CA Ram would
be held guilty of professional misconduct for engaging in another
profession/ occupation without the permission of ICAI.
(c) A CA in practice cannot be an Equity Research Advisor, for his
existing clients or for any other person. Hence, CA Lakshman will
be held guilty of professional misconduct.
(d) Yes. As per clause 11 of Part I of First Schedule read with Part III
of Second Schedule, CA Ram would be held guilty of professional
misconduct for engaging in another profession/ occupation without
the permission of ICAI.

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 PART II – Descriptive Question (70 Marks)
Question No.1 is compulsory.
Attempt any four questions from the rest.
1. (a) Spice Ltd., FMCG company, having its tea gardens in northeastern
states of the country is exclusively dealing in blending, processing,
packing and selling of various brands of tea. During the year under
audit, the company entered into joint venture for purchasing Tea
Gardens in South Africa and Vietnam. M/s Dharam & Associates
are the statutory auditors of the company for the financial year
2023-24. During the audit, the audit team was unable to obtain
sufficient appropriate evidence about a single element of the
consolidated financial statements being Joint venture investment
in Croptop Ltd. representing over 89% of the group’s net assets
having both material and pervasive possible effect to the
consolidated financial statements. The group’s investment in
Croptop Ltd. is carried at ` 120 crore in the group’s consolidated
balance sheet.
Draft the opinion paragraph and basis of opinion paragraph to be
included in the Independent Auditor’s report. (5 Marks)
(b) As auditor of Growth Limited, you have sent positive confirmation
requests to 45 creditors of the company in March 2024. All of the
creditors in the informal sector are small concerns. You choose 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 articled clerk informs you that out of above 45 creditors,
GST registrations of 38 concerns 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 auditor of the
company? (5 Marks)

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 (c) 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 the
above issue. (4 Marks)
2. (a) CA J is the statutory auditor of a 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. (5 Marks)
(b) Mr. Aditya, a Chartered Accountant was the auditor of 'DRAW
Limited'. During the financial year 2023-24, the investment
appeared in the Balance Sheet of the company of ` 23 lakh and
was the same amount as in the last year. Later on, it was found
that the company's investments were only ` 76,000, but the value
of investments was inflated for the purpose of obtaining higher
amount of Bank loan. Comment with reference to the provisions of
the Chartered Accountants Act, 1949 and Schedules thereto.
(5 Marks)
(c) 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? (4 Marks)
3. (a) Deepti & Co., Chartered Accountants, during the audit of Magma
Ltd. found that certain machinery had been imported for
production of new product. Although the auditors have applied the

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 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? (4 Marks)
(b) 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 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 (5 Marks)
(c) 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.
(5 Marks)

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4 (a) Discuss the reporting responsibilities of statutory auditor in the
following situations for year 2023-24 under CARO, 2020:
(i) In the financial year 2023-24, 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 1st March, 2024 under e-appeals scheme with JCIT
(Appeals). (5 Marks)
(b) 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 from Public
Share Bank and Deposits
Capital PFI
XYX Limited Listed 100 230 20 48

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 MNM Limited Unlisted 60 100 50 24
Public
GFG Limited Unlisted 70 180 80 -
Private

You are required to evaluate the requirements regarding the

appointment of internal Auditors for the Group Companies.
Discuss. (5 Marks)
(c) 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. (4 Marks)
5. (a) 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. (5 Marks)
(b) 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

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 (for instance modification and/or emphasis of matter paragraph in
accordance with SA 705/706) made by component auditors?
(5 Marks)
(c) 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
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.
(4 Marks)
6. (a) 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? (5 Marks)
(b) 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

288
 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. (5 Marks)
(c) Vicky 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 Vicky on what specific aspects should be focused during
due diligence to ensure that there are no hidden liabilities in this
deal? (4 Marks)
OR
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? (4 Marks)

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 MODEL TEST PAPER 5
FINAL COURSE: GROUP I
PAPER-3: ADVANCED AUDITING, ASSURANCE AND
PROFESSIONAL ETHICS
Time Allowed- 3 hours Maximum Marks-100
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions
(MCQs)
3. Part II comprises questions which require descriptive type answers.
PART I - Case Scenario based MCQs (30 Marks)
Write the most appropriate answer to each of the following multiple-
choice questions by choosing one of the four options given. All MCQs
are compulsory and carry 2 Marks each.
1. PIHU Ltd. is a company engaged in the manufacture of Kids toys. The
company sells its goods on credit basis. M/s. Mohan Sohan &
Associates have been appointed as statutory auditors of PIHU Ltd. for
the FY 2023-24. During the course of audit, CA Mohan, the engagement
partner asks the management about the e-mail addresses of trade
receivables of the company for the purpose of obtaining balance
confirmation from the trade receivables. The management of the
company asked its sales supervisor to send a confirmation request to
the trade receivables and collect all the responses and provide all such
responses to the auditor. The management of PIHU Ltd. also informed
CA Mohan that confirmation with respect to two of its trade receivables,
namely Moon Ltd. and Sun Ltd. won’t be available as a dispute between
PIHU Ltd. and both the trade receivables is going on. With respect to
other trade receivables, the sales supervisor provided CA Mohan with all
the balance confirmation. With respect to the balance confirmation
request, which of the following is warranted as per the requirement of
the relevant SA?
(a) CA Mohan should not have relied on the explanation provided by
the management with respect to the trade receivables, namely
Moon Ltd. and Sun Ltd. and he should perform alternative
procedures with respect to such trade receivables.

290
 (b) CA Mohan should have obtained direct response from all other
trade receivables instead of sales supervisor receiving direct
responses from trade receivables and providing them to the
auditor.
(c) Both (a) and (b).
(d) CA Mohan should give a qualified opinion as balance confirmation
with respect to two trade receivables is not available.
2. CA Rajveer is conducting an audit of a manufacturing company. To
streamline the audit process, he uses a sampling tool to select a
representative sample of transactions from a large dataset of sales
records. He also employs a BOT to cross-check the company’s
compliance with statutory payments like GST and TDS. While reviewing
the financial statements, Rajveer relies on Excel to automate
calculations such as variance analysis and trend reports, ensuring the
audit is completed on time and meets regulatory requirements. Which
type of audit is being described in the above?
(a) Digital Auditing.
(b) Auditing Digitally.
(c) Manual Auditing with technological assistance.
(d) Traditional Audit.
3. TK Associates a chartered accountant firm has been appointed as an
auditor of the company for the financial year 2023-24. It consists of two
partners CA T & CA K. CA T is brother of the father of the finance
director of the company BAC Ltd. CA K is an old friend of the finance
director of the company BAC Ltd.
What kind of ethical threat is associated with appointment of TK
Associates as an auditor of BAC Ltd.?
(a) Self Interest Threat.
(b) Advocacy Threat.
(c) Familiarity Threat.
(d) Self-Review Threat.

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Case Scenario I [MCQ 4-8]
GROSS Ltd., an unlisted company in Jamshedpur, is engaged in the business
of spices. Total paid up capital of the company is ` 10 Crore. Details of annual
turnover and profit of the company for the last 3 years are given below:
Year ended Turnover (` in crore) Profit (loss)before tax (` in
crore)
31-03-2022 475.20 (Audited) 65.75
31-03-2023 278.35 (Audited) 01.32
31-03-2024 108.25 (provisional) (06.25)

The company is using conventional method for preparing spices. This

requires more human intervention and hence, cost of production is high as
compared to innovative method used by other new companies. Though the
company had significant growth in the past years, it has not done well over
the last two financial years due to competition.
A new competitor viz, Spice Herbs Ltd, had come in the market during the
year 2022 and by the end of March, 2023, they captured around 75% of
market share by offering the product at a reduced price. They use new
machinery which allows minimizing manual steps and reducing cost of labour.
In order to reduce cost of production and thereby re-capture the market, the
management of GROSS Ltd has planned to erect a new plant with an
automatic machine. The estimated cost of plant & machinery is ` 75 lakh. The
company approached IDN Bank Ltd for a term loan of ` 70 lakh which would
be repaid in 5 years. On 28-12-2023, the bank had sanctioned the loan; and
disbursed ` 35 lakh till 31st March, 2024.
GROSS Ltd. has appointed M/s Hook & Crook, Chartered Accountants, as
auditors of the company at its AGM held on 15-08-2023 for a period of 5
years. As agreed, the audit team commenced their audit work for the year
2023-24 in February, 2024 and completed the work by the end of May, 2024.
The audit team submitted following findings to the engagement partner:
• PX Ltd., one of the material suppliers, filed a case against the company
on 10-08-2023 for a compensation of ` 2.5 crore.
• Company has made an estimate for allowance of debtors @8%.

292
• 65% of the value of inventory was only covered in physical verification
during the year 2023 due to fire.
• Company got a show cause notice from State Pollution Control Board
for the contravention of the provisions of Hazardous and waste
Management Rule.
• Three incidences of fraud noticed (Total ` 1.25 crore)- fraud committed
by the Purchase manager ` 90 Lakh, by Accounts manager ` 15 Lakh
and by a cashier ` 20 Lakh.
As an auditor of GROSS Ltd for the year 2023-24, answer the following
questions based on the facts given in the above paragraph:
Based on above facts, answer the following MCQs
4. Though the company had significant growth in the past years, it has not
done well over the last two financial years. As per SA 570, there are
certain events or conditions that individually or collectively may cast
significant doubt about the going concern assumptions. In order to
assess whether GROSS Ltd. is a going concern or not, which of the
following audit procedures should not be performed?
(a) Analyse and discuss with the management of the company to find
out whether installation of new plant and machinery would enable
the company to reduce cost of production.
(b) Inquire the company’s legal counsel regarding existence of legal
litigation and claim against the company, reasonableness of
management assessments of their outcome and estimate of their
financial implication.
(c) Evaluating management’s future plan and strategy to increase
market share of product.
(d) Analyse and discuss the company’s cash flow and profit of the
previous years with the projected accounts.
5. Company has made an estimate for allowance of debtors @8%. Some
financial statement items cannot be measured precisely but can only be
estimated. The nature and reliability of information available to
management to support the making of an accounting estimate varies
widely, which thereby affects the degree of estimating uncertainty
associated with accounting estimates. Please advise which among the

293
 following may have higher estimate uncertainty and higher risk as per
SA 540?
(a) Judgments about the outcome of pending litigation with PX Ltd
against the company.
(b) Estimates made for inventory obsolescence that are frequently
made and updated.
(c) A model used to measure the accounting estimates is well known
and the assumptions to the model are observable in marketplace.
(d) Accounting estimate made for allowance for doubtful debts where
the result of the auditors’ review of similar accounting estimates
made in the prior period financial statements do not indicate any
substantial difference between the original accounting estimate
and the actual outcome.
6. The company in the notes accompanying its financial statements
disclosed the existence of suit filed against the company with full details.
Based on the audit evidence obtained, it is necessary to draw user’s
attention to the matter presented in the financial statement by way of
clear additional communication as there is an uncertainty relating to the
future outcome of the litigation. In this situation, which of the following
reporting option would be correct if auditor is satisfied with the
conclusions reached by the management and this matter is fundamental
to the reader of financial statements?
(a) Include an Emphasis of Matter paragraph in Auditors report having
a clear reference to the matter being emphasized and issue a
qualified opinion.
(b) Include in the Basis for Adverse opinion paragraph and issue an
adverse opinion having a clear reference to the matter referred in
the notes on accounts.
(c) Include in the Basis for Disclaimer of opinion paragraph having a
clear reference to the matter and issue a disclaimer opinion.
(d) Include an Emphasis of Matter Paragraph in Auditors report having
a clear reference to the matter being emphasized and to where
relevant disclosures that fully describe the matter can be found in
the financial statement.

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7. Company got a show cause notice from State Pollution Control Board.
As per SA 250, the auditor shall perform the audit procedures to help
identify instances of non-compliance with other laws and regulations
that may have a material effect on the financial statements. As the audit
team of the company became aware of information concerning an
instance of non-compliance with law, what would NOT be the audit
procedure to be performed?
(a) Understand the nature of the act and circumstances in which it has
occurred and obtain further information to evaluate the possible
effect on the financial statement.
(b) Discuss the matter with management and if they do not provide
sufficient information; and if the effect of non-compliance seems to
be material, legal advice may be obtained.
(c) Monitoring legal requirement and compliance with code of conduct
and ensuring that operating procedures are designed to assist in
the prevention of non-compliance with law and regulation and
report accordingly.
(d) Evaluate the implication of non-compliance in relation to other
aspects of audit including risk assessment and reliability of written
representation and take appropriate action.
8. The company had availed some amount of loan for new plant and
machinery during the year under audit. Out of the total loan sanctioned,
an amount of ` 35 lakh was earmarked for the purchase of the
machinery- Spice Grinder; but the company has acquired an improved
model of machinery, viz, Spice grinder and mixer instead. State which of
the reporting option would be correct.
(a) State the fact in CARO report that out of term loan taken for
machinery-spice grinder, ` 35 Lakh was not utilized for acquiring
the machinery for which it was sanctioned.
(b) Ask the management to change terms and condition of term loan
as the company has acquired a different machinery. Report under
CARO, if the management does not agree with the demand.
(c) State the fact in CARO report that the term loan taken has been
applied for the purpose for which it was sanctioned.

295
 (d) State the fact in CARO report that the term loan taken has not
been applied for the purpose for which it was sanctioned. Also
qualify the report as there are misstatements that are material but
not pervasive.
Case Scenario II [MCQ 9-11]
The UNCO Bank Ltd. was having 145 branches all over India by the year
ending 31st March 2023. Twelve branches of the bank were already covered
for concurrent audit and the Bank’s Audit Committee decided to include the
below mentioned branches for concurrent audit from the year 2023-24.
(i) Udaipur branch which deals in treasury functions like investments and
interbank borrowings but not in bill re-discounting.
(ii) Varanasi branch which started foreign exchange business from
February 2024.
(iii) Chandigarh branch whose aggregate deposits were more than 35% of
the aggregate deposits of the bank.
Globe and Associates, Chartered Accountants were appointed as the stock
auditors by the Bank’s audit committee for four branches for year 2022-23.
The Bank’s management appointed and fixed the remuneration of Globe and
Associates, Chartered Accountants as the statutory auditors also for the year
2022-23, for the same five branches for which they were given the
assignment of stock audit.
At the Kolkata branch of the bank there were high value cash deposits in one
of the current accounts during April 2023. Your firm has been appointed as
the concurrent auditors for the Kolkata branch for the year 2023-24. The cash
collected by the branch was remitted to currency chest on the very same day
but, during the concurrent audit for the month of April 2023 itself the auditor
noticed that the branch was unable to show intimations sent via e-mail to
currency chest for the cash remittance.
Based on above facts, answer the following MCQs
9. Globe and Associates, Chartered Accountants were already appointed
for stock audit by the audit committee for the four branches, so whether
Globe and Associates, Chartered Accountants are authorised to accept
the appointment as statutory auditors for the same branches? Select
correct option from the following:

296
 (a) Globe and Associates, Chartered Accountants cannot accept the
appointment as it was not offered by the audit committee and
Bank’s management is not authorised to appoint the auditors.
(b) Globe and Associates, Chartered Accountants can accept the
appointment as they were already appointed for the stock audit of
those branches by the audit committee.
(c) Globe and Associates, Chartered Accountants can accept the
appointment as they have been appointed statutory auditors for
the same five branches for which they were conducting stock
audit.
(d) Globe and Associates, Chartered Accountants cannot accept the
appointment as the audit firms should not undertake statutory
audit assignment while they are associated with internal
assignments in the Bank during the same year.
10. Whether the Bank’s Management is authorised to appoint and fix the
remuneration of statutory auditors without consulting the Audit
Committee of the Board of Directors or members in Annual General
Meeting? Select correct option from the following:
(a) Bank’s Management cannot appoint or fix the remuneration of the
statutory auditor unless the same is passed by a resolution in the
Annual General Meeting of the Bank.
(b) Bank’s Management can appoint and fix the remuneration of
statutory auditors only in consultation with the Audit Committee of
the Board of Directors.
(c) Globe and Associates, Chartered Accountants were already
appointed for stock audit by the audit committee, therefore only
audit committee was authorised to appoint or fix their
remuneration as statutory auditors.
(d) Globe and Associates, Chartered Accountants were already
appointed for stock audit by the audit committee, so the Bank’s
Management is authorised to appoint the same firm as the
statutory auditors without consulting the audit committee or
members in the Annual General Meeting.
11. How the discrepancy of not preserving the intimations of cash
remittances to currency chest by Kolkata branch of the bank should be

297
 dealt by the concurrent auditor in his audit report? Select the correct
option from the following:
(a) The auditor should report the matter as a major irregularity in his
audit report to the management.
(b) The auditor should verify the details from e-mail sent to currency
chest and close the matter.
(c) As it is a minor irregularity the auditor can ignore the same.
(d) The auditor should discuss the importance of preserving the hard /
soft copy of e-mail sent for cash remittance with the Branch
Manager and check for its compliance in the next audit period.
Case Scenario III [MCQ 12-15]
M/s AIM & Co. Chartered Accountants is a newly started firm. Their first
assignment was to conduct a statutory audit of M/s DM Crackers Ltd.
(a cracker manufacturing company). Since it was their first audit, the partners
immediately accepted the work, without paying attention to the relevant
procedures. They started their audit work from 25th May 2023 for the financial
year (say previous year) ended on 31st March 2023.
During the course of the audit,
(I) The auditors requested for the financials of the preceding previous year,
along with the details of transactions till 25th May of the current year.
The management, however, argued that both the details are out of the
scope of audit and hence told that they can’t provide the details.
However, after repeated request from the auditors, they finally provided
in September 2023.
(II) It was suspected that the senior accountant could have indulged in a
fraud amounting to ` 115 lakh. However, on further investigation by
management it was found that there was a gross mistake on part of the
accountant, who had wrongly debited and credited certain accounts by
mistake, which amounted to ` 17 lakh. The company provided proper
and correct evidence for the balance amount; hence the auditors were
strongly convinced that no fraud had taken place. Due to the absence of
an audit committee, the auditors suggested to the director (finance) to
replace the existing accountant as he was poor in basic accounting
skills.

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Initially, the company thought of handing over the tax audit work to the
previous auditor. However, since they had a bad experience last year, in form
of an argument regarding the contents to be included in the tax audit report,
especially with respect to the disclosure of key ratios, it was decided that the
AIM & Co. shall also act as tax auditors.
After the conclusion of the audit, Mr. Shyam, one of the partners of the firm,
was confused as to whether the firm could be held guilty of professional
miscount for a plausible violation of any of the provisions of the Chartered
Accountants Act. He contacted Mr. Ghanshyam, his partner, to get clarified
about the doubt.
M/s Hire (P) Ltd., a recruitment agency contacted Mr. Shyam regarding a
vacancy in one of the leading manufacturing company. Eventually Mr. Shyam
resigned as the partner of AIM & Co. and joined the company. The agency
raised an invoice for the service rendered by them, which amounted to 0.2%
of the CTC offered. Mr. Shyam agreed to pay the amount. However, since his
friend was a manager at the agency, he received full discount on the invoice.
Angered by the act of resignation, Mr. Ghanshyam filed a complaint with the
Institute of Chartered Accountants of India (ICAI) stating that Mr. Shyam had
violated the provisions of the Chartered Accountants Act and is guilty of
professional misconduct. Having come to know that Mr. Ghanshyam was the
one who had filed a complaint against him, Mr. Shyam decided to take
revenge. While thinking for a suitable reason to file a complaint, he recalled
the fact that Mr. Ghanshyam was engaged as a Registration Authority for
obtaining digital signatures for his clients. Quoting the same, he filed a
complaint against Mr. Ghanshyam stating that he was guilty of misconduct for
violating the provisions of the Chartered Accountant Act.
Based on the above facts, answer the following:-
12. What can you infer from the situation given in Point I?
(a) Management was right. Both the details asked by the auditors
were out of the scope of audit.
(b) The auditors have the right to ask only the details of preceding
previous year and not the details of transactions till 15th May of
current year.
(c) Both the auditors and the management have the right to ask both
the details and the right to not provide both the details.

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 (d) The auditors have the right to ask both the details. The
management’s contention that it is out of the scope of audit is
wrong.
13. Is M/s AIM & Co. guilty of professional misconduct for violating any of
the provisions of the Chartered Accountants Act? If so, as per which
clause?
(a) Clause 1 of Part I of Second Schedule.
(b) Clause 8 of Part I of First Schedule.
(c) Clause 2 of Part II of Second Schedule.
(d) No. The firm has not violated any of the provisions and hence not
guilty of professional misconduct.
14. Is Mr. Shyam guilty of professional misconduct, if so, under what
clause?
(a) Clause 1 of Part I of First Schedule.
(b) Clause 2 of Part II of Second Schedule.
(c) No. Mr. Shyam is not guilty of professional misconduct.
(d) Clause 1 of Part II of First Schedule.
15. Is Mr. Ghanshyam guilty of professional misconduct, if so, under what
clause?
(a) No. Mr. Ghanshyam is not guilty of professional misconduct.
(b) Clause 11 of Part I of First Schedule.
(c) Part III of Second Schedule.
(d) Clause 1 of Part II of Second Schedule.

PART II – Descriptive Question (70 Marks)

Question No.1 is compulsory.
Attempt any four questions from the rest.
1. (a) Neptune Ltd. is a company that holds significant investments in a
portfolio of equity securities. Due to a decline in market values, the
company's investments have suffered a notable diminution in
value. For the financial year ended 31st March 2023, the audit

300
 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? (5 Marks)
(b) Pratibha Ltd. is a company engaged in the manufacturing of iron
doors. JLN & Associates are the statutory auditors of Pratibha Ltd.
for the Financial Year 2023-24. During the course of audit, CA
Shiv, 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
case of Pratibha Ltd.? (5 Marks)
(c) During the course of audit of PEC Limited, CA Guru has reason to
believe that a fraud involving Rs.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? (4 Marks)
2. (a) Mr. Arjun was appointed as the engagement partner for
conducting the audit of Kurukshetra Tech Ltd. for financial year
2023-24, on behalf of NEMI & Associates. Mr. Krishna was
appointed as the engagement quality control reviewer (EQCR) by
the firm for the said audit.
During financial year 2023-24, Kurukshetra Tech Ltd. implemented
an ERP system in phases, leading to the automation of certain
business processes. This implementation had a substantial impact

301
 on the auditor's overall audit strategy. Mr. Arjun discussed the
implementation of such a system with Mr. Krishna and also told
him that such matter may be a key audit matter to be reported in
the audit report.
Mr. Krishna considered the significance of said matter, however,
he was of the opinion that ERP implementation did not appear to
link with the matters disclosed in the financial statements and so
there was no need to disclose such matter as a key audit matter.
Whether the contention of Mr. Krishna is appropriate with respect
to the matters to be communicated as a key audit matter?
(5 Marks)
(b) 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 for 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? (5 Marks)
(c) Remote audit is an audit where the auditor uses the 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? (4 Marks)

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3. (a) Studio Ltd. appointed AB & Associates and CD & 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 AB & 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. (5 Marks)
(b) 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
` 1,75,00,000/-(one crore seventy five lakhs) and was not having
registration certificate from RBI and applied for it on
29th March 2024. The company appointed Mr. Kabra as its
statutory auditors for the year 2023-24. Advise the auditor with
reference to auditor procedures to be taken and reporting
requirements on the same in view of CARO 2020? (5 Marks)
(c) DIGI & Associates. conducted Stock Audit of PQR Ltd. as per
instructions issued by ASG Bank. However instead of visiting the
site where the stock was lying, the firm relied on the Management
Information Systems report along with inspections reports and
photographs of Stock taken by the employees of PQR Ltd. The
photographs were also carrying the date and time printed on them.
Comment with reference to the Chartered Accountants Act, 1949
and Schedules thereon. (4 Marks)
4 (a) Girdhar Ltd. owns 61% voting power in Meera 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. Girdhar Ltd. represents
that while preparing Consolidated Financial Statements, Meera
Ltd. can be excluded from the consolidation. As a Statutory
Auditor, how would you deal? (5 Marks)

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 (b) Abhinandan Ltd., a company wholly owned by Delhi government
was disinvested during the previous year, resulting in 38% of the
shares being held by public. The shares were also listed on the
NSE. Since the shares were listed, all the listing requirements
were applicable, including publication of quarterly results,
submission of information to the NSE etc.
Paras, the Finance Manager of the company is of the opinion that
now the company is subject to stringent control by NSE 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. (5 Marks)
(c) CA Ram, a practicing chartered accountant, is well known for his
expertise in handling Goods and Services Tax (GST) cases at the
GST Tribunal and he does not provide any assurance services.
Given his long-standing reputation in the field, CA Ram is
approached by DEF Limited to file an appeal in the Tribunal
against a GST demand of ₹ 6 crore, which was imposed by the
Commissioner (Appeals), and to represent DEF Limited in the
matter. CA Ram offers to accept a fee of ₹ 3,50,000 for filing the
appeal and pleading at the GST Tribunal.
Comment on the act of CA Ram in terms of the Chartered
Accountant Act, 1949 and Schedules thereon. (4 Marks)
5. (a) 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? (5 Marks)

304
(b) 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. (5 Marks)
(c) Consistent Enterprises Ltd., a listed company, has been voluntarily
preparing and disclosing its sustainability report based on the
internationally accepted “Integrated Reporting” framework for
some years, even 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 focus of Integrated Reporting is how
the company creates value over the short, medium, and long term.
Following further information is provided in respect of the above
company:
(i) It has secured a loan to expand its operations and invests
the funds in purchasing raw materials and machinery. The
loan, along with revenue generated from existing sales,
contributes to the pool of resources available for production.
(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 the above information, identify which of the capitals of
“Integrated Reporting” are being referred to at [i] and [ii]
respectively? (4 Marks)

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6. (a) 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. (5 Marks)
(b) Mr. Jay is a practicing Chartered Accountant working as proprietor
of M/s Adhya & Co. He went abroad for 4 months. He delegated
the authority to Mr. Vijay a Chartered Accountant his employee for
taking care of routine matters of his office. During his absence, Mr.
Vijay has conducted the under mentioned jobs in the name of M/s
Adhya & Co.
(i) Asking for information or issue of questionnaire.
(ii) Initiating and stamping of vouchers and of schedules
prepared for the purpose of audit.
(iii) Acknowledging and carrying on routine correspondence with
clients.
Comment on eligibility of Mr. Vijay for conducting such jobs in
name of M/s Adhya & Co. and liability of Mr. Jay under the
Chartered Accountants Act, 1949. (5 Marks)

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(c) The practitioner shall not accept the compilation engagement
unless the practitioner has agreed 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. (4 Marks)
OR
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. (4 Marks)

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 MODEL TEST PAPER 6
FINAL COURSE: GROUP I
PAPER-3: ADVANCED AUDITING, ASSURANCE AND
PROFESSIONAL ETHICS
Time Allowed- 3 hours Maximum Marks-100
1. The question paper comprises two parts, Part I and Part II.
2. Part I comprises Case Scenario based Multiple Choice Questions
(MCQs)
3. Part II comprises questions which require descriptive answers.
PART I - Case Scenario based MCQs (30 Marks)
Write the most appropriate answer to each of the following multiple-
choice questions by choosing one of the four options given. All MCQs
are compulsory and carry 2 Marks each.
1. M/s DEF & Associates have been appointed as the statutory auditor of
JKL Ltd., a PSU engaged in the generation of electricity from solar
power. The Committee on Public undertakings with a view to examining
PSU's physical and financial performer is examining the reports and
accounts of public undertaking and also audit findings of the C & AG.
Following are some of the functions of specialised committees:
(i) to examine the statement of accounts of autonomous and semi-
autonomous bodies, the audit of which is conducted by the
Comptroller & Auditor General either under the directions of the
President or by a Statute of Parliament;
(ii) to examine the estimates to report what economies, improvements
in organization, efficiency or administrative reform, consistent with
the policy underlying the estimates may be effected;
(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 examine public enterprises through 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.

308
 From the above functions, which are the functions of Committee on
Public Undertakings (COPU)?
(a) (i) & (iv)
(b) (ii) & (iii)
(c) (i) & (ii)
(d) (iii) & (iv)
2. KALI Ltd. is India's one of the largest FMCG Company with 50-year
heritage in the country. In terms of compliance of reporting under
Business Responsibility and Sustainability Report (BRSR), for the F.Y.
2023-24, CEO & MD of the company reports that "At KALI Ltd. our
BRSR adheres to the nine principles of the SEBI framework on
sustainability reporting, informing stakeholders of our sustainability
endeavours." While giving principle wise performance the following core
elements associated with the respective principle need to be covered in
the report:
(i) Entities, when in the business of providing essential goods and
services (e.g. Utilities), should enable universal access, including
to those whose services have been discontinued for any reason, in
a non-discriminatory and responsible manner.
(ii) Entities should inform the customers on the safe and responsible
ways of usage, reuse, recycling, and disposal of their products,
and ways to eliminate over consumption.
(iii) The entities should transparently and accurately disclose all kinds
of adverse impacts to the user, planet, society, on the biodiversity
from their products.
(iv) The entities are responsible to educate and make aware their
consumers and clients about their rights.
From the above information, identify which core elements are related to
Principle-9?
(a) (i) & (iv)
(b) (i), (ii) & (iii)
(c) (i), (iii) & (iv)
(d) (ii), (iii) & (iv)

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3. For conducting the statutory audit for the financial year 2024-25, CA P
has been appointed by SEA Ltd., which is on the verge of becoming sick
unit and has accumulated losses but the said losses are not equal to or
exceeding its entire net worth as per last audited accounts for the year
2023-24. The audited accounts for the year 2021-22, 2022-23 were
showing liability for payment of undisputed audit fees payable to
predecessor auditors but were settled completely during last F.Y.
2023-24.
In terms of Council General guidelines, 2008, Chapter 7, read with
relevant proviso of the said guideline, which of the following statement is
correct in respect of the aforesaid scenario?
(a) CA P shall be deemed to be guilty of professional misconduct as
he has accepted the appointment as auditor of SEA Ltd. which had
not paid undisputed audit fee for the year 2021-22 and 2022-23 of
predecessor auditor, though settled in F.Y. 2023-24.
(b) CA P would not be held guilty of professional misconduct as he
has accepted the appointment as auditor of SEA Ltd. which is on
the verge of becoming sick unit but whose accumulated losses are
not equal to or exceeding its entire net worth as per last audited
accounts for the year 2023-2024.
(c) CA P would not be held guilty of professional misconduct as he
has accepted the appointment as auditor of SEA Ltd., which is not
a sick unit, whose accumulated losses are not equal to or
exceeding its entire net worth as per last audited accounts for the
year 2023-24 and there are no unpaid undisputed audit fees of
predecessor auditors.
(d) CA P shall be deemed to be guilty of professional misconduct as
he has accepted the appointment as auditor of SEA Ltd. which is
on the verge of becoming sick unit and it had not paid undisputed
audit fee of predecessor auditor though settled in subsequent
year.
Integrated Case scenario I
Tom Ltd. is in to the business of manufacturing and distributing of Toys for the
past 25 years. Since inception, the company is having its own in-house
dedicated internal audit department, having team of competent & qualified
chartered accountants, headed by the Chief Internal Auditor, who with

310
systematic and disciplined approach monitors various Internal Controls laid
down at all levels of the functional areas. M/s Deva & Co., Chartered
Accountants, have been newly appointed as the statutory auditors of the
company for the F.Y. 2024-25.
• M/s Deva & Co. want to use the work of the internal audit function in
respect of testing of the operating effectiveness of controls and in respect
of substantive procedures involving limited judgement. Due to time
constraints and the extensive scope of statutory audit, M/s Deva & Co.
want to take direct assistance of internal auditors in the areas of Physical
verification of fixed assets, inventory verification and Goodwill impairment
assessment. Accordingly, M/s Deva & Co. are in the process of
determining in which areas and to what extent internal auditors can be
used and in which areas statutory auditors shall not use internal auditors
to provide direct assistance to perform procedures.
• M/s Deva & Co. during the course of identifying and assessing the risks of
material misstatement through understanding the entity and its
environment and during the course of performing the audit procedures
finds that the company is holding significant bank accounts and having
branch operations in tax-haven jurisdictions for which there appears to be
no clear business justification. Also, there were significant related party
transactions which do not appear to be in the normal course of business.
• The audit report of Tom Ltd. for the last F.Y. 2023-24, audited by
predecessor auditor, contained a qualification regarding non provision of
doubtful debts. In F.Y. 2024-25 also, the company does not want to make
provision for doubtful debts. The statutory auditors, M/s Deva & Co., in
their auditor's report on the current period's financial statements want to
report the same.
• Pursuant to the reporting requirements under CARO, 2020 in respect of
the company's regularity in depositing undisputed arrears of outstanding
statutory dues to the appropriate authorities, M/s Deva & Co. are
considering to take a view on the following issue observed during the
audit of Tom Ltd.
The company in view of voluminous pay roll data consistently follows the
method of making lump sum deposit of estimated amount of ESI collections
and adjust the excess or deficit against next following months' deposit and the
difference of the said amount always remains insignificant.

311
Based on the above facts, answer the following Questions (Q.Nos.4 to
7):
4. M/s Deva & Co., in their auditor's report on the current period's financial
statements wants to report that Tom Ltd. does not want to make
provision for doubtful debts in F.Y. 2024-25. Identify the correct action to
be resorted out of the following:
(a) As per SA 710, can modify their report for previous year's figures
of financial statements since the auditor's report on the prior
period, as previously issued, included a qualified opinion.
(b) As per SA 710, can modify their report for current year's figures of
financial statements but need not refer to the previous year's
modification.
(c) As per SA 710, will have to modify their report for both current and
previous year's figures of financial statements since the auditor's
report on the prior period, as previously issued, included a
qualified opinion.
(d) As per SA 710, cannot modify their report but need to refer to the
earlier year's modification.
5. M/s Deva & Co. assigned the following procedures to internal auditors to
provide direct assistance.
(i) that relate to higher assessed risks of material misstatement
where the judgment required in performing the relevant audit
procedures or evaluating the audit evidence gathered is more than
limited.
(ii) that relate to work with which the internal auditors have been
involved and which will not be reported to management or those
charged with governance by the internal audit function.
(iii) that relate to decisions the statutory auditor makes in accordance
with SA.
From the above, identify the appropriate procedure(s) that can be
assigned to internal auditors:
(a) (i), (ii), (iii)
(b) (ii) only

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 (c) (ii) & (iii)
(d) (iii) only
6. Issue identified by Deva & Co., with regard to holding significant bank
accounts and having branch operations in tax-haven jurisdictions and
significant related party transactions is a fraud risk factor. What is the
condition created by that fraud risk factor and what fraud does it result
in?
(a) The risk factor creates a rationalization for the fraud and results in
a misstatement due to fraudulent financial reporting.
(b) The risk factor creates an incentive /pressure for the fraud and
results in a misstatement due to misappropriation of assets.
(c) The risk factor creates a perceived opportunity for the fraud and
results in a misstatement due to fraudulent financial reporting.
(d) The risk factor creates a perceived opportunity for the fraud and
results in a misstatement due to misappropriation of assets.
7. Out of the following which view of M/s Deva & Co. is the correct one for
complying the reporting requirement under CARO, 2020 as regards
lump-sum deposit of estimated ESI collections and its adjustment
against next months’ deposit leaving the insignificant difference of ESI
amount?
(a) the company consistently follows the method of payment in
respect of ESI collections and the difference between the total
dues and lump sum deposit is not significant, as per materiality
concept, it need not be considered that dues have not been
regularly deposited and hence not to be reported.
(b) depositing of ESI collections and the arrears of ESI dues cannot
be considered as statutory dues under CARO, 2020 and hence not
to be reported.
(c) lumpsum deposit of estimated ESI amount and adjusting
excess/deficit against following months' deposit shall be
considered as dues payable and hence to be reported under
CARO, 2020.
(d) even though the difference between the total dues of ESI and lump
sum deposit is not significant, as per materiality concept, it shall

313
 be considered that dues have not been regularly deposited and
hence to be reported under CARO, 2020.
Integrated Case Scenario II
XYZ & Associates LLP, is a firm of Chartered Accountants, consisting of 12
partners has been allotted Central statutory audit of Maha Bank Limited, a
scheduled commercial bank.
(i) During the course of audit, you, as the Engagement partner, have been
asked by the GM to calculate CRAR. For this purpose, you have
referred to the Master circular on "Prudential Guidelines on Capital
Adequacy and Market Discipline - New Capital Adequacy Framework
(NCAF)", which provides the guidelines to be followed by banks for
capital adequacy.
You are informed that the basic approach of capital adequacy
framework is that a bank should have sufficient capital to provide as
table resource to absorb any losses arising from the risks in its
business. You have observed that Capital is divided into tiers according
to the characteristics/qualities of each qualifying instrument. For
supervisory purposes capital is split into two categories: Tier I and Tier
II, representing different instruments quality as capital.
You have calculated Eligible total capital funds comprising -
1. Tier I capital of Share capital ` 200 Crore, and disclosed Reserves
` 20 Crore.
2. Tier II capital of Other Reserves ` 30 Crore, and subordinated
debt ` 20 Crore.
The Risk weighted assets constitute ` 25 Crore, while Off-balance sheet
items are ` 5 Crore.
(ii) As a part of the scope, the audit firm has been asked to find out the
correct position of Demand and Time liabilities of Maha Bank.
DTL balance as on 30th September 2024 was ` 50,000 Crore which
included the following-
` Cr.
(i) Paid up capital 27,000
(ii) Reserves 1,650

314
 (iii) Credit balance in Profit & Loss account 1,210
(iv) Loan taken from RBI 575
(v) Refinance taken from EXIM bank and NHB 480
(vi) Part amounts of recoveries from the borrowers in
respect of debts considered bad and doubtful of recovery 125
(vii) Net credit balance in branch adjustment accounts 105
(viii) Interest accrued but not accounted for in books 90
(ix) Margins held and kept in sundry deposits for
funded facilities 80
(iii) During the FY 2024-25, XYZ & Associates LLP is appointed as Statutory
auditors of APP Ltd., an NBFC, which was set up under the Companies
Act, 2013 and got itself registered as non-banking financial company
(NBFC) with the Reserve Bank of India, fulfilling the required criteria.
During the financial year ending 31st March 2025, the company
commenced operations on a massive scale. You are informed that RBI
has revised different facets of existing NBFC Classification and
regulation like Capital requirements, Government standards, Prudential
regulations, etc. based on four layers that are defined based on their
size, activity and perceived riskiness.
During the FY 2024-25 APP Ltd. has accepted deposits of ` 900 Crore,
while its asset size is ` 990 Crore. It has also undertaken following
activities -
(i) Standalone Primary Dealers (SPDs)
(ii) Infrastructure Debt Fund
(iii) Housing Finance
(iv) Infrastructure Finance
The auditors are about to begin audit of APP Ltd. for which your audit
team has been asked to prepare audit checklist.
(iv) XYZ & Associates LLP has been appointed as auditors of Heavy
Electricals Corporation, a Public Sector Undertaking (PSU) during the
FY 2024-25 by C & AG. It has been 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,

315
 well before the commencement of Audit. The Engagement partner has
asked the audit team to prepare an Audit Design Matrix (ADM) as it is a
structured and highly focused approach for designing a performance
audit study. The audit team has been informed that ADM should be
prepared on the basis of information and knowledge obtained during the
planning stage. Further, it is desirable to prepare ADM for each of the
audit objectives.
On the basis of above details, you are required to answer the following
questions.
8. Keeping in view of the information in para (iii), Identify under which layer
APP Ltd. will be categorised -
(a) Top Layer
(b) Upper Layer
(c) Middle Layer
(d) Base Layer
9. Based on facts given in para (i), you are required to arrive at the correct
percentage of Capital Risk Adequacy Ratio for the Maha Bank Limited
(a) 10%
(b) 10.80%
(c) 8.33%
(d) None of the above
10. Based on facts given in para (ii), you are required to Compute Demand
and Time Liabilities (DTL) balance as on 30th September 2024.
(a) ` 18,000 crore
(b) ` 19,360 crore
(c) ` 18,790 crore
(d) ` 18,880 crore
11. Keeping in view of the information in para (iv), in the case of
Performance audit of PSU, which one of the following is not part of Audit
Design Matrix (ADM)
(a) Audit programme

316
 (b) Evidence
(c) Audit Questions
(d) Data collection and Analysis Method
Integrated Case Scenario - III
M/s HVM & Co. is a firm of Chartered Accountants based in Chennai. CA M,
CA V and CA H are the partners of the firm. The firm is engaged in various
assignments including Audits and its engagement partners who were handling
their respective assignments for the financial year 2023-24 dealt with the
following issues raised during and after the course of their respective audits.
M/s HVM & Co. are appointed as statutory auditors of AST Ltd. for the
financial year 2023-24. CA V, the engagement partner while conducting audit
of AST Ltd. was encountered with significant difficulties. He observed that
there are not only inordinate delays by the management but lack of
willingness by the authorised personnel of the company in providing the
required information necessary to perform audit procedures in making the
assessment of AST Ltd.'s ability to continue as a going concern in view of
material uncertainty related to it. CA V wants to communicate this and other
circumstances as additional information in his report with those charged with
the governance.
Financial statements of VED Ltd. for the year ended on 31st March 2024 were
signed by CA H, the engagement partner on 15th May 2024. The AGM was
decided to be held during the month of August 2024. On 17th May 2024 the
company had received a communication from the Central Government that an
amount of ` 8500 crore on account of incentives in respect of F.Y. 2021-22
which was kept in abeyance would be released to the company by 15th June
2024. Accordingly, the Board of Directors of the company agreed to amend
the accounts and gave approval to include this amount in the financial
statements of the company for the Financial Year ended on 31st March, 2024
and requested CA H to consider this matter.
During the course of audit of SIM Limited there arose doubts as to the
reliability of written representation regarding the existence and value of
certain Machineries. The management gave a certificate to prove the
existence and value of Machinery as appearing in the books of account. The
certificate from the Registered valuer shows a value which is inconsistent with
the written representation of management.

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HT institute of professional studies is a reputed educational institution
providing various courses in the field of commerce and arts. The management
of the institution is inclined towards imparting quality education to the
students, therefore most of the faculties engaged by them are qualified
professionals. CA M of M/s HVM & Co. is an alumnus of the institution, and he
has joined as a visiting faculty for teaching financial management and
accounting subject. The management of the HT institute of professional
studios is highly satisfied with his teaching skills and level of knowledge he
possesses. Due to his capabilities, the management offers CA M to take up
the assignment of statutory audit of their institute for the financial year
2023-24.
Based on the above facts, answer the following Questions (Q. Nos. 12 to
15):
12. Since there arose a doubt on the management representation and
considering the responsibilities of M/s HVM & Co. to obtain written
representations from management as per relevant Standard on Auditing,
select the incorrect option from the following:
(a) Although written representations provide necessary audit
evidence, they do not provide sufficient appropriate audit evidence
on their own about any of the matters with which they deal.
(b) The fact that management has provided reliable written
representations affect the nature or extent of other audit evidence
that the auditor obtains about the fulfilment of management's
responsibilities, or about specific assertions.
(c) In the case of identified inconsistencies between one or more
written representations and audit evidence obtained from another
source, the auditor may consider whether the risk assessment
remains appropriate and, if not, revise the risk assessment and
determine the nature, timing and extent of further audit procedures
to respond to the assessed risks.
(d) The auditor may have identified significant issues relating to the
competence, integrity, ethical values or diligence of management,
or about its commitment to or enforcement of these, but concluded
that the written representations are nevertheless reliable. In such
a case, this significant matter is documented in accordance with
SA 230.

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13. CA V, engagement partner, in the course of audit of AST Ltd. wants to
communicate as he considers necessary to include additional
information in the auditor's report in accordance with SA 260. Following
are the circumstances for which communication with those charged with
governance is required.
Help CA V in getting identified incorrect circumstance from the below
mentioned circumstances.
(a) when the auditor has concluded that there is an uncorrected
material misstatement of the other information in accordance with
SA 720.
(b) when the auditor considers it necessary to include an Emphasis of
Matter paragraph or Other Matter paragraph in accordance with
SA 706 or is required to do so by other SAs.
(c) when a material uncertainty related to going concern is reported in
accordance with SA 570.
(d) when there are no key audit matters to be communicated in
accordance with SA 701.
14. In view of the Board of Directors of the VED Ltd. agreeing to include an
amount of ` 8500 crore on account of incentives in respect of F.Y. 2021-
22 in the financial statements of the company for the Financial Year
ended on 31 March, 2024 by amending the accounts, CA H shall
consider the following procedures. Identify the incorrect procedure from
the following:
(a) Carry out the audit procedures necessary in the circumstances on
the amendment.
(b) Extend those audit procedures to the date of new auditor's report
which were designed to obtain sufficient appropriate audit
evidence that all events occurring between the date of the financial
statements and the date of the auditor's report that require
adjustment of, or disclosure in, the financial statements have been
identified.
(c) Provide a new auditor's report on the amended financial
statements. The new auditor's report shall not be dated earlier
than the date of approval of the amended financial statements.

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 (d) Modify the opinion as required by SA 705 and then provide the
auditor's report.
15. In response to the management offer, guide CA M, whether to take up
the assignment of statutory audit of HT institute of professional studies
for the financial year 2023-24.
Select the correct option in terms of professional code of conduct.
(a) CA M can accept the assignment as his role as a visiting faculty
will not interfere with the statutory audit functions.
(b) CA M cannot accept the assignment as it violates clause (4) of
Part I of the Second schedule to the Chartered Accountants Act,
1949.
(c) CA M can accept the statutory assignment as he does not have
any substantial interest in the HT Institute of professional studies.
(d) CA M cannot accept the assignment as it violates clause (11) of
Part I of the First schedule to the Chartered Accountants Act,
1949.

PART II – Descriptive Question (70 Marks)

Question No.1 is compulsory.
Attempt any four questions from the rest.
1. (a) PQR Associates are the statutory auditors of a large un-listed
company, which is engaged in manufacturing of auto components.
Subsequent to re-appointment 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

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 companies. PQR Associates are yet to recruit another senior
manager having adequate experience in the audits of clients
engaged in automotive sector.
Elaborate the matters to be considered by PQR Associates with
respect to acceptance & continuance of client relationships
considering the above issues. (5 Marks)
(b) 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 5thOctober 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.
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. (5 Marks)

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 (c) 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. (4 Marks)
2. (a) 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? (5 Marks)
(b) PN and Associates are appointed as the Statutory Auditors of The
Iron Company Ltd. The Central Government holds 65% of the
paid-up share capital in this company. The appointment letter of
the company gave a very limited time to PN and Associates for
accepting the audit. CA N, the engagement partner communicated
with the previous auditor but due to lack of time he had to give
acceptance for the audit assignment before receiving reply from
the previous auditor. Hence CA N gave a conditional acceptance
of the appointment and commenced the audit. Discuss with
reference to the Chartered Accountants Act, 1949 and the
schedules thereunder, whether CA N has complied with same.
(5 Marks)

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 (c) 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.
Help CA J. (4 Marks)
3. (a) 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?
(5 Marks)
(b) 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? (5 Marks)

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 (c) 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. (4 Marks)
4. (a) 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 the ways of
resolving the differences of opinion between CA Giri and the
engagement partner. (5 Marks)
(b) 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 differ from assurance
engagements. Give your views on the applicability of SQC 1 to this
engagement. (5 Marks)
(c) 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 Limited to make disclosures on
their performance against the various principles of the "National

324
 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. (4 Marks)
5. (a) PQ Pharma Limited, a company dealing in research and
development and manufacture of pharmaceuticals is coming up
with an Initial Public Offer (IPO). PQ Pharma Ltd has prepared the
prospective financial statements for the next 3 years and included
the same in the prospectus as part of its IPO. The prospective
financial information includes projected balance sheets, statement
of profit and loss and cash flow statements, which are prepared on
the basis of several key assumptions like favourable government
regulations, planned research and development of more effective
medicines at reasonable prices, etc.
The company approaches CA Z to provide assurance on the
prospective financial information and to assess the presentation
and disclosure of the prospective financial information included in
the IPO. List out the aspects that must be considered for making
such assessment. (5 Marks)
(b) R 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.

325
 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.
(5 Marks)
(c) 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 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. (4 Marks)
6. (a) You are appointed as a Statutory Auditor of SDA Limited for the
year
2023-24 in the place of CA T. During 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 casted on
you regarding the above matters under CARO, 2020 for the year
2023-24? (5 Marks)
(b) 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

326
 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 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. (5 Marks)
(c) 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 Income-tax Tribunal
will be higher of the following (a) or (b):
(i) ` 5,00,000/-
(ii) 10% of Tax Demand Reduced.
Comment on the act of CA Kumar in terms of the Chartered
Accountant Act, 1949 and Schedules thereon. (4 Marks)
OR
Kushal 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? (4 Marks)

327
 ANSWERS OF MODEL TEST PAPER 1
FINAL COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING, ASSURANCE AND
PROFESSIONAL ETHICS
Part I: MULTIPLE CHOICE QUESTION
1. (a)
2. (c)
3. (d)
4. (c)
5. (d)
6. (b)
7. (c)
8. (b)
9. (b)
10. (b)
11. (a)
12. (c)
13. (b)
14. (a)
15. (b)

Part II - DESCRIPTIVE QUESTION

1. (a) 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,

588
 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.

589
  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 marks are put to
confirm completion of counting.
(b) 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

590
 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 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.
(c) 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

591
 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.
2. (a) 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.

592
 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.
(b) 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

593
 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.
(c) 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 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 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.

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3. (a) 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 recognised in the 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.

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

596
 from any proper source. In case the auditor has simply relied on the
management’s representation, the auditor has failed to perform his
duty.
Conclusion: Accordingly, CA. Mayank, will be held liable for the
professional misconduct under Clauses (2), (7) and (8) of Part I of
the Second Schedule to the Chartered Accountants Act, 1949.
4. (a) (i) 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;

597
 (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.
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.
(b) 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.

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 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.
(c) In the present case, with respect to the loans and advances of
₹ 75 Lacs given to Hariharan Pvt. Limited, the Company has not
furnished any agreement to CA. Navya. In the absence of such an
agreement, CA. Navya 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
evidence 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. Navya 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. Navya should give a qualified
opinion.
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 effects of the matter
described in the Basis for Qualified Opinion section of our report,
the financial statements of Lakshay Ltd. 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
The Company is unable to furnish the loan agreement with respect
to loans and advances of ₹ 75 Lacs given to Hariharan Pvt. Ltd.
Consequently, in the absence of such an agreement, we are unable

599
 to verify the terms of repayment, chargeability of interest and other
terms.
5. (a) 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.
Contention of the partner of the firm that auditors are not concerned
with such disclosures made by the management in its annual report,
is incorrect.
(b) 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

600
 • 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.
“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”.
(c) 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.

601
 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.
6. (a) When the auditor’s report on the audited financial statements
contains a qualified opinion, 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, in addition to the
elements of auditor’s report on summary financial statements
described in SA 810: -
(a) State that the auditor’s report on the audited financial
statements contains a qualified opinion and
(b) Describe:
(i) The basis for the qualified opinion on the audited
financial statements, and that qualified opinion; and
(ii) The effect thereof on the summary financial
statements, if any
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

602
 auditor shall express an adverse opinion on the summary financial
statements.
Or
(a) In a review engagement performed under SRE 2400, the
practitioner performs primarily inquiry and analytical procedures to
obtain sufficient appropriate evidence as the basis for a conclusion
on the financial statements as a whole expressed in accordance
with the requirements of SRE 2400.
In a review engagement, evidence obtained through inquiry is often
the principal source of evidence about management intent.
Application of professional skepticism in evaluating responses
provided by management is important to enable the practitioner to
evaluate whether there are any matters that would cause the
practitioner to believe that the financial statements may be
materially misstated. Performing inquiry procedures also assists
the practitioner in obtaining or updating the practitioner’s
understanding of the entity and its environment, to be able to
identify areas where material misstatements are likely to arise in the
financial statements.
In a review of financial statements, performing analytical
procedures assists the practitioner in: -
 Obtaining or updating the practitioner’s understanding of the
entity and its environment, including to be able to identify
areas where material misstatements are likely to arise in the
financial statements.
 Identifying inconsistencies or variances from expected trends,
values or norms in the financial statements such as the level
of congruence of the financial statements with key data,
including key performance indicators.
 Providing corroborative evidence in relation to other inquiry or
analytical procedures already performed.
 Serving as additional procedures when the practitioner
becomes aware of matters that cause the practitioner to
believe that the financial statements may be materially
misstated. An example of such an additional procedure is a
comparative analysis of monthly revenue and cost figures

603
 across profit centers, branches or other components of the
entity, to provide evidence about financial information
contained in line items or disclosures contained in the financial
statements.
In a review engagement, practitioner’s report contains a description
of a review of financial statements and its limitations, and the
following statements in this respect: -
(i) A review engagement under this SRE is a limited assurance
engagement.
(ii) 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
(iii) 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.
(b) 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.

604
 Therefore, there is no difference if CA. Z had earned income from
currency derivatives. However, in accordance with 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. Z would be held guilty of professional misconduct for
engaging in business other than profession of Chartered
Accountancy.
(c) 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.

605
 ANSWERS OF MODEL TEST PAPER 2
FINAL COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING, ASSURANCE AND
PROFESSIONAL ETHICS
PART I: MULTIPLE CHOICE QUESTION
1. (a)
2. (b)
3. (c)
4. (c)
5. (c)
6. (d)
7. (a)
8. (b)
9. (d)
10. (a)
11. (c)
12. (a)
13. (d)
14. (a)
15. (b)
PART II - DESCRIPTIVE QUESTION
1. (a) 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-

606
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.

607
 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 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”.
(b) 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.

608
 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.
(c) 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 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

609
 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
2. (a) Use of Benchmarks in Determining Materiality for the Financial
Statements as a Whole: As per SA 320, “Materiality in Planning
and Performing an Audit” 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:

610
• 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 PCM Ltd. is engaged in manufacture and sale of air
conditioner, and is having regular profits: CA. Suneel, the auditor
may consider profit before tax /Earnings.
In case if PCM Ltd. is engaged in the construction of large
infrastructure projects and incurred losses in the previous two
financial years, due to pandemic: CA. Suneel, the auditor may
consider Revenue or Gross Profit as benchmarking. Alternatively,
CA. Suneel, 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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(b) Some examples of technology risks where Mr. Ravi should test
the appropriate controls for relying on the digital systems
• 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
• Inappropriate manual intervention
• Potential loss of data or inability to access data as required
• Risks introduced when using third-party service providers
• Cybersecurity risks
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.

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 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.
(c) Given situation can be visualize in following parts:
(i) 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.
(ii) 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 the Chartered Accountants Act, 1949 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.

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 Therefore, in the given case, the activities of Mr. S as a paper-
setter and involvement in agricultural activities do not make
him guilty of professional misconduct.
(iii) 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.
3. (a) 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

614
 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.
(b) 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 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.

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• 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, 2023:
Name NPA since F.Y. Amount (₹ in lakh)
Fin Pvt. Ltd. 2019-20 36.55
Dairy Works 2021-22 55.24
Book Store 2018-19 29.85
Fancy Corp. 2017-18 61.42
RSM and Associates 2020-21 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 2023.
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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 (c) 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. Anuj will be held guilty of professional misconduct
under Clause (6) of Part I of First Schedule to the Chartered
Accountants Act, 1949.
4. (a) As per SA 600, “Using the work of Another auditor”, the principal
auditor is normally entitled to rely upon the work of component
auditor unless there are special circumstances to make it essential
for him to visit the component and/or to examine the books of
account and other records of the said component. The principal
auditor might discuss with the other auditor the audit procedures
applied or review a written summary of the other auditor’s
procedures and findings which may be in the form of a completed
questionnaire or check-list. The principal auditor may also wish to
visit the other auditor. The nature, timing and extent of procedures

617
 will depend on the circumstances of the engagement and the
principal auditor's knowledge of the professional competence of the
other auditor.
The principal auditor should consider the significant findings of the
other auditor.
The principal auditor may consider it appropriate to discuss with the
other auditor and the management of the component, the audit
findings or other matters affecting the financial information of the
components. He may also decide that supplemental tests of the
records or the financial statements of the component are necessary.
Such tests may, depending upon the circumstances, be performed
by the principal auditor or the other auditor.
Accordingly, CA. Soni, can perform the above-mentioned audit
procedures. However, the audit of the component’s financial
statements by the principal auditor is not required.
So, the contention of CA. Soni that for the purpose of audit of
consolidated financial statements he is required to conduct an audit
of the components financial statements is not correct.
Further, SA 230 issued by ICAI on Audit Documentation, and
“Standard on Quality Control (SQC) 1, provides that, unless
otherwise specified by law or regulation, audit documentation is the
property of the auditor. He may at his discretion, make portions of,
or extracts from, audit documentation available to clients, provided
such disclosure does not undermine the validity of the work
performed, or, in the case of assurance engagements, the
independence of the auditor or of his personnel.
Accordingly, it is the discretion of the component auditor as the
working papers with respect to the components examined by the
component auditor are the property of the component auditor.
So, the contention of CA. Soni is not correct.
(b) 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

618
 basis in a structured way. It is a 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 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.
(c) 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.

619
 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.
5. (a) 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

620
 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.
Contention of the partner of the firm that auditors are not concerned
with such disclosures made by the management in its annual report,
is incorrect.
(b) 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.

621
 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.
(c) 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.
6. (a) 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

622
 (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.
Or
(a) 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:

623
 • 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 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.
(b) 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)

624
 Ltd., as a Chartered Accountant in practice when he had not even
applied for the 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.
(c) Inventory Frauds-Inventory frauds are many and varied but 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.

625
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 godown 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.

626
 ANSWERS MODEL TEST PAPER 3
FINAL COURSE: GROUP – I
PAPER – 3: ADVANCED AUDITING AND PROFESSIONAL ETHICS
Part I: MULTIPLE CHOICE QUESTION
1. (c)
2. (a)
3. (d)
4. (b)
5. (a)
6. (d)
7. (b)
8. (b)
9. (c)
10. (d)
11. (a)
12. (c)
13. (a)
14. (c)
15. (c)

Part II - DESCRIPTIVE QUESTION

1. (a) As per SA 550, “Related Parties”, communicating significant matters
arising during the audit in connection with the entity’s related parties
helps the auditor to establish a common understanding with those
charged with governance of the nature and resolution of these
matters. Examples of significant related party matters include, non-
disclosure (whether intentional or not) by management to the
auditor of related parties or significant related party transactions,
which may alert those charged with governance to significant
related party relationships and transactions of which they may not
have been previously aware; The identification of significant related

627
party transactions that have not been appropriately authorised and
approved, which may give rise to suspected fraud; etc.
It may be noted that unless all of those charged with governance
are involved in managing the entity, the auditor shall communicate
with those charged with governance significant matters arising
during the audit in connection with the entity’s related parties.
The auditor is also required to ensure the compliance of Ind AS 24
Related Party Disclosures.
In view of above in the given scenario, the auditor is required to
prepare a summary of following items to be reported to those
charged with governance in accordance with SA 260
Communication with Those Charged with Governance:
(i) A related party transaction with M/s. MNJ Associates involving
₹4.75 lakh per month for marketing services was identified,
where ₹0.18 lakh per month exceeds the arm’s length price.
This transaction has not been disclosed as a related party
transaction in accordance with Ind AS 24 Related Party
Disclosures.
(ii) The refusal by the CFO of the company to provide details of a
related party transaction amounting to ₹ 35 lakh on the
grounds of confidentiality, is not in order, as denying for the
related party details of ₹ 35 lakh is imposing limitation of scope
of auditor in view of SA 705.
(iii) The receipt of free-of-cost computers and long-term
borrowings (without agreed terms for repayment of interest
and principal) from the parent company needs to be
separately disclosed in the financial statements as per Ind AS
24 Related Party Disclosures.
Further, in all the above cases, the auditor would also need to
assess his reporting requirements under the clause (xiii) of
Paragraph 3 of CARO 2020 with respect to related party
transactions that whether all transactions with the related parties
are in compliance with sections 177 and 188 of Companies Act,
2013 where applicable and the details have been disclosed in the
financial statements etc., as required by the applicable Accounting
Standards.

628
(b) Auditor’s responsibility in cases where audit report for an earlier
year is qualified is given in SA 710 “Comparative Information –
Corresponding Figures and Comparative Financial Statements”.
As per SA 710, 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:
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
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 Param Limited does not correct the treatment
of depreciation extent of ₹ 3.75 crore for previous year, the auditor
will have to modify his report for both current and previous year’s
figures as mentioned above. If, however, the figures and provisions
are corrected, the auditor need not refer to the earlier year’s
modification.
(c) Written Representations: As per SA 540, “Auditing Accounting
Estimates, Including Fair Value Accounting Estimates, and Related
Disclosures”, the auditor shall obtain written representations from
management and, where appropriate, those charged with
governance whether they believe significant assumptions used in
making accounting estimates are reasonable.

629
 SA 580, “Written Representations” discusses the use of written
representations. Depending on the nature, materiality and extent of
estimation uncertainty, written representations about accounting
estimates recognised or disclosed in the financial statements may
include representations:
(i) About the appropriateness of the measurement processes,
including related assumptions and models, used by
management in determining accounting estimates in the
context of the applicable financial reporting framework, and
the consistency in application of the processes.
(ii) That the assumptions appropriately reflect management’s
intent and ability to carry out specific courses of action on
behalf of the entity, where relevant to the accounting
estimates and disclosures.
(iii) That disclosure related to accounting estimates are complete
and appropriate under the applicable financial reporting
framework.
(iv) That no subsequent event requires adjustment to the
accounting estimates and disclosures included in the financial
statements.
2. (a) Acceptance and Continuance of Client Relationships and
Specific Engagements: 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, JPG & Associates, Chartered Accountants,
statutory auditors of VS Limited for the last three years, came to
know that the company has expanded its operations into a new
segment as well as new geography. JPG & Associates does not
possess the necessary expertise for the same, therefore, JPG &
Associates wish to withdraw from the engagement and client

630
 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.
JPG & Associates should address the above issues before deciding
to withdraw.
(b) Key Steps for Auditors in a Changing Technology Environment
As auditors obtain an understanding of the impact of technology on
a company’s business, its systems of internal control, and its
financial reporting. Some key steps to be taken by the auditor
include the following:
• Maintain sufficient professional skepticism when reviewing
management’s risk assessment for new systems.
• Understand the direct and indirect effects of new technology
and determine how its use by the entity impacts the auditor’s
overall risk assessment.
• Understand how the technologies impact the flow of
transactions, assess the completeness of the in-scope ICFR
systems, and design a sufficient and appropriate audit
response.

631
 • Assess the appropriateness of management’s processes to
select, develop, operate, and maintain controls related to the
organization’s technology based on the extent the technology
is used.
(c) Failure to Exercise Reasonable Care and Skill: Clause (7) of Part
I of Second 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 does not exercise due diligence,
or is grossly negligent in the conduct of his professional duties.
In the given case, CA. T did not detect any fraud. However, the C &
AG audit staff, during their routine inspection, found that the chief
cashier of the company committed fraud in debtor's ledger and
absconded with the amount.
Apparently, it appears that the auditor did not exercise proper skill
and care and that he performed his work in an improper manner. In
this matter, the test for auditor’s liability lies in whether he has
applied reasonable care, skill and caution called for in the
circumstances of the case and whether he reasonably used all the
information that he came across during the audit.
The auditor should have been highly concerned about the
cashbook’s state due to the unexpected disappearance of the head
cashier. This unexplained absence is a major red flag and demands
a thorough investigation by the auditor.
As per SA 240, “The auditor’s responsibilities relating to fraud in an
audit of financial statements”, it can be concluded that the auditor
did not plan and perform the audit with an attitude of professional
skepticism. Thus, having regard to this that fraud has actually taken
place during the year committed by the absconding cashier, it is
reasonable to think that prima facie there is a case against the
auditor for gross negligence.
As it appears from the facts of the case, CA. T has been grossly
negligent in performing his duties which constitutes professional
misconduct. Thus, such instances require reference to Disciplinary
Committee of the Council of the Institute.
3. (a) As per SA 530, “Audit Sampling”, the auditor shall evaluate:
(a) The results of the sample; and

632
 (b) Whether the use of audit sampling has provided a reasonable
basis for conclusions about the population that has been
tested.
In the given case, Ridhi concludes that audit sampling has not
provided a reasonable basis for conclusions about the population
that has been tested, Ridhi 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.
(b) The areas of advances which need to be verified are as under:
i. Interest rates fed in the system need to be verified with
respect to corresponding sanction letters. It would help ensure
that the 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.
(c) Disclosure of Material Facts: A Chartered Accountant in practice
is deemed to be guilty of professional misconduct under Clause (5)

633
 of Part I of the Second Schedule if he “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”.
In the given case, Mr. Anuj was aware of some part of the expenses
not applied towards the object i.e. contraventions and irregularities
committed by the trust as these were referred to in the separate
report given by him to the Board of Trustees of the company.
However, he issued an audit report without any qualification is not
in order.
Therefore, CA Anuj is deemed to be guilty of professional
misconduct.
4. (a) (i) Matters to be reported by Mr. Sodi as per CARO, 2020 are as
follows:-
According to Clause (i) (d) of Para 3 of CARO 2020, the
auditor is required to report whether the company has
revalued its Property, Plant and Equipment (including Right of
Use assets) or intangible assets or both during the year and,
if so, whether the revaluation is based on the valuation by a
Registered Valuer; specify the amount of change, if the
change is 10% or more in the aggregate of the net carrying
value of each class of Property, Plant And Equipment or
intangible assets;
In the given situation, Capital Limited has revalued one of the
Plant and Equipment taken on a lease (‘right of use’ asset)
based on the valuation by a registered valuer. The amount of
change in the value of such Plant and Equipment is ₹ 35 lakh.
As the net carrying value of Plant and Equipment in aggregate
was changed from ₹ 3 crore to ₹ 3.35 crore i.e. change was
10% or more.
Thus, the auditor is required to report the amount of change
of ₹ 35 lakh in accordance with Clause (i) (d) of Para 3 of
CARO 2020.
(ii) As per Clause (ii) (b) of Para 3 of CARO 2020, the auditor is
required to report whether during any point of time of the year,
the company has been sanctioned working capital limits in

634
 excess of five crore rupees, in aggregate, from banks or
financial institutions on the basis of security of current assets;
whether the quarterly returns or statements filed by the
company with such banks or financial institutions are in
agreement with the books of account of the Company, if not,
give details;
In the instant case, Capital Limited has been sanctioned a
cash credit limit of ₹ 5.10 crore by BDD Bank during the year
under consideration, which is exceeding the prescribed limit
of ₹ 5 crore based on the security of current assets. Further,
quarterly returns have also been filed by the company with the
BDD bank in this connection which is in agreement with Books
of Accounts.
In view of the above, the auditor is required to report the same
in accordance with Clause (ii) (b) of Para 3 of CARO 2020.
(b) Principle 3 – Promote well-being of all employees including
those in the value chain:
The third principle relates to all the initiatives an entity has to take
for the benefit of its employees from the point of view of their dignity,
health, well-being.
The essence of the core elements associated with the principle is:
a) The entity should ensure compliance with all regulatory
requirements as far as employees are concerned.
b) The entities are to respect the dignity of employee as a human
being and should not restrict their freedom of associations,
unions, and other participatory mechanism for collective
bargaining of their rights and redressal of issues they face at
the workplace.
c) The entities should prevent all kinds of child labour, bonded
labour, and any other forms of involuntary labour.
d) The entities should have a system in which the work-life
balance of the employees is not compromised.
e) The businesses have to ensure timely payment of the worker’s
wages and compensation.

635
 f) The payment of the wages has to be as per the living wages,
that can take care of the basic needs and provide economic
security to the employees.
g) The entities are responsible to create a workplace and work
environment that is safe, hygienic, and comfortable for people
to work for long durations.
h) The skill development, career development and training of the
workforce is another responsibility of the entities employing
them.
i) The creation of a workplace which is free of harassment and
violence is also a responsibility of the entity.
(c) Auditor’s duties in case of inconsistency in Audit evidence:
SA 705 “Modifications to the Opinion in the Independent Auditor’s
Report”, deals with 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.
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 judgement 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, that the financial statements as a whole
are not free from material misstatement:
In the present case, during the course of the audit, CA. Suchi
obtained certain audit evidence which was not consistent with the
affirmation made in financial statements. Therefore CA. Suchi
should modify her report in accordance with SA 705 as per the
circumstances of the case.

636
 • CA. Suchi shall express Qualified opinion when, having
obtained sufficient appropriate audit evidence, she concludes
that misstatements, individually or in the aggregate, are
material, but not pervasive, to the financial statements.
• CA. Suchi shall express an Adverse opinion, where the
auditor, having obtained sufficient appropriate evidence,
concludes that misstatements, individually, or in the
aggregate, are both material and pervasive to the financial
statements.
5. (a) 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 namely: 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 namely
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%)

637
 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 were 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%
(b) Applicability of Provisions of Internal Audit: As per section 138
of the Companies Act, 2013, following class of companies
(prescribed in Rule 13 of 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

638
 (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, IDI 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, IDI Limited is required to
appoint an internal auditor.
Further, TIJ 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, TIJ Limited is required to appoint an internal auditor as
per section 138 of the Companies Act, 2013.
MIN Limited is unlisted private company and having ` 60 crore
as equity share capital, ` 190 crore as turnover and ` 50 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,
MIN Limited is not required to appoint an internal auditor.
It can be concluded that IDI Limited and TIJ Limited is required
to appoint the internal auditor as per the provisions of the
Companies Act, 2013 whereas MIN Limited is not required to
do the same.
(c) Sharing Professional Fees with Registered Valuer: As per
Clause (3) of Part I of the First Schedule to the Chartered
Accountants Act, 1949, a Chartered Accountant will be guilty of
professional misconduct if he accepts or agrees to accept any part
of the profits of the professional work of a person who is not a
member of the Institute.
A member cannot share his fees with a non-member similarly he is
also not permitted to receive and share the fees of others except for
sharing with member of such professional body or other person
having such qualification as may be prescribed (Regulation 53A of
the Chartered Accountants Regulations, 1988) by the council.

639
 Under the Regulation 53A of the Chartered Accountants
Regulations, 1988, registered valuer is not included.
In the instant case Mr. Rishi, who is a newly qualified Chartered
Accountant in practice entered into an agreement with Mr. Krish, a
qualified and experienced registered valuer, to share 18%
professional fees for all case of valuation referred to him by CA.
Rishi. CA. Rishi also received ₹ 1,15,000 for the same from
Mr. Krish. Thus, CA. Rishi will be held guilty for misconduct under
clause (3) of Part I of the First Schedule to the Chartered
Accountants Act, 1949.
6. (a) As per SAE 3400, “The Examination of Prospective Financial
Information”, when determining the nature, timing and extent of
examination procedures, the auditor should consider matters such
as:
(i) the knowledge obtained during any previous engagements;
(ii) management’s competence regarding the preparation of
prospective financial information;
(iii) the likelihood of material misstatement;
(iv) the extent to which the prospective financial information is
affected by the management’s judgment;
(v) 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;
(vi) the stability of entity’s business; and
(vii) the engagement team’s experience with the business and the
industry in which the entity operates and with reporting on
prospective financial information.
Or
As per SRE 2410, “Review of Interim Financial Information
Performed by the Independent Auditor of the Entity”, when in the
auditor’s judgment, those charged with governance do not respond
appropriately within a reasonable period, the auditor should
consider:

640
 (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.
In the given case, CA. Tripti who was conducting review of the
quarterly financial information of a company, communicated the
matter to the CFO and audit committee. However, no response was
received even after waiting for a reasonable time. In such case, she
has above mentioned options as per SRE 2410.
(b) Mr. Nandkishore has violated following provisions of the Chartered
Accountants Act, 1949:
(i) 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 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.
In this connection, members sponsoring activities relating to
Corporate Social Responsibility may mention their individual
name with the prefix “CA”. However, mentioning a firm’s name
or CA Logo is not permitted.
An event relating to Corporate Social Responsibility was
sponsored by NK & Associates, whereby in the sponsorship
banner, name of Mr. Nandkishore as ‘CA Nandkishore,
Proprietor, NK & Associates’ was mentioned. Thus, firm’s
name was mentioned which is not allowed and thus, Mr.
Nandkishore has violated the restriction imposed under
Clause (6) of Part I of the First Schedule to the Chartered
Accountants Act, 1949.
(ii) As per Clause (3) of Part II of the Second Schedule to the
Chartered Accountants Act, 1949, a member of the ICAI shall
be deemed to be guilty of professional misconduct, if he
includes in any information, statement, return or form to be
submitted to the Institute, Council or any of its Committees,
Director (Discipline), Board of Discipline, Disciplinary

641
 Committee, Quality Review Board or the Appellate Authority,
any particulars knowing them to be false.
Mr. Nandkishore in the statement of appeal submitted with the
Appellate Authority mentioned some facts knowing them to be
false and thus, he has violated the restriction imposed under
Clause (3) of Part II of the Second Schedule to the Chartered
Accountants Act, 1949.
(c) Steps involved in the verification of assets and liabilities
included in the Balance Sheet of the borrower company which
has been furnished to the Bank - The investigating accountant
should prepare schedules of assets and liabilities of the borrower
and include in the particulars stated below:
(i) Fixed assets - A full description of each item, its gross value,
the rate at which depreciation has been charged and the total
depreciation written off. In case the rate at which depreciation
has been adjusted is inadequate, the fact should be stated. In
case any asset is encumbered, the amount of the charge and
its nature should be disclosed. In case an asset has been
revalued recently, the amount by which the value of the asset
has been decreased or increased on revaluation should be
stated along with the date of revaluation. If considered
necessary, he may also comment on the revaluation and its
basis.
(ii) Inventory - The value of different types of inventories held (raw
materials, work-in-progress and finished goods) and the basis
on which these have been valued.
Details as regards the nature and composition of finished
goods should be disclosed. Slow-moving or obsolete items
should be separately stated along with the amounts of
allowances, if any, made in their valuation. For assessing
redundancy, the changes that have occurred in important
items of inventory subsequent to the date of the Balance
Sheet, either due to conversion into finished goods or sale,
should be considered.
If any inventory has been pledged as a security for a loan the
amount of loan should be disclosed.

642
(iii) Trade Receivables, including bills receivable - Their
composition should be disclosed to indicate the nature of
different types of debts that are outstanding for recovery; also
whether the debts were being collected within the period of
credit as well as the fact whether any debts are considered
bad or doubtful and the provision if any, that has been made
against them.
Further, the total amount outstanding at the close of the period
should be segregated as follows:
(i) debts due in respect of which the period of credit has not
expired;
(ii) debts due within six months; and
(iii) debts due but not recovered for over six months.
If any debts are due from directors or other officers or
employees of the company, the particulars thereof should be
stated. Amounts due from subsidiary and affiliated concerns,
as well as those considered abnormal should be disclosed.
The recoveries out of various debts subsequent to the date of
the Balance sheet should be stated.
(iv) Investments - The schedule of investments should be
prepared. It should disclose the ¬date of purchase, cost and
the nominal and market value of each investment. If any
investment is pledged as security for a loan, full particulars of
the loan should be given.
(v) Secured Loans - Debentures and other loans should be
included together in a separate schedule. Against the
debentures and each secured loan, the amounts outstanding
for payments along with due dates of payment should be
shown. In case any debentures have been issued as a
collateral security, the fact should be stated. Particulars of
assets pledged or those on which a charge has been created
for re-payment of a liability should be disclosed.

643
(vi) Provision of Taxation - The previous years up to which taxes
have been assessed should be ascertained. If provision for
taxes not assessed appears in be inadequate, the fact should
be stated along with the extent of the shortfall.
(vii) Other Liabilities - It should be stated whether all the liabilities,
actual and contingent, are correctly disclosed. Also, an
analysis according to ages of trade payables should be given
to show that the company has been meeting its obligations in
time and has not been depending on trade credit for its
working capital requirements.
(viii) Insurance - A schedule of insurance policies giving details of
risks covered, the date of payment of last premiums and their
value should be attached as an annexure to the statements of
assets, together with a report as to whether or not the
insurance-cover appears to be adequate, having regard to the
value of assets.
(ix) Contingent Liabilities - By making direct enquiries from the
borrower company, from members of its staff, perusal of the
files of parties to whom any loan has been advanced those of
machinery suppliers and the legal adviser, for example, the
investigating accountant should ascertain particulars of any
contingent liabilities which have not been disclosed. In case,
there are any, these should be included in a schedule and
attached to the report.
Finally, the investigating accountant should ascertain whether any
application for loan to another bank or any other party has been
made. If so, the result thereof should be examined.

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 ANSWERS OF MODEL TEST PAPER - 4
FINAL COURSE: GROUP I
PAPER-3: ADVANCED AUDITING, ASSURANCE AND
PROFESSIONAL ETHICS
Part I: MULTIPLE CHOICE QUESTION
1. (c)
2. (a)
3. (b)
4. (d)
5. (b)
6. (c)
7. (d)
8. (b)
9. (a)
10. (c)
11. (d)
12. (a)
13. (b)
14. (c)
15. (a)
Part II - DESCRIPTIVE QUESTION
1. (a) M/s Dharam & Associates are unable to obtain sufficient appropriate
audit evidence about the financial information of a joint venture
investment that represents over 89% of the group’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:

645
 Disclaimer of Opinion
We were engaged to audit the accompanying consolidated financial
statements of Spice Ltd., (hereinafter referred to as the “Holding
Company”) and its subsidiaries (the Holding Company and its
subsidiaries together referred to as “the Group), which comprise the
consolidated balance sheet as at March 31, 2024, the consolidated
statement of Profit and Loss, (consolidated statement of changes in
equity) and consolidated statement of cash flows for the year then
ended, and notes to the consolidated financial statements, including
a summary of significant accounting policies (hereinafter referred to
as the “Consolidated Financial Statements”).
We do not express an opinion on the accompanying consolidated
financial statements of the group. Because of the significance of the
matter 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
consolidated financial statements.
Basis for Disclaimer of Opinion
The Group’s investment in its joint venture Croptop Ltd. company is
carried at ₹ 120 crore on the Group’s consolidated balance sheet,
which represents over 89% of the Group’s net assets as at March
31, 2024. We were not allowed access to the management and the
auditors of Croptop Ltd., including audit documentation of auditors
of Croptop Ltd. As a result, we were unable to determine whether
any adjustments were necessary in respect of the Group’s
proportional share of Croptop Ltd.’s assets that it controls jointly, its
proportional share of Croptop Ltd.’s liabilities for which it is jointly
responsible, its proportional share of Croptop Ltd.’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.
(b) SA 505, “External Confirmations”, 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.

646
 In the instant case, GST registrations of 38 concerns have been
cancelled in the year 2023-24. It indicates that businesses at 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, “Audit Evidence” 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 given 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.
(c) 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.

647
 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.
2. (a) Audit procedure to verify Current Accounts and Saving
Accounts are:
• 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 a significant reduction in
balances of such accounts as compared to previous year,
examine authorisation for withdrawals.

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(b) 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, the investment of ₹ 23 lakh appeared in the
Balance Sheet of the company and was the same amount as in the
last year. Later, it was found that the company's investments were
only ₹ 76,000, but the value of investments was inflated for the
purpose of obtaining higher amount of bank loan. 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.
Thus, in view of above, CA Aditya 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.
(c) Key considerations that CA Kabir should address for
effectiveness and security of the remote audits are:
Feasibility and Planning
• Planning should involve agreeing on audit timelines, meeting
platform (Zoom calls/ Microsoft Teams/Google Meet) to be

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 used for audit sessions, data exchange mechanisms, any
access authorization requests. Ensure feasibility is
determining what technology may be used, if auditors and
auditees have competencies and that resources are available.
• The execution phases of a remote audit involve video/tele
conferencing with auditees. The documentation for audit
evidence should be transferred through a document sharing
platform.
Confidentiality, Security and Data Protection
• To ensure data security and confidentiality, access to
document sharing platform should be sufficiently restricted
and secured by encrypting the data that is sent across the
network. The information, once reviewed and documented by
auditor, is removed from the platform, and stored according to
applicable archiving standards and data protection
requirements.
Auditors should take into consideration legislation and
regulations, which may require additional agreements from
both sides (e.g., there will be no recording of sound and
images, or authorizations to using people’s images). Auditors
should not take screenshots of auditees as audit evidence.
Any screenshots of documents or records or other kind of
evidence should be previously authorized by the audited
organization. In case of accessing the auditee’s IT system
auditor should use VPN (Virtual private network). VPN is a
service which creates safe and encrypted online connections.
It prevents unauthorized users to enter into the network and
allows the users to perform work remotely.
Risk assessment
• The communication from auditor as well as auditees need to
clear and consistent, and this becomes crucial during remote
audit. The risks for achieving the audit objectives are
identified, assessed and managed. The assessment if remote
audit would be sufficient to achieve the audit objectives should
be done and documented for each audit involving all members
of the audit team and the audited organization representative.

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3. (a) 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.
(b) 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

651
 (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.
(c) 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

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 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.
4. (a) (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 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.

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 (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.
(b) 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

654
 (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.
(c) As per Clause (7) of Part I of 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.

655
 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 Second Schedule to the Chartered
Accountants Act, 1949.
5. (a) 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

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 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.
(b) 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.

657
 (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”.
(c) 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.

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6. (a) As per SAE 3400, “The Examination of Prospective Financial
Information”, when determining the nature, timing and extent of
examination procedures, the auditor should consider matters such
as:
(i) the knowledge obtained during any previous engagements;
(ii) management’s competence regarding the preparation of
prospective financial information;
(iii) the likelihood of material misstatement;
(iv) the extent to which the prospective financial information is
affected by the management’s judgment;
(v) 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;
(vi) the stability of entity’s business; and
(vii) the engagement team’s experience with the business and the
industry in which the entity operates and with reporting on
prospective financial information.
(b) 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.

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 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.
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.
(c) The objective of the Due Diligence exercise will be to look
specifically for any hidden liabilities or over-valued assets.
Example of 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 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.

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• Product and other liability claims; warranty liabilities; product
returns/discounts; liquidated damages for late deliveries etc.
and all litigation.
• Tax liabilities under 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.
OR
As per SA 810, “Engagements to Report on Summary Financial
Statements”, 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,
additionally:
(a) State that the auditor’s report on the audited financial
statements contains an adverse opinion or disclaimer of
opinion;
(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, it is inappropriate to express an opinion on the
summary financial statements.

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 ANSWERS OF MODEL TEST PAPER 5
FINAL COURSE: GROUP I
PAPER-3: ADVANCED AUDITING, ASSURANCE AND
PROFESSIONAL ETHICS
Part I: MULTIPLE CHOICE QUESTION
1. (c)
2. (b)
3. (c)
4. (d)
5. (a)
6. (d)
7. (c)
8. (c)
9. (d)
10. (a)
11. (d)
12. (d)
13. (b)
14. (d)
15. (a)
Part II - DESCRIPTIVE QUESTION
1. (a) 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.

662
 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 provision for
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.
(b) In the present case based on the audit evidence obtained, CA Shiv
has concluded that a material uncertainty exists related to the
outcome of the legal dispute, which is uncertain, but if it results in
an unfavorable judgment, it could severely impact the Company’s
financial position and cash flows. In such circumstances, CA Shiv
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

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 accordance with the Accounting Standards issued by the Institute of
Chartered Accountants of India.
Basis for Adverse Opinion
The financing arrangements of Pratibha Ltd. has 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 not adequately disclose this fact.
(c) 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.
2. (a) As per SA 701, ‘Communicating Key Audit Matters in the
Independent Auditor’s Report’, 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, the auditor shall take into
account the following:

664
(i) Areas of higher assessed risk of material misstatement, or
significant risks identified in accordance with SA 315.
(ii) 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.
(iii) The effect on the audit of significant events or transactions
that occurred during the period.
The auditor shall determine which of the aforesaid matters
considered were of most significance in the audit of the financial
statements of the current period and therefore are the key audit
matters.
These aforesaid considerations focus on the nature of matters
communicated with those charged with governance. Such matters
are often linked to matters disclosed in the financial statements and
are intended to reflect areas of the audit of the financial statements
that may be of particular interest to intended users.
The fact that these considerations are required is not intended to
imply that matters related to them are always key audit matters;
rather, matters related to such specific considerations are key audit
matters only if they are determined to be of most significance in the
audit.
In addition to matters that relate to the specific required
considerations, there may be other matters communicated with
those charged with governance that required significant auditor
attention and that therefore may be determined to be key audit
matters. Such matters may include, for example, matters relevant
to the audit that was performed that may not be required to be
disclosed in the financial statements. For example, the
implementation of a new IT system (or significant changes to an
existing IT system) during the period may be an area of significant
auditor attention, in particular if such a change had a significant
effect on the auditor’s overall audit strategy or related to a

665
 significant risk (e.g., changes to a system affecting revenue
recognition).
In the given case, there was implementation of ERP system in the
company due to which some of its business processes got
automated and which had a significant effect on the auditor’s overall
audit strategy during the period.
As per Mr. Arjun, Engagement Partner, above mentioned matter can
be considered as a key audit matter and should be reported in the
audit report since it requires significant attention that had affected
his overall audit strategy. Mr. Krishna, EQCR, considered the
significance of said matter, however, he was of the opinion that ERP
implementation did not appear to link with the matters disclosed in
the financial statements, therefore, no need to disclose such matter
as a key audit matter.
In view of the above, the contention of Mr. Krishna is not appropriate
as matters that do not link with the matters disclosed in the financial
statements can also be considered as a key audit matter, if it
requires significant attention.
(b) 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

666
 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
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.
(c) Advantages and Disadvantages of Remote Audit:
ADVANTAGES DISADVANTAGES
Cost and time effective: No Due to network issues, interviews
travel time and travel costs and meetings can be interrupted.
involved.
Comfort and flexibility to Limited or no ability to visualize
the audit team as they facility culture of the organization,
would be working from and the body language of the
home environment, auditees. Time zone issues could
also affect the efficiency of remote
audit session.
Time required to gather The opportunity to present
evidence can spread over doctored documents and to omit
several weeks, instead of relevant information is increased.
concentrated into a small This may call for additional
period that takes personnel planning, some additional/different
from their daily activities. audit procedures, Security and
confidentiality violation.
Auditor can get first-hand Remote access to sensitive IT
evidence directly from the systems may not be allowed.
IT system as direct access Security aspects related to remote
may be provided. access and privacy needs to be
assessed
Widens the selection of Cultural challenges for the auditor.
auditors from global Lack of knowledge for local laws
network of experts. and regulations could impact
audit. Audit procedures like
physical verification of assets and
stock taking cannot be performed.

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3. (a) 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

668
 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 AB &
Associates and CD & 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 AB & Associates.
In view of SA 299, AB & Associate will be held responsible for the
same as trade receivable valuation work was looked after by AB &
Associates only. Further, there is violation of SA 299 as the division
of work has not been documented.
(b) 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 attracts the requirement 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:
(i) 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.
(ii) 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

669
 constitute more than 50 per cent of the gross income.
(iii) Whether the company has net owned funds as required for the
registration as NBFC.
(iv) Whether the company has obtained the registration as NBFC,
if not, the reasons should be sought from the management
and documented.
(v) The auditor should report incorporating the following:-
(1) Whether the registration is required under section 45-IA
of the RBI Act, 1934.
(2) If so, whether it has obtained the registration.
(3) If the registration not obtained, reasons thereof.
In the given case, Manu Finance Ltd. is a Non-Banking Finance
Company and was in the business of accepting public deposits and
giving loans since 2019. The company was having net owned funds
of ` 1,75,00,000/-(one crore seventy five 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
29th March 2024). The auditor is required to report on the same as
per Clause (xvi) of Paragraph 3 of CARO 2020.
(c) According to Clause (7) of Part I of Second Schedule to the
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 usually gets attracted whenever it is
necessary to judge whether the accountant 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.
In the instant case, DIGI & Associate did not exercise due diligence
and is grossly negligent in the conduct of his professional duties
since it did not visit the site where the stock was lying and instead
the firm relied on the MIS report along with inspection reports and

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 photographs of stock taken by the employees of PQR Ltd, which is
incorrect.
To conduct stock audit, ascertainment of existence and physical
condition of stocks, cross tallying the stock with Stock statement
submitted by bank borrower, correct classification of stocks for
valuation purpose etc. is essential. Further submitting stock audit
report without physically verifying the stock amounts to gross
negligence.
From the above, it can be concluded that DIGI & Associate is guilty
of professional misconduct under Clause (7) of Part I of Second
Schedule to the Chartered Accountants Act, 1949.
4. (a) 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, Girdhar Ltd.’s intention is disposal of 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, Girdhar Ltd.
is required to prepare Consolidated Financial Statements in
accordance with Ind AS 110 as exemption for ‘temporary control’ is
not available in the same.
(b) 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

671
 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.
In the given situation, Abhinandan Ltd. is a company wholly owned
by Delhi Government was disinvested during the previous year,
resulting in 38% of the shares being held by public. The shares were
also listed on the NSE. The listing of company’s shares on a stock
exchange is irrelevant for this purpose and hence, opinion of finance
manager Paras is not correct.
(c) 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) of the Chartered Accountants Act, 1949,
read with Regulation 191 of Chartered Accountants Regulations,
1988 a member shall be deemed to be in practice if he, in his
professional capacity and neither in his personal capacity nor in his
capacity as an employee, acts as representative for taxation
matters.
In the given situation, CA Ram, a practicing Chartered Accountant,
provides non-assurance services. He is approached by DEF
Limited, a non-audit client, to file an appeal in GST Tribunal against
GST Demand of ₹ 6 crore, which was imposed by the Commissioner
(Appeals) and to plead on behalf of DEF Limited in the matter. CA
Ram offers to accept the case and agrees to charge fees of
` 3,50,000.
Therefore, CA Ram is not guilty of professional misconduct.
5. (a) 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

672
 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 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.
(b) 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

673
 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
completions.
In this audit scenario, Mr. Gautam, the auditor, must review and re-
assess 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.
(c) The information given in situation [i] states that company has
secured a loan to expand its operations and invests the funds in
purchasing raw materials and machinery. The loan, along with
revenue generated from existing sales, contributes to the pool of

674
 resources available for production. Therefore, it involves pool of
funds that is available to the organization for use in the production
of goods or provision of services. Further, it is obtained through
financing, such as debt, equity, or grants, or generated through
operations or investments. The capital referred to at [i] is “Finance
Capital”.
Further, situation [ii] describes 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.”
6. (a) 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

675
 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.
(b) 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 Jay proprietor of M/s Adhya & Co., went to abroad
and delegated the authority to another Chartered Accountant Mr.
Vijay, 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 of India.
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.

676
 In the given case, Mr. Vijay, a Chartered Accountant being employee
of M/s Adhya & Co. has asked for information or issued
questionnaire. He has also proceeded for initiating and stamping of
vouchers and of schedules prepared for the purpose of audit. Apart
from the same, he acknowledged and carried out routine
correspondence with clients. Here Vijay is right in doing the same,
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.
(c) The practitioner shall not accept the compilation engagement
unless the practitioner has agreed 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.
OR
(c) As per SRE 2400, “Engagements to Review Historical Financial
Statements”, 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

677
the entity’s ability to continue as a going concern, the practitioner
shall:
(i) 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.
(ii) Evaluate the results of those inquiries, to consider whether
management’s responses provide a sufficient basis to: -
(1) 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
(2) Conclude whether the financial statements are
materially misstated or are otherwise misleading
regarding the entity’s ability to continue as a going
concern.
(iii) Consider management’s responses in light of all relevant
information of which the practitioner is aware as a result of the
review.

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 ANSWERS OF MODEL TEST PAPER 6
FINAL COURSE: GROUP I
PAPER-3: ADVANCED AUDITING, ASSURANCE AND
PROFESSIONAL ETHICS
Part I: MULTIPLE CHOICE QUESTION
1. (d)
2. (b)
3. (c)
4. (c)
5. (b)
6. (c)
7. (a)
8. (c)
9. (a)
10. (d)
11. (a)
12. (b)
13. (d)
14. (d)
15. (b)
Part II - DESCRIPTIVE QUESTION
1. (a) 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: -
 Integrity of Client, promoters, and key managerial personnel.
 Competence (including capabilities, time, and resources) to
perform engagement.

679
 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

680
 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.
(b) 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.

681
 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.
(c) 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

682
 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.
2. (a) 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

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 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 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.
(b) As per Clause (8) 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 accepts a
position as auditor previously held by another chartered accountant
or a certified auditor who has been issued certificate under the
Restricted Certificate Rules, 1932 without first communicating with
him in writing.
Although the mandatory requirement of communication with
previous auditor being Chartered Accountant applies, in uniform
manner, to audits of both government and Non-Government
entities, yet in the case of audit of government Companies/ banks
or their branches, if the appointment is made well in time to enable
the obligation cast under this clause to be fulfilled, such obligation
must be complied with before accepting the audit. However, in case
the time schedule given for the assignment is such that there is no
time to wait for the reply from the outgoing auditor, the incoming
auditor may give a conditional acceptance of the appointment and
commence the work which needs to be attended to immediately
after he has sent the communication to the previous auditor in
accordance with this clause. In his acceptance letter, he should
make clear to the client that his acceptance of appointment is
subject to professional objections, if any, from the previous auditors
and that he will decide about his final acceptance after taking into
account the information received from the previous auditor.

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 In the given case, PN and Associates are appointed as the Statutory
Auditors of The Iron Company Ltd. which is a government company
as Central Government holds 65% of the paid-up share capital of
the company and CA N has given a conditional acceptance of the
appointment and commenced the audit. In view of above, it can be
concluded that CA N has complied with the provisions of the
Chartered Accountants Act, 1949 and the Schedules thereunder.
(c) In order to demonstrate that the audit trail feature was functional,
operated and was not disabled, a company would have to design
and implement specific internal controls (predominantly IT controls)
which in turn, would be evaluated by the auditors, as appropriate.
An illustrative 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.
3. (a) To investigate the profitability of the business for judging the
accuracy of the schedule of repayment furnished by the borrower,
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, the investigating accountant should take the under-
mentioned steps:
(1) Prepare a condensed income statement from the Statement
of Profit and Loss for the previous five years, showing
separately therein various items of income and expenses, the
amounts of gross and net profits earned and taxes paid

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 annually during each of the five years. The amount of
maintainable profits determined on the basis of foregoing
statement should be increased by the amount by which these
would increase on the investment of borrowed funds.
(2) Compute the under-mentioned ratios separately and then
include them in the statement to show the trend as well as
changes that have taken place in the financial position of the
company:
(i) Sales to Average Inventories held.
(ii) Sales to Fixed Assets.
(iii) Equity to Fixed Assets.
(iv) Current Assets to Current Liabilities.
(v) Quick Assets (the current assets that are readily
realisable) to Quick Liabilities.
(vi) Equity to Long Term Loans.
(vii) Sales to Book Debts.
(viii) Return on Capital Employed.
(3) Enter in a separate part of the statement the break-up of
annual sales product-wise to show their trend.
(b) 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

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 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 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.
(c) 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

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 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 the 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 the Chartered Accountants
Act, 1949.
4. (a) 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;

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 (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.
(b) 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

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 • 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.
(c) Principle 1 – Ethics, Transparency and Accountability: The first
principle emphasizes that the business decisions in an organisation
should be open to disclosure and accessible to the relevant
interested parties.

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 The essence of the core elements associated with the first principle
are:
(i) The entities’ governing structure should develop policies,
procedures, and practices for their offices, factories, and work
areas, ensuring that ethics is not compromised.
(ii) The information relating to the policies, procedures, and
practices along with the performance should be made
available to the stakeholders.
(iii) In case of adverse effects, more care has to be taken for
transparent disclosures.
(iv) The entities in the value chain should be encouraged to adopt
these principles by the governance structure.
(v) 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.
5. (a) When assessing the presentation and disclosure of the prospective
financial information and the underlying assumptions, in addition to
the specific requirements of any relevant statutes, regulations as
well as the relevant professional pronouncements, it needs to be
considered whether: -
(i) the presentation of prospective financial information is
informative and not misleading
(ii) the accounting policies are clearly disclosed in the notes to
the prospective financial information
(iii) the assumptions are adequately disclosed in the notes to the
prospective financial information. It needs to be clear whether
assumptions represent management’s best-estimates or are
hypothetical and, when assumptions are made in areas that
are material and are subject to a high degree of uncertainty,
this uncertainty and the resulting sensitivity of results needs
to be adequately disclosed
(iv) the date as of which the prospective financial information was
prepared is disclosed. Management needs to confirm that the
assumptions are appropriate as of this date, even though the

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 underlying information may have been accumulated over a
period of time
(v) the basis of establishing points in a range is clearly indicated
and the range is not selected in a biased or misleading
manner when results shown in the prospective financial
information are expressed in terms of a range and
(vi) if there is any change in the accounting policy of the entity
from that disclosed in the most recent historical financial
statements, whether reason for the change and the effect of
such change on the prospective financial information has
been adequately disclosed.
(b) For consolidation of subsidiaries in accordance with the
Companies (Indian Accounting Standards) Rules, 2015:
• the financial statements of the parent and its subsidiaries are
combined as per Ind AS 110, “Consolidated Financial
Statements” on a line-by-line basis by adding together like
items of assets, liabilities, income, expenses, and cash flows;
• related goodwill/ capital reserve (or gain on bargain purchase)
and non-controlling interest is determined as per Ind AS 103;
• business combinations involving entities or businesses under
common control shall be accounted for using the pooling of
interest method in accordance with Ind AS 103;
• adjustments like elimination of intra-group transactions,
balances, unrealised profits and deferred tax etc. are made in
accordance with the requirements of Ind AS 110;
• investments in associates and joint ventures are accounted
for using the Equity Method as prescribed in Indian
Accounting Standard (Ind AS) 28, “Investments in Associates
and Joint Ventures”. Interests in assets, liabilities, revenues,
and expenses in a joint operation are accounted for as part of
separate financial statements of the entity in accordance with
Indian Accounting Standard (Ind AS) 111, “Joint
Arrangements”;
• in a business combination achieved in stages, the acquirer
shall remeasure its previously held equity interest in the

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 acquiree at its acquisition-date fair value and recognise the
resulting gain or loss, if any, in profit or loss or other
comprehensive income, as appropriate in accordance with Ind
AS 103.
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.
(c) In the given situation, CA R is looking after the audit of the TP
Limited, a listed company. During 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". 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

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 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.
6. (a) 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
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

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 `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.
(b) Key Areas for an Auditor to Understand IT Environment: Key
Areas for an Auditor to Understand IT Environment are as follows:
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

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 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.
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.
(c) 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.

696
 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 either
` 5,00,000 or 10% of Tax Demand reduced whichever is higher.
Conclusion: Therefore, Mr. Kumar will not be held guilty of
professional misconduct since he is not providing any assurance
services to non-audit client pursuant to Regulation 192 read with
Clause 10 of Part I of First Schedule.
Or
(c) 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 Kushal 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.

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