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 CA FINAL AUDIT BOMB 4.0
INDEX

CHAPTER

01 STANDARDS ON AUDITING 01

CHAPTER

02 AUDIT PLANNING, STRATEGY & EXECUTION 22

CHAPTER

03 RISK ASSESSMENT AND INTERNAL CONTROL 25

CHAPTER

04 AUDIT IN AN AUTOMATED ENVIRONMENT 31

CHAPTER

05 DECLARATION AND PAYMENT OF DIVIDEND 35

CHAPTER

6A COMPANY ACCOUNTS AND AUDIT 37

CHAPTER

6B LIABILITIES OF AUDITOR 52

CHAPTER

6C CARO, 2020 55

CHAPTER

07 AUDIT COMMITTEE AND CORPORATE GOVERNANCE 63

CHAPTER

08 AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS 68

CHAPTER

09 AUDIT OF BANKS 71

CHAPTER

10 AUDIT OF INSURANCE COMPANIES 83

CHAPTER

11 AUDIT OF NON BANKING FINANCIAL COMPANIES 90

CHAPTER

12 AUDIT UNDER FISCAL LAWS 94

 CA FINAL AUDIT BOMB 4.0
INDEX

CHAPTER

13 AUDIT OF PUBLIC SECTOR UNDERTAKINGS 105

CHAPTER

14 INTERNAL AUDIT, MANAGEMENT AND OPERATIONAL AUDIT 109

CHAPTER

15 DUE DILIGENCE, INVESTIGATION AND FORENSIC AUDIT 114

CHAPTER

16 PEER REVIEW AND QUALITY REVIEW 119

CHAPTER

17 PROFESSIONAL ETHICS 126

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 1 STANDARDS ON AUDITING

1. The auditor is responsible for maintaining an attitude of professional scepticism throughout the audit.
Do you agree with the statement?

Ans: Questioning mind, being alert to conditions + possible misstatement + critical assessment.
Professional scepticism includes being alert to: • Contradictory audit evidence. • Questions on
reliability of documents. • Conditions indicating possible frauds. • Circumstances suggesting need for
audit procedures in addition to those suggested in SAs.

2. BSS & Associates is a partnership firm of Chartered Accountants which was established five years back.
The firm was offering only advisory services at the beginning, however, after audit rotation and advent
of GST, firm sees lot of potential in these areas also and started looking for opportunities in these areas
also. These services being assurance in nature, the firm required some internal restructuring and set up
some policies and procedures for compliance year on year. The firm started getting new clients for
these new services and is now looking to 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 has been setting up a process to document how the issues
were resolved. The firm is now looking to work with only select clients which are in line with the
policies of the firm. The firm understands that the extent of knowledge it will have regarding the
integrity of a client will grow within the context of an ongoing relationship with that client. With regard
to the integrity of a client, you are required to give some examples of the matters to be considered by
the firm as per the requirements of SQC 1.

Ans: With regard to the integrity of a client, matters that the firm considers include, for example: 1. The
identity and business reputation of the client’s principal owners, key management, related parties and
those charged with its governance. 2. The nature of the client’s operations, including its business
practices. 3. Information concerning the attitude of the client’s principal owners, key management and
those charged with its governance towards such matters as aggressive interpretation of accounting
standards and the internal control environment. 4. Whether the client is aggressively concerned with
maintaining the firm’s fees as low as possible. 5. Indications of an inappropriate limitation in the scope
of work. 6. Indications that the client might be involved in money laundering or other criminal
activities. 7. The reasons for the proposed appointment of the firm and non-reappointment of the
previous firm. The extent of knowledge a firm will have regarding the integrity of a client will generally
grow within the context of an ongoing relationship with that client.

3. “An Opinion expressed by the auditor is neither an assurance as to the future viability of the enterprise
nor the efficiency or effectiveness with which management has conducted the affairs of the
enterprise.”

Ans: The auditor’s opinion on the financial statements deals with whether the F.S. are prepared, in all
material respects, in accordance with the applicable FRF. Such an opinion is common to all audits of
financial statements. The auditor’s opinion therefore does not assure, the future viability of the entity
Page No. 1
 nor the efficiency or effectiveness with which management has conducted the affairs of the entity. In
some cases, however, the applicable laws and regulations may require auditors to provide opinions on
other specific matters, such as the effectiveness of internal control, or the consistency of a separate
management report with the financial statements. While the SAs include requirements and guidance in
relation to such matters to the extent that they are relevant to forming an opinion on the financial
statements, the auditor would be required to undertake further work if the auditor had additional
responsibilities to provide such opinions.

4. You are an audit senior working for the firm Bohra & Company. You are currently carrying out the audit
of Wisdom Ltd., a manufacturer of waste paper bins. You are unhappy with Wisdom Ltd.’s inventory
valuation policy and have raised the issue several times with the audit manager. He has dealt with the
client for a number of years and does not see what you are making an objection about. He has refused
to meet you on site to discuss those issues.

As the audit manager had dealt with Wisdom Ltd. for so many years, the other partners have decided to
leave the audit of Wisdom Ltd. in his capable hands. Comment on the situation outlines above.
Ans: Audit Firm has not complied with the requirements of SQC-1 and SA 220 in so far as appears that
no engagement partner is appointed to audit engagement undertaken by the firm, to take
responsibility for the engagement on behalf of the firm and the firm does not have a suitable policy to
resolve conflicting views.

5. R & Co., a firm of Chartered Accountants have not revised the terms of engagements and obtained
confirmation from the clients, for last 5 years despite changes in business and professional
development. Please elucidate the circumstances that may warrant the revision in terms of
engagement.

Ans: Any indication that the entity misunderstands the objective and scope of the audit. Any revised or
special terms of the audit engagement. A recent change of senior management. A significant change in
ownership. A significant change in nature or size of the entity’s business. A change in legal or
regulatory requirements. A change in the financial reporting framework adopted in the preparation of
the F.S. A change in other reporting requirements.

6. AKJ Ltd. is a small-sized 30 years old company having business of manufacturing of pipes. Company has
a plant based out of Dehradun and have their corporate office in Delhi. Recently the company
appointed new firm of Chartered Accountants as their statutory auditors. The statutory auditors want
to enter into an engagement letter with the company in respect of their services but the management
has contended that since the statutory audit is mandated by law, engagement letter may not be
required. Auditors did not agree to this and have shared a format of engagement letter with the
management for their reference before getting that signed. In this respect management would like to
understand that as per SA 210 (auditing standard referred to by the auditors), if the agreed terms of
the engagement shall be recorded in an engagement letter or other suitable form of written
agreement, what should be included in terms of agreed audit engagement letter?

Ans: SA 210 written agreement and shall include: (a) The objective and scope of the audit of the F.S.; (b)
The responsibilities of the auditor; (c) The responsibilities of management; (d) Identification of the
applicable FRF for the preparation of the F.S.; and (e) Reference to the expected form and content

7. X, a Chartered Accountant was engaged by PQR & Co. Ltd. for auditing their accounts. He sent his letter
of engagement to the Board of Directors, which was accepted by the Company. In the course of audit
of the company, the auditor was unable to obtain appropriate sufficient audit evidence regarding
receivables. The client requested for a change in the terms of engagement. Offer your comments in this
regard.

Page No. 2
 Ans: If the auditor is unable to agree to a change of the terms of the audit engagement and is not
permitted by management to continue the original audit engagement, the auditor shall: (i)Withdraw
from the audit engagement where possible under applicable law or regulation; and (ii) Determine
whether there is any obligation, either contractual or otherwise, to report the circumstances to other
parties, such as TCWG, owners or regulators.

8. Mr. Ram Kapoor, Chartered Accountant, has been appointed as the statutory auditor by XYZ Private
Limited for the audit of their financial statements for the year 2018-19. The company has mentioned in
the audit terms that they will not be able to provide internal audit reports to Mr. Ram during the
course of audit. Further, company also imposed some limitation on scope of Mr. Ram.
What are the preconditions Mr. Ram should ensure before accepting/ refusing the proposal? Also
advise, whether Mr. Ram should accept the proposed audit engagement?

Ans: SA 210 Audit premise

9. During the audit of FMP Ltd, a listed company, Engagement Partner (EP) completed his reviews and
also ensured compliance with independence requirements that apply to the audit engagement. The
engagement files were also reviewed by the Engagement Quality Control Reviewer (EQCR) except the
independence assessment documentation. Engagement Partner was of the view that matters related
to independence assessment are the responsibility of the Engagement Partner and not Engagement
Quality Control Reviewer. Engagement Quality Control Reviewer objected to this and refused to sign
off the documentation. Please advise as per SA 220.

Ans: Obtain relevant information from Firm; Evaluate information on identified breaches.; Take
appropriate action to eliminate such threats or Promptly report inability to take appropriate action to
firm.
The independence assessment should also be given to the EQCR for his review.

10. OP & Associates are the statutory auditors of BB Ltd. BB Ltd is a listed company and started its
operations 5 years back. The field work during the audit of the financial statements of the company for
the year ended March 31, 2019 got completed on May 1, 2019. The auditor’s report was dated May 12,
2019. During the documentation review of the engagement, it was observed that the engagement
quality control review was completed on May 15, 2019. Engagement partner had completed his
reviews in entirety by May 10, 2019. Comment.

Ans: Signing of auditor’s report on May 12, 2019 which is before the completion of review engagement
quality control review i.e. May 15, 2019, is not in order.

11. M/s Anil Chandra & Co. has been appointed as an auditor of SC Ltd. for the financial year 2018-19. CA.
Anil, one of the partners of M/s Anil Chandra & Co., completed entire routine audit work by 29th May,
2019. Unfortunately, on the very next morning, while roving towards office of SC Ltd. to sign final audit
report, he met with a road accident and died. CA. Chandra, another partner of M/s Anil Chandra & Co.,
therefore, signed the accounts of SC Ltd., without reviewing the work performed by CA. Anil. State
whether CA. Chandra is right.

Ans: CA. Chandra may rely on the work performed by CA. Anil provided he exercises adequate skill and
due care and review the work performed by CA Anil.

12. B is the Principal Auditor of ABC Co. Ltd., with 8 branches audited by 8 Branch Auditors. B wanted to
ensure that the works of Branch Auditors were adequate for the purpose of his audit. Hence, he
insisted on Branch Auditors to get familiar with a check list he prepared for branches and, besides,

Page No. 3
 required them to share the working papers complied by them for his review and return. Is principal
auditor within his right in asking for such sharing of working papers?

Ans: Principal Auditor is not within his rights to ask the branch auditors to share the working papers
compiled by branch auditors. Principal auditor is entitled to reply on the work performed by the branch
auditors in accordance with the provisions of SA 600, but is not entitled to review the working papers
of branch auditors as per the provisions of SA 230.

13. The statutory auditor of the Holding Company demands for the working papers of the auditors of the
subsidiary company, of which you are the auditor.

Ans: Statutory auditor of Holding company cannot have access to audit working papers of the
subsidiary company’s auditor. He can however, asks the auditor to answer certain questions about the
manner in which the audit is conducted and certain other clarifications regarding audit

14. Discuss the Auditor’s responsibilities to provide access to his audit working papers to Regulators and
the third parties.

Ans: It is auditor’s responsibility to provide access to his audit working papers to Regulators when
required by law, whereas auditor is under no obligation to provide access to working papers to third
parties.

15. In the course of audit A Ltd you suspect the management has indulged in fraudulent financial
reporting? State the possible source of such fraudulent financial reporting.

Ans: Different ways to commit Fraud Financial Reporting: fictitious journal entries, changing judgments
used to estimate, Omitting, advancing or delaying recognition, Concealing, or not disclosing, facts that
could affect the amounts recorded, complex transactions, Altering records and terms.

16. Fraud can be committed by management overriding controls using such techniques as engaging in
complex transactions that are structured to misrepresent the financial position or financial
performance of the entity. In view of the above-mentioned circumstances of management fraud,
explain briefly duties and responsibilities of an auditor in case of material misstatement resulting from
such Management Fraud.

Ans: “Auditor’s duties for prevention and detection of fraud”. Also mention the auditor’s duties u/s
143 of Companies Act, 2013 and Para 3(x) of CARO, 2016.

17. In the books of accounts of M/s OPQ Ltd. huge differences are noticed between the control accounts
and subsidiary records. The Chief Accountant informs that this is common due to huge volume of
business done by the company during the year.

Ans: Circumstances indicate the possibility of material misstatements (that might be due to fraud) and
accordingly, the auditor must investigate further to consider effect on F.S. In addition, auditor should
also consider the requirements of Section 143(12) of Companies Act, 2013 and Para 3(x) of CARO, 2016.

18. You notice a misstatement resulting from fraud or suspected fraud during the audit and conclude that
it is not possible to continue the performance of audit. As a Statutory Auditor, how would you deal?

Ans: Mention the auditor’s duties u/s 143 of Companies Act, 2013 + If the auditor concludes that it is
not possible to continue performing the audit- consider the professional and legal responsibilities,
consider the possibility of withdrawing.

Page No. 4
19. What are the roles and responsibilities of the statutory auditor in relation to compliance with the laws
and regulations by the entity.

Ans: General understanding of: (a) The legal and regulatory framework (b) compliance with that
framework. + obtain sufficient appropriate audit evidence regarding compliance + Inquiring of
management, Inspecting correspondence + remain alert to the possibility that other audit procedures
applied may bring instances of non-compliance + Obtain written representation

20. While conducting statutory Audit of ABC Ltd., you come across IOUs amounting to Rs. 2 crores as
against a cash balance shown in books of Rs. 2.10 crores. You also observe that despite similar high
balances throughout the year, small amounts of Rs. 50,000 are withdrawn from the bank to meet day-
to-day expenses.

Ans: Circumstances indicate the possibility of fraud and accordingly, the auditor must investigate
further to consider effect on financial statements.

21. Management is responsible for compliance with Laws and regulations.

Ans: Monitoring legal requirements, internal control, code of conduct, employees are properly trained,
Monitoring compliance, Engaging legal advisors, Maintaining a register of significant laws and
regulations.

22. M/s Honest Limited has entered into a transaction on 5thMarch, 2019, near year-end, whereby it has
agreed to pay Rs. 5 lakhs per month to Mr. Y as annual retainer-ship fee for "engineering consultation".
No amount was actually paid, but Rs. 60 lakhs is provided in books of account as on March 31, 2019.
Your inquiry elicits a response that need-based consultation was obtained round the year, but there is
no documentary or other evidence of receipt of the service. As the auditor of M/s Honest Limited,
what would be your approach?

Ans: In present case, it appears that company has passed fictitious journal entries, near year-end, to
manipulate the operating results. Hence, auditor should recognize the possibility that a material
misstatement due to fraud could exist and perform the procedures accordingly. In addition, auditor
should also consider the requirements of Section 143(12) of Companies Act, 2013 and Para 3(x) of
CARO, 2016.

23. CA. Yusuf has been appointed as an auditor of Ajanta Ltd., a textile entity. While going through the
employee records of the company, CA. Yusuf identified that most of the laborers employed are of the
age between 11-12 years. On enquiring the same, the management argues that there is no such
boundation with regard to employment of such lower age children and contends that it is out of the
scope of audit as well to check such compliance. Comment in the context of relevant standard on
auditing whether the contention of management is tenable.

Ans: Auditor should ensure the disclosure of the fact and provision for the cost of fines, litigation or
other consequences. In case auditor concludes that non-compliance may have a material effect on
financial statements, he should modify his opinion accordingly.

24. State the Significant Difficulties encountered during audit with reference to SA 260.

Ans: Significant delays by management to provide required information., An unnecessarily brief time
within which to complete the audit. Extensive unexpected effort required to obtain SAAE.
Unavailability of expected information. Restrictions imposed on the auditor by management.
Management’s unwillingness to make or extend its assessment of the entity’s ability to continue as a
going concern when requested.

Page No. 5
25. “The auditors should communicate audit matters of governance interest arising from the audit of
financial statements with those charged with the governance of an entity”. Briefly state the matters to
be included in such Communication.

Ans: Auditor’s views about significant qualitative aspects of the entity’s accounting, Significant
difficulties, if any, encountered during the audit, Circumstances that affect the form and content of the
auditor’s report, other significant matters

26. Factors governing modes of communication of auditor with those charged with governance.

Ans: Matter has been satisfactorily resolved, management has previously communicated the matter,
size, operating structure, control environment, and legal structure, auditor also audits the entity’s
general purpose F.S, Legal requirements, The expectations of TCWG, amount of ongoing contact and
dialogue the auditor has with TCWG.

27. What do you mean by deficiencies in Internal Control. Explain various indicators of Significant
deficiencies.

control is designed, implemented or operated is unable to prevent, or detect and correct, misstatements

control necessary to prevent, or detect and correct, misstatements on a timely basis

28. Your firm is one of the Joint Auditors of FMP Ltd. Under what circumstances joint auditors are jointly
liable for the work in relation to audit of financial statements? Is there any restriction on a joint auditor
to communicate a dissenting note differing from the majority opinion of the other joint auditors in the
audit report issued under section 143 of the Companies Act 2013?

Ans: In case of separate reports, the audit report(s) issued by the joint auditor(s) shall make a reference
to the separate audit report(s) issued by the other joint auditor(s). Such reference shall be made under
the heading “Other Matter Paragraph” as per SA 706.

29. Dice Ltd. appointed two CA firms MN & Associates and PQ & Co. as joint auditors for conducting audit
for the year ended 31st March, 2019. In the course of audit, it has been observed that there is a major
understatement in the value of inventory. The inventory valuation work was looked after by MN &
Associates but there was no documentation for the division of the work between the joint auditors.
Comment on the above situation with regard to responsibilities among joint auditors.

Ans: Both Joint auditors are jointly and severally responsible.

30. Excellent Bank Ltd. is a Public Limited Company. The said Bank has various branches all over India. The
Bank appoints 3 Joint Auditors for the financial year ending 31/03/2019. All the 3 Joint Auditors divide
the work with mutual consent. Verification of Consolidation, however, remained undivided. All
branches and zones were divided amongst the 3 Joint Auditors. During audit of zones, CA. Z, one of the
joint auditors expressed a concern about internal control in one of the large corporate branches
situated in his zone. The irregularity was not reported in the final accounts as the other 2 Joint Auditors
were not in favour of reporting and decision of not reporting the same was taken on the basis of
majority. Subsequently, fraud has been detected in the said branch which was audited by CA. Z. The
Bank seeks your advice about the responsibility of the 3 Joint Auditors in the above situation.

Ans: In the present case, Mr. Z was required to issue a separate report. He was not bound by the views
of other joint auditors. Mr. Z will be held responsible for non-reporting of the matter.
Page No. 6
31. NMN & Co LLP and ABC & Associates LLP are the joint statutory auditors of BHS Ltd. BHS Ltd. is a listed
company and has been in existence for the last 50 years. Since beginning this company was audited by
MQS & Associates but due to audit rotation, the company had to bring in new auditors. Considering
the size of the company, two auditors were appointed as joint auditors. Since the company is new to
these auditors and the concept of joint auditors to whom audit work has been divided, management
had a discussion and understood that each joint auditor is responsible only for the work allocated to
him, whether or not he has prepared a separate report on the work performed by him. Advise.

Ans: Joint auditors are required to issue common audit report. case of any disagreement, separate
audit report. joint auditor is not bound by the views of the majority.

32. Briefly discuss the following statements in view of SA 300 “Planning an Audit of Financial Statements”:
(a) For an initial audit, the auditor may need to expand the planning activities.
(b) Audit planning is not a discrete phase but a continuous phase.

Ans: (a) “Additional Considerations in Initial Audit Engagements” and (b) Planning

33. Z Ltd. has its entire operations including accounting computerised. As the audit partner you are
concerned about inherent and control risk for material financial statement assertions. What could be
the areas you look forward for deficiencies and risk identification.

Ans: (a) Program development and Maintenance (b) System Software Support (c) Operations including
processing of Data (d) Physical CIS Security. (e) Control over access to Specialized CIS Utility Programs.

34. Auditor shall establish an overall strategy that sets the scope, timing and direction of the audit, and
that guides the development of the audit plan”.

Ans: Identify the characteristics of the engagement that define its scope; Ascertain the reporting
objectives of the engagement to plan the timing, factors that are significant in directing the
engagement team, results of preliminary engagement activities, Ascertain the NTE of procedures
necessary to perform.

35. “The auditor shall document (i) The overall audit strategy; (ii) The audit plan; and (iii) Any significant
changes made during the audit engagement to the overall audit strategy or the audit plan, and the
reasons for such changes.” Explain.

Ans: Documentation is a record of the key decisions. Documentation of the audit plan is a record of the
planned NTE of RAPs and FAPs at the assertion level in response to the assessed risks.

36. Explain the concept of Audit risk at the level of financial statements.

Ans: It refers to risks of material misstatement that relate pervasively to the financial statements as a
whole and potentially affect many assertions. Risks at the financial statement level may derive in
particular from deficient control environment (although these risks may also relate to other factors,
such as declining economic conditions). For example, deficiencies such as management’s lack of
competence may have a more pervasive effect on the F.S. and may require an overall response by the
auditor. The auditor’s understanding of internal control may raise doubts about the audit ability of an
entity’s financial statements.

37. Enumerate the specific risks that Information Technology (IT) systems can pose to an entity’s internal
control.

Page No. 7
 Ans: (a) Reliance on systems or programs that are inaccurately processing data, processing inaccurate
data or both (b) Unauthorised access to data that may result in destruction of data or improper changes
to data, including the recording of unauthorized or non existent transactions, or inaccurate recording of
transactions. Particular risk may arise when multiple users access a common database. (c) The possibility
of IT personnel gaining access beyond those necessary to perform their assigned duties thereby breaking
down segregation of duties. (d) Unauthorised changes to data in Master files. (e) Unauthorised changes
to systems or programs. (f) Failure to make necessary changes to systems or programs. (g) In appropriate
manual intervention (h) Potential loss of data or inability to access data as required.

38. What are the broad matters to be considered while obtaining knowledge of business for a new audit
engagement of a manufacturing concern?

Ans: (a) Relevant industry, regulatory, and other external factors including applicable financial
reporting framework. (b) The nature of the entity, including: (i) its operations; (ii) its ownership and
governance structures; (iii) the types of investments that the entity is making and plan to make; & (iv)
the way that the entity is structured and how it is financed; (c) The entity’s selection and application of
accounting policies, including the reasons for changes thereto. (d) The entity’s objectives and
strategies, and those related business risks that may result in risks of material misstatement. (e) The
measurement and review of the entity’s financial performance.

39. The Entity’s Risk Assessment Process includes how management identifies business risks relevant to
the preparation of financial statements in accordance with the entity’s applicable financial reporting
framework, estimates their significance, assesses the likelihood of occurrence and decides upon
actions to respond to and manage them and the results thereof. Elucidate the circumstances in which
risks can arise or change.

Ans: Changes in operating environment, New personnel, New or revamped information systems, Rapid
growth, New technology, New business models products or activities, Corporate restructurings,
Expanded foreign operations, New accounting pronouncements.

40. Mr. X was appointed as the auditor of M/s Easygo Ltd. and intends to apply the concept of materiality
for the financial statements as a whole. Please guide him as to the factors that may affect the
identification of an appropriate benchmark for this purpose.

Ans: The elements of the financial statements, Whether there are items on which the attention of the
users of the particular entity’s financial statements tends to be focused, The nature of the entity,
entity’s ownership structure, relative volatility of the benchmark.

41. Durafone Mobile Co. Ltd. have pan India presence and market leader in mobile operation. It has
outsourced all its revenue operation including accounting functions to Set Solutions (P) Ltd. As an
Auditor of the mobile company, enumerate the factors to be taken into consideration related to its
financial reporting.

Ans: SA 402

42. While commencing the statutory audit of B Company Limited, the auditor undertook the risk
assessment and found that the detection risk relating to certain class of transactions cannot be
reduced to acceptance level. Explain.

Ans: The auditor should use his professional judgement to assess audit risk and to design audit
procedures to ensure that it is reduced to an acceptably low level. If it cannot be reduced to an
acceptable level, the auditor should express a qualified opinion or a disclaimer of opinion as may be
appropriate.
Page No. 8
43. While commencing the statutory audit of ABC Company Limited, what should be the considerations of
the auditor to assess Risk of Material Misstatement and his response to such risks?

Ans: Risk Assessment Process in SA 315 + Auditor’s Procedures Responsive to the Assessed RMM in SA
330.

44. In audit plan for T Ltd, as the audit partner you want to highlight the sources of misstatements, arising
from other than fraud, to your audit team and caution them. Identify the sources of misstatements.

Ans: inaccuracy in gathering, omission of an amount, ncorrect accounting estimate, Judgments of

management.

45. The auditor of SS Ltd. accepted the gratuity liability valuation based on the certificate issued by a
qualified actuary. However, the auditor noticed that the retirement age adopted is 65 years as against
the existing retirement age of 60 years. The company is considering a proposal to increase the
retirement age. Comment.

Ans: In view of provisions of SA 500, the assumption made by actuary has no relevance and
reasonableness as presently retiring age is of 60 years. Hence the auditor is required to bring out the
facts to the notice of management and advice the modification accordingly. In case of failure of
compliance of the same the auditor may qualify the report.

46. While auditing accounts of a public limited company for the year ended 31stMarch 2018, an auditor
found out an error in the valuation of inventory, which affects the financial statement materially –
Comment as per standards on auditing.

Ans: Auditor has detected the material errors affecting the financial statements; the auditor should
communicate his findings to the management on a timely basis, consider the implications on true and
fair view and also ensure that appropriate disclosures have been made.

47. The auditor of XY & Co. Ltd. has intimated the management that certain misstatements identified
during the course of audit need to be corrected. As an auditor, discuss the impact of such
misstatements in case the management does not carry out the said corrections.

Ans: The auditor shall determine whether the overall audit strategy and audit plan need to be revised
if: The nature of identified misstatements and the circumstances of their occurrence indicate that
other misstatements may exist that, when aggregated with misstatements accumulated during the
audit, could be material; or The aggregate of misstatements accumulated during the audit approaches
materiality determined in accordance with SA 320

48. External Confirmations in audit.

Ans: direct written response to the auditor from a third party (the confirming party)
- Positive confirmation request, Negative confirmation request.

49. As a Statutory Auditor, how would you deal with the following case: M/s LNK’s group gratuity
scheme’s valuation by actuary shows wide variation compared to the previous year’s figures.

Ans: In the present case, the auditor must verify the reasonableness of assumptions made and
methods adopted by the actuary in the evaluation particularly with reference to factors such as rate of
return on investments, retirement age, number and salary of employees, etc. Accordingly, the auditor
has to satisfy himself whether valuation done by the actuary can be adopted, otherwise he may report
on his findings for wide variation.

Page No. 9
50. Situations where external confirmations can be used.

Ans: 1. Bank balances and other information relevant to banking relationships. 2. Accounts receivable
balances and terms. 3. Inventories held by third parties at bonded warehouses for processing or on
consignment. 4. Property title deeds held by lawyers or financiers for safe custody or as security. 5.
Investments held for safekeeping by third parties or purchased from stockbrokers but not delivered at
the balance sheet date. 6. Amounts due to lenders, including relevant terms of repayment and
restrictive covenants. 7. Accounts payable balances and terms.

51. Never Permit Limited refused to allow you to get direct confirmation of the outstanding balances of
trade receivables. You want to ensure on grounds of materiality that atleast outstanding above a
threshould limit needs to be confirmed and reconciliation is to be carried out before finalising the
audit. If the company does not relent, how will you respond?

Ans: (a) Inquire as to reasons and seek evidence as to their validity & reasonableness; (b) Evaluate the
implications of refusal on the assessment of risks of material misstatement, including the risk of fraud
and on the NTE of other audit procedures; and (c) Perform alternative audit procedures designed to
obtain relevant and reliable audit evidence.

52. As an auditor how would you deal with the following: When the audit team visited the client to
perform substantive audit of debtor, the client produced ledger account of customers and
confirmations for the top 10 customers. One of the debtors was more than 5 years old, but it had
confirmed his balance.

Ans: The auditor should enquire into the debtor whose dues are outstanding for 5 years or more about
his financial abilities and why he has not paid, reasons behind the same, and if found adverse, the
client should be advised to provide for “Provision for bad debts’ and also to confirm that it is not a
forged confirmation.

53. Mr. Z who is appointed as auditor of Elite Co. Ltd. wants to use confirmation request as audit evidence
during the course of audit. What are the factors to be considered by Mr. Z when designing a
confirmation request? Also state the effects of using positive external confirmation request by Mr. Z.

Ans: (i) Assertion being addressed. (ii) Specific identified RMM. (iii) Layout & presentation of request.
(iv) Prior experience on the audit of similar engagements. (v) Method of communication. (vi)
Management authorisation / encouragement to Confirming Party to respond to auditor. (vii) Ability of
Confirming Party to provide/confirm requested info.
Effects: asks the confirming party to reply to the auditor in all cases, expected to provide reliable audit
evidence, auditor may reduce this risk by using positive confirmation requests

54. Moon Limited replaced its statutory auditor for the Financial year 2017-18. During the course of audit,
the new auditor found a credit item of `5 lakhs. On enquiry, the company explained him that it is, a
very old credit balance. The creditor had neither approached for the payment nor he is traceable.
Under the circumstances, no confirmation of the credit balance is available.

Ans: The statutory auditor should examine the validity of the credit balance as appeared in the
company’s financial statements. He should obtain sufficient evidence in support of the balance. He
should apply alternative audit procedures to get documentary proof for the transaction/s and should
not rely entirely on the management representation. Finally, he should include the matter by way of a
qualification in his audit report to the members.

55. During the course of audit of Star Limited the auditor received some of the confirmation of the
balances of trade payables outstanding in the balance sheet through external confirmation by negative
Page No. 10
 confirmation request. In the list of trade payables, there are number of trade payables of small
balances except one, old outstanding of Rs. 15 Lacs, of whom, no confirmation on the credit balance
received. Comment with respect to Standard of Auditing.

Ans: Considering the materiality of the account balance, the auditor may examine subsequent cash
disbursements or correspondence from third parties, and other records, such as goods received notes.

56. Mr. X has been appointed as an auditor of M/s ABC Ltd., Mr. X wants to be satisfied about the
sufficiency and appropriateness of ‘Opening Balances’ to ensure that they are free from
misstatements. Lay down the audit procedure, Mr. X should follow, in the initial audit engagement of
M/s ABC Ltd. Also suggest the approach to be followed regarding mention in the audit report if Mr. X is
not satisfied about the correctness of ‘Opening Balances’?

Ans: Considerations while drafting Report:

If the auditor is unable to obtain sufficient appropriate audit evidence regarding the opening balances,
the auditor shall express a qualified opinion or a disclaimer of opinion, as appropriate. Further, If the
auditor concludes that the opening balances contain a misstatement that materially affects the current
period’s financial statements, and the effect of the misstatement is not properly accounted for or not
adequately presented or disclosed, the auditor shall express a qualified opinion or an adverse opinion.

57. CA Mr. X, a recently qualified practicing Chartered Accountant got his first audit assignment of Futura
(P) Ltd. for the financial year 2019-20. He obtained all the relevant appropriate audit evidence for the
items related to Statement of Profit and Loss. However, while auditing the Balance Sheet items, CA X
left out obtaining appropriate audit evidence, say, confirmations, from the outstanding Accounts
Receivable amounting Rs. 100 lakhs, continued as it is from the last year, on the affirmation of the
management that there is no receipts and further credits during the year. CA X, therefore, excluded
from the audit programme, the audit of accounts receivable on the understanding that it pertains to
the preceding year which was already audited by predecessor auditor. Comment.

Ans: Mr. X is required to obtain SAAE regarding opening balances and in the present case, he should
insist for management representation for their views. As per code of ethics, Mr. X is also guilty for
professional misconduct for not exercising the due diligence.

58. Y Ltd. Engaged an actuary to ascertain its employee cost, gratuity and leave encashment liabilities. As
the auditor of Y Ltd. you would like to use the report of actuary as an audit evidence and for this
purpose auditor is required to evaluate the competence, capability and objectivity of the expert. What
are the sources from where information about the competence, capability and objectivity of expert
may be obtained.

Ans: Source of information on competence, capability and objectivity

59. You have been appointed as an auditor of M/s Excellent Hotels Ltd. As a senior partner, you want to
use analytical procedures in respect of room rentals as well as payroll expenses. Discuss.

Ans: In case of Payroll cost - Where an entity has a known number of employees at fixed rates of pay
throughout the period, it may be possible for the auditor to use this data to estimate the total payroll
costs for the period with a high degree of accuracy, thereby providing audit evidence for a significant
item in the financial statements and reducing the need to perform tests of details on the payroll. In
case of Room Rental Income of Hotel, different types of analytical procedures provide different levels
of assurance. Analytical procedures involving the prediction of total rental income in case of hotel
taking the room tariff rates, the number of rooms and vacancy rates into consideration, can provide
persuasive evidence and may eliminate the need for further verification by means of tests of details,
provided the elements are appropriately verified
Page No. 11
60. While planning the audit of S Ltd. you want to apply sampling techniques. What are the risk factors you
should keep in mind?

Ans: The risk that the auditor’s conclusion based on a sample may be different from the conclusion if
the entire population were subjected to the same audit procedure.

61. “In cases where audit sample selection has been done on a random basis, no statistical process for
selection of samples needs to be followed”. Comment.

Ans: For application of statistical sampling techniques, one of the pre-requisite is selection on random
basis, hence in case of selection of an audit sample on random basis, no other statistical process for
selection of samples need to be followed.

62. “Accounting estimate means an approximation of a monetary amount in the absence of a precise
means of measurement”. Discuss explaining the accounting estimates according to SA-540.

Ans: An Accounting estimate may be defined as “An approximation of a monetary amount in the
absence of a precise means of measurement”. The degree of estimation uncertainty affects the risks of
material misstatement of accounting estimates. A difference between the outcome of an accounting
estimate and the amount originally recognized in the financial statements does not necessarily
represent a misstatement of the financial statements.

63. “An Auditor while analyzing the errors in a sample need not consider the qualitative aspects of errors
detected.” Comment.

Ans: Statement is not correct, as auditor is required to investigate the nature and causes of the errors
identified.

64. A 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. Please advise.

Ans: Management is not correct in refusing the relevant information to the auditor.

65. Mr. L while conducting the audit of ABC Ltd., observed that a substantial amount is recognized in
respect of obsolescence of inventory and warranty obligation in the financial statements. Mr. L wants
to obtain written representation from the management to determine whether the assumptions and
estimates used are reasonable. Guide Mr. L with reference to the relevant Standard on Auditing.

Ans: About the appropriateness of the measurement processes, assumptions appropriately reflect
management’s intent and ability to carry out specific courses of action on behalf of the entity,
disclosure related to accounting estimates are complete and appropriate, no subsequent event
requires adjustment.

66. While auditing Z Ltd., you observe certain material financial statement assertions have been based on
estimates made by the management. As the auditor how do you minimize the risk of material
misstatements?

Ans: Requirements of the applicable financial reporting framework, How management identifies those
transactions, estimation making process adopted, review the outcome of accounting estimates.

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67. In the course of your audit you have come across a related party transaction which prima facie appears
to be biased. How would you deal with this?

Ans: Maintaining Alertness for RP Information + “Auditor responses - In case of identification of

significant Related party transaction outside the entity normal course of business

68. A statutory auditor is required to follow the procedures so as to identify the risk of material
misstatement associated with related parties. What are the auditor’s duties when he identifies related
parties or related party transactions that management not previously disclosed to him?

Ans: Auditor’s responses - In case of identification of unidentified/undisclosed RP or RP transaction

69. M/s LMP Associates, Chartered Accountants while conducting the audit of PQR Ltd want to conduct an
inquiry of management and those charged with governance as to whether any subsequent events have
occurred which might affect the financial statements. Guide M/s LMP Associates with the matters
where specific enquiry may be conducted to evaluate subsequent events.

Ans: 1. Whether new commitments, borrowings or guarantees have been entered into. 2. Whether
sales or acquisitions of assets have occurred or are planned. 3. Whether there have been increases in
capital or issuance of debt instruments, such as the issue of new shares or debentures, or an
agreement to merge or liquidate has been made or is planned. 4. Whether any assets have been
appropriated by government or destroyed, for example, by fire or flood. 5. Whether there have been
any developments regarding contingencies. 6. Whether any unusual accounting adjustments have been
made or are contemplated. 7. Whether any events have occurred or are likely to occur that will bring
into question the appropriateness of accounting policies used in the F.S., as would be the case, for
example, if such events call into question the validity of the going concern assumption. 8. Whether any
events have occurred that are relevant to the measurement of estimates or provisions made in the
financial statements. 9. Whether any events have occurred that are relevant to the recoverability of
assets.

70. A Co. Ltd. has not included in the Balance Sheet as on 31-03-2019 a sum of Rs. 1.50 crores being
amount in the arrears of salaries and wages payable to the staff for the last 2 years as a result of
successful negotiations which were going on during the last 18 months and concluded on 30-04-2019.
The auditor wants to sign the said Balance Sheet and give the audit report on 31-05-2019. The auditor
came to know the result of the negotiations on 15-05-2019.

Ans: The facts of the case indicates the event as of adjusting nature as per AS–4 and requires
adjustment in assets and liabilities, which has not been made by the management. Auditor should
request management to adjust the sum of `1.50 crores by making provision for expenses. If the
management does not accept the request, the auditor should qualify the Audit Report.

71. Amudhan & Co., are the Auditors of XYZ Company Ltd., for the year ended on 31/03/2019. The Audit
Report for that year was signed by the Auditors on 04/05/2019. The Annual General Meeting was
decided to be held during the month of August 2019. On 06/05/2019, the Company had received a
communication from the Central Government that an amount of Rs. 5800 crore kept pending on
account of incentives pertaining to Financial Year 2018-19 had been approved and the amount would
be paid to the Company before the end of May 2019. To a query to Chief Financial officer of the
company by the board, it was informed that this amount had not been recognised in the Audited
Financial Statements in view of the same not being released before the close of the financial year and
due to uncertainty of receipt. Now, having received the amount, the board of Directors wished to
include this amount in the Financial Statements of the company for the Financial Year ended on
31.03.2019. On 08.05.2019, the Board amended the accounts, approved the same and requested the

Page No. 13
 Auditor to consider this event and issue a fresh Audit Report for the year ended on 31.03.2019. Analyse
the issues involved and give your views as to whether or not the Auditor could accede to the request of
the Board of Directors.

Ans: Issue involved comprises of accounting as per Ind-As 10 and auditing procedure as per SA 560.
Auditor may accede to the request of the Board of Directors.

72. As a statutory auditor of a company, comment on the following: A fire broke out on 15th May, 2019, in
which material worth Rs. 50 lakhs which was lying in inventory since 1st March, 2019 was totally
destroyed. The financial statements of the company have not been adopted till the date of fire. The
management of the company argues that since the loss occurred in the year, 2019-20, no provision for
the loss needs to be made in the financial statements for 2018-19

Ans: The event will have no impact on items appearing at the Balance Sheet date and hence not
required any adjustment as per AS-4, subject to satisfaction in respect of non-violation of going
concern concept. Hence management is correct by not providing provision. However, auditor is
required to ensure the proper disclosure in report of approving authority.

73. A Company's net worth is eroded and creditors are unpaid due to liquidity constraints. The
management represents to the statutory auditor that the promoter's wife is expected to give an
unsecured loan to meet the liquidity constraints and that negotiations are underway to secure large
export orders.

Ans: In this case, it is subjective, but prima-facie a mere expectation of future cash flows from the
promoter’s wife without any firm commitment and the possibility of an export order being negotiated,
may not that be sufficient appropriate audit evidence of mitigating factors for resolving the going
concerns question under SA 570 “Going Concern”.

74. ABC Company files a law suit against Unlucky Company for Rs. 5 crores. The Attorney of Unlucky
Company feels that the suit is without merit, so Unlucky Company merely discloses the existence of the
law suit in the notes accompanying its financial statements. As an auditor of Unlucky Company, how
will you deal with the situation?

Ans: Auditor should evaluate the source data on which basis the opinion is formed and evaluate the
appropriateness of use of going concern assumption. If the auditor finds the uncertainty, he may
request the management to adjust the sum of Rs. 5 crores by making provision for expenses as per AS
29. If the management does not accept the request the auditor should qualify the audit report.

75. R & Co. is the statutory auditor of S Ltd. For the financial year ended on 31stMarch 2019, S Ltd had
disclosed in the notes (Note No. X) “The state pollution control board had ordered the closure of the
company’s only manufacturing plant on the ground that it is environmentally damaging, which the
company had challenged in a law suit. Pending the outcome of the law suit the financial statements are
prepared on a going concern basis”. Further the financial statements prepared by the management of S
Ltd include financial statements of certain branches which are audited by other auditors. What are the
reporting responsibilities of R & Co?

Ans: In the present case, as appropriate disclosure is given in financial statements, R & Co. R & Co.
should express an unmodified opinion and the auditor’s report shall include a separate section under
the heading “Material Uncertainty Related to Going Concern”. With respect of audit of branches, R &
Co. should include an “Other Matter Paragraph” in the audit report.

76. Toddle Limited had definite plan of its business being closed within a short period from the close of the
accounting year ended on 31st March, 2019. The financial statements for the year ended 31/03/2019
Page No. 14
 had been prepared on the same basis as it had been in earlier periods with an additional note that the
business of the company shall cease in near future and the assets shall be disposed off in accordance
with a plan of disposal as decided by the management. The statutory auditors of the company
indicated this aspect in Key Audit matters only by a reference as to a possible cessation of business and
making of adjustments, if any, thereto to be made at the time of cessation only. Comment on the
reporting by the statutory auditor as above.

Ans: Auditor was required to issue adverse opinion as financial statements are prepared on Going
concern, which is not appropriate in this case. Key Audit matter cannot be considered as a substitute
for modified opinion.

77. Yummy Ltd., dealing in manufacturing and trading of milk butter, has a benchmark in its product for so
many years. Tasty Ltd., a rival company to Yummy Ltd., has introduced its new product, peanut butter.
Due to being health conscious, the consumers have shifted from milk butter to peanut butter within
few months. This has result into massive loss during the year to Yummy Ltd. due to nonselling of
perishable milk products. The company has also started having negative net worth. It's production
head, finance head and marketing head have also left the company. The company has no sound action
plan to mitigate these situations. Kindly guide the auditor of Yummy Ltd., how he should deal with the
situation.

Ans: Auditor should ask the management for appropriate disclosure in the financial statement and
include the same in his report. However, if the management fails to make adequate disclosure, the
auditor should express a qualified or adverse opinion, as appropriate in accordance with SA 705 and 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 F.S. do not adequately disclose this matter.

78. AQP Limited is one of the prominent players in the chemicals industry. The company is a public
company domiciled in India and listed on BSE and NSE. The Company was facing extreme liquidity
constraints and there were multiple indicators that casted doubt over the company’s ability to
continue as a going concern. The Company was led into insolvency proceedings by consortium of banks
led by PNB and the NCLT ordered the commencement of corporate insolvency process against the
Company on 31 August 2017. The company invited prospective lenders, investors and others to submit
their resolution plans to the Resolution Professional (RP) latest by 1 January 2018. The RP reviewed the
resolution plans and ensured conformity with Insolvency and Bankruptcy Code 2016. The compliant
plans were presented to Committee on Creditors (CoC) on 2 February 2018 and the resolution plan
submitted by PQR Ltd. was evaluated as highest evaluated Compliant Resolution Plan. CoC of AQP Ltd
approved the Resolution Plan submitted by PQR Ltd. on 2 March 2018. The approval of NCLT was
finally obtained on 4 May 2018. PQR Ltd submitted detailed plans and commitments as part of the
resolution plan including clearance of all outstanding debts which were leading to negative cash flows.
Please suggest how would you deal with this situation as the auditors of AQP Ltd.

Ans: Approval of the resolution plan is a significant mitigating factor to counter the going concern
issues of AQP Ltd. Therefore, it can be said that the events and conditions are mitigated effectively and
there is no material uncertainty in relation to the ability of the company to continue as a going
concern.

79. Explain what is meant by “Written Representations” and indicate to what extent an auditor can place
reliance on such representations.

Ans: Extent of Reliance: • If the auditor has concerns about the competence, integrity, ethical values or
diligence of management, the auditor shall determine their effect on the reliability of representations

Page No. 15
 (oral or written) and audit evidence in general. • In particular, if written representations are inconsistent
with other audit evidence, the auditor shall perform audit procedures to attempt to resolve the matter. •
If the auditor concludes that the written representations are not reliable, the auditor shall take
appropriate actions, including determining the possible effect on the opinion. • If he claims that there is
sufficient doubt about integrity of management, he shall issue a disclaimer of opinion.

80. In the course of audit of K Ltd., its auditor Mr. 'N' observed that there was a special audit conducted at
the instance of the management on a possible suspicion of a fraud and requested for a copy of the
report to enable him to report on the fraud aspects. Despite many reminders it was not provided. In
absence of the special audit report, Mr. 'N' insisted that he be provided with at least a written
representation in respect of fraud on/by the company. For this request also, the management
remained silent. Please guide Mr. 'N'.

Ans: Auditor may either withdraw from engagement applying the provisions of SA 240 or he may
disclaim the opinion applying the provisions of SA 580.

81. M/s Airlift Ltd., Carrying on the business of Passenger Transportation by air is running into continuous
financial losses as well as reduction in Sales due to stiff competition and frequent break down of its
own aircrafts. The Financial Statements for the year ended on 31.03.2019 are to be now finalized. The
Management is quite uncertain as to its ability to continue in near future and has informed the
Auditors that having seized of this matter, it had constituted a committee to study this aspect and to
give suggestions for recovery, if any, from this bad situation. Till the study is completed, according to
the Management, the issue involves uncertainty as to its ability to continue its business and it informs
the Auditor that the fact of uncertainty clamping on the “Going Concern” would suitably be disclosed
in notes to accounts. State the reporting requirement if any, in the Independent Auditor’s Report in
respect of this matter.

Ans: Auditor is required to include a separate section under the heading “Material uncertainty Relating
to Going concern” in the Auditor’s report” as per the requirements of SA 570.

82. While auditing a lawyer company, Mr. X, the statutory auditor of the company, was unable to get the
confirmation about the existence and value of certain books existed in the library worth `35 lakh.
However, the management gave him a certificate to prove the existence and value of the books as
appearing in the books of account. The auditor accepted the same without any further procedure and
signed the audit report. Is he right in his approach?

Ans: The approach adopted by the auditor is not right, as “Written Representations” cannot be a
substitute for other audit evidence that the auditor could reasonably expect to be available.

83. Comment on the following: Statutory auditor of O Ltd requested the management for a written
representation in respect of obsolescence of inventory and warranty obligations recognized by the
company in its financial statements. The management denied the representation on the ground that
during the course of audit, all the required procedures were performed by the auditor and after
obtaining sufficient appropriate audit evidence, auditor has issued a clean report. Please comment.

Ans: Management’s contention on the ground that during the course of audit, all the required
procedures were performed by the auditor and after obtaining sufficient appropriate audit evidence,
auditor has issued a clean report, for not providing written representation is not correct. The
management should provide written representations to the auditor. If management does not provide
one or more of the requested written representations, the auditor shall perform as per requirements
of SA 580.

Page No. 16
84. 89. Mr. A is appointed as statutory auditor of XYZ Ltd. XYZ Ltd is required to appoint internal auditor as
per statutory provisions given in the Companies Act, 2013 and appointed Mr. B as its internal auditor.
The external auditor Mr. A asked internal auditor to provide direct assistance to him regarding
evaluating significant accounting estimates by the management and assessing the risk of material
misstatements.
(a) Discuss whether Mr. A, statutory auditor, can ask direct assistance from Mr. B, internal auditor as
stated above in view of auditing standards.
(b) Will your answer be different, if Mr. A ask direct assistance from Mr. B, internal auditor with
respect to external confirmation requests and evaluation of the results of external confirmation
procedures.

Ans: (a) Mr. A cannot ask direct assistance from internal auditors regarding evaluating significant
accounting estimates and assessing the risk of material misstatements.
(b) It would not be appropriate to use direct assistance w.r.t. obtaining external confirmation requests
and their evaluation. Assistance may be used in assembling information necessary for the external
auditor to resolve exceptions in confirmation responses

85. B Ltd. is the Subsidiary company of A Ltd. ABC & Associates has been appointed as auditor of A Ltd. for
the Financial year 2018-2019 and XYZ & Associates has been appointed as auditor of B Ltd for the year
2018-19. Explain the role of ABC & Associates and XYZ & Associates as auditors of the parent company
and subsidiary respectively.

Ans: Visit component and examine books of account, if essential., Consider the professional
competence of Other Auditor, if Other Auditor is not a member of ICAI., Perform procedures to obtain
SAAE, that the work of the OA is adequate for the PA purposes Review a written summary of OA
procedures Consider significant findings of OA.

86. “There should be sufficient liaison between a principal auditor and other auditors”. Discuss the above
statement and state in this context the reporting considerations, when the auditor uses the work
performed by other auditor.

Ans: the principal auditor may find it necessary to issue written communication(s) to the other
auditor, The other auditor, knowing the context in which his work is to be used by the principal
auditor, should co-ordinate with the principal auditor.
When the work of the other auditor cannot be used and the principal auditor has not been able to
perform sufficient additional procedures, the principal auditor should express a qualified opinion or
disclaimer of opinion.

87. Rajpanth Ltd. appointed you as its statutory auditor for the current financial year. During the course
of auditing, you meticulously analysed that the work performed by company's internal auditor is likely
to be adequate for the purpose of statutory audit. Consequently, you decided to use the work of
internal auditor in respect of physical verification of tangible assets specifically. State how you would
evaluate the specific work performed by internal auditor to determine its adequacy and who would
be responsible for expression of opinion on financial statements.

Ans: (a) Objectivity of the internal auditors; (b) Level of competence; and (c) Application of Systematic
and disciplined approach.

88. OPQ Ltd. is in the business of software consultancy. The company has had large balances of accounts
receivables in the past years which have been assessed as area of high risk. For the year ended 31
March 2019, in respect of the valuation of accounts receivable, the statutory auditor has assigned the

Page No. 17
 checking of the accuracy of the aging of the accounts receivables and provision based on ageing to the
internal auditor providing direct assistance to him. Please advise.

Ans: Statutory auditor could assign the checking of the accuracy of the aging to an internal auditor
providing direct assistance. However, because the evaluation of the adequacy of the provision based
on the aging would involve more than limited judgment, it would not be appropriate to assign that
latter procedure to an internal auditor providing direct assistance.

89. What are the factors that may influence the auditor’s decision on whether to use an auditor’s expert,
when management has used a management’s expert in preparing the financial statements?

Ans: 1. The nature, scope and objectives of the management’s expert’s work. 2. Whether the
management’s expert is employed by the entity, or is a party engaged by it to provide relevant
services. 3. The extent to which management can exercise control or influence over the work of the
management’s expert. 4. The management’s expert’s competence and capabilities. 5. Whether the
management’s expert is subject to technical performance standards or other professional or industry
requirements. 6. Any controls within the entity over the management’s expert’s work.

90. O Ltd. is in the business of manufacturing of steel. The manufacturing process requires raw material as
iron ore for which large stock was maintained by the company at year end – 31 March 2019. The
nature of raw material is such that its physical verification requires involvement of an expert.
Management hired their expert for stock take and auditors also involved auditor’s expert for the stock
take. The auditor observed that the work of the auditor’s expert was not adequate for auditor’s
purposes and the auditor could not resolve the matter through additional audit procedures which
included further work performed by both the auditor’s expert and the auditor.
Basis above, the auditor concluded that it would be necessary to express a modified opinion in the
auditor’s report because the auditor has not obtained sufficient appropriate audit evidence. However,
the auditor issued a clean report and included the name of the expert in his report to reduce his
responsibility for the audit opinion. Comment.

Ans: The auditor cannot reduce his responsibility by referring the name of auditor’s expert and
thereby issuing a clean report. Auditor should have issued a modified report and could have given
reference to the work of an auditor’s expert in that report if such reference was relevant to
understanding of a modification to the auditor’s opinion but even in that case the auditor should have
indicated in his report that such reference of auditor’s expert does not reduce his responsibility for
that opinion.

91. KPI Ltd. is a company on which International Standards on Auditing are applicable along with
Standard on Auditing issued by the ICAI. The company appointed new auditors for the audit of the
financial statements for the year ended 31 March 2019 after doing all appointment formalities. In the
auditor’s report, auditor referred the International Standard on Auditing in addition to the Standard
on Auditing issued by the ICAI. As an expert, you are required to advise the auditor regarding auditor’s
report for audits conducted in accordance with both the Standards

Ans: (a) There is no conflict between the requirements in the International Auditing Standards and
those in SAs that would lead the auditor: • to form a different opinion, or • not to include an
Emphasis of Matter paragraph or Other Matter paragraph that, in the particular circumstances, is
required by SAs; and
(b) The auditor’s report includes, at a minimum, each of the elements set out in Auditor’s Report
Prescribed by Law or Regulation discussed above when the auditor uses the layout or wording
specified by the Standards on Auditing.

Page No. 18
92. X Ltd had a net worth of INR 1300 crores because of which Ind AS became applicable to them. The
company had various derivative contracts – options, forward contracts, interest rate swaps etc. which
were required to be fair valued for which company got the fair valuation done through an external
third party. The statutory auditors of the company involved an auditor’s expert to audit valuation of
derivatives. Auditor and auditor’s expert were new to each other i.e. they were working for the first
time together but developed a good bonding during the course of the audit. The auditor did not enter
into any formal agreement with the auditor’s expert. Please advise.

Ans: Auditor should have signed a formal agreement/ engagement letter with the auditor’s expert in
respect of the work assigned to him.

93. Enumerate the basic elements of Audit Report as enshrined in SA 700.

Ans: Title (Independent Auditor’s report), Addressee (To the Shareholders of the Company), Auditor’s
opinion Heading: “Opinion”, Basis for Opinion Heading “Basis for Opinion”, Going Concern, Key Audit
Matters, Other Information, Mngt. Responsibility for the Financial statements, Auditor’s
Responsibility Para, Other reporting Responsibilities Signature of the auditor, Place of Signature, Date
of the Auditor’s Report.

What are the procedures to be followed by a statutory auditor for verifying the provisions for accrued
liability for retirement benefits which is based on a certificate of a reputed actuary engaged by the
auditor for the purpose.

Ans: Findings and Conclusion, Significant Assumptions and Method used, Source data used.

94. The property, plant and equipment of ABC Ltd. included Rs. 25.75 crores of earth removing machines
of outdated technology which had been retired from active use and had been kept for disposal after
knock down. These assets appeared at residual value and had been last inspected ten years back. As
an auditor, what may be your reporting concern as regards matters specified above?

Ans: Reporting required to TCWG as per requirement of SA 260 and in audit report as Key Audit
Matter as per requirement of SA 701

95. AKY Ltd. is a listed company engaged in the business of software and is one of the largest company
operating in this sector in India. The company’s annual turnover is Rs. 40,000 crores with profits of Rs.
5,000 crores. Due to the nature of the business and the size of the company, the operations of the
company are spread out in India as well as outside India. The company’s contracts with its various
customers are quite complicated and different. During the course of the audit, the audit team spends
significant time on audit of revenue – be it planning, execution or conclusion. This matter was also
discussed with management at various stages of audit. The efforts towards audit of revenue also
involve significant involvement of senior members of the audit team including the audit partner. After
completion of audit for the year ended 31 March 2019, the audit partner was discussing significant
matters with the management wherein they also communicated to the management that he plans to
include revenue recognition as key audit matter in his audit report. The management did not agree
with revenue recognition to be shown as key audit matter in the audit report. Comment.

Ans: Assessment of the auditor is valid as concerned matter qualifies to be a key audit matter; hence,
it should be reported accordingly by the auditor in his audit report

96. ADKS & Co LLP are the newly appointed statutory auditors of PKK Ltd. During the course of audit, the
statutory auditors have come across certain significant observations which they believe could lead to
material misstatement of financial statements. Management has a different view and does not concur

Page No. 19
 with the view of the statutory auditors. Considering this the statutory auditors are determining as to
how to address these observations in terms of their reporting requirement. Please advise.

Ans: The auditor concludes that, based on the audit evidence obtained, the F.S. as a whole are not
free from material misstatement, The auditor is unable to obtain sufficient appropriate audit evidence
to conclude that the financial statements as a whole are free from material misstatement.

97. “The Company’s has been unable to re-negotiate or obtain replacement financing. This situation
indicates the existence of a material uncertainty that may cast significant doubt on the Company’s
ability to continue as a going concern and therefore, the Company 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 fully disclose this fact.” You are required to identify the type of opinion and draft the
same.

Ans: Type of Opinion – Qualified Opinion.

98. As an auditor of a company registered under section 8 of the Companies Act, 2013 you find that as per
the notification of the Ministry of Corporate Affairs regarding applicability of Indian Accounting
Standards (Ind-AS), the company has to prepare its financial statements for the year ended 31st
March, 2019 under Ind-AS. The management of the company is however of the strong view that being
a section 8 company having charitable objects, Ind-AS cannot apply to the company. The financial
statements are therefore prepared by the management under the earlier GAAP and a note for the
same is given in the financial statements. How would you report on these financial statements?

Ans: Financial reporting framework applied by the management is unacceptable and hence auditor is
required to modify the opinion in accordance with SA 705.

99. “The Company’s financing arrangements expired and the amount outstanding was payable on March
31, 20X0. 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.” You are required to identify the type of
opinion and draft the same.

Ans : Type of Opinion – Adverse Opinion.

100. For the year ended 31st March, 2018, the audit report of Avinash Ltd., contained a qualification
regarding non-provision for diminution in the value of investments to the extent of Rs. 50 lacs. As an
Auditor of the Company for the year 2018-19, how would you report, if:
(i) The Company does not make provision for diminution in the value of investments in the year 2018-
2019.
(ii)The Company makes adequate provision for diminution in the year 2018-2019.

Ans: (a) If P Ltd. does not make provision the auditor will have to modify his report for both current
and previous year figures as mentioned above.
(b) If however, the provision is made, the auditor need not refer to the earlier year’s modification.

101. Mr. A, a practicing Chartered Accountant, audited the financial statements of C Ltd. for the previous
year 2017-18 and expressed an unmodified opinion. C Ltd. was of the view that Mr. A is not
conducting the audit properly and therefore, for the current year 2018-19, it appointed Ms. B, a
leading practicing Chartered Accountant to conduct the audit and present Comparative Financial
Statements. Ms. B, while performing the auditing procedures, found that C Ltd. has undercharged the
Page No. 20
 wages of Rs. 10 lakhs during the previous year resulting in overstatement of profits. What are the
further procedures, Ms. B is required to pursue?

Ans: Ms. B is required to communicate the matter to the management and request them to inform the
same to Mr. A. After revision or non- revision of the prior period’s financial statements, Ms. B may
report accordingly.

102. D Ltd., a Delhi based company having turnover of Rs. 25 crores, has a branch at USA having a turnover
of Rs. 10 lakhs (as converted from US dollars). The area where the branch office is located in USA was
severely affected by storms and the office along with all accounting records was completely
destroyed. Due to the unavailability of records, the financial statements of D Ltd. for the financial year
2018-19 did not include the figures pertaining to the said branch. As the statutory auditor of D Ltd.,
how will you report on the same?

Ans: If appropriate disclosures are given in Notes to Accounts, an unmodified opinion with EOM para
need to be issued. However, if appropriate disclosures are not given in Notes to Accounts, auditor
should qualify the report.

103. SA 720 requires the auditor to read and consider the other information because other information
that is materially inconsistent with the F.S. or the auditor’s knowledge obtained in the audit may
indicate that there is a material misstatement of the F.S. or that a material misstatement of the other
information exists, either of which may undermine the credibility of the F.S. and the auditor’s report
thereon. Explain the meaning of the term Other Information and state the requirements of SA 720 as
to obtaining and considering the other information.

Ans: (a) Determine, through discussion with management, which documents comprises the annual
report, and the entity’s planned manner and timing of the issuance of such documents;
(b) Make appropriate arrangements with management
(c) request management to provide a written representation that the final version of the documents
will be provided to the auditor when available

Page No. 21
 2 AUDITING PLANNING, STRATEGY AND EXECUTION

1. Write short notes on: Usefulness of careful and adequate audit planning.

Ans: Attention to Important Areas, Timely resolution of Potential Problems, Proper Organisation and
Management of Audit Engagement, Proper Selection of Engagement Team, Direction & Supervision of ET,
Coordination.

2. You have been appointed as the auditor of a Multiplex Cinema House Draw an audit programme in respect
of its Revenue and Expenditure

Ans

Income ; Verify the system of - collection from the parking; control exercised on receivable from
advertisements; accounting for collection of sale of tickets of; online booking and system of realization of
money; reconciliation of collections with the No of seats; effectiveness relating to the income from cafe
shops, pubs etc.,
Expenses : Verify the payments in respect of the maintenance of the building; Ensure at the time of
settlement any payment of advance made to the distributor is also adjusted against the amount due. Verify
the system of payment of salaries & other benefits and ensure that statutory requirements are complied with

3. A & Co. was appointed as auditor of Great Airways Ltd. As the audit partner what factors shall be
considered in the development of overall audit plan?

Ans:
• Terms of his engagement and any statutory responsibilities.
• Nature and timing of reports or other communications.
• Applicable Legal or Statutory requirements.
• Accounting policies adopted by the clients and changes, if any, in those policies.
• The effects of new accounting and auditing pronouncement on the audit.
• Identification of significant audit areas.
• Setting of materiality levels for the audit purpose.
• Conditions requiring special attention such as the possibility of material error or fraud or involvement of
parties in whom directors or persons who are substantial owners of the entity are interested and with whom
transactions are likely.
• Degree of reliance to be placed on the accounting system and internal control.
• Possible rotation of emphasis on specific audit areas.
• Nature and extent of audit evidence to be obtained.
• Work of the internal auditors and the extent of reliance on their work, if any in the audit.
• Involvement of other auditors in the audit of subsidiaries or branches of the client and involvement of
experts.
• Allocation of works to be undertaken between joint auditors and the procedures for its control and review.
• Establishing and coordinating staffing requirements.

4. Designing an Audit Strategy is the back bone of the “Audit planning” process. Discuss.
Ans: Obtaining Knowledge of Business, Performing Analytical Procedures at Initial Stages, Evaluating
Inherent Risk, Evaluating Internal Control System for Strategy Purposes, Formulating Audit Strategy.
Page No. 22
5. What are the major sources of obtaining information about the client’s business.

Ans: Annual Reports, Minutes of meetings, Internal reports, Working Papers, Policy and procedures
Manual, Discussions with the client, Publications of the ICAI, Consideration of general state of the
economy, Visits to the premises.

6. The process of establishing the overall audit strategy assists the auditor to determine certain matters with
respect of team resource. Explain those matters.

Ans: Employment of Qualitative Resources, Allocation of Quantity of Resources, Timing of Deployment of

Resources, Management of Resources.

7. You have been appointed as an auditor of Bahubali Ltd. for the first time. Enumerate the factors to be
considered while establishing an overall audit strategy and its benefits.

Ans: SA 300

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

Ans: (i) Classes of transactions in the entity’s operations that are significant to the financial statements; (ii)
Procedures, (IT enabled and manual both), by which transactions are initiated, recorded, processed,
corrected as necessary, transferred to the general ledger and reported in the financial statements; (iii)Related
accounting records, supporting information and specific accounts in the financial statements that are used to
initiate, record, process and report transactions; (iv)How the information system captures events and
conditions, other than transactions, that are significant to the financial statements; (v) Controls surrounding
journal entries, including non-standard journal entries used to record non-recurring, unusual transactions or
adjustments.

9. Discuss the relationship between overall audit strategy and audit plan.

Ans: • Audit strategy and audit plan are inter-related to each other because change in one would result into
change in the other.
• The audit strategy is prepared before the audit plan. The audit plan contains more details than the overall
audit strategy.
• The audit strategy provides the guidelines for developing the audit plan.
• Audit strategy establishes the scope, timing and direction of the audit and thereby works as basis for
developing a detailed audit plan
• Detailed audit plan would include the nature, timing and extent of the audit procedures so as to obtain
sufficient appropriate audit evidence.

10. As an internal auditor for a large manufacturing concern, you are asked to verify whether there are
adequate records for identification and value of Plant and Machinery, tools and dies and whether any of
these items have become obsolescent and not in use. Draft a suitable audit programme for the above

Ans: Examination of Internal Control System Aspects, Examination of Assets Register, Examination of
Measurement of Cost, Examination of Code Register, Physical Verification, Disposal of Assets, Spare Parts
Register, Review of Maintenance.

Page No. 23
11. As an internal auditor of a Cement Manufacturing Company, draft an audit programme for verification of
transportation charges for dispatches from the factory.

Ans: Rates contracted with transporters, rates charged in the invoice, transporter’s invoice includes a delivery
challan bearing the customers stamp, goods to be dispatched have a transport booking order reference,
invoice of transporter’s mentions the transport booking, booking orders have corresponding transporters
names, Ensure correct recording of amount, service-tax on the transporters is properly correctly calculated
and accounted.

12. Cineplex, a movie theatre complex, is the foremost theatre located in Delhi. Along with the sale of tickets
over the counter and online booking, the major proportion of income is from the cafe, shops, pubs etc.
located in the complex. It’s other income includes advertisements exhibited within/outside the premises
such as hoardings, banners, slides, short films etc. The facility for parking of vehicles is also provided in the
basement of the premises.
Cineplex appointed your firm as the auditor of the entity. Being the head of the audit team, you are
therefore required to draw an audit programme initially in respect of its revenue and expenditure
considering the above mentioned facts along with other relevant points relating to a complex.

Ans: Study the MOA and AOA, income from sale of tickets, e income from cafes shops, pubs etc., e income
receivable from advertisements, collection from the parking areas, payment to the distributors, payment
of salaries and other benefits to the employees, maintenance of the building.

13. XY Ltd. is a manufacturing company, provided following details of wastages of raw materials in percentage,
for various months. You have been asked to enquire into causes of abnormal wastage of raw materials.
Draw out an audit plan. Wastage percentage are
July 2019 - 1.5% | Aug 2019 - 1.7% | Sep 2019- 1.4% | Oct 2019 - 4.1%

Ans: A list of raw materials used in the production, Ascertain the basis of computation of normal wastage,
Obtain internal control reports, Examine the stock records, Examine the production records so as to
determine the material received from the store, Maintenance Programme of machinery, Ascertain whether
employees engaged in production, existence and effectiveness of quality control techniques, inventory
controls in respect of storage, Obtain a statement showing break up of wastage figures, Consider the
existence of following situations that may also cause the abnormal wastage:
(a) Purchase of poor quality of raw materials.
(b) Machinery breakdown or power failure.
(c) High rate of rejections of finished goods
(d) Deterioration of raw material lying in godowns
(e) Abnormal wastages in storage and handling.
(f) Commencing new production line.

14. Key phases in the audit execution stage are Execution Planning, Risk and Control Evaluation, Testing and
Reporting. Explain.
Ans:

Risk and Control

Execution Planning Testing Reporting
Evaluation

Page No. 24
 3 RISK ASSESSMENT AND INTERNAL CONTROL

1. In the audit planning process of X Ltd., you would like to consider audit risk at the financial statement
level. What are the factors can influence your decision?

ANSWER:

1. Integrity of management.
2. Management’s experience, knowledge and changes in management during the period.
3. Unusual pressures on management.
4. The nature of the entity’s business.
5. Factors affecting the industry in which the entity operates.

2. What do you mean by risk based audit? What are the general steps in the conduct of risk based audit

Ans. superior to traditionaI audit approaches, Focuses on Risks, the underIying causes of financiaI surprises;
not just the accounting records, It shifts the focus from inspecting the quaIity of the financiaI inf. that is
recorded in the FST to buiIding quaIity into the financiaI reporting process and adding vaIue to the
organization's operations.
Steps : Analysis of Audit Risk ; setting Materiality thresholds ; Developing Audit Programmes

3. Briefly describe the various stages of a Risk Assessment process

Ans:
Define Business Objective & GoaIs; Identification of Events Affecting Buiness GoaIs & Objectives; Assess
LikeIihood & Respond & Mitigate Impact Risk; Assess ResiduaI Risk

4. In a controls-based audit, the audit approach can be classified into three broad phases comprising of
planning, execution, and completion. You are required to briefly explain the relevant considerations of
every phase in above audit approach in case of automated environment

Ans Risk Assessment Process (Identify significant accounts and disclosures; Qualitative and Quantitative
considerations; Relevant Financial Statement Assertions (FSA); Identify likely sources of misstatement;
Consider risk arising from use of IT system)
Understand and Evaluate Controls( Document understanding of business processes using Flowcharts /
Narratives; Prepare Risk and Control Matrices (RCM);Understand design of controls by performing
walkthrough of end−to−end process; Process wide considerations for Entity Level Controls, Segregation of
Duties; IT General Controls, Application Controls)
Test for Operating Effectiveness (Assess Nature, Timing and Extent (NTE) of controls testing; Assess
reliability of source data; completeness of population; Testing of key reports and spreadsheets; Sample
testing; Consider competence and independence of staff /team performing controls testing)
Reporting (Evaluate Control Deficiencies; Significant deficiencies, Material weaknesses; Remediation of
control weaknesses; Internal Controls Memo (ICM) or Management Letter ; Auditor’s report)

Page No. 25
5. As an auditor, during your interim visit at Marathon Ltd you observed that internal controls were not in
use throughout the period covered under audit What are the controls objectives you would like to
consider to achieve your purpose?
Ans. Risk assessment procedures; Safeguarding of its assets; Timely preparation of reliable financial
information; Reliability of entity’s financial reporting; Proper authorization; Compliance with applicable
laws and regulations; Effectiveness and efficiency; Assets verified at reasonable intervals; Systematic
information processing; adherence to company’s policies; Changes occurred in the accounting and
internal control systems during the period ;Policies and procedures adopted by the company for
ensuring the orderly and efficient conduct of its business; Monitoring of accounting/financial controls;
Reviews of performance; Accuracy and completeness of the accounting records.; Supervisory and Physical
controls; Ensure segregation of duties

6. Describe how you would identify the inherent risk at the account balance and class of transaction level
in the planning process of the audit of a large multi-locational company.

ANSWER:

1. Quality of the accounting system.

2. Susceptibility of Financial statements to misstatement.
3. The complexity of underlying transactions and other events which might require using the work of
an expert.
4. The degree of judgement involved in determining account balances.
5. Susceptibility of assets to loss or misappropriation.
6. The completion of unusual and complex transactions, particularly at or near period end.
7. Transactions not subjected to ordinary processing

7. Factors relevant in evaluation of Inherent Risk

ANSWER: Answers of the above 2 questions

8. Compute the overall Audit Risk if looking to the nature of business there are chances that 40% bills of
services provided would be defalcated, inquiring on the same matter management has assured that
internal control can prevent such defalcation to 75%. At his part the Auditor assesses that the
procedure he could apply in the remaining time to complete Audit gives him satisfaction level of
detection of frauds & error to an extent of 60%. Analyse the Risk of Material Misstatement and find
out the overall Audit Risk.

ANSWER:

ROMM = 40% X 25% = 10%

Detection risk= 100-60=40%
Overall audit risk = ROMM X Detection risk = 10 X 40% = 4%

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

Page No. 26
 ANSWER: Understanding the auditee operations, Determination of Residual Risk, Manage Residual
Risk, Reporting to Auditee.

10. Pasta Ltd., a manufacturing concern want to develop internal control system. You are an expert in
developing the internal control system, hereby called to brief about the same. In view of above, you
are required to brief about internal control system and inherent limitations of the internal control?

ANSWER:

(a) Management’s consideration that a control should be cost effective.

(b) The fact that the most controls do not tend to be directed at transactions of unusual nature.
(c) Potential for human error.
(d) Possibility of circumvention of controls through collusion with parties outside the entity or with
employees of entity.
(e) Possibility that a person responsible for exercising control could abuse that authority.
(f) Possibility that procedures may become inadequate due to changes in conditions and compliance
with procedures may deteriorate.
(g) Manipulations by management with respect to transactions or estimates and judgments required
in the preparation of financial statements.

11. XYZ Hospital Private Ltd. is engaged in running a hospital of 200 Beds since last 20 years. Revenue Track
of the hospital for last 3 years is as under:

2016-17 : ₹20 Crores

2017-18 : ₹25 Crores
2018-19 : ₹35 Crores

Hospital has its own Pharmacy, Laboratory, Blood Bank, Radiology & General Stores. Its management
suspects that leakages/theft is happening in Pharmacy, Radiology, Laboratory and General Stores
departments. It seeks advice of RST & Co., Internal Auditors of the Company, as to how it can
Institute/Improve its Internal Control. In this context, Management wants to understand the concept
of components of Internal Control Structure in detail. Advise.

ANSWER:

Control
Environment

Accounting System

Control Procedure

12. As auditor of Z Ltd., you would like to limit your examination of account balance tests. What are the
control objectives you would like the accounting control system to achieve to suit your purpose?

ANSWER:

1. Whether all transactions are recorded;

Page No. 27
 2. Whether recorded transactions are real;
3. Whether all recorded transactions are properly valued;
4. Whether all transactions are recorded timely;
5. Whether all transactions are properly posted;
6. Whether all transactions are properly classified and disclosed;
7. Whether all transactions are properly summarized.

13. In the use of standardized Internal Control Questionnaire (ICQ), certain basic assumptions about
elements of a good internal control system are taken into account. List down few such assumptions.

ANSWER: Procedures used by most business concerns are essential in achieving reliable internal
control, Extensive division of duties and responsibilities, Separation of accounting function, no single
person is entrusted with the responsibility of completing a transaction, evidence to identify the person,
expected to come under review of another, proper documentation and recording of the transaction

14. Explain briefly the Flow Chart technique for evaluation of the Internal Control system.

ANSWER:

graphic presentation of internal controls in the organisation

most concise and comprehensive way for reviewing the internal controls

flow chart is a diagram full with lines and symbols

A properly drawn up flow chart can provide a neat visual picture of the whole activities
of the section or department

15. Briefly discuss the compliance procedures and their use in evaluation of internal controls.

ANSWER:

(a) Inspection of documents supporting transactions and other events to gain audit evidence that
internal controls have operated properly.
(b) Inquiries about and observation of internal controls which leave no audit trail.
(c) Re-performance of internal controls.
(d) Testing of internal controls operating on specific computerised applications.

16. A newly qualified professional has received his first appointment as auditor of a large company and is
very much concerned about the effectiveness of internal control and wants to assess and evaluate the
control environment as part of his audit program. Towards achieving his objective, he seeks your help
in knowing the Standard Operating Procedures (SOPs) of assessment and evaluation of control.

ANSWER: Enterprise Risk Management, Segregation of Job Responsibilities, Job Rotation in Sensitive
Areas, Documents of delegation of Financial Powers, IT based Controls.

17. Y Co. Ltd. has five entertainment centers to provide recreational facilities for public especially for
children and youngsters at 5 different locations in the peripheral of 200 kilometers. Collections are
made in cash. Specify the adequate system towards collection of money.

Page No. 28
 ANSWER: Printing of tickets, Sale of Tickets, Reconciliation of daily cash, Banking of daily cash
collection, Cancellation of Entrance ticket, Advance booking, Discounts and free pass, Surprise checks.

18. During the course of his audit, the auditor noticed material weaknesses in the internal control system
and he wishes to communicate the same to the management. You are required to elucidate the
important points the auditor should keep in mind while drafting the letter of weaknesses in internal
control system.

ANSWER:

(a) It lists down the area of weaknesses in the internal control system and recommends suggestions for
improvement.
(b) It should clearly indicate that this letter covers only weaknesses which have come to the attention
of the auditor during his evaluation of internal control for the purpose of determining nature, timing
and extent of further audit procedures.
(c) Letter should clearly indicate that his examination of internal control has not been designed to
determine the adequacy of internal control for management.
(d) This letter serves as a significant means for management and governing body for the purpose of
improving the system and its strict implementation.
(e) The letter may also serve to minimize legal liability in the event of a major defalcation or other loss
resulting from a weakness in internal control.

19. Committee of Sponsoring Organizations of the Treadway Commission (COSO) framework includes 17
principles representing the fundamental concepts associates with its five components. List these
principles.

ANSWER:

Operations Objectives Reporting Objectives Compliance objectives

20. Write a short note on: Control Objectives for Information and Related Technology (CoBIT) Framework.

ANSWER: COBIT stands for Control Objectives for Information and Related Technology framework
created by the ISACA, Business managers are equipped with a model to deliver value to the
organization, control model that guarantees the integrity of the information system, COBIT ensures
quality, control and reliability of information systems.

21. New life Hospital is a multi-specialty hospital which has been facing a lot of pilferage and troubles
regarding their inventory maintenance and control. On investigation into the matter it was found that
the person in charge of inventory inflow and outflow from the store house is also responsible for
purchases and maintaining inventory records. According to you, which basic system control has been
violated? Also list down the other general conditions pertaining to such system which needs to be
maintained and checked by the management.

ANSWER: Internal check system to ensure that Independent and complete control should not be given
to a single person has been violated. For general conditions refer the topic “Considerations for
effective internal check”.

Page No. 29
22. BSF Limited is engaged in the business of trading leather goods. You are the internal auditor of the
company for the year 2018-19. In order to review internal controls of the Sales Department of the
company, you visited the Department and noticed the work division as follows:
(1) An officer was handling the sales ledger and cash receipts.
(2) Another official was handling dispatch of goods and issuance of Delivery challans.
(3) One more officer was there to handle customer/ debtor accounts and issue of receipts.
As an internal auditor, you are required to briefly discuss the general condition pertaining to the
internal check system prevalent in internal control system. Do you think that there was proper division
of work in BSF Limited? If not, why?

ANSWER: Company has not done proper division of work as: (i) the receipts of cash should not be
handled by the official handling sales ledger and (ii) delivery challans should be verified by an
authorised official other than the officer handling despatch of goods.

Page No. 30
 4 AUDIT IN AN AUTOMATED ENVIRONMENT

1. A real-time environment is a type of automated environment in which business operations and

transactions are initiated, processed and recorded immediately as they happen without delay. It has
several critical IT components that enable anytime, anywhere transactions to take place. You are
required to name the components and its example of real-time environment.

ANSWER: Real Time Environment is a type of automated environment in which business operations
and transactions are initiated, processed and recorded on a real-time basis, i.e. immediately on their
occurrence

IT components:
1. Applications like ERP, Core Banking Etc.
2. Middleware like web servers
3. Networks like WAN, Internet hosting.
4. Hardware like Data centers, storage devices, power supply etc.

2. SA 315 requires the auditor to obtain an understanding of the entity and its environment as a part of
Risk Assessment procedure to identify and assess Risk of Material Misstatements. List the areas of
which auditor is required to obtain understating in an automated environment.

ANSWER:
1. Applications being used by the entity;
2. IT infrastructure components for each of the application;
3. Organisation structure and governance;
4. Policies, procedures and processes followed;
5. IT risks and controls.

3. In a controls-based audit, the audit approach can be classified into three broad phases comprising of
planning, execution, and completion. You are required to briefly explain the relevant considerations for
every phase in above audit approach in case of an automated environment.
ANSWER:
Considerations of automated
environment in different
stages of Audit

Planning Execution Reporting

Risk Assessment Assessing Entity Testing of Reports

Process Level Controls & Information
produced by the
entity at
completion stage
Understanding Assessing process
of the Business Level Controls

Page No. 31
4. The volatility, unpredictability and pace of fast changes that exists in the automated environment
today is far greater than in the past and consequently it throws more risks to business which requires
them to have a need to continuously manage such risks. State various risks which an enterprise may
have to face and manage.

ANSWER:

1. Market Risks
2. Regulatory and Compliance Risks
3. Technology Risks
4. Financial reporting Risks
5. Operational Risk
6. Credit Risk
7. Environmental Risks
8. Product Risks

5. Briefly describe the various stages of a Risk Assessment process

ANSWER:

Step 1 - Define Business Objectives and Goals.

Step 2 - Identify events that affect achievement of business objectives.
Step 3 - Assess likelihood and impact.
Step 4 - Respond and mitigate risks.
Step 5 - Assess Residual Risks.

6. Describe application controls and give three examples of automated application controls.

ANSWER:

Application controls are manual or automated procedures that typically operate at a business process
level and apply to the processing of individual applications.
+
Designed to ensure the integrity of the accounting
+
Help ensure that transactions occurred, are authorised, and are completely and accurately recorded
and processed.

7. Identify the controls which are automated, manual or IT dependent manual for the below mentioned
cases?
(i) Price master configured in the sales master can only be edited by authorised personnel in the
system.
(ii) Invoice cannot be booked in SAP in case Purchase orders are not approved.
(iii) Inventory ageing report is pulled out from the system based on which provisioning is calculated
after analyzing the future demand by the inventory personnel and approved by the controller.
(iv) All invoices are signed by warehouse personnel before the goods are dispatched to the customer.
(v) Credit limit is assigned to the customer and goods cannot be sold in excess of credit limit
configured in the system.
(vi) All changes to the credit limit is approved manually by sales manager.
(vii) Ageing report is pulled out from SAP based on which provisioning is calculated by accounting
personnel and approved by financial controller.

Page No. 32
 (viii) PO, GRN (Good received note) and invoice are matched by the system before it is posted in the
financial records.

ANSWER:

(i), (ii), (v), (viii) – Automated Controls;

(iii), (vii) – IT Dependent;
(iv), (vi) – Manual Controls.

8. While evaluating the risks and controls at entity level, the Auditor should take cognizance of the
prevalent direct and indirect entity level controls operating in the entity. Explain what they pertain to
with few examples.

ANSWER: Entity Level controls also known as pervasive controls operate across an entity, considered to
a part of a company’s internal control framework, subjective by nature and therefore require
application of more professional judgement.

9. In an automated environment, the data stored and processed in systems can be used to get various
insights into the way business operates. This data can be useful for preparation of management
information system (MIS) reports and electronic dashboards that give a high-level snapshot of business
performance. In view of above you are required to briefly discuss the meaning of data analytics and
example of circumstances when auditing in an automated environment, auditors can apply the
concepts of data analytics.

ANSWER: Data analytics is an analytical process by which meaning information is generated and
prepared from raw system data.

Application –
1. Preliminary Analytics;
2. Risk Assessment;
3. Control Testing;
4. Non-Standard Journal Analysis;
5. Evaluation of Deficiencies;
6. Fraud Risk assessment.

10. “Generating and preparing meaningful information from raw system data using processes, tools, and
techniques is known as Data Analytics and the data analytics methods used in an audit are known as
Computer Assisted Auditing Techniques or CAATs.” You are required to give a suggested approach to
get the benefit from the use of CAATs.

ANSWER:

Step – 1 Understand Business Environment including IT.

Step – 2 Defines the Objectives and Criteria against which subject matter will be evaluated.
Step – 3 Identify Source and Format of Data
Step – 4 Extract Data
Step – 5 Verify, Completeness, accuracy and Validity of extracted Data
Step – 6 Apply Criteria on data extracted.
Step – 7 Validate and Confirm results
Step – 8 Document the results and Report the conclusions

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11. When auditing in an automated environment the auditor should be aware, adhere to and be guided by
the various standards, guidelines and procedures that may be relevant to both audit and the
automated environment. Briefly describe any four such standards.

ANSWER: Standards, Guidelines and Procedures – to be adhered to while auditing in an automated

environment.

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 5 DECLARATION AND PAYMENT OF DIVIDEND

1. Write short note on: Investor Education and protection Fund

ANSWER: Sec. 125 of Companies Act 2013.

2. As a Statutory Auditor, how would you deal with the following: While adopting the accounts for the
year, the Board of Directors of Sunrise Ltd. decided to consider the Interim Dividend declared @15% as
final dividend and did not consider transfer of Profit to reserves.

ANSWER: Assuming that the company has complied with the depreciation requirement, the interim
dividend can be declared without transferring profits to reserves.

3. A company has paid interim dividend at 10% based on its half-yearly performance while at the end of
the year suffered a net loss. How you will deal with the matter in your audit report as a statutory
auditor?

ANSWER: Assuming that company does not have accumulated profits or free reserves, it can be
considered that dividend has been paid out of capital and hence Auditor should state the fact in his
report.

4. For the year ended on 31st March, 2020, P Ltd. proposed to pay a dividend of 25% on its equity shares
and it further proposed to transfer 20% of Net profit for that year after tax to its reserves. Its auditor
objected to the same stating that 10% is the maximum permissible limit to transfer to reserves.

ANSWER: Auditor’s objection is not tenable as company is not mandatorily required to transfer the
profit to reserves, it is an option available to the company to transfer a percentage of profits to
reserves.

5. As a statutory auditor, how would you deal with the following: ABC Ltd. having a paid-up capital of ₹1
crore earned as total net profit of ₹1 crore for the years 2016-17 to 2018-19. The Company did not
declare any dividend nor transferred any amount to Reserves for these years. The entire profit was
retained in the Profit & Loss Account. In 2019-20, the company made a profit of ₹20 lacs. The company
also proposed in 2019-20 to declare dividend @25% of capital out of accumulated profits.

ANSWER: The company is well within its power and right to declare the dividend of ₹25 lacs for the
year 2019-20.

6. AARK Ltd is a large-sized listed company having annual turnover of INR 4000 crores. The company also
has a plan to get listed on New York Stock Exchange next year. The company has paid good amount of
dividend during the year to its shareholders which is significantly higher as compared to earlier years.
The statutory auditors would like to focus on this aspect at the time of their statutory audit. Please
advise the relevant procedures that the statutory auditors should perform in respect of this area

ANSWER: Ensure that all the rules and regulations concerning the declaration or payment of dividends
have been complied with., dividends have been declared or paid only out of distributable profit, verify
that the rules related to distribution of dividends has been complied, dividend recommended by the
Page No. 35
 Board has been approved by the members at the AGM, dividend has been transferred to the separate
scheduled bank account within 5 days from the declaration, dividend has been paid within 30 days
from the declaration, company has prepared a statement within a period of 90 days of making any
transfer, if any money transferred to Unpaid Dividend Account has remained unpaid or unclaimed for a
period of 7 years from the date of such transfer then, whether it has been transferred by the company
along with interest accrued, check that all the compliances with laws, regulations, accounting and
disclosure related to the dividends have been made appropriately.

7. The Board of Directors of ACP Ltd. has recommended the dividend of 15% on paid up share capital of
₹450 crores for the year ended 31st March, 2020, at their meeting held on 1st of May, 2020 when the
accounts for the financial year 2019-20 were approved. The Board of Directors when they met on 7th
July, 2020 for the review of first Quarter accounts, the Board has decided to rescind their decision to
recommend dividend. The notice for AGM to be held on 14.08.2020 was sent on 15th July, 2020
without any recommendation of dividend. At the AGM the members asked the management how they
can rescind the declaration of dividend once recommended. Comment.

ANSWER: Board of directors are well within their powers to rescind the dividend which is
recommended earlier, but not yet declared in the AGM.

8. ABC Limited is in the practice of maintaining consistent dividend payment over a minimum of 14%. The
Financial year 2019-20 was so very bad for the company that it was not possible for the company to
maintain the payment of consistent dividend as above. The Management, being hopeful of recovery of
its performance in next year, felt that the depreciation of the year to the extent of 75% alone be
charged to the statement of profit and loss and the remaining 25% be kept in a separate account code
in the balance sheet – ‘Debit Balances Adjustable against Revenue Account’. The Management was of
the view that it would be in fair practice of accounting if the depreciation for asset is charged before
the expiry of the lifes of assets and the amount parked in asset code as above would unfailingly be
adjusted to Revenue before the close of next financial year anyway. Analyse the issues involved and
state how the Auditor should decide on this matter.

ANSWER: View of the management is incorrect keeping in mind the provisions of Sec. 123 and
requirements of Schedule II w.r.t. useful lives to compute depreciation.

Page No. 36
 6A COMPANY ACCOUNTS AND AUDIT

1. CA. X is a partner in M/s AB & Associates and M/s MN & Associates simultaneously. M/s AB &
Associates has completed its tenure of 10 years as an auditor in XYZ Ltd. immediately preceding the
current financial year. It may be noted that the provisions for applicability of rotation of auditors are
applicable to XYZ Ltd. Now, the company wants to appoint M/s MN & Associates as auditor for 5 years.
(a) Whether M/s MN & Associates is allowed to accept the appointment as auditor of XYZ Ltd.?
(b) Would your answer be different from above if CA. X, being in-charge of M/s AB & Associates and
certifying authority of financial statements of XYZ Ltd., retires from the partnership in M/s AB &
Associates and joins M/s MN & Associates?

ANSWER:

(a) Not allowed due to rotation provisions of Sec. 139(2);

(b) Not Allowed – Refer Explanation to Rule 6.

2. ABC Pvt. Ltd., a new company, incorporated on 01.07.2019 is engaged in the manufacturing business.
On 30.07.2019, the Managing Director of ABC Pvt. Ltd. himself appointed CA Mohan, his daughter’s
husband, as the first auditor of the company. You are required to –
(i) State the provisions of the Companies Act, 2013 relating to appointment of first auditor.
(ii) Comment on the action of the Managing Director.

ANSWER: of Mr. Mohan is not valid as per provisions of Section 139(6) of Companies Act, 2013.

3. KM Pvt. Ltd., engaged in the manufacturing business of Silk Shirts, is a newly incorporated company
dated 01.09.2019. On 28.09.2019, the members of KM Pvt. Ltd. themselves appointed CA Raj, a
renowned practitioner, as the first auditor of the company opposing that Board is not authorised to
appoint the auditor. You are required to comment on the action of the Members

ANSWER: Appointment of CA Raj by the Members of the company is not in order as per provisions of
Section 139(6) of Companies Act, 2013.

4. The first auditor of M/s Healthy Wealthy Ltd., a Government company, was appointed by the Board of
Directors.

ANSWER: The appointment of first auditors made by the Board of Directors of M/s Healthy Wealthy
Ltd., is null and void

5. Nick Ltd. is a subsidiary of Ajanta Ltd., whose 20% shares have been held by Central Government, 25%
by Uttar Pradesh Government and 10% by Madhya Pradesh Government. Nick Ltd. appointed Mr. P as
statutory auditor for the year.

ANSWER: Appointment of ‘P’ is invalid and ‘P’ should not give acceptance to the Directors of Nick Ltd.

6. At the AGM of ICI Ltd., Mr. X was appointed as the statutory auditor. He, however, resigned after 3
months since he wanted to give up practice and join industry. State, how the new auditor will be
appointed by ICI Ltd and the conditions to be complied for.
Page No. 37
 ANSWER: In this case the casual vacancy has been created on account of resignation. Therefore, Board
of Directors will have to fill the vacancy within thirty days and such appointment shall be approved by
the company at the general meeting within three months of the recommendations of the board. The
new auditor so appointed shall hold office only till the conclusion of the next AGM.

7. Due to the resignation of the existing auditor(s), the Board of directors of X Ltd appointed Mr. Hari as
the auditor. Is the appointment of Hari as auditor valid?

ANSWER: Appointment of Hari by Board of Directors will be valid if it is made within 30 days of casual
vacancy and such appointment is approved by the company at a general meeting within three months
of the recommendations of the Board.

8. At an AGM of a listed company, Mr. R a retiring auditor after completing the tenure of 5 consecutive
years of his service claims that he has been reappointed automatically, as the intended resolution of
which a notice had been given to appoint Mr. P, could not be proceeded with, due to Mr. P's death.

ANSWER: Mr. R cannot continue due to rotation provisions of Section 139(2).

9. No AGM was held for the year ended 31st March, 2018, in XYZ Ltd., Mr. X is the auditor for the
previous 5 years, whether he should continue to hold office for current year or not.

ANSWER: Mr. X shall continue to hold office till the conclusion of the AGM

10. M/s Young & Co., a Chartered Accountant firm, and Statutory Auditors of Old Ltd., is dissolved on
1.4.2019 due to differences of opinion among the partners. The Board of Directors of Old Ltd. in its
meeting on 6.4.2019 appointed another firm M/s Sharp & Co. as their new auditors for one year.

ANSWER: In the instant case the action of the board of directors in appointing M/s Sharp & Co. to fill
up the casual vacancy due to dissolution of M/s Young & Co., is correct. However, the board of
directors are not correct in giving them appointment for one year. M/s Sharp & Co. can hold office until
the conclusion of next AGM only.

11. X Ltd. is an unlisted public company. Its balance sheet shows paid up share capital of Rs. 7.5 crore and
public deposits of Rs. 70 crores. The company appointed M/s ABC & Co., a CA firm, as the statutory
auditor in its annual general meeting held at the end of September, 2019 for 11 years. Comment.

ANSWER: Company is covered u/s 139(2) as deposits exceeds Rs. 50 Crore, so appointment can be only
for 1 term of 5 years (in case of individual) and 2 terms of 5 years each (in case of firm).

12. While auditing, CA Mr. X, the statutory auditor of Y Ltd. encounters exceptional circumstances that
bring into question his ability to continue performing the audit. Considering it appropriate, CA Mr. X
resigned from the office of auditor of Y Ltd. Due to the resignation of the existing auditor, the Board of
Directors of Y Ltd. itself appointed CA Mr. Y, a practicing Chartered Accountant, as the statutory
auditor till the conclusion of 6th meeting. You are required to state the provisions related to filling of
casual vacancy as per the Companies Act, 2013 and comment upon the validity of appointment made
by the Board.

ANSWER: Appointment of Mr. Y by BOD requires approval of general meeting and auditor can hold
office only till conclusion of next AGM.

Page No. 38
13. C.A. Ashwin was appointed as auditor of Bristol Ltd. for the year 2019-20. Since he declined to accept
the appointment, the Board of Directors appointed CA John as the Auditor in place of C.A. Ashwin and
the appointment was accepted by C.A. John. Discuss.

ANSWER: Board of Directors are not authorised to fill up the vacancy in case the auditors appointed at
the AGM refuse to accept the appointment.

14. M/s IO Ltd. is registered with Registrar of Companies on 1st of May 2019. The company’s 27% of paid
up share capital is held by Central Government; 28% by State Government and the remaining 45% by
public. The Board of Directors appointed RMG, Chartered Accountants as statutory auditors for the
financial year 2019-20 by passing a resolution at the Board Meeting held on 25th May, 2019. Comment
whether appointment is valid or not.

ANSWER: Appointment of First Auditor within 60 days of registration of government company by

Board of Directors is not valid.

15. M/s. ABC & Co. is an audit firm having partners Mr. A, Mr. B and Mr. C, whose tenure as statutory
auditor in R Ltd. a listed entity, has expired as per the Companies Act, 2013. M/s XY is another audit
firm which is appointed as the statutory auditor of R Ltd. for the subsequent year. Mr. A joins M/s. XY
as partner, 3 months after it was appointed as the statutory auditor of R Ltd. Comment.

ANSWER: Applying the provisions of Sec. 139(2), no issue arises as there were no common partners as
on date of appointment.

16. “M/s. PQR, audit firm has been re-appointed as sole statutory auditor of a listed company in the AGM,
where till last year M/s. LMN, audit firm was also one of the joint auditors along with M/s. PQR. One
tenure of consecutive five years of both the firms get completed in the mentioned AGM. Mention the
steps that should be taken by M/s. PQR before commencing the audit”.

ANSWER: Ensure Compliance of Sec. 140(4) and Clause 8 & 9 of Part I of First Schedule of Chartered
Accountant Act, 1949.

17. PQR Company Ltd. removed their first auditor by passing a resolution in the meeting of the Board of
Directors for his removal without obtaining prior approval from the Central Government. Offer your
comments in this regard.

ANSWER: Removal of Auditor is Invalid as Special Resolution has not been passed and approval of
Central Govt. not obtained.

18. What are the professional obligations of the auditor who has resigned from the audit before
completion of his term due to non co-operation of the Management in completing certain audit
procedures?

ANSWER: Section 140(2)

19. On the advice of Management of M/s Quick Ltd., the auditor of the Company overlooked and did not
report on shifting of certain current year’s sales transactions to the next year. The National Company
Law Tribunal (NCLT) wants to take action against you. Describe the powers of the NCLT under Section
140(5) of the Companies Act, 2013 for such action and consequences to the auditor.

ANSWER: Section 140(5)

Page No. 39
20. “Mr. A”, a practicing Chartered Accountant, is holding securities of “XYZ Ltd.” having face value of Rs.
900/-. Whether Mr. A is qualified for appointment as an Auditor of “XYZ Ltd.”? Would your answer be
different, if instead of Mr. A; Mr. B the step father of Mr. A is holding the securities.

ANSWER: Mr. A. is holding security of ₹900 in the XYZ Ltd, therefore he is not eligible for appointment
as an Auditor of “XYZ Ltd”. However, in the second case, Mr. A is eligible, as relative may hold
securities of face value upto Rs. 1 Lac.

21. Mr. P, a practicing Chartered Accountant, has been offered for appointment as an auditor of ABC Ltd.,
a leading company. Later on, Mr. Q, the step-brother of Mr. P, purchased securities of the company
having face value of Rs. 90,000. Comment, whether Mr. P may accept the offer of appointment as an
auditor?

ANSWER: In the present case, Mr. Q. (relative of Mr. P, an auditor), is having securities of Rs. 90,000
face Value in the ABC Pvt. Ltd., which is as per requirement of proviso to section 141 (3)(d)(i),
Therefore, Mr. P will not be disqualified to be appointed as an auditor of ABC Ltd.

22. “BC & Co.” is an Audit Firm having partners “Mr. B” and “Mr. C”, and “Mr. A” the relative of “Mr. C”, is
holding securities of “MWF Ltd.” having face value of Rs. 1,01,000/-. Whether “BC & Co.” is qualified
from being appointed as an Auditor of “MWF Ltd.”?

ANSWER: In the instant case BC & Co, will be disqualified for appointment as an auditor of MWF Ltd as
the relative of Mr. C i.e. partner of BC & Co., is holding the securities in MWF Ltd which is exceeding the
limit mentioned in proviso to section 141(3)(d)(i).

23. A, a chartered accountant has been appointed as auditor of Laxman Ltd. in the AGM of the company
held in Sep. 2018, which assignment he accepted. Subsequently in January, 2019 he joined B, another
chartered accountant, who is the Manager Finance of Laxman Ltd., as partner.

ANSWER: In the present case, A, an auditor of M/s Laxman Ltd., joined as partner with B, who is
Manager Finance of M/s Laxman Limited, will be disqualified by Sec. 141(3)(c) and, therefore, he shall
be deemed to have vacated office of the auditor of M/s Laxman Limited.

24. An auditor purchased goods worth Rs. 501,500 on credit from a company being audited by him. The
company allowed him one month’s credit, which it normally allowed to all known customers.

ANSWER: In instant case, auditor has become indebted to the company and consequently he has
deemed to have vacated his office.

25. Salman Khan, a member of the ICAI, does not hold a Certificate of practice. Is his appointment as an
auditor valid?

Ans: Mr. Salman khan does not hold a COP and hence cannot be appointed as an auditor of a company.

26. Ram and Hanuman Associates, Chartered Accountants in practice have been appointed as Statutory
Auditor of Krishna Ltd. for the accounting year 2019-2020. Mr. Hanuman holds 100 equity shares of
Shiva Ltd., a subsidiary company of Krishna Ltd.

ANSWER: The firm, M/s Ram and Hanuman Associates would be disqualified to be appointed as
statutory auditor of Krishna Ltd., which is the holding company of Shiva Ltd., because one of the
partner Mr. Hanuman is holding equity shares of its subsidiary.
Page No. 40
27. Aish & Company, a firm of Chartered Accountants was appointed as statutory auditors of Abhishek
Company Ltd. Abhishek Company Ltd. holds 51 % shares in Sarang Company Ltd. Mr. Aish, one of the
partners of Aish & Company, owed Rs. 1,500 as on the date of appointment to Sarang Company Ltd. for
goods purchased in normal course of business.

Ans: Mr Aish is not disqualified to be appointed as auditor of the company as he is indebted to the company
for an amount not exceeding Rs. 5,00,000, consequently, Aish & Co., is not disqualified to be appointed as
an auditor of Abhishek Company Ltd.

28. Mr. Amar, a Chartered Accountant, bought a car financed at Rs. 7,00,000 by Chaudhary Finance Ltd.,
which is a holding company of Charan Ltd. and Das Ltd. He has been the statutory auditor of Das Ltd.
and continues to be even after taking the loan.

ANSWER: Mr. Amar should vacate his office immediately and Das Ltd must have to appoint any other
CA as an auditor of the company.

29. Praveen, a member of the ICAI, does not hold a Certificate of practice. Is his appointment as an auditor
valid?

ANSWER: Mr. Praveen does not hold a COP and hence cannot be appointed as an auditor of a
company.

30. ‘B’ owes Rs. 5,01,000 to ‘C’ Ltd., of which he is an auditor. Is his appointment valid? Will it make any
difference, if the advance is taken for meeting-out travelling expenses?

ANSWER: B’s appointment is not valid and he is disqualified as the amount of debt exceeds Rs.
5,00,000.

31. Mr. Aditya, a practising chartered accountant is appointed as a “Tax Consultant” of ABC Ltd., in which
his father Mr. Singhvi is the Managing Director.

ANSWER: Mr. Aditya can be appointed as a tax consultant irrespective that his father is the managing
director of the company

32. Mr. Ram, a relative of a Director was appointed as an auditor of the company. Comment

ANSWER: Disqualified under section 141(3)(f) of Companies Act, 2013.

33. Dabloo Ltd. offered appointment as its auditor to Mr. Bee, a practicing Chartered Accountant. Later on,
Mr. Dee, the step-brother of Mr. Bee, purchased securities of the company having face value of
₹4,99,000. Comment, whether Mr. Bee may accept the offer of appointment as an auditor?

ANSWER: Mr. Bee is disqualified u/s 141 as his relative holds securities of which face value is more that ₹1
Lac.

34. M/s Duster & Co., Chartered Accountants, appointed as a statutory auditor of R Ltd. for the financial
year 2019-20. The company is also in need of some actuarial services. Consequently, the Board of
Directors of the company offered the same to M/s Srivastava & Co., an associate to M/s Duster & Co.,
which has been duly accepted by the firm. Comment.

ANSWER: M/s Duster & Co. becomes disqualified u/s 141(3)(i) of companies Act 2013 and needs to
vacate the office as required u/s 141(4).
Page No. 41
35. CA Mr. X was indebted to ABC Ltd. for a sum of ₹5,50,000 as on 01.04.2019. However, Mr. X having
come to know that he might be appointed as auditor of the company, he squared up the amount on
10.7.2019. Later on, he was appointed as an auditor of the company for the year ended 31.3.2020 at
the Annual General Meeting held on 16.07.2019. Subsequently, one of the shareholders complains that
the appointment of Mr. X as an auditor is invalid because he incurred disqualification under section
141 of the Companies Act, 2013. Comment.

Ans: Appointment of Mr. X is valid as no disqualification attracts as on date of appointment.

36. X & Associates, a Chartered Accountant firm, has been appointed as Statutory Auditor of H Ltd. for the
financial year 2019-2020. Mr. Y, the relative of Mr. X, a partner in X & Associates, is indebted for
₹5,50,000 to S Ltd., a subsidiary company of H Ltd. Comment.

Ans: X & Associates is disqualified u/s 141(3)(d)(ii) of Companies Act. 2013.

37. (i) Mr. B, a partner of Mr. A held shares of face value of Rs. 1,00,000 in DEF Ltd., the holding company
of ABC Ltd. Mr. B has sold the securities after a period of 45 days from the date of appointment of Mr.
A as an auditor of ABC Ltd.
Mrs. A, wife of Mr. A had given a financial guarantee for the principal amount of a debt owed by Mr. X
to ABC Ltd. for Rs. 6 lakhs. Mr. X has repaid Rs. 5 lakhs to ABC Ltd. 2 days before the date of
appointment of Mr. A as an auditor of the company.

Ans: (i) Invalid Appointment

(ii) Valid Appointment.

38. R and M is an audit firm having partners CA R, CA M and CA G. Mr. S is the relative of CA R holding
shares of STP Ltd. having a face value of ₹1,51,000 Whether CA R and CA M are qualified to be
appointed as auditors of STP Ltd.?

Ans: CA R and CA M are not qualified to be appointed as auditor of STP Ltd.

39. Mr. Y, a practicing Chartered Accountant, has been appointed as an auditor of M/s Z Ltd. on 12th June,
2018 for the year ended 31st March, 2019. Following persons have done following transactions in
securities of M/s Z Ltd.:
Daughter of Mr. Y: Purchase of Securities on 10th September, 2018 of face value of Rs. 45,000 (market
value Rs. 90,000)
Husband of daughter of Mr. Y: Purchase of Securities on 10th December, 2018 of face value of Rs.
90,000 (Market value Rs. 1,90,000).
All the above securities were sold on 10th March, 2019 for Rs. 3,00,000. Discuss the implications of the
above on the appointment of Mr. Y.

Ans: Sec. 141(3)(d) read with Rule 10 of Companies (Audit and Auditor’s) Rules, 2014. MR. Y becomes
disqualified on expiry of 60 days from 10th Dec. 2018 as he fails to take corrective action so as to bring
the shareholding of relatives within limit prescribed limit of ₹1 Lac (face Value).

40. “MENTAL & Co.” is an Audit Firm having partners “Mr. A”, “Mr. B” and “Mr. C”, Chartered Accountants.
“Mr. A”, “Mr. B” and “Mr. C” are holding appointment as an Auditor in 4, 6 and 10 Companies
respectively.
(i) Provide the maximum number of Audits remaining in the name of “MENTAL & Co.”
(ii) Provide the maximum number of Audits remaining in the name of individual partner i.e. Mr. A, Mr.
B and Mr. C.

Page No. 42
 (iii) Can MENTAL & Co. accept the appointment as an auditor in 60 private companies having paid-up
share capital less than ₹100 Cr. which has not committed default in filing its financial statements under
section 137 or annual return under section 92 of the of the Companies Act with the Registrar, 2 small
companies and 1 dormant company?
41. Would your answer be different, if out of those 60 private companies, 45 companies are having paid-up
share capital of ₹110 crore each?

Ans:
(i) Remaining number of Audits available to the Firm = 40
(ii) CA. A can hold: 20 - 4 = 16 more audits. CA. B can hold 20 - 6 = 14 more audit. CA. C can hold 20 -10 =
10 more audits.
(iii) M/s MENTAL & Co. can hold appointment as an auditor in all the 60 private companies having paid-
up share capital less than ₹100 crore, 2 small companies and 1 dormant company as these are excluded
from the ceiling limit of company audits given under section 141(3)(g) of the Companies Act, 2013.
(iv) M/s MENTAL & Co. can also accept the appointment as an auditor for 2 small companies, 1
dormant company, 15 private companies having paid-up share capital less than ` 100 crore and 40
private companies having paidup share capital of ₹110 crore each in addition to above 20 company
audits already holding.

42. PEEKEV and Co. is an audit firm with P and Q as partners. For the financial year 2018-19, the firm has
been appointed as statutory auditor of M/s Mango Orchards Hotel Ltd. The audit firm is a regular
customer of the hotel and the partners usually stay in the same hotel at various locations in the course
of travelling for their various professional assignments. Normally, payments for such stay are settled
against quarterly bills raised by the company. Give you comment with respect to the Companies Act,
2013.

Ans: Sec. 141(3)(e) read with Rule 10 of Companies (Audit and Auditor’s) Rules, 2014. No
disqualification arises as the services availed are in ordinary course of business of client and cannot be
considered as business relationship.

43. What are the steps to be taken by a firm of Chartered Accountant to ensure that its appointment as
Statutory Auditor of a Company is valid?

Ans: Ensure compliance of Ceiling limit, verify resolution for appointment, compliance of Sec. 139 &
140, compliance of code of conduct.

44. M/s PUSHPA and Co., a firm of Chartered Accountants, comprising of three partners A, B, and C are
Statutory Auditors of 50 Companies as per details given below:
(i) Small Companies - 10
(ii) Private Companies having paid up share capital of less than ₹100 Crores – 20
(iii) Private Companies having paid up share capital of more than ₹100 Crores – 15
(iv) Public Companies – 5 Mr. A signs the Balance Sheet of 10 Small Companies and 10 Private
Companies having paid up share capital of less than ₹100 Crores. Mr. B signs the Balance Sheet of 10
Private Companies having paid up share capital of less than Rs. 100 Crores and 5 private Companies
having paid up share capital of more than ₹100 Crores. Mr. C signs the Balance Sheet of 10 Private
Companies having paid up share capital of more than ₹100 crores and 5 Public Companies. What is the
maximum number of audits that the firm as a whole can accept and what is the maximum number of
audits each individual partner can accept?

Ans: Firm can accept 40 more audits of Public companies and private companies having paid up capital
of more than ₹100 Crores. Audit of Small companies and private companies having paid up share

Page No. 43
 capital less than ₹100 cr. are not considered for the purpose of ceiling. Partner A can accept 20 audits
of Public companies and private companies having paid up capital of more than ₹100 Crores. Partner B
can accept 15 audits of Public companies and private companies having paid up capital of more than
₹100 Crores. Partner C can accept 5 audits of Public companies and private companies having paid up
capital of more than ₹100 Crores. Audit of Small companies and private companies having paid up
share capital less than ₹100 cr. are not considered for the purpose of ceiling.

45. TAGGEDELE & Co. a firm of Chartered Accountants has three partners, K, B & C; K is also in whole time
employment elsewhere. The firm is offered the audit of ABC Ltd. and is already holding audit of 40
companies. Comment

Ans: TAGGEDELE & Co. can’t accept the offer for audit of ABC Ltd.

46. JAFFA & Co. Chartered Accountants is an audit firm having two partners CA K and CA Y. JAFFA & Co. is
already holding appointment as auditors of 36 public companies. JAFFA & Co. seeks your advice in the
following situations:
(i) JAFFA & Co. has been offered the appointment as Auditors of 7 more Private Limited Companies. Of
the seven, one is a company with a paid-up share capital of 150 crores, five are “small companies” as
per the Act and one is a “Dormant Company”.
(ii) Would your answer be different, if out of those 7 Private Companies, 3 Companies have paid up
capital of ` 90 crores each?

Ans: Sec. 143(3)(g)

(i) JAFFA & Co. can accept audit of all 7 Private companies, because 5 small companies and one
dormant company will not be considered for the purpose of ceiling limit. Total number of audit after
acceptance of all seven audits remains at 37.
(ii) Answer will remain same, as the private companies having paid up capital less than 100 Crores are
not considered for the purpose of ceiling limit. Total number of audit after acceptance of all seven
audits remains at 40 assuming that other four companies having paid up capital in excess of ` 100
Crores.

47. CA. G, was appointed by DP Ltd., as Statutory Auditor. While doing the audit of DP Ltd., CA. G observed
that certain loans and advances were made without proper securities; certain trade receivables and
trade payables were adjusted inter se; and personal expenses were charged to revenue. As a company
auditor comment on the reporting responsibilities of CA. G.

Ans: Sec. 143(1) – Inquiry into Propriety Matters

48. As an auditor, how would you deal with the following: In the audit of ABC Private Limited, auditor
came across cases of payments to Directors, whereby, expenses of a personal nature were re-
imbursed.

Ans: Sec. 143 (1)

49. Director of T Ltd. draws an advance of US$ 200 per day in connection with the foreign trip undertaken
on behalf of the company. On his return he files a declaration stating that entire advance was
expended without any supporting or evidence. T Ltd. books the entire expenses on the basis of such
declaration. As the auditor of T Ltd. how do you deal with this?

Ans: Auditor is required to inquire whether the payment made by the company for the foreign trip is
personal expense or not and collect the necessary supporting evidences. If it appears to be personal

Page No. 44
 expense, auditor is required to ascertain whether such expense is properly authorized or not. If not
authorized, auditor should state the matter in his report.

50. What are the statements of facts that an auditor has to report u/s 143 of the Companies Act, 2013.

Ans: Section 143(3) – Long answer.

51. The auditor of X Ltd. did not report on the matters, specified u/s 143(1) of the Companies Act, 2013, on
which he inquired into, because of the reason that he was satisfied. But the management of the
company wanted the auditor to report on those matters so that the members can also be aware of the
true position of the company. Comment as to whether the auditor is required to report the matters,
specified under the Act, he inquired into and whether the contention of the management is
sustainable.

Ans: The auditor of X Ltd. is correct in non-reporting on the matters specified in Sec. 143(1) of the Act
and hence, the contention of the management is not sustainable.

52. While conducting the audit of a limited company for the year ended 31st March, 2019, the auditor
wanted to refer to the Minute Books. The Board of Directors refused to show the Minute Books to the
auditor.

Ans: In case the directors have refused to produce the Minute Books, the auditor may consider
extending the audit procedure as also consider qualifying his report in any appropriate manner.

53. M/s XYZ & Co., auditors of Goodwill Education Foundation, a recognised non profit organisation feels
that the standards on auditing need not to be applied as Goodwill Education Foundation is a non-profit
making concern.

Ans: In the given case, even though the client is a non-profit oriented entity the SAs shall apply and the
auditor is required to ensure their compliance. In case he fails to discharge his duty he shall be guilty of
professional misconduct.

54. An auditor became aware of a matter regarding a company, only after he had issued his audit opinion.
Had he become aware of the same prior to his issuing the audit report, he would have issued a
different opinion.

Ans: It will be advisable for the auditor to attend the meeting with a view to bringing to the notice of
the shareholders the matter which came to his knowledge subsequent to his signing the report and
perform procedures are per the requirement of SA 560.

55. Y, is the auditor of X Pvt. Ltd. In which there are four shareholders only, who are also the Directors of
the company. On account of bad trade and for reducing the expenses in all directions, the directors
asked Y to accept a reduced fee and for that he has been offered not to carry out such full audit as he
has done in the past. Y accepted the suggestions of the directors.

Ans: Y, should not accept the suggestions of the directors regarding the scope of the work to be done. If
he accepts the suggestions of the directors regarding the scope of work to be done, it would not reduce
his responsibility as an auditor under the law and he will be violating the provisions of the Companies
Act, 2013.

Page No. 45
56. Mr. Rajendra, a fellow member of the Institute of Chartered Accountants of India, working as
Manager of Shrivastav and Co., a Chartered Accountant firm, signed the audit report of Om Ltd. on
behalf of Shrivastav & Co.

Ans: Mr. Rajendra, a fellow member of the Institute and a manager of M/s Shrivastav & Co., Chartered
Accountants, cannot sign on behalf of the firm in view of the specific requirements of the Companies
Act, 2013.

57. At the Annual General Meeting of the Company, a resolution was passed by the entire body of
shareholders restricting some of the powers of the Statutory Auditors. Whether powers of the
Statutory Auditors can be restricted?

Ans: Any resolution restricting the scope of statutory right of auditor even if passed by entire body of
shareholders is ultra vires and therefore void.

58. The members of C. Ltd. preferred a complaint against the auditor stating that he has failed to send the
auditors report to them.

Ans: Auditor cannot be held liable for the failure to send the report to the shareholders.

59. What are the duties of an auditor regarding disqualifications of directors under section 164(2) of
Companies Act, 2013.

Ans: Section 143(3)(g)

60. The Board of Directors of a company have filed a complaint with the ICAI against their statutory
auditors for their failing to attend the AGM of the Shareholders in which audited accounts were
considered.

Ans: Complaint filed by the Board of Directors is valid if the auditor was not being exempted by the
company.

61. One of the directors of Hitech Ltd. is attracted by the disqualification under Section 164(2) of the
Companies Act, 2013.

Ans: The auditor shall state in his report as per Sec. 143 about the disqualification of the particular
director.

62. Mr. X, a Director of M/s KP Private Ltd., is also a Director of another company viz., M/s GP Private
Ltd., which has not filed the financial statements and annual return for last three years 2016-17 to
2018-19. Mr. X is of the opinion that he is not disqualified u/s 164(2) of the Companies Act, 2013, and
auditor should not mention disqualification remark in his audit report.

Ans: In this case, Mr. X is a director of M/s KP Private Ltd. as well as of M/s GP Private Ltd., And, M/s
GP Private Ltd. has not filed the financial statements and annual return for last three years. Hence the
provisions of section 164(2) are applicable to him and as such he is disqualified from directorship of
both the companies. Therefore, the auditor shall report about the disqualification u/s 143(3)(g) of the
Companies Act, 2013.

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63. The auditor report of company states that proper books of accounts as required by law have been
maintained by the company. What is the role of statutory auditor of the company, when a company
be said to have not maintained proper books of account?

Ans: Section 143(3) of Companies Act 2013.

64. Contravene Ltd. appointed CA Innocent as an auditor for the company for the current financial year.
Further the company offered him the services of actuarial, investment advisory and investment
banking which was also approved by the Board of Directors

Ans: The auditor is advised not to accept the services as these services are specifically notified in the
services not to be rendered by him as an auditor as per section 144 of the Act.

65. You have been appointed statutory auditor of a company for the financial year ended 31st March,
2019 in place of the retiring auditor. During the course of audit, you observe that a fraud had been
committed by a general manager who retired in March 2019. While going into further details, it was
found that the fraud was going on since last 2-3 years and the total amount misappropriated was
likely to exceed ₹100 lakhs. As statutory auditor, what would be your reporting responsibilities to the
government?

Ans: Sec. 143(12) of Companies Act, 2013 and Rule 13

66. RX Ltd. is a sugar manufacturing company. The company appointed Mr. Suresh, a practicing cost
accountant, to conduct cost audit of its cost records under section 148 of the Companies Act, 2013.
While conducting audit, Mr. Suresh found some misstatement resulting into fraud committed by the
officers of the company amounting ₹1.5 crore. However, he did not report the matter to the Central
Government believing that liability for such reporting lies only with statutory auditor of the company.
Advise.

Ans: Sec. 143(12) & 143(14). Mr. Suresh failed to perform his duties.

67. Auditor’s Right of Lien as per Companies Act, 2013

Ans: In respect of auditor exercising the lien, The Institute of Chartered Accountants of England and
Wales has expressed a similar view subject to the following conditions:
(i) Documents must belong to the client who owes the money,
(ii) These documents must have come to the possession of the auditor on the client’s authority.
(iii) The auditor can retain such documents, only if he has done work on such documents, on which fees
have not been paid.

68. Bahubali Ltd. is a top bahubali manufacturer and exporter in India operating from Noida Specific
Economic Zone, Uttar Pradesh. Its revenue from sale/export for the preceding year is given below:
Sale within India ₹ 1157 lakhs
Sale outside India (Export) ₹ 1353 lakhs
Total Revenue ₹ 2510 lakhs
Mr. X, the statutory auditor of Bahubali Ltd., is of the view that the company is mandatorily required
to include cost records in their books of account and consequently conduct cost audit. He also
suggested the name of his friend, who is a Cost Accountant in Practice, for the purpose of such cost
audit. However, the management is of the view that the company neither required including cost
records in their books of account nor conduct cost audit. Comment.

Page No. 47
 Ans: Applying Rule 3 and 4 of Companies (Cost Records and Audit) Rules, 2014, company is neither
required to maintain cost records nor requires cost audit.

69. KATTAPPA Ltd. having place of business in Delhi, is engaged in the production, trading, import and
export of orthopaedic implants and pacemaker. The company’s revenue from export is usually in
foreign currency. Its total revenue classification for the immediate preceding financial year is as
below:
Intra-state Sale ₹ 1400 lakhs
Inter-state Sale ₹ 1550 lakhs
Export to US ₹ 4900 lakhs
Export to UK ₹ 6900 lakhs
Total Revenue ₹ 14750 lakhs
The management of the company is of the opinion that the company is not required to maintain cost
records in their books of accounts. Consequently, there is no need to appoint cost auditor and
conduct cost audit. Comment.

Ans: KATTAPPA Ltd. is required to include cost records in their books of account in accordance with
Rule 3 of the Companies (Cost Records and Audit) Rules, 2014.
However, the company is not required to conduct cost audit as its revenue from exports, in foreign
exchange, exceeds 75 per cent of its total revenue.

70. X Ltd. is engaged in the production of Iron and Steel. A CA Firm ‘M/s M & Co.’ was appointed as the
statutory auditor of X Ltd. for the current financial year. During the year, the management of the
company realized that the company is required to maintain cost records in their books of account and
get it audited. Therefore, in a general meeting, the members of the company appointed M/s M & Co.
as the cost auditor of the company. You are required to examine the validity of appointment of M/s M
& Co. as the cost auditor.

Ans: Appointment is not valid as a CA firm cannot be appointed as cost auditor. As per Sec. 148(3) of
Companies Act, 2013 read with Rule 6 of Companies (Cost Records and Audit) Rules, 2014, cost audit
shall be conducted by a Cost Accountant appointed by BOD.

71. Electro Ltd. is engaged in generation of electricity for captive consumption through Captive
Generating Plant. The Company also maintain cost records in their books of account as required under
Cost Records and Audit Rules. Mr. X, friend of Managing Director of the company, suggested name of
his brother, who is a Cost Accountant in Practice, for the purpose of cost audit. However, the
statutory auditor of the company, is of the view that the company is not legally required to conduct
cost audit. Now, the Managing Director is in dilemma about the requirement of cost audit.
Being an expert in cost records and audit rules, you are required to guide in this regard.

Ans: Electro Ltd. is not required to conduct cost audit as it is falling under the exemption criteria under
Rule 4 of Companies (Cost Records and Audit) Rules, 2014.

72. On 30.08.2019, the Board of SRE Ltd. proposed to appoint Mr. Elex, a Cost Accountant in practice, for
conducting cost audit for the financial year 2019-20. The management came to know about the
certificate which needs to be obtained from the auditor before such appointment is made. However,
the management is unaware about what certification is required from the auditor. Please guide.

Ans: The Cost Auditor appointed shall submit certificate that-

Page No. 48
 (a) the individual or the firm, as the case may be, is eligible for appointment and is not disqualified for
appointment under the Act, the Cost and Works Accountants Act, 1959 and the Rules or regulations
made there under.
(b) the individual or the firm, as the case may be, satisfies the criteria provided in Sec. 141, so far as
may be applicable.
(c) the proposed appointment is within the limits laid down by or under the authority of the Act.
(d) the list of proceedings against the cost auditor or audit firm or any partner of the audit firm pending
with respect to professional matters of conduct, as disclosed in the certificate, is true and correct.

73. Pearl Ltd. is an exporter of precious and semi-precious stones. The turnover of the company is Rs. 150
crores, out of which Rs. 105 crores are from export business and remaining Rs. 45 crores from
domestic sales. Amount received from export business is all in foreign currency. Directors of Pearl Ltd.
is of the opinion that cost audit is not applicable to their company as maximum revenue has been
generated from export business. Give you opinion.

Ans: Rule 4 of Companies (Cost records and Audit) Rules, 2014. As revenue from exports does not
exceeds 75% of total revenue, hence exemption from cost audit is not available.

74. As a Statutory Auditor, how would you deal with the following: P Ltd. of whom you are the Statutory
Auditor appoints M/s XYZ as Branch Auditors for one of its branches. M/s XYZ conducted the audit of
the branch without visiting the branch and instead getting the books at the H.O. M/s XYZ has
submitted their Branch Audit Report to you.

Ans: The statutory auditor is required to deal with branch auditor’s report in the manner it considers fit
under the circumstances.

75. X Ltd. has a branch office in Malaysia. The company has appointed Mr. X, who is qualified to audit
accounts as per Malaysian laws. Mr. Z, the statutory auditor objects to the same, contending that he
alone can audit the branch office accounts. Discuss.

Ans: Mr. Z contention that he alone can audit the branch office accounts is not valid.

76. Bhishm Limited decided to appoint Mr. Rajvir, chartered accountant, as the branch auditor for the
audit of its Lucknow branch accounts for the year 2018-19. The decision to appoint branch auditor was
taken by way of Board Resolution in the meeting of Board of Directors of the company, held in April
2018, subject to shareholders’ approval in AGM of the company scheduled to be held in June 2018.
Meanwhile, the Principal Auditor of the company raised an objection that the branch auditor cannot
be appointed without his consent. Advise, whether the objection raised by company auditor is valid.

Ans: Objection raised by company auditor is not valid and the Board has authority to appoint branch
auditor but should be approved by shareholders in General Meeting.

77. M/s. Seeman & Co. had been the company auditor for Amudhan Company Limited for the year 2018-
19. The company had three branches located at Chennai, Delhi and Mumbai. The audits of branches-
Chennai, Delhi were looked after by the company auditors themselves. The audit of Mumbai branch
had been done by another auditor M/s Vasan & Co., a local auditor situated at Mumbai. The branch
auditor had completed the audit and had given his report too. After this, but before finalization, the
company auditor wanted to visit the Mumbai branch and have access to the inventory records
maintained at the branch. The management objects to this on the grounds of the company auditor is
transgressing the scope of audit areas agreed. Comment.

Page No. 49
 Ans: Management’s objection that the company auditor is transgressing the scope of audit areas
agreed, is absolutely, wrong. The right of company auditor in visiting and accessing the records of
branch can not be forfeited. Even where the branch accounts are audited by another local auditor, the
company auditor has right to visit the branch and can have access to the books and vouchers of the
company maintained at the branch office.

78. A Ltd. is a Chennai based company. The total turnover of the company is ₹10 crores for the year 2018-
19. The company has a branch office at an area which was recently affected by flood. The
transportation services are not available due to destruction caused by flood. The branch office
recorded turnover of ₹1,50,000 in the Financial Year 2018-19. No audit of branch has been carried out.
The statutory auditor of the company has made no reference of the above branch in his report.
Comment.

Ans: Auditor is required to state the fact in his report and deal appropriately

79. Lakshya Ltd. has a branch office located outside India. Company is in the process of appointment of
non-Chartered Accountant as an auditor but otherwise qualified person from country where the
branch office is situated. Statutory auditor is of the opinion that non-Chartered Accountant cannot be
appointed as branch auditor. Comment.
You are also required to discuss the applicability of SA 600 using the work of another auditor by the
head office auditor in regard to branch located outside India, if non-Chartered Accountant is
appointed.

Ans: Opinion of statutory auditor is wrong

80. MKc LLP is a newly set up LLP (Limited Liability Partnership). The operations of the LLP have been
picking up and management is currently in the process of setting up processes and procedures in
place. As per the understanding of the management of the LLP, its accounts would not be required to
be audited mandatory because of its operations but still the management has decided that they
would get the accounts audited voluntarily. In this regard, the management would like to understand
some of the aspects which they should consider not only limited to audit but also about the
maintenance of books of accounts as per the relevant laws. Please advise.

Ans: Maintenance of books of account, other records and audit, etc – Sec. 34 of LLP Act, 2008

81. X Ltd. issued 10,000 shares of face value of ₹10 each at a premium of ₹450 each in May, 2019. The
company received the stated minimum amount in the prospectus and transferred a sum equal to the
aggregate amount of the premium received on shares (i.e. ₹45 lakhs) to the ‘Securities Premium
Account’. Unfortunately, in the month of July, the godown of the company caught fire and stock
worth ₹40 lakhs burnt to ashes. Now, the management desires to adjust the loss due to fire against
the said premium account. Comment.

Ans: X Ltd. is not permitted to adjust its loss against the securities premium account by virtue of
provisions of Section 52 of Companies Act, 2013.

82. Mr. X is a whole-time director of Manthan Ltd. who has a very good relation with the Director
(Operations) of the company. Consequently, he entered into a purchase contract for supply of goods
of ₹5,00,000 with the company without obtaining prior consent of the Board. What is the
responsibility of the auditor in relation to the Companies Act, 2013?

Ans: Auditor is required to ensure compliance of Section 184, 188 & 189 of Companies Act 2013.

Page No. 50
83. Mr. X, Director of ABC Ltd. made a purchase contract for ₹10,00,000 with the company. Comment.

Ans: Auditor is required to ensure compliance of Section 184, 188 & 189 of Companies Act 2013. In case
of any violation, auditor is required to state the fact in his audit report accordingly

84. M/s IT Limited has prepared the financial statements for the year 2017-18 and mentioned in the
significant accounting policies that depreciation on tangible fixed assets is provided on the straight-
line method over the useful lives of the assets as estimated by the management. The company has
ignored the useful lives of assets mentioned in Schedule II of the Companies Act, 2013. As statutory
auditor of the company how would you deal with this?

Ans: Company may use different useful lives, but disclosure is required in financial statements with
justification supported by technical advice.

85. Beneath Minerals Limited is a Public-Sector company engaged in extraction of minerals from land. It
has to pump out water in the first layer of the soil if the minerals are to be excavated. The company
pumps out water and diverts the water through a water course constructed by it to nearby villages
and the water is allowed to be used by villagers for drinking purposes. The cost of construction of
water course amounted to ₹5.25 crores and the company had disclosed this amount as CSR expenses
in the statement of profit and loss. Comment.

Ans: Though expenditure incurred in arranging drinking facilities qualifies as CSR expense, but any
expenditure incurred in the normal course of business activity is not classified as CSR Expense. In the
present case, pumping out the water is an essential part of business activity and for its disposal, a
water course is being constructed. So, expenditure cannot be classified as CSR Expense and hence
auditor should state the fact in the report and qualify the report.

Page No. 51
 6B LIABILITIES OF AUDITOR

1. Indicate the precise nature of auditor’s liability for a misstatement that had occurred in the prospectus
issued by the company.

ANSWER: If an auditor of a company contravenes any of the provisions of Sec. 139, Sec. 143, Sec. 144
or Sec. 145, the auditor shall be punishable with fine which shall not be less than ₹25,000 but which
may extend to ₹5 Lacs or four times the remuneration of auditor whichever is less.
If auditor has contravened such provisions knowingly or willfully with the intention to deceive the
company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment
for a term which may extend to one year and with fine which shall not be less than ₹50,000 but which
may extend to ₹25 Lacs or 8 times the remuneration of auditor whichever is less.
Where an auditor has been convicted u/s 147(2), he shall be liable to (i) refund the remuneration
received by him to the company; and (ii) pay for damages to the company, statutory bodies or
authorities or to members or creditors of the company for loss arising out of incorrect or misleading
statements of particulars made in his audit report.

2. Mr. Arjun, a newly qualified Chartered Accountant started his practice wants to specialize in Audits of
corporate and required your advice on criminal liabilities of an auditor under the Companies Act, 2013.
Kindly guide him.

ANSWER: Section 34, 447 and 448 of Companies Act, 2013.

3. A Chartered Accountant in practice has been appointed as an auditor of a company which raised
finance from the capital market on the basis of a prospectus issued a few years back. The main object
for raising the finance was specified to be setting up a project on information technology. The company
advanced the sum so raised to various firms and private companies in which the directors of the
company were a partner or a director respectively. These parties had no standing whatsoever with
information technology. In the Balance Sheet, these advances appeared as a current asset under the
head “Short-term Loans and Advances – unsecured, considered good”. There was no mention to the
notes to accounts about nature and purpose of such advances; and the auditor has issued routine audit
report without any qualifications. On the very next day to the issuance of audit report, the directors
and their related parties gone disappeared. The company, in which the auditor was conducting audit,
has just vanished. You are required to state whether the auditor will be held guilty for professional
misconduct? Is there any liability subsists under any law?

ANSWER: Auditor is guilty of professional misconduct under Clause 7 of part I of Second Schedule to CA
Act, 1949 and is also liable to be punished u/s 147 of Companies Act 2013, due to non-observance of
compliance of Schedule III and Section 184, 188 and 189 of Companies Act 2013.

4. Indicate the precise nature of auditor's liability in the following situation: Certain weaknesses in the
internal control procedure in the payment of wages in a large construction company were noticed by
the statutory auditor who in turn brought the same to the knowledge of the Managing Director of the
company. In the subsequent year huge defalcation came to the notice of the management. The origin
of the same was traced to the earlier year. The management wants to sue the auditor for negligence
and also plans to file a complaint with the Institute.

Page No. 52
 ANSWER: The statutory auditor, by bringing the weakness to the notice of the managing director had
alerted the management which is judicially held to be primarily responsible for protection of the assets
of the company and can put forth this as defence against any claim arising subsequent to passing of the
information to the management.

5. Indicate the precise nature of auditor's duties in the following situation: Based upon the legal opinion
of a leading advocate, X Ltd. made a provision of Rs. 5 crores towards Income Tax liability. The
assessing authority has worked out the liability at Rs. 15 crores. It is observed that the opinion of the
advocate was inconsistent with legal position with regard to certain revenue items.

ANSWER: Auditor should reject the opinion and insisted upon making proper provision.

6. State the nature of liability as provided in the Companies Act, 2013 of an auditor for not appropriately
dealing with a misstatement appearing in audited financial statements or a false statement in Audit
Report.

ANSWER: Sec. 448 and 447 of Companies Act, 2013.

7. In assessment procedure of M/s Cloud Ltd., Income Tax Officer observed some irregularities.
Therefore, he started investigation of Books of Accounts audited and signed by Mr. Old, a practicing
Chartered Accountant. While going through books he found that M/s Cloud Ltd. used to maintain two
sets of Books of Accounts, one is the official set and other is covering all the transactions. Income Tax
Department filed a complaint with the Institute of Chartered Accountants of India saying Mr. Old had
negligently performed his duties. Comment.

ANSWER: As Mr. Old, performed the auditing with due skill and diligence; and, therefore, no question
of negligence arises. It is the duty of the Department to himself investigate the truth and correctness of
the accounts of the assessee.

8. Write a short note on - Auditor’s liability in case of unlawful acts or defaults by clients.

ANSWER: Clause 1, Part I of Second Schedule of Chartered Accountants Act, 1949

9. What are the liabilities of a Chartered Accountant under Income Tax Act, 1961 for furnishing an
incorrect statement in any report or certificate required to be submitted by him under the Act?

ANSWER: Sec. 278 and 271J of Income Tax Act, 1961.

10. Explain the liability of the auditor under section 35 of the Companies Act, 2013, for making an untrue
statement in the report (as an expert forming a part of the prospectus).

ANS. Civil liability for mis−statement in prospectus under Section 35 of the Companies Act, 2013

11. Certain weaknesses in the internal control procedure in the payment of wages in a large construction
company were noticed by the statutory auditor who in turn brought the same to the knowledge of the
Managing Director of the company. In the subsequent year huge defalcation came to the notice of the
management. The origin of the same was traced to the earlier year. The management wants to sue the
auditor for negligence and also plans to file a complaint with the Institute.

ANs. (SA 265) As long as the auditor took due care in performing the audit work, he cannot be held liable.
The fact that the matter was brought to the notice of the managing director may be a good defence for
the auditor as well. As per case law Re Kingston Cotton Mills Ltd., (1896) it is the duty of the auditor to
Page No. 53
probe into the depth only when his suspicion is aroused. The statutory auditor, by bringing the weakness
to the notice of the managingdirector had alerted the management which is judicially held to be primarily
responsible for protection of the assets of the company and can put forth this as defence against any
claim arising subsequent to passing of the information to the management.

Page No. 54
 6C CARO, 2020

1. ABC Pvt. Ltd. is a holding company of XYZ ltd. Whether CARO is applicable to ABC Pvt. Ltd.?

ANSWER: CARO is applicable.

2. ABC Pvt. Ltd. is a holding company of XYZ ltd. Whether CARO is applicable to ABC Pvt. Ltd.?
Or
Astha Pvt. Ltd. has fully paid capital of ` 140 lakhs. During the year, the company had borrowed ` 15
lakhs each from a bank and a financial institution independently. It has the turnover (Net of excise ` 50
lakhs which is credited to a separate account) of ` 475 lakhs. Will Companies (Auditor’s Report) Order,
2020 be applicable to Astha Pvt. Ltd.?

Ans: CARO is applicable.

Provision: The Companies (Auditor’s Report) Order, 2020, exempts private limited companies, not
being a subsidiary or holding of a public company, from its application which fulfils all the following
conditions:
(i) its paid-up capital and reserves are not more than ` 1 Cr. as on Balance Sheet date, and
(ii) its total borrowings any bank or financial institution are not more than ` 1 cr. at any point of time
during the financial year; and
(iii) its total revenue as disclosed in Schedule III (including revenue from discontinuing operations) does
not exceed ` 10 Cr. during the financial year as per the financial statements.

3. E-Tech Pvt. Ltd., which has an aggregate outstanding loan of ₹20 lakhs from Banks and ₹30 lakhs from
Financial Institutions, defaulted in repayment thereof to the extent of 50%. The company holds that it
being a private limited company, the Companies (Auditor’s Report) Order, 2020 is not applicable. You
are required to state the list of companies to which CARO is not applicable and state how would you
deal with the given situation as an auditor of the company.

Ans: Contention of the E Tech Pvt. Ltd., is correct that CARO, 2020 will not be applicable on it as
outstanding loan from banks and financial institution in aggregate does not exceeds ₹1 Cr.

4. A Private limited company reports the following position as on 31st March, 2021: Paid up capital 60
Lacs Revaluation reserves 20 Lacs Capital reserves 22 Lacs P & L A/c (Dr. Balance) 4 Lacs. The
management of the company contends that CARO, 2020 is not applicable to it.

Ans: As per Guidance Note on CARO, 2020 issued by ICAI, while computing paid up capital and reserves,
capital reserves, revenue reserves, revaluation reserves and credit balance of Profit and loss account are
to be considered in aggregate as reduced by debit balance in the profit and loss account, if any. CARO is
not applicable as paid-up capital and reserves does not exceed `1 Cr.

5. T Pvt. Ltd.’s paid up Capital & Reserves are less than ₹1 Cr. and it has no outstanding loan exceeding ₹1
cr. from any bank or financial institution. Its sales are ₹12 Crores before deducting Trade discount ₹20
lakhs and Sales returns ₹.90 Cr. The services rendered by the company amounted to ₹20 lakhs. The
company contends that reporting under Companies Auditor’s Reports Order (CARO) is not applicable.
Discuss.

Page No. 55
 Ans: here, the turnover of the company amounts to ` 10.10 crores (i.e. 12 - 0.20 – 1.90 + 0.20 crore).
Hence, the Contention of the company that CARO is not applicable is not correct, as revenue of the
company as per Schedule III including value of service rendered, after deducting trade discount and
sales returns amounts to ₹10.10 Cr and it exceeds rs 10 cr.

6. A Pvt. Ltd. is incorporated on 1st July, 2019. During the year ended 31st March, 2020, it had issued
shares (fully paid up) of Rs. 80 lakhs, had borrowed Rs. 60 lakhs each from 2 financial institutions and
its turnover (Net of excise Rs. 100 lakhs which is credited to a separate account) is Rs. 950 lakhs. Will
Companies Auditors Report Order, 2020 (CARO) be applicable to A Pvt. Ltd.?

Ans: Since total borrowings do not exceed ` 100 lakhs during the year, reporting under CARO is not
required. Hence, A Pvt. Ltd. is not correct in its contention, as the total borrowings exceeds Rs. 1 Cr.,
hence reporting under CARO, 2020 will be required.

7. L Private Ltd., which has outstanding loan of more than Rs. 100 lakhs from Financial Institution
defaulted in repayment thereof to the extent of 50%. The company holds that it being a private limited
company, the Companies Auditors Report Order (CARO) is not applicable.

Ans: Since the total borrowings exceed ` 100 Lakhs out of which company defaults in repayment to the
extent of 50%. As borrowings exceeds ` 1 Cr. during the year, reporting under CARO is required.
Contention of L Pvt. Ltd. is not correct and the auditor is required to report the period and amount of
default in repayment of dues under Para 3(viii) of CARO, 2020.

8. X Pvt. Ltd. is a subsidiary of a listed entity. The management of the company believes that since X Pvt.
Ltd. is a private company and satisfies all conditions under CARO 2020, reporting under CARO is not
applicable.

Ans: M/s X Pvt. Ltd. is a subsidiary of a listed entity and its management believes that the company
satisfies all conditions as required under CARO, 2020. CARO is applicable as exemption is not available
to a private company which is a subsidiary or holding of a public company.

9. H Private Ltd had taken overdrafts from two banks with a limit of ₹40 lacs each against the security of
fixed deposit it had with those banks and an unsecured overdraft from a financial institution of ₹36
lacs. The said loans were outstanding as at 31st March 2020. The paid-up capital and reserves of the
company as at that date was ₹80 lacs and its revenue for the financial year ended on 31st March 2020
was ₹6 crores. The management of the company is of the opinion that CARO, 2020 is not applicable to
it because turnover and paid up capital were within the limits prescribed and loans taken against the
fixed deposits cannot be considered. The company further contended that loan limit is to be reckoned
per bank or financial institution and not cumulatively. Comment.

Ans: (While computing total borrowings from banks and financial statements, loans against Fixed
deposits are to be taken into consideration. Further loans from banks and financial institutions are to be
taken cumulatively not individually.) The contention of the company is not correct as total borrowings
exceeds ₹1 cr., hence reporting under CARO, 2020 will be required.

10. Whether CARO is Applicable to the auditor of consolidated financial statement?

Ans: CARO shall not apply to consolidated financial statements. This is done to avoid repetitive
information in annual report. Further CARO is designed for individual companies and not for group as a
whole.

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11. A Private Limited Company reports the following position as on 31st March, 2021: Paid up Capital ` 70
Lacs Revaluation Reserve ` 24 Lacs Capital Reserve ` 20 Lacs Profit & Loss (Dr.) Balance ` 24 Lacs The
Management of the Company contends that CARO, 2020 is not applicable to it. Comment.

Ans: Since paid-up capital and reserves does not exceed ` 1 Cr. CARO is not applicable.

12. Evolution Pvt. Ltd. borrowed a sum of 110 lakh from Banks and Financial Institutions, subsequently,
the company defaulted in repayment of its loans, to the extent of 50%. The management of the
company contends that that it being a private limited company, the Companies (Auditor’s Report)
Order [CARO], 2020 is not applicable. You are required to state the list of companies to which CARO is
not applicable and state whether it will be applicable on Evolution Pvt. Ltd.

Ans: CARO, 2020 will be applicable on Evolution Pvt. Ltd. And auditor is required to report the period and
amount of default in repayment of dues under clause (viii) of Para 3 of CARO, 2020.

13. Ansh Pvt. Ltd. is a private limited company, not being a subsidiary or holding company of a public
company, having fully paid capital and reserves and surplus of 50 lakh. During the financial year, the
company had borrowed 80 lakhs from a financial institution. It has the revenue of 8 crore from normal
operations and 3 crores from discontinuing operations as disclosed in Scheduled III to the Companies
Act, 2013. Will Companies (Auditor’s Report) Order, 2020 (CARO, 2020) be applicable to Ansh Pvt. Ltd.?

Ans: Ansh Pvt. Ltd. is a private limited company, not being a subsidiary or holding company of a public
company. It has paid capital and reserves and surplus of 50 lakh i.e. less than 1 crore, outstanding loan of
80 lakh i.e. less than 1 crore. However, it has total revenue of 11 crore ( 8 crore from normal operations +
3 crore from discontinuing operations) i.e. exceeding 10 crore as disclosed in Scheduled III to the
Companies Act, 2013. CARO, 2020 will be applicable to Ansh Pvt. Ltd.

14. As the statutory auditor, what are the audit procedures to be followed and what is the reporting under
CARO, 2020 for the following:
ABC Ltd. owns a piece of Land and Building situated at IP road, Mumbai which was purchased before
30 years. The title deeds for the same are deposited with State Bank of India for obtaining credit
facilities by the company.

Ans: Para 3(i)(c) of CARO, 2020 requires the auditor to comment whether the title deeds of all the
immovable properties (Other than properties where the company is the lessee and the lease agreements
are duly executed in favour of the lessee) disclosed in the financial statements are held in the name of
the company

15. The Property, Plant and Equipment of Amir Ltd. included Rs.25.75 crores of earth removing machines
of outdated technology which had been retired from active use and had been kept for disposal after
knock down. These assets appeared at residual value and had been last inspected ten years back. As an
Auditor, what may be your reporting concern in view of CARO, 2020 on matters specified above.

Ans: Inspection of machines was done 10 years back, is not in compliance with CARO, 2020.
Hence, this fact needs to be disclosed in the Audit Report as per clause (i) (a) and (b) of Paragraph 3 of
CARO 2020. Auditor is required to state the fact about discrepancies in system of physical
verification of machineries held for disposal

16. X Ltd. closed its manufacturing operations and sold all its manufacturing fixed assets during the
financial year ended 31st March, 2021. However, it intends continue its operations as a trading
company. In respect of other fixed assets, the company carried out a physical verification as at the end

Page No. 57
 of 31st March, 2021 and found a material discrepancy to the tune of ` 1 lac, which was written off and
is disclosed separately in the profit and loss account. Kindly incorporate the above in your audit
report.

Ans: Para 3(i) of CARO, 2020, and, SA 570 “Going Concern” requires the auditor to perform appropriate
procedures so as to ensure appropriateness of going concern assumption.
Hence, reporting required as follows:
“As per AS-1, “Disclosure of Accounting Policies”, “the enterprise is normally viewed as a going concern,
that is as continuing its operation for the foreseeable future. It is assumed that the enterprise has neither
the intention nor the necessity of liquidation or of curtailing materially the scale of its operations.”
Although the company has disposed of its manufacturing fixed assets during the financial year ending on
31-3-2021, it is still a going concern in the form of a trading company.
We also report that on physical verification of other fixed assets, a material discrepancy to the tune of ` 1
Lac was noticed and that the same has been properly dealt with in the books of account”

17. NSP Limited has its factory building, appearing as fixed assets in its financial statements in the name of
one of its directors who was overlooking the manufacturing activities.

Ans: Para 3(i)(c) of CARO, 2020 requires the auditor to comment whether the title deeds of all the
immovable properties (Other than properties where the company is the lessee and the lease
agreements are duly executed in favour of the lessee) disclosed in the financial statements are held in
the name of the company.

18. CCE Ltd closed its manufacturing operations and sold all its manufacturing fixed assets during the
financial year ended 31st March, 2020. However it intends to continue its operations as a trading
company. In respect of other fixed assets, the company carried out a physical verification as at the end
of 31st March, 2020 and found a material discrepancy to the tune of ` 1 lac, which was written off and
is disclosed separately in the Statement of Profit and Loss. Kindly incorporate the above in your audit
report.

Ans: Selling of manufacturing fixed assets does not affect the going concern assumption of the company.
Additionally, while carrying out physical verification of fixed assets, a material discrepancy to the tune of `
1 lac was found, which was written off and disclosed separately in the Statement of Profit and Loss.
Hence, this fact needs to be disclosed in the Audit Report.

19. The company has advanced a loan to a firm in which a director was interested at a rate lower than the
prevailing market rate as well as there was no agreement on terms of repayment. How auditor will
report in CARO, 2020?

Ans: Pare 3(iii)(f) of CARO, 2020 requires the auditor to report whether the company has granted any
loans or advances in the nature of loans either repayable on demand or without specifying any terms or
period of repayment, if so, specify the aggregate amount, percentage thereof to the total loans granted,
aggregate amount of loans granted to Promoters, related parties as defined in Sec. 2(76) of the
Companies Act, 2013.

20. Explain the audit procedure to be followed by the auditor:

CARO, 2020 requires the auditor of the company to report whether maintenance of cost records has
been specified by the Central Government under section 148 of the Companies Act, 2013 and whether
such accounts and records have been so made and maintained.

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 Ans: Para 3(vi) of CARO, 2020 requires the auditor to comment “whether maintenance of cost records
has been specified by the CG u/s 148(1) of the Companies Act, 2013 and whether such accounts and
records have been so made and maintained”.
“We have broadly reviewed the books of account maintained by the company pursuant to the Rules
made by the Central Government for the maintenance of cost records under section 148 of the Act, and
are of the opinion that prima facie, the prescribed accounts and records have been made and
maintained.”

21. ABC Ltd. has granted a loan of ` 20 crores to its associate XYZ (P.) Ltd. at the beginning of the financial
year and it remain outstanding at the year end. How the auditor should report the fact?

Ans: Para 3(iii) of CARO, 2020

22. As a Company auditor you noticed that there is an inter corporate loan granted by the company. What
are the reporting requirements as regard the matters concerning terms of interest on the inter-
corporate loan?

Ans: As per Para 3(iv) of CARO, 2020, the auditor is required to report, in respect of loans, investments,
guarantees, and security whether provisions of Sections 185 and 186 of the Companies Act, 2013 have
been complied with. If not, provide details thereof.

23. Shahjahan Pvt. Ltd. has submitted the financial statements for the year ended 31-3-13 for audit. The
audit assistant observes and brings to your notice that the company's records show following dues:
Income Tax relating to Assessment Year 2007-08 ` 157 lacs - Appeal is pending before Hon'ble ITAT
since 30-9-10. Customs duty ` 65 lakhs - Demand notice received on 15-9-12 but no action has been
taken to pay or appeal. As an auditor, how would you bring this fact to the members?

Ans: During the audit, the auditor shall remain alert to the possibility that other audit procedures applied
may bring instances of non−compliance or suspected non−compliance with laws and regulations to the
auditor’s attention. If the auditor concludes that the non−compliance has a material effect on the
financial statements and has not been adequately reflected in the financial statements, the auditor shall
express a qualified or adverse opinion on the financial statements.

24. During the course of audit of CT Ltd. for the financial year 2020-17, it has been noticed that Rs. 2.00
lakhs of employee contribution and Rs. 9.50 lakhs of employer contribution towards employee state
insurance contribution have been accounted in the books of accounts in respective heads. Whereas, it
was found that Rs. 4.00 lakhs only have been deposited with ESIC department during the year ended
31st March, 2017. The Finance Manager informed the auditor that due to financial crunch they have
not deposited the amount due but will deposit the amount overdue along with interest as and when
financial position improves. Comment as a statutory auditor.

Ans: In the instant case, even though accrual principles have been followed, disclosure of non−payment is
necessary. The auditor should disclose the fact of non−payment of rupees 7.50 lakhs in his report.

25. Big and Small Ltd. received a show cause notice from central excise department intending to levy a
demand of ` 25 lakhs in December 2014. The company replied to the above notice in January 2015
contending that it is not liable for the levy. No further action was initiated by the central excise
department upto the finalization of the audit for the year ended on 31st March, 2015. As the auditor of
the company, what is your role in this?

Page No. 59
 Ans: On the basis of above facts prima facie, it cannot be said that there exist any dispute. Hence no
reporting required under CARO.
But if the auditor after performing audit procedures is of the opinion that there exist a dispute then as
per AS 29 "Provisions, Contingent liabilities and Contingent Assets", future events that may affect the
amount required to settle an obligation should be reflected in the amount of a provision where there is
sufficient objective evidence that the event will occur.If the auditor concludes that there is non-
compliance, then provision for the same should be made as per AS 29.The auditor should also report the
number of dues not deposited on account of dispute and the forum where dispute is pending, in his audit
report.If the management does not accept the request, the auditor should qualify the audit report
accordingly or vice versa.

26. Under CARO how, as a statutory auditor how would you comment on the following: A Term Loan was
obtained from a bank for ` 75 lakhs for acquiring R&D equipment, out of which ` 12 lakhs were used to
buy a car for use of the concerned director, who was overlooking the R&D activities.

Ans: n our opinion and according to the information and explanations given to us, the Company has
utilized the money raised by the term loans during the year for the purposes for which they were raised,
except for: Nature of the fund Raised, Name of the lender, Amount diverted, Purpose for which amount
was sanctioned, Purpose for which amount was utilised

27. K Ltd. has taken a term loan from a nationalized bank in 2010 for ` 200 lakhs repayable in five equal
instalments of ` 40 lakhs from 31st March 2011 onwards. It had repaid the loans due in 2011 & 2012,
but defaulted in 2013, 2014 & 2015. As the auditor of K Ltd. what is your responsibility assuming that
company has sought re schedulement of loan?

Ans: Since K Ltd. has defaulted in repayment of dues for three years. Application for rescheduling will not
change the default position. So the auditor has to report in his audit report that the Company has
defaulted in its repayment of dues to the bank to the extent of `120 lakhs.

28. PQR Ltd. has not deposited Provident Fund contribution of ` 10 lakhs with the authorities till the year-
end. As an auditor, how would you deal with the situation?

Ans: Para 3(vii)(a) of CARO, 2020 :Non-payment of PF needs to be disclosed by the auditor in his audit
report.

29. XYZ Pvt. Ltd. has submitted the financial statements for the year ended 31-3-2021 for audit.
Income Tax relating to Assessment Year 2017-18 ` 125 lacs – Appeal is pending before Hon’ble ITAT
since 30-09-2020. Customs duty ` 85 lakhs – Demand notice received on 15-9-2020 but no action has
been taken to pay or appeal.

Ans: Para 3(vii)(a) of CARO, 2020 requires the auditor to comment whether the company is regular
in depositing undisputed statutory dues including GST, Provident Fund, Employees State
Insurance (ESI), Income-tax, Sales-tax, Wealth tax, Service tax, Duties of Customs, Duty of Excise,
Value Added Tax, cess and any other statutory dues with the appropriate authorities and if
not, the extent of the arrears of outstanding statutory dues as at the last day of the financial
year concerned for a period of more than six months from the date they became payable shall
be indicated.

30. OK Ltd. has taken a term loan from a nationalized bank in 2020 for ` 200 lakhs repayable in five equal
instalments of ` 40 lakhs from 31st March, 2017 onwards. It had repaid the loans due in 2017 & 2018,

Page No. 60
 but defaulted in 2019, 2020 & 2021. As the auditor of OK Ltd. what is your responsibility assuming that
company has sought re-schedulement of loan?

Ans: The auditor has to report in his audit report that the Company has defaulted in its
repayment of dues to the bank to the extent of ` 120 lakhs, As per Para 3(ix)(a) of CARO, 2020.

31. LM Ltd. had obtained a Term Loan of ` 300 lakhs from a bank for the construction of a factory. Since
there was a delay in the construction activities, the said funds were temporarily invested in short term
deposits.

Ans: Auditor is required to report the fact that the pending utilisation of term loan, the funds are
temporarily invested in short term deposits, in his audit report as per requirement of paragraph 3 (ix)(c)
of CARO, 2020.

32. A Term Loan was obtained from a bank for ` 80 lakh for acquiring R&D equipment, out of which ` 15
lakh was used to buy a car for use of the concerned director who was overlooking the R&D activities.

Ans: Car though used by R&D Director does not fall within the meaning of R&D equipment. The auditor is
required to state the fact in his report, that out of the term loan taken for R&D equipment, ` 15 lakh was
not utilised for the purpose of acquiring R&D equipment.

33. During the financial year ended on 31-3-2021, LM Private Limited had borrowed from a Nationalized
Bank, a term loan of ` 120 lakhs consisting of ` 100 lakhs for purchase of a machinery for the new plant
and ` 20 lakhs for erection expenses. As on the date of 31st March, 2021, the total of capital and free
reserves of the Company was ` 50 lakhs and turnover for the year 2020-21 was ` 750 lakhs. The Bank
paid ` 100 lakhs to the vendor of the Company for the supply of machinery on 31-12-2020. The
machinery had reached the yard of the Company. On 28-2-2021, the Company had drawn the balance
of loan viz. ` 20 lakhs to the credit of its current account maintained with the Bank and utilized the full
amount for renovating its administrative office building. The machinery had been kept as capital stock
under construction. Comment as to reporting issues, if any, that the Auditor should be concerned with
for the financial year ended on 31-3-2021, in this respect.

Ans: As per requirement of Para 3(ix)(c) of CARO, 2020, auditor is required to report the fact that out of
the term loan obtained for machinery purchase and erection, ` 20 Lacs was not utilized for the purpose of
erection of machinery.

34. ABC Pvt. Ltd. is a manufacturer of jewellery. A senior employee of the Company informed you that the
Company does not properly disclose the purity of gold used on the jewellery.
Ans: no reporting is necessary for non-proper disclosure of purity of gold on the jewellery.

35. RNT Ltd. has entered into non-cash transactions with Mr. Ram, son of one of the directors of the
company, which is an arrangement by which the RNT Ltd. is in process to acquire assets for
consideration other than cash. Under CARO, 2020, as a statutory auditor, how would you report?

Ans: Para 3(xv) of CARO, 2020 requires the auditor to comment “whether the company has entered
into any non-cash transactions with directors or persons connected with him and if so, whether
provisions of Section 192 of Companies Act, 2013 have been complied with”.

36. The Internal Auditor of the Company has identified a fraud in the recruitment of employees by the HR
department wherein certain sums were alleged to have been taken as kick-back from the employees

Page No. 61
 for taking them on board with the Company. After due investigation, the concerned HR Manager was
sacked. The amount of such kick-backs is expected to be in the range of ` 12 Lakhs.

Ans: Para 3(xi) of CARO, 2020

”Reporting is required, as a fraud has been identified in recruitment of employees by the HR Department
wherein certain sums were alleged to have been taken as kick-back from the employees of company
amounting to ` 12 Lakhs. approx.

37. An amount of ` 3.25 Lakhs per month is paid to M/s. WE CARE 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 ` 0.25 Lakhs per month. Whilst the transaction was accounted in the financial
statements based on the amounts’ paid, no separate disclosure has been made in the notes forming
part of the accounts highlighting the same as a ‘related party’ transaction.

Ans: Auditor is required to report the matter as per Para 3(xiii) of CARO, 2020 which requires him to
report “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”

38. RPS Ltd. has entered into non-cash transactions with Mr. Rahul, son of director, which is an
arrangement by which RPS Ltd. is in process to acquire assets for consideration other than cash

Ans: RPS Ltd. has entered into non−cash transactions with Mr. Rahul, son of director which is an
arrangement by which RPS Ltd. is in process to acquire assets for consideration other than cash and falls
within the meaning of section 192 of Companies Act, 2013.

Page No. 62
 7 AUDIT COMMITTEE AND CORPORATE GOVERNANCE

1. Write short note on: Corporate Governance.

ANSWER: Corporate Governance is the system by which companies are directed and governed by the
management in the best interests of the stakeholders and others ensuring better management, greater
transparency and timely financial reporting.

2. Enumerate the issues addressed in the SEBI (Listing Obligations and Disclosure Requirements)
Regulations, 2015 regarding Corporate Governance.

ANSWER:

(a) Board of Director including its composition, independent director, non-executive director etc.
(b) Obligations w.r.t. Independent Directors, directors and senior management.
(c) Code of Conduct and Vigil mechanism
(d) Provisions regarding composition and functioning of Audit Committee (Regulation 18).
(e) Provisions regarding setting up and role of Nomination and Remuneration Committee.
(f) Provisions regarding setting up and role of Stakeholder Relationship Committee
(g) Provisions regarding setting up and role of Risk Management Committee
(h) Management of Subsidiaries
(i) Disclosures on important issues regarding Related party Transaction, accounting treatment etc.
(j) Disclosure of Management Discussion and Analysis.
(k) Information to shareholders
(l) CEO/CFO Certification.
(m) Compliance Certificate

3. Explain the constitution and functions of audit Committee u/s 177 of the Companies Act.

ANSWER: Section 177(1) and 177(4) of Companies Act 2013.

4. Every listed company shall constitute a qualified & Independent audit committee in accordance with
the terms of reference subject to a few conditions. Explain

ANSWER:

(a) The audit committee shall have minimum 3 directors as members. Two-thirds of the members of
audit committee shall be independent directors. In case of a listed entity having outstanding
Superior Rights (SR) equity shares, the audit committee shall only comprise of independent
directors.
(b) All members of audit committee shall be financially literate and at least one member shall have
accounting or related financial management expertise.
(c) The Chairperson of the Audit Committee shall be an independent director.
(d) The Chairperson of the Audit Committee shall be present at AGM to answer shareholder queries.
(e) The audit committee at its discretion shall invite the finance director or head of the finance
function, head of internal audit and a representative of the statutory auditor and any other such
executives, to be present at the meetings of the committee.
Page No. 63
 (f) The Company Secretary shall act as the secretary to the committee.

5. List few documents that require mandatory review by Audit Committee.

ANSWER: Management discussion and analysis of financial conditions and results of operations.
 Statement of significant related party transactions submitted by management
 Management letters/letters of internal control weaknesses issued by the statutory auditors.
 Internal audit reports to internal control weaknesses; and
 The appointment, removal and terms of remuneration of the Chief Internal Auditor.
 Statement of deviations

6. Mr. ‘U’, a respectable Chartered Accountant of international repute was requested by one of the major
corporates in India to join its Board and also as a Chairman of Audit Committee. He expressed his
apprehensions that he is not having the requisite experience. Mr. ‘U’ seeks your view on the
responsibility of Audit Committees vis-àvis the review of Financial Statements.

ANSWER: Role of Audit Committee- as per SEBI (LODR) Regulations, 2015.

7. Comment on the following in the light of certificate of compliance of conditions of Corporate

Governance to be issued for a listed company where the Board consists of 10 directors including a
nonexecutive director as its chairman and further:
(i) There were 5 meetings held during the year as follows: 01/04/2019, 01/06/2019, 01/09/2019,
03/01/2020, 25/03/2020.
(ii) There are 4 independent directors. One of them resigned on 25/05/2019. A new independent
director was appointed on 01/09/2019.
(iii) The chairman of Audit Committee did not attend the Annual General meeting held on 14/09/2019.
(iv) The internal audit reports were obtained by Audit Committee on quarterly basis. Quarter 1 internal
audit report commented on certain serious irregularities as regards electronic online auction of
scrap. The agenda of Audit Committee did not deliberate or take note of the issue.

ANSWER:

(i) Gap between meetings held on 01.09.2019 and 03.01.2020 is more than 120 days;
(ii) Casual vacancy in the office is director was filled up after the period prescribed under section
149(4);
(iii) Chairman was mandatorily required to attend AGM
(iv) Review of internal audit reports is mandatory for audit committee.

8. Briefly explain the role of auditor in audit committee and certification of compliance of conditions of
Corporate Governance.

ANSWER: Ensure that he communicates frequently with the Audit Committee on key accounting or
auditing issues, ensure that he addresses any questions or concerns, assist and advise the Audit
Committee on improving corporate governance, assist the management and the Audit Committee to
enable them to discharge their functions effectively.

9. You have been appointed as an auditor of M/s Real Ltd. in which total number of directors in the board
is 9. As an auditor, state the points to be considered in verification of composition of Board under
Regulation 17 of The Securities and Exchange Board of India (Listing Obligations and Disclosure
Requirements) Regulations, 2015.

Page No. 64
 Ans: The auditor should ascertain whether, the Board of Directors comprises an optimum combination
of executive and non−executive directors, with at least one−woman director and not less than 50% of
the Board of Directors comprising non−executive directors. Annual disclosure submitted by the
directors to the Board of Directors may be examined for this purpose. If the Board of Directors has
followed any particular procedure(s) to ascertain the independence of directors, the auditor should
examine the same. Effect of changes in the composition of the Board and/or its Chairman and its
impact on compliance throughout the reporting period should also be examined.

10. ASN Ltd., a company incorporated in India has six members in its Audit Committee. Due to recessionary
conditions in India the revenue of the company is going down and there is showdown in other
activities of the company. Therefore, it is expected that there would not be significant work for
members of the Audit Committee. Considering the overall recession in the company and the economy,
the members of the Committee decided unanimously to meet only once at the year end. They
reviewed monthly information system of the company and found no errors. As an auditor of ASN
Limited would you consider the decision taken by the Audit Committee to hold the meeting once in a
year, is complying with Listing Obligation and Disclosure Requirements (LODR)? Also state the quorum
requirements for such meetings.

Ans: The stand taken by the company is not in line with the requirements of Regulation 18 of SEBI
(LODR) Regulations, 2015.

11. The auditor of Mould Limited made an adverse statement in his certificate as the Audit Committee of
the company did not meet four times a year. Discuss few circumstances which require an adverse or
qualified statement in the auditor’s certificate in respect of compliance of the requirements of
Corporate Government.

Ans: Some situations may require an adverse or qualified statement or a disclosure without necessarily
making it a subject matter of qualification in the Auditors’ Certificate, in respect of compliance of
requirements of corporate governance.

Issues relating to
powers related related to setting up and display of financial
directors and
to Transfer of meetings of the
meetings of the results of the
Shares audit committee company on its
board
website and sebi

12. Elaborate under SEBI (LODR) Regulations, 2015, who is an independent director.

ANSWER:

(a) Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and
experience;
(b) Who is or was not a promoter of the company or its holding, subsidiary or associate company; and
not related to promoters or directors in the company, its holding, subsidiary or associate company;
(c) Apart from receiving director's remuneration, has or had no material pecuniary relationship with
the company, its holding, subsidiary or associate company, or their promoters, or directors, during
the two immediately preceding financial years or during the current financial year;
(d) None of whose relatives has or had pecuniary relationship or transaction with the company, its
holding, subsidiary or associate company, or their promoters, or directors, amounting to 2% or
more of its gross turnover or total income or ` 50 Lacs or such higher amount as may be prescribed,
whichever is lower, during the two immediately preceding financial years or during the current
financial year;
Page No. 65
 (e) Who, neither himself nor any of his relatives
 holds or has held the position of a key managerial personnel or is or has been employee of the
company or its holding, subsidiary or associate company in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed;
 is or has been an employee or proprietor or a partner, in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed, of:
1. a firm of auditors or CS in practice or cost auditors of the company or its holding, subsidiary
or associate company; or
2. any legal or a consulting firm that has or had any transaction with the company, its holding,
subsidiary or associate company amounting to 10% or more of the gross turnover of such
firm;
3. holds together with his relatives 2% or more of the total voting power of the company; or
4. is a Chief Executive or director, by whatever name called, of any non profit organisation that
receives 25% or more of its receipts from the company, any of its promoters, directors or its
holding, subsidiary or associate company or that holds 2%or more of the total voting power
of the company;
5. is a material supplier, service provider or customer or a lessor or lessee of the company;
 Who is not less than 21 years of age.
 Who is not a non- independent director of another company on the board of which any non-
independent director of the listed entity is an independent director.

13. P Limited is a listed Company in which no code of conduct is laid down for its board members and
senior members. As an auditor of P Limited:
(i) Briefly explain the compliance requirements with respect to Code of Conduct as per Listing Order
Disclosure Requirement (LODR) Regulations.
(ii) What will be your role in compliance of above-mentioned Code of Conduct as per LODR
Regulations?

ANSWER:

(i) Regulation 17(5), Regulation 26(3), Regulation 46(2), Annual Report of the company shall contain a
declaration signed by the CEO stating that the members of board and senior management have
affirmed compliance with the code of conduct,
(ii) Board has laid down a Code of Conduct for all Board members, Obtain a copy of the code of
conduct, Verify whether all Board members and senior management have affirmed compliance
with the code, code posted on company’s website.

14. Content of Management Discussion and Analysis.

ANSWER:

1. Industry structure and developments.

2. Opportunities and Threats.
3. Segment–wise or product-wise performance.
4. Outlook
5. Risks and concerns.
6. Internal control systems and their adequacy.
7. Discussion on financial performance with respect to operational performance.
8. Material developments in Human Resources/Industrial Relations front, including number of people
employed.
9. Details of significant change

Page No. 66
 10. Details of any change in Return

15. A listed entity has to obtain a compliance certificate from either the statutory auditors or practicing
company secretaries regarding compliance of conditions of corporate governance and annex it to the
Directors’ Report. Discuss some situations which may require an adverse or qualified statement in
respect of the above certificate.

ANSWER:

(a) The number of non-executive directors is less than 50% of the strength of Board of directors.
(b) A qualified and independent audit committee is not set up.
(c) The chairman of the audit committee is not an independent director.
(d) The audit committee does not meet four times a year.
(e) The necessary powers have not been vested by the Board in the audit committee.
(f) The time gap between two Board meetings is more than 120 days.
(g) A director is a member of more than ten committees across all companies in which he is a director
or act as chairperson of more than 5 committees.
(h) The information of quarterly results is neither put on the company’s website nor sent in a form so
as to enable the Stock Exchange on which the entity’s securities are listed to enable such Stock
Exchange to put it on its own website.
(i) The power of share transfer is not delegated to an officer or a committee or to the registrar and
share transfer agents.

16. M/s All-in-one limited is a large – sized listed Indian company with focus on design and delivery of
custom-made information Technology applications for various business entities in India and abroad.
The management wants to know whether they are required to constitute Risk Management committee
as per SEBI (LODR) Regulations, 2015 and if so, required, what should be its composition? Advise.

ANSWER:

majorityshall consist
board shall constitute an RMC
of members of the board

Chairperson of the Risk

management committee shall meet at least once in a year
be a member of the board

shall define the role and applicable to top 500 listed

responsibility of the Risk entities, determined on the
Management Committee basis of market capitalisation

17. Mr. S has been appointed as a director of CAC Ltd. You are required to state the information to be
provided to the shareholders of the company in accordance with Regulation 36 of the Securities and
Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015.

ANSWER: Regulation 36 of SEBI (LODR) Regulations, 2015.

Page No. 67
 8 AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS

1. ANC Ltd., having two subsidiaries but did not have any holding company, is a company whose
securities are not listed on any stock exchange, whether in India or outside India. The CEO of the ANC
Ltd says that since it is an unlisted company therefore consolidation of financial statement is not
applicable. Comment on the contention of the CEO.

Ans: Contention of CEO is not correct.

2. Xcess Ltd., having two subsidiaries but did not have any holding company, is a company whose
securities are not listed on any stock exchange, whether in India or outside India.
The CEO of the Xcess Ltd says that since it is an unlisted company therefore consolidation of financial
statement is not applicable. Comment on the contention of the CEO.

Ans: Contention of the CEO of the company is not acceptable and the company needs to consolidate its
financial statements.

3. Deluxe Ltd. holds the ownership of 51% of voting power and control over Executive Ltd. Holding
company have prepared the consolidated financial statement as required by Sec. 129 of the Companies
Act, 2013. What will be your objective, as an Auditor, in the audit of such Consolidated Financial
Statement?

Ans: CFS in accordance with FRFw, true and fair view, enquire into the matters, clauses (a) to (i) of
section 143(3) of the Companies Act, 2013.

4. Responsibility of holding company for preparation of Consolidated Financial Statements.

Ans: identifying components, identifying reportable segments, identifying related parties, accurate and
complete financial information, appropriate consolidation adjustments, Harmonisation of accounting
policies, GAAP conversion.

5. Moon Ltd acquired 65% shares of Sun Ltd on 28th October 2016 On 25th April 2017 they sold 25%
shares of Sun Ltd While preparing consolidated financial statements for the year ended 31st March,
2017, accountant of Moon Ltd did not consider financial statements of Sun Ltd for consolidation.
Comment

Ans: 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

6. Christmas Limited is the holding company of Y Limited and Z Limited. Explain the nature of current
period consolidation adjustments which will be taken into account for the preparation of Consolidated
Financial Statements.

Ans: Intra-group interest paid, unrealised intra-group profits, intra-group indebtedness, harmonising
the different accounting policies, adjustments to recognized subsequent events, effects of significant
transactions, determination of movement in equity.

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7. A Ltd. holds the ownership of 10% of voting power and control over the composition of Board of
Directors of B Ltd. While planning the statutory audit of A Ltd., what factors would be considered by
you for audit of financial statements?

Ans: Special considerations in case of entities controlling the composition of Board of Directors of
others.

8. Parent Ltd. acquired 51% shares of Child Ltd. during the year ending 31.03.2019. During the financial
year 2019-20 the 20% shares of Child Ltd. were sold by Parent Ltd. Parent Ltd. while preparing the
financial statement for the year ending 31.03.2019 and 31.03.2020 did not consider the financial
statements of Child Ltd. for consolidation. As s statutory auditor how would you deal with it?

Ans: Auditor’s duties in case of exclusion of subsidiaries/associates in consolidation

9. H Ltd. owns 55% voting power in S Ltd. It however holds and discloses all the shares as "Stock-in-trade"
in its accounts. The shares are held exclusively with a view to their subsequent disposal in the near
future. H Ltd. represents that while preparing Consolidated Financial Statements, S Ltd. can be
excluded from the consolidation. As a Statutory Auditor, how would you deal?

Ans: Company is required to comply with the provisions on consolidated financial statements provided
in Schedule III to the Act

10. H Limited, a company registered with SEBI, has three subsidiaries and one associate. While doing the
audit of Consolidated Financial Statement (CFS) of H Limited you have come to know that the associate
entity had made a provision for dividend in its financial statement. H Limited computed its share of the
results of operations of the associate after taking into account the proposed dividend. Comment.

Ans: Explanation (b) to Para 6 of AS 23 “Accounting for Investments in Associates in Consolidated

Financial Statements” requires that in case an associate has made a provision for proposed dividend in
its financial statements, the investor’s share of the results of operations of the associate is computed
without taking in to consideration the proposed dividend. Auditor is required to state the matter and
quality the report accordingly.

11. C Ltd. is holding 55% shares of D Ltd. M/s. AB & Associates are statutory auditors of C Ltd. Whereas for
D Ltd. there is another firm appointed as statutory auditors. What are the reporting responsibilities of
M/s. AB & Associates for audit of consolidated financial statements?

SA 600

Parent’s Auditor
is not the Auditor
of all of its
components

disclose the portion of indication of the

the F.S. audited by the divided responsibility
other auditor of auditors

12. H Co. Ltd., is a holding company with two subsidiaries R Co. Ltd. and S Co. Ltd., The H Co. Ltd., adopts
straight line method of depreciation for its assets whereas S Co. Ltd., follows written down value or
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 diminishing value method. Though R Co. Ltd., follows straight line method of depreciation, it does not
give effect to component accounting of depreciation in respect of high value assets, while consolidating
the financials of the R Co. Ltd., and S Co. Ltd., with those of H Co. Ltd., determine the possible issue
that you have to ensure for compliance in the light of above facts.

Ans: Ensure compliance of AS 21 and Ind-AS 110. + financial statements of the parent and its
subsidiaries are combined on a line by line basis + using uniform accounting policies + appropriate
adjustments + fact should be disclosed together with the proportions.

13. B Ltd. is the Subsidiary company of A Ltd. ABC & Associates has been appointed as auditor of A Ltd. for
the Financial year 2019- 2020 and XYZ & Associates has been appointed as auditor of B Ltd for the year
2019-20. Explain the role of ABC & Associates and XYZ & Associates as auditors of the parent company
and subsidiary respectively.

Ans: SA 600

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

Ans: H Ltd. is not required to consolidate accounts of investee companies as provided under Para 31 of
Ind-AS 110. However, company is required to comply with the provisions on consolidated financial
statements as provided in Schedule III.

15. ALM Associates has been appointed as auditor of M/s Harry Ltd. which acquired 55% shares in M/s
Sam Ltd. on 15th October, 2019. During audit of Harry Ltd. the auditors found that the company have
not prepared consolidated financial statements because on the date of acquisition the fair value of
certain assets & liabilities has not been ascertained which is significant and are accounted for on
estimated basis only. Help ALM Associates in framing opinion paragraph of audit report.

Ans: Sec. 129(3) of Companies Act, 2013. Consolidation is mandatory, auditor is required to state the
fact in auditor report on standalone financial statements.

16. M Ltd. acquired 51% shares of S Ltd. on 01.04.2019 and sold 25% of these shares during the financial
year 2019-20. M Ltd. did not prepare Consolidated Financial Statements for the financial year 2019-20
on the plea that the control was only temporary. Do you agree with the view of M Ltd.? Decide,
assuming that M Ltd. is required to prepare its financial statements under Ind As.

Ans: There is no exemption for ‘temporary control’, or “for operation under severe long-term funds
transfer restrictions” in Ind AS 110 and consolidation is mandatory for Ind AS compliant financial
statement in this case. Hence Auditor should ask the management for the consolidation of subsidiary.
If Consolidation not made, auditor should modify the audit report on Consolidated Financial
Statements.

Page No. 70
 9 AUDIT OF BANKS

1. Principal Enactments governing Bank Audit.

ANSWER:

Banking
regulation
act

Reserve bank
SARFAESI Act
of india act

Principal
enactments

Prevention
Banking
of money
companies
laundering
Act
act

Companies
act

2. Statutory Central Auditors of a Bank have to furnish a number of reports/certificates in addition to

their main report. List such reports/certificates.

ANSWER: Report on adequacy and operating effectiveness of Internal Controls Over Financial
Reporting, Long form audit report (LFAR), compliance with SLR, Report on treasury operations,
Certificate on reconciliation of securities, compliance of prudential and other guidelines, whether the
income recognition, asset classification and provisioning have been made, serious irregularity was
noticed, custody of unused Bank Receipt forms, authentication of capital adequacy ratio, Certificate in
respect of DICGC claims, status of the compliance by the bank, instances of adverse credit-deposit
ratio, . Asset liability management, Certificate on Corporate Governance, Certification on claim of
various interest subsidies.

Page No. 71
3. Banks are distinguished from other commercial enterprises and hence it needs special audit
consideration. specify the various peculiarities which may necessitate special audit consideration to be
taken care

ANSWER:
 Nature of risks associated;
 The scale of banking operations and resultant significant exposures;
 the extensive dependence on IT;
 the effect of statutory and regulatory equirements;
 the continuing development of new products and services and banking practices

4. Requirements of a Risk Management Process/System in a bank.

ANSWER:
Approved risk mgmt
Involvement policies
of TCWG
consistent with
bank's policies

monitoring significantly affecting

of risks bank Goal

Requirements
Credit Risk

Operational Risk

Control
market Risk
activities

Monitoring
activities

Reliable Information
Activities

5. List the key security control aspects that an auditor of a bank needs to address when undertaking audit
in a computerised environment.

ANSWER: Data available for processing is authorised, unauthorised amendments are prevented,
authorisation rights given to staff, bank charges calculated manually, verify whether exceptional

Page No. 72
 transaction reports are being authorised, verify that all the general ledger accounts, backup media,
anti-virus software, access to the computer room is restricted.

6. In the course of audit of, your firm observed that the bank has classified some of the assets as non-
performing assets (NPA), for example, bills receivables for remaining overdue more than 30 days, loans
for remaining overdue for more than 60 days etc. Guide the accountant with regard to criteria to be
adopted for classifying an asset as NPA.

Ans. The following criteria are to be applied for determining the status of:
 Term Loans: Overdue for a period of more than 90 days.
 Cash Credits and overdrafts: Remains out of order.
 credit Card Accounts: minimum amount due is not paid fully within 90 days
 Agricultural Advances: Short duration crops as NPA, if the instalment remains overdue for two crop
seasons and, long duration crops will be treated as NPA, if the instalment remains overdue for one
crop season.
 Bills Purchased and Discounted: Remain overdue and unpaid for a period of more than 90 days.
 Securitisation: Amount of liquidity facility remains outstandingfor more than 90 days,

7. Exceptions to the General Rule of treating advances as Nonperforming Assets.

Ans. Exceptions to the General Rule of treating advances as Non-performing Assets:

Asset Classification to be Borrower-wise not Facility-wise:
Erosion in Value of Securities/ Frauds Committed by Borrowers: the asset should be straightaway
classified as doubtful or loss asset, as appropriate.
Further,
Erosion in the value of securities by more than 50% - the asset to be classified as doubtful
straightaway
The realisable value of security is less than 10% of the outstanding in the borrower accounts, - the
asset should be classified as loss asset.
Advances under Consortium: Should be based on the record of recovery of the respective individual
member banks and other aspects having a bearing on the recoverability of the advances.
Temporary Deficiencies: Banks should not classify an advance as NPA merely due to the existence of
some temporary deficiencies. However, stock statements relied by the banks should not be older
than 3 months.
The outstanding in the account based on drawing power calculated from stock statements older than
3 months are considered as irregular.
Agricultural Advances Affected by Natural Calamities: Circular issued by the RBI deals elaborately
with the classification and income recognition issues. The NPA classification would be governed by
such rescheduled terms.
Regularisation Near About Balance Sheet: Indicates inherent weakness - on the basis of the data
available, the account should be deemed as an NPA.
Government Guaranteed Advances Central government:Treated as NPA only when the government
repudiates its guarantee when invoked; State Government – NPA if Remainoverdue for more than 90
days.
Advances Against Term Deposits, NSCs, KVPs/ IVPs, etc.: Need not be treated as NPAs, provided

Page No. 73
 adequatemargin is available in the accounts.
Advances to Staff: Classified as NPA only when there is a default in repayment on the respective due
dates.

8. You have been appointed as an auditor of LCO Bank, a nationalized bank. LCO Bank also deals in
providing credit card facilities to its account holder. The bank is aware of the fact that there should be
strict control over storage and issue of credit cards. How will you evaluate the Internal Control System
in the area of Credit Card operations of a Bank?

ANSWER: Effective screening of applications, strict control over storage and issue of cards, prompt
reporting system, Reimbursement to merchants, reimbursements should be immediately charged,
statements are sent regularly, monitor and follow-up of customers’ payments, overdue beyond a
reasonable period should be identified, periodic review of credit card holders’ accounts.

9. As the concurrent auditor of Z Bank Ltd you are requested by its management to draft an internal
control policy in respect of loans and advances. What factors do you consider as important while
drafting such a policy?

ANSWER: Evaluating creditworthiness of the borrowers, loan documents should be executed by the
parties before advances, sufficient margin should be kept against securities, Securities should be
received by responsible officer, Securities requiring registration should be registered in the name of the
bank, goods should be test checked at the time of receipts, Personal inquiries should be made,
irregular accounts should be brought to the notice.

10. Income Recognition Norms of Investments in case of banking companies.

ANSWER: Performing Investments, Income on NPI, Government Guarantee, Dividend on Shares of

Corporate Bodies, Discount earned in discounted instruments, Units of MFs, Profit/Loss on sale of
Investments.

11. What is the income recognised in the case of ‘non-performing’ assets of bank?

Ans
On Partial Recoveries in NPAs - exercise right of appropriation of recoveries in a uniform and consistent
manner.
On Leased Assets - The finance charge component of finance income credited to income account before
the asset became NPA should be reversed
Government Guaranteed- not be taken to income account unless the interest has been realised.
Reversal of Income - interest accrued and credited to income account in the past should be reversed
Secured by FD / NSc / IVP / KVP / LIP - May be taken to income provided adequate margin is available
Fees / Commission on Renegotiation / Rescheduling - Recognised on an accrual basis
On Take-out Finance -Not recognise income unless realised

12. Your firm has been appointed as Central Statutory Auditors of a Nationalised Bank. The bank has
recognised on accrual basis income from dividends on securities and Units of Mutual Funds held by it
as at the end of financial year. The dividends on securities and Units of Mutual Funds were declared
after the end of financial year. Comment.

Page No. 74
 ANSWER: Recognition of dividend income on securities may be recognized on accrual basis if the same
has been declared by the Corporate Body in its AGM and the Shareholder’s right to receive payment is
established. In the present case, dividends were declared after the end of financial year. Hence,
recognition of income from dividends on securities and units of mutual fund on accrual basis is not in
order.

13. Your firm has been appointed as branch auditor of East West Bank Ltd. In carrying out verification of
advances, what are the primary evidences you will look into?

ANSWER: General Audit Procedure: Evaluation of Internal Control, Substantive Audit Procedure,
Examination of recoverability.

14. As a branch auditor of a Nationalised bank, how would you classify the following advances based on
securities?

(i) Advances covered by ECGC If, loan is 100 and guarantee is 60%, 60 shown under
/DICGC guarantees. government guarantees and 40 in unsecured. Further if Rs
5 is received from ECGC balance 55 will be shown under
guaranteed amount.

(ii) An account which is fully secured shown as secured as security covers whole loan.
but the margin in which is lower
than that stipulated by the bank.

(iii) Advances covered against will be treated as unsecured, unless there is any other
cheques purchased including tangible collateral security.
self−cheques.
(iv) Advances against supply bill. will be treated as unsecured unless something else is
offered as collateral security.

15. As a bank branch auditor, what aspects will be considered while reporting on credit appraisal,
sanctioning /disbursement and documentation in respect of advances in the LFAR?

Ans : Verification of Advances in the LFAR:

Applications is complete; Procedural instructions have been complied with; Sanctions are within
delegated authority and disbursements as per terms of the sanction; Documentation is complete; and
supervision is timely, effective and as per prescribed guidelines.

16. Your firm has been appointed as auditors of a branch of a nationalised Bank. The bank is a consortium
member of Cash Credit Facilities of Rs. 50 crores to X Ltd. Bank's own share is Rs. 10 crores only. During
the last two quarters against a debit of Rs. 1.75 crores towards interest, the credits in X Ltd's account
are to the tune of Rs. 1.25 crores only. Based on the certificate of lead bank, the bank has classified the
account of X Ltd as performing.

ANSWER: Advance to be classified as NPA.

17. M/s. S Ltd. is a MSME unit. The company does multiple banking. The company is availing cash credit
limit from U Bank of Rs. 25 crores. The limit availed remained less than Rs. 5.00 crores during all the
days of F.Y. 2018-19. The company has not done any credit in cash credit account during the year as it

Page No. 75
 is operating current account in newly opened another bank branch adjoining to company premises.
The company is having sufficient security of stocks and debtors and DP of Rs.25.00 crores remains all
over the year. The company is availing term loans from other bank branches. Now the Bank Manager is
insisting to route the sale proceeds through U Bank, otherwise cash credit limit and term loan accounts
with other banks will be treated as Non-Performing Accounts. Now company seeks your opinion.

ANSWER: Cash credit facility with U bank need to be classified as NPA as there are no credit in the
account to serve the interest charged in the account. Classification of term loans with other banks
depends upon the payment made to that bank.

18. Shy & Co. had been allotted the branch audit of a nationalized bank for the year ended 31st March,
2019. In the audit planning, the partner of Shy & Co. observed that the allotted branches are
predominantly based in rural areas and major portion of the advances were for agricultural purpose.
He needs your assistance in incorporating the criteria prescribed for determination of NPA norms in
respect of agricultural advance, in audit plan.

ANSWER: Ensure that NPA norms have been applied in accordance with the crop season, NPA norms
are made applicable to all direct agricultural advances, identification of NPAs has been done on the
same basis as non-agricultural advances.

19. 19. During the bank audit AB & Co. a new Chartered Accountant firm, observed the sale/purchase of
NPAs. Please help them by narrating the aspects, relating to sale/purchase of NPAs, to be considered.
OR
In the course of audit of skip Bank Ltd., you found that the bank had sold certain of its non-performing
assets. Draft the points of audit check that are very relevant to this area of checking.

Ans. In case of sale of an NPA:

Sale Only such NPA, which remained NPA in the bank for at least 2 years; Cash Basis only; without
recourse; doesn’t assume any risk of sold NPA; removed from the books;Sale price not be lower than the
NPV; Each bank make its own assessment of value offered ; No contingent price; short fall in book value
charged to the profit and loss account. Where the sale is for a value higher than the NBV, no profit is
recognized; Prudential norms issued by RBI, from time to time, should be adhered to.
In case of Purchase of an NPA:
No purchase of an NPA which had originally sold; the NPA purchased is subject to the provisioning
requirements ; any recovery first adjusted against its acquisition cost; assign 100% risk weights to the
NPAs from other banks.

20. In course of audit of Good Samaritan Bank as at 31st March 2019 you observed the following: In a
particular account there was no recovery in the past 18 months. The bank has not applied the NPA
norms as well as income recognition norms to this particular account. When queried the bank
management replied that this account was guaranteed by the central government and hence these
norms were not applicable. The bank has not invoked the guarantee. Please respond. Would your
answer be different if the advance is guaranteed by a State Government?

ANSWER: Bank is correct to the extent of not applying the NPA norms for provisioning purpose. But
this exemption is not available in respect of income recognition norms.
The situation would be different if the advance is guaranteed by State Government because this
exception is not applicable for State Government Guaranteed advances, where advance is to be
considered NPA if it remains overdue for more than 90 days.

Page No. 76
21. As a branch auditor of a nationalised bank, how would you verify the following? Advances to DOT COM
Companies.
Business Plan & Revenue Model
Internal Control to Check Credit Worthiness & Sanctions
Examine Loan Documents Relevant for Company (COC, resolution copies)
Security in the form of Mortgage the evidence of registration of the charge with the Registrar of
Companies.
Legal Enforceability of Security
Review Periodic Statements
Review Unusual Activities
Healthy Turnover & Trends
Compliance to Provisioning Norms

22. The bank’s advance portfolio comprised of significant loans against Life Insurance Policies. Write
suitable audit program to verify these advances.

ANSWER: Inspect the policies, examine if premium has been paid, Certificate regarding surrender
value, see that if such surrender value is subject to payment of certain premia.

23. As a statutory auditor of a bank, how would you verify advances against goods?

ANSWER:
 Hypothecated Goods
Register & Scrutiny System:
Letter of Hypothecation:
Certification of Registration of Charge
Statement from Borrower
 Pledged Goods
Statement from borrower
Movement of Goods
Outstanding Delivery
 Goods with Third Party
Undertaking
Confirmation Certificates

24. Audit Procedure for Accounts falling under Corporate Debt Restructuring (CDR) Programme.
ANSWER:
present NPA Ascertain whether resolution
classificati cannot be Review the terms conversion account under the
on under upgraded DCA and of of loan has been CDR is
IRAC bcoz of ICA rehabilitati into equity referred to atleast
norms CDR on BIFR 75% / 60%

75% of the
creditors
by value
and 60% in
number

Page No. 77
25. M/s Sri & Co., Chartered Accountant have been allotted the branch audit of a nationalized bank for the
year ended 31st March, 2019. You are part of audit team and have been instructed by your partner to
verify the following areas:
(i) Fulfilment of the criteria prescribed for NPA norms for the advances given for agricultural purposes.
(ii) Drawing power calculation from stock statements in respect of working capital accounts.
What may be your areas of concern as regards matters specified above?

ANSWER:
(i) Agricultural advances
(ii) DP calculated as per BOD guidelines, Proper reporting of sundry creditors, ensure Stock audit done.

26. INDO Bank appointed your firm of Chartered Accountants as a branch auditor for the financial year
2018-19. Being head-in-charge of the assignment, while planning, you distributed the work among your
team members and assigned Mr. Pary for verification of bills payable. However, Mr. Pary, being fresh
to the bank audits, needs your guidance. Kindly guide.

ANSWER: Evaluate the existence, effectiveness and continuity of internal controls, Examine an
appropriate sample of outstanding items comprised in bills payable accounts, Correspondence with
other branches after the year-end.

27. While auditing APNA Bank, you observed that a lump sum amount has been disclosed as contingent
liability collectively. You are, therefore, requested by the management to guide them about the
disclosure requirement of Contingent Liabilities for Banks. Kindly guide.
Or
Briefly explain the disclosure requirement of Contingent Liabilities for Banks

ANSWER: Claims against the bank not acknowledged as debts, Liability for partly paid investments,
Liability on account of outstanding forward exchange contracts, Guarantees given on behalf of
constituents, Acceptances, endorsements and other obligations.

28. While doing the audit of a Nationalised bank branch, your audit assistant informed you that he
suspects some irregularities in Guarantees issued by the Bank. What should be your guidance in the
matter to check the same?

ANSWER: Adequacy of internal controls, adequacy of controls exercised over unused guarantee forms,
prescribed procedure of marking off the expired guarantees, relevant guarantee registers, expired
guarantees are not included, Verify guarantees with the copies of the letters, Verify the securities held
as margin + AS 29

29. You have been appointed as a statutory central auditor of AAPKA Bank, a Nationalized bank. What
special points would you borne in mind while conducting the audit of compliance with "Statutory
Liquidity Ratio" (SLR) requirements?

ANSWER: To verify compliance with SLR requirements, the statutory auditor has to examine two
aspects:
(a) Correctness of the figure of the Demand and Time Liabilities (DTL), and
(b) Maintenance of prescribed percentage of liquid assets.

30. Write a short note on reversal of income under bank audit.

ANSWER: First time NPAs, Commission/other Income, Finance Charge of leased assets.

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31. Your firm has been appointed as Statutory Branch auditor of a Nationalised Bank for the financial year
2018-19 which is dealing in Nostro accounts. Enumerate the audit procedures you will follow for
verification of Nostro accounts

ANSWER: “Vostro Account” - foreign bank in another country maintains stocks of Indian rupees with
their Indian branch.
Examination Aspects: Reconciliation, Evaluation of I.C, Inter-bank confirmation.

32. ABC Chartered Accountants have been appointed as concurrent auditors for the branches of Effective
Bank Ltd. for the year 2018-19. You are part of the audit team for Agra branch of the bank and have
been instructed by your senior to verify the advances of the audit period. You are required to guide
your assistant about the areas to be taken care while doing verification during the concurrent audit.

ANSWER:

letters of credit
Check bank
sanctioned issued within
guarantees
the delegated
properly issued
power

in accordance any mis

with proper follow-
utilisation of the
up of overdue
delegated loans
authority

securities and post advances are as

documents disbursement per RBI
have been supervision guidelines
received

33. Drawing power calculation from stock statements in respect of working capital accounts. What may be
your areas of concern as regards matters specified above

Ans:
Drawing Power & Sanctioned Limit
 All accounts should be kept within both the drawing power and the sanctioned limit
 Sanction Limit = 1/5th of Last Year Turnover or (75% of LY Stock − Creditor + 60% of LY Debtor)
whichever is lower
Drawing Limit = (75% of Actual Stock − Actual Creditor) + 60% Actual Debtor
Stock Statements / Annual Report / Policy
Special consideration should be given to proper reporting of sundry creditors for the purposes of

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 calculating drawing power.
Irregular Account
stock statements for determining drawing power should not be older than three months.
Stock Audit
The stock audit carried out by the bank for all accounts having funded exposureof more than Rs 5 crores.

34. How will you evaluate the Internal Control system in the area of Credit Card operations of a Bank?

Ans. Control over Storage & Issue; Screening Before Issue; System to check Card Limit; Settlement
Confirmation; Reimbursement; Charge to Customer; Statements ; Monitoring

35. Your firm has been appointed as an auditor of a nationalised bank. You allocated the task of verifying
Telegraphic Transfers and Demand Draft to your Audit Assistant. While verifying, the Audit Assistant
informed you that there are a lot of irregularities in Telegraphic Transfers and Demand Drafts. What
guidance would you give him?

Ans. Telegraphic Transfers and Demand Drafts

Secret Codes for TT
Signature Matching for Demand Draft
Advice after Issue
Discrepancy

36. Describe the procedure for verification of the following balances appearing in the account books of a
bank: Drafts paid without advice.

Ans. Drafts Paid Without Advice:

Verifying authenticity by reference to specimen signature, and the completeness of the draft
the system of co−relating drafts paid with advices
The system of sending reminders where advices are not received

37. Describe the procedure for verification of the following balances appearing in the account books of a
bank: Branch adjustment account.

Ans.
All branch accounts are periodically reconciled.
Adjustments are done properly and supported by documentary evidence.
Reversal entries are made under proper authority and after due explanation andevidence.

38. Explain the scope of concurrent audit of a bank with reference to Reserve Bank of India guidelines

 Ans. Scope of Concurrent Audit

 Cash
 Deposits
 Advances
 Investments
 Foreign Exchange
 House Keeping
 Other Items

39. NAYASA Bank appointed your firm of Chartered Accountants as a branch auditor for the financial year
2016-17. Being head-in-charge of the assignment, while planning, you distributed the work among your
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 team members and assigned Mr. Hary for verification of Balances in account of the bank situated in
foreign country. However, Mr. Hary, being fresh to the bank audits, needs your guidance. Kindly guide.
OR
As an auditor of a nationalised bank, how would you verify the following? Balances in account of a
bank situated in a foreign country.

Ans.

Verify ledger balances with bank confirmation certificates and reconciliation statements
Review the reconciliation statements
Examine the large transactions in inter−bank accounts, particularly towards the year−end, to ensure that no
transactions have been put through for window dressing.
Check original deposit receipts in addition to confirmation certificates obtained
Check whether these balances are converted into the Indian currency at the exchange rates prevailing on
the balance sheet date and ensure compliance with relevant Accounting Standard

40. You are the Concurrent Auditor of a Branch of Nationalized Bank which deals in foreign exchange
transactions. Give focus areas of your checking in this respect

Ans. foreign bills negotiated under letters of credit; FCNR and other NRI accounts whether the debits
and credits permissible; inward/outward remittance properly accounted; Examine extension and
cancellation of forward contracts; duly authorized and charges recovered; Balances in Nostro within the
limit; overbought/oversold position is reasonable; adherence to the guidelines issued by RBI/HO;
verification/reconciliation of Nostro and Vostro

41. Write a short note on - Vostro and Nostro Accounts.

Foreign currencies in form of Bank Accounts with their overseas branches/correspondents are “Nostro
Account”.

Foreign bank in maintains stocks of Indian rupees with their Indian branch/ correspondent/local bank are
Vostro Account.
While examining the auditor should also pay attention to reconciliation of Nostro Accounts with the
respective minor account. Unreconciled Nostro Accounts may reveal unauthorized payments
Evaluate the internal control with regard to inward/ outward messages they should be properly
authenticated, and discrepancies noticed, should be properly dealt with, in the books of accounts.
Verify, whether prescribed procedure is followed or not. In case balance confirmation certificate received
but not reconciled, or not received should be reported

42. How would you verify “Acceptances, Endorsements and other obligations” appearing in the Balance
Sheet of a bank

Ans.

Acceptances, Endorsements and Other Obligations: Internal controls over issuance of letters of credit
and over custody of unused LC ; verify the balance of letters of credit from the register; Examine the
guarantees and copies of the letters of credit issued; The security obtained for issuing letters of credit
should be verified.

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Other Acceptances and Endorsements :
Examine the arrangements made by the bank; Test check the amounts of bills with the register;
Verify whether such bills are marked off in the register on payment at maturity; Where letters of
comfort issued, verify whether the bank hasincurred a potential financial obligation; If an obligation
has been cast under letters of comfort, ensure that the amount is shown as contingent liability

Page No. 82
 10 AUDIT OF INSURANCE COMPANIES

1. Discuss Solvency Margin in case of an Insurer carrying on General Insurance Business.

ANSWER:

 Requirement of solvency margin: maintain an excess of value of assets over the amount of
liabilities of, not less than 50% of the amount of minimum capital
 Non-compliance of solvency margin:
 Power of authority to prescribe level of solvency
 Submission of Financial Plan
 Modifications to Financial Plan
 Non-submission of financial plan

2. AX Insurance Limited has made a provision of 75% of net premium in case of marine hull insurance and
50% in case of marine cargo and miscellaneous business of net premium for unexpired risks reserve in
its books. Comment.

ANSWER: Auditor of AX Insurance Ltd should qualify his report as the company has made a provision of
only 75% against the prescribed minimum of 100% (Marine Hull Insurance), thereby resulting in
overstatement of profit.

3. You have been appointed as an auditor of a General Insurance Company. In this context, explain
Unexpired Risks Reserve and audit procedures for the same
OR
GH Insurance Ltd has made a provision of 25% on unexpired risks reserve in its books Comment

ANSWER: IRDA (General Insurance-Claim Reserving) Regulations, 2013 requires creation of a minimum
amount of unexpired risks reserve at a specified percentage of net premium as under:
 For marine hull insurance – 100% of net premium
 For fire, marine cargo and miscellaneous business – 50% of net premium.

4. High Life Insurance is into life insurance business and has established presence in this field since last 25
years. Your firm, SR & Co. are appointed auditors of the High Life Insurance company. While
conducting its audit, you come across several important actuarial processes being followed in
accordance with general regulatory guidelines. You also understand & realise that the actuarial
department is calculating and modelling hub of the company. In the above context explain the role of
auditors.
OR
Briefly discuss the importance and role of auditor with respect to actuarial process for Life Insurance
business

ANSWER: The role of Actuaries in life insurance business is to concentrate on following key areas:
1. Product Development/ Pricing and Experience analysis.
2. Model Development.
3. Statutory Valuations and reserving.
4. Business Planning.
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 5. Solvency management.
6. Management reporting on various business valuations and profitability models of the Life
Insurance business.

5. Auditors should evaluate various sub-processes, employed by the Insurance Companies in accounting
of premiums like collection of premium from the policy holders, booking of premium, banking,
accounting and reconciliation of the same. In view of above, you are required to briefly discuss some
illustrative points, auditors are required to follow during the Audit of Accounting of Premiums in case
of Life Insurance Companies

ANSWER: Premium refers to consideration received by insurance company from the policy holder.
Premium income is recognized as:
(1) New business premium – premium received for the first policy year and
(2) Renewal premium – premium received for subsequent policy years.
Premium received but not identifiable against any policy would be treated as ‘unallocated premium’/‘
suspense amount’.

6. In an audit of an insurance company, the Receipts and Payments Account is also subjected to audit”.
Comment on this statement in brief.

Ans. Sec 11 Considers Receipts & Payments as FinancialStatements

Every Insurer, should prepare BS, a P&L , Receipts and Payments & Revenue Account in accordance with
the regulations specified. Receipts and Payments Account has been made a part of FS, it’s implied
Receipts and Payment Account is also required to be audited
The auditor of an insurance company to
 Check Receipts and Payments Account is in agreement with the BOA.
 Express an opinion as to whether the Receipts and Payments Account has been prepared in
accordance with the provisions of the relevant statute.
 Whether Receipts and Payments Account gives a true and fair view

7. As on 31st March 2017 while auditing Safe Insurance Ltd, you observed that a policy has been issued
on 25th March 2017 for fire risk favouring one of the leading corporate houses in the country without
the actual receipt of premium and it was reflected as premium receivable. The company maintained
that it is a usual practice in respect of big customers and the money was collected later on. As an
auditor discuss the steps to be taken while verifying the Premium of Life Insurance Company
OR
You have been appointed as an auditor of ABC Insurance Co. Ltd. and found that M/s PQR Ltd. got
their Plant & Machinery insured on 01-10-2018 but the amount of premium has been paid by them on
15-10- 2018. In the meanwhile, on 10-10-2018 a fire has broken out in the factory and the company
filed a claim for damages of plant & machinery with the Insurance company. Advise the insurance
company in this regard.

Ans.

 No Risk Assumption without Premium -

 System for Calculation of Premium & it’s due dates:
 Accounting of ’Advance Premium':
 Collection of Premium, timely deposits, daily reconciliation:
 Recognition of Income based on issued policies:

Page No. 84
  Methods for generation of reports & Reporting figures to IRDA/ Management:
 Appropriate SOPs developed and are strictly followed
 Check that the Company conducts premium reconciliation on daily basis.

8. Register and Records generally prepared in respect of Claims by Insurance Companies.

Ans. The following register and records are generally prepared in respect of claims
Claims Paid Register;
Claims Disbursement Bank Book; Claims
Intimation Register;
Report of quality assurance team; and
Claims Dockets,
S−Salvage register.

9. ABC & Co., Chartered Accountants are the Auditors of Just Care Life Insurance Company Limited.
Enumerate the steps to be taken by the auditor while verifying the "Investment".

ANSWER:
(a) To review the management structure to ensure adequate segregation of duties between
Investment Front office, Mid Office and Back office.
(b) To review the operating procedures prescribed by the IRDA Regulations.
(c) To review of investment policy.
(d) To review the functioning and scope of Investment Committee.
(e) To check compliance of Investment regulations.
(f) To review cash management system to track funds available for investment considering the
settlement obligations and subscription and redemption of units, etc.
(g) To review fund wise reconciliation with investment accounts, bank, and custodian records.
(h) To ensure that there is split between Shareholders’ and Policyholders’ funds and earmarking of
securities between various funds namely Life (Participating & Non Participating), Pension & Group
(Participating & Non Participating) and Unit Linked Fund.
(i) To review the arrangements and reconciliations of holdings with the insurer’s custodian.
(j) To review and check insurer’s Investment Accounting and valuation policy.
(k) To review the controls around personal dealings and insider trading.

10. Briefly explain the term policy lapse and revival in case of Life Insurance Company and role of auditor
in verifying the same.

ANSWER:

 Discontinuation of the policy owing to non-payment of premium dues is known as lapse. Lapsation
affects all the stakeholders – the policy holder, agents and the insurer. A lapsed policy ceases to
provide insurance protection to the insured. It forfeits the benefits under the policy and cost of
new policy is higher. Agents do not get renewal premium commission if the policy is lapsed.
 The terms and conditions of the policy stipulate, that where the premium is not paid within the
grace period, the policy lapses but may be revived during the life time of the life assured. Some
insurers do not allow revival, if the policy has remained in lapsed condition for more than specified
period. This is because of the possibility that the arrears of premiums on such a policy would be
too heavy and that it would be better to take out a fresh policy.

Page No. 85
11. Internal control functions in case of general insurance business can be categorised under main
operational cycles. Since various operational cycles are inter -linked, the internal controls operating
within the systems of such cycles should be reviewed simultaneously. State the specific control
procedures to be evaluated in relation to general insurance business.

ANSWER: Underwriting, Premium, Commission, Claim, Reinsurance.

12. While auditing Suryankiran Insurance Ltd. as on 31st March, 2019, you observed that there is one
policy which has been issued on 25th March, 2019 towards fire risk favouring one of the leading
corporate houses in the country without the actual receipt of premium and it was reflected as
premium receivable. It is the usual practice maintained by the company in respect of big customers
that they would issue the policy before receiving the premium. The premium money was collected on
5th of April 2019. It is further noticed that there was a fire accident in the premises of insured on 31st
March, 2019 and a claim was lodged. The insurance company also provided for the same. How would
you respond?

ANSWER: Applying provisions of Sec. 64VB, the insurance company is not liable to pay the claim and
hence no provision for claim is required.

13. You have been appointed as an auditor of ABC Insurance Co. Ltd. and found that M/s PQR Ltd. got their
plant & Machinery insured on 01- 10-2018 but the amount of premium has been paid by them on 15-
10- 2018. In the meanwhile, on 10-10-2018 a fire has broken out in the factory and the company filed a
claim for damages of plant & machinery with the Insurance company. Advise the insurance company in
this regard.

ANSWER: Applying provisions of Sec. 64VB, the insurance company is not liable to pay the claim.

14. You are the Auditor of Good Luck General Insurance Company. You want to ensure that there exists
goods system that effectively serves the requirements of true and fair accounting of claim-related
expenses and liabilities. Suggest how this can be ensured.

ANSWER: Coinsurance, Settlement Amount, Claims communicated after the year-end, Accounting for
salvage and letter of subrogation, Amount deposits with courts, Unqualified Discharge Note.

15. While auditing Secure Insurance Ltd., you observed that the major proportion of expense of the
company is the remuneration/commission paid to its insurance agents. As the auditor of the company,
what audit procedure would you adopt for verification of such expense?
OR
You have been appointed to carry out the audit of Sky Insurance Company Ltd. for the year 2017-18. In the
course of your audit, you observed that the commission paid to agents constituted a major expense in
operating expenses of the Company. Enumerate the audit concerns that address to the assertions required
for the Auditor to ensure the continued existence of internal control as well as fairness of the amounts in
accounting of commission paid to agents.

ANSWER: Commission/brokerage is not paid in excess, commission/brokerage is paid as per rates

agreed, commission/brokerage is paid to the agent/broker who has solicited the business, Vouch
disbursement entries, all disbursements were properly authorized, calculation of commission,
Scrutinize agent’s ledger.

16. M/s ABC & Co., a CA firm was appointed as the auditor of ‘Always Safe General Insurance Ltd.’ Advise
them how they will verify outstanding premium and agent’s balances.

Page No. 86
 ANSWER: Commission is not paid in excess of the limits specified by IRDAI;As per rates with the agent
and rates filed with IRDAI ; Agent is not blacklisted by IRDAI; Paid to the agent/broker who has solicited
the business; Test check correctness; vouchers are authorized by the officers-in–charge; TDS deducted as
applicable; Vouch disbursement entries; Scrutinize agents’ ledger and balances; commission outgo have
been duly accounted;

17. State the procedure to determine the value of listed and unlisted equity securities and derivative
instruments of an insurance company.

Ans.
 Listed and Actively Traded:

B/S date value = Fair Value = Lowest of the last quoted closing price
Changes In Fair Value:
 Unrealized gains/losses due to change in fair value - taken to Equity under the head “Fair
Value Change Account” & not be available for distribution as dividends
Impairment loss:
 Impairment loss recognized as an expense to the extent of difference of re−measured Fair
value.
 Any reversal of Impairment loss should be recognized in Revenue/ P&L a/c.
 Other than Actively Traded:
B/S value = Historical Cost:
Provision for Diminution shall be made & be reversed if subsequently the value increases
Impairment loss recognized as expense

18. State the disclosure requirements in respect of contingent liabilities in the notes to the Balance Sheet
of a General Insurance Company.

ANSWER:

(a) Partly paid up investments.

(b) Underwriting Commitments outstanding.
(c) Claims, other than those under policies, not acknowledged as debts.
(d) Guarantees given by or on behalf of the Company.
(e) Statutory demands/Liabilities in dispute, not provided for.
(f) Reinsurance obligations to the extent not provided for in the accounts.
(g) Others

19. Incoming and Outgoing Co-insurance.

ANSWER:

Page No. 87
 Incoming Outgoing
CoInsurance CoInsurance

Ensure that the Premium Account

scrutinise the transactions
is credited on the basis of
statements received from the relating to the outgoing
Lead insurer. business,

all premium in respect of risks

assumed in any year is booked in checked with reference to the
the same year relevant risks assumed

verify claims
provisions and claims paid

20. Enumerate the steps to be taken by an auditor for the verification of Re-insurance Outward in case of a
General Insurance Company.
OR
Steps to be taken by an auditor for the audit of re-insurance ceded

ANSWER:
 verify opening outstanding claims
 parameters and guidelines applicable to the relevant year.
 cessions as per the stipulationapplicable.
 outward remittances as per the foreign exchange regulations.
 cessions are as per the agreements withvarious companies.
 commission on cession calculated as per terms of the agreement
 computation of profit commission
 Cash loss recoveries - claimed and accounted.
 Claims Paid item appears in Outstanding Claimslist
 provisioning for outstanding losses confirmed by the re−insurers
 Accounting aspects to be checked
 subLedger balances tallies with the general ledger balances.
 balances with re−insurers are supported by necessary confirmation.
 Review the individual accounts to find out provisioning / write off or write back.
 Any major event after the Balance Sheet date

21. Enumerate the steps to be taken by an auditor for the verification of Re-insurance inward in case of a
General Insurance Company.

Ans: Internal control system in the area of reinsurance accepted to ensure determination of correct
amount, adequate guidelines and procedures are established, Reconcile reinsurance underwriting
returns received from various units, terms of the agreement with the Principal Insurer, claims paid have
been accounted on a regular basis, remittances from foreign Principal Insurer are as per foreign exchange
regulations, confirmations have been obtained regarding balances, Review individual accounts of
Principal Insurers.

22. Facultative reinsurance under Insurance Act, 1938.

Page No. 88
 ANSWER: It is a type of reinsurance whereby contract relates to one particular risk and is expressed in
the reinsurance policy. Each transaction has to be negotiated individually. Each party has free choice
i.e., ceding company to offer and re-insurer to accept. used even today, mainly when:
Automatic covers has exhausted; The risk is excluded from the Treaties; The insurer does not want his
reinsurance treaties overburdened; No automatic cover at his disposal in a particular branch, where he
issues policies rarely.
The nature of business is such that technical guidance or consultation with the reinsurer is required at
every stage of acceptance of the risk itself or for a type of business where the number of risks is very
small, for example, in atomic energy installations, oils rigs, etc

23. Explain the difference between the Proportional Treaties and Non-Proportional Treaties?

Proportional Treaties –
based on pro−rata apportionment - pre−determined percentage/ratio.
Quota Share Treaty, Surplus Treaty, Auto− Fac Treaty and pools.
Non-Proportional Treaties –
Distribution of liability on the basis of losses
Loss Treaties, Stop Loss Treaties

24. “Trade credit insurance policy” and basic requirements of a trade credit insurance product

ANSWER: It provides protection to suppliers against the risk of non-payment of goods or services by
their buyers who may be situated in the same country (domestic risk) or in another country (export
risk) against non-payment as a result of insolvency of the buyer or non-payment after an agreed
number of months after due date.
Requirements:
Policyholder's loss arises due to non-receipt of trade receivable. Policyholder is a supplier of goods or
services, Buyer is liable to pay a trade receivable to the policyholder in return for the goods and
services, Premium for the entire Policy Period, Other requirement.

Page No. 89
 11 AUDIT OF NON BANKING FINANCIAL COMPANIES

1. Shubham & Associates are going to start the audit of NBFCs. They have not performed much work for
the NBFCs in the past years. You are required to explain the requirements related to registration and
regulation of NBFCs which an auditor needs to keep in his mind while planning the audit of NBFC which
would help this firm.

ANSWER: No NBFC is allowed to commence or carry on the business of a NBFC without obtaining a
certificate of registration from RBI., financing activity is a principal business of the company, company’s
financial assets constitute more than 50% of the total assets, income from financial assets constitute
more than 50% of the gross income, This test is popularly known as 50-50 test and is applied to
determine whether or not a company is into financial business.

2. What are the different types of NBFCs registered with RBI?

ANSWER: Investment and Credit Company, Infrastructure Finance Company, Systemically Important
Core Investment Company, Infrastructure debt Fund, -Micro Finance Institution, Non-Banking Financial
Company – Factors, Non-Operative Financial Holding Company.

3. Write short note on: Infrastructure Finance Companies.

ANSWER:

(i) a minimum of 75 per cent of its total assets should be deployed in infrastructure loans;
(ii) Net owned funds of ₹300 crores or above;
(iii) minimum credit rating 'A' or equivalent of CRISIL, FITCH, CARE, ICRA or equivalent rating by any
other accrediting rating agencies;
(iv) Capital to Risk Asset Ratio (CRAR) of 15%.

4. You are the auditor of MP Ltd., a NBFC registered with RBI as an Investment Company. How would you
proceed to ensure the "Compliance of Prudential Norms Directions" by MP Ltd.?

ANSWER: The auditor has to verify the compliance of prudential norms relating to
(1) income recognition;
(2) Income from investments;
(3) Asset classification;
(4) Provision for bad & doubtful debts;
(5) Capital adequacy norm;
(6) Prohibition of granting loans against its own shares;
(7) Prohibition on loans & investments for failure to repay public deposits &
(8) Norms for concentration of credit etc.

5. You are appointed as the auditor of a NBFC which an Investment company is registered with RBI. What
shall be the special points to be covered for the audit of NBFC in case of Investment companies
OR
Shivam & Co LLP are the auditors of NBFC (Investment and Credit Company). Some of the team
members of the audit team who audited this NBFC have left the firm and the new team members are
Page No. 90
 in discussion with the previous team members who are still continuing with the firm regarding the
verification procedures to be performed. In this context, please explain what verification procedures
should be performed in relation to audit of NBFC - Investment and Credit Company (NBFC-ICC).

Ans. Board Minutes for purchase and sale of investments; obtain a certificate to the effect whether
acquired investment is current or Long-Term Investments; Test check bills/contract notes; NBFC
Prudential Norms; investments in unquoted debentures/bonds have not been treated as investments
for purposes of income recognition and asset classification; securities of same type received back by the
lender/paid by the borrower together with all corporate benefits; Physically verify shares and securities;
confirmation from depository for securities held on behalf of the it; Valuation as per NBFC Prudential
Norms Directions;

6. You are the auditor of ABC Ltd., a NBFC registered with RBI. How would you proceed to ensure the
compliance of Public Deposit Directions by it.

ANSWER: Credit Rating, Interest and Brokerage payments, Written Application, Deposit Register,
Repayment of deposits, Custody of investments, Submission of Accounts, Filing of Annual return, Board
Resolution in case of non-acceptance of public deposits.

7. You are appointed as the auditor of a Hire-Purchase Finance Company. Enumerate the verification
procedures in relation to audit of such Non-Banking Financial Company

Adequate appraisal system For credit worthiness; payment for asset should be made directly to the supplier;
whether the RC contains an endorsement ; Assets on hire purchase have been adequately insured; high value
hire purchase items - whether valuation reports and installation reports are called for; hire purchase
instalments are being received regularly; No change in Method of accounting followed by the hire purchase
finance company; verifying the hire purchase assets periodically.

8. Under what heads can the frauds committed by Non-Banking Financial Companies (NBFCs) be
classified?

ANSWER:
(a) Misappropriation and criminal breach of trust
(b) Fraudulent encashment through forged instruments, manipulation of books of account or through
fictitious accounts and conversion of property
(c) Unauthorised credit facilities extended for reward or for illegal gratification.
(d) Negligence and cash shortages
(e) Cheating and forgery
(f) Irregularities in foreign exchange transactions
(g) Any other

9. Write a short note on the special points that may be covered in the audit of equipment leasing finance
company.

Ans.
Adequate appraisal system for extending equipment leasing finance; Verify lease agreement; Adequate system
for monitoring insurance of assets and regular maintenance; Adequate system for installation of assets and
physical verification; Physical verification of the leased assets; AS on “Accounting for Lease” has been
followed.

10. An auditor has been appointed for the audit of a loan financing company, registered as an NBFC. You
are required to state special points to be kept in mind while auditing such company
Page No. 91
 Adequate system of proper appraisal and follow up of loans and advances; properly sanctioned; verify
conditions attached to the sanction; security obtained and the agreements entered into; No advance against
the security of its own; whether NBFC has not lent/invested in excess of the specified limits; Check
classification of loans and advances are as required by NBFC Prudential Norms Directions; Obtain balance
confirmations; Proper records/documents have been maintained; Regular system to ascertain the credit
worthiness of the clients.

11. What are the specific matters to be included in Auditor’s Report in an audit of NBFC not accepting
public deposits.

ANSWER: Board resolution, accepted any public deposits, complied with the prudential norms,
Systemically Important Non-deposit taking NBFC, correctly classified as NBFC Micro Finance
Institutions (MFI).

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

ANSWER:

(a) the provisions of Chapter III B of Reserve Bank of India Act, 1934; or
(b) the NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016; or
(c) NBFC–Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016
and NBFC Systemically Important Non-Deposit taking Company and Deposit taking Company
(Reserve Bank) Directions, 2016.

13. The RBI restrict companies from carrying on the business of a nonbanking financial institution without
obtaining the certificate of registration, therefore, obtaining registration under section 45-IA of the
Reserve Bank of India Act, 1934 is necessary. Additionally, new clause has been inserted under CARO,
2016 for commenting whether the registration has been obtained, if required. You are required to
state the audit procedure and reporting to be followed under above mentioned circumstances.

ANSWER:
(i) Examine the transactions of the company with relation to the activities covered under the RBI Act
and directions to determine whether the company is engaged in financial activity.
(ii) Auditor should examine the financial statements to ascertain whether company’s financial assets
constitute more than 50 per cent of the total assets and income from financial assets constitute
more than 50 per cent of the gross income.
(iii) Ascertain whether the net owned funds of the company exceed such amount so as to require the
company to get itself registered as NBFC with RBI.
(iv) Ascertain whether the company has obtained the registration as NBFC, if not, the reasons should
be sought from the management and documented.
(v) Auditor’s Report under CARO, 2016 shall incorporate 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.

14. Mr. G has been appointed as an auditor of LMP Ltd., a NBFC company registered with RBI. Mr. G is
concerned about whether the format of financial statements prepared by LMP Ltd. is as per
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notification issued by the Ministry of Corporate Affairs (MCA) dated October 11, 2018. The notification
prescribed the format in Division III under Schedule III of the Companies Act, 2013 applicable to NBFCs
complying with Ind-AS. Mr. G wants to know the differences in the presentation requirements
between Division II and Division III of Schedule III of the Companies Act, 2013. Help Mr. G.

ANSWER: The presentation requirements under Division III for NBFCs are similar to Division II (Non
NBFC) to a large extent except for the following:
(a) NBFCs have been allowed to present the items of the balance sheet in order of their liquidity which
is not allowed to companies required to follow Division II. Additionally, NBFCs are required to
classify items of the balance sheet into financial and non-financial whereas other companies are
required to classify the items into current and non-current.
(b) An NBFC is required to separately disclose by way of a note any item of ‘other income’ or ‘other
expenditure’ which exceeds 1% of the total income. Division II, on the other hand, requires
disclosure for any item of income or expenditure which exceeds 1% of the revenue from operations
or ₹10 lakhs, whichever is higher.
(c) NBFCs are required to separately disclose under ‘receivables’, the debts due from any Limited
Liability Partnership (LLP) in which its director is a partner or member.
(d) NBFCs are also required to disclose items comprising ‘revenue from operations’ and ‘other
comprehensive income’ on the face of the Statement of profit and loss instead of showing those
only as part of the notes.

Page No. 93
 12 AUDIT UNDER FISCAL LAWS

1. Comment with respect to computation of total sales, turnover or gross receipts in business exceeding
the prescribed limit under section 44 AB of Income Tax Act, 1961.
(i) Discount allowed in the sales invoice
(ii) Cash discount
(iii) Price of goods returned related to earlier year
(iv) Sale proceeds of fixed assets.

Ans:
 (i) Will be deducted from turnover
 (i) Not to be deducted being in the nature of financing charge.
 (iii) Will be deducted from turnover.
 (iv) Will not form part of turnover

2. Mr. Raju deals in a commodity and purchase and sales of that commodity is ultimately settled
otherwise than by the actual delivery. During the financial year 2018-19 he purchased the commodity
worth ₹95 Lacs and sold the same commodity for ₹104 Lacs and the contract was settled otherwise
than by the actual delivery. Raju seeks your advice whether he is liable for tax audit u/s 44AB of the
Income Tax Act.

Ans: Mr. Raju is not liable for Tax audit u/s 44AB of the Income Tax Act, 1961, as in case of speculative
transactions the difference of sale and purchase amount is turnover. In this case turnover is only ₹9 Lacs
(₹104 Lacs – ₹95 Lacs).
(WEF AY 2022-23, the threshold limit increased from 1 to 10 crores in case when cash receipts and
payments made during the year does not exceed 5% of total receipt or payment, as the case may be.)

3. M/s. OY & Co. has been appointed as tax auditor under section 44 AB of Income Tax Act, 1961 by
Woodcraft Interior Consultants, a professional partnership firm, having turnover ₹1.25 Crores. M/s XZ
& Co. are the statutory auditors of the firm but they are unable to give their report on the financial
statements of the firm. M/s. OY & Co., have, however, completed their tax audit and want to issue
their reports. Comment.

Ans: Form No. 3CA requires the tax auditor to enclose a copy of the audit report conducted by the
statutory auditor. Where the report of the statutory auditor is not available for whatever reasons, it will
be possible for the tax auditor to give his report in Form No. 3CB and to certify the relevant particulars in
Form No.3CD.
(WEF AY 2022-23, the threshold limit increased from 1 to 10 crores in case when cash receipts and
payments made during the year does not exceed 5% of total receipt or payment, as the case may be.)

4. Draft an Audit programme for conducting the audit of a Public Trust registered under section 12A of
the Income Tax Act, 1961.

Ans: Preliminary: Copy of resolution from the trust, list of accounting records, Trial Balance as at end of
accounting period, Balance Sheet and Profit & Loss account.
Compliance and Substantive Checking; Issuing Audit Report.

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5. A Co-operative Society having receipts above ₹200 lakhs get its accounts audited by a person eligible to
do audit under Co-operative Societies Act, 1912, who is not a C.A. State with reasons whether such
audit report can be furnished as tax audit report u/s 44AB of the Income Tax Act, 1961?

Ans: Audit report by a person other than Chartered Accountant cannot be furnished as tax audit report
under Section 44AB of the Income-tax Act, 1961.

6. A member of the institute shall not accept in a year more than the specified number of tax audits
under section 44AB of the Income Tax Act.
Mr. Gaurav is a partner in M/s. XYZ & Co., a firm of Chartered Accountants with 6 partners. During the
assessment year 2015-16, Mr. Gaurav alone had signed 290 tax audit reports consisting of both
corporate and non-corporate assesses.

Ans: Section 44AB - Council Guidelines 2008, Max Limit of Firm is 60 tax audit assignments per partner X
6 partners = 360. Therefore, all the 6 partners of the firm can collectively sign 360 tax audit reports. This
maximum limit of 360 tax audit assignments may be used by the partners as per their wish. For instance,
1 partner can individually sign 360 tax audit reports in case remaining 5 partners are not signing any tax
audit report.

7. XYZ Ltd., a non-resident company, is engaged in the business of extraction of mineral oils, having
turnover of ₹20 lakhs during the financial year 2018-19. The company claims that its profits and gains
chargeable to tax under the head "Profits and gains of business or profession" is lower than the
deemed income chargeable under section 44BB of the Income Tax Act, 1961. Therefore, it decided to
get its accounts audited under section 44AB of the Income Tax Act, 1961. Discuss reporting
requirement of Form 3CD in this behalf.

Ans: Under Clause 8, auditor is required to indicate the relevant clause of Section 44AB under which
audit is to be conducted and in addition under clause 12, auditor is required to indicate the amount of
profits of business covered u/s 44AB and the relevant section.

8. M/s ELI Ltd. engaged in business presented the following information to you for the FY 18-19. Turnover
made during the year ₹124 lacs. Goods returned in respect of sales made during FY 17-18 is ₹20 lacs not
included in the above. Cash discount allowed to his customers ₹1 lac for prompt payment. Special
rebate allowed to customer in the nature of trade discount ₹5 lacs. Kindly advise him whether he has
to get his accounts audited u/s 44AB of the Income Tax Act, 1961.

Ans: Tax Audit Not Required. (Turnover 124 Lacs – 20 Lacs – 5 Lacs = 99 Lacs). (WEF AY 2022-23, the
threshold limit increased from 1 to 10 crores in case when cash receipts and payments made during the
year does not exceed 5% of total receipt or payment, as the case may be.)

9. Briefly discuss the provisions given under section 66 regarding Special Audit required under CGST Act.

Ans: Sec 66 CGST ACT – Special Audit

10. Hero Ltd. is engaged in the business of manufacturing of Oven. The company recorded the turnover of
₹1.13 crore during the financial year 2018-19 before adjusting the following:
Discount allowed in the Sales Invoice ` 8,20,000
Cash discount (other than allowed in Cash memo/sales invoice) ` 9,20,000
Trade discount ` 2,90,000
Commission on Sales ` 6,00,000
Sales Return (F.Y. 2017-18) ` 1,60,000

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 Sale of Investment ` 6,60,000
You are required to ascertain the effective turnover to be considered for the prescribed limit of tax
audit and guide the company whether the provisions relating to tax audit applies.

Ans: Tax Audit required as effective turnover is ₹1,00,30,000

(WEF AY 2022-23, the threshold limit increased from 1 to 10 crores in case when cash receipts and
payments made during the year does not exceed 5% of total receipt or payment, as the case may be.)

11. Mr. None is conducting the Tax audit u/s 44 AB of the Income Tax Act, 1961 of MG Ltd. for the year
ended 31st March, 2019. There is a difference of opinion between Mr. none and the Management in
respect of certain information to be furnished in Form No. 3CD. As a tax auditor, Mr. none has to
report whether the statement of particulars in Form 3CD are true and correct and the same is to be
annexed to the report in Form No. 3CA. Advise on the matters to be considered by Mr. none while
furnishing the particulars in Form No. 3CD.

Ans: It is advisable for Mr none to consider Form 3CD Considerations

12. You are appointed as tax auditor of Mr. LEGAL a practicing advocate in Agra. During the previous year
he collected GST of ₹7 lakhs but utilized for personal use. The department issued a show cause notice
to him why the tax collected by him in not deposited to the Government account. He appeared before
the department and stated his inability to pay the sum due to financial crisis. The proceedings are still
pending. Mr. LEGAL requests you not to disclose his GST registration details while filling particulars to
be furnished in From No. 3CD. As a tax auditor how would you deal with this?

Ans: Instruction of Mr. Legal is not acceptable as clause 4 of Form 3CD requires tax auditor to furnish the
details of registration number or other identification number of assessee, if assessee is required to pay
indirect taxes like GST etc.

13. Y2Z Ltd., is consistently following accounting standards as required u/s 133 of the Companies Act,
2013. During your tax audit u/s 44AB of the Income tax act, 1961, the board of directors informed you
that profits of the company is properly arrived at and the ASs applicable to it have been followed
consistently and as such, there need not be any adjustments to be made as per ICDS notified u/s 145 of
Income Tax Act, 1961. Based on the requirement of Law in this regard, examine the validity of the
stand of management in this regard.
Ans: Stand of management is not correct. As there are certain differences in between AS notified u/s 133
of Companies Act, 2013 and ICDS notified u/s 145 of Income Tax Act, 1961. Reporting required under
clauses 13(d), (e), (f) of Form 3CD.

14. State the reporting requirement regarding books of account (prescribed, maintained and examined) in
Form No. 3CD of Tax Audit under Section 44AB of the Income Tax Act, 1961.

Ans: Clause 11.

15. T Ltd's previous year ended on 31st March 2012 T Ltd had changed the method of determination of
cost formula for the purpose of stock valuation from FIFO basis to Weighted Average Cost basis, but
that was also not reflected in clause 14 of Form 3CD which requires reporting on change in accounting
method employed Comment.
OR
A leading jewellery merchant used to value his inventory at cost on LIFO basis. However, for the
current year, in view of requirements of AS-2, he changed over to FIFO method of valuation. The

Page No. 96
 difference in value of stock amounted to ₹55 lakhs which is higher than that under the previous
method. In such a situation, what are the reporting responsibilities of a Tax Audit u/s 44AB of Income
Tax Act, 1961.

Ans: If the change in method of valuation is bonafide and is regularly and consistently adopted in the
subsequent years as well, such change would be permitted to be made for tax purposes. In the instant
case, the change in the valuation of stock is pursuant to mandatory requirements of the AS-2 ‘Valuation
of Inventories’ and therefore should be viewed as bonafide change. In addition, the tax auditor in his
report has to specifically refer to the method of valuation of stock under Clause 14 in Form 3CD.

16. NEW Ltd’s previous year ended on 31st March 2019. During that period, it made a claim for refund of
customs duty which was admitted as due by the customs authorities during April 2019. NEW Ltd
neither credited the claim in the profit and loss account nor reported the same in clause 16(b) of Form
3CD for the reason that this has been admitted as due by the authorities only in the next financial year.
Further NEW Ltd had changed the method of determination of cost formula for the purpose of stock
valuation from FIFO basis to Weighted Average Cost basis, but that was also not reflected in clause
13(b) of Form 3CD which requires reporting on change in accounting method employed. Comment.

Ans: Non-reporting of claim of refund of custom duty in Form 3CD is in order, as Clause 16(b) requires
details of refund of custom duty, if admitted as due but not reported in Profit and Loss account. The
claim which have been admitted as due after the relevant previous year need not be reported. Non-
reporting of method of valuation in Form 3CD is also in order, as Clause 13(b) requires reporting in case
of change in method of accounting employed. But in the present case there is a change in accounting
policy. Change in Accounting policy cannot be treated as change in method of accounting.

17. A leading manufacturing concern valued its inventory following a method not in line with the
provisions of Income Computation and Disclosure Standard (ICDS) – 2 ‘Valuation of Inventories’.
In such a situation, discuss the relevant clause of Form No. 3CD under which the tax auditor is required
to report?

Ans: Clause 13 of Form No. 3CD; ICDS II−Valuation of Inventories ; Clause 13(f) Disclosures

18. Write a short note on - Method of accounting in Form No. 3CD of Tax Audit.

Ans: Clause 13 of Form No. 3CD; ICDS; Section 145

19. While conducting the tax audit of CIA & Co. you observed that it made an escalation claim to one of its
customers but which was not accounted as income. What is your reporting responsibility?

Ans: A tax auditor has to report under clause 16(c) of Form 3CD on any escalation claim accepted during
the previous year and not credited to the profit and loss account under clause 16(c) of Form 3 CD

20. ZIA Ltd., a manufacturing concern, sold a house property in Mumbai for a consideration of ₹48 lakh, to
Mr. A on 01.08.2018. ZIA Ltd. had purchased the house property in the year 2015 for ₹30 lakh. The
stamp duty value on the date of transfer, i.e., 01.08.2018, is ₹65 lakh for the house property. How
would you deal this matter in tax audit report?

Ans: Since sale is less than SDV Hence, tax auditor is required to report on the same under Clause 17 of
Form 3CD.

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21. While writing the audit program for tax audit in respect of YUVI Ltd you wish to include possible
instances of capital receipt if not credited to Profit & Loss A/c which needs to be reported under clause
16(e) of Form 3CD. Please elucidate possible instance.

Ans: Instances of Capital receipt:

(a) Capital subsidy received in the form of Government grants, which are in the nature of promoters’
contribution i.e., they are given with reference to the total investment of the undertaking or by way of
contribution to its total capital outlay. For e.g., Capital Investment Subsidy Scheme.
(b) Government grant in relation to a specific fixed asset where such grant is shown as a deduction from
the gross value of the asset by the concern in arriving at its book value.
(c) Compensation for surrendering certain rights.
(d) Profit on sale of fixed assets/investments to the extent not credited to the profit and loss account.

22. BHUVI Ltd., engaged in manufacturing of goods carriage, appointed you as the tax auditor for the
financial year 2018-19. How would you deal with the following matters in your tax audit report:
(i) Payments of 6 invoices of ₹5,000 each made in cash to Mr. A, engaged in leasing of goods carriages
on 4th July, 2018.
(ii)Payments of 2 invoices of ₹18,000 each made in cash to Mr. B, engaged in leasing of goods carriages
on 5th July, 2018 and 6th July, 2018 respectively.
(iii) Payment of ₹40,000 made in cash to Mr. C, engaged in leasing of good carriages on 7th July, 2018
against an invoice for expenses booked in 2017-18.

Ans: Section 40A of Income Tax Act, 1961. Reporting required under Clause 21(d) w.r.t. payment of
₹40,000 only as the other payments made on 4th July, 5th July and 6th July are not disallowed under
Section 40A.

23. As an auditor of a partnership firm under section 44AB of the Income Tax Act, 1961, how would you
report on the following: Capital Expenditure incurred for scientific research asssts.

Ans: Clause 19 of Form 3 CD (Amt dr to PNL; Admissible as per IT – Sec35; Fulfils the conditions)

24. As an auditor of a partnership firm under section 44AB of the Income Tax Act, 1961, how would you
report on the following: Expenditure incurred at Clubs.

Ans: Clause 21(a) – Form 3 CD.

25. M is proprietor of a firm M/s MNO & Co. The firm has a turnover of ₹500 lakhs during the financial year
ended 31.03.2019. The firm sold land and building during the year for a consideration of Rs. 15 lakhs,
whose value for stamp duty purposes was Rs. 16 lakhs. As the Tax Auditor of the said firm, is the above
to be reported? If yes, how will you report the same?

Ans: Clause 17 of Form 3CD

26. Mr. Ram, the Tax Auditor finds that some payments inadmissible under Section 40 A (3) were made
and advised the client to report the same in form 3CD. The client contends that cash payments were
made since the other parties insisted upon the same and did not have Bank Accounts. Comment.

Ans: Payments made by the client are inadmissible u/s 40A(3) of the Income Tax Act, 1961 and hence,
needs to be reported under clause 21(d)(A) of Form 3CD. Cash payment made on insistence of other
parties on the contention that they do not have bank accounts is not covered under the list of exceptions
provided under Rule 6DD.

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27. MNO Ltd. pays ₹90,000 for its 10 employees to a Hotel as boarding and lodging expenses of such
employees for a conference. The Company pays the amount in cash to the Hotel. The Hotel gives 10
bills each amounting to ₹9,000. The Company contends that each bill is within the limit, so there is no
violation of the provisions of the Income Tax Act, 1961. As the tax auditor, how would you deal with
the matter in your tax audit report for the Assessment Year 2019-20?

Ans: Payments made by the MNO Ltd. are inadmissible u/s 40A(3) of the Income Tax Act, 1961 and
hence, needs to be reported under clause 21(d) of Form 3CD.

28. You are the Tax auditor of HEAVY & Co., a partnership firm engaged in the business of plying of Goods
Carriages for the financial year 2018-19 having a turnover of Rs. 20 crores. How would you deal and
report on the following?
(i) Payment of Rs. 50,000 in cash to Mr. R on 10th September, 2018 towards settlement of invoice for
expenses accounted in financial year 2017-18.
(ii) Payments of 3 invoices of Rs. 15,000 each made in cash to Mr. Y on 8th, 9th, 10th, July, 2017
respectively.

Ans: Section 40A of Income Tax Act, 1961.

(i) Reporting required under Clause 21(d)(B) w.r.t. payment of ₹50,000.
(ii) Reporting required under Clause 21(d)(A) w.r.t. each payment as individual payment made on a day
exceeds ₹10,000.

29. As the tax auditor of a Company, how would you report on payments exceeding ₹10,000 made in cash
to a supplier against an invoice for expenses booked in an earlier year?

Ans: The tax auditor is required to report under clause 21(d)(B), being the amount disallowed under
section 40A(3A) of the Income Tax Act, 1961.

30. Mr. Sagar carries on the business of dealing and export of diamonds. For the year ended 31st March
2019, you as the tax auditor find that the entire exports are to another firm in U.S.A. which is owned by
Mr. sagar’s brother. Comment

Ans: No Reporting required under Clause 23 w.r.t. particulars of payment made to persons specified u/s
40A(2)(b)

31. As an auditor appointed under section 44AB of the Income Tax Act, 1961, how would you verify and
report on the following: The assessee has paid rent of ₹5 lakhs for premises to his brother.

Ans: Reporting required under Clause 23 w.r.t. particulars of payment made to persons specified u/s
40A(2)(b).

32. How will you verify the Income & Expenditure of earlier years credited/debited in current year for
reporting under clause 27(b) of 3CD while carrying out Tax Audit u/s 44AB of the Income Tax Act, 1961?

Ans:
(i) Schedule indicating particulars of expenditure/ income of any earlier
(ii) Verify various expenses account to see whether any expenditure pertaining to any earlier year has
been debited
(iii) Properly disclosed.
(iv) Check that, there is no expenditure/ income relating to earlier years that has not been mentioned in
the particulars furnished by the Assessee.

Page No. 99
 (v) In case of cash system of accounting, there will be no amount to be disclosed under this head.

33. DEF Pvt. Ltd. And ABC Pvt. Ltd. are the Companies in which public are not substantially interested.
During the previous year 2018-19, DEF Pvt. Ltd. received some property being shares of ABC Pvt. Ltd.
The details of which are provided below:
No. of shares 1000
Face Value ₹10 per share
Aggregate Fair Market Value ₹1,00,000
Consideration Value Nil
As the tax auditor how would you deal with the situation?

Ans: Clause 28 requires reporting of income taxable u/s 56(2)(viia). Finance Act, 2017 amends Sec. 56(2),
in accordance with which provisions of Section 56(2)(viia) are not applicable for transactions taken place
on or after 01.04.2017. This transaction now, falls under Sec. 56(2)(x). For transactions falling u/s
56(2)(x), reporting is required as per Clause No. 29B.

34. AB Ltd. is a company in which public are not substantially interested. During the previous year 2018-19,
the company issued shares to residents of India and provides you the following data related to such
issue:
No. of shares issued 1,00,000
Face Value ₹ 10 per share
Fair Market Value (FMV) ₹ 60 per share
Consideration received ₹ 80 per share
The management of the company contends that, it is a normal issue of shares, thus, needs not to be
reported. As the tax auditor of AB Ltd., how would you deal with the matter in your tax audit report?

Ans: Excess of issue price over fair market value of shares issued, is taxable as per section 56(2)(viib) of
the Income Tax Act, 1961. Therefore, the tax auditor is required to furnish the details of shares issued
under clause 29 of Form 3CD. The contention of the management that reporting is not required, being it
is a normal issue of shares, is not acceptable.

35. As an auditor appointed under section 44AB of the Income Tax Act, 1961, how would you verify and
report on the following: The assessee has borrowed ₹50 lakhs from various persons partly in cash and
partly by account payee cheque.

Ans: clause 31(a) & clause 31(c).

36. SL Pvt. Ltd. is a company engaged in the production of wool. Along with its production business, the
company is also engaged in buying and selling of securities with the expectation of a favourable price
change. It reports the following data for the current financial year:
S. No Particulars Amount (in `)
1 Paid up Share Capital 100 lakhs
2 Capital Reserve 33 lakhs
3 Capital Redemption Reserve 45 lakhs
4 Revaluation Reserve 32 lakhs
5 Speculation Loss on account of 12 lakhs
Purchase and
Sales of Securities

Ans: Furnish the details under Clause 32(e) of Form 3CD with respect to the speculation loss of ` 12 lakhs
made during the year.

Page No. 100

37. KGF Printing Press, a proprietary concern, made a turnover of above ₹103 lacs for the year ended
31.03.2019. The Management explained its auditor Mr. Z that it undertakes different job work orders
from customers. The raw materials required for every job are dissimilar. It purchases the raw materials
as per specification/requirements of each customer, and there is hardly any balance of raw materials
remaining in the stock, except pending work-in-progress at the year end. Because of variety and
complexity of materials, it is rather impossible to maintain a stock-register. Give your comments.

Ans: As per requirement of Para 35(b) and Para 11(b) of Form 3CD, auditor is required to report on the
details of stock and account books (including stock register) maintained. He must verify the closing stock
of raw materials and finished products and by-products of the entity. In case the details are not properly
maintained, he has to specifically mention the same, with reasons for non-maintenance of stock register
by the entity
(WEF AY 2022-23, the threshold limit increased from 1 to 10 crores in case when cash receipts and
payments made during the year does not exceed 5% of total receipt or payment, as the case may be.)

38. Discuss the reporting requirements in Form 3CD of the Tax Audit Report U/S 44AB of the Income-tax
Act, 1961 for the Brought forward loss or depreciation allowance.

Ans: Clause 32(a)

39. ZINC Ltd., is a company engaged in the production of wool. Along with its production business, it is also
engaged in buying and selling of securities with the expectation of a favourable price change. During
the year, its speculation loss on account of purchase and sale of securities was to the tune of ₹12 lacs.
As a tax auditor, what is the reporting requirement in Form 3CD u/s 44AB of the Income Tax Act, 1961?

Ans: Clause 32(e) of Form 3CD requires the auditor to furnish the details of speculation losses incurred by
the assessee during the previous year

40. Discuss the reporting requirements in Form 3CD of the Tax Audit Report U/S 44AB of the Income-tax
Act, 1961 for the Tax on distributed profits.

Ans: Clause 36 of Form 3CD.

41. Bhishma Ltd., having principal place of business in Delhi, is engaged in the generation, transmission,
distribution and supply of electricity throughout the India. The management of the company came to
know that the provisions related to maintenance of cost records and cost audit are applicable to the
company. The company, therefore, appointed a cost auditor for the financial year 2018-19. The cost
auditor reported certain disqualifications in Form CRA-3 of the cost audit report to which the
management of the company disagreed. The management of Bhishma Ltd. instructed its tax auditor
not to reveal any of the disqualifications related to the cost audit while filling particulars to be
furnished in Form No. 3CD contending that the disqualifications are not relevant and there is no
correlation between tax audit and cost audit as well. As a tax auditor, how would you deal with the
matter?

Ans: Contention of management is not acceptable as auditor is required to provide the details of
disqualifications on any matter/item/value/quantity as may be reported/identified by cost auditor under
clause 37 of Form 3CD.

42. As a tax auditor, which are the accounting ratios required to be mentioned in the report in case of
manufacturing entities? Explain in detail any one of the above ratios and how does it help the tax
auditor in his analytical review.

Page No. 101

 Ans: Clause 40 of Form 3CD

43. State with reasons whether an auditor conducting tax audit ‘certifies’ or ‘reports’ on information
contained in the statement of particulars attached to the tax audit report under Section 44AB of
Income-tax Act, 1961.

Ans: Auditor conducting tax audit “reports” on certain information, apart from “certifying” factual
information contained in the statement of particulars annexed to the tax audit report under section 44AB
of the Incometax Act, 1961.

44. The Statutory Auditor of I Ltd. is also appointed to undertake its Tax Audit. After the completion of
Statutory Audit, he finalizes Tax Audit without referring to Standards on Auditing and Guidance Notes
of Institute as he is of the opinion that Tax Audit relates only to tax matters with which the Income tax
department is concerned. Moreover, the assessee furnishes to the auditor only the requisite
information and records for the purpose of Tax Audit.

Ans: Opinion of the auditor that Tax Audit relates only to tax matters with which the Income tax
department is concerned and there is no need to refer the Standards on Auditing and Guidance Notes of
Institute is not correct. Moreover, since the appointment of the tax auditor is made by assessee, it will be
in the interest of the assessee to furnish all the information and explanation and produce books of
account and records required by the tax auditor.

45. You are doing the tax audit of a Limited Company. After submission of Tax Audit Report, management
notices that there was apparent mistake of law and due to this mistake, revised the final accounts. As a
tax auditor, company seeks your opinion whether the tax audit can also be revised or not.

Ans: Normally, the report of the tax auditor cannot be revised later. However, when the accounts are
revised in the following circumstances, the tax Auditor may have to revise his Tax audit report also. (a)
Revision of accounts of a company after it adoption in the annual general meeting. (b) Change in law with
retrospective effect. (c) Change in interpretation of law (e.g.) CBDT Circular, Notifications, Judgments,
etc. The Tax Auditor should state that it is a revised Report, clearly specifying the reasons for such
revision with a reference to the earlier report.

46. In terms of Sl. No. 5G of Form GSTR 9C, the turnovers included in the audited financial statement for
the period April 2017 to June 2017 shall be declared and deducted from the annual turnover to arrive
at the turnover as per the GST Laws. Please specify which of the following supplies would form part of
reporting under turnover for the period April 2017 to June 2017:
(a) Goods were manufactured and cleared from a factory on 1.6.2017 on sale or approval basis. The
goods were not approved by the recipient and returned back on 25.12.2017.
(b) Goods were manufactured and cleared from a factory located in Bangalore on 30.4.2017. The goods
were cleared to its showroom located in Hyderabad and eventually been sold from there on 30.8.2017.
The audit under the GST Law will be conducted for Bangalore GSTIN.
(c) Continuous supply of service in the nature of telecommunication service has been provided for the
period 1.6.2017 to 30.6.2017. The bill is raised on 3.7.2017. The bill is payable by the customer only on
21.7.2017. Should the revenue be recognised in the month of June 2017 and reduced from total
turnover or should it form part of turnover for the period July 2017 to March 2018 since the due date
for payment of consideration is 21.7.2017. The entity recognised the revenue in the month of June
2017.
(d) Services were provided during the period June 2017. The service was completed on 20.6.2017, but
invoice for the service was raised only on 1.8.2017.

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 (e) Service has been provided in the month of May 17 amounting to ₹1,00,000. Invoice has been raised
within 30 days. There was a deficiency in the provision of service. The customer has paid only ₹20,000.
The company has issued credit note amounting to ₹80,000 on 31.3.2018 and closed the customer’s
account. Should any amount be reduced for the period April 2017 to June 2017. Are any adjustments
required to be made for the period July 2017 to March 2018?

Ans: (a) 2nd proviso to Section 142(12) of the CGST Act since the goods were returned after 6 months
from appointed date (i.e. 1.6.2017), GST would be payable for the tax period December 2017.
(b) Since audit is being conducted for Bangalore GSTIN and since supply has occurred from Hyderabad
GSTIN, it would not be necessary to make adjustments for the period April 2017 to June 2017.
(c) The said amount should be deducted as turnover under this Sl. No. for the period April 2017 to June
2017.
(d) Therefore, the said value of invoice must be deducted for the period April 17 to June 2017.
(e) As per Sec. 142(2)(b) of the GST Act - only ₹20,000 is required to be reduced.

47. Please state which of the following are liable to reverse charge
(a) GTA issued a consignment note on 1.1.18. The consignment notes charges GST @ 12%. The
consignor has booked the GTA. The recipient has paid the freight to GTA on ‘to collect’ basis. Would
this turnover be mentioned in Table 7D?
(b) GTA issued a consignment note on 1.1.18. The consignment note does not charge GST. The
consignor has booked the GTA. The recipient has paid the freight to GTA on ‘to collect’ basis. Would
this turnover be mentioned in Table 7D?
(c) Advocate Mr. X has provided legal service and charged GST of ` 18 on his invoice of ` 100. The
advocate’s client has paid 118 to the advocate. The advocate has remitted ` 18 to government and is of
the opinion that the aforesaid transaction should not be reduced in Table 7D. Is the stand taken by the
advocate correct?

Ans: (a) The Consignment note contains GST @ 12%, so reverse charge does not attract as per
N.No.13/17 CT (R) w.e.f. 22.8.10. Hence tax has to be paid by GTA under forward charge, and this
transaction should not be entered in Table 7D.
(b) Since consignment note has not charged GST @ 12%, reverse charge provisions would apply. Tax is to
be paid by the person liable to pay freight, that is, the recipient and not the GTA under forward charge.
Because of this, the impugned transaction has to be entered in Table 7D.
(c) Supplies by a Registered Person, whose suppliers are liable for reverse charge, are to be inserted in
Table 7D. Legal service provided by the advocate to his client is liable for reverse charge (assuming all
other conditions in reverse charge notification stand satisfied). Hence the impugned transaction should
be inserted in Table 7D. GST wrongly collected and paid by the advocate under forward charge will not
change the fact that the aforesaid service is liable to reverse charge and hence merits insertion in Table
7D.

48. While doing Tax Audit, under section 44AB of the Income tax Act, 1961, of the accounts of Glue Private
Limited for the Assessment Year 2019-20, it was found that during the Financial Year 2018-19, Glue
Private Limited had received 9,000 shares, the market value of which was Rs. 90,000 on the date of
transfer, at a price of Rs. 45,000 from stick Private Limited. The Management of Glue Private Limited
maintained that the transaction was as per the terms of negotiations and there would be no cause for
the Auditor to bring this matter in his Tax Audit Report-Comment.

Ans: Clause 28 requires reporting of income taxable u/s 56(2)(viia). Finance Act, 2017 amends Sec. 56(2),
in accordance with which provisions of Section 56(2)(viia) are not applicable for transactions taken place
on or after 01.04.2017. This transaction now, falls under Sec. 56(2)(x). For transactions falling u/s
56(2)(x), reporting is required as per Clause No. 29B. Clause 29B requires the auditor to state “Whether

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 any amount is to be included as income chargeable under the head 'income from other sources' as
referred to in clause (x) of sub-section (2) of section 56” (Yes/No). As the difference of Fair Market Value
and consideration paid is lower than Rs. 50,000, auditor is required to state the answer with “No”.

49. As the auditor appointed under the GST Act, 2017, how would you verify’ Unbilled transactions at the
beginning of the financial year’?

Ans: Tables 5B and 5I

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 13 AUDIT OF PUBLIC SECTOR UNDERTAKINGS

1. Write short note on: Organisation subject to CAG Audit.

Ans: Departmentally managed undertakings, Government companies, Corporations set up under the
specific Acts of legislature.

2. Briefly describe the various principles associated with audit of Public Sector enterprises.

Ans:
GENERAL- Ethics & Independence, Professional Judgement, due care and scepticism, Quality Control,
Audit Team Management & Skill, Audit Risk, Materiality, Documentation, Communication.
PRINCIPLES OF AUDIT- obtain an understanding of the nature, conduct a risk assessment or problem
analysis, identify and assess the risks of fraud, perform audit procedures that provide sufficient and
appropriate audit evidence, evaluate the audit evidence, prepare a report based on the conclusions,
Follow up.

3. Write a short note on Public Accounts Committee.

Ans: Examine money disbursal, expenses authorisation, re-appropriation (disbursements of funds),

statement of accounts of autonomous and semi-autonomous bodies.

4. Write short note on: Objectives and Scope of Audit of PSU.

Ans: Objectives- Fiscal Accountability, Managerial accountability, help the government and the
enterprise management, bringing out financial and operational deficiencies.
Scope- Financial, Compliance, Comprehensive, Propriety and Performance audit.

5. Write short notes on the Role of C&AG in the Audit of a Government company.

Ans: Section 143(5), 143(6) & 143(7) of Companies Act 2013.

CAG shall appoint the auditor and The CAG shall within 60 days from the date of receipt of the audit
report have a right to, conduct a supplementary audit. The CAG may cause test audit to be conducted of
the accounts of such company.

6. Various Types of Audit conducted by CAG.

Ans: Financial, compliance, comprehensive, performance, propriety audit. [PCPCF]

7. Contents of Audit report given by comptroller & Auditor – General of India

Ans: Introduction containing a general review, Results of comprehensive appraisals, resume of the
company auditor’s reports, Significant results of audit.

8. The Comptroller & Auditor General of India plays a key role in the functioning of the financial
committees of Parliament and the State Legislatures. He has come to be recognised as a 'friend,

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 philosopher and guide' of the Committees. In view of above, you are required to list down any four
roles.

Ans: Reports of CAG form the basis of Committees' working, Committees requires the assistance of C &
AG for scrutinising the notes which the Ministries submit to the Committees, CAG assists various
committees in suggesting the recommendations.

9. Enumerate the right of C&AG of India to conduct a supplementary audit of the financial statement of a
company, or comment upon or supplement audit report provided under section 143(6) of the
Companies Act, 2013.

Ans: The Comptroller and Auditor−General of India shall within 60 days from the date of receipt of the
audit report have a right to conduct a supplementary audit. Any comments shall be sent by the company
to every person entitled to copies of audited financial statements. Also, The CAG may cause test audit to
be conducted of the accounts of such company.

10. Comptroller & Auditor General of India were conducting supplementary audit U/s 143(6) of the
Companies Act, 2013 made certain comments on the reported foreign exchange loss in the accounts of
a Public-sector company. The Board of Directors failed to reply to the comments of C & AG in their
report. Comment.

Ans: The Board of Directors has not contravened any of the provisions of the Companies Act.

11. What are the relevant sections of the Companies Act, 2013 and steps involved in audit of Government
Companies?

Ans: Section 139(5), 139(7), 143(5), 143(6) and 143(7).

12. On receipt of statutory audit report on 30-03-2018 of M/s Sunlight Ltd., a government company, C&AG
on 25-05-2018 appointed M/s Veeru & Associates to conduct supplementary audit u/s 143(6)(a) of the
Companies Act, 2013. They submitted their report to C&AG as per their scope of work. The Company
held its AGM on 01-09-2018 but directors did not think it necessary to discuss supplementary auditor’s
report and comment of the C&AG. Is the approach of the directors of Sunlight Ltd. correct? Guide the
company with the provisions related to supplementary audit.

Ans: Any comments given by the CAG supplement to, the audit report shall be sent by the company to
every person entitled to copies of audited financial statements and placed before the AGM of the
company. Thus, in this case, management thinking does not seem to be proper.

13. Areas covered in Comprehensive Audit

Ans: AU SEA PIECE

1. Comparison of overall capital cost of the project with the approved planned costs.
2. Production or operational outputs vis-a-vis under-utilisation of the installed capacity.
3. Soundness of systems of project formulation and implementation.
4. Achievement of Planned rate of return
5. Adequacies of Cost control measures.
6. Existence and performance of Research and development programmes.
7. Existence of adequate system of repairs and maintenance.
8. Effective and economical procedures
9. Inefficiency or insufficiency of Project planning

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 10.Undue waste, unproductive time for men and machines, wasteful utilisation or even non utilisation of
resources

14. General Principles relating to Propriety Aspect.

Ans: Expenditure is not more than the required, use of power by authority will not accrue to its own
advantage, funds not utilised for the benefit of a particular person or group, no other reward except
the agreed remuneration given to the management personnel.

15. ABG & Co., a Chartered Accountant firm has been appointed by C & AG for performance audit of a
Sugar Industry. What factors should be considered by ABG & Co., while planning a performance audit
of Sugar Industry?

1. Significance and the needs of potential users of the audit report.

2. Obtaining an understanding of the program to be audited.
3. Legal and regulatory requirements.
4. Management controls.
5. Identifying the criteria needed to evaluate matters subject to audit.
6. Identify significant findings and recommendations from previous audits that could affect the current
audit objectives.
7. Potential sources of data that could be used as audit evidence and consider the validity and reliability
of these data.
8. Consider whether the work of other auditors and experts may be used to satisfy some of the auditors'
objectives.
9. Providing sufficient staff and other resources to do the audit.
10. Preparing a written audit plan.

16. Short note on performance audit.

Ans: It is an independent assessment of the performance of a government organization to improve

public accountability. = Economy + effectiveness + efficiency.

17. Important aspects that are required to be looked into, to assess the efficiency.

Ans: Efficiency is the measurement of input-output. Aspects include the procurement practices, the
maintenance of resources, operating procedures, and cost-effectiveness of the public sector
programmes.

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

Ans:
 How does the overall capital cost of the project compare with the approved planned costs? Were
there any substantial increases and, if so, what are these and whether there is evidence of
extravagance or unnecessary expenditure?
 Have the planned production or operational outputs been achieved? Has there been under-
utilisation of installed capacity or shortfall in performance and, if so, what has caused it?
 Has the planned rate of return been achieved?

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  Are the systems of project formulation and execution sound? Are there inadequacies? What has
been the effect on the gestation period and capital cost?
 Are cost control measures adequate and are there inefficiencies, wastages in raw materials
consumption, etc.?
 Are the purchase policies adequate? Or have they led to piling up of inventory resulting in
redundancy in stores and spares?
 Does the enterprise have research and development programmes? What has been the performance
in adopting new processes, technologies, improving profits and in reducing costs through
technological progress?
 If the enterprise has an adequate system of repairs and maintenance?
 Are procedures effective and economical?
 Is there any poor or insufficient or inefficient project planning?

19. BT Ltd , a company wholly owned by central government was disinvested during the previous year,
resulting in 40% of the shares being held by public. The shares were also listed on the BSE. Since the
shares were listed, all the listing requirements were applicable, including publication of quarterly
results, submission of information to the BSE etc. Sam, the FM of the company is of the opinion that
now the company is subject to stringent control by BSE and the markets, therefore the auditing
requirements of a limited company in private sector under the Companies Act 2013 would be
applicable to the company and the C&AG will not have any role to play. Comment.

Ans: Section 2(45) of the Companies Act, 2013, defines a “Government Company” as a company in
which not less than 51% of the paid-up share capital is held by the Central Government or by any State
Government or Governments or partly by the Central Government and partly by one or more State
Governments, and includes a company which is a subsidiary company of such a Government company.
The auditors of these government companies are firms of Chartered Accountants, appointed by the
Comptroller & Auditor General, who gives the auditor directions on the manner in which the audit
should be conducted by them. The listing of company’s shares on a stock exchange is irrelevant for this
purpose and hence Sam’s opinion is not correct.

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 14 INTERNAL AUDIT, MANAGEMENT AND OPERATIONAL AUDIT

1. WWF Ltd. is a public company having ₹40 lacs paid up capital in previous financial year which raised to
₹60 lacs in current financial year under audit. The company had turnover of previous three consecutive
financial years being ₹49 crores, ₹145 crores and ₹150 crores. During the previous year, WWF Ltd.
borrowed a loan from a public financial institution of ₹110 crores but squared up ₹20 crores by the
year end. The company does not have any internal audit system. In view of the management, internal
audit system is not mandatory. Comment.

Ans: Internal audit is mandatory as outstanding loan during the preceding financial year was exceeding
₹100 Cr. for some point.

2. JKH Pvt. Ltd. who is into the business of imparting coaching to CA students did not appoint any internal
auditor for the year ended 31st March, 2020. As on 31st March, 2019, the company had paid up capital
of ₹50 lakhs and reserves of ₹10 crores. Its turnover for the 3 years preceding the year ended 31st
March, 2020 was ₹75 crores, ₹145 crores and ₹260 crores respectively. As an auditor of the company
for the year ended 31st March, 2020, how would you deal with the above?

Ans: Internal audit is mandatory under section 138 as the turnover exceeds ₹200 Crores.

3. PQR Ltd., a listed company and having an average annual turnover of more than ₹5 crores has no
Internal Audit System. Give your views.

Ans: PQR is liable for internal audit, being a listed entity.

4. Webcom Ltd, a public company with a paid up share capital of Rs. 20 crores has a turnover for the
financial year 2019-20 of Rs. 220 crores. X, a recently qualified Chartered Accountant, has been
appointed for conducting internal audit. He seeks your advice in drafting a good quality internal audit
report. Please guide him by elaborating (in brief) the essential features of good internal audit report.

Ans: Quote the Essential Features of Internal Audit Report

5. AB Pvt. Ltd. company having outstanding loans or borrowings from banks exceeding one hundred crore
rupees wants to appoint internal auditor. Please guide him who can be appointed as internal auditor
and what would be reviewed by him.

Ans: Sec. 138 of Companies Act 2013

6. Interior Pvt. Ltd. is a manufacturing company having turnover of ₹210 crore but having maximum
outstanding loan from public financial institution of ₹90 crore only during the preceding financial year.
You are required to state whether the company is liable for internal audit as per the provisions of the
Companies Act, 2013.

Ans: Company is liable for internal audit as turnover for the preceding financial year exceeds ₹200 Cr.

7. XYZ Yarns Ltd. is a manufacturing company engaged in manufacturing of different types of yarns. Its
annual turnover is Rs. 100 Crores and net profit Rs. 10 crores. It has two manufacturing units. Company
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 is facing difficulties in maintaining adequate system of internal control. Company wants to appoint
Internal Auditor who would help in the above task and also various other functions including
compliance. In view of above, you are required to explain the main responsibility of Internal Auditors.

maintenance of perform his work appraise policies

operate observe unusual
adequate system with and procedures
independently facts
of internal control. independence prevailing

8. ABC Ltd. is engaged in manufacturing of Yarns and Towels. It sells its product in both domestic as well
as in International Market. It has achieved turnover of 200 crores in the F.Y. 2019-20. Directors of the
company realized that they are not managing the company professionally and thereby request your
firm of Internal Auditors for appraisal of its organizational structure to ascertain whether it is in
harmony with the objectives of ABC (P) Ltd. Comment

Ans: Review the manner in which the activities of the enterprise are grouped for managerial control,
Examine the organisation chart, the responsibilities of managerial staff at headquarters do not overlap
with those of chief executives at operating units, Examine the reasonableness of the span of control of
each executive, Evaluate the process of managerial development.

9. Management Audit and Operational Audit are complementary and supplementary to one another.
Discuss.

Ans: Management audit is concerned with the quality of managing, whereas operational audit is
concerned with the quality of operations.
In management audit, the auditor evaluates decisions taken at the level of top management, operational
audit auditor evaluates effectiveness, efficiency and economy of operations under management’s control
along with recommendations for improvement.
In addition to what would normally be covered in an operational audit, management audit would also
encompass the relevance and effectiveness of the aims, duties and decisions of management at various
levels.
The expression “management and operational audit” may be acceptable as a management audit which
includes within its scope all the elements of operational auditing.

10. Financial vs. Operational Audit

Or
The main objective of operational auditing is to verify the fulfilment of plans, and sound business
requirements while in financial auditing, the concentration is more in the financial and accounting
areas to ensure that possibilities of loss, wastage and fraud are minimized or removed. Analyze and
Explain stating clearly major differences between Financial and Operational Auditing.

Ans.
Purpose - The financial auditing - the historical information recorded is correct or not, operational
auditing - on effectiveness and efficiency.
Area - Financial audits - financial statements; operational auditing - All activities that are related to
efficiency and effectiveness
Reporting - financial audit – to all stockholders; operational audit - for the management.
End Task - financial audit - report findings as its end objective; the operational audit - includes suggestions
also.

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11. K Ltd. requires you to organize a Management audit program. Briefly state a plan of action.

Ans: Devising a statement of policy, Location of audit function within the organization, Allocation of
personnel, Staff Training, Time and other aspects, Frequency of audit.

12. Management Audit Questionnaire.

Ans: A management audit questionnaire is an important tool for conducting the management audit.
Through these questionnaires auditors make an inquiry into important facts by measuring current
performance.
Objectives: examination of an organization’s management; Appraisals of management actions;
Weakness and Deficiencies; Review of management functions of planning; effectiveness of
decision−making process

13. Briefly explain the objectives and scope of Operational Audit.

Appraisal of organizational structure; Appraisal of controls; Appraisal of objectives and plans;
Evaluation of performance

14. Management audit Reports.

Ans: Oral Reports, Interim written report, Regular written reports, Summary written report.

15. Write a short note on - Summary Written Report.

These are known as flash reports. They are significant highlights for immediate attention of top
management.

16. Explain in brief the behavioural aspects encountered in the management audit and state the ways to
solve them.

Ans: Causes:
Staff/Line conflict, Control
Solutions:
protective and constructive benefit; provide maximum service in all feasible managerial dimensions;
ensure minimum interference with regular operation; Involve responsible officers in the process of
review; atmosphere of trust and friendliness.

17. What are the types of Operational Audits

Ans Functional Audits; Organizational Audit; Special Assignments

18. Mr. 'P' have been appointed as operational auditor of M/s Books & Magazine Ltd. and observed a
totaling error in invoice of ₹1,000. He has not taken care of the same saying that this is out of scope of
his work. Comment.

Ans: Contention of operational auditor is not correct as he is supposed to ensure that all the
management functions including controlling are working effectively and efficiently; existence of error
indicates weaknesses of control system.

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19. Operational Auditing is a systematic process involving logical, structured and organized series of
procedures. It concentrates on effectiveness, efficiency and economy of operations and therefore it is
future oriented. In this perspective, state the need of operational auditing.

Ans: Traditional sources of information remain inadequate for an effective management, Operational
audit as a specialised management information tool fill the void that conventional information sources
fail to fill. filled a very significant vacuum; it has come to provide the management with inexpensive,
continuous and objective appraisal of activities.

20. DLF Ltd., a manufacturing unit does not accept the recommendations for improvements made by the
Operational Auditor. Suggest an alternative way to tackle the hostile management

Ans.
Suggestion & recommendations based on Audit Findings
Cold war B/W Auditor & Managers
Participative Approach (Involve Management)
Benefit of Participative Approach
friendly attitude; Minimal resistance to change, feelings of hostility disappear ; feelings of mutual trust;
Team spirit is developed.

21. Internal auditor makes an appraisal of organization structure to ensure that it is in harmony with the
objectives of the entity, besides checking of financial transactions and operational activities of the
entity- Elaborate.
OR
ABC Ltd. is engaged in manufacturing of Yarns and Towels. It sells its product in both domestic as well
as in International Market. It has achieved turnover of 200 crores in the F.Y. 2016-17. Directors of the
company realized that they are not managing the company professionally and thereby request your
firm of Internal Auditors for appraisal of its organizational structure to ascertain whether it is in
harmony with the objectives of ABC (P) Ltd. Comment.

Ans. Conduct appraisal & Review of the Organisation Structure & Evaluate:
Activities of the enterprise; examine the organization chart- that no function enjoys an undue
dominance; responsibilities of managerial staff at headquarters do not overlap; reasonableness of the
span of control; dual responsibilities cannot be avoided; process of managerial development.

22. Perfect Steel Ltd. has reported a higher turnover of ₹560 crores in the year 2018-19 as compared to
earlier years but its sales return has also increased to 10% from only 4% upto the last year. The
management is concerned about the high sales returns and feels a need to get the operational audit
done for sales and production department of the company. The company is also having an internal
audit system in the company. Elaborate the possible reason/s, why management is getting operational
audit done when internal audit has already been done for both the departments by stating the
shortcomings of conventional information sources.

Ans: Operational audit as a specialised management information tool fill the void that conventional
information sources fail to fill. Conventional sources of management information are departmental
managers, routine performance report, internal audit reports, and periodic special investigation and
survey. These conventional sources fail to provide information for the best direction of the
departments all of whose activities do not come under direct observation of managers.

23. Employees of GIG Ltd. have to travel frequently for business purposes, so the company entered into a
contract with a Simony Travels Ltd. for managing booking, cancellation and other services required by
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 their employees. As per contract terms, Simony travels has to raise its monthly bills for the tickets
booked or cancelled during the period and the same are paid by GIG Ltd. within 15 days of the bill date.
The bills raised by Simony travels were of huge amount, so the management of GIG Ltd. decided to get
an audit conducted of the process followed for booking/ cancellation of tickets and verify the accuracy
of bills raised by the travel agency. Which audit do you feel the management should opt for? Also
briefly discuss the qualities the auditor should possess for such audit.

Ans: Management should opt for Operational Audit (Functional Audit).

24. In an operational audit performance evaluation, what factors can cause unsatisfactory production
performance?

Ans: Factors causing unsatisfactory production:

(a) Inadequate or unskilled personnel
(b) Non-availability of raw materials
(c) Lack of proper supervision
(d) Lack of proper machine maintenance
(e) Strikes and/or lock out
(f) Problems of power supply
(g) Non-availability of essential machine spares
(h) Lack of proper quality control
(i) Poor quality of raw materials
(j) Other causes like fire, earthquake etc

25. The Board of Directors of XYZ Ltd. is concerned with decreasing operating efficiency in material
consumption. As an Auditor entrusted with investigating the causes for this poor state, what may be
the areas of your focus in this respect.

Ans
Analytical procedure; Study of production process, scheduling, machine usage, material mix; internal
control system; The budget, standard costing and other MIS reports; A reconciliation of variation ;
Discussions/ inquiry ; Internal audit report; key material

26. You have been appointed as management auditor of a large engineering company suffering from a
working capital crunch. Enlist and discuss the related areas which you would probe into to overcome
the company’s problem.

Working Capital Estimation;

Cash Flow Statement / Cash Budget;
Inventory / Stock Management: RM and inventories should be classified properly to determine the
level of stock of materials.
Credit Management: (policies to determine the credit period and offering discounts for early payment)
Funds Flow Analysis - distinguish between long−term and short−term;
Investment Management; WIP Analysis

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 15 DUE DILIGENCE, INVESTIGATION AND FORENSIC AUDIT

1. A German Company engaged in the business of manufacturing and distribution of industrial gases, is
interested in acquiring a listed Indian Company having a market share of more than 65% of the
industrial gas business in India, request you to conduct a “Due Diligence” of this Indian Company and
submit your Report. As due Diligence Auditor, discuss the key areas you will cover in your review.

ANSWER: Commercial/ Operational due diligence, Financial Due Diligence, Tax Due diligence,
Information Systems due diligence, Legal due diligence, Environment al due diligence, Personnel due
diligence.

2. Mr. Q is the proprietor of a very profitable business dealing in specialty chemicals. Due to his old age,
Mr. Q wants to sell his business and has approached XYZ Pvt. Ltd., a competitor, for the same. As an
advisor to XYZ Pvt. Ltd., you are appointed to do a “Due Diligence’ of the business. Enumerate the
points which you would look into as part of the Due diligence exercise.

ANSWER: Studying the Business History, Significant Accounting Policies, Examining Profit and Loss
Account, Examining Net worth, Payment of Taxes, Studying the Economic environment, Cash Flow,
Cash Flow, Management and Employees.

3. A Ltd who is one of the leading manufacturer of kids clothing is interested to acquire B Ltd. B Ltd is
currently a manufacturer of women’ clothing. As a professional consultant in due diligence and
valuation, A Ltd entrusted you to value B Ltd. The valuation of B Ltd is dependent on future
maintainable sales. Discuss the factors you would consider in assessing the future maintainable
turnover of B Ltd?

ANSWER:

Trends Marketabiity

Political and
economic Competition
considerations

4. What are the important steps involved while conducting Investigation on behalf of an Incoming
Partner?

Page No. 114

 Ans.
Areas to be covered: -
Reasons for the offer of admission; Deed of partnership, for composition of partners, their capital
contribution; Any special clause in deed for admission; Ascertainment of the history of the firm; Scrutiny
of the record of profitability; Record of capital employed and the rate of return; quality of clientele;
composition and quality of key personnel; Examination of the asset and liability position; Scrutinize
terms of loan finance to assess its usefulness and implication; manner of computation of goodwill on
admission & also retirement; Examine incomplete contracts.

5. K.DK Bank Ltd., received an application from a pharmaceutical company for takeover of their
outstanding term loans secured on its assets, availed from and outstanding with a nationalized bank.
KDK Bank Ltd., requires you to make a due diligence audit in the areas of assets of pharmaceutical
company especially with reference to valuation aspect of assets. State what may be your areas of
analysis in order to ensure that the assets are not stated at overvalued amounts

OR

Vita Ltd. is anticipating taking over a manufacturing concern and appoints you for due diligence review.
While reviewing, it requests you to look specifically for any hidden liabilities. State in brief the major
areas you would examine for hidden liabilities.

OR

Zeta Ltd is anticipating taking over a manufacturing concern and appoints you for due diligence review
While reviewing, it requests you to look specifically for any hidden liabilities and overvalued assets
State in brief the major areas you would examine for hidden liabilities and overvalued assets

OR

M Limited is going to acquire S Limited The purchase consideration has been decided at Rs 4000 Crores
M Limited is worried about hidden liabilities or overvalued assets of S Limited and approached you to
examine the same List out eight important transactions/items which you would like to investigate in
the Due Diligence exercise

Ans.
 Items of Hidden Liabilities:
o Any show cause notices not matured into demands
o “Letters of Comfort” to banks and Financial Institutions.
o Agreed indemnification of liabilities on sale of Subisidary
o warranty liabilities; product returns/discounts;
o Direct and indirect Tax liabilities
o Long pending sales tax assessments.
o Pending final assessments of customs duty
o Agreement to buy back shares at a stated price.
o Future lease liabilities.
o Claims/third party claims.
o Unfunded gratuity/superannuation/leave salary liabilities.
o Huge labour claims under negotiation
 Items of Over-Valued Assets:
o Uncollected/uncollectable receivables.

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 o Obsolete, slow non−moving inventories or inventories valued above NRV
o obsolete Plant and Machinery; asset impaired due to sudden fall in market value
o Litigated assets and property.
o Investments carried at cost though realizable value is much lower.
o Investments carrying a very low ROI.

6. XYZ Limited, a company engaged in the business of manufacturing and distribution of copper rods and
copper wire is interested in acquiring a listed company having a market share of 38% of Insulated
Copper Wires. You were appointed to conduct a “Due Diligence” of the target company and you have
completed review of a few key areas. List out the contents of the Due Diligence Report which you will
submit to XYZ Limited.

ANSWER:
1. Executive summary.
2. Introduction.
3. Objective of due diligence.
4. Terms of reference and scope of verification.
5. Brief History of the company.
6. Summary on capital structure and group structure of company.
7. Shareholding pattern.
8. Observations on the review.
9. Assessment of Management structure.
10. Assessment of financial liabilities.
11. Assessment of valuation of assets.
12. Assessment of operating results.
13. Assessment of taxation and statutory liabilities.
14. Assessment of possible liabilities on account of litigation.
15. Assessment of net worth.
16. Any liabilities not provided for in the books.
17. SWOT analysis comments on future projections.
18. Status on charges, liens, mortgages and assets of the company.
19. Ways and means to cover unforeseen contingent liabilities.
20. Aspects to be taken care of before/after merger.
21. Interlocking investments

7. Ekbote Co. is currently a large organisation trading in items of office furniture. The entity wants to
expand and hence are looking at acquisition of Rawat Co which deals in items of household furniture.
Ekbote Co. hires a Chartered accountant to conduct a due diligence to consider whether there is the
potential for additional value to be brought out of the target company by improving its operational
function and also whether there are serious operational risks about which the potential buyer should
be concerned (thereby allowing the buyer to consider aborting the deal or renegotiating the price).
Which of the due diligence review would be helpful to achieve the above objective? You are also
required to briefly discuss the contents of a due diligence report.

ANSWER: Operational Due Diligence is required in this case

8. General objective of an audit is to find out whether the financial statements show true and fair view.
On the other hand, investigation implies systematic, critical and special examination of the records of a
business for a specific purpose. In view of the above, you are required to brief out the difference
between Audit and Investigation.

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 ANSWER: Differentiate between audit and investigation in a tabular form.

9. The general approach for investigation under Sections 210 and 213 of the Companies Act, 2013 is
conditioned by the legal requirements in these regards. Explain the approach/Steps for pursuing the
investigation.

ANSWER: Clarity of Terms of Reference, Scope of Investigation, Period for investigation, Framing of
Programme, Using the work of Experts, Legal requirements and investigation, Report.

10. The Central Government is of the view that there are certain interested members and companies who
are financially interested in the success or failure of the company or who have been able to control or
to materially influence the policy of the company. Hence the Central Government wants to investigate
the ownership of the company. Describe the scope and extent of investigation by an Investigator/
Chartered Accountant on behalf of Central Government under Companies Act, 2013.

ANSWER: Scope specified at the time of appointment, determine the areas of accounts to be
investigated, all dealings of subsidiaries shall be examined, material only if it has resulted in a loss to
the company, Any negligence in the discharge of duty must be construed very broadly, interrogation,
Investigating accountant is required to report on the efficiency.

11. What are the important steps involved while conducting Investigation on behalf of an Incoming
Partner?

ANSWER: History of the firm, deed of partnership, record of profitability, asset and liability position,
position of order at hand, terms of loan to finance, contractual and legal obligations, composition and
quality of key personnel, reasons for offer of admission, record of capital employed, manner of
computation of goodwill, special cause.

12. A nationalized bank received an application from an export company seeking sanction of a loan to
expand the existing sea food processing plant. In this connection, the Manager, who is in charge of
Advances, approaches you to conduct a thorough investigation of this company and submit a
confidential report based on which he will decide whether to sanction this loan or not. List out the
points you will cover in your investigation before submitting your report to the General Manager.

ANSWER:

Collection of information
• purpose of loan
• schedule of repayment
• reputation
• authorisation
• history of growth

Examination of financial st.

• preparation of a condensed income statement
• computation of ratios
• breakup of annual sales
• schedule of assets and liabilities

13. In cases like holding back cash sales, collections by travelling salesmen, V.P.P receipts, or casual
receipts, e.g., sales of scrap, recoveries out of debts written off earlier, etc., the amount or amounts of
receipts embezzled may be subsequently covered up by the perpetrator adopting certain methods. In a
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 company, it is suspected that there has been embezzlement in cash receipts. The company appoints
you as an investigator. What are the areas you would verify?

ANSWER: Cash receipts, Cash Payment, Suppliers’ Ledger, Customers’ Ledger, Stock.

14. You have been appointed to investigate a suspected embezzlement of cash receipts in a departmental
store. What are the steps you would take in this regard?

ANSWER: Almost the same points as verification answer.

15. A company engaged in manufacturing of chemicals is consistently recording higher sales turnover, but
declining net profits since the last 5 years. As an investigator appointed to find out the reasons for the
same, what are the points you would verify?

ANSWER: Unfavourable Sales mix, Negative Impact of Financial Leverage, Other Items Included in
Sales, High Administrative and Selling Expenses, Cost-Price Relationship, Competitive Price, Additions
to Fixed Assets.

16. Mr Sharma is reviewing the anti-fraud controls for a construction company. The company has
witnessed a few frauds in the past mainly in the nature of material stolen from the sites and fake
expense vouchers.
Mr. Sharma is evaluating options for verifying the process to reveal fraud and the corrective action to
be taken in such cases. As an expert, you are required to brief Mr. Sharma about the inventory fraud
and verification procedure with respect to defalcation of inventory?

ANSWER:
(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) Stock records may be manipulated by employees who have committed theft so that book
quantities tally with the actual quantities of stocks in hand.

17. Forensic Auditors can be engaged in public practice or employed by insurance companies, banks, police
forces, government agencies and other organizations. Briefly mentioned the areas in which forensic
auditor can render the services.

ANSWER: Fraud Detection, Fraud prevention, Computer Forensics, Expert Testimony.

18. You have been appointed as a forensic accountant in M/s Secure Ltd. to carryout various analysis as
part of your assignment to arrive at a particular result. Specify the various analysis which might have to
be carried out by you to arrive at your result.

ANSWER:
 Summarisation of a large number of transactions.
 Performing robust procedures to trace unidentified assets.
 Calculating the economic damages and if required, the loss of goodwill.
 Estimating the present value of the financial losses or frauds involved in case such irregularities or
frauds took place for a long period of time.
 Performing the statistical regression or sensitivity analysis of the frauds etc.
 Using various computerized application software’s and graphs etc. to explain and analyse the
frauds.

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 16 PEER REVIEW AND QUALITY REVIEW

1. Explain the objectives of Peer Review.

ANSWER: Ensure that members comply with technical standards, member proper system to ensure
quality of attestation services, adherence to various statutory and regulatory requirements, enhance
the reliance placed by the users for economic decision making.

2. Focus of peer review.

ANSWER: Compliance with directions relating to article assistants, Training programmes for staff,
Systems and procedure, Quality of reporting, Compliance with Technical, Professional and Ethical
Standards, Compliance with guidelines relating to fees and number of audits, etc

3. Technical, ethical and professional standards as per statement on peer review

ANSWER: Accounting Standards issued by ICAI, Engagement standards, Statements, Guidance notes,
Standards on Internal Audit, Statements on Quality Control, Notifications / Directions /
Announcements, Framework for the Preparation and presentation of financial statements, framework
of statements and Standard on Auditing, Standard on Assurance Engagements, Provisions of the
various relevant statutes and / or regulations.

4. Collection of Evidence by Peer Reviewer.

ANSWER: Inspection, observation, inquiry.

5. What are the areas excluded from the scope of Peer Review?

ANSWER:
(i) Management Consultancy Engagements;
(ii) Representation before various Authorities;
(iii) Engagements to prepare tax returns or advising clients in taxation matters;
(iv) Engagements for the compilation of financial statements;
(v) Engagements solely to assist the client in preparing, compiling or collating information other than
financial statements;
(vi) Testifying as an expert witness;
(vii) Providing expert opinion on points of principle, such as Accounting Standards or the applicability
of certain laws, on the basis of facts provided by the client; and
(viii) Engagement for Due diligence.

6. Mr. Praveen, a practicing Chartered Accountant is appointed to conduct the peer review of another PU
named SVD & Associates. What areas Mr. Praveen should review in the assessment of independence of
SVD & Associates?

ANSWER:

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 Policy to ensure independence, objectivity and integrity, on the part of partners and staff;
communication of these policies to staff; monitoring the compliance; periodically review the practice
unit's association with clients.

7. What is the eligibility to be a ‘Peer Reviewer’?

ANSWER:

Shall have: At least 10 years of practice experience, undergone the training, furnish a declaration at the time
of acceptance of appointment, signed the Declaration of Confidentiality, Should have conducted audit of
Level I Entities for at least 7 years to be eligible for conducting Peer Review of Level I Entities as referred to
in Para II of this Statement.

Shall not have: Disciplinary action, found guilty by the Council, convicted by a Competent Court, Obligation
or conflict of interest.
Reviewer shall not accept any professional assignment from the Practice Unit for a period two years
from the date of appointment.

8. Preliminary Report under Peer review

ANSWER: Before reporting to the Board, PR shall communicate his findings in the Preliminary Report to
the PU. PU shall make representations within 15 days.

If response is

Satisfactory Not-Satisfactory

he shall submit a Peer Review submit a modified Report to the Board

Report to the Board along incorporating his reasons
with his initial findings.

In case of a modified report, The Board shall order for a “Follow On” Review after a period of one year
from the date of issue of report

9. Explain the stepwise approach adopted by the Peer reviewer

ANSWER: Obtain an understanding of assignment + Selection of assurance engagements + Examine the

Policies and procedures of Practice Unit + - Review and Evaluation of records – Compliance and
Substantive Checking

10. What are the inherent limitations of Peer Review?

ANSWER: Not expected to show all deficiencies, System of quality control has its own deficiencies.

11. Maximum no. of years in a review cycle

= 3 years

12. What are the objectives of the Quality review?

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 ANSWER: Evaluate Audit Quality, Identify & Address Weaknesses & Identify Deficiency & Failures,
Review Aspects of Selected Statutory Audits & Firms Quality Control System, Not the Purpose to
Review all Audits.

13. Scope of Quality Review.

ANSWER: Compliance with Technical Standards, Compliance with Law and Regulations,
Implementation of Quality Control System

14. Procedures to be followed by the Quality Review Board in discharge of its functions.

ANSWER: Evaluate and review the quality of work, lay down the procedure of evaluation criteria to
evaluate various services being provided, call for information, invite experts to provide
expert/technical advice, make recommendations to the Council to guide the members to improve their
professional competence and qualifications.

15. Mention the stages involved in the Quality Review Process.

ANSWER:
Selection of Audit Firm and Technical Reviewer

Technical Reviewer to accept and send Letter of Engagement

Intimation to the Audit Firm

send the specified Quality Review Program General Questionnaire

carry out the Quality Review

send the preliminary report to Audit firm

submit representation on the preliminary report to the Technical Reviewer

submit final report along with a copy of Annual report

make recommendations to Quality Review Board

Quality Review Board to consider the report of the Quality Review Group and decide.

16. What are the reporting responsibilities of the technical reviewer while carrying out a Quality review
assignment?

ANSWER: Quality Review process enables the Technical Reviewers to express an opinion that ensures
compliance with the applicable Technical standards. Review would not necessarily disclose all
weaknesses in the quality of attestation work. There are inherent limitations. System of quality
controls may become inadequate because of changes in conditions.

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17. Reviewers, based on the conclusions drawn from the quality review, shall issue a preliminary report
and subsequently the final report. As a quality reviewer briefly discuss the basic elements of Quality
Review Report.

ANSWER:

• scope of the review and the period

Audit quality • instances of lack of compliance with technical standards
• instances of lack of compliance with relevant laws and regulations

• indication of whether the firm has implemented a system of quality

control
• system of quality control is the responsibility of the reviewed firm
• opinion on whether the reviewed firm’s system of quality control has
Quality control • been designed to meet the requirements of the quality control
• reference to the preliminary report
• attachment which describes the quality review

18. What are the consequences if the Quality review board notices major non-compliances with the
requirements of the Standards on quality control or standards on auditing or accounting standards?

ANSWER:

Referring the
case to the
Informing the
Director
details of the
(Discipline) of
non-compliance
the Institute for
necessary action

Intimating the inform the audit

Auditor as to the firm/auditor
findings accordingly

19. Give examples of areas of Standards of Auditing on which the reviewer may qualify the report?

ANSWER: AS 1, 2, 3, 9, 11, 15, 19, 20

20. Give example of some of the situations when Reviewer of Quality Review Board may qualify the
report.

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 Ans: non-compliance with technical standards; non-compliance with relevant laws and regulations;
quality control system design deficiency; non-compliance with quality control policies and procedures;
or non-existence of adequate training programmes for staff

21. The elements of skill, experience and independence of reviewers are ensured before initiating them in
Peer Review process. In the above light, state few eligibility criteria fixed for a person to be empaneled
and also for being appointed as a Peer Reviewer.

Ans:

1. A PEER REVIEWER SHALL: -

(a) Shall be a member in practice with at least 10 years of experience for Level I entities and 7 years of
experience for Level II entities.
(b) In case a member has moved from industry to practice and is currently in practice he should have
at least 15 years of experience in industry and at least 5 years’ experience in practice for Level I
entities and an experience of at least 10 years in industry and at least 3 years’ experience in
practice, for Level II entities.
(c) Should have undergone the requisite training and cleared the requisite test for Peer Review as
prescribed by the Board.
(d) Should have conducted audit of Level I Entities for at least 7 years or got his entity audited for at
least 7 years which should be a Level I entity to be eligible for conducting Peer Review of Level I
Entities.

2. A MEMBER ON BEING APPOINTED AS A REVIEWER SHALL BE REQUIRED TO -

(a) furnish a declaration as prescribed by the Board, at the time of acceptance of Peer Review
appointment.
(b) sign a Declaration of Confidentiality as per Annexure A to this Statement .

22. Explain to CA Yaseen the various stages involved in the conduct of the quality review assignments.

Ans:

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 QRB selects Audit Firm and the audit file for review and identifies TR to conduct Quality Review

QRB sends Offer Letter of Engagement to TR

TR conveys his acceptance of Letter of Engagement to QRB by sending necessary declarations

QRB intimates AFUR about the proposed Quality Review.

TR sends the specified Quality Review Questionnaire to the AFUR for filling-up.

off-site review by making proper planning for the review and then on-site visiting the office of the AFUR

On completion of on-site review, TR to send the preliminary report to AFUR.

AFUR to submit representation on the preliminary report to the TR

TR to submit final report along with a copy of Annual report of the entity for the year to teh qrb

AFUR to submit to QRB their reply on the final report and feedback

TR shall submit to QRB within next 7 days a summary of his findings, and his final comments

QRG to consider the report of the TR and responses of AFUR and make recommendations to QRB

QRB to consider report and recommendations of QRG and decide further course of action

23. Mr. Ravi Agarwal, a practicing Chartered Accountant is appointed to conduct the peer review of
another practicing unit. What areas Ravi Agarwal should review in the assessment of independence?

Ans: Check the following aspects :

 Does the practice unit have a policy to ensure independence, objectivity and integrity, on
the part of partners and staff? Who is responsible for this policy?
 Does the practice unit communicate these policies and the expected standards of professional
behaviour to all staff?
 Does the practice unit monitor compliance with policies and procedures relating to
independence?
 Does the practice unit periodically review the practice unit's association with clients to
ensure objectivity and independence?
 How does the practice unit deal with the threats to independence?

24. What are the areas excluded from the scope of peer reviewer?

ANSWER:
(i) Management Consultancy Engagements;
(ii) Representation before various Authorities;
(iii) Engagements to prepare tax returns or advising clients in taxation matters;
(iv) Engagements for the compilation of financial statements;

Page No. 124

 (v) Engagements solely to assist the client in preparing, compiling or collating information other than
financial statements;
(vi) Testifying as an expert witness;
(vii) Providing expert opinion on points of principle, such as Accounting Standards or the applicability
of certain laws, on the basis of facts provided by the client; and
(viii) Engagement for Due diligence.

25. What are the reporting responsibilities of the technical reviewer while carrying out a Quality review
assignment?

ANSWER: The Technical Reviewers expresses an opinion on whether the system of quality control for
the attestation services of the firm under review has been designed so as to carry out professional
attestation services assignments in a manner that ensures compliance with the applicable Technical
standards and maintenance of the quality of attestation service work they perform. The Technical
Reviewer’s review would not necessarily disclose all weaknesses in the quality of attestation work or
all instances of lack of compliance with applicable Technical Standards. As there are inherent
limitations in the effectiveness of any system of quality control, departure from the system may occur
and not be detected. Also, projection of any evaluation of system of quality control to future periods is
subject to the risk that the system of quality controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies and procedures may deteriorate. In the
process, the Technical Reviewers also identified what they considered to be deficiencies and any
defects in, or criticisms of the firm’s quality control system.

26. What are the important areas for evaluation while conducting quality reviews in terms of SQC -1
Standard on Quality Control?

ANSWER:

Whether the engagement

Whether the audit firm Whether the audit firm assigns
quality control reviewer review
establishes and implements as the person responsible for
at an appropriate time for the
policies and procedure on all the the monitoring of the system of
planning of an audit, significant
element of system of quality quality control a person with
audit judgement, and
control appropriate experience
expressions of an audit opinion

Whether the audit firm develop

Whether the audit firm obtain, Whether the audit firm perform
and provides education/ training
at least annually, a confirmation the independence confirmation
program that fully take into
letter concerning compliance procedure set forth in its
account the knowledge,
with policies and procedure for internal rules before acceptance
experience, competence and
the maintenance of and continuance of an audit
capabilities of the professional
independence engagement
staff

Page No. 125

 17 PROFESSIONAL ETHICS

1. What are the fundamental principles as per code of ethics of ICAI? What are the threats involved while
complying with the fundamental principles?

ANSWER: IOPCP
Integrity, Objectivity, Professional Competence and due care, Confidentiality, Professional behaviour.
Threats:
Self-interest, Self-review, Advocacy, Familiarity, Intimidation.

2. What is self-review threat. List the circumstances that may create self-review threats.

ANSWER:

(a) Reporting on the operation of financial information systems after being involved in their designing
or implementation.
(b) Having prepared the original data used to generate records that are the subject matter of the
engagement.
(c) A member of the engagement team is being associated with the client as a director or officer.
(d) A member of the engagement team is being employed by the client in a position to exert direct and
significant influence over the subject matter of the engagement.
(e) Performing a service for a client that directly affects the subject matter of engagement.

3. A professional accountant in public practice is always subject to various threats in compliance with
fundamental principles of his profession and you, as a professional accountant, is worried about
engagement specific threat in your audit assignment of M/s Soft Ltd. and want to implement some
measures to eliminate and reduce the same. Enumerate some engagement specific safeguards which
you may introduce in your work environment to ward off such threats.

ANSWER: Involving an additional professional accountant to review the work, Consulting an

independent third party, Discussing ethical issues with TCWG, Disclosing to TCWG of the client the
nature of services provided and extent of fees charged, Rotating senior assurance team personnel.

4. Mr. A, a practicing Chartered Accountant agreed to select and recruit personnel, conduct training
programmes for and on behalf of a client. Will he be guilty?

Ans: There is no misconduct on part of Mr. A as personnel recruitment and selection are covered under
management consultancy and other services.

5. Mr. Sam, a Chartered Accountant in practice, provides guidance on post-issue activities to his clients
e.g. follow up steps which include listing of instruments, dispatch of certificates and refunds etc. with
the various agencies connected with the work. During the year 2017-18, looking to the growing needs
of his clients to invest in the stock markets, he also started advising them on Portfolio Management
Services whereby he managed portfolios of some of his clients.

ANSWER: P would be guilty of professional misconduct under the Chartered Accountants Act, 1949, as
a practicing CA is not permitted to render portfolio management services.
Page No. 126
6. CA Natraj, in practice, accepted an assignment as advisor and consultant to the public issue of shares
by his client M/s Super Ltd. Besides helping the company as an advisor, he also underwrote the public
issue of the company to the extent of 25% at a commission of 1%. Remaining shares were underwritten
by banks and other financial institutions at the same rate of commission. He contends that above
assignments are part of management consultancy work permitted by the council of the Institute. Do
you agree with the view of CA Natraj? Decide in the light of applicable code of conduct.

ANSWER: CA Natraj would be guilty of misconduct under the Chartered Accountants Act, 1949 as a
practicing CA is not permitted to render underwriting services.

7. Mr. S, a practicing CA agreed to provide “Portfolio management Services” to his client M/s. D Limited.
Comment with reference to the Chartered Accountants Act, 1949.

ANSWER: P would be guilty of misconduct under the Chartered Accountants Act, 1949 as a practicing
CA is not permitted to render portfolio management services.

8. Discuss the following with reference to the CA Act, 1949 and schedules thereto: Mr. A, CA in practice
has been suspended from practice for a period of 6 months & he had surrendered his COP for the said
period. During the said period of suspension, though he did not undertake any audit assignments, he
undertook representation assignments for income tax whereby he would appear before the tax
authorities in his capacity as a CA.

ANSWER: A would not be allowed to represent before the income tax authorities for the period he
remains suspended. Accordingly, in the present case, he is guilty of professional misconduct.

9. Mr. Dice, a practicing Chartered Accountant was ordered to surrender his certificate of practice and he
was suspended for one year on certain professional misconduct against him. During the period of
suspension, Mr. Dice, designating himself as GST consultant, did the work of filing GST returns and
made appearance as a consultant before various related authorities. He contended that there is
nothing wrong in it as he, like any other GST consultant, could take such work and his engagement as
such in no way violate the order of suspension inflicted on him. Is he right in his contention?

ANSWER: Contention of Mr. Dice is correct as long as he is not working in his capacity as a CA, during
the period he was suspended from practice as CA.

10. Is there any misconduct on the part of a Chartered Accountant in the following circumstances: Mr. G, a
Chartered Accountant in practice as a sole proprietor has an office in Mumbai near Church Gate. Due to
increase in professional work, he opens another office in a suburb of Mumbai which is approximately
80 kilometers away from the municipal limits of the city. For running the new office, he employs three
retired Income-tax Officers.

ANSWER: As the second office is situated beyond 50 kms of municipal limits of Mumbai city, Mr. G
would be liable for committing a professional misconduct.

11. Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules
thereto: XY & Co., a firm of Chartered Accountant having 2 partners X & Y, one in charge of Head Office
and another in charge of Branch at a distance of 80 kms, puts up a name-board of the firm in both
premises and also in their respective residences.

Page No. 127

 ANSWER: The chartered accountants are guilty of misconduct as name board of the firm cannot be put
in place of residence.

12. Give your comments with reference to the Chartered Accountants Act, 1949 and Schedules thereto: K,
Chartered Accountant in practice as a sole proprietor at Chennai has an office in the suburbs of
Chennai. Due to increase in the income tax assessment work, he opens another office near the income
tax office. For running the new office, he has employed a retired Income Tax Commissioner.

ANSWER: Assuming that the distance between new office and municipal limits of Suburbs (area where
existing office is situated) is greater than 50 Km., Mr. K would be liable for committing a professional
misconduct.

13. Mr. K, Chartered Accountant in practice as a sole proprietor at Chennai has an office in the suburbs of
Chennai. Due to increase in the income tax assessment work, he opens another office near the income
tax office, which is within the city and at a distance of 30 kms. from his office in the suburb. For
running the new office, he has employed a retired Income Tax Commissioner who is not a Chartered
Accountant. Comment.

ANSWER: No professional misconduct as distance between municipal limits of first office and second
office does not exceed 50 Kms.

14. M & Co., a sole proprietary Chartered Accountant firm in practice with an office in a busy belt of a city,
had great difficulty in regularly attending to the consultancy needs of his client who are mostly located
in an industrial cluster in a nearby outskirt which is situated at a distance of 26 kms from the office of
the firm. To mitigate the difficulty and to have ease of business, a facilitation centre was opened in the
industrial cluster. The proprietor managed both the office and the facilitation centre, by himself. No
intimation was made to the institute of chartered accountants of India. Examine whether there is any
professional misconduct in this respect.

ANSWER: Misconduct arises due to non-intimation to ICAI.

15. The manager of ZedEx (P) Ltd. approached CA. Vineet in the need of a certificate in respect of a
consumption statement of raw material. Without having certificate of practice (CoP), CA. Vineet 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.

Ans: Clause (1) of Part II of Second Schedule

CA. Vineet will be held guilty of professional misconduct for contravention of provisions of this Act by
issuing certificate in respect of a consumption statement of raw material

16. CA Sant, a newly qualified professional with certificate of practice, approached CA Pant, the auditor of
his father’s company M/s Max Ltd., to allow him to have some practical and professional knowledge
and experience in his firm before he can set up his own professional practice. CA Pant allowed him to
sit in his office for 6 months and allotted a small chamber with other office infrastructure facility. In the
course of his association with CA Pant’s office, he used to provide tax consultancy independently to the
client of the firm and also filed few IT and GST return and represented himself before various tax
authorities on behalf of the firm although no documents were signed by him. During his association in
CA Pant’s office he did not get any salary or share of profit or commission but only re-imbursement of
usual expenses like conveyance, telephone etc. was made to him. After the end of the agreed period,
he was given a lump sum amount of Rs. 3,00,000 by CA Pant for his association out of gratitude.
Examine the case in the light of code of professional misconduct.

Page No. 128

 ANSWER: No Misconduct arises on part of CA Sant and CA Pant assuming the amount paid as
consideration for the work performed during the agreed period.

17. A CA obtained a loan from a finance company for purchase of office building agreeing to pay interest at
6% p.a. and 10% of his gross professional receipts till the loan is repaid.

ANSWER: Professional misconduct by virtue of Clause 2, Part 1 of First Schedule.

18. Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules
thereto: A CA Firm pays share of profits to widow of deceased partner.

ANSWER: Clause 2, Part I, of the First Schedule to the CA Act, 1949, a legal representative or widow of a
deceased partner would be entitled to share the profits only where the partnership agreement
provides the same. Hence, if the agreement so provides, there would not be any professional
misconduct on part of the firm, otherwise, it amounts to professional misconduct.

19. Give your comments with reference to the Chartered Accountants Act, 1949 and Schedules thereto: K,
a practicing Chartered Accountant gave 50% of the audit fees received by him to L, who was not a
Chartered Accountant, under the nomenclature of office allowance and such an arrangement
continued for a number of years.

ANSWER: Mr. K will be deemed to be guilty of professional misconduct under Clause 2 of Part I of First
Schedule.

20. A Chartered Accountant who was in practice since last 18 years died in a road accident. His widow sold
the practice to another Chartered Accountant in practice for ` 30 lakhs. The price also included the right
to use the firm name.

Ans: Goodwill of a CA sold to another member: Clause (2) of Part I of First Schedule : the aboveact of
the widow of the Chartered Accountant is permissible.

21. Mr. X who passed his CA examination of ICAI on 18th July, 2017 and started his practice from August
15, 2017. On 16th August 2017, one female candidate approached him for articleship. In addition to
monthly stipend, Mr. X also offered her 1% profits of his CA firm. She agreed to take both 1% profits of
the CA firm and stipend as per the rate prescribed by the ICAI. The Institute of Chartered Accountants
of India sent a letter to Mr. X objecting the payment of 1% profits. Mr. X replies to the ICAI stating that
he is paying 1% profits of his firm over and above the stipend to help the articled clerk as the financial
position of the articled clerk is very weak. Is Mr. X liable to professional misconduct.

ANSWER: Mr. X will be guilty of professional misconduct in terms of Clause 2 of Part I of First Schedule
and reply of Mr. X that he is paying 1% profits over and above the stipend to help the article clerk is not
tenable.

22. Mr. Qureshi, Chartered Accountant, in practice died in a road accident. His widow proposes to sell the
practice of her husband to Mr. Pardeshi, Chartered Accountant, for Rs. 5 lakhs. The price also includes
right to use the firm name-Qureshi and Associates. Can widow of Qureshi sell the practice and can Mr.
Pardeshi continue to practice in that name as a proprietor?

ANSWER: Widow of deceased member can sell the goodwill provided sale is completed within one year
from the death of member and permission of ICAI is obtained.

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23. Mr. X is a practicing Chartered Accountant. Mr. Y is a practicing Advocate representing matters in the
court of law. X and Y decided to help each other in the matters involving their professional expertise.
Accordingly, Mr. X recommends Mr. Y in all litigation matters in the court of law and Y consults X in all
matters relating to finance and other related matters, which comes to him in arguing various cases.
Consequently, they started sharing profits of their professional work. Is Mr. X liable for professional
misconduct?

ANSWER: Clauses 2 & 3 permits a CA in practice for profit sharing with members of any other
professional bodies or with such other persons having prescribed qualifications and advocates are
prescribed under Regulation 53A.

24. CA. P 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. A, a qualified and experienced registered
valuer to share 20% professional fees for all cases of valuation referred to him by CA. P. Based on this,
CA. P received ₹1,20,000 during the year 2018-19 from Mr. A. Is CA. P guilty of misconduct under the
Chartered Accountants’ Act, 1949?

ANSWER: Mr. P will be deemed to be guilty of professional misconduct by virtue of Clause 3, Part I of
First Schedule as he accepts professional fees from a person who is not a member of ICAI. Further,
registered valuers are not recognised for profit sharing purpose under Regulation 53A and 53B.

25. Comment on the following with reference to the Chartered Accountants Act, 1949 and Schedules
thereto: Mr. P, a Chartered Accountant in practice entered into a partnership with Mr. L, an advocate
for sharing of fees for work sent by one to the other. However, due to some disputes, the partnership
was dissolved after 1 month without any fees having been received.

ANSWER: Mr. P will not be deemed to be guilty of professional misconduct as clause 4 permits a CA in
practice for entering into partnership with members of any other professional bodies or with such
other persons having prescribed qualifications and members of bar council of India and persons having
Bachelor of Law are prescribed.

26. Mr. X is a practicing Chartered Accountant. Mr. Y is a practicing Advocate representing matters in the
court of law. X and Y decided to help each other in the matters involving their professional expertise.
Accordingly, Mr. X recommends Mr. Y in all litigation matters in the court of law and Y consults X in all
matters relating to finance and other related matters, which comes to him in arguing various cases.
Consequently, they started sharing profits of their professional work. Is Mr. X liable for professional
misconduct?

Ans: Clauses 2 & 3 permits a CA in practice for profit sharing with members of any other professional
bodies or with such other persons having prescribed qualifications and advocates are prescribed under
Regulation 53A.

27. A Chartered Accountant having CoP entered into partnership with persons, who are not the members
of the institute, for the purpose of carrying on business. The share of the chartered account in the
profit and losses was 25%. He was to take part in the business and was entitled to represent the firm
before Govt. authorities etc. He was operating the bank account of the firm, was receiving moneys
from the customers and was also looking after the affairs of the Partnership.

Ans: Chartered Accountant shall be held guilty of professional misconduct under Clause (4) and Clause
(11).

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28. Z, a Chartered Accountant wrote several letters to Government Department, pointing out seniority of
his firm, sending his life sketch and stating that he had a glorious record of service to the country as
well as to the organisation of accountancy profession with a view to get the audit work. Can Z be held
guilty?

Ans: Guilty of professional misconduct by virtue of clause 6 of Part I of First Schedule which prohibits a
member in practice to solicits professional work by means of advertisement, circular, personal
communication or roving enquiries, etc.

29. M/s XYZ, a firm of Chartered Accountants created a website “www.xyzindia.com”. The website besides
containing details of the firm and bio-data of the partners also contains the photographs of all the
partners of the firm. Comment.

Ans: M/s XYZ had complied with all the guidelines and there does not appear any violation of the
Chartered Accountants Act, 1949 and its Regulations.

30. An advertisement was published in a Newspaper containing the photograph of Mr. X, a member of the
institute wherein he was congratulated on the occasion of the opening ceremony of his office.
Comment.

Ans: X would be therefore held guilty under Clause (6) of Part I of the First Schedule
A Chartered Accountant in practice shall be deemed to be guilty of misconduct if he solicits clients or
professional work either directly or indirectly by a circular, advertisement, personal communication or
interview or by any other means

31. Mr. S, a Chartered Accountant published a book and gave his personal details as the author. These
details also mentioned his professional experience and his present association as partner with M/s
RST, a firm. Comment.

Ans: Mr. S has violated the restriction imposed under Clause 6 of Part I of First Schedule and hence
held to be guilty of professional misconduct.

32. XYZ & Associates, a firm with 5 partners developed a website www.xyzassociates.com. The website
also contained a link to “All India Chartered Accountants Association”, a voluntary association where X,
a partner of the firm is currently the Vice-president.

Ans: As per guidelines issued by ICAI for development and contents of website, a website may provide a link
to website of ICAI, its regional councils, branches and government departments and other professional
bodies like AICPA, ICAEW etc. In the present case, website provide a link to the “All India Chartered
Accountants Association” which is not permitted. Hence the firm is guilty of professional misconduct by
virtue of Clause 6 of Part I of First Schedule.
33. CA. Sonam and CA. Monam are two partners of the CA firm ‘Sonam Monam and Associates’. Being very
pious, CA. Sonam organised a religious ceremony at his home for which he instructed his printing agent
to add his designation “Chartered Accountant” with his name in the invitation cards. Later on, the
invitations were distributed to all the relatives, close friends and clients of both the partners.

Ans: CA. Sonam would be held guilty of professional misconduct under the said clause for sending such
invitations to the relatives, close friends and clients of CA. Monam

34. M/s LMN, a firm of Chartered Accountants responded to a tender from a State Government for
computerization of land revenue records. For this purpose, the firm also paid Rs. 50,000 as earnest
deposit as part of the terms of the tender.
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 Ans: Clause 6 of Part I of First Schedule allows a practicing CA to respond to tenders. As per the
guidelines w.r.t. responding to tenders, if a matter relates to any non-exclusive area, members can
respond to any tender and are permitted to pay reasonable amount towards earnest money/security
deposits.

35. Mr. Brilliant, a chartered accountant in practice, created his own website in attractive format and
highlighted the contents in blue colour. He also circulated the information contained in the website
through Email to acknowledge public at large about his expertise. However, due to shortage of time, he
could not intimate his website address to the Institute.

Ans: Member would be held guilty of professional misconduct as circulation of information contained
in the website through e-mail would amount to solicitation. However, no misconduct arises on his part
towards failure to intimate the website address to the Institute.

36. A special notice has been issued for a resolution at 3rd annual general meeting of Fiddle Ltd. providing
expressly that CA. Smart shall not be re-appointed as an auditor of the company. Consequently, CA.
Smart submitted a representation in writing to the company as provided under section 140(4)(iii) of
the Companies Act, 2013. In the representation, CA. Smart incorporated his independent working as a
professional throughout the term of office and also indicated his willingness to continue as an auditor
if reappointed by the shareholders of the Company

Ans: will not be held guilty for professional misconduct under Clause (6) of Part I

37. CA. S and CA. M are two partners of the CA firm ‘SM & Co. Being very pious, CA. S organised a religious
ceremony at his home for which he instructed his printing agent to add his designation “Chartered
Accountant” with his name in the invitation cards. Later on, the invitations were distributed to all the
relatives, close friends and clients of both the partners.

Ans: Using the designation “Chartered Accountant” in invitation cards is permitted under Guidelines
issued in Clause 6 of Part I of First Schedule provided cards are distributed to relatives, close friends
and clients of the concerned member. In the present case, invitations are also given to relatives, close
friends and clients of partner also; hence misconduct arises on part of CA. S.

38. Mr. X, a CA in practice, provides part-time tutorship under the coaching organization of the Institute.
On 30th June 2017, he was awarded ‘Best Faculty of the year’ as gratitude from the Institute. Later on,
he posted his framed photograph on his website wherein he was receiving the said award from the
Institute.

Ans: Mr. X will be guilty of professional misconduct as the guidelines for the website issued under
Clause 6 of Part I of First Schedule, no photograph of any sort (except passport size photograph of
member) is permitted to be displayed on website.

39. Comment on the following with reference to the CA Act, 1949, and Schedules thereto: A special notice
has been issued for a resolution at 6th AGM of F Ltd. providing expressly that CA. S shall not be
reappointed as an auditor of the company. Consequently, CA. S submitted a representation in writing
to the company as provided under section 140(4)(iii) of the Companies Act, 2013. In the
representation, CA. S incorporated his independent working as a professional throughout the term of
office and also indicated his willingness to continue as an auditor if reappointed by the shareholders of
the Company.

Page No. 132

 Ans: There is no misconduct on Part of CA. S as guidelines issued under Clause 6 of Part I of First
Schedule allows a CA in practice to make the representation u/s 140(4) of Companies Act, 2013 which
is not used by the auditor to secure needless publicity.

40. CA. N, in practice, started project consultancy work as a part of his practice and to advance the same,
sent mail to all the CAs in the country informing them of his services and for securing professional
work.

Ans: There is no misconduct on Part of CA. N as exceptions to Clause 6 of Part I of First Schedule allows
a CA in practice to secure professional work from another CA in practice.

41. Mr. Nigal, a Chartered Accountant in practice, delivered a speech in the national conference organized
by the Ministry of Textiles. While delivering the speech, he told to the audience that he is a
management expert and his firm provides services of taxation and audit at reasonable rates. He also
requested the audience to approach his firm of chartered accountants for these services and at the
request of audience he also distributed his business cards and telephone number of his firm to those in
the audience. Comment.

Ans: Mr. Nigal will be held guilty of professional misconduct under Clauses 6 & 7 of Part I of First
Schedule to the CA Act 1949, due to solicitation of professional work and advertisement of services
rendered by his firm.

42. M/s LMN & Associates, a firm of Chartered Accountants responded to a tender issued exclusively for
Chartered Accountants by an organisation in the area of tax audit. However, no minimum fee was
prescribed in the tender document.

Ans: LMN & Associates shall be guilty of professional misconduct as responding to tenders in exclusive
area in which minimum fees is not prescribed amounts to solicitation of work.

43. M/s XYZ a firm in practice develops a website “XYZ.com”. The colour chosen for the website was a very
bright green and the website was to run on a “push” technology where the name of the partners of the
firm and the major clients were to be displayed on the web site without any disclosure obligation from
any regulator.

Ans: As per guidelines of ICAI in relation to development of website, there is no restriction on the use
of colours. However, the website is required to run on a “pull” technology and not on “push”
technology; and the name of clients and fees charged from them is not permitted to be appearing on
the website unless required by any regulator. Hence the firm would be liable for professional
misconduct.

44. A special notice has been issued for a resolution at 3rd AGM of LED Ltd., providing expressly that CA.
Anoop shall not be re-appointed as an auditor of the company. Consequently, CA. Anoop submitted a
representation in writing to the company with a request to circulate to the members. In the detailed
representation, CA. Anoop 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.

Ans: Mr. Anoop will be guilty of professional misconduct under Clause (6) of Part I of the First Schedule
to the Chartered Accountants Act, 1949, as including contributions made by him in strengthening the
control procedures of the company, amounts to solicitation of work which is not permitted.

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45. Mr. Adnan, a Chartered Accountant in practice, is a partner of 4 firms. While printing his personal
letter heads, Mr. Adnan gave the names of all the firms in which he is a partner. Comment

Ans: There is no restriction as to mentioning of firm’s name on personal letter heads under Clause 7
of Part I of First Schedule, hence Mr. B (Adnan) is not guilty of any professional misconduct.

46. Give your comments with reference to Chartered Accountants Act, 1949 and schedules thereto: Mr.
B, a practicing Chartered Accountant as well as a qualified lawyer, was permitted by the bar council
to practice as a lawyer also. He printed his visiting card where he mentioned his designation as
Chartered Accountant and Advocate.

Ans: Mr. B is guilty of professional misconduct due to simultaneous use of designation as Chartered
Accountant and Advocate.

47. Mr. SP, a Chartered Accountant obtains registration as category IV merchant banker under the SEBI’s
Rules and Regulations and act as Advisor to a capital issue of MB Co. Ltd. He designated himself
under the caption “Merchant banker” in client offer documents and ‘Advisor to issue’ in his own
letterheads, visiting cards and professional documents.

Ans: Guilty of Professional Misconduct under Clause 7 of Part I of First Schedule due to use of
designation other than Chartered Accountant.

48. An advertisement was published in a Newspaper containing the photograph of Mr. X, a member of
the institute wherein he was congratulated on the occasion of the opening ceremony of his office.

Ans: Mr. X would be guilty under Clause 6 of Part-I of the First Schedule to the Chartered
Accountants Act, 1949 as advertisement in the newspaper amount to solicitation.

49. Mr. X, a Chartered Accountant and the proprietor of X & Co., wrote several letters to the Assistant
Registrar of Co-operative Societies stating that though his firm was on the panel of auditors, no audit
work was allotted to the firm and further requested him to look into the matter.

Ans: Mr. X would be held guilty under clause 6 of Part I of the Act, as roving inquiries for solicitation
of work is not allowed.

50. PQR & Associates, Chartered Accountants have their website and on the letterhead of the firm it is
mentioned that "Visit our website: www.pqr.com". In the website the nature of assignments
handled, names of prominent clients and fees charged is also displayed.

Ans: PQR & Associates will be held guilty of Professional Misconduct under Clause 6 of Part I of First
Schedule to the Chartered Accountants Act, 1949. The name of clients and fees charged from them is
not permitted to be appearing on the website unless required by any regulator.

51. Mr. Sodhi, a Chartered Accountant in practice, who is proposed to be removed as the auditor of a
company makes unsubstantiated and derogatory remarks against the management of the company
in his representation u/s 140 of the Companies Act, 2013.

Ans: In the present case, Mr. Sodhi is guilty of professional misconduct as he makes derogatory
remarks against the management of the company.

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52. Mr. Honest, a Chartered Accountant in practice, wrote two letters to M/s XY Chartered Accountants
a firm of CA’s; requesting them to allot him some professional work. As he did not have a significant
practice or clients he also wrote a letter to M/s ABC, a firm of Chartered Accountants for securing
professional work. Mr. Clever, another CA, informed ICAI regarding Mr. Honest’s approach to secure
the professional work. Is Mr. Honest wrong in soliciting professional work?

Ans: Mr. Honest is not wrong in soliciting professional work from another CA, hence there is no
professional misconduct.

53. A Chartered Accountant in practice, empanelled as IP (Insolvency Professional) has mentioned the
same on his visiting cards, letter heads and other communications also. Mr. A, who is residing in his
neighbourhood has filed a complaint for professional misconduct against the said member for such
mention of insolvency professional on circulations.

Ans: Clause 7 of Part I of First Schedule. No misconduct arises as 'Insolvency Professional' is a title
recognised by the Central Government.

54. Mr. X a chartered Accountant accepted his appointment as tax auditor of a firm under Sec. 44AB of
the Income Tax Act and commenced the tax audit within two days of his appointment since the client
was in a hurry to file return of income before the due date. After commencing the audit, Mr. X
realised his mistake of accepting this tax audit without sending any communication to the previous
tax auditor. In order to rectify his mistake, before signing the tax audit report, he sent a registered
post to the previous auditor and obtained the postal acknowledgement. Will Mr. X be held guilty
under the CA Act?

Ans: Guilty by virtue of clause 8 of Part I of First Schedule as communication to previous auditor is
required before commencement of audit.

55. During the opening ceremony of a new branch office of CA. Young, his friend CA. Old introduced to
CA. Young, his friend and client Mr. Rich, the owner of an Export House whose accounts had been
audited by CA. Old for more than 15 years. After few days, Mr. Rich approached CA. Young and
offered a certification work which hitherto had been done by CA. Old CA. Young undertook the work
for a fee which was not less than fee charged by CA. Old in earlier period.
Comment whether CA. Young had done any professional misconduct.

Ans: Acceptance of original professional work emanating from a client introduced by another
member is not permitted. Mr. Young will be deemed guilty of professional misconduct under clause
6, Part I of First Schedule.

56. Can a practicing Chartered Accountant be held guilty of professional misconduct under the following
circumstance: W, a Chartered Accountant has sent letters under certificate of posting to the previous
auditor informing him about his appointment as an auditor before the commencement of audit by
him.

Ans: Guilty of professional misconduct by virtue of clause 8 of Part I of first schedule in accordance
with which communication need to be sent “Registered Post Acknowledgement Due (RPAD)” or by
“hand against a written acknowledgement”.

57. Mr. M, a chartered accountant in practice, has printed visiting cards which besides other details also
carries a Quick Response (QR) code. The visiting card as well the QR code contains his name, office

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 and residential address, contact details, e-mail id and name of the firm’s website. Comment with
reference to the Chartered Accountants Act, 1949 and schedules thereto.

Ans: No misconduct arises on part of Mr. M in get the visiting cards printed which contains his name,
address, contact details, e-mail id and name of the firm website. Also, no misconduct arises in
printing QR code on visiting card if it does not contain any information that is not otherwise
permissible to be printed on visiting card.

58. Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules
thereto: BC & Co, a firm of Chartered Accountants, accepted an assignment for audit under State
level VAT Act, without any prior communication with the previous auditor.

Ans: BC & Co., the firm is guilty of professional misconduct due to non- compliance of requirement as
stated in Clause 8 of Part I of First Schedule.

59. Comment with the reference to the Chartered Accountants Act, 1949 and schedules thereto: R, a
practicing Chartered Accountant, is a Director in X Ltd; a Public Company. The prospectus of X Ltd.
mentions the name of Mr. R as a director along with his various professional attainments, his areas
of specialization and expertise in the fields of international taxation.

Ans: Name of CA acting as director in the company is permissible to appear in the prospectus of the
company, however descriptions regarding his expertise, specialisation and knowledge in any
particular field is not permitted. Hence Mr. R will be deemed to be guilty of professional misconduct
under Clause 7, Part I of First Schedule.

60. M/s CD & Co., a firm of Chartered Accountants, accepted an assignment for audit under State level
VAT Act and communicated the same over phone to the previous auditor, M/s AB & Co., Chartered
Accountants. Comment.

Ans: Guilty of professional misconduct by virtue of clause 8 of Part I of first schedule, as Incoming
auditor is required to sent his communication by RPAD or by hand against an acknowledgement in
writing. Mere communication over phone is not sufficient to establish written communication.

61. Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules
thereto: Mr. B was appointed as auditor of XYZ Ltd. in place of Mr. A. Mr. B had send a letter of
communication to Mr. A under certificate of posting and proceeds to conduct the audit. A makes a
complaint to the Institute on the basis of non-receipt of communication.

Ans: Guilty of professional misconduct by virtue of clause 8 of Part I of first schedule, as incoming
auditor is required to sent his communication by Registered post acknowledgement due or by hand
against an acknowledgement in writing. Mere posting of a letter under certificate of posting is not
sufficient to establish communication.

62. A CA firm M/s GST & Associates, has sent a letter to the Goods and Service Tax Council stating that
the firm has 2 partners who specialize in the law of Goods and Service Tax and asked the said Council
to include their name in the panel, whenever formed, for providing advisory to the Chartered
Accountants Act, 1949.

Ans: The member is guilty of misconduct in terms of the Clause 6, Part I of First schedule as he has
solicited professional work from the Finance Ministry, by inquiring about the maintenance of the
panel.

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63. Give your comments with reference to the CA Act, 1949 and Schedules thereto: M, a practicing
Chartered Accountant sent a letter to another firm of Chartered Accountants, claiming himself to be
a pioneer in liasoning with Central Government Ministries and its allied Departments for getting
various Government clearances for which he had claimed to have expertise and had given a list of his
existing clients and details of his staff etc.

Ans: Mr. M was guilty of professional misconduct as per clause 6 of part I of First Schedule of the
Chartered Accountants Act, 1949.

64. CA X was appointed as the Auditor of ABC Ltd. for 2018-19. Since he declined to accept the
appointment, the Board of Directors appointed CA Y as the auditor in the place of CA X, which was
also accepted by CA Y.

Ans: CA. Y is guilty of professional misconduct as per Clause 9 of Part I of the First Schedule as he
accepted the appointment without verification of statutory requirements of Sec. 139 of Companies
Act, 2013.

65. Comment on the following with reference to the Chartered Accountants Act, 1949 and its Schedules:
CA. T, in practice, was appointed to carry out internal audit of a stock broker, listed with BSE.
However, he failed to intimate his appointment to the statutory auditors of the company. The
statutory auditor feels this is violation of professional ethics.

Ans: There is no violation of professional ethics as Clause 8 of Part I of First schedule applies in case
of replacement positions and not in case of parallel positions.

66. XYZ Ltd. appoints you as the auditor of the company. You observe that previous auditor’s A & Co.,
resigned. Also Balance Sheet as at 31- 03-2018 shows an audit fee payable of Rs. 25,000. What
precautions you will take before commencing the audit work?

Ans: Ensure compliance of Section 139 and 140 of Companies Act, 2013 and clause 8 and 9 of Part I of
First Schedule of Chartered Accountant Act, 1949.

67. Can a practicing Chartered Accountant be held guilty of professional misconduct under the following
circumstance: P, a Chartered Accountant had accepted appointment as an auditor of QRS Company
limited without ascertaining from the company whether the requirements of Sec. 139 and 140 of the
Companies Act, 2013 had been complied with. However, he realised this defect only after
acceptance.

Ans: P will be held to be guilty of professional misconduct under clause 9 of Part I of First Schedule to
the Chartered Accountants Act, 1949. Realisation of defect subsequent to acceptance of audit is
immaterial.

68. Comment with reference to the CA Act, 1949 and schedules thereto: CA D, a Chartered Accountant
prepared a project report for one of his clients to obtain bank finance (long-term) of Rs. 50 lakhs
from a Commercial Bank. Consequent to the sanction of the loan by the bank CA. D raised a bill for
his services @ 2% of the loan sanctioned.

Ans: Charging fees on a %age basis amounts to misconduct under Clause 10 of Part I of First Schedule
except as permitted under regulation 192. Charging fees on %age of fund raised is covered under
Regulation 192. Hence no misconduct arises on part of Mr. D.

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69. Efficient Ltd. is running into loses and in order to optimize resource utilization and cost reduction,
approaches you to carry out the assignment and offers a fee of 5% of benefits derived from the
suggestions made by you. Comment with respect to Chartered Accountants Act, 1949 and
Regulations there to.

Ans: No Misconduct arises under Clause 10 of Part I to First schedule as charging fees as a percentage
of benefits received in case of cost optimisation services is permitted by Regulation 192.

70. An auditor of a cooperative society has agreed to charge fees @ 5% of the profits of the society.

Ans: Audit of Co-operative society is included in the exceptions stated in regulation 192, the auditor
is not guilty of any professional misconduct

71. Mr. J started his practice as Chartered Accountant in 2013. During 2019, he got an offer for the post
of Chief Accountant of a Software Development Company, as a fulltime employee for a salary of Rs.
60,000 p.m. On accepting the offer, Mr. J converted his practice into a partnership firm by taking a
fresh Chartered Accountant as his partner. Mr. J neither intimated the Institute nor obtained
permission from the Institute about his employment. Will Mr. J be held guilty under the CA Act?

Ans: Guilty of professional misconduct by virtue of Clause 11 of Part I of First schedule, as he has
accepted the employment in addition to the practice without obtaining permission of the Institute.

72. PQR Pvt Ltd. approached CA. Whai, a Chartered Accountant in Practice, for debt recovery services. CA
Whai accepted the work and insisted for fees to be based on 2% of the debt recovered.

Ans: No misconduct arises as charging fees in case of debt recovery services on the basis of
percentage of the debt recovered is permitted under Regulation 192

73. A CA in practice takes up the appointment as managing director of a public limited company.

Ans: Appointment requires prior and specific approval from Council. In absence of such approval,
member will be held to be guilty of professional misconduct (by virtue of clause 11 of Part I of First
Schedule and Regulation 190A), otherwise not.

74. Mr. P a practicing Chartered Accountant acting as liquidator of AB & Co. charged his professional fees
on percentage of the realization of assets.

Ans: No Misconduct on part of Mr. P under Clause 10 of Part I to First schedule as charging fees as a
percentage of realisation of assets while acting as a liquidator is permitted by Regulation 192.

75. Mr. J.J. a practicing Chartered Accountant engages himself as part time finance manager of Quick
Return Securities Ltd. He is of the view that as both functions are independent, he need not take
permission from the Institute

Ans: Guilty of professional misconduct by virtue of Clause 11 of Part I of First schedule, as he has
accepted the employment in addition to the practice without obtaining permission of the Institute.

76. Mr. A, a Chartered Accountant in practice has been appointed editor of a monthly journal which
analyses performance of the Stock Market and Mutual Fund Schemes.

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 Ans: Clause 11 permits editorship of professional journals, but in the instant case journal related to
performance analysis of stock market and mutual fund schemes cannot be treated as professional
journal hence, Mr. A would be held guilty of professional misconduct by virtue of Clause 11 of Part I
of First Schedule.

77. M, a Chartered Accountant in practice, is the Statutory Auditor of S Ltd. for the year ended 31st
March 2019. In January 2019, he was appointed as a Director in H Ltd., which is the holding Company
of S Ltd

Ans: Auditor of a subsidiary should not accept the position as a director in holding company as it
might affect his independence.

78. CA. Sufi is practicing since 2008 in the field of company auditing. Due to his good practical
knowledge, he was offered editorship of a ‘Company Audit’ Journal which he accepted. However, he
did not take any permission from the council regarding such editorship.

Ans: Clause 11 permits editorship of professional journals; hence no misconduct arises on part of Mr.
S.

79. Mr. A, a practicing CA, took over as the executive Chairman of a software company on 01.04.2019.
On 10.04.2019 he applied to the council for permission.

Ans: Mr. A is guilty of professional misconduct in terms of Clause 11 of Part I of First Schedule of the
Chartered Accountants Act, 1949, as he accepted the employment without obtaining permission
from Council.

80. CA. Preeti is a leading Income Tax Practitioner in Delhi. She is very much fond of cooking. Due to this
passion of her, she also wrote a cookery book “Delight your tummy” during the year. But, she didn’t
take any permission from the Council of the Institute for engaging herself into authorship of such
book. Comment

Ans: Clause 11 permits authorship of any book, hence no misconduct arises on part of CA. Preeti.

81. C.A Z, is a leading income tax practitioner and consultant for derivative products. He resides in
Mumbai near to the ABC commodity stock exchange and does trading in commodity derivatives.
Every day, he invests nearly 50% of his time settle the commodity transactions. Is CA Z liable for
professional misconduct?

Ans: If Mr. Z has obtained specific permission of the council, then there is no misconduct, otherwise
he will be deemed to be guilty of professional misconduct under clause 11 of Part I of First Schedule
of CA Act, 1949.

82. S. a practicing Chartered Accountant gives power of attorney to an employee Chartered Accountant
to sign reports and financial statements, on his behalf.

Ans: S is guilty of professional misconduct under clause 12 of Part I of First Schedule.

83. Mr. B is a practising Chartered Accountant holding a valid certificate of practice. He accepted the
appointment as Director of the Green WorId Co. Ltd. Mr. C, a partner of Mr. B is statutory auditor of
the said company.

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 Ans: Mr. B will be held for Professional Misconduct under Clause 11 of Part 1 of First Schedule to the
Chartered Accountants Act, 1949. Mr. C, a partner of Mr. B, should vacate the office as per
requirement of Sec. 141(4) of Companies act, 2013, being disqualified u/s 141(3)(c).

84. Comment with respect to Chartered Accountant Act, 1949: A Chartered Accountant having COP
entered into partnership with persons, who are not the members of the institute, for the purpose of
carrying on business. The share of the chartered account in the profit and losses was 25%. He was to
take part in the business and was entitled to represent the firm before Govt. authorities etc. he was
operating the bank account of the firm was receiving moneys from the customers and was also
looking after the affairs of the partnership

Ans: Guilty of Professional Misconduct by virtue of clauses 4 & 11 of Part I of First Schedule due to
entering into partnership with persons other than prescribed under Clause 4 and carrying on a
business without obtaining permission from Council of ICAI.

85. CA Raghu is practicing in the field of Income – tax over a period of 12 years. He has gained experience
in this domain over others. Sam, a student of Chartered Accountancy Course is very much impressed
with the knowledge of CA Raghu. He approached CA Raghu to take guidance on some topics of
Income-tax related to his course. CA Raghu, on request decided to spare time and started providing
private tutorship to Sam and some of his friends along with. However, he forgot to take specific
permission from the ICAI, for such private tutorship, Is CA Raghu, professionally liable for
misconduct?

Ans: Mr. Raghu will not be liable for professional misconduct as for imparting private tutorship no
specific permission is required to be obtained from Council of ICAI as provided under Regulations
190A.

86. Give your comments with reference to the Chartered Accountants Act, 1949 and Schedules thereto:
CA Smart, a practicing Chartered Accountant was on Europe tour between 15-9-18 and 25-9-18. On
18-9-18 a message was received from one of his clients requesting for a stock certificate to be
produced to the bank on or before 20-9- 18. Due to urgency, CA Smart directed his assistant, who is
also a Chartered Accountant to sign and issue the stock certificate after due verification, on his
behalf.

Ans: CA Smart is guilty of professional misconduct under clause 12 of Part I of First Schedule of the
CA Act, 1949.

87. Mr. 'A' is a practicing Chartered Accountant working as proprietor of M/s A & Co. He went abroad for
3 months. He delegated the authority to Mr. 'Y' a Chartered Accountant his employee for taking care
of routine matters of his office. During his absence Mr. 'Y' has conducted the under mentioned jobs
in the name of M/s A & Co.
(i) He issued the audit queries to client which were raised during the course of audit.
(ii) He issued production certificate to a client under GST Laws.
(iii) He attended the Income Tax proceedings for a client as authorized representative before Income
Tax Authorities.
Comment on eligibility of Mr. 'Y' for conducting such jobs in name of M/s A & Co. and liability of Mr.
'A' under the Chartered Accountants Act, 1949.

Ans:

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 (i) Issuing audit queries during the course of audit falls under routine work, which can be delegated
by the auditor. Therefore, there is no misconduct in this case.
(ii) Issuance of production certificate to a client under GST Laws by Mr. “Y” is not a routine work and
it is outside his authorities. Thus, CA ‘A’ is guilty of professional misconduct under clause 12 of Part I
of First Schedule of the Chartered Accountants Act, 1949.
(iii) Attending Income tax proceedings for a client as authorized representative before Income Tax
Authorities falls under routine work, hence Mr. Y, the employee of M/s A & Co. can attend to routine
matter in tax practice. Therefore, there is no misconduct in this case.

88. Mr. X, a Chartered accountant, employed as a paid assistant with a Chartered Accountant firm. On
31st Dec. 2018, he leaves the services of the firm. Despite many reminders from ICAI he fails to reply
regarding the date of leaving of the services of the firm.

Ans: Mr. X is held guilty of professional misconduct as per Clause 2 of Part III of the First Schedule to
the Chartered Accountants Act, 1949.

89. CA D, a chartered accountant in practice availed of a loan against his personal investments from a
bank. He issued 2 cheques towards repayment of the said loan as per the installments due. However,
both the cheques were returned back by the bank with the remarks “Insufficient funds”. Comment
with reference to the Chartered Accountants Act, 1949.

Ans: As the cheques were dishonoured due to insufficiency of funds, the drawer will be held guilty of
offence under Negotiable Instruments act, 1881 and consequently CA D would be held guilty of
“Other Misconduct”.

90. Mr. ‘K’, a practicing Chartered Accountant is the proprietor of M/s K & Co. since 1995. He went
abroad in the month of December 2018. He delegated the authority to Mr. ‘Y’ a Chartered
Accountant, his employee for taking care of the important matters of his office. During his absence
Mr. ‘Y’ has conducted the under mentioned jobs in the name of M/s K & Co.
(i) He issued Net worth certificate to a client for furnishing to a Bank.
(ii) He attended the GST proceedings for a client as authorized representative before GST Authorities.
Please comment on eligibility of Mr. ‘Y’ for conducting such jobs in name of M/s K & Co. and liability
of Mr. ‘K’ under the Chartered Accountants Act, 1949.

Ans:
(i) Issuance of Net Worth Certificate to a client for furnishing to Bank by Mr. “Y” is not a routine work
and it is outside his authorities. Thus, CA ‘K’ is guilty of professional misconduct under clause 12 of
Part I of First Schedule of the Chartered Accountants Act, 1949.
(ii) Attending GST proceedings for a client as authorized representative before GST Authorities falls
under routine work, hence Mr. Y, the employee of M/s K & Co. can attend to routine matter in tax
practice. Therefore, there is no misconduct in this case.

91. Give your comments with reference to Chartered Accountants Act, 1949 and Schedules thereto: Mr.
'C', a Chartered Accountant holds a certificate of practice while in employment also, recommends a
particular lawyer to his employer in respect of a case. The lawyer, out of the professional fee
received from employer paid a particular sum as referral fee to Mr. 'C'.

Ans: Mr. C is guilty of professional misconduct by virtue of clause 2 of Part II of First schedule for
accepting referral fees from the lawyer of his employer.

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92. XYZ Associates, a Chartered Accountants Firm is having a relationship with a multi-national
accounting firm in India. The ICAI required that all firms having networking relationship with any
other entity need to furnish information online within the stipulated time. XYZ Associated failed to
respond. Comment on this with reference to professional misconduct, if any.

Ans: XYZ Associates will be held guilty for professional misconduct under the Clause 2 of Part III of
First Schedule for not providing the information to the institute.

93. Mr. ‘C’, a Chartered Accountant employed as Senior executive in charge of Tax in a company, and not
holding certificate of practice recommends a particular lawyer to his employer in respect of a case.
The lawyer, out of the professional fee received from the employer of Mr. ‘C’ paid a particular sum as
referral fee to Mr. ‘C’. Comment with reference to the Chartered Accountants Act, 1949 and
schedules thereto.

Ans: Mr. C (Mr. A) is guilty of professional misconduct by virtue of clause 2 of Part II of First schedule
for accepting referral fees from the lawyer of his employer.

94. Mr. 'G', while applying for a certificate of practice, did not fill in the columns which solicit
information about his engagement in other occupation or business, while he was indeed engaged in
a business.

Ans: Mr. G will be held guilty for professional misconduct under the Clause 2 of Part III of First
Schedule for not providing the information to the institute.

95. Comment on the following: Mr. P, a Chartered Accountant in practice approached Manager of a
Nationalised Bank for a loan of Rs. 25 lakhs. He has also informed the Manager that if the loan is
sanctioned, the Income Tax return of the Manager and staff will be filed without charging any fees,
as quid Pro quo for the loan sanctioned.

Ans: Mr. P will be held guilty of other misconduct under Clause 2 of Part IV of the First Schedule of
the Chartered Accountants Act, 1949.

96. A CA in practice was engaged by a businessman to represent him before the tax authorities on
current matters and in the course of such employment he came across certain documents pointing of
tax frauds in the preceding years for which the client was not represented by him. Is the member
liable to disclose the existence and contents of the documents to tax authorities?

Ans: In respect of such matters, the code of conduct recommends that “If the fraud discovered by the
member, relates to the accounts or tax matters of the client for past year(s) for which the client was
not represented by the member the client should be advised to make a disclosure. The member may
however, continue to act for the client in respect of current matter, but is under no obligation so to
continue.

97. CA Kumar who is contesting Central Council Elections of Institute, engages his Articled Assistant for
his election campaigning promising him that he will come in contact with influential people which
will help to enhance his career after completion of his training period.

Ans: Mr. A would be guilty of Other Misconduct under Part IV of First Schedule and liable to
disciplinary action under Section 21.

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98. YKS & Co., a proprietary firm of Chartered Accountants was appointed as concurrent auditor of a
bank. YKS used his influence for getting some cheques purchased and thereafter failed to repay the
loan/overdraft.

Ans: YKS & Co will be held guilty of other misconduct under clause 2 of Part IV of First Schedule of the
Chartered Accountants Act, 1949.

99. L, a chartered accountant prepares and certifies projected financial statements of his client Abacus
Ltd. Abacus Ltd. forwarded the same to their banks to secure some loans and bank, on that basis
sanctioned a loan. Comment with reference to the Chartered Accountants Act, 1949 and schedules
thereto.

Ans: Mr. L will be deemed to be guilty of professional misconduct under Clause 3 of Part I of Second
Schedule assuming that conditions stated in SAE 3400 are not being fulfilled.

100. Mr. A, a practicing Chartered Accountant, failed to return the books of account and other documents
of a client despite many reminders from the client. The client had settled his entries fees dues also.

Ans: Mr. A would be guilty of Other Misconduct under Part IV of First Schedule and liable to
disciplinary action under Section 21.

101. D, a practicing Chartered Accountant examined and reported on the prospective financial statements
for one of his clients to obtain a cash credit facility of Rs.75 lakhs from a Private Bank. The bank has
sanctioned the cash credit facility for Rs. 60 lakhs to his client. Consequent to the sanction of loan by
Bank, he charged a fee of Rs. 60,000 based on 1% of the credit facility sanctioned.

Ans: Mr. D is allowed to examine the prospective financial information of the clients provided
conditions as stated in SAE are being fulfilled. Assuming that conditions stated in SAE 3400 are being
fulfilled, no misconduct arises on part of Mr. D under Clause 3 of Part I of Second Schedule. However,
charging fees on a %age basis amounts to misconduct under Clause 10 of Part I of First Schedule
except as permitted under regulation 192. Charging fees on %age of fund raised is covered under
Regulation 192. Hence no misconduct arises on part of Mr. D.

102. XYZ Co. Ltd. has applied to a bank for loan facilities. The bank on studying the financial statements of
the company notices that you are the auditor and requests you to call at the bank for a discussion. In
the course of discussions, the bank asks for your opinion regarding the company and also asks for
detailed information regarding few items in the financial statements. The information is available in
your working paper file. What should be your response and why?

Ans: There is no requirement compelling the auditor to divulge information obtained in the course of
audit and included in the working papers to any outside agency except as and when required by any
law or permitted by the client.

103. As a CA in practice, you are asked to conduct a review of the “Profit Forecast” prepared by a
Company in connection with its application for a Term loans from a bank.

Ans: A CA in practice is allowed to conduct a review of profit forecast subject to conditions stated in
SAE 3400.

104. AP & Co., a firm of Chartered Accountants, was appointed by D Ltd., to evaluate the cost of a new
product manufactured by it for their information system and fixation of fair market price. Partner ‘P’

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 of the CA firm is a non-executive director of the Company. Comment with reference to Chartered
Accountants act, 1949 and Regulations there to.

Ans: There is no professional misconduct in evaluating the costs of a company in which one of the
partners of firm is a non- executive director.

105. You were the statutory auditor of Speed Ltd., a PSU, for the year 2016-17. In the course of your audit,
you did not observed 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 have committed a
fraud in Debtor’s ledger and absconded with the amount. Investigation made in the fraud revealed
that the Auditor did not exercise proper skill and care and performed his work in an improper way.
Director of the Company, intends to file disciplinary proceeding against the Auditor with the ICAI.
Discuss the position of the auditor with regard to the disciplinary proceeding under Chartered
Accountants Act, 1949 and Regulations there to.

Ans: The auditor 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.

106. Mr. A was appointed by H Ltd. to audit the PF trust maintained by the company. While conducting
the audit he noticed that large number of loans have been given out of the trust to the employer
company in contravention of the rules of the PF Trust. He disclosed the irregularities to the trustees
and to the company but not to the individual subscribers of the PF. When queried on his omission to
disclose, he explained that he owed no duty to the individual members.

Ans: Guilty by virtue of Clause 5 of Part I of Second Schedule to the CA Act, 1949, as he was required
to disclose the facts to beneficiaries of the fund just like he gives his report to the shareholders of the
company.

107. Mr. X, a CA in practice and statutory auditor of True Ltd., advised the Managing Director of the
company to include in sales, “Orders under negotiation” to reflect a better financial position for
obtaining bank loan. Mr. X, thereafter, gave clean reports on the balance sheet prepared accordingly
without examining the accounts.

Ans: Guilty of misconduct under Clauses 2 & 7 of Part I, Second Schedule to the CA Act, 1949, as he
issued the report without examining the accounts and has acted in a negligent manner. He will also
be deemed guilty of other misconduct under Clause (2) of part IV of First Schedule for advising
unethical practice to the client.

108. Loans were given out of the funds of an Employees Provident Fund to the employer company in
contravention of the applicable rules. As the auditor of the said Provident Fund, M discloses the
contraventions to the Trustees of the fund but failed to do so to the members of the fund. Comment.

Ans: Guilty by virtue of Clause 5 of Part I of Second Schedule to the CA Act, 1949, as he was required
to disclose the facts to members of the fund just like he gives his report to the shareholders of the
company.

109. Mr. X partner of X & Co. Chartered Accountants, has compiled and signed the balance sheet of False
Ltd. for submission to the bankers of the said company. Mr. X has also compiled and signed at the
request of the company another balance Sheet inflating the value of assets by 20%, for submission to

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 a term lending institution. Both the Balance Sheets were not in conformity with the books of
accounts maintained by the company as they were not up-to-date. Comment on Mr. X liability.

Ans: Mr. X would be held guilty under Clauses 5 and 6 of Part I of Second Schedule to the CA Act,
1949 as Mr. X had compiled the two different balance sheets for the same date without reference to
the actual books of accounts, but on instructions of the client. As per clause 5 he has failed to
disclose material fact known to him & as per clause 6 he has also failed to report a material
misstatement known to him.

110. Give your comments with reference to the Chartered Accountants Act, 1949 and Schedules thereto:
Z, a practicing Chartered Accountant issued a certificate of circulation of a periodical without going
into the most elementary details of how the circulation of a periodical was being maintained i.e. by
not looking into the financial records, bank statements or bank pass books, by not examining
evidence of actual payment of printers bills and by not caring to ascertain how many copies were
sold and paid for.

Ans: CA Z is guilty of professional misconduct as per Clauses 2, 7 and 8 of Part I of Second Schedule of
CA Act, 1949 as certificate is issued without examination of related records, failed to exercise due
diligence and failed to obtain necessary information.

111. Mr. Fair a practicing CA, was appointed to carry out a Balance Sheet Audit of a Non-Profit
Organisation. The Internal Auditors detected certain irregularities at one of the branches of the
organization which Mr. Fair had failed to detect.

Ans: Mr. Fair is not guilty as he was appointed to carry out the Balance Sheet Audit, hence he is not
required to check matters relating to branch in depth.

112. Give your comments with reference to Chartered Accountants Act, 1949 and schedules thereto: Mr.
D, a practicing Chartered Accountant, did not complete his work relating to the audit of the accounts
of a company and had not submitted his audit report in due time to enable the company to comply
with the statutory requirements.

Ans: Mr. D is guilty of professional misconduct by virtue of Clause 7 of Part I of Second Schedule to
the CA Act, 1949.

113. Comment on the following with reference to the Chartered Accountants Act, 1949 and schedules
thereto: M/s XYZ a firm of Chartered Accountants received Rs. 2 lakhs in January 2018 on behalf of
one of their clients, who has gone abroad and deposited the amount in their Bank account, so that
they can return the money to the client in July 2018, when he is due to return to India.

Ans: Guilty of professional misconduct by virtue of Clause 10 of Part I of Second Schedule as the
money is required to be kept in a separate bank account.

114. Give your comments with reference to the Chartered Accountants Act, 1949 and schedules thereto:
Mr. A, a Chartered Accountant was the auditor of 'A Limited'. During the financial year 2018-19, the
investment appeared in the Balance Sheet of the company of Rs. 10 lakhs and was the same amount
as in the last year. Later on, it was found that the company's investments were only Rs. 25,000, but
the value of investments was inflated for the purpose of obtaining higher amount of Bank loan.

Ans: Mr. A, will be held liable for professional misconduct under Clauses (2), (7) and (8) of Part I of
the Second Schedule to the Chartered Accountants Act, 1949.

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115. Comment on the following with reference to Chartered Accountants Act, 1949 and schedules
thereto: A charitable institution entrusted Rs. 10 lakhs with its auditor’s M/s Ram and Co., a
Chartered Accountant firm, to invest in some specified securities. The auditors pending investment of
the money deposited it in their Savings bank account and no investment was made in the next three
months.

Ans: M/s Ram & Co. will be held guilty of professional misconduct as he deposited the client money
in his saving bank account.

116. The manager of ABC (P) Ltd. approached CA. X in the need of a certificate in respect of a consumption
statement of raw material. Without having certificate of practice (COP), CA. X 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.

Ans: Mr. X has violated the provisions of section 6 of CA Act, 1949 and hence would be guilty of
professional misconduct under Clause 1, Part II of Second Schedule.

117. Mr. Z, a practicing Chartered Accountant received a sum of Rs. 1 lac on 01.09.2018 from a client who
intends to leave abroad for a period of year, with a request that his advance tax liabilities to be paid
over the three installments, on 15th Sep. 2018, 15th Dec. 2018 and 15.03.2019. After remitting the
1st installment of advance tax on 15.09.2017, Z did not keep the money in a separate bank account
and he is of the opinion that he will remit the money within reasonable time as per schedule of
advance tax.

Ans: Mr. Z is guilty of professional misconduct as per Clause 10 of Part I of Second Schedule of the
Chartered Accountants Act, 1949.

118. M/s. XYZ, a firm of Chartered Accountants has taken a loan for acquiring a home from a company
whose Managing Director’s son is an Articled Assistant with X, a partner of M/s. XYZ. The Articled
Assistant had no direct interest in the Company and the loan was not related to his engagement.

Ans: There will be no professional misconduct on part of M/s XYZ as articled trainee had no interest
in the company and the loan was not related to engagement.

119. Mr. Shah, a Chartered Accountant certified the financial statements of a company in which his wife is
a Director holding substantial interest.

Ans: Guilty of professional misconduct under Clause 1 of Part II of Second Schedule due to violation
of Chapter IV of Council General Guidelines 2008.

120. Mr. A has been appointed statutory auditor of a private limited company where his spouses’ sister’
husband is having 75% ownership.

Ans: Mr. A is qualified to be appointed as auditor, as spouse sister husband is not covered within the
definition of term relative as per AS 18, hence no breach of Chapter IV of Council General Guidelines,
2008.

121. Mr. P and Mr. Q are running a firm of Chartered Accountants in the name of M/s PQ & Co. On
23.05.2019, they included the name of Mr. R, a practicing Chartered Accountant, without his
knowledge, as a partner while submitting an application for empanelment as auditor for Public

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 Sector Bank branches to the Institute. However, they added Mr. R as a partner to their firm offering a
share of 25% of the profits, on 25.05.2017.

Ans: CA P & CA Q will be held guilty of professional misconduct as per Clause 3, Part II of Second
Schedule for submitting false information with the Institute.

122. A film artist who was going abroad for long shooting, deposited a sum of Rs. 20 lakhs with his tax
consultant Mr. G, a practicing Chartered Accountant for payment of GST monthly when they were
due. Mr. G duly remitted all but one installment. He utilized the amount of instalment which he did
not pay, to remit his own advance of income tax. However, while filing return of GST of the film
artist, he duly remitted on her behalf the tax payable with interest due for late payment of GST out
of money lying with him. He also bore for himself the interest due to short fall in remittance of tax of
his client. Comment on the above in the light of Code of Conduct.

Ans: Mr. Z is guilty of professional misconduct as per Clause 10 of Part I of Second Schedule of the
Chartered Accountants Act, 1949.

123. Mr. Brilliant, a practicing CA received a major professional assignment. To complete the said
assignment, he was required to buy four computers. Due to his inability to provide funds for
acquiring the same he borrowed money from a firm, where one of the articled clerk’s and his father
were interested. What will be the Chartered Accountants liability?

Ans: Accepting a loan from an articled clerk in case of an engagement of an article clerk is prohibited
under the Regulations. But, in the present case, it appears from the facts that the articled clerk is
already been engaged and serving under him, and thus, Mr. Brilliant will not be held guilty of
professional misconduct under Clause 1 of Part II of Second Schedule of CA Act, 1949.

124. A Chartered Accountant in practice certified in requisite Form that an articled assistant was
undergoing training with him, whereas, he was also employed in a company between 10 a.m. and 6
p.m. on a monthly salary of Rs. 17,000 and attended the office of the Chartered Accountant
thereafter until 7 p.m. The Chartered Accountant pleaded that the articled assistant was on audit of
the company.

Ans: CA will be guilty of professional misconduct under Clause 1 of Part II of Second Schedule for
contravention of regulations of the Institute and under Clause 3 of Part II of Second Schedule for
submission of false information to the ICAI.

125. P, a Chartered Accountant in practice, accepts appointment as statutory auditor for LMN Pvt. Ltd. Q,
brother of P has substantial interest in LMN Pvt. Ltd

Ans: Guilty of professional misconduct under Clause 1 of Part II of Second Schedule due to violation
of Chapter IV of Council General Guidelines 2008.

126. Mr. Z accepted the statutory audit of a sick unit - NCT Ltd., for the year ending 31.03.2019. During the
course of audit, it was noticed that company’s net worth was negative for the year ended 31.03.2018
and there was also a liability of tax audit fees of `35,000 in favour of the previous auditor. Comment.

Ans: Mr. Z would not be guilty of professional misconduct since the M/s NCT Ltd. is a sick unit having
negative net worth for the year 2016- 17.

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127. 126. Mrs. M is a Director of XYZ Private Limited, having 15% share-holdings in the company. During
2018, the company appointed C.A. Mr. N, Mrs. M spouse, as its statutory auditor. On Mr. N’s advice,
the company issued fresh equity shares in 2018-19, in the ratio of one share for every two shares
held by the shareholders of the company. Mr. N used to deliver audit report for subsequent years
without any comments or disclosures, thereupon.

Ans: Guilty of professional misconduct under Clause 9 of Part I of First Schedule due to
noncompliance of Sec. 141 of Companies Act, 2013.

128. X, a practicing Chartered Accountant in an application for permission to study submitted by his
Articled Assistant to the Council had confirmed that the normal working hours of his office were from
11 A.M. to 6 P.M. and the hours during which the Articled Assistant was required to attend classes
ere 7.00 A.M. to 9:30 A.M. According to the information from College, the Articled Assistant
attended the College from 10 A.M. to 1.55 P.M. on all week days. About the Articled Assistant
attending the classes even during office hours, X pleaded ignorance.

Ans: Mr. X will be deemed to be guilty of professional misconduct under Clause 1 of Part II of Second
Schedule for contravention of regulations of the Institute and under Clause 3 of Part II of Second
Schedule for submission of false information to the ICAI.

129. A member of the institute shall not accept in a year more than the specified number of tax audits
under section 44AB of the Income Tax Act. Mr. Gaurav is a partner in M/s XYZ & Co., a firm of
Chartered Accountants with 6 partners. During the assessment year 2019-20, Mr. Gaurav alone had
signed 290 tax audit reports consisting of both corporate and noncorporate assessees. Comment.

Ans: Mr. Gaurav is eligible to sign 290 tax audit reports on behalf of the firm as the eligibility of the
firm is to accept 360 tax audits. (Refer Chapter VI of Council General Guidelines, 2008).

130. Mr. Moon is the auditor of M/s Sun Ltd., which has a turnover of Rs. 100 crores. The audit fee for the
year is fixed at Rs. 25 lakhs. During the year the company offers Mr. Moon an assignment of
Management Consultancy for a remuneration of Rs. 50 lakhs.

Ans: It would be a misconduct on A’s part due to breach of Chapter IX of Council General Guidelines,
2008 as he accepts the management consultancy assignment at a fee higher than audit fees.

131. D, who conducts the tax audit u/s 44AB of the Income Tax Act, 1961 of M/s ABC, a partnership firm,
has received the entire audit fees of Rs. 25,000 in April, 2018 in respect of the tax audit for the year
ended 31.3.2018. The audit report was, however, signed on 25.5.2018. What will be your answer if
fees were recovered on progressive basis?

Ans: Mr. D will be held guilty of professional misconduct by virtue of Clause I of Part II of Second
Schedule due to breach of Chapter X of Council General Guidelines, 2008 (being disqualified as
indebted to the assessee due to explanation to Sec. 288 of Income Tax act, 1961). However, if fees
were recovered on progressive basis, no professional misconduct arises.

132. M/s ASKS, a firm of Chartered Accountants, having three partners accepts an audit assignment of a
private limited company for a fee of Rs. 4,000 only. Comment.

Ans: M/s ASKS will not be held liable for guilty of misconduct as minimum fees prescribed is
recommendatory only.

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133. As a practising chartered accountant do you approve the following: The Chairman of an Audit
Committee of a Bluechip Company, who is a Chartered Accountant asked the firm in which he was
previously a partner to quote their fee on a success fee basis so as to ensure that a professional work
is assigned to such firm.

Ans: Not approved as it will amount to professional misconduct by virtue of clause 10 of Part I of First
Schedule.

134. Is there any misconduct on the part of a Chartered Accountant in the following circumstances: The
offer document of a listed company in which Mr. D, a practising Chartered Accountant is a director
mentions the name of Mr. D as a director along with his various professional attainments and
spheres of specialisation.

Ans: Clause 6 & 7 of Part I of First schedule: if a public Company, in which a CA in practice is a
Director issues a prospectus or gives any announcement that gives descriptions about the CA’s
expertise, specialization and knowledge in any particular field, it will attract professional misconduct
under clauses 6 & 7. In the given case, the CA is guilty of professional misconduct.

135. M (P) Ltd. appointed CA. P for some professional assignments like company’s ROC work, preparation
of minutes, statutory register etc. For this, CA. P charged his fees depending on the complexity and
the time spent by him on each assignment. Later on, M (P) Ltd. filed a complaint against CA. P to the
ICAI that he has charged excessive fees for the assignments comparative to the scale of fees
recommended by the Committee as well as duly considered by the Council of ICAI.

Ans: Scale of fees recommended by the Committee as well as duly considered by the Council of ICAI
is only recommendatory and not mandatory, hence no misconduct arise on part of Mr. P.

136. Mr. R, a Chartered Accountant in practice has been elected as the treasurer of a Regional Council of
the Institute. The Regional Council had organized an international tour through a tour operator
during the year for its members. During the audit of the Regional Council, it was found that Mr. R had
received a personal benefit of Rs. 50,000 from the tour operator.

Ans: Guilty of Other Misconduct under Part IV of First Schedule read with Sec. 21 of CA Act, 1949.

137. Mr. P, a CA in practice runs his proprietorship firm as “M/s P & Co.”. His annual gross receipts are in
excess of Rs. 50 Lakhs. He maintains a small pocket diary in which he writes the fees received from
various clients. Based on his record, he prepares and files his income tax return.

Ans: Mr. P will be held guilty of professional misconduct by virtue of Clause 1 of Part II of Second
Schedule, due to contravention of Chapter V of Council General Guidelines, 2008 for non-
maintenance of books of accounts.

138. Mr. X, a practicing Chartered Accountant, accepts appointment as a valuer of goodwill of a business
for the purpose of determining the value of gift under the Income Tax Act on the condition that he
would be paid 5% of the value of the goodwill so determined as his fees.

Ans: Permitted under Regulation 192, hence not guilty of professional misconduct.

139. Is there any misconduct on the part of a Chartered Accountant in the following circumstances: Mr. X
has charged a fee for representing his client in an income tax appeal based on the expected relief as a
result of the appeal.

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 Ans: Professional misconduct by virtue of clause 10 of part I of First Schedule.

140. A Chartered Accountant in service agrees to entrust the work of investment broker to Mr. X on the
specific understanding that 20% of commission Mr. X earns would be paid to him.

Ans: Guilty of professional misconduct by virtue of clause 2 of Part II of First Schedule.

141. As a Practising CA do you approve the following: In a representation to be submitted to a company

u/s 140(4) of the Companies Act, 2013, the partner of the firm of auditors wants to include the
contributions made by the firm in strengthening the control procedures of the company during their
association with the company. If not, why?

Ans: Action proposed by a partner could not be approved since it would lead to his being held guilty
of professional misconduct under Clause (6) of Part I of the First Schedule to the Chartered
Accountants Act, 1949.

142. X & Co. Chartered Accountants were informed by True & Co. Ltd. that they have been appointed as
auditor of the company in place of ABC & Co. who have been removed, subject however to the
approval of the shareholders in the ensuing AGM. X & Co. accepted the appointment and
commenced the work without their appointment being approved by the shareholders of the
company.

Ans: Guilty of professional misconduct by virtue of clause 9 of Part I of First Schedule.

143. A CA in practice, inspite of repeated requests from the secretary of the Institute, fails to submit Form
18. Is he liable for misconduct.

Ans: Guilty of professional Misconduct by virtue of clause 2 of Part III of First Schedule.

144. A CA in practice appearing on television on budget proposals was introduced to the viewers, on the
basis of the bio-data furnished by him, as the senior most partner of M/S Tick & Tag a leading firm of
CA’s established in Delhi in 1948. See whether there is any professional misconduct in this case.

Ans: As per Clause 7 of Part I of First Schedule, (1) Reference to name of the firm , (2) Use of adjective
expressions such as “a leading firm of CA’s and Senior Most Partner”, and (3) Reference to the date
of establishment of firm, violate the code of conduct. Hence the CA will be guilty of professional
misconduct.

145. Z, a Chartered Accountant, certifies a financial forecast of his client which was forwarded to the
client’s bank based on which the bank sanctioned a loan to the client.

Ans: Guilty of professional Misconduct by virtue of clause 3 of Part I of Second Schedule, if he has
certified the financial forecast without taking adequate safeguards as specified in SAE 3400.

146. A CA in practice entered into partnership with his uncle in Textile business, which, however, did not
take off. Will he be held guilty of professional misconduct?

Ans: A CA in practice cannot engage in any business or occupation other than the profession of
Chartered Accountant unless permitted by the council so to engage. Even if the agreement is not

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 acted upon, the mere fact that he entered into partnership by such an agreement would constitute
misconduct. Hence the CA will be guilty under clause 4 & 11.

147. A Chartered Accountant holding certificate of practice and having four articled clerks registered
under him accepts appointment as a full-time lecturer in a college. Also he becomes a partner with
his brother in a business. Examine his conduct in the light of CA. Act, 1949 and the regulations
thereunder

Ans: Guilty of professional misconduct by virtue of clause 11 of Part I of First Schedule.

148. A is a partner of 2 firms, M/s ABC & Company and M/s A & Associates. For most of the audits
handled by him, the appointment is in the name of M/s ABC & Company . The visiting cards of A
carries the names of both the firms.

Ans: Firms name can be printed on the visiting cards, hence not guilty of professional misconduct.

149. Z, a Chartered Accountant wrote several letters to Government Department, pointing out seniority of
his firm, sending his life sketch and stating that he had a glorious record of service to the country as
well as to the organization of accountancy profession with a view to get the audit work.

Ans: Clauses 6 & 7 of Part I of First Schedule, the CA is guilty of professional misconduct.

150. T, a practicing CA uses the designation, ‘Municipal Councilor’ apart from the expression ‘FCA’ on his
visiting card. Comment.

Ans: A member is not permitted to use the designation such as ‘Member of Parliament’, Municipal
Councilor’ or any other functionary in addition to that of CA. Therefore, as per Clause 7, Part I of First
Schedule, T is guilty of professional misconduct.

151. X & Co., CAs informed selected multinational organizations, who are not their clients that Mr. Y, the
former Partner – in – charge of taxation of one of the largest accounting firms of the world, had
joined them as a partner. Is this action liable for professional misconduct?

Ans: According to the provisions of Clause 6 & 7 of Part I of First Schedule.

152. M/s ABC, a partnership firm carrying on business has complained to the Institute of Chartered
Accountants of India (ICAI) that Mr. M, a Chartered Accountant has charged the firm excessive fees
for a professional assignment.

Ans: Mr. M is not liable for any professional misconduct under the Chartered Accountants Act, 1949.

153. M/S PQR a firm of Chartered Accountants responded to a tender from a State Government
department for switching over to double entry system of accounting. For the purposes the firm also
paid Rs. 20,000 as earnest money deposit as per the terms of the tender.

Ans: M/S PQR have not committed any professional misconduct.

154. A junior CA in practice requests in writing to a senior member of his profession who is over-burdened
with professional work to divert some of his work to him on profit sharing basis. Is there any offence
in seeking professional work by a member from another member. Give reasons for your answer?

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 Ans: Clause 6 of Part I of first Schedule, a CA can solicit the work from another CA, hence there is no
professional misconduct in the above case.

155. A Partner of a firm of Chartered Accountants during a T.V. interview handed over a bio-data of his
firm to the Chairperson. Such bio-data detailed the standing with International firm and also his
achievements and recognition as an expert in the field of Taxation. The bio-data was read out during
the said interview.

Ans: Partner is guilty of professional misconduct under Clause 6 of Part I of the First
Schedule to the Chartered Accountants Act, 1949.

156. CA. Aman, a practicing Chartered Accountant, took over as the executive chairman of Signora IT Ltd.
on 01.04.2018. However realizing about obtaining prior approval from the Council of the ICAI for
engaging into other business, he applied to Council for permission within 10 days.

Ans: CA. Aman will be deemed to be guilty of Professional Misconduct under Clause 11 of Part I of
First Schedule as he accept the position of chairman of a company for which prior permission from
Council is required

157. CA. Raagi, a practicing Chartered Accountant, certifies a financial forecast of Capex Ltd. one of her
clients, which was forwarded to the company's bank based on which the bank sanctioned a loan
amounting Rs. 2.5 crore to the company. CA. Raagi, however, mentioned in the report that her
responsibility is to examine the evidence supporting the assumptions and other information in the
Prospective financial information, her responsibility does not include verification of the accuracy of
the projections, therefore, she does not vouch for the accuracy of the same.

Ans: No misconduct arises on part of CA. Raggi for certifying financial forecast under clause 3 of Part I
of Second Schedule as she certifies the forecast in compliance of SAE 3400.

158. Mr. Raj, a renowned practicing CA, decided to tie his knot with Ms. Anjali. While giving order for
marriage invitation cards, Mr. Raj instructed to add his designation “Chartered Accountant” with his
name. Later on, the cards were distributed to all his relatives, close friends and clients.

Ans: Using the designation “Chartered Accountant” in invitation cards is permitted under Guidelines
issued in Clause 6 of Part I of First Schedule provided cards are distributed to relatives, close friends
and clients. Hence no misconduct arises on part of Mr. Raj.

159. WCP & Co LLP are the internal auditors of DEF Ltd. WCP & Co LLP also agreed to undertake Goods
and Service Tax (GST) Audit of DEF Ltd simultaneously.

Ans: An Internal Auditor of an entity cannot undertake GST Audit of the same entity. WCP & Co LLP
will be held guilty for misconduct.

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