Audit Case Studies
Audit Case Studies
Audit Case Studies
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CHAPTER-14
CASE STUDY
Case Scenario 1
A Partnership Firm of Chartered Accountants by the name of HS and Associates was appointed to audit
books of accounts of WT Limited for financial year 2019-20. HS and Associates consisted of two partners CA
H and CA S.
While conducting audit of WT Limited for financial year 2019-20, CA H, one of the partners of HS and Associates
used different audit procedures in order to obtain audit evidence.
The different audit procedures used by CA H were as follows:
(1) As WT Limited was engaged in manufacturing business of wooden doors, CA H and his team members
carefully watched the whole process of counting of finished wooden doors by employees of WT Limited.
The counting of finished wooden doors was necessary for the purpose of verification of stock of finished
wooden doors.
(2) In WT Limited the stock of finished wooden doors was valued manually by multiplying number of
finished wooden doors with value per finished wooden door. A team member of CA H again did the
calculation in order to verify the accuracy regarding valuation of stock of wooden finished doors.
(3) CA H with the help of his team members obtained information from people (who were experienced in
manufacturing business of wooden doors) about the purchase price of raw materials required in
manufacturing business of wooden doors and also obtained some non-financial information.
(4) CA H and his team members while conducting the audit of WT Limited for financial year 2019-20 in
detail checked and evaluated the books of accounts and relevant documents of W Limited.
(5) CA H asked for written confirmations regarding account balances from Debtors and Creditors of WT
Limited.
Keeping the basic concepts about various audit procedures in mind, answer the following multiple-choice
questions:
1. CA H and his team members carefully watched the whole process of counting of finished wooden
doors by employees of WT Limited. This is an example of which audit procedure:
(a) External Confirmation. (b) Observation.
(c) Inquiry. (d) Inspection.
2. In order to verify the accuracy regarding valuation of stock of wooden finished doors, a team member
of CA H again did the calculation. This is an example of which audit procedure:
(a) Analytical Procedures. (b) Inquiry.
(c) Inspection. (d) Recalculation.
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3. CA H with the help of his team members obtained information (both financial and non-financial
information) from experienced people in manufacturing business of wooden doors. These experienced
people provided the required information. This whole method of obtaining information is an example
of which audit procedure:
(a) Inspection (b) Reperformance.
(c) Inquiry. (d) Investigation.
4. CA H and his team members in detail checked and evaluated the books of accounts and relevant
documents of WT Limited. This is an example of which audit procedure:
(a) Inspection. (b) Reperformance.
(c) Recalculation. (d) Investigation
5. Asking for written confirmations regarding account balances from Debtors and Creditors of WT Limited
by CA H is an example of which audit procedure:
(a) Inquiry (b) Inspection
(c) Investigation. (d) External Confirmation.
Case Scenario 2
RM & Associates have been appointed as Auditors of Techblocks Consulting Ltd. for the year 2020-21. CA R
and CA M were the Engagement partners.
Para 1
The Firm has freshly appointed 2 Article Clerks who had no practical knowledge in the area of Auditing. They
had to work to tight hard-headed factual issues and were baffling to understand the various terms and their
objectives in the field of Auditing.
Para 2
To make sure that the Article Clerk do not misplace or mis-handle the Working Papers, CA M also described
the relevance of Audit File and clarified that working papers are the property of Auditor. Such Audit file
should be preserved for a period of seven years.
Para 3
CA R while scrutinizing Books of Accounts suspected some fictitious sales as a result of which he anticipated
inflated Debtors. Management was reluctant to give the details. As CA R could not gather more evidence
from the Management, he sought to obtain details from the third party.
Para 4
On further perusal of Opening Balances, it is essential to perceive that Accounting Policies have been
consistently applied in the current period’s financial statements and whether any changes have been properly
accounted for and disclosed. CA M assigned this duty to his article clerk. The Article clerk explained to CA M
about how he had observed that Accounting policies were not consistently applied in relation to opening
balances in accordance with the financial reporting framework or a change is not properly accounted or not
adequately disclosed.
Para 5
Subsequently, the Auditors gathered from the Management that there was a fire in the Factory premises
after the Balance Sheet date, as a result of which the company suffered loss of Inventories. It did not provide
any conditions on the Balance Sheet date. SA 560 deals with such type of transactions.
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Case Scenario 3
Mars Ltd. is a public limited Company incorporated during the previous financial year 2019-20. R S Shah &
Associates have been appointed as the Auditors of the Company.
Para 1
Its Authorized Capital was Rs. 75 Lacs. Subsequently it increased its Share Capital. They issued Shares at a
premium of Rs.25/- per share. The Company has transferred the amount received as premium to the Securities
Premium Account.
Para 2
CA R recommended his Engagement Team to prepare an Audit Strategy as well as Audit plan for efficient
conduct of audit. He advised to the team that they should include a series of verification procedures to be
applied to Financial Statements of the Company for accomplishing the Audit objectives. CA R illustrated to
his team the relationship between Audit strategy as well as Audit plan.
Para 3
Encompassed by a huge clientele, one of the Auditee firm was a LLP. It was in the name of Mangaldeep
Geotech LLP. They conducted the business in a very efficient way but had allotted only the Audit and the
Income Tax work to CA R S Shah & Associates. The Partners of the LLP were capable enough but however
inadvertently bypassed the ROC Compliances. They had no knowledge about the Compliances and its related
penalties. Thus they approached CA R S Shah and Associates for their guidance. They were completely
clueless as to filing of Annual Return with ROC.
Para 4
R S Shah and Associates have been appointed as Auditors of a large Enterprise namely Search Results Ltd.
Considering the overhaul required in the Organization’s Risk Management, Directors of the listed companies
braced the subject of Internal Financial Control with much seriousness and rigor. The dawn of the Financial
Year lays down the daunting task of establishing and implementing Internal Financial Control in an Enterprise.
Para 5
The Auditors are performing their Audit work in the Company Search Results Ltd by using CAAT’s. The
Company is completely automated and all the processes, operations are carried out using the Computer
systems. Testing is performed in an automated environment to increase the efficiency and allow for more
robust tools to be built. There are four types of testing methods in an Automated environment. They are
Inquiry, Observation, Inspection and Re-performance.
1. Sec. 52 of the Companies Act states that Security Premium Account can be applied by the Company for
one of the purpose mentioned below. Which of the following is an INCORRECT option?
(a) To write off preliminary expenses of the Company
(b) To pay dividend to equity shareholders
(c) To provide premium on redemption of Preference share capital
(d) To purchase its own shares or other securities under Sec 68(Buyback)
2. In reference to para 2, which of the following Statement is inappropriate?
(a) Once the overall audit strategy is established, an audit plan can be developed to address the
various matters identified in the overall audit strategy.
(b) The establishment of overall audit strategy as well as detailed audit plan is a discrete and
sequential process.
(c) Audit Strategy and Audit plan are inter-related as changes in one may result in consequential
changes to the other.
(d) The Audit plan is more detailed than the Audit Strategy that includes the nature, timing and
extent of audit procedures to be performed by engagement team members.
Case Scenario 4
A Partnership Firm of Chartered Accountants by the name of S K and Associates were appointed as the
Auditors of the Company named Big Box Ltd.
Para 1
Big Box Ltd is a Public Listed Company. The CA Firm comprised of 2 partners namely CA S and CA K.
Subsequently, a close relative of CA K, acquired security having face value Rs.495000/- of Big Box Ltd. As per
the provisions of Section 141 of the Companies Act 2013, an Auditor will be disqualified from appointment,
if the Auditor himself or his relative acquires the security exceeding the prescribed limit in the Company.
Para 2
Further, the Auditors, S K and Associates also had to bank on the policies and procedures adopted by the
Company for ensuring the efficient conduct of its business. They have to state about the adequacy of
Internal Financial Controls in the Company. The Company had a turnover of Rs. 60 Crores as per the latest
Audited Balance Sheet and its Borrowings during the year were Rs. 20 Crores from Banks.
Para 3
The CFO of the Company, Mrs. Darshana felt dubious in the Accounts department of the Company. She
entreated the Auditors to perform a thorough investigation of the Accounts department. Mrs. Darshana was
also anticipating a fraud in this situation. Both the Auditor as well as the CFO of the Company analyzed the
various risk factors. The Auditors observed that the Head Accountant of the Department has inflated the
Sales amount to finish his targets. There was collusion between the Head Accountant & Employees of the
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Company. Employees were presented incentives on accomplishing their targets. This resulted in a fraud by
the Head Accountant of amount aggregating to Rs.75 Lacs.
Para 4
Mr. X, an acquaintance of CA S, wanted to form an LLP with his distant relatives. He wanted to possess in-
depth knowledge about LLP. CA S explained him that LLP is a separate legal structure and is liable to full
extent of its assets but the partners are liable to the extent of their agreed contribution in LLP. Mr. X additionally
wanted to know the criteria for the accounts of LLP to be audited. CA S enlightened him that the accounts of
every LLP shall be audited in accordance with Rule 24 of LLP, Rules 2009.
Para 5
Big Box Ltd. is expanding its business. Consequently it requires many Computers. Purchasing computers
may involve paying a huge upfront cost. Cash flow may get disrupted. Hence the Company came up with an
idea of getting the Computers on lease. It will allow the businesses to have access to the latest technology
without harming their cash flow.
The Auditors explained to the Directors that leasing Computers shall come under the purview of Operating
Lease.
1. With reference to para 1, S K and Associates can take corrective actions within _______days. The relative
may hold security or interest in the company of face value not exceeding ____________
(a) 45 days, Face Value Rs.100000/- (b) 60 days, Market Value Rs.500000/-
(c) 30 days, Face Value Rs. 500000/- (d) 60 days, Face Value Rs.100000/-
2. The Auditors of S K and Associates were doubtful concerning the applicability of Internal Financial
Controls in the Company Big Box Ltd. With reference to details provided in Para 2 above, please guide
them in this regard.
(a) It will be applicable as Turnover exceeds the threshold limit of Rs.50 Crores.
(b) It is not applicable as the Borrowings are less than 25 Crores during the financial year.
(c) It will be applicable as the Company is a Public Listed Company.
(d) Reporting on Internal Financial Control is not under the scope of Auditors reporting. Hence, Not
Applicable.
3. With reference to para 3, wherein a fraud was observed by the Auditor, what should be the course of
action of the Auditor?
(a) The Auditor should report the fraud details to Central Government.
(b) The Auditor shall report the fraud to the audit Committee or to the Board within the prescribed
time.
(c) The Auditor shall disclose it in the Audit Report and report the fraud details to RBI too.
(d) Both a & c above.
4. With regard to information provided in Para 4, which of the following is a CORRECT option?
(a) Any LLP whose turnover does not exceed, in any financial year, Rs.40 Lacs or whose contribution
does not exceed Rs.25 Lacs is not required to gets its accounts audited.
Case Scenario - 5
Ms. Rhea was among the promoters who set up a public company by the name “Aksham Ltd”.
The company appointed CA Rajendra as the auditor of Aksham Ltd. CA Rajendra is the brother of one of the
directors of Aksham Ltd. After setting up of company, the company had a dispute with one customer of the
company in year 2019-20 who took the company to court. There are probable chances that company will
have to shelve out ‘50 lakhs as compensation but the case will likely to be finalised in year 2021-22.
CA Rajender considers the fact that Askham Ltd has a present obligation and it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation and that a reliable estimate
i.e. ` 50 Lakhs can be made of the amount of the obligation.
Aksham Ltd. declared dividend of ` 10 per equity share on 10th April,2021. The financial statements were
approved on 30th June,2021. Askham Ltd took loan of ` 65 lakhs from Saksham Bank for a period of 10 years;
the loan amount was guaranteed by Mr. Pramod, one of the directors of Aksham Ltd. The loan was completely
secured against the fixed assets of the company. Aksham Ltd drew designs of one of the products of the
company and this product constituted 90 % sales of the company. The designs of the product were such that
the sale of the company will increase every year for the next 5 years. Aksham Ltd booked the designs of the
company at a value of ` 1 crore in the books of account of the company as intangibles at its cost.
Based on the above information, answer the following questions:
1. State whether appointment of CA Rajendra is correct in law.
(a) Yes, it is correct in law as per Companies Act, 2013
(b) It is incorrect in law as per Companies Act, 2013 as the relative of director is not allowed to be
appointed as an auditor of the company.
(c) It is correct in law as per Companies Act, 2013 because brother is not covered under the definition
of relative.
(d) It is correct as appointment of auditor is not governed by any law in India.
2. Advise the company regarding the course of action Aksham Ltd will have to follow for the court case for
financial statements prepared for year ending 31st March, 2021
(a) create provision (b) create revenue reserve
(c) create capital reserve (d) to be disclosed as contingent liability
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3. What is the action which Aksham Ltd is supposed to take with regard to treatment of dividend declared
while preparing and finalizing financial statements for year ending 31st March,2021?
(a) recognise dividends as a liability (b) disclose the amount of dividend
(c) both a and b (d) none of the above.
4. State the disclosures Aksham Ltd is required to make with respect to the long-term borrowings taken
from Saksham Bank.
I. Secured loan from Saksham Bank.
II. The fixed assets are secured against the loan
III. The loan of ‘ 65 lakhs is guaranteed by director.
IV. Repayment terms of the loan
(a) I, II, III and IV (b) I, II
(c) I, II, III (d) II, III
5. State which of the following statement is true with respect to recording an intangible in the books of
the company.
(a) Intangible is correctly booked by the company.
(b) Intangible is wrongly booked by the company as an intangible cannot be booked as per the
accounting standard of India.
(c) Intangible is wrongly booked by the company as an intangible cannot be booked as per the
auditing standards of India.
(d) Intangible is wrongly booked by the company as an intangible cannot be booked as per the
Companies Act, 2013.
Case Scenario - 6
Best Tea House is a Co-operative society formed as per the provisions of the Co-operative Societies Act,
1912. It runs a chain of restaurants serving mainly tea and snacks in Delhi. RAS & Associates, a Chartered
Accountant firm, has been appointed to conduct the statutory audit of the society. None of the partners of
the firm, CA R, CA A and CA S have ever conducted a Co-operative Society audit before and so familiarise
themselves with the provisions of the particular Act governing the society before starting the audit.
During the audit, Best Tea House informs the auditors that they have been in operation for the last five
years, and no audit was required earlier since their turnover had not exceeded the prescribed limit.
While examining the books of account of Best Tea House, RAS & Associates notice that as stated under
section 43(h) of the Central Act, certain rules were framed prescribing the books and accounts to be kept by
Best Tea House.
The auditors also understand that according to section 5 of the Central Act, in the case of a society where the
liability of a member of the society is limited, no member of a society other than a registered society can
hold such portion of the share capital of the society as would exceed a maximum of a certain percentage of
the total number of shares or of the value of shareholding to a specified amount. RAS & Associates were
concerned with this provision so as to watch any breach relating to holding of shares.
While examining the loans of Best Tea House, the auditors notice that the society has given a loan to a
relative named Mr. P, of a member of the society, Mr. T, of an amount not exceeding ‘ 1000.
RAS & Associates examined the overdue debts and checked its classification which they are required to
report.
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General MCQs
1. To jointly audit books of accounts of WZ Limited for the financial year 2020-21 two different firms of
Chartered Accountants namely MH and Associates and NR and Associates were appointed. MH and
Associates and NR and Associates can together be called as:
(a) Principal Auditors of WZ Limited. (b) Branch Auditors of WZ Limited.
(c) Individual Auditors of WZ Limited. (d) Joint Auditors of WZ Limited.
2. Mr. H and his team members carefully watched the whole process of counting of finished wooden
doors by employees of Bottom Limited. This is an example of which audit procedure:
(a) External Confirmation. (b) Observation.
(c) Inquiry. (d) Inspection.
3. Under section 43(h) of the Central Act, who can frame rules prescribing the books and accounts to be
kept by a co-operative society?
(a) Central Government (b) State Government
(c) Management Committee of the Society. (d) Secretary of the Co-operative Society.
4. ………….. is the threat which occurs when auditors are deterred from acting objectively with an adequate
degree of professional skepticism.
(a) Familiarity threat (b) Advocacy threat
(c) Self Review threat (d) Intimidation threat
5. The persons with responsibility for overseeing the strategic direction of the entity and obligations
related to the accountability of the entity are :
(a) management (b) those charged with governance
(c) audit committee (d) board of directors
Case Scenario - 7
Suresh Rana & Associates have been appointed as the statutory auditors of HAIL Ltd. by the Comptroller &
Auditor General for the FY 2019-20. HAIL Ltd. is a Government company engaged in the manufacture of
metro train coaches. During the course of audit, CA Suresh extended his scope of audit to cover efficiency,
effectiveness and economy audit. CA Suresh Rana also asked his audit team to conduct expenditure audit as
part of the audit engagement of HAIL Ltd.
During the course of audit, CA Suresh also found that the company has constructed its new stockyard for
parking its metro coaches and maintenance of its metro coaches. However, the stockyard was not being
used by the company for the designated purpose and the company continued using the rented stockyard.
Suresh considered such expenditure as infructuous and avoidable expenditure.
The engagement partner also discussed with his team regarding the areas to be covered while conducting
the audit of receipts. The reporting responsibilities of the engagement team were also discussed by the
engagement partner with his team.
Based on the above facts, answer the following:-
1. Statement 1: Government audit provides public accounting of operational, management programme
and policy aspects of public administration as well as accountability of officials administering them.
Statement 2: Government audit is equipped and intended to function as an investigating agency, to
pursue every irregularity or misdemeanour to its logical end.
Case Scenario - 8
RS & Associates have been appointed as the statutory auditors of MNO Ltd. for the Financial Year 2019-20. CA
Ramesh is the engagement partner for the assignment. The management of MNO Ltd. has duly given a
written representation letter to CA Ramesh regarding acknowledgement of its responsibility for the
implementation and operation of accounting system and the internal control system of the company. The
management has assured the audit firm that such accounting and internal control systems are designed and
implemented to prevent and detect any misstatement on account of fraud or error.
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During the course of audit, the auditor found that the wages cost has increased substantially as compared to
the last year. On detailed checking CA Ramesh found that many new workers have been added to the
workers list which appear to be dummy workers to CA Ramesh.
Further the auditor found that there was a fraud amounting to Rs. 2 crores committed during the year under
audit by an officer of the company. Such fraud has already been reported by the Cost Accountant of the
company, Mr. Sudesh, to the Central Government. The statutory auditors are considering their reporting
responsibilities in this regard.
The audit team also realized that there is inadequate Internal Control System with respect to the following:
• The system of authorization and approval of transactions specially in the process of making purchases.
• The system of record keeping with respect to the assets.
Based on the above facts, answer the following:-
1. As the management of MNO Ltd. has given a written representation regarding its responsibility for
prevention and detection of misstatement on account of fraud and error, M/s RS & Associates:-
(a) Should rely on such management representation and conduct its audit procedures without wasting
much time and resources towards detection of fraud and error.
(b) Should not consider such management representation as a substitute for obtaining sufficient and
appropriate audit evidence and design its audit procedures accordingly.
(c) Should not rely on such management representation and should obtain written representation
from those charged with governance.
(d) Should concentrate on audit of accounting system and accounting policies so used by the company
as the prevention and detection of fraud and error is the responsibility of the management.
2. The inclusion of dummy workmen in the workmen list by the management of MNO Ltd. as noticed by
CA Ramesh amounts to:-
(a) Suppressing cash receipts (b) Casting wrong total in cash book
(c) Inflating cash payment (d) Misappropriation of goods
3. With respect to the fraud which has already been reported by The Cost accountant of the company, Mr.
Sudesh, what is the responsibility of M/s RS & Associates in this regard?
(a) Since the reporting has been done to the Central Government by the cost accountant of the
company, the statutory auditor has no responsibility for such fraud and its reporting.
(b) The cost accountant has detected and reported the fraud to the Central Government. The statutory
auditor should not interfere in the work of the Cost Accountant.
(c) CA Ramesh should review the steps taken by the management with respect to the reported fraud
and if he is not satisfied with such steps, he should request the management to perform additional
procedures to enable him to satisfy himself that the matter has been appropriately addressed.
(d) CA Ramesh should obtain written representation from the management that once the matter is
appropriately addressed, he will be duly informed by the management.
6. ………..is a possible obligation that arises from the past events and whose existence will be confirmed
only by the occurrence/ non occurrence of one or more uncertain future events not wholly within the
control of the entity:-
(a) Provisions (b) Reserves
(c) Contingent Liabilities (d) Liability
7. In relation to completed engagements, procedures designed to provide evidence of compliance by
engagement teams with the firm’s quality control policies and procedures is known as :
(a) Monitoring (b) Inspection
(c) Subsequent Audit procedures (d) Compliance procedures
8. The concept of materiality is applied by the auditor :
(a) in planning and performing the audit
(b) in evaluating the effect of identified misstatements on the audit
(c) both in planning and performing the audit, and in evaluating the effect of identified misstatements
on the audit
(d) none of the above is correct
9. ___________ in which the auditor selects the sample without following a structured technique.
(a) Haphazard selection (b) Monetary Unit Sampling
(c) Block Sampling (d) Structured Sampling
10. The persons with responsibility for overseeing the strategic direction of the entity and obligations
related to the accountability of the entity are :
(a) management (b) those charged with governance
(c) audit committee (d) board of directors
Case Scenario - 1
SaveLives Limited is a listed Company which deals in the manufacture of Sanitizers, floor cleaners, dish and
fabric cleaners etc. In spite of spread of covid 19 in the country, the company’s sales have been very high in
the last financial year due to essential products it deals in. The Company is highly automated and is driven
by IT systems and applications that are used in the preparation of the financial statements of the Company.
The Company uses an integrated enterprise resource planning system since last five years.
KRAN & Associates has been appointed to conduct the statutory audit of the Company. The firm consists of
eight partners, and CA N has been appointed as engagement partner for the audit of SaveLives Limited.
CA N briefed the team about the audit and also how IT would be relevant to the audit of SaveLives Limited.
The team obtained an understanding of the entity and its aut omated environment which involved an
understanding of how the IT department was organised, IT activities, IT dependence and the relevant risks
and controls.
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One of the team members wanted to understand the importance of different types of controls in an
automated environment viz., General IT Controls, Application Controls and IT- Dependent Controls. Same
was discussed in detail along with the relationship between different controls.
The Companies Act, 2013 has placed a greater emphasis on the effective implementation and reporting on
the internal controls for a company. So, CA N decided to himself evaluate and validate the design and
operating effectiveness of Internal Financial Controls over Financial Reporting (IFC-FR) of the company as at
the Balance Sheet date. Internal Financial Controls (IFC) refers to the policies and procedures put in place by
SaveLives Limited for ensuring adequacy and also the operating effectiveness of such controls.
The audit team decided to use the tools and techniques that auditors use in applying the principles of data
analytics which are known as CAATs. Data analytics could also be used in testing of electronic records and
data residing in IT systems using spreadsheets and specialised audit tools viz., IDEA and ACL to perform
various functions.
1. Under which situation is IT not relevant to an audit?
(a) Increased complexity of transactions (b) Hi-tech nature of business
(c) Volume of transactions is low (d) Company Policy (Compliance).
2. Which of the following is a risk that arises from the use of IT systems?
(a) Direct data changes (backend changes). (b) Limited/Monitored access.
(c) Adequate segregation of duties. (d) Authorized access to data.
3. The relationship between two controls is such that _____________ are needed to support the functioning
of _______________, and both are needed to ensure complete and accurate information processing
through IT systems.
(a) IT Dependent Controls, General Controls (b) Application Controls, General Controls.
(c) General Controls, IT Dependent Controls. (d) General IT Controls, Application Controls.
4. The term Internal Financial Controls (IFC) refers to the policies and procedures put in placeby companies
for ensuring which of the following:
(a) reliability of financial transactions. (b) effectiveness and efficiency of operations.
(c) safeguarding of human resources. (d) prevention and detection of errors.
5. Data analytics can be used in testing of electronic records and data residing in IT systemsusing
spreadsheets and specialized audit tools viz., IDEA and ACL to perform which of thefollowing:
(a) Evaluating impact of control deficiencies.
(b) Compliance with applicable laws and regulations.
(c) Authorized changes to system or programs.
(d) Providing latest information.
Case Scenario - 2
You are a partner in ABC & Company, a Chartered Accountant firm based in New Delhi. ABC & Company has
been appointed as the statutory auditor of onetime Limited, a public limited company which manufactures
and sells wall and table clocks and has many branches all over India. onetime Limited has been exporting the
clocks since past two years. However, the domestic sales have contributed towards major source of revenue
for the Company.
You being the engagement partner have started the audit for the year ended 31.03.2021 along with your five
team members. One of the team members, CA B started verification of inventory.
In addition to other procedures, he also checked that valuation of Inventory had been recognised in
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accordance with AS -2. During detailed checking, he noticed that the amount spent on salary of administrative
employees and normal wastage on production of the clocks, had not been added to the valuation of Inventory.
The contention of XYZ Limited was that since the co st was not directly related to the production cost and so
not added to the cost of inventory.
CA B also noticed that one of the suppliers of onetime Limited, Mr AM had sent some raw material to the
Company for storage in their warehouse in March 2021. Due to renovation going on at his warehouse, his
stock could be damaged and so he had requested Onetime Limited to keep the same in their warehouse.
onetime Limited contended that since the raw material was anyway billed to the Company the next month,
so the same had been included in the valuation of stock, since physically the stock was present in the
warehouse of Onetime Limited as on 31.03.2021.
The Company had issued shares at premium, and the premium received on the shares had been transferred
to a “securities premium account”. The same was then applied in writing off the expenses of selling the
clocks, writing off the preliminary expenses of the Company and also writing off the commission paid to the
sales agents. You have verified the same in detail.
While verifying debtors, team member C noticed that there were a few trade receivables pertaining to
export sales mainly to England. Mr. C verified the same with respect to the invoices issued and other
supporting documents. The amount booked as on 31.03.2021 was based on the exchange rate as on the date
of the invoice.
Mr. T, another team member verified the fixed assets of the Company. onetime Limited had purchased few
cars for its directors during the year of audit. The same were appearing in the fixed assets schedule of the
Company. Mr T verified the same with respect to the invoices as well as physically verified the assets in the
Company’s premises. Since the cars were for the official use of the Directors, they were purchased in the
name of the Directors of the Company.
Mr. T verified the amount with the Invoice and checked the registration and insurance documents.
One of the article clerks was assigned the work of verification of “Provisions” appearing in the Balance
sheet. He wanted to understand from you the circumstances in which a provision is recognised in the books
of account. You explained him the situations in which an entity recognises Provisions in its books.
Onetime Limited has invested in the shares of other companies. One of the Compan ies has declared
dividend on its shares. Onetime Limited has not recognised the same in the profit & loss account. Team
Member R has asked you to look into the matter since she is unable to understand the reasons for the same.
The Company had spent a huge amount on repair and maintenance of the machinery used for the production
of the clocks. The amount was accounted for in two parts: repairs were booked as a revenue expenditure
and annual maintenance charges were capitalised and added to the machinery cost. Ms. R has verified the
same in detail and raised her observations.
1. Is the raw material lying in the warehouse of onetime Limited accounted for correctly in its books of
account?
(a) No, since the same belongs to Mr. AM and should appear in his books.
(b) Yes, since the same is in possession of onetime Limited and was billed to it the following month.
(c) It should be shown in the books of both onetime Limited and Mr. AM.
(d) It should not appear in the books of onetime Limited or Mr. AM and the raw material should be
disclosed as a note in the final accounts of both the entities.
2. Which exchange rate is considered for accounting of foreign debtors at the year end?
(a) Exchange Rate on the date of the invoice.
(b) Exchange Rate on the last day of the financial year.
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(c) Exchange Rate on the date of shipment of the products to the customer.
(d) Exchange Rate on the date of delivery of the products to the customer.
3. Which of the following assertions with respect to fixed assets has not been compl ied with by the
Company?
(a) Existence (b) Valuation
(c) Cut-Off (d) Rights and Obligations
4. Which of the following condition is not required to be met for recognizing a provision?
(a) When a possible obligation that arises from past events and whose existence will be confirmed
only by the occurrence or non-occurrence of one or more uncertain future events not wholly
within the control of the entity.
(b) When an entity has a present obligation (legal or constructive) as a result of a past event.
(c) A reliable estimate can be made of the amount of the obligation.
(d) When it is probable that an outflow of resources embodying economic benefits will be required
to settle the obligation.
5. Dividends are recognized in the statement of profit and loss only on fulfilment of which condition:
(a) the entity’s right to receive payment of the dividend is established.
(b) it is probable that the economic benefits associated with the dividend will flow to the entity.
(c) the amount of the dividend can be measured reliably.
(d) All of the above
6. A type of super user access to information systems that enforces less or no limits on using that system
is known as:
(a) Super access. (b) Super user access.
(c) Unlimited access. (d) Privileged access.
7. Which of the following is not an example of inflation of payments:
(a) Making payments against fictitious vouchers.
(b) Adjusting unauthorized or fictitious rebates, allowances, discounts, etc. to customer’ accounts
and misappropriating amount paid by them.
(c) Making payments against vouchers, the amounts whereof have been inflated.
(d) Manipulating totals of wage rolls either by including therein names of dummy workers or by
inflating them in any other manner.
8. _____requires firms to establish policies and procedures for the retention of________. The retention
period for audit engagements ordinarily is no shorter than ______from the date of the auditor’s report,
or, if later, the date of the group auditor’s report
(a) SA 220, audit evidence, six years
(b) SA 200, audit documentation, seven years
(c) SQC 1, engagement documentation, seven years
(d) SA 230, documentation, six years
9. ………….. is the threat which occurs when the auditor promotes, or is perceived to promote, a client’s
opinion to a point where people may believe that objectivity is getting compromised
1. State with reason (in short) whether the following statements are true or false:
(i) No entry is passed for cheques received by the auditee on the last day of the year and not yet
deposited with the Bank.
(ii) Written representation from management can be a substitute for other evidence that the auditor
could expect to be reasonably available.
(iii) According to Para 3(1)(d) of CARO, 2020, an auditor needs to report whether the company has
revalued its Property, Plant and Equipment (including Right of Use assets) or intangible assets or
both during the year and, if so, whether the revaluation is based on the valuation by a Registered
Valuer; specify the amount of change, if change is 5% or more in the aggregate of the net carrying
value of each class of Property, Plant and Equipment or intangible assets
(iv) Communicating key audit matters in the auditor’s report is a substitute for reporting in accordance
with SA 570 when a material uncertainty exists relating to events or conditions that may cast
significant doubt on an entity’s ability to continue as a going concern
(v) A loan granted for short duration crops will be treated as NPA, if the instalment of principal or
interest thereon remains overdue for one crop season.
(vi) It needs to be ensured that the drawing power is calculated as per the extant guidelines formulated
by the RBI and agreed upon by the concerned statutory auditors. Special consideration need not
be given to proper reporting of sundry creditors for the purposes of calculating drawing power.
(vii) The duties and powers of the Comptroller and Auditor General in relation to the audit of the
accounts of government companies shall be performed and exercised by him in accordance with
the provisions of the The Comptroller & Auditor General’s (Duties, Powers and Conditions of
Service) Act, 1971
(viii) Before holding inquiry by the Central Registrar thirty days’ notice must be given to the Multi-
State co-operative society.
Ans. (i) Incorrect: The person who is controlling the trade receivables should ensure that proper accounting
entries have been passed by crediting respective trade receivables account. The balance of cheque in
hand should be disclosed along with the cash and bank balances in the financial statements.
(ii) Incorrect: One of the objectives of the written representation is to support other audit evidence
relevant to the financial statements or specific assertions in the financial statements by means of
written representation. So it is clear that written representations cannot be a substitute for other
evidence that the auditor could expect to be reasonably available.
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(iii) Incorrect: According to Para 3(1)(d) of CARO, 2020, an auditor needs to report whether the company has
revalued its Property, Plant and Equipment (including Right of Use assets) or intangible assets or both
during the year and, if so, whether the revaluation is based on the valuation by a Registered Valuer;
specify the amount of change, if change is 10% or more in the aggregate of the net carrying value of
each class of Property, Plant and Equipment or intangible assets
(iv) Incorrect: Communicating key audit matters in the auditor’s report is not a substitute for reporting in
accordance with SA 570 when a material uncertainty exists relating to events or conditions that may
cast significant doubt on an entity’s ability to continue as a going concern
(v) Incorrect: A loan granted for short duration crops will be treated as NPA, if the instalment of principal
or interest thereon remains overdue for two crop seasons.
A loan granted for long duration crops will be treated as NPA, if the instalment of principal or interest
thereon remains overdue for one crop season.
(vi) Incorrect: It needs to be ensured that the drawing power is calculated as per the extant guidelines
formulated by the Board of Directors of the respective bank and agreed upon by the concerned statutory
auditors. Special consideration should be given to proper reporting of sundry creditors for the purposes
of calculating drawing power.
(vii) Incorrect The duties and powers of the Comptroller and Auditor General in relation to the audit of the
accounts of government companies shall be performed and exercised by him in accordance with the
provisions of the Companies Act, 2013
(viii) Incorrect: Before holding inquiry by the Central Registrar fifteen days’ notice must
be given to the Multi-State co-operative society.
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